Fire Hydrant of Freedom
Politics, Religion, Science, Culture and Humanities => Politics & Religion => Topic started by: Crafty_Dog on December 07, 2007, 07:01:34 AM
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Let's Not Panic and Ruin the World
By BRIAN S. WESBURY
December 7, 2007; Page A17
WSJ
You can't move these days without bumping into an economic pessimist. "Recession in America looks increasingly likely," said the Economist magazine on Nov. 17. Two days later, in the International Herald Tribune, Nobel Prize winner Paul A. Samuelson brought up the specter of the Great Depression. And then, on Nov. 26, former U.S. Treasury Secretary Larry Summers wrote in the Financial Times that, "the odds now favor a recession that slows growth significantly on a global basis."
The pressure on policy makers to do something is intense. Not only is there a desire to see the government get even more involved in the housing loan market -- witness the Bush administration's plan to freeze starter rates -- there is also tremendous pressure on the Fed to make another large 50 basis-point rate cut in attempt to alleviate credit-market problems.
This desire for government intervention to fix problems that grown adults have created for themselves is dangerous. Constantly counting on the government to save the economy undermines confidence in free markets, conditions people to believe they don't have to live with bad decisions, and creates a willingness to take imprudent risk. Actions to stabilize the economy in the short term can destabilize it in the longer term, and set the stage for even more intervention to fix the new problems at a later date.
Moreover, all this pessimism makes serious economic problems less likely. If it really happens, a recession in the next year could be the most anticipated ever. That fact alone makes it improbable. Recessions usually surprise the consensus. When a recession is expected, the odds of rapidly rising inventories, excessive investment, or a surprise drop in new orders are reduced.
In the past, when manufacturing was a larger share of the economy and inventory control was less exact, recessions often began abruptly, sometimes on the heels of very strong growth. Today, with services a larger share of the economy, and technology speeding up information flow, the economy tends to glide more gently into recession. Given this, all the doom and gloom seems unnecessary.
Real GDP in the U.S. grew 4.9% at an annual rate in the third quarter, and has averaged 4.4% in the past two quarters. While real growth in the current quarter will slow (our forecast is 1.5% to 2.0%), this is more of a payback for the past two quarters of strong growth than it is a new direction for the economy. Average annualized growth in real GDP from March to December will be roughly 3.5%.
In addition, nominal GDP, or total spending, has accelerated from a 3.6% annual growth rate in the second half of 2006 to 6.2% in the past two quarters. This is an excellent signal that Fed policy is still accommodating. When the Fed is tight, the growth rate of nominal GDP, or aggregate demand, does not accelerate.
Despite all of this, many believe that credit-markets problems have increased economic risk dramatically. Mr. Summers argues that "levels of the federal-funds rate that were neutral when the financial system was working normally are quite contractionary today." "Speculative markets will not stabilize themselves," wrote Paul Samuelson. For Messrs. Summers and Samuelson, only Fed action can save the world.
But this argument confuses money and credit. It is increases in the money supply that drive total spending (or aggregate demand), not increases in credit. Many people confuse the idea of a "money multiplier" with money creation. They believe banks can create money. This is not true: The Fed is the only entity in the world that creates new dollars.
In a fractional reserve banking system, the money multiplier works as banks lend out part of their deposits and keep some in reserve. Then the next bank, which receives deposits as a result of the first bank's loan, lends out part of the money again. This is repeated over and over so that every dollar of the monetary base is "multiplied" into many more dollars of lending or credit.
Despite problems at many major financial institutions, this process is not breaking down. The Fed is not behind the curve. When the Fed buys bonds to inject new liquidity into the banking system, that money doesn't go into a black hole. Even if a bank has had its capital eroded by large write-downs, it must invest the new cash. Some banks are putting the cash right back into Treasury bonds, which is one reason Treasury yields are so low. Banks need less capital to hold Treasury bonds than they need to hold loans to the private sector.
But, contrary to popular belief, when a bank buys Treasuries, the money mechanism does not stop. For every debit there must be a credit, and this continues endlessly. In fact, it may be that banks are buying those Treasury bonds from foreign holders, say the Abu Dhabi Investment Authority, which just made a huge investment in Citibank. In this case, the money came right back into the U.S. banking system.
There are an infinite number of paths that the monetary transmission mechanism can take. The only time it breaks down is when investors expect deflation, as in the Great Depression. This is when hording cash makes sense. But this is not the case today. Consumer prices are up 3.5% versus last year. As a result, as long as the Fed is accommodative, money will find its way into the financial system and the multiplier process will continue.
This does not require massive money center banks such as Citibank. It can happen through any well-capitalized institution. For example, tens of thousands of community and regional banks made few or no subprime loans and have large amounts of excess capital. They are in fantastic shape. However, because the cost of funds for banks does not fall quickly, and adjustable rate loans reset immediately, a rate cut can hurt these banks' earnings. In addition, with uncertainty about the economy elevated, forcing banks to lend at lower rates doesn't make sense. Widening spreads between Treasury and private-sector bond yields are a signal that the federal-funds rate is too low, not too high. This helps explain why many regional Federal Reserve Bank presidents sound hawkish.
Hedge funds, private equity firms and nonfinancial corporations also have trillions in cash that is already being put to work. Citadel, a hedge fund, bought at-risk loan pools from E*Trade, and increased its investment stake by $2.5 billion. The French parent of CIFG Services Inc., a major bond insurer, injected $1.5 billion of new capital to shore up its balance sheet. Bank of America invested in Countrywide and HSBC brought its high-risk loans back onto its balance sheet.
The only real problem is that these "fixes" are not cheap. Citibank is paying 11% to Abu Dhabi. E*Trade reportedly sold its problem loans to Citadel for 27 cents on the dollar, a price many think is well below the true value. Institutions with cash and capital will make huge profits in this environment, while those without these two things will fight to survive. While not everyone is happy about it, the market is healing itself.
Some say that we can't risk a spillover of credit problems into the economy as a whole, but that ignores two things. First, outside of housing-related businesses and financial institutions that invested in subprime securities, the economy is in good shape. Despite many months of fearful forecasts and an erosion in consumer confidence, the economy remains resilient. Early holiday shopping data have been strong, car and truck sales rose in November and manufacturing continues to expand.
Second, more Fed rate cuts risk a weaker dollar, rising inflationary pressures and a new round of lax lending standards. Don't forget that similar arguments were used between 2001 and 2004 to justify a 1% federal-funds rate that was designed to ward off the significant and serious risk of deflation. That policy helped create the subprime lending crisis in the first place.
To top it off, as long as the Fed allows the market to believe more rate cuts are coming, the greater the incentive to put off business activity. An investor who wants to buy distressed property or debt, a potential home buyer, or a hedge fund looking to make a leveraged investment may choose to wait for lower interest rates before taking action. This delays the self-healing process of the marketplace.
All of this argues for a much more laissez-faire approach. Attempting to offset the problems caused by a few (i.e., a bailout), actually creates larger risks for the economy as a whole. The very act of saving the world puts it at greater risk.
Mr. Wesbury is chief economist for First Trust Portfolios, L.P.
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Wesbury is right on the money IMO. While I like low interest rates and as an exporter I like a weak dollar, taking the Fed rates to artificially low levels for economic stimulus would be to repeat a pattern that causes them to go up later to punitive levels and risk future stagflation.
The government has other stimulative tools available, not just free money. Legalize energy production comes first to mind. Introduce market reforms into health care. Make the previous tax rate cuts permanent, stable and predictable, not just stimulative. Cut corporate tax rates. At the state level, stop taxing capital gains that include inflationary gains as ordinary income!
The Fed's primary function is to maintain a stable value of the currency, not to attempt to tweak out all the minor ups and downs in the economy. Other than energy, health care and government costs, none of which are dollar-caused problems, price stability has been good.
Stable interest rates are a secondary, but VERY important goal as well. It is bad for the economy to have homebuilding, for example, alternate in boom and bust modes instead of to flourish as an ongoing, profitable industry employing millions.
The Fed was painted into a corner last time when it lowered its rate to 1%. The only step down from there would have been to just give money away. They were out of policy options and admitted later that they don't want to be in that situation again.
Wesbury didn't like the last rate cut and I like rates right where they are now. Let's start solving other problems. - Doug
p.s. Here is a link to Wesbury's weekly column. He posts every Mondays afternoon from what I have seen. http://www.ftportfolios.com/Retail/Commentary/CommentaryArchiveList.aspx?CommentaryTypeCode=MMO&CommentaryCategoryCode=ECONOMIC_RESEARCH
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The Roots of the Mortgage Crisis
Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own.
WSJ
BY ALAN GREENSPAN
Wednesday, December 12, 2007 12:01 a.m. EST
On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. Virtually overnight the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged. Interest rates on a wide range of asset classes, especially interbank lending, asset-backed commercial paper and junk bonds, rose sharply relative to riskless U.S. Treasury securities. Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.
The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.
The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.
A large segment of the erstwhile Third World, especially China, replicated the successful economic export-oriented model of the so-called Asian Tigers: Fairly well educated, low-cost workforces were joined with developed-world technology and protected by an increasing rule of law, to unleash explosive economic growth. Since 2000, the real GDP growth of the developing world has been more than double that of the developed world.
The surge in competitive, low-priced exports from developing countries, especially those to Europe and the U.S., flattened labor compensation in developed countries, and reduced the rate of inflation expectations throughout the world, including those inflation expectations embedded in global long-term interest rates.
In addition, there has been a pronounced fall in global real interest rates since the early 1990s, which, of necessity, indicated that global saving intentions chronically had exceeded intentions to invest. In the developing world, consumption evidently could not keep up with the surge of income and, as a consequence, the savings rate of the developed world soared from 24% of nominal GDP in 1999 to 33% in 2006, far outstripping its investment rate.
Yet the actual global saving rate in 2006, overall, was only modestly higher than in 1999, suggesting that the uptrend in developing-economy saving intentions overlapped with, and largely tempered, declining investment intentions in the developed world. In the U.S., for example, the surge of innovation and productivity growth apparently started taking a breather in 2004. That weakened global investment has been the major determinant in the decline of global real long-term interest rates is also the conclusion of a recent (March 2007) Bank of Canada study.
Equity premiums and real-estate capitalization rates were inevitably arbitraged lower by the fall in global long-term interest rates. Asset prices accordingly moved dramatically higher. Not only did global share prices recover from the dot-com crash, they moved ever upward.
The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions. The Economist's surveys document the remarkable convergence of more than 20 individual nations' house price rises during the past decade. U.S. price gains, at their peak, were no more than average.
After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.
I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.
Demand in those days was driven by the expectation of rising prices--the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).
I and my colleagues at the Fed believed that the potential threat of corrosive deflation in 2003 was real, even though deflation was not thought to be the most likely projection. We will never know whether the temporary 1% federal-funds rate fended off a deflationary crisis, potentially much more daunting than the current one. But I did fret that maintaining rates too low for too long was problematic. The failure of either the growth of the monetary base, or of M2, to exceed 5% while the fed-funds rate was 1% assuaged my concern that we had added inflationary tinder to the economy.
In mid-2004, as the economy firmed, the Federal Reserve started to reverse the easy monetary policy. I had expected, as a bonus, a consequent increase in long-term interest rates, which might have helped to dampen the then mounting U.S. housing price surge. It did not happen. We had presumed long-term rates, including mortgage rates, would rise, as had been the case at the beginnings of five previous monetary policy tightening episodes, dating back to 1980. But after an initial surge in the spring of 2004, long-term rates fell back and, despite progressive Federal Reserve tightening through 2005, long-term rates barely moved.
In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities. Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates.
Arbitragable assets--equities, bonds and real estate, and the financial assets engendered by their intermediation--now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion. Carry trade and foreign exchange markets have become huge.
The depth of these markets became readily apparent in March 2004, when Japanese monetary authorities abruptly ceased intervention in support of the U.S. dollar after accumulating more than $150 billion of foreign exchange in the preceding three months. Beyond a few days of gyrations following the halt in purchases, nothing of lasting significance appears to have happened. Even the then seemingly massive Japanese purchases of foreign exchange barely budged the prices of the vast global pool of tradable securities.
In theory, central banks can expand their balance sheets without limit. In practice, they are constrained by the potential inflationary impact of their actions. The ability of central banks and their governments to join with the International Monetary Fund in broad-based currency stabilization is arguably long since gone. More generally, global forces, combined with lower international trade barriers, have diminished the scope of national governments to affect the paths of their economies.
Although central banks appear to have lost control of longer term interest rates, they continue to be dominant in the markets for assets with shorter maturities, where money and near monies are created. Thus central banks retain their ability to contain pressures on the prices of goods and services, that is, on the conventional measures of inflation.
The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.
Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).
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The Global Money Machine
By DAVID ROCHE
December 14, 2007; Page A21
Robert Graves defined hell as "words repeated endlessly until they all but lose their meaning." "Liquidity" is one such word from the financial lexicon. Yet, properly defined, it is the clue to the potentially disastrous outlook for the global economy and financial markets.
It is a no-brainer to say that the credit crunch is making liquidity scarce. It is less clear why central banks are powerless to do anything to stop it contracting, and why this shrinkage will sabotage economic growth as economies fall prey to the credit drought in places as far-flung as the Baltic states to China, as well in the OECD countries.
But to back up for a minute, what is liquidity? Two years ago, when confronted with financial-sector balance sheets and asset prices that were growing at a multiple of GDP and money supply that wasn't, we at Independent Strategy found our answer. At the time, there was precious little correlation between money and financial-asset prices. That seemed strange. Unless return on assets, measured by corporate return on capital, was rising exponentially, there was no justification for asset prices to be doing so.
Further research indicated that what was driving asset prices was the supply of copious and cheap credit with which to buy them. This type of asset money or credit was not counted in the traditional definition of liquidity, which is simply broad money, made up of central-bank money and bank lending.
The reason for the exponential growth in credit, but not in broad money, was simply that banks didn't keep their loans on their books any more -- and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.
There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."
So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.
No longer could central banks determine how much debt was created. They used to do that by limiting the amount of central-bank money they supplied, which formed the base of all loans, and then obliging commercial banks to make reserves for every loan. This made lending capacity finite. Now that the loans didn't stay on banks' balance sheets, this control mechanism was ineffective. Lending capacity became almost infinite -- for a while. Indeed, central banks didn't even control the price of money very well any more; again; risk appetite set how risk was priced and central-bank rates held very little sway over the outcome. Yield curves, which were inverting at the time, had the effect that when central banks raised rates, long-term credit markets reduced them.
The credit tide is now ebbing. Since August, the credit system has been frozen solid. Debt issuance for all sectors of the economy has plummeted. Banks don't trust each other's balance sheets (and they alone know how bad their assets are). The rates at which they lend to each other show the same levels of risk premium as at the outbreak of the crisis, despite central banks' efforts to inject liquidity into markets.
For these reasons the Federal Reserve this week announced joint actions with central banks around the world to ease liquidity conditions. The Fed said it will initiate a series of auctions under the Term Auction Facility (TAF) that will inject funds to a broader range of participant depositary institutions against a broader range of collateral. The minimum rate of interest charged will be the expected fed-funds rate over the term of the loan. The auctions start on Dec. 17 for an amount of $20 billion to be lent for 20 days. Other auctions are planned for Dec. 20, Jan. 14 and Jan. 28. At the same time, the Fed set up bilateral swap agreements with the Swiss National Bank and the European Central Bank, so that these central banks could also borrow U.S. currency to fund dollar liquidity needs among their own banks.
These measures are an extension of what central banks were doing anyway: substituting central-bank money for funds normally lent and borrowed between banks in the interbank market. The funds themselves are not a "net" addition to liquidity, because they are paid back when the loan becomes due. The Fed's additional TAF auctions will help fulfill the responsibility of the central bank to ensure the proper functioning of financial markets by providing temporary liquidity. But they are not an additional easing of monetary policy or a bailout of banks' bad assets.
Therein lies the problem: The auctions address a liquidity shortage -- caused by the banks' refusal to lend and borrow from each other due to mistrust of each other's balance sheets -- but cannot address the solvency problem inherent in the balance sheets themselves.
Moreover, much of the leverage that fuels the economy is downstream from the banks, and on the balance sheets of nonbank financial intermediaries (such as brokers, hedge funds and investment banks) in the form of securitized debt and derivatives. Neither these entities nor many of the assets they own are eligible for central bank loans.
It was excessively optimistic risk appetite and consequent mispricing of risk that created this leverage problem. The reversal of risk appetite is now driving the deleveraging process. Just as the central banks were powerless to control the expansion of liquidity in the expansionary phase, it is unlikely that they can control its contraction and its economic consequences.
The deleveraging process will be ugly. First, the junk assets that the banks moved off balance sheet will have to be financed by the banks, and a lot of them will have to be moved back onto banks' balance sheets. As this happens, bank lending capacity gets used up. Second, re-intermediated junk assets will have to be written down. This destroys bank capital and further reduces lending capacity.
Finally, future bank lending practice is going to be changed. Much more lending will be kept on banks' balance sheets. When loans are securitized, banks will remain responsible for the quality of the credit and have to make prudent reserves against it. All this means lower liquidity expansion, particularly of asset money, and lower economic growth.
In a globalized system, no one is immune. The big shock of 2008 will be that the China bubble pops. After all, where would China be without excessive global liquidity flooding into its domestic markets over a quasi-fixed exchange rate and excessive household borrowing stoking U.S. consumer demand for China's goods? We are about to find out.
Mr. Roche, president of Independent Strategy, a global investment consultancy based in London, is the author of "New Monetarism" (Independent Strategy, 2007).
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Money Illusions
December 17, 2007; Page A20
Groucho Marx once asked, "Who are you going to believe, me or your own eyes?" Too bad Groucho doesn't work at either the Federal Reserve or on Wall Street, where economists have been predicting that slower economic growth would lead to a slowdown in inflation. They should have believed their own eyes.
As any American who has shopped for groceries or gasoline can tell you, prices are rising. That was confirmed last Friday in the official figures for November, with overall consumer prices jumping 0.8% from a month earlier. That was the largest monthly gain in two years, and 4.3% higher than a year ago. The report for producer prices was equally as alarming a day earlier, rising 3.2%. The producer price index is up 7.7% in the past 12 months, on a seasonally adjusted basis.
Some analysts continue to ignore all this and focus on so-called "core" inflation, which excludes food and energy. That is cold comfort to Americans who devote increasingly larger chunks of their monthly budget to -- food and energy. One lesson of the past few years is that relying too much on core inflation data, as the Fed has done until recently, can be a dangerous mistake. We couldn't help but notice that former Fed Chairman Alan Greenspan, a longtime "core" watcher, was quoted last week as saying it is now a less reliable guide to monetary policy.
Not surprisingly, equity markets fell Friday on the inflation news -- the same markets that only a week earlier had been begging for easier money from the Fed. Anyone who recalls the 1970s understands that inflation is very bad for stocks in general, though of course price-sensitive shares like commodities can do very well for a while. If nothing else, the inflation figures should remind us that there is no free lunch for Wall Street in continuing its cheerleading for easier money.
It should also remind us once again that inflation doesn't rise or fall along with economic growth. Inflation is a monetary phenomenon and reflects the supply and demand for currency created by central banks. We learned in the 1970s that rising prices can co-exist with slower growth, and we learned in the 1980s, or should have, that rapid growth can co-exist with falling levels of inflation.
Those are lessons too many people seem to have forgotten this decade, which is why the Fed now has both less credibility and less leeway to ease money amid the housing recession and mortgage mess. If politicians want to help the economy, they'll stop relying on the monetary delusion and instead focus on fiscal policy -- specifically, a tax cut.
WSJ
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David Malpass today: Markets and the Dollar. http://online.wsj.com/article/SB120027129559487301.html?mod=opinion_main_commentaries
I don't agree 100% but it is the best I've read explaining the weak market for the dollar and what to do about it. (sorry I can't post the text)
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Global stock markets are down in large part because the world is concerned that the US economy is in a recession and our politicians and policymakers are clueless in the face of this predicament. The Bush administration and the presidential hopefuls are all talking about fiscal stimulus plans that mostly involve taking money from one person's pocket and putting it in another (e.g., tax rebates). You can't make an economy stronger by funding one man's extra spending with money taken by taxing or borrowing from another man. Policies oriented to increasing consumer demand have no ability to expand the economy, otherwise (as Jude Wanniski used to say) we could spend ourselves to prosperity. Meaningful stimulus has to involve a permanent change in the incentives to work and invest, since that expands the output/supply side of the economy; ultimately, only rising incomes can fuel rising spending. In the below article Richard Rahn talks about a simple fix to the tax code which could make a world of difference: indexing capital gains for inflation. What politician, even the die-hard Democrats who hate it that the rich are getting richer, would want to argue in an election year against tax reform that is fundamentally fair, would help everyone, and would boost the economy? Word is that the Bush administration is considering precisely this as part of a fiscal stimulus package. The idea first cropped up in the early 1990s, but was abandoned. Now would be a great time to revive it. With all the pessimism out there it's about time somebody did something positive.
This is especially timely because with the Fed's latest effort to boost the economy by lowering interest rates, inflation risk is rising. We've already seen inflation rise from a low of 1% in 2003 to 3-4% currently, thanks to Alan Greenspan's misguided decision to push interest rates down to 1% in 2003. That not only contributed to the housing price bubble, but also drove the dollar down and boosted commodity and gold prices. Since it became obvious last summer that the Fed would be forced to lower rates to stem the losses from subprime lending, the dollar is down over 5% and is now at an all-time low, and gold is up 35% to almost $900/oz. Lower interest rates may help fix the subprime crisis by slowing and limiting the decline in home prices, but only at the cost of higher inflation in the years to come. Without this inflation-adjustment fix, the effective rate on capital gains will be rising significantly, and that would place a big burden on the stock market and the economy. Let's keep our fingers crossed that someone back in Washington can figure this out before it's too late.
Inflation and the Tax Man
By RICHARD W. RAHN
WSJ, January 17, 2008; Page A17
Rudy Giuliani's tax-reform proposal includes indexing capital-gains taxes for inflation -- that is, putting the original price of the asset in today's dollars. All of the Republican candidates have called for low or lower taxes on capital gains, while the Democrats favor higher capital-gains taxes. But inflation-indexing of capital gains should be part of every candidate's "economic stimulus" package, regardless of party affiliation.
Accounting for inflation in this way has the advantages of producing more short-term revenue to the Treasury as long-term gains are "unlocked." Furthermore, lowering the cost of capital would stimulate investment and the stock markets, and would increase the fairness of the tax system by not taxing phantom gains for people at all income levels. It would also square capital-gains taxation with the U.S. Constitution.
Assume you purchased a common stock in a company in 1984 for $100 a share and sold it in 2007 for $200 a share. Have you received any "income" from the sale of the shares of stock? The IRS would say "yes," but this is clearly wrong. The IRS will claim that you had a $100 per share capital gain on the stock in the above example, yet actually the increase was solely a result of inflation. Because you cannot buy more goods and services with $200 now than you could have with $100 in 1984, you have had no "income" or wealth accretion.
Over the years numerous economists, lawyers and others have tried to fix this problem and have gotten nowhere with Congress. But now, due to increased concerns about inflation, economic growth and judicial salaries, the time may be right to move forward.
Chief Justice John Roberts has just renewed his call for an increase in pay for federal judges. He, his predecessor William Rehnquist and other judges have complained about the "steady erosion" of judicial salaries over the past 20 years. According to Article III, Section I of the U.S. Constitution, compensation of federal judges "shall not be diminished during their Continuance in Office."
As inflation has outstripped the increase in judicial salaries, the judges have clearly had "diminished compensation" in real terms. Chief Justice Roberts currently makes $212,000 per year, yet all but five of his predecessors in the past 200 years made more in inflation-adjusted dollars (Warren Burger's 1969-1986 income averaged about $250,000 per year in 2006 dollars).
The debate centers on the definition of income. The 16th Amendment to the Constitution states, "The Congress shall have the power to lay and collect taxes on incomes," and the Fifth Amendment clearly states, "No person shall . . . be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation."
If the portion of a capital gain due solely to inflation is not income, then taxation without inflation-indexing is an unconstitutional taking of property. Income is commonly defined as, "the amount of money or its equivalent received during a period of time in exchange for labor or services from the sale of goods or property, or as profit from financial investments."
To be money or its equivalent, the payment must have the power to command goods or services produced in the economy. Thus, if the money received from the sale of an asset cannot command more goods and services than the original capital invested, there clearly has been no income.
Too few judges and members of Congress have a basic understanding of economics. As a result, they do not readily see how small but steady losses in value over long periods (except when it comes to their own salaries) is damaging. Inflation of 2%, 3% or 4% per year may seem trivial, but over time it causes great distortions -- the U.S. dollar is now worth less than 1/20th of what it was worth in 1913 when the Fed was established. If the 12% inflation the U.S. experienced in 1979 had continued, the price level would have doubled every six years.
Congress, in order to prevent unlegislated tax-rate increases, has indexed the tax brackets and some other parts of the income-tax code for inflation, which recognizes that a dollar of income in 1998 is not the same as one in 2008. Yet they have failed to do this for capital gains or the AMT, which is now creating great heartache for them as well as for taxpayers. For the code to be logically consistent and to avoid an unconstitutional taking of property -- and for the word "income" to have the same meaning throughout the code -- any capital gain necessarily needs to be indexed for inflation.
The reasons capital gains have not been indexed for inflation (in addition to some members of Congress and judges who do not understand the proper definition of income) are that some argue it would be too complex, and that, since capital gains are taxed at a lower rate than regular income, the problem has already been addressed. Some claim it would result in a big revenue loss. But in the age of advanced tax software, indexing of capital gains is no more complex than many other provisions of the tax code. (The whole code needs to be simplified, but that is another issue.)
Taxing capital gains at a lower rate is done for a number of good economic reasons, and only offsets inflation for assets that have appreciated rapidly in a short time period. Adjusting capital gains for inflation would clearly increase revenues in the short run because of the "unlocking" effect, and probably over the long run because of the higher levels of investment it would stimulate. Over the past 30 years, the Joint Tax Committee, using largely static models, has consistently erred grossly -- at times even getting the direction of the plus or minus sign wrong -- in forecasting capital-gains tax revenues as a result of tax-rate changes.
The Bush administration ought to make inflation indexing part of its "stimulus package." If properly explained, considerable bipartisan congressional and judicial support should be obtained. A number of legal scholars have argued that the executive branch could unilaterally make the change by requiring the IRS to correctly define the words "cost" and "income," given that it was the IRS that originally incorrectly defined them.
It is not likely that many judges or members of Congress would find it in their personal, political, or the national interest to argue that phantom gains are "income." After all, most Americans do understand the meaning of income, even if some in Washington do not.
Mr. Rahn is the chairman of the Institute for Global Economic Growth and an adjunct scholar at the Cato Institute.
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There is something ironic about having Congress -- which is holding hearings on steroid use in baseball -- trying to solve our current economic challenges with the economic equivalent of fiscal steroids.
The maneuvering and posturing in Washington has assumed all of its normal pre-failure patterns.
The fact is, there could be no greater contrast between the approach I outlined in my new book, Real Change, and the traditional insider politics of Washington.
A Washington Insider Economic Package That Is Too Small and Too Temporary
Republican staff advisers are developing an economic package within the timid boundaries allowed by the Washington establishment. The package they are working on is too small, too temporary and clearly inadequate for the scale of the economic problems we face.
To make matters worse, the Democrats who control Congress will begin demanding even less-useful and more-destructive economic proposals that will spend a lot more money with even less hope of helping the economy.
The Federal Reserve chairman will forget that his primary job is protecting the stability and strength of the dollar and will become a complicit political player in trying to develop an insider package that will only weaken the dollar still further. We saw evidence of this yesterday, when Chairman Bernanke and his colleagues reduced the Federal Reserve's federal funds rate three-quarters of a percentage point. As a result, the dollar dropped in global markets almost immediately.
In short, the normal patterns of Washington, D.C., are likely to lead to temporary, marginal tinkering when what America really needs is long-term, fundamental reform to protect the dollar, increase productivity and create jobs.
A Familiar Pattern of Failure
We are witnessing the same destructive pattern that led to "stagflation" in the 1970s -- the economic disaster that ultimately led Gov. Ronald Reagan to win the presidency on the dual pledges of anti-inflationary monetary policy and a fiscal policy of cuts in non-defense spending, regulation and taxes in order to revive the economy.
This same destructive pattern led the first Bush Administration to break its "no new taxes pledge," which set the stage for the Democratic victory of 1992.
And it was this same pattern that led the Clinton Administration to adopt the largest tax increase in history in 1993 and set the stage for the Contract with America and the first Republican House majority in 40 years.
Why a Washington Insider Stimulus Package Is Doomed to Fail Politically
This pattern of Washington insider negotiating and posturing is doomed to fail politically because of the power of the world financial news system and because this gimmicky approach goes against the fundamental desires of the American people.
Just open the financial pages from yesterday: The world markets have already condemned the initial administration proposals.
If the stimulus package was designed to be a confidence builder, it is clearly failing.
On Monday, London fell 5.48%, Germany 7.16%, China 5.14%, Hong Kong 5.49% and India 7.41%. This was the world's investors' way of making clear they were not reassured.
Furthermore, to make the situation even more intense, the power of the markets is amplified by the global financial news system. Market reactions are transmitted instantly, 24 hours a day, by cable news and other news outlets.
I was on the new Fox Business Channel as a guest on Neil Cavuto's show Monday evening (read a transcript here). By then, it was clear that the on-air analysts were joining the investors in condemning the stimulus package as inadequate and ineffective.
Americans Want Long-Term Solutions
The American people will ultimately reject the stimulus package, because it violates one of their deepest beliefs. Americans believe in long-term solutions, not short-term fixes. This Washington insider maneuvering is politics as usual at a time when the American people are crying out for a change of course.
In our American Solutions polling last summer, the American people told us by a margin of 92% to 5% that our goal should be to provide long-term solutions instead of short-term fixes. You can find this and other economic data in the Platform of the American People in Real Change and at AmericanSolutions.com.
Overwhelmingly, the American people told us that they are prepared to be told the truth and for large, fundamental changes.
Short-term fixes are going to be rejected by the American people, and the politicians who endorse them are going to find their reputations suffering as a result.
Why a Washington Insider Stimulus Package Will Fail Economically
The stimulus packages being discussed won't just fail politically, they'll also fail economically. The size of the challenge is much bigger than the size of the current solutions being offered by Washington.
Consider these economic indicators:
Gold has been hitting record highs ($914.30 an ounce a week ago). Gold was up 32% in 2007.
U.S. Treasury notes, historically the best store of currency value, have lost 20% compared to gold since August 2007.
Silver has hit a 24-year high ($16.60 an ounce last week).
Platinum has skyrocketed to $1,592 an ounce (and if platinum is a primary metal in the next generation of cars, the world's supply will run out in 15 years, according to some estimates).
Oil hit $100 a barrel but has slid to about $90 a barrel on recession news. (A weak economy means declining oil prices, a strong economy means rising oil prices.)
Harbingers of Inflation
High commodity prices like these are usually harbingers of inflation.
The declining dollar has been a similar indicator of inflationary pressures coming.
The producer price index was up 7.7% through November 2007. That is the biggest jump in 34 years.
The consumer price index was up 4.2% through November 2007. That is the biggest jump in 17 years.
The Role of the Federal Reserve: To Protect the Value of the Dollar
In this setting, it is important for Chairman Ben Bernanke and the Fed to remember their primary mission: protecting the value of the dollar.
People want their government to keep the value of its currency. We won't save and invest if we think politicians are going to steal our earnings and savings by inflating the currency.
The Fed should focus its eye firmly on strengthening the dollar and driving inflation down to 2%.
If the world came to believe the Fed was serious about protecting the dollar, the price of oil would decline substantially, the price of gold would decline substantially, the world's capital flows would return to the United States and the economy would be inherently healthier.
Creating Jobs and Productivity While Stabilizing the Dollar
If the Federal Reserve should focus on creating a stable dollar, the President and Congress should focus on increasing productivity and creating jobs.
Our political leaders should concentrate on making the American worker more successful in competing with China, India, Japan and Europe. They should also ensure that long-term productivity gains in the United States result in real prosperity that would enable Americans to pay off their debts and increase their savings for their retirement years.
Recognizing the Reality of Democratic Control of Congress
Any economic plan has to start with the recognition that Democrats control Congress. That means they get to have a large say in a successful package.
The difficulty here is compounded by the fact that the Democrats have a lot less to lose by allowing nothing to happen, because they will blame any economic problems on President Bush and the Republicans.
The key is to give the Democrats substantial influence over half the economic growth package -- the half aimed at increasing consumer spending -- but insist that the President and Republicans control the other half of the package aimed at increasing productivity and creating jobs.
Give Democrats Control Over Half the Stimulus Package. . .
If Republicans were proposing consumer stimulus plans, an ideal change would be to offset the payroll tax for both individuals and employers. Almost nothing would increase take-home pay for working Americans as fast or enable businesses to hire more people.
A second good option would be a significant increase in the tax allowance for children. This would help working families and single working mothers and could have a very positive impact.
For their part, the Democrats will almost certainly want some kind of direct giveaway program of rebates or some other payment.
As long as the amount is capped at half of a very robust package (say $150 billion of a $300 billion package), it should be the price Republicans pay to get a productivity-increasing bill through a Democratic Congress.
Here's the bottom line trade-off: Republicans should offer relative freedom to the Democrats to design the consumer stimulus part of the bill but then insist on similar freedom to design the productivity increasing portions of the bill.
. . .With a Big 'If'
There is a big "if" involved in this approach.
The Republicans have to be prepared to play hardball. They have to stand firm for a powerful productivity- and growth-oriented component or be prepared to accept the failure of the package.
The Democrats will attempt to panic the Republicans into giving up all their principles just to get "something" passed quickly.
It is very important for the President and House and Senate Republicans to stand firm for a sophisticated package that would actually increase productivity.
The first key to productivity improvements is that they have to be permanent so people can rely on them.
A Bold Plan for Economic Growth
What America needs is deep, fundamental reform to make American businesses more competitive so American workers have better paying jobs with greater job security.
The change from the current situation to a powerfully competitive American future is a much bigger change than anyone in Washington is contemplating.
Here are a few proposals that would begin to move us in the right direction:
1. Adopt the Rangel proposal for a corporate income tax cut.
When even liberal Democrats such as Ways and Means Chairman Charlie Rangel (D-N.Y.) recognize that the United States is killing jobs at home by having the second-highest corporate income tax in the world, there is a possibility of getting something done. In Rangel's generally bad bill of massive tax increases there is a provision for a corporate income tax rate cut. Republicans should simply lift that section from his bill and propose it in his name.
2. Abolish or index the capital gains tax.
A plurality of Americans favor abolishing the capital gains tax (American Solutions polling found a margin of 49% to 41%). This number will go up as Americans look at the disastrous impact of the financial meltdown on their planned retirement funds and their children's college education funds.
Abolishing the capital gains tax would lead to an immediate jump in the value of the stock market, leading to an immediate jump in the value of every retiree's 401(k). More importantly, it would lead to a burst of new investments in the United States, creating a foundation for long-term economic growth.
If abolishing capital gains is politically impossible for Democrats (who tend to be anti-capital in between high-dollar fundraisers) to accept, then the fallback position should be to index the capital gains tax so inflation does not erode capital gains. As Richard Rahn has pointed out, this would have a big effect on increasing investment in America.
3. Allow 100% expensing of all investments in new equipment.
If American businesses could write off 100% of their new equipment within one year of its purchase, there would be a boom in equipping American workers with the best and most modern equipment so they can compete with any economy in the world.
These kinds of real, permanent changes would begin to make America more competitive and more productive. They will allow the dollar to increase in value as investors start to buy up dollars to invest in the low-tax U.S. economy. In turn, this will give the Fed more room to keep interest rates low. These changes would be a step toward permanent, long-term, improved economic health.
And Don't Forget About Scoring
It is essential to remember that anything good for the American economy will be scored badly by the bureaucrats at the Joint Tax Committee and the Office of Management and Budget. Both bureaucracies have a history of being anti-capitalist, anti-market and anti-growth in predicting how economic policy changes will effect economic growth and government revenue.
The answer, however, is simple.
Establish a margin of error equal to how wrong they were in scoring revenue from the last cycle of tax cuts. Then declare that anything within that margin of error is scored as acceptable.
The fact is that it is impossible to establish sound policy for economic growth with Socialist scoring. However, in the short run, it is impossible to change these two entrenched bureaucracies.
Therefore, the answer is simply to publish the degree to which the bureaucrats were wrong in the last two or three tax-cutting cycles and write the bill within that margin of historically provable inaccuracy.
Good News From Innovative Governors: Sanford Proposes an Optional Flat Tax
In the Platform of the American People, there is overwhelming support for an optional flat tax with a one page tax form. South Carolina Gov. Mark Sanford (R) has picked up on this overwhelming desire for real change in how we pay taxes.
Here's what Gov. Sanford had to say about the optional flat tax in his State of the State address:
"A flat tax alternative that would allow someone the option of forgoing exemptions and instead pay a 3.4% flat tax in this state. We continue to believe finding ways to lower the marginal tax rate is vital to our economy, vital to competitiveness and in this case vital to the taxpayer's pocket. It is worth noting that a recent report from the Federal Reserve documented the connection between lower income tax rates and higher economic and employment growth. This is something we can do to better the economy of our state, and I'd thank Rep. Merrill for introducing a bill toward this end."
Louisiana's Jindal Starts With Accountability and Transparency
Newly elected Louisiana Gov. Bobby Jindal (R), one of the brightest and most creative people in public life, began his governorship with an executive order making state spending transparent and ordering it to be posted on the Internet so every citizen could see how their tax money is being spent.
For a Louisiana governor, this was an enormous step toward reform.
Transparency in government spending is a growing movement among the states and, like so much of the innovation on the state level in America, it's an idea the President would do well to make his own.
Publishing all non-classified federal spending on the Internet would put the power to unearth fraud and abuse in the hands of the American people.
It would be a step toward real accountability in government.
In other words, it would be real change, just what we need in Washington right now.
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A Global Fed
January 26, 2008; Page A10
This week the world learned that economic "decoupling" from America is a myth. The next lesson to re-learn is that the Federal Reserve's monetary mistakes have global consequences, and that one result of the Fed's great dollar miscalculation this decade has been a dangerous breakdown in world monetary cooperation.
Look no further than the European Central Bank, which was notably absent when the Fed made its emergency rate cut amid falling global stocks on Tuesday. In testimony Wednesday before the European Parliament, ECB President Jean-Claude Trichet came about as close as a member of the brotherhood ever will to calling out a fellow central banker: "In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets."
If we can interpret Mr. Trichet further, he thinks the Fed helped to create the current financial mess by going on a bender in the late Alan Greenspan era, and is now once again running dangerous inflation risks by cutting rates too soon in the face of Wall Street pressure. He's also unhappy because the dollar's fall against the euro has increased political pressure on the ECB to ease as well. So now that the Fed wants his help to avoid a further dollar decline against the euro, he's in no mood to oblige.
Mr. Trichet has a point about American mistakes, and for that matter so do all the Davos-types chortling this week about U.S. credit woes. Europeans and many Asians love to see the Yanks humbled, and the sight of America's banking giants going hat in hand to Abu Dhabi, Singapore and China is too much Schadenfreude to pass up. One irony is that the cause of all this Yankee humiliation isn't the familiar Euro-gripe about the "trade deficit" or tax cuts. It is monetary policy. But they'll enjoy it whatever the cause.
They shouldn't get carried away, however, because their own stock markets were showing earlier this week what could happen to European and Asian economies if the U.S. heads into recession. The $7 billion fraud at Société Générale and the mess at Britain's Northern Rock mortgage lender also make clear that American bankers don't have a monopoly on bad judgment. The currency reserves and sovereign wealth funds that many countries have been piling up are in substantial part the result of that same Fed mistake. This means they can vanish as fast as they arose if commodity prices fall again and the dollar rises. Recall the Texas oil patch, circa 1983, as Paul Volcker's Fed corrected the inflation of the 1970s.
Mr. Trichet also has an advantage over Fed chairman Ben Bernanke in that his mandate under the ECB constitution is to focus solely on the price level. Under Humphrey-Hawkins, the Fed must target the price level and employment. Mr. Trichet is right to keep his own eye on a stable euro, but we also wish he and the Fed weren't so obvious about their mutual discord.
The other great casualty of the Fed's blunder has been the global dollar bloc. This had been building for years, as more nations adopted either formal (such as a currency board) or informal dollar links to their currencies. A stable exchange rate creates economic and trading efficiencies, while a formal dollar link means a country can reduce political uncertainty by delegating its own monetary policies to the Fed.
This made sense as long as the dollar's value was stable. But as the dollar has fallen, these countries have imported inflation and some are now severing their dollar links. The Gulf Cooperation Council is mulling a link to a euro-dominated basket of currencies, and even China is slowly revaluing the yuan against the dollar -- less because of U.S. political pressure than out of its own self-interest to control internal inflation.
This world of greater exchange-rate volatility is dangerous. The extreme movements of the euro versus the dollar across the last decade have created enormous uncertainty for business, while distorting trade and investment flows. They also contribute to economic anxiety and a populist trade backlash. The collapse of the dollar bloc, if it continues, will add to this exchange-rate volatility and in the worst case make it easier for beggar-thy-neighbor currency manipulation.
This week showed once again that the world needs more monetary cooperation, not less. As the world's most important central bank, the Fed must take the lead. And the way to start is by sending a message that its monetary decisions will be based on a renewed determination to protect the value of the dollar and its role as a reserve currency.
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Brain Wesbury has an outstanding track record as an economist. His predictions have an unusually high degree of accuracy.
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The Economy Is Fine (Really)
By BRIAN WESBURY
January 28, 2008; Page A15
WSJ
It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.
True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.
It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.
A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year -- real GDP expanded 4.4% at an annual rate between April and September.
With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.
Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications.
Some large companies outside of finance and home building are reporting lower profits, but the over-reaction to very spotty negative news is astounding. For example, Intel's earnings disappointed, creating a great deal of fear about technology. Lost in the pessimism is the fact that 20 out of 24 S&P 500 technology companies that have reported earnings so far have beaten Wall Street estimates.
Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%. This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.
Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire "house of cards," otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.
For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire.
This outlook is both perplexing and worrisome. Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets.
Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.
In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.
But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.
These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.
Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.
Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.
The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it's the development that investors should really worry about. It reads just like the 1970s.
The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.
Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It's a wonderful buying opportunity.
Mr. Wesbury is chief economist for First Trust Portfolios, L.P.
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Obama Comes to Earth?
Republicans may be on the verge of selecting a nominee, but Democrats are making plans for some long trench warfare.
Mark Penn, a pollster and key strategist for Hillary Clinton, told reporters on a conference call yesterday that he thinks "the search for delegates is going to continue... straight through to the convention."
Mr. Penn also told reporters that while Barack Obama has been basking in his endorsement by Ted Kennedy, there are signs that voters are starting to see Mr. Obama as just another politician: "I think there's a growing perception that Sen. Obama is on the attack."
Logistics also favor the Clinton campaign in the Super Tuesday primaries to be held next week. Mr. Penn noted that unions with six million members are backing the New York Senator and will be on the ground providing get-out-the-vote muscle and resources to deliver her supporters to the polls.
-- John Fund
Mitt Closes His Wallet
Nothing in yesterday's GOP presidential debate from the Reagan Library in California changed John McCain's front-runner status. Mr. McCain was clearly not particularly likeable or at the top of his game but he swatted away the criticisms hurled at him with ease. Mitt Romney was dragged into a lengthy defense on an alleged statement he made about a timetable for withdrawal in Iraq. As the old adage goes: if you are explaining, you are not gaining.
Mr. Romney has only a few days left to change the dynamic of the race before 21 states vote next Tuesday. As of yesterday afternoon, his campaign had purchased no television ad time in any of the Super Tuesday states. "If Thursday goes by without an ad buy, it will be a sign the Romney campaign is only going through the motions," says one TV advertising expert with ties to no candidate. "After all, we know he can write a check if he has to."
-- John Fund
The Candidate Who Memorized 'In Search of Excellence'
At last night's (blessedly) final Republican presidential debate, Mitt Romney had the look, and sound, of someone who knows it's over. While predictions in this political season have become a fool's game, I am going to venture that no matter how many states he competes in, Gov. Romney knows he will never close the five-point gap that separated him from John McCain in New Hampshire and now Florida.
Last night the famous Matinee Mitt smile of self-confidence seemed to have been replaced by a more relaxed, wistful glance over at the Arizona Senator seated next to him. That resigned, tight smile said something: I am smarter than you are, Senator, on virtually every issue other than who ran Pakistan 10 years ago, but I am still losing. Why?
Here's why. As was clear again in last night's debate, Gov. Romney's message on the campaign trail or on TV was a perpetual data-dump. Yes, Mitt was smarter than the other guys, but he had the smartest-kid-in-the-class malady of compulsively trying to show off his brain with what in the end merely amounted to a lot of policy details, a lot of "stuff." Did anyone ever understand his explanation of his Massachusetts health care reform?
Result: His message was disorganized. The bumper sticker was "Let Mitt Fix Washington," but the Mitt fix itself came across to audiences as a grab-bag of analysis, nostrums and pieces of supporting data pulled randomly from some folder in his brain. As Mike Huckabee might put it, the bane of the Romney candidacy was Bain & Company. Bain is the consulting firm where by his own admission Mr. Romney learned how to think about the world -- through the eyes of a management consultant. As any CEO who has ever hired one of these firms will tell you, they are fascinating guys to talk to but you wouldn't want them actually running your company.
The Romney candidacy never quite came into focus. Yeah, fix Washington, but beyond that a blizzard of technocratic data at every whistlestop. One can see why he'd be maddened losing to the almost stolid McCain candidacy. But no one could miss the McCain message: national honor, a duty to fulfill the nation's responsibilities and the real and present danger of an external threat. It's a mindset they teach in the military but not in consulting: Keep it simple, stupid.
Mitt couldn't. He's done.
-- Daniel Henninger
Quote of the Day
"One reality is likely to emerge for voters who care most about national security: John McCain enthusiastically supported the surge, the key course correction in a battle that all Republicans call the 'central front' in the war on terror -- and he did so at great political risk. Still, McCain had several moments [in last night's debate] that will anger conservatives. His line that he worked 'for patriotism, not for profit' is bad. Romney rightly suggested that small business owners will be offended at the implication that profits are somehow ignoble. McCain earns a lot of support because of his service -- military and political. But people know it without him touting his own patriotism. McCain threw a sharp elbow at Romney for laying people off during his time as a venture capitalist. It was unwise and undignified. I imagine his advisers all cringed at the substance and timing of it" -- Stephen Hayes, writing on last night's GOP debate at weeklystandard.com.
Class of '94
The recent retirement announcements by Reps. Tom Davis (R-Va.) and Dave Weldon (R-Fla.) means that 28 Republicans in the House of Representatives will not be returning in 2009, and scratches two more members of the historic 1994 Republican freshman class from the House roster. Out with the tide is slowly going the Republican commando force that, led by Newt Gingrich and campaigning on the "contract with America," ended 40 years of Democratic control in the House.
In 2006, eight members of the 1994 class were either defeated or resigned in scandal. And the attrition continues. Along with Mr. Davis and Mr. Weldon, fellow 1994 classmates Barbara Cubin (R-Wyo.), Ray LaHood (R-Ill.) and Jerry Weller (R-Ill.) are retiring this year. Among the five, only Mr. LaHood was not likely to be seriously challenged. With their retirements, plus the recent appointment of Rep. Roger Wicker (R-Miss.) to the Senate, the 73-member Republican Revolution class will have dwindled to 17 by next year.
The only remaining 1994 class member who is likely to face serious re-election competition this year is Rep. Walter Jones (R-N.C.), whose toughest race may be in the Republican primary. In 2007, Mr. Jones was one of only two Republicans to join Democrats in co-sponsoring the non-binding resolution opposing President Bush's troop surge in Iraq. The same congressman who in 2003 pushed the House cafeteria to rename French fries "freedom fries" is now facing a challenge from the right for his stance on the Iraq war.
-- Kyle Trygstad, RealClearPolitics.com
WSJ
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The 'Stimulus' Markets
February 6, 2008
WSJ
President Bush and Congress are marching arm in arm to pass their economic "stimulus," but it's clear that at least one group of observers isn't impressed: investors. They blew right through all the Beltway happy talk yesterday, selling off the major stock indexes by some 3% or so on an ugly day.
Investors were more impressed, or we should say depressed, by the plunge in the Institute for Supply Management's services index for January. The ISM survey took a header to 41.9, down from 54.4 for December, which suggests a decline in the service economy for the first time in nearly five years. Any reading below 50 indicates contraction, so January's reading is another talking point for those who think the economy is heading toward recession.
Heretofore, the recession evidence had been decidedly mixed. Friday's Labor Department jobs report for January was rotten with a decline of 17,000, but a private sector survey that's typically accurate found 130,000 new jobs. Durable goods were strong last week, and the ISM manufacturing survey also showed surprising strength above recession levels. But with services now such a dominant part of the U.S. economy, there's no sugar-coating yesterday's report.
Naturally, the ISM news encouraged predictions that the Federal Reserve will have to cut interest rates even more than it has in the past two weeks. The Fed's Open Market Committee next meets on March 18, but given its recent willingness to respond to Wall Street's demands, look for more voices to encourage another big "emergency" interest rate cut before then.
In case the Fed still cares, however, we'd note that yesterday's ISM report was hardly reassuring on prices. The prices paid index came in at 70.7, down only slightly from December's 71.5, which suggests considerable upward pricing pressure. In the 1970s, the word for this kind of predicament was "stagflation."
And, much like the 1970s, the political class is riding to the fiscal rescue with a "jobs program" designed mostly to preserve its own jobs. The House passed its $146 billion version of tax rebates and tax credits last week, while the Senate wants to raise the bidding to $157 billion. Republicans tried to resist this last week, but yesterday the White House signaled it will roll over again. Treasury Secretary Hank Paulson said he'll "work something out" on expanding the tax rebates to include 20 million retirees.
These one-time federal checks will give Americans a little more ready cash in time for Election Day, but they aren't impressing investors worried about recession. Yesterday's selloff came despite the White House concession to the Senate, and perhaps even because of it. The real damage from this exercise in bipartisan self-delusion is the lost opportunity for a serious tax cut that would increase incentives for capital investment and risk-taking.
Meanwhile, Senator John Sununu (R., N.H.) is being attacked by Democrats for voting against the extra Senate "stimulus" last week. As one of the strongest pro-growth voices still left in the Senate, but facing a tough re-election battle, Mr. Sununu's prospects aren't helped by yesterday's White House retreat. Mark that down as another reason investors can be forgiven for looking at Washington, and then selling stocks.
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It's the Dollar, Stupid
By JUDY SHELTON
March 5, 2008; Page A17
When the United States broke up the Bretton Woods international monetary system on Aug. 15, 1971, it marked the official end of an era when the dollar was literally "as good as gold." President Nixon's announcement -- that the U.S. would no longer permit foreign central banks to redeem U.S. dollars for gold at the established fixed rate -- shocked Japan and Europe, our main overseas trade partners.
It was the repudiation of a formal agreement hammered out some 27 years earlier at Bretton Woods, N.H., and signed by delegates from 29 participating nations. The whole purpose of the agreement -- which was initiated by the U.S. -- was to establish a stable, post-World War II monetary foundation so that free trade could flourish. Never again would nations shortsightedly cheapen their currencies to obtain an unfair advantage; the nightmare of economic warfare leading to military warfare would be ended.
Today, our trade partners are no longer shocked. They have come to expect domestically focused monetary policy from America. But they are deeply concerned by the demise of the once-dependable dollar and deeply impacted by the economic distortions caused by skewed exchange rates. They are, no doubt, deeply affronted by what they detect as the same cavalier attitude that decades earlier prompted Nixon's Treasury Secretary, John Connally, to quip to U.S. allies: "It may be our currency -- but it's your problem."
Has the U.S. forever given up on the dream of a rules-based monetary order for a global economy dedicated to free trade? Have we abandoned all sense of duty associated with providing the world's key reserve currency?
These days it's easy to forget that, during the Great Depression years leading to World War II, floating exchange rates were not considered the free-market approach to currencies. They were considered the antithesis of global monetary order. Whereas the international gold standard guaranteed a level playing field in the trade arena, facilitating market-based outcomes among well-intentioned competitors in an open global marketplace, a nation that devalued its money against gold -- i.e., floated its currency -- was considered to be cheating.
Monetary manipulation was akin to moving the goalposts, an attempt to increase exports of your country's goods by rendering them less expensive when calculated in foreign currencies. Other nations responded with protectionist tariffs on imported goods and tit-for-tat currency devaluations of their own, strangling international trade and worsening the downward economic spiral.
Historical perspective is critical to understanding where we are now -- and what our nation may be facing even as we evaluate leading presidential contenders.
Money meltdown is not some remote topic to be relegated to abstruse scholarly articles published by universities, think tanks, and global institutions such as the International Monetary Fund. (Especially not the IMF, which long lost its mandate to preserve the Bretton Woods system of fixed exchange rates.) The consequences of currency chaos affect the personal fortunes of millions of individual citizens; once unleashed, it can spawn social resentments and political upheavals that change the destiny of whole nations.
We need to ask Sens. Barack Obama, Hillary Clinton and John McCain what they would do -- if anything -- to restore the integrity of the dollar as a meaningful unit of account, a reliable store of value. Would they put forward any new proposals for more comprehensive international monetary reform?
Given that Sen. Obama has garnered the support of Paul Volcker, the highly-respected former chairman of the Federal Reserve under Presidents Carter and Reagan, U.S. voters are apt to get a meaningful and well-considered reply. "I think we are skating on increasingly thin ice," Mr. Volcker noted in the Washington Post in April 2005. He warned that the stagflation of the 1970s was characterized by "a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions." Mr. Volcker's solution? Act now to comply with "the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline."
On the broader issue of global monetary reform, Mr. Volcker's ideas are less orthodox, more visionary. "My sense is that if we are to have a truly globalized economy, with free movement of goods, services and capital, a world currency makes sense," he stated in January 2000. "That would be a world in which the objectives of growth, economic efficiency and stability can best be reconciled."
Sen. McCain, for his part, suffers from an embarrassment of riches when it comes to economic advice.
One of his chief advisers is former Sen. Phil Gramm, a budget-balancing fiscal conservative with a Ph.D. in economics. Mr. Gramm is a disciple of the late Milton Friedman -- the Nobel laureate who furnished the academic rationale in the 1960s for ditching Bretton Woods and letting currencies float -- and might thus be expected to oppose any sweeping reforms to international monetary relations. Yet he has consistently emphasized the need "to refocus the IMF on its core mission of short-term lending to address financial and monetary instability." He considers protectionism "immoral."
Another McCain adviser, Jack Kemp, champions tax cuts and pro-growth policies over budgetary rigidity. A hero of the supply-side movement whose tireless efforts helped to bring about the Reagan boom of the 1980s, Mr. Kemp has never shied away from bold proposals.
Testifying before Congress in 1999, he criticized protectionist instincts that were misdirected at free and open trade "instead of the real source of the problem -- an international monetary arrangement of floating currencies in which no currency is linked to a stable anchor and all countries are tempted to use currency devaluation as an economic policy instrument during times of economic duress." Mr. Kemp's favored economic scholar is Robert Mundell, who received his Nobel for historical research on the operation of the gold standard and his theory of optimal currency areas. Considered the intellectual father of the euro, Mr. Mundell believes gold could be used as a reserve asset in a reformed international monetary system for the 21st century.
If the reality of a collapsing dollar and foreign exchange turmoil starts to bite consumers where they keep their pocketbooks -- for example, if the U.S. finds it necessary to raise interest rates to entice foreigners to buy the government bonds that finance our deficit -- the affects of currency misalignment could quickly move from the realm of dry treatises to the hyperactive world of live, televised political debate. Media consultants may grow apoplectic at the thought of having to reduce seemingly complex options into clever sound bites: Does the candidate advocate a new global monetary order linked to a universally-recognized reserve asset as a mechanism to guard against tinkering by self-serving governments? ("Gold: Money We Can Believe In.") Or is it possible to defend the existing, do-your-own-thing approach to currency relations, which undermines stable trade and capital flows at the expense of global prosperity? Meanwhile, foreign-exchange market specialists earn big profits by gambling -- some $3 trillion daily -- on where currencies might go next.
It's time the candidates devote less time on the minutiae of configuring the next economic stimulus package, or renegotiating the North American Free Trade Agreement. They should be thinking about how they will confront the imminent global currency crisis.
It's the dollar, stupid.
Ms. Shelton, an economist, is author of "Money Meltdown" (Free Press, 1994).
WSJ
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For a mathematical economist, Brian Wesbury has a great way of making complex things understandable IMO.
Government Failure, Or Market Failure? by Brian Wesbury, 3/24/08
Every time the US has an economic problem that causes
pain or fear (a recession, high energy prices, bank failures, or a
market crash) there is always a frantic look for scapegoats.
And most often it is greedy corporations or otherwise nefarious
private-sector-types that get the blame.
For example, many believe that energy companies are
manipulating oil prices. Politicians are always investigating
them, and threatening legislation or special taxes. The Great
Depression, many believe, was caused by excessive greed.
Others think that Savings & Loans went belly-up because they
defrauded people and made bad loans. And today, there is a
clear belief that subprime loans are all about greed and fraud.
Some of this is true. Found in the rubble of each of these
economic upheavals are people who either made very bad
decisions or committed fraud. But, a thorough look at these
economic problems shows how government policy mistakes
played the key causal role in each of them.
The Great Depression was caused by excessively tight
monetary policy that began in the late 1920s. This created
deflation, and put upward pressure on the dollar, which in turn
encouraged protectionism – the Smoot-Hawley Tariff Act was
the result. Then Herbert Hoover raised tax rates in 1932, and
Franklin Roosevelt ramped up regulation and government
spending. The economy never stood a chance.
Richard Nixon closed the gold window, and devalued the
dollar in the early 1970s. The Federal Reserve made huge
mistakes, boosting inflation and undermining the dollar. This
drove up oil prices. Windfall profits taxes and energy price
controls made the problems worse.
In the late 1970s and early 1980s, Chicago’s Harris Bank
would not make oil loans if the oil in the ground was valued at
more than $20 per barrel. Penn Square Bank in Oklahoma
thought oil would stay high indefinitely and made billions of oil
loans. It failed in 1982. The 8th largest US bank, Chicago’s
Continental Bank, failed in 1984 partly because it had
purchased $1 billion in oil and gas participations from Penn
Square. In other words, the unexpected decline in oil prices
during the early 1980s, when Paul Volcker successfully killed
off inflation, helped cause large bank failures. Harris was fine.
It wasn’t the bank failures that caused the recessions of the
early 1980s, it was Volcker’s unexpectedly tight money. This
tight money also undermined S&L’s. Double-digit short-term
rates when many of the mortgages on their books had singledigit
interest rates turned them upside down. The losses
eventually came to roughly $250 billion.
Today, just like in the past, the US is paying a hefty price
for monetary policy mistakes. They began back in 1999 and
2000 when the Fed tightened policy too much. This caused
deflationary pressures which the Fed reacted to by cutting
interest rates to 1% in 2003. These 1% interest rates, and the
belief that they would stay low for a long time, led to excesses
in housing, just like the excesses of oil lending were caused by
commodity inflation. And with mark-to-market accounting in
place today the problems compound even more quickly.
Some argue that since individual people made all these
decisions, it’s not really the Fed’s fault. But this is like telling
someone after it’s been raining for 2 ½ years straight that they
should not have sold their nice red convertible or wasted money
on an umbrella now that it has stopped raining. Government
failure is more responsible for our current economic problem
than is generally realized. Arguing otherwise, and regulating
the economy even more, risks compounding the government’s
already large mistakes. It’s government failure that investors
should worry about, not market failure.
- Brian Wesbury, First Trust
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Hillary's Bad History
March 31, 2008; Page A18
No, not sniper fire in Bosnia. We're referring to Hillary Clinton's lament last week that the U.S. is flirting with a 1990s Japan-style deflation. Perhaps it's a good time to remind everyone what really happened in Japan, so Mrs. Clinton and the rest of Washington don't make the same mistakes.
"I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone," Mrs. Clinton said in the interview with Journal reporters. "I think the Japanese tried that and tried and tried that." She added Japan should have relied more on fiscal stimulus spending and aid to banks and homeowners, which is what she wants Washington to try now.
The Senator needs a refresher in Japanese economic history. Far from easing monetary policy, the Bank of Japan kept money too tight for too long in the early 1990s. Japan's stock market slide began in early 1990, but its central bank raised interest rates through most of that year and didn't cut them until July 1991. While the Bank of Japan eventually chased interest rates down to zero, it was always too late to break the deflationary spiral.
There's little sign the U.S. is facing a similar danger today, given that the Federal Reserve has been dropping rates quickly as the economy has slowed. If anything, the problem is the opposite, with the Fed risking future inflation by putting rates into negative real territory and devaluing the dollar. (See Ronald McKinnon nearby.)
Japan also made the mistake of refusing to make banks pay for the mistakes they made during their global lending spree in the late 1980s. As the world economy fell into recession in 1990, so did Japan. But rather than letting banks take their losses, the Liberal Democratic Party kept bailing them out. This merely delayed the day of reckoning, as insolvent banks were allowed to exist as "zombies," alive in name but unable to lend.
The government also raised consumption taxes, burdening consumers at exactly the wrong time. Meanwhile, with encouragement from the Clinton Treasury, Tokyo launched a vast Keynesian spending program. Roads, bridges, trains -- you name it, Japan built it. The nearby chart shows the impact this spending had on overall Japanese government debt, which exploded over the decade. The nearly annual spending programs led to several false recoveries with growth blips, but they never changed incentives enough to revive domestic risk-taking.
Yet this is exactly the policy that Mrs. Clinton now wants the U.S. to emulate. Rather than let housing speculators and lenders take the hit for mispricing credit and allow the market to clear, she wants a 90-day freeze on foreclosures and a five-year freeze on mortgage resets. She also wants the feds to buy up mortgage-backed securities and guarantee troubled mortgages. Rather than let housing markets find a bottom where they can begin a recovery, she and her allies in both parties would prolong the agony. While some homeowners and banks would be saved from foreclosure or greater losses, the cost would be to lengthen the housing recession.
A better model is the one the late Al Casey put into practice during the savings and loan crisis in the early 1990s. As president of the Resolution Trust Corp., Mr. Casey sold almost $400 billion of bankrupt assets as rapidly as he could. Declaring that his purpose was to "put the RTC out of business," Mr. Casey let investors buy those assets even at "vulture" prices. The real estate market was able to find a bottom, and the recovery came so fast that Bill Clinton inherited an economy that grew by 3.3% in 1992.
The Beltway class also now wants to indulge in the same Keynesian "stimulus" that failed in Japan. Mrs. Clinton's "Rebuild America Plan" would invest $10 billion over 10 years in an "Emergency Repair Fund" -- a plan she claims would create 48,000 jobs for every billion dollars spent, or close to half a million jobs. She would build ports, railroads, airports, public transit, tunnels and roads. Senate Democrats are proposing more than $35 billion in new spending -- on top of their $168 billion in tax rebates. These may also lead to false recoveries, but they won't ignite a new round of risk-taking and investment.
Japan finally emerged from its funk earlier this decade after it realized its bank losses and caught the updraft from global monetary reflation. Still, its economic growth remains mediocre -- a level that wouldn't be tolerated in the U.S. and may not be enough even in Japan. Sluggish growth has already sunk one Prime Minister and could prove fatal to the current leader, Yasuo Fukuda, whose approval ratings are dropping fast.
The way to revive U.S. growth is by learning from Japan's mistakes, and doing the opposite. The U.S. needs monetary policy that maintains a stable price level, bank supervision that recognizes mortgage losses and lets markets clear, and marginal rate tax cuts that boost incentives to work and invest. In short, the American policies of the 1980s, not those of Japan's lost decade.
See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.
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A companion post to the preceding post:
The Dollar and the Credit Crunch
By RONALD MCKINNON
March 31, 2008; Page A19
We are all too familiar with the problem of mortgage credit associated with the slump in home prices. The great unresolved puzzle in today's financial crisis is why some other private credit markets are seizing up.
The financial press is full of stories about a shortage of the U.S. Treasury bonds necessary in the multitrillion-dollar interbank market as collateral for borrowing by illiquid banks. This shortage seems even stranger in the face of a large federal fiscal deficit ($237.5 billion in 2007) that continually increases the supply of new Treasurys.
This shortage of Treasurys, and the unexpected severity of the credit crunch, is linked to the flight from the dollar in the foreign exchanges.
The U.S. Federal Reserve has hastily cut short-term interest rates to just 2.25% in March 2008 from 5.25% in July 2007. Unsurprisingly, private capital inflows for financing the huge U.S. trade deficit have dried up. Hot money has flowed out of the U.S. into those countries (of which China is the most prominent) with currencies that are most likely to appreciate.
Foreign central banks (apart from those in Europe) are then induced to intervene, sometimes massively, to buy dollars in order to slow their currencies' appreciations. In 2007, China had the biggest overall reserve buildup of $460 billion. Other central banks, from the Gulf oil-producing states to Russia, Brazil and some smaller Latin American and Asian countries, have also intervened to accumulate dollar reserves.
A substantial proportion of these official reserves is invested in U.S. Treasurys. The Federal Reserve's Flow of Funds data (March 2008) show that in 2007 foreign central banks accumulated about $209 billion of U.S. Treasurys. Somewhat inconsistently, the Treasury's own data show an accumulation of $250 billion.
Although acute in 2007 and more so going into 2008, this drain of Treasurys was also very large from 2003 to 2005. By early 2004, the federal funds rate had been cut to just 1%, which also triggered a flight from the dollar -- at that time more into yen than renminbi. This previous episode of easy money and unduly low interest rates greatly aggravated both the U.S. housing bubble and the more general overleveraging of the American financial system from 2003 to 2006.
In 2007-08, the crash in housing and the implosion of over-leveraged hedge funds, special investment vehicles and so on, has increased counterparty risk in most financial transacting. Illiquid financial institutions cannot effectively bid for funds by putting up suspect private bonds or loans as collateral. Unsurprisingly, there is a "flight to quality" that increases the private domestic demand for Treasurys. But this is happening at a time when the flight from the dollar in the foreign exchanges has greatly reduced their supply.
This increased demand coupled with a fall in supply helps explains why, in the midst of a U.S. credit squeeze with higher interest rates on private financial instruments, nominal interest rates on U.S. Treasury bonds have fallen to surprisingly low levels. Despite substantial ongoing U.S. price inflation of 4.3% in the consumer price index and 6.4% in the producer price index, Treasury yields are less than 1% on a three-month bill, 1.32% on a two-year note, and 3.5% on the benchmark 10-year bonds. There are even reports of effectively negative nominal yields on certain very short-term Treasurys. The real yield on Treasury Inflation Protected Securities has turned negative. (See chart.)
So we have a paradox. Despite the financial turmoil in the U.S. and its government's not-so-strong fiscal position, with huge contingent liabilities for guaranteeing private and public pensions as well as bailing out failing banks, its credit standing has strengthened. The fact that the U.S. government can market Treasury bonds at insultingly low interest rates at least provides an argument for using fiscal stimuli -- such as the $160 billion tax rebate passed in February 2008 -- to prop up the sagging U.S. economy.
Beginning on March 27, the Fed offered to lend banks and bond dealers as much as $200 billion of Treasurys from its own portfolio for up to 28 days, in return for a variety of collateral. The Fed was responding to complaints from dealers of a shortage of Treasurys in the interbank markets, but without recognizing that the root cause was the flight from the dollar in the foreign exchanges.
In the 1970s under the dollar standard, episodes of a weak and depreciating dollar led to monetary explosions in foreign trading partners, with world-wide inflationary consequences. Now, the inflation threat to the U.S. could be aggravated if foreign central banks intervene to prevent their currencies from appreciating too fast and overly expand their money supplies.
Stabilizing the dollar in the foreign exchanges and encouraging the return of flight capital to the U.S. will require two things. The first is to convince the U.S. Federal Reserve that continually cutting interest rates and expanding the U.S. monetary base is not the appropriate response to today's credit crunch; rather it triggers a vicious cycle.
The Fed responds to the credit crunch by cutting interest rates, which would be the seemingly correct textbook strategy if the economy were closed and the foreign exchanges could be ignored. But the economy is open, and capital flies out of the country. Because of the unique position of the U.S. at the center of the world dollar standard, the drain of Treasurys -- the prime collateral in impacted credit markets -- exacerbates the credit crunch, and monetary expansion abroad worsens world-wide inflation. The Fed then further expands in response to the tightening of U.S. credit markets.
The second component of a strong dollar policy is more direct action on exchange rates. At the very least, China bashing as a means to force dollar depreciation against the renminbi should end. The U.S. government should also cooperate with central banks in Europe, Japan, Canada and elsewhere to stabilize the sinking dollar.
The best solution to the current crisis is to stop the flight from the dollar. This would be beneficial beyond relieving the drain of Treasurys and relaxing the crunch in American credit markets. Letting the dollar depreciate without any convincing action to secure its long-term value against other major currencies undermines confidence in the dollar's long-term purchasing power. It also lets the inflation genie out of the bottle, and makes a return to 1970s-style stagflation look imminent.
Mr. McKinnon is a professor at Stanford University and a senior fellow at the Stanford Institution for Economic Policy Research.
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'10% of GDP'
April 17, 2008; Page A18
Is Washington looking in the wrong place for financial market risk to taxpayers? According to a new study by Standard & Poor's, the answer is yes.
Congress is disturbed about the bailout risk from the Federal Reserve opening its discount window to borrowing from investment banks and broker-dealers. That's a reasonable concern, especially with the Fed guaranteeing $29 billion in dodgy Bear Stearns paper. But according to S&P, the "maximum potential cost" of bailing out Wall Street would be below 3% of GDP, assuming a deep and prolonged recession. That's painful, but not catastrophic.
Guess where the far greater danger comes from? If you said Fannie Mae and Freddie Mac, you are a faithful reader of these columns and we bow before you. According to the S&P study, the taxpayer risk from Fan and Fred, combined with that of other government-guaranteed agencies, "yields a potential fiscal cost to the government of up to 10% of GDP." With total U.S. GDP estimated at somewhere north of $14 trillion, that would put the Fan and Fred bailout cost at about $1.4 trillion. Yowza. This "fiscal burden" would be so large, in fact, that S&P figures it could even jeopardize the AAA credit rating of the U.S. government.
These are the same two companies, by the way, that have recently had their capital requirements reduced and their jumbo mortgage lending limits increased to a maximum of $729,750. New York Senator Chuck Schumer, among many others on Capitol Hill, had browbeaten the Bush Administration until it eased those limits. Capital is of course the only cushion taxpayers have against a bailout if Fan and Fred keep racking up losses. Better hope this recession isn't deep.
WSJ
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Second post of the morning:
Obama and Economic Opportunity
By JACK KEMP
April 17, 2008; Page A19
Dear Barack,
Greetings, it's me again, giving more advice and taking you up on your thoughtful suggestion to open up a national discussion and dialogue on race and racial reconciliation in America.
First of all, some historical perspective, not for you senator, but for my other readers.
I believe all great achievements in our nation's progress toward social, legal and economic justice have been led by a combination of agitation and idealism. From the Founders in 1776, to the Civil War waged to save the union and abolish slavery, to the Civil Rights Movement which began to fully integrate African Americans into the electoral and economic mainstream, we have wrestled with, debated and discussed the next steps that are needed toward "a more perfect Union."
Each great era of progress was led by men and women of conviction who challenged us to live up to the highest ideals of our nation, who declared in a very radical way that we are all God's children. This ideal was not even close to reality until the passage of the 1964 Civil Rights Act and the 1965 Voting Rights Act, both of which were aimed at abolishing the last vestiges of the evil practices known collectively as "Jim Crow."
This month I thought about April 15 not just in terms of taxes (they're too high and complex), but because of a great African-American agitator, Jackie Robinson, who broke the color barrier in baseball on that date and helped lead all professional sports to higher levels of excellence and performance.
Barack, as we fast-forward to today, I contend we've successfully integrated the U.S military, the arts and entertainment, and sports at all levels. The one area of American life that is still very separate and very, very unequal is our economy. Many people of color have risen spectacularly against the odds – Oprah Winfrey, Bob Johnson, Magic Johnson, Whoopi Goldberg and many other professional athletes, entertainers and businessmen and women of whom we can be proud. Still, we need to look at all those left behind, all those you have spoken of who today lack economic opportunity to climb the ladder of wealth, ownership and asset creation so central to achieving the American Dream.
As Jesse Jackson said at a Wall Street Project conference I attended, "Capitalism without capital is nothing but an ism." Truer words were never spoken. Look at the great fortunes generated by the Carnegies and Mellons, the Rockefellers, Guggenheims and others. These were established in an economic climate of sound money with very low taxes on income, estates and capital gains.
Before you start thinking, "There goes Kemp again, calling for a kind of laissez-faire approach to capitalism," let me note that incentives in the tax code to encourage investment have been championed at one time or another by both political parties – from Coolidge to Kennedy and from Reagan to Rangel. (Charlie Rangel to a lesser degree, but my old friend co-sponsored enterprise zones, with Joe Lieberman and me, that actually zeroed out capital gains taxes and has called for a cut in corporate income tax rates.)
In my opinion, people of all colors and income levels don't hate the rich. They want to get rich. They're more interested in generating wealth than they are in redistributing wealth. They want to own property, educate their children and build a nest egg that can be passed on to their heirs. Unfortunately, some aren't able to access the same ladder of opportunity that is so readily available to the majority.
As I'm fond of saying, you can't get rich on wages, you have to earn, save, invest, reinvest and pass on to your children the products of your labors.
Senator, I believe our tax code punishes this process of upward mobility, especially for people of color, and in some cases it actually prevents people from escaping poverty. In this respect, I believe your economic views are short-sighted. You've pledged to raise income tax rates to 39.5% and lift the cap on payroll taxes, which would end up raising the top rate on income to 52% or more. You also want to raise dividend taxes to 39.5% and capital gains to 28%, plus you want to return to a confiscatory 55% "death tax." Unwittingly, your plans would prohibit most black Americans, indeed most Americans, from ever getting rich or even richer. Your economic ideas, sincere as they are, would weaken the economy, weaken the dollar, and weaken our chances of reducing poverty and unemployment.
It's my strongly held belief that we should be working to democratize our free-enterprise, private property-based system. We can do this by expanding empowerment zones and offering zero capital gains taxes for those who invest there; by reforming the tax code to open access to capital; and by providing more school choice in urban America.
As for the housing sector, we should listen to my former colleague Bruce Bartlett, who has called for the repeal of this year's $117 billion tax rebate, and to redirect the money into a package of measures that would help those homeowners who actually need assistance to save their homes.
By giving people access to capital and allowing them to take ownership of assets, entrepreneurship will be encouraged and the cycle of poverty can begin to be broken. All persons should have the opportunity to go as high as their merit and determination can carry them. My favorite quote is from Abraham Lincoln, who said, "I don't believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else."
Lincoln's definition of entrepreneurial capitalism is the best I have ever heard. I believe that a bipartisan consensus could be reached in America on a 21st-century war on poverty that takes the best of the "center left" and the best of the "center right" on the reforms necessary to make the American Dream accessible to all our people. We may have a long way to go, but I remain an optimist about improving the human condition, expanding our democratic ideals, and forming a true partnership with private enterprise.
I love what Bobby Kennedy said in Bedford-Stuyvesant in 1968: "To ignore the potential contribution of private enterprise is to fight the war on poverty with a single platoon, while great armies are left to stand aside."
Barack, let's get together with, say: John Bryant of Operation Hope in Los Angeles; Ambassador Andrew Young of Good Works International; Bob Woodson of Neighborhood Enterprise Foundation in Washington, D.C.; Ted Forstmann of Forstmann Little & Company in New York; Russell Redenbaugh, a U.S. civil rights commissioner in Philadelphia; and economist Art Laffer. We can discuss how best to tackle the issue you raised in your March 18 speech, when you identified the lack of economic opportunity for people of color as one of our nation's greatest challenges.
Any interest, sir?
Mr. Kemp is a former congressman, the 1996 Republican vice presidential candidate, and a former secretary of Housing and Urban Development.
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http://www.latimes.com/news/opinion/commentary/la-op-orourke4-2008may04,0,6913702.story
From the Los Angeles Times
Fairness, idealism and other atrocities
Commencement advice you're unlikely to hear elsewhere.
By P.J. O'Rourke
May 4, 2008
Well, here you are at your college graduation. And I know what you're thinking: "Gimme the sheepskin and get me outta here!" But not so fast. First you have to listen to a commencement speech.
Don't moan. I'm not going to "pass the wisdom of one generation down to the next." I'm a member of the 1960s generation. We didn't have any wisdom.
We were the moron generation. We were the generation that believed we could stop the Vietnam War by growing our hair long and dressing like circus clowns. We believed drugs would change everything -- which they did, for John Belushi. We believed in free love. Yes, the love was free, but we paid a high price for the sex.
My generation spoiled everything for you. It has always been the special prerogative of young people to look and act weird and shock grown-ups. But my generation exhausted the Earth's resources of the weird. Weird clothes -- we wore them. Weird beards -- we grew them. Weird words and phrases -- we said them. So, when it came your turn to be original and look and act weird, all you had left was to tattoo your faces and pierce your tongues. Ouch. That must have hurt. I apologize.
So now, it's my job to give you advice. But I'm thinking: You're finishing 16 years of education, and you've heard all the conventional good advice you can stand. So, let me offer some relief:
1. Go out and make a bunch of money!
Here we are living in the world's most prosperous country, surrounded by all the comforts, conveniences and security that money can provide. Yet no American political, intellectual or cultural leader ever says to young people, "Go out and make a bunch of money." Instead, they tell you that money can't buy happiness. Maybe, but money can rent it.
There's nothing the matter with honest moneymaking. Wealth is not a pizza, where if I have too many slices you have to eat the Domino's box. In a free society, with the rule of law and property rights, no one loses when someone else gets rich.
2. Don't be an idealist!
Don't chain yourself to a redwood tree. Instead, be a corporate lawyer and make $500,000 a year. No matter how much you cheat the IRS, you'll still end up paying $100,000 in property, sales and excise taxes. That's $100,000 to schools, sewers, roads, firefighters and police. You'll be doing good for society. Does chaining yourself to a redwood tree do society $100,000 worth of good?
Idealists are also bullies. The idealist says, "I care more about the redwood trees than you do. I care so much I can't eat. I can't sleep. It broke up my marriage. And because I care more than you do, I'm a better person. And because I'm the better person, I have the right to boss you around."
Get a pair of bolt cutters and liberate that tree.
Who does more for the redwoods and society anyway -- the guy chained to a tree or the guy who founds the "Green Travel Redwood Tree-Hug Tour Company" and makes a million by turning redwoods into a tourist destination, a valuable resource that people will pay just to go look at?
So make your contribution by getting rich. Don't be an idealist.
3. Get politically uninvolved!
All politics stink. Even democracy stinks. Imagine if our clothes were selected by the majority of shoppers, which would be teenage girls. I'd be standing here with my bellybutton exposed. Imagine deciding the dinner menu by family secret ballot. I've got three kids and three dogs in my family. We'd be eating Froot Loops and rotten meat.
But let me make a distinction between politics and politicians. Some people are under the misapprehension that all politicians stink. Impeach George W. Bush, and everything will be fine. Nab Ted Kennedy on a DUI, and the nation's problems will be solved.
But the problem isn't politicians -- it's politics. Politics won't allow for the truth. And we can't blame the politicians for that. Imagine what even a little truth would sound like on today's campaign trail:
"No, I can't fix public education. The problem isn't the teachers unions or a lack of funding for salaries, vouchers or more computer equipment The problem is your kids!"
4. Forget about fairness!
We all get confused about the contradictory messages that life and politics send.
Life sends the message, "I'd better not be poor. I'd better get rich. I'd better make more money than other people." Meanwhile, politics sends us the message, "Some people make more money than others. Some are rich while others are poor. We'd better close that 'income disparity gap.' It's not fair!"
Well, I am here to advocate for unfairness. I've got a 10-year-old at home. She's always saying, "That's not fair." When she says this, I say, "Honey, you're cute. That's not fair. Your family is pretty well off. That's not fair. You were born in America. That's not fair. Darling, you had better pray to God that things don't start getting fair for you." What we need is more income, even if it means a bigger income disparity gap.
5. Be a religious extremist!
So, avoid politics if you can. But if you absolutely cannot resist, read the Bible for political advice -- even if you're a Buddhist, atheist or whatever. Don't get me wrong, I am not one of those people who believes that God is involved in politics. On the contrary. Observe politics in this country. Observe politics around the world. Observe politics through history. Does it look like God's involved?
The Bible is very clear about one thing: Using politics to create fairness is a sin. Observe the Tenth Commandment. The first nine commandments concern theological principles and social law: Thou shalt not make graven images, steal, kill, et cetera. Fair enough. But then there's the tenth: "Thou shalt not covet thy neighbor's house. Thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor anything that is thy neighbor's."
Here are God's basic rules about how we should live, a brief list of sacred obligations and solemn moral precepts. And, right at the end of it we read, "Don't envy your buddy because he has an ox or a donkey." Why did that make the top 10? Why would God, with just 10 things to tell Moses, include jealousy about livestock?
Well, think about how important this commandment is to a community, to a nation, to a democracy. If you want a mule, if you want a pot roast, if you want a cleaning lady, don't whine about what the people across the street have. Get rich and get your own.
Now, one last thing:
6. Don't listen to your elders!
After all, if the old person standing up here actually knew anything worth telling, he'd be charging you for it.
P.J. O'Rourke, a correspondent for the Weekly Standard and the Atlantic, is the author, most recently, of "On The Wealth of Nations." A longer version of this article appears in Change magazine, which reports on trends and issues in higher education.
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October 25, 2005, 8:27 a.m.
Moore Hypocrites Than True Believers?
Exposing the Do As I Say (Not As I Do) Left.
Q&A by Kathryn Jean Lopez
The mother of Princeton bioethics professor Peter Singer is lucky that her son is an hypocrite. Her son is a leading proponent of excising the undesirable — the imperfect via abortion, infanticide, and euthanasia. The disabled would fall under there, also, sometimes, the elderly.
Peter Singer's mother has Alzheimer's.
Peter Schweizer reports in his new book Do As I Say (Not As I Do): Profiles in Liberal Hypocrisy that "far from embracing his own moral ethic, Singer hired a group of health care workers to look after her."
Good for him, he can't even buy his own poison. (When your ideas are destructive, at least a little hypocrisy saves a life here and there, despite the widespread damage you may be doing.)
Singer isn't the only hypocrite on the Left. Hoover Institution fellow Schweizer exposes a handful of popular Lefty hypocrites in his new book. He recently talked to National Review Online editor Kathryn Lopez about his latest book and the Left's deficiencies.
KATHRYN JEAN LOPEZ: Michael Moore makes money off oil and war? Why would he bother lying about owning stock? Is Peter Schweizer the only person who bothered checking?
PETER SCHWEIZER:Michael Moore is constantly trying to prove his and the Left's moral superiority, so he says things about himself that are patently not true. He's pathological about it. How else to explain that he's loudly proclaimed no less than three times that he doesn't invest in the stock market because it's morally wrong while quietly picking up shares in a whole host of companies. A portfolio that includes Halliburton, Boeing, and HMOs doesn't fit the bill so he lies about it. I think he assumed that no one would poke around and investigate. When it comes to the MSM he was correct in making that assumption. He never responded to my questions. I'm dying to know how he explains away this one.
LOPEZ: Where did you get the idea for Do As I Say...? Did you just know the line of inquiry would be productive or did something fall into your lap?
SCHWEIZER: I got tired of having discussions and arguments with people on the Left who operate on the assumption that they possess the moral high ground. They're not greedy, they're the only ones who truly care about the poor, minorities, you name it. Knowing quite a few people on the Left I knew that wasn't true. So I started poking around — looking at tax returns, IRS filings, court documents, etc. Frankly, it's amazing how easy it was to find examples of lefties being completely hypocritical.
LOPEZ: Given the hypocrisy you expose on this front, please tell me Nancy Pelosi at least isn't a Wal-Mart basher.
SCHWEIZER: Nancy Pelosi bashes everyone who doesn't allow unions to call the shots. Everyone that is except herself. It's takes an amazing amount of gall to accept the Cesar Chavez Award from the United Farmworkers Unions while using non-UFW workers on your Napa Valley Vineyard. It takes the same to praise the Hotel Employees and Restaurant Employees Union and take massive sums of money from them all the while keeping them out of your Hotel and chain of restaurants. But again, I think Pelosi correctly assumes that no one in the media will challenge her on this.
LOPEZ: I'm all for having a little legitimate fun with liberals. But doesn't revealing Barbra Streisand's water bill feel a little like going through her garbage? Actually: Did you have to go through her or anyone else's garbage? Where did you get this stuff?
SCHWEIZER: I didn't go through Bab's trash. All the info in the book was obtained legally and ethically. Streisand's annual water bill of $22,000 to keep her lawn green is relevant because she made it relevant: She's constantly lecturing ordinary Americans about the need to cut back on our consumerist culture. Maybe if she turns off the taps she'll have some legitimate grounds for making the claims she does. As Kermit the Frog said, it's not easy being green.
LOPEZ: Um and the Clinton's underwear? Though the Clinton's claiming $4 per pair of used underwear among their charitable contributions does seem like it is begging for a New York Post cover.
I suppose there was not blue dresses. Something like that would make a lot more on ebay.
SCHWEIZER: Ah, yes, the Clintons, who profess to pay the maximum amount on their taxes every year because it's the right thing to do. The Clintons are simply amazing in their ability to lecture Americans about their need to pay more taxes while at the same time finding lucrative tax shelters and taking outrageous tax deductions. Again, the media gives them a free pass.
LOPEZ: What else about the Clintons do you want to hand over to RNC op research before 2008?
SCHWEIZER: I think their record of greed, jilting poor people out of their money, and their avarice are a sight to behold. Let people see how they have made their money over the last couple of decades and it speaks for itself.
LOPEZ: Tell me the great hypocrisy of that greatest of all public intellectuals according to one recent depressing survey: Noam Chomsky.
SCHWEIZER: Noam Chomsky thinks he's the Moses of this age and even those on the Left who don't agree with him on everything accept his moral authority. But Chomsky is a socialist who practices capitalism, and an anti-militarist who has made millions off of Pentagon contracts. Wonder what his followers would think of that? Then there is his constant lecturing about "tax gimmicks" and "tax shelters" that "the rich" use to avoid paying their "fair share." He must have forgotten about that when he set up his tax shelter.
LOPEZ: And he wasn't a lot of fun when you got in touch with him, was he?
SCHWEIZER: I give credit to Chomsky for responding to my questions. His excuses were something to behold. No wonder he teaches linguistics. It's amazing how he twists his words. By the way, he said it was okay to criticize other rich people for setting up trusts and setting one up himself. After all, he explained, he's been fighting for poor people his whole life.
LOPEZ: Did anyone ever take Al Franken seriously anyway? Why shouldn't anyone?
SCHWEIZER: I'm not sure that most people take Franken seriously, but the media most assuredly does. He professes to be more than a comedian. He claims to be a political analyst and apparently wants to be a U.S. senator. (His former writing partner says he really wants to be president. Yikes!) His vicious attacks against conservatives as racists are not meant to be funny. He really does think that we're bigots. So questions about his absolutely abysmal record when it comes to hiring minorities should be exposed. (For those who want a hint, less than one percent of his employees have been black. That's a worse record than Bob Jones University, which Franken claims is "racist.")
LOPEZ: So he lies you say? At heart, he's a comedian. Does it really matter?
SCHWEIZER: Yes it does matter. Among the liberal/Left base, they see Franken as some sort of prophet who speaks the truth. And again, the media gives him a free pass. I caught him on The Late Show with David Letterman last Friday. They chuckled a bit and Franken went on to explain his twisted and distorted view of the world. He wasn't challenged on anything he said.
LOPEZ: About Franken, he wanted to fight our Rich Lowry. You nervous now that your book is out?
SCHWEIZER: I tried to get Franken to answer my questions. I wanted him to explain some of the outrageous comments he made a few years ago about disliking homosexuals and the fact that he was glad one had been killed. (Imagine if a conservative had said that?) And I wanted to ask him why he considered conservatives and Republicans racist because they hired so few blacks when he had such a horrible record himself. Alas, he never responded.
About the Lowry-Franken fight: Rich is too classy to take him up on it but I wish he had. He could have taken him easy.
LOPEZ: Any Lefties you checked into who came out with flying non-hypocritical colors worth lauding for at least practicing what they preach?
SCHWEIZER: I really thought that Ralph Nader would be that man. He lives a monk-like existence and tends to shun the material things in life. But then I discovered that he fired some of his employees for trying to form a union and I realized he wouldn't fit the bill. I'm still looking....
LOPEZ: Another say-something-nice question: Is there anyone on the Left you admire? Or are you a hater?
SCHWEIZER: I don't admire the ideas of the Left but there are some individuals that I think demonstrated integrity and honesty. Senator Paul Wellstone — say what you will about him, but he seemed to at least try to live a life somewhat consistent with his principles.
LOPEZ: Were you depressed or invigorated by the big wigs of the Left's hypocrisy?
SCHWEIZER: Invigorated. It's another reminder that the ideas the left want to impose on the rest of us are so fundamentally bad that they don't even try to live by them. At the end of the day, when all the fun is done, I hope people view this as a book about ideas and the failure of liberal/Left ideas. They don't work for the leading lights of the Left. How could they possibly work for our country?
LOPEZ: One overarching kinda question: We all have our moments of hypocrisy. That we don't practice what we preach doesn't make what we preach any less valid. People are human, etc. Is there something about your book that is somewhat fundamentally unfair?
SCHWEIZER: Yes, we are all hypocrites and I talk about that in the book. But liberal hypocrisy and conservative hypocrisy are quite different on two accounts. First, you hear about conservative hypocrisy all the time. A pro-family congressman caught in an extramarital affair, a minister caught in the same. This stuff is exposed by the media all the time. The leaders of the liberal-Left get a complete pass on their hypocrisy. Second, and this is even more important, the consequences of liberal hypocrisy are different than for the conservative variety. When conservatives abandon their principles and become hypocrites, they end up hurting themselves and their families. Conservative principles are like guard rails on a winding road. They are irritating but fundamentally good for you. Liberal hypocrisy is the opposite. When the liberal-left abandon their principles and become hypocrites, they actually improve their lives. Their kids end up in better schools, they have more money, and their families are more content. Their ideas are truly that bad.
LOPEZ: Is there something about the book that sums something up philosophically about the Left?
SCHWEIZER: After researching the book I really truly believe that the leading lights of the Left — Moore, Franken, Clinton, Pelosi, Kennedy, etc. — really honestly don't believe what they are selling us. Their own experiences teach them that their ideas don't work.
LOPEZ: So I can't stand Michael Moore anyway. I really don't need any more anger aimed in his direction. Ditto with some others who get chapters in your book. Why should I read your book anyway? How might a Michael Moore fan get something out of Do As I Say...?
SCHWEIZER: All I would ask a Michael Moore fan do is look at the facts. Moore professes to hate capitalism ("the last evil empire" he's called it) but practices it in spades. Moore condemns people for their racism and claims to support and practice affirmative action, but has a lousy record of hiring minorities. He outsources post-production film work to Canada so he can pay non-union wages. I could go on and on. I would ask his fans: is this really a sincere person?
LOPEZ: You always seem to have projects going on. What's next for you?
SCHWEIZER: Right now I'm working to promote the book. I have some ideas for future projects but nothing set in stone. I wrote a novel with Cap Weinberger that came out a couple of months ago called Chain of Command. Cap is a class act and I enjoyed writing fiction. Maybe another novel at some point. We'll see.
LOPEZ: What's the funniest story you learned while compiling the book?
SCHWEIZER: It has to be one about Michael Moore. In his books Michael Moore goes on and on about the fact that Americans are racist because they live in white neighborhoods. It's an example of latent segregationist attitudes in his mind. When I checked the demographics on Michael Moore's residence I burst out laughing. Michael Moore lives in a town of 2,500 in Michigan. According to the U.S. Census Bureau, there is not a single black person in the entire town.
LOPEZ: Do you like any Streisand songs?
I've lately been partial to "You Don't Bring Me Flowers." It makes me think of the president's relationship with conservatives of late. (Don't judge me for my weirdness.)
SCHWEIZER: Yes, that song does seem fitting these days. Streisand has a pretty voice but I don't really listen to her. Not because of politics, but I like something with a strong beat.
LOPEZ: One more before we go: Can't you just be happy for Gloria Steinem, man?
SCHWEIZER: I am happy for Gloria Steinem. She finally found her man. My question is why couldn't she just be happy for other women who got married? A classic example of Do As I Say, Not As I Do.
http://www.nationalreview.com/interrogatory/schweizer200510250827.asp
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The author fails to discuss BO's approach to capital gains taxes wherein he admits he would raise rates even though it would yield less revenues, but I post it anyway because I think his point about bracket creep a worthy one.
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Obama's Faulty Tax Argument
By ANDREW G. BIGGS
May 9, 2008; Page A17
As the presidential campaign heats up, a key issue is whether to extend the 2001 and 2003 income tax cuts, which expire in 2011. John McCain wants to make the tax cuts permanent. Barack Obama and Hillary Clinton want to let the rates rise.
Opponents of the tax cuts point to spending programs that could be financed by the extra revenues. Chief among these is Social Security. Sen. Obama's Web site, for example, argues that "extending the Bush tax cuts will cost three times as much as what is needed to fix Social Security's solvency over the next 75 years."
Such statements imply that if we return to the seemingly modest tax rates of the 1990s, we could fund the $4.3 trillion Social Security deficit, and so much more. As Mr. Obama recently told Fox News, "I would roll back the Bush tax cuts on the wealthiest Americans back to the level they were under Bill Clinton, when I don't remember rich people feeling oppressed."
This argument seems compelling, but it is misguided. In reality, repealing the tax cuts would raise taxes far above Clinton-era levels. Due to quirks in the tax code, average taxes would be almost 25% higher than during the 1990s.
Mr. Obama's claim that the lost revenue from the income-tax cuts exceeds the Social Security shortfall derives from an analysis by the Center on Budget and Policy Priorities. The Center's conclusions have been widely cited, but rely on dubious assumptions.
The basic methodology is simple: Compare the income-tax revenues if the tax cuts expire to revenues if the tax cuts are extended. The Center measures the difference in revenue 10 years from now – to match the government's 10-year budget measurement period – then extends the difference over 75 years to make it comparable to the 75-year Social Security shortfall.
To account for the effects of inflation and economic growth, analysts compare tax revenues to the size of the economy. The Congressional Budget Office projects that if the tax cuts expire, income-tax receipts in 2018 will be 1.5% higher relative to gross domestic product than if the cuts are made permanent. By comparison, Social Security's 75-year shortfall is just 0.6% of GDP.
So Social Security is a costly problem, but the tax cuts cost much more. Open and shut case, right?
Not exactly. Tax revenues would skyrocket if the tax cuts expire, due to "bracket creep." Average incomes are higher today than in the 1990s, but income-tax brackets aren't adjusted for the growth of earnings. As a result, Americans will shift into higher tax brackets and pay a greater share of their incomes in taxes.
Going back to the tax rates of the 1990s doesn't mean that households will pay 1990s taxes. Because the tax brackets haven't risen along with incomes, average taxes would be significantly higher, and grow each year.
If the tax cuts expire, income-tax revenues by 2018 will rise to 10.8% of the total economy from 8.7% today – an increase of 24%. Compared to the average over the last 50 years, allowing the rates to rise would increase tax revenues by 32%.
Believe it or not, income taxes will rise even if the tax cuts remain in place, because the revenue-increasing effects of bracket creep more than offset the lower rates. With the lower rates, total income-tax revenues will increase to 9.3% of GDP by 2018. This level is 7% higher than today, and 13% above the 1957-2007 average. Thus even with the tax cuts, revenues will increase by more than enough to fix Social Security.
So even if the tax cuts are made permanent, future Americans will pay a greater share of their incomes to the government than in the past. But for some in Washington, that's not enough.
Not surprisingly, neither party highlights these rising tax receipts. They undercut liberal arguments that the government is starved of revenue. And they render conservative claims for the tax cuts unimpressive. ("Vote GOP: A smaller tax increase than the other guys!")
The next president will face difficult choices regarding how much to collect in taxes, and how much to spend on entitlements like Social Security. Future citizens may decide that paying higher taxes is worthwhile. But in any event, the misleading tax cuts vs. Social Security argument should not guide policy makers on this issue.
Mr. Biggs, a resident scholar at the American Enterprise Institute in Washington, D.C., is the former principal deputy commissioner at the Social Security Administration.
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Geopolitical Diary: Asian Banks and Rising Commodity Prices
May 28, 2008
Export-based economies that depend on a steady stream of dollars are beginning to feel the effects of an economic slowdown in the United States. This was evident Tuesday when central banks in Indonesia, the Philippines, Taiwan and South Korea began selling dollars in what is most likely an effort to strengthen their currencies against the dollar — a conscious decision to demote the importance of cheap exports in favor of controlling inflation.
Typically, East Asian countries hoard dollars in order to keep their own currencies weak. Weak currencies translate into lower prices and higher demand from foreign markets which in turn supports the export-centric East Asian economies. But this system works best when the dollar is strong and the price low for raw material like minerals (including oil), building supplies and food.
Right now this is not the case. With oil at $130 per barrel, grain prices at record highs and raw materials in fierce demand, the situation is becoming dire for manufacturing economies.
The currency-strengthening move undertaken by the central banks Tuesday is a shift in policy. Historically, a weak-currency export strategy has been a mainstay in East Asian economies. In fact, Japan, Taiwan, South Korea and Singapore all dragged themselves out of post World War II doldrums using this strategy. Since then, they have migrated from manufacturing-based economies to ones that are technological and service-centered. Others like Indonesia (which is still largely agriculturally based) are also hurting from the recent rise in commodity, energy and food prices but not to the degree of a manufacturing-based economy.
The recent currency manipulation strategy raises the specter of the East Asian financial crisis, set off by the Thai government’s decision in 1997 to float the baht. While the events Tuesday do not necessarily signal the beginning of another crisis, they certainly show that at least a few East Asian countries have hit some sort of threshold. They can no longer keep up with rising commodity prices. While Indonesia, the Philippines, Taiwan and South Korea are lower- and mid-level economies in East Asia, the decisions by their central banks are important, especially as a sign of what may come.
In fact, the real pain from high commodity prices is not necessarily being felt by the countries that tinkered with their currencies Tuesday, but by China and Thailand. As of 2006, manufacturing made up 41 percent and 35 percent of the Chinese and Thai economies respectively. By far, these countries operate the most manufacturing-dependent economies in East Asia.
In China and Thailand, factories are the backbone of the economy. In order to fuel the machines that produce the goods, these economies demand electricity, heat and large amounts of commodities ranging from iron to copper to platinum. Trucks, trains and boats are required to get those products to port and all consume fuel also. Compared to economies such as Japan, which is much more technology- and service-based, China and Thailand use far more energy and raw materials per dollar of wealth created.
Therein lies their weakness. China in particular is feeling the pain of high commodity prices. Like the other East Asian countries, it also has an export-based economy. But China’s case is special in that its top priority is political stability — a balance derived by providing its people with basic requirements like food. Thus far, China has been successful in doing so by reaping the benefits of a red-hot economy that has brought it wealth at a rapid pace. But rising commodity prices threaten the country’s economy and political stability in two ways. First, the high cost of raw materials and energy means that factories are seeing their already-tight profit margins shrink even further. Second, the rising cost of food can quickly lead to social upheaval if workers cannot afford to feed their families.
Although it has not employed the same methodology as the central banks on Tuesday, China has been taking action to strengthen its currency gradually since July 2005 — not by selling off dollars that it holds, but by making its yuan policy more flexible.
While other countries can buy breathing room by selling off chunks of U.S. dollars, the same luxury does not exist for China. If the yuan stays relatively weak against the dollar, then the country will continue to suffer high commodity prices and become vulnerable to food and energy shortages and thus social unrest. However, if China suddenly ramps up the current gradual strengthening of the yuan, then it risks shuttering factories that depend on exports and thus increasing unemployment. China also runs the risk of devaluing a significant portion of the approximately $1.7 trillion in savings it holds in foreign exchange reserves.
Ultimately, these actions — and those taken by the central banks Tuesday — do not change the fact that China, like all manufacturing-heavy economies, is in for some challenging times ahead.
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That Stagflation Show
June 9, 2008; Page A16
Friday's market rout in employment, oil, the dollar and stocks was not the end of the world, but it is a warning. The message is that the current Washington policy mix of easy money and Keynesian fiscal "stimulus" is taking us down the road to stagflation.
Stocks hit the skids following a plunge in the dollar and a nearly $11 leap in the oil price, which in turn followed a jump in the jobless rate to 5.5% in May from 5%. Investors are guessing that the weak jobs report means that the Federal Reserve won't follow through on its recent pledge to defend the dollar. That sent the dollar lower and gold and oil (which is denominated in dollars) soaring, which in turn adds to doubts about future economic growth. The market foreboding concerns a rerun of "That '70s Show" of higher prices but mediocre growth.
Washington has been on this path in earnest since the credit market blowup last August. The Fed slashed interest rates dramatically to save Wall Street and prevent a recession, ignoring the risk to the dollar. Meanwhile, Congress and the White House agreed to about $168 billion in "stimulus," mainly in the form of tax-rebate checks to prop up consumer spending. If you don't feel stimulated by this repeat of nostrums from the 1970s, join the club.
The Fed's strategy has triggered a dollar rout and commodity boom that has sent food and energy prices soaring. The nearby chart shows how oil prices have risen as interest rates have fallen. This commodity spike has made a recession more likely, not less. The trend is ominous enough that early last week Fed Chairman Ben Bernanke finally dropped his not-so-benign neglect and talked up the dollar; oil prices fell.
But Friday's markets show that investors still have little confidence in the Fed's ability to resist political pressure to keep easing money. A day earlier, European Central Bank President Jean-Claude Trichet signaled that he'll soon raise rates no matter what the Fed does. Mr. Trichet is right not to want to repeat the Fed's mistake, but his action didn't help confidence in the greenback.
As for those rebate checks, they were promoted in January by the Democratic Party's main policy intellectuals, including former Treasury Secretaries Robert Rubin and Larry Summers. The idea was that the rebates would tide the economy over until the credit crunch passed and the Fed's easy money began to work. The checks have been at least one-third distributed, and we're still waiting for their growth kick. Much of the cash is going to pay for $4 gasoline and higher food prices. In any event, such temporary rebates provide at best a short-term lift to consumer spending and do nothing to change the incentives to save or invest.
The White House acquiesced for the sake of bipartisan amity and the appearance of "doing something." Yet now that the jobless rate is rising, Democrats are blaming Republicans anyway. As a political matter, Republicans would have been better off fighting in January for tax cuts that stimulated something other than new Democratic voters. Instead, they've added $168 billion to the deficit without any growth payback.
The vast, diverse U.S. economy has shown remarkable resilience, and left to its own devices its natural tendency is to grow. But the problem looking forward is the Washington policy consensus. Mr. Bernanke continues to blame the commodity spike on a change in "relative prices" caused by growing demand for oil, even though demand is falling as the world economy slows.
Last week, Mr. Bernanke also explicitly rejected any comparison to the 1970s. The fact that he felt he had to defend himself on that score is telling. We prefer to stick with Paul Volcker, who lived through the 1970s and has said publicly that today's policy explanations sound exactly like those that were used to justify easy money in the early part of that lost economic decade. The Fed has to protect the dollar with deeds, not words.
Meanwhile, the born-again Democratic Keynesians are already demanding a second round of nonstimulating stimulus. They now want tens of billions of dollars in new public spending and a housing bailout this year, while in stark contradiction promising a huge tax increase to reduce the deficit next year. The one thing they rule out is a tax cut that would work.
None of this means Republicans have to repeat their January error. John McCain has a chance to break with this Beltway consensus and offer a pro-growth policy mix. To wit, tighter money to defend the dollar, burst the oil bubble and protect middle-class purchasing power; and marginal, immediate and permanent tax cuts to boost incentives and restore risk-taking.
No doubt Democrats would block a tax cut in Congress this year, and Barack Obama would say it's for the rich. But this is a fight Mr. McCain should welcome. Without his own economic narrative and policy breakout, Mr. McCain will find himself lashed to the status quo and playing defense. The markets are saying they don't want a repeat of the 1970s, and if they aren't heeded the voters will deliver the same message in November.
See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.
And add your comments to the Opinion Journal forum.
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The Weak-Dollar Threat to World Order
By JUDY SHELTON
June 9, 2008; Page A17
Imagine how Americans would feel if we suddenly realized that our most trusted trade partners have been slowly but inexorably imposing a tariff against U.S. goods since 2002 – a tariff now in excess of 50%.
What really stings is that these same trade partners are also our most important allies, in both military and ideological terms. We like to think we share the same moral values when it comes to defending democracy and the virtues of free market capitalism.
David Gothard
How disillusioning to discover that the leading proponents of open global trade – the ones who insist on a "level playing field" – think nothing of adopting policies that render our products overly expensive for their consumers, even as they proffer their goods around the world at inordinately discounted prices.
Now you know how members of the European Union feel these days.
As former New York Fed economist David King recently observed, the value of the U.S. dollar against the euro has fallen drastically in the last few years. In December 2002, one dollar was equal in value to one euro; today, it requires more than half again as many dollars to equal one euro. For American consumers, that means prices of imported European goods are more than half again higher than they would be had the dollar retained its value relative to the euro.
Too bad for our esteemed friends across the Atlantic. If the steep price rise was the result of a tariff imposed by the U.S. government, they could haul us before the World Trade Organization on a complaint that we engage in unfair trade practices. But since it's accomplished through loose monetary policy for domestic purposes and bolstered by plausible deniability at the highest levels – "A strong dollar is in our nation's interest" – there is little the Europeans can do about it.
The euro is the official currency used by 320 million Europeans in 15 member states: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain. Another three member states – Denmark, Sweden and the United Kingdom – use their own currencies. But the nine countries that have become EU member states since 2004 have all set convergence goals to join the eurozone in the near future: Slovakia (2009), Lithuania (2010), Estonia (2011), Bulgaria (2012), Hungary (2012), Latvia (2012), Czech Republic (2012), Poland (2012) and Romania (2012).
Taking note of these latest EU member states – former victims of Soviet-style central planning, now advocates for private enterprise – makes it clear that the U.S. has much more at stake than merely undercutting the competition in global markets with cheapened dollars. The connection between price stability and entrepreneurial effort is profound. Why should anyone work hard or take risks if financial rewards can be blithely confiscated through inflation? The old communist aphorism – "They pretend to pay us and we pretend to work" – reflects deep cynicism borne of citizen subservience to totalitarian government. Honest money is the bedrock of democratic capitalism.
When the U.S. turns a blind eye to the consequences of diluting the value of its monetary unit, when we abuse the privilege of supplying the global reserve currency by resorting to sleight-of-hand monetary policy to address our own economic problems – inflating our way out of the housing crisis, pushing taxpayers into higher brackets through stealth – it sends a disturbing message to the world.
Why would the nation that espouses Adam Smith and the wisdom of the invisible hand permit its currency to confound the validity of price signals in the global marketplace? How can Americans champion the cause of free trade and exhort other nations to rid themselves of protectionist measures such as tariffs and subsidies – and then smugly claim that U.S. exports are becoming "more competitive" as the dollar sinks?
That's not competing. It's cheating.
The U.S. cannot go on pretending the dollar's fate is somehow beyond our ken. Maintaining a reliable currency is a moral responsibility as well as a strategic imperative. To the extent we force Europeans to bear the costs of fighting inflation unleashed by accommodative Fed policy – higher interest rates and the hidden tariff of currency appreciation – we renege on our shared commitment to democratic capitalism, both in principle and practice. Moreover, we risk causing a rift in our vital alliance at a time when the geopolitical situation most requires strategic partnership.
It is interesting that one of the major foreign policy goals envisioned by Republican presidential candidate John McCain is to form a "League of Democracies" to promote the values of freedom and democracy. "I am an idealist," Sen. McCain noted in remarks before the Los Angeles World Affairs Council this past March, "and I believe it is possible in our time to make the world we live in another, better, more peaceful place, where our interests and those of our allies are more secure, and American ideals that are transforming the world, the principles of free people and free markets, advance even farther than they have."
The greatest ideological struggle since World War II – the one with the potential to devastate mankind through a nuclear exchange – united the U.S. and what was then called "Western Europe" against an "Eastern bloc" dominated by the Soviet Union. As today's Russia displays renewed interest in recapturing old territory, the seeming Cold War victory of democratic capitalism cannot be taken for granted. Nor should we underestimate the role of stable international monetary relations to facilitate free markets and secure the blessings of free trade.
Ukraine is among the most besieged – and perhaps the most pivotal – of Europe's recent converts to democracy. The biggest threat to Ukraine's prospects for success, both politically and economically? Inflation, now soaring past 30%. Ukraine's hryvnia is pegged to the dollar; every cut in the U.S. fed-funds rate spawns huge dollar inflows that must be converted by Ukraine's central bank into the domestic currency, further exacerbating inflation.
One way to mitigate the impact would be to let the hryvnia appreciate relative to the dollar. But that would doom Ukraine's efforts to boost its two main exporting industries, metallurgy and chemicals. Ironically, Russia finds itself in a similar monetary predicament, forced to choose between inflation (the ruble is based 55% on the dollar, 45% on the euro) or a rising currency.
It's hard to elicit sympathy for oil-rich Russia right now. Still, the economic uncertainties and social tensions unleashed by currency chaos can only damage the outlook for democratic states across Europe and the world. Mr. McCain's proposal for creating new institutions to secure and advance the transforming values of individual liberty and entrepreneurial capitalism holds out great promise. But to provide a stable foundation for global prosperity, the League of Democracies also needs to take on the essential task of international monetary reform.
Edouard Balladur, France's former prime minister, called for a union between Europe and the U.S. in a 120-page essay published in France last November, asserting it is time "to put an end to the disorder of floating currencies, which threatens the prosperity of the world and its progress, and which, in the end will destroy the very idea of liberalism." Nobel laureate Robert Mundell suggests a multiple-currency monetary union among the dollar, euro and yen that could be patterned similarly to the process that brought about European monetary union. Both men have invoked the possible inclusion of gold in a reformed international monetary system, recognizing the importance of protecting its integrity through automatic mechanisms and sanctions beyond the control of governments.
Notwithstanding Fed Chairman Ben Bernanke's assurances – "We are attentive to the implications of changes in the value of the dollar for inflation" – the need for honest money remains.
A gold standard beats a gab standard.
Ms. Shelton, an economist, is author of "Money Meltdown" (Free Press, 1994).
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Second post of morning
The Weak-Dollar Threat to World Order
By JUDY SHELTON
June 9, 2008; Page A17
Imagine how Americans would feel if we suddenly realized that our most trusted trade partners have been slowly but inexorably imposing a tariff against U.S. goods since 2002 – a tariff now in excess of 50%.
What really stings is that these same trade partners are also our most important allies, in both military and ideological terms. We like to think we share the same moral values when it comes to defending democracy and the virtues of free market capitalism.
David Gothard
How disillusioning to discover that the leading proponents of open global trade – the ones who insist on a "level playing field" – think nothing of adopting policies that render our products overly expensive for their consumers, even as they proffer their goods around the world at inordinately discounted prices.
Now you know how members of the European Union feel these days.
As former New York Fed economist David King recently observed, the value of the U.S. dollar against the euro has fallen drastically in the last few years. In December 2002, one dollar was equal in value to one euro; today, it requires more than half again as many dollars to equal one euro. For American consumers, that means prices of imported European goods are more than half again higher than they would be had the dollar retained its value relative to the euro.
Too bad for our esteemed friends across the Atlantic. If the steep price rise was the result of a tariff imposed by the U.S. government, they could haul us before the World Trade Organization on a complaint that we engage in unfair trade practices. But since it's accomplished through loose monetary policy for domestic purposes and bolstered by plausible deniability at the highest levels – "A strong dollar is in our nation's interest" – there is little the Europeans can do about it.
The euro is the official currency used by 320 million Europeans in 15 member states: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain. Another three member states – Denmark, Sweden and the United Kingdom – use their own currencies. But the nine countries that have become EU member states since 2004 have all set convergence goals to join the eurozone in the near future: Slovakia (2009), Lithuania (2010), Estonia (2011), Bulgaria (2012), Hungary (2012), Latvia (2012), Czech Republic (2012), Poland (2012) and Romania (2012).
Taking note of these latest EU member states – former victims of Soviet-style central planning, now advocates for private enterprise – makes it clear that the U.S. has much more at stake than merely undercutting the competition in global markets with cheapened dollars. The connection between price stability and entrepreneurial effort is profound. Why should anyone work hard or take risks if financial rewards can be blithely confiscated through inflation? The old communist aphorism – "They pretend to pay us and we pretend to work" – reflects deep cynicism borne of citizen subservience to totalitarian government. Honest money is the bedrock of democratic capitalism.
When the U.S. turns a blind eye to the consequences of diluting the value of its monetary unit, when we abuse the privilege of supplying the global reserve currency by resorting to sleight-of-hand monetary policy to address our own economic problems – inflating our way out of the housing crisis, pushing taxpayers into higher brackets through stealth – it sends a disturbing message to the world.
Why would the nation that espouses Adam Smith and the wisdom of the invisible hand permit its currency to confound the validity of price signals in the global marketplace? How can Americans champion the cause of free trade and exhort other nations to rid themselves of protectionist measures such as tariffs and subsidies – and then smugly claim that U.S. exports are becoming "more competitive" as the dollar sinks?
That's not competing. It's cheating.
The U.S. cannot go on pretending the dollar's fate is somehow beyond our ken. Maintaining a reliable currency is a moral responsibility as well as a strategic imperative. To the extent we force Europeans to bear the costs of fighting inflation unleashed by accommodative Fed policy – higher interest rates and the hidden tariff of currency appreciation – we renege on our shared commitment to democratic capitalism, both in principle and practice. Moreover, we risk causing a rift in our vital alliance at a time when the geopolitical situation most requires strategic partnership.
It is interesting that one of the major foreign policy goals envisioned by Republican presidential candidate John McCain is to form a "League of Democracies" to promote the values of freedom and democracy. "I am an idealist," Sen. McCain noted in remarks before the Los Angeles World Affairs Council this past March, "and I believe it is possible in our time to make the world we live in another, better, more peaceful place, where our interests and those of our allies are more secure, and American ideals that are transforming the world, the principles of free people and free markets, advance even farther than they have."
The greatest ideological struggle since World War II – the one with the potential to devastate mankind through a nuclear exchange – united the U.S. and what was then called "Western Europe" against an "Eastern bloc" dominated by the Soviet Union. As today's Russia displays renewed interest in recapturing old territory, the seeming Cold War victory of democratic capitalism cannot be taken for granted. Nor should we underestimate the role of stable international monetary relations to facilitate free markets and secure the blessings of free trade.
Ukraine is among the most besieged – and perhaps the most pivotal – of Europe's recent converts to democracy. The biggest threat to Ukraine's prospects for success, both politically and economically? Inflation, now soaring past 30%. Ukraine's hryvnia is pegged to the dollar; every cut in the U.S. fed-funds rate spawns huge dollar inflows that must be converted by Ukraine's central bank into the domestic currency, further exacerbating inflation.
One way to mitigate the impact would be to let the hryvnia appreciate relative to the dollar. But that would doom Ukraine's efforts to boost its two main exporting industries, metallurgy and chemicals. Ironically, Russia finds itself in a similar monetary predicament, forced to choose between inflation (the ruble is based 55% on the dollar, 45% on the euro) or a rising currency.
It's hard to elicit sympathy for oil-rich Russia right now. Still, the economic uncertainties and social tensions unleashed by currency chaos can only damage the outlook for democratic states across Europe and the world. Mr. McCain's proposal for creating new institutions to secure and advance the transforming values of individual liberty and entrepreneurial capitalism holds out great promise. But to provide a stable foundation for global prosperity, the League of Democracies also needs to take on the essential task of international monetary reform.
Edouard Balladur, France's former prime minister, called for a union between Europe and the U.S. in a 120-page essay published in France last November, asserting it is time "to put an end to the disorder of floating currencies, which threatens the prosperity of the world and its progress, and which, in the end will destroy the very idea of liberalism." Nobel laureate Robert Mundell suggests a multiple-currency monetary union among the dollar, euro and yen that could be patterned similarly to the process that brought about European monetary union. Both men have invoked the possible inclusion of gold in a reformed international monetary system, recognizing the importance of protecting its integrity through automatic mechanisms and sanctions beyond the control of governments.
Notwithstanding Fed Chairman Ben Bernanke's assurances – "We are attentive to the implications of changes in the value of the dollar for inflation" – the need for honest money remains.
A gold standard beats a gab standard.
Ms. Shelton, an economist, is author of "Money Meltdown" (Free Press, 1994).
-
I'm not sure how well this will print here, but anything by Brian Wesbury, an absolutely outstanding supply side economist (and market prognosticator) is worth the reading:
WSJ
Change We Can Believe In Is All Around Us
By BRIAN WESBURY
June 11, 2008; Page A23
Rarely do senators become president, but in less than five months either John McCain or Barack Obama will become the 44th president of the United States. That's change, and that's interesting.
It's also what everyone seems to want – change. Sen. Obama promises to provide "Change We Can Believe In." Sen. McCain suggests that "the choice is between the right change and the wrong change." If it's the war that is the focus of all this talk about change, well, that's understandable, and maybe people really do want change. But if it's the economy, it's hard to imagine that change could happen any faster.
In fact, the U.S. economy (really, the global economy) is transforming at an absolutely astounding rate. We're living in Internet Time, where policies and their consequences travel the world at the speed of light. The normal human reaction to such a rapid pace of change is to be overwhelmed, stressed out, anxious and fearful. As a result, it is probably true that when voters listen to talk about change, what they really hear are promises of "no change," which would be a huge difference from the status quo. They just want things "the way they were."
Look at the chart nearby. America's manufacturing output, as measured by the Federal Reserve, is up seven-fold since 1950, but manufacturing jobs as a share of all jobs have fallen to 10% from 30%. Your grandfather and father may have worked for General Motors (and joined the UAW), but it's likely that you don't and won't.
The problem, if it really is one, is not foreign competition or evil financiers. It is technology and productivity. In the 10 years ending in 2007, durable goods manufacturing productivity averaged an annual growth rate of 4.8%. In other words, if real growth is less than 4.8%, the sector needs fewer workers year after year.
For the economy as a whole, overall U.S. business productivity rose 2.7% at an average annual rate during the decade ending in 2007, 1.7% in the decade ending in 1997 and 1.4% in the 10 years through 1987. Change is everywhere, and it's accelerating.
This has happened before – in the Industrial Revolution – where the political environment bred America's first real populists, people like William Jennings Bryan and Theodore Roosevelt. Bryan was perhaps the best orator of American political history, and like Mr. Obama, he could affect people emotionally. Roosevelt, like Mr. McCain today, was a true American hero and one tough guy. History may not be exactly repetitive, but it sure seems to move to similar rhythms.
Unfortunately for the American economy, the populist movement of the late 19th and early 20th centuries led to a rapid growth in government intrusion into business activity. The populists didn't like the gold standard and demanded more government regulation.
AP
Sens. John McCain and Barack Obama in January 2007.
In 1913, the Federal Reserve System was created and the income tax was introduced to pay for a growing government. And then, during the Great Depression – which was caused by the new Fed, trade protectionism and tax rate increases – a massive expansion in government took place. Forty years later, in the malaise of the late 1970s and early 1980s, the U.S. finally figured out what it was doing wrong. By returning to hard money under Paul Volcker, and lower taxes and less regulation under Ronald Reagan, the high-tech leg of the Industrial Revolution began.
The fruits of this are plain to see. Rather than watching the sun set on the U.S., as many believed would happen in the early 1980s, the U.S. has experienced one of the greatest booms in wealth creation in world history. And the impact of our technological innovation has helped lift untold numbers out of poverty.
This technology has created massive amounts of change. Like the Industrial Revolution before it, the current transformation is anything but pain-free. It's what Joseph Schumpeter called creative destruction. Google, Craigslist and Microsoft have been prospering. General Motors, United Airlines and the New York Times have not. In the midst of layoffs in the newsroom, it's hard to see anything good happening in the rest of the economy.
Yes, there are serious problems in the housing market, and yes, oil prices are at all-time highs, even after adjusting for inflation. As a result, it feels like things are getting worse rapidly. But the subprime mess will end up costing much less in real terms than the savings-and-loan crisis. Americans are spending about 7% of their total budget on energy, roughly the same as in 1970 and well below the peak of 9% in 1981. Once the Fed starts to lift rates again, oil prices should drop.
Americans have had it so good, for so long, that they seem to have forgotten what government's heavy hand does to living standards and economic growth. But the same technological innovation that is causing all this dislocation and anxiety has also created an information network that is as near to real-time as the world has ever experienced.
For example, President Bush put steel tariffs in place in March 2002. Less than two years later, in December 2003, he rescinded them. This is something most politicians don't do. But because the tariffs caused such a sharp rise in the price of steel, small and mid-size businesses complained loudly. The unintended consequences became visible to most American's very quickly.
Decades ago the feedback mechanism was slow. The unintended consequences of the New Deal took too long to show up in the economy. As a result, by the time the pain was publicized, the connection to misguided government policy could not be made. Today, in the midst of Internet Time, this is no longer a problem. So, despite protestations from staff at the White House, most people understand that food riots in foreign lands and higher prices at U.S. grocery stores are linked to ethanol subsidies in the U.S., which have sent shock waves through the global system.
This is the good news. Policy mistakes will be ferreted out very quickly. As a result, any politician who attempts to change things will be blamed for the unintended consequences right away.
Both Mr. McCain and Mr. Obama view the world from a legislative perspective. Like the populists before them, they seem to believe that government can fix problems in the economy. They seem to believe that what the world needs is a change in the way government attacks problems and fixes the anxiety of voters. This command-and-control approach, however, forces a misallocation of resources. And in Internet Time this will become visible in almost real-time, creating real political pain for the new president.
In contrast to what some people seem to believe, having the government take over the health-care system is not change. It's just a culmination of previous moves by government. And the areas with the worst problems today are areas that have the most government interference – education, health care and energy.
The best course of action is to allow a free-market economy to reallocate resources to the place of highest returns. In the midst of all the natural change, the last thing the U.S. economy needs is more government involvement, whether it's called change or not.
Mr. Wesbury is chief economist for First Trust Portfolios, L.P.
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Bernanke's Market Week
June 21, 2008; Page A8
The Federal Reserve's Open Market Committee meets again next week, and one of its jobs will be to clean up the mess the Fed made this week.
Earlier this month, Chairman Ben Bernanke signaled a turn in Fed policy to include a focus on maintaining a "stable" dollar. Sure enough, the dollar strengthened, the price of oil fell and stocks crept up. Then earlier this week, someone in the upper reaches of the Fed began leaking to the press in advance of next week's FOMC meeting that Mr. Bernanke saw no reason to raise interest rates this month, or indeed until the autumn.
Sure enough, oil shot up and gold rose back above $900 an ounce, with equities tanking in turn on stagflation fears. Throw in renewed worries over credit problems in the banking system, and the markets had a very ugly week.
What we can't figure out is what in the world Fed officials are thinking, assuming that's even the right word. The most precious commodity a Fed Chairman has is credibility. When he makes a widely advertised public commitment to maintain dollar stability, and then he or his minions leak that he has no plans to back that up with any action, he is squandering his own currency. Central banking isn't an academic seminar where ideas don't have consequences.
With inflation climbing around the globe, most of it inspired by dollar weakness, the Fed has a growing credibility problem. Mr. Bernanke needs to understand that investors are beginning to suspect that the most important financial official in the world doesn't seem to appreciate the Fed's primary role in undermining the greenback. If that conclusion becomes fixed, this week's market meltdown will look pretty by comparison.
wsj
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A Chance for McCain
by Robert Novak
Posted: 06/23/2008
When John McCain met privately with Rep. Paul Ryan of Wisconsin after a political event in the Milwaukee suburbs May 29, the Republican presidential candidate might not have realized that he had just come face to face with an opportunity and a test. Ryan showed him his plan to reform the economy. McCain expressed interest and said he would turn it over to his campaign's economists.
That was truly ominous. If the Kemp-Roth tax cut had been handed over to economists three decades ago, it likely would have died in its crib and aborted the national and Republican revival under President Ronald Reagan. Ryan's plan is more sweeping than the proposal by his boss and mentor Jack Kemp, who dealt only with taxes. In 70 pages, "Ryan's Roadmap for America's Future" shows the way to reform taxes, control spending and brake runaway entitlement outlays.
Ryan has proposed far too much to handle for nervous House Republican leaders. They have refrained from publicly knocking Ryan down only because they are in a state of terror over their party's desperate condition, as indicated by plummeting polls and special election defeats. More important is the yet unstated reaction by McCain, famously uninterested in economics but never shy on courage to defy the conventional wisdom.
Actually, to embrace Ryan's Roadmap requires more political insight than courage. Ryan was met with enthusiastic approval at some 35 town meetings in his southern Wisconsin industrial district, where he unveiled his plan over the last two months. His constituents, who sent liberal Democrat Les Aspin to Congress for 22 years, are legendary "Reagan Democrats" who have soured on the GOP. Ryan believes they are far ahead of politicians in their alarm over entitlements. "Do we have the guts to act?" asks Ryan.
Continued
Ryan fears potential national disaster is ahead because we "will exceed the European extent of government and bring our economy to extinction." With the U.S. government share of the economy at 20 percent, he sees it rising to a calamitous 40 percent when his three children (ages 3, 4 and 6) reach their 30s, requiring a doubled tax rate. President Bush's appropriations rose $49 billion over the last year, and the Democratic-controlled House upped that ante. But spending enacted by Congress is dwarfed by statutory increases in Social Security, Medicare, Medicaid and other entitlements.
Ryan's Roadmap makes a serious effort, as neither Congress nor the Bush administration did, to cut appropriated spending. Ryan calls it "Gramm-Rudman on steroids" (referring to successive spending control measures beginning in 1985).
But his boldest thrust comes in radical changes to entitlements, including an option for persons under 55 years old to buy private retirement insurance, plus reduced benefits and delayed retirement for Social Security. His Internal Revenue reform would amount to an optional modified flat tax (advocated in principle by McCain) and substituting a small business consumption tax for the corporate income tax rate -- while holding federal taxes to 18.5 percent of gross domestic product.
It is hardly likely the Republican leadership would embrace Ryan's daring agenda if it cannot even bring itself temporarily to forego pork-barrel spending by passing a moratorium on earmarks. But Ryan represents a younger breed of reform Republicans who now have junior leadership positions.
Ryan, 38, top Republican on the House Budget Committee, has been working closely with freshman Rep. Kevin McCarthy, 43, who has been named chairman of the national platform by Minority Leader John Boehner, and Rep. Eric Cantor of Virginia, 45, the party's chief deputy whip. After another expected bad GOP defeat in the 2008 congressional elections, Ryan, McCarthy and Cantor could constitute the party's new House leadership.
But who will be in the White House? McCain so far has generated little excitement in his own Republican base, much less among Reagan Democrats. His cautious political and economic advisers flinch at complicated tax changes, massive budget cuts and tampering with Social Security. But a campaign based on Barack Obama's shortcomings may not be enough on Election Day. While Ryan says the people are more than ready for his strong medicine, McCain has not yet agreed.
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"But a campaign based on Barack Obama's shortcomings may not be enough on Election Day."
EXACTLY so. Part of BOs appeal so far I believe to be grounded in the fact that people are tired of the Hatfield vs. McCoys squabbling of Washington and BO speaks in positives.
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Elaine L. Chao
'I See Opportunities in This Country a Little Differently'
By BRENDAN MINITER
July 12, 2008; Page A9
Washington
Secretary of Labor Elaine L. Chao immigrated to the United States on a cargo ship in 1961, when she was 8 years old. The trip from Taiwan took a month. It was no easy passage.
"My sister fell ill during the ocean journey," she told me on a recent afternoon in her spacious office, a short walk from the U.S. Capitol. "Seventeen hundred nautical miles, there were no doctors on board and my mother sat up for three nights and three days, just continuously soaking my sister's body, little body, with cold water" to break her fever.
Zina Saunders
"So I see opportunities in this country, perhaps, in a slightly different way. . . . America really is unique," she says. "It's really a land of meritocracy, where it doesn't matter where you were born, who you know. If a person works hard, most of the time . . ."
On this last point, Ms. Chao's words trail off, as the current state of the economy seems to be weighing on her mind. There is widespread speculation that the economy could soon slip into recession as the country sheds jobs and faces a slumping housing market. Still, Ms. Chao points out that the national unemployment rate remains below where it averaged in the 1990s (5.5% today versus 5.7% last decade). "People forget that," she says.
Yet Ms. Chao seems most concerned with the long-term trends that affect the workforce. The old economy that relied heavily on domestic manufacturing and production is giving way to a modern economy based on technology and instant communications. This change is empowering workers, allowing them to work more flexible schedules and boost their productivity. At the same time, it is also changing the criteria required to get ahead -- and forcing a decline in union membership.
In 1979, 24.1% of American workers belonged to a union. Today only 12.1% do, and the number falls to 7.5% for those who do not work for the government. Whether a worker has a college or even a high-school diploma is now much more important for lifetime earnings and employment than whether they have a union card.
Numbers tell the story. Workers with a bachelor's degree earn, on average, more than $1,400 a week and have an unemployment rate of just 2.2%. High-school dropouts, by contrast, average just $528 a week for full-time work and their unemployment rate is 8.3%. "We have a skills gap in this country," Ms. Chao said.
Ms. Chao seems to be concerned that the country could cease to be the land of opportunity that drew her parents decades ago. Congress appears eager to impose restrictive regulations that could hurt the economy in the name of helping those who don't have the skills to compete. If these regulations are enacted, Ms. Chao fears the "Europeanization" of the American economy.
"I have a whole list here," she says, of what Congress could do to hobble economic growth, and it includes legislation that is gaining traction on Capitol Hill. Every measure would make it more expensive to employ people in America, or would make it easier for unions to capture a larger slice of the workforce.
On the list is "card check" -- legislation that would allow union leaders to dispense with secret ballot elections in unionizing a company's workforce. Instead, union officials would be allowed to get the union certified once a majority of employees in a workplace merely signed a union card. This measure -- the most radical change in labor relations since the New Deal -- passed the House last year, but was stopped in the Senate. Ms. Chao is happy it was. "The right to a private ballot election is a fundamental right in our American democracy and it should not be legislated away at the behest of special interest groups," she says.
Other items on her list include bills that would expand the Family Medical Leave Act, force some employers to give 90 days' notice before laying off workers (up from 60 days now), and mandate minimum paid sick leave. There's also "comparable worth," a bill being pushed by Sen. Hillary Clinton and others that would force employers to pay the same wages for different occupations. Employers would have to pay nursing aides (mostly female), for example, the same wages they offer janitors (mostly male), if the bureaucracy deemed these occupations were of comparable value.
If these regulations become law next year, she believes it would make it more difficult for employers to adapt their workforce to a changing economy. "The flexibility of our workforce is one of the reasons for our great economic success," she says. "Only with our flexibility will there be continued dynamism, vibrancy and opportunities. We had young people in France rioting at the age of 24 because they fear that if they do not find a job by the age of 24 that they will never find a job for the rest of their lives. That is so foreign to what the American experience is all about."
"The Eurozone countries and Japan have not created as many jobs as America has in the last seven years," she adds. "And their unemployment rate is double, if not sometimes triple, that of the United States. So the best way to help a worker get a job . . . is to help them get reconnected to the workforce as quickly as possible because the longer they stay out, the more things will change at the workplace and the harder it will be for them to re-enter the workforce."
"Some in Washington want to increase benefits, regulations and mandates and that's the European model. That is not the path we want to follow long term."
Ms. Chao says that when she attends meetings with other labor ministers from around the world, "they may not agree totally with our point of view, but they all want to learn about how America creates opportunities and jobs and how the dynamism of our economy, the flexibility of our economy creates opportunities."
What does she tell them?
"That freedom works. It is universally accepted that there needs to be open markets, transparency, low tax rates, less regulation and the rule of law . . . in a world-wide economy if there is not transparency, if there is greater taxation, if there is greater regulation, capital and labor will move."
Ms. Chao is in charge of one of the most powerful regulatory agencies in the federal government. She's also amassed a record conservatives applaud -- for example in year seven of her tenure, her department's budget is slightly smaller than it was on year one, even as workplace injuries have fallen to all time lows.
When I ask her what role a labor secretary should play now, her answer can be summed up in two words: job training.
"We should really be called the department of job training," she says. After all, the labor department spends more than 90% of its $50 billion entitlement budget on it. The problem is that much of this never reaches workers. Instead, it's wasted on overhead or spent on courses workers don't want to take.
So in her last months in office Ms. Chao is pushing for more flexibility in how job training funds can be used. "Would it not make more sense if we allowed . . . the worker to take that money and register at a community college . . . choose a course of their own liking, preference?"
An even more important issue is transparency. One of Ms. Chao's early initiatives was to clean up decades-old regulations that mired even good employers in costly litigation because the rules were written for occupations that no longer exist. "Straw boss" and "key punch" are two that Ms. Chao rattled off. "We in government have a responsibility for ensuring that the regulations that we issue are clear and understandable."
Another of Ms. Chao's transparency initiatives involved union financial disclosure. Federal union disclosure rules have been on the books since at least 1959. But when Ms. Chao came into office in 2001, many unions gave such vague descriptions of their expenses that it was impossible to track where they spent their money. One, for example, listed more than $3.9 million of expenditures as "sundry expenses."
Ms. Chao tightened the disclosure rules and then spent years fighting union objections in court. In the end she won. Today unions have to itemize expenses greater than $5,000. This has made it easier for rank-and-file members to keep tabs on their own union officials. It has also led to more than a little embarrassment, such as when a disclosure form filed by the New York City Ironworkers Local 40 in 2006 drew media attention because it revealed that the union spent $52,879 at a Cadillac dealer for a "retirement gift."
But when I ask what she thinks about being called a foe of unionized labor, she stops me before I can finish the question. "I just enforce the law." There are approximately 180 laws that the labor department is charged with administering. Her success has come by quietly enforcing all of them.
This no-nonsense approach to her job and her faith in the flexibility of America's labor markets stems from Ms. Chao's immigrants roots.
Her parents fled the communist revolution in China in 1949 and settled in Taiwan. As a sea captain nearly a decade later, her father had few economic opportunities. So he took the National Maritime Master's Special Qualification Examination and scored so well that the Taiwanese government sponsored him to study in the U.S. But there was a catch: The offer was for him alone. He would have to leave his two children and wife behind.
"They never hesitated," she said, adding that "my mother didn't try to persuade my father not to go. In fact, it was quite the opposite.
"He came and landed the day after Christmas. He was alone for three years . . . before he was finally able to bring us over."
"How they knew what America stood for, or where America was, is pretty impressive to me -- that this young couple with no connections, no financial resources to speak of, would dare to audaciously dream that they could come to America."
Mr. Miniter is an assistant features editor at The Wall Street Journal.
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Stupidity and the State, Part II
By ERNEST S. CHRISTIAN and GARY A. ROBBINS
July 19, 2008; Page A7
Washington can be counted on to create a crisis -- usually by sheer incompetence. Then it rushes to the rescue, often doing more harm than good. Late last year, with an impending recession, Congress rushed forward to spend more money. The plan was to send $106 billion of Economic Stimulus Payments -- typically between $1,200 and $1,800 -- to millions of American families.
The planners predicted people would immediately spend the money on additional consumption and that increased demand, especially for consumer durables, would stimulate production, boost the economy, and forestall recession. In January, House Speaker Nancy Pelosi declared that 500,000 jobs would be created.
FROM THE ARCHIVES
Stupidity and the State, Part I
06/07/08By the end of June, $86 billion was in the hands of 105 million households. By October, the remaining $20 billion will have been shoveled out the door. But people have not gone on a spending spree. Recent Commerce Department data indicate that less than 10% of the stimulus money is being spent on new consumption.
In a classic case of government working against itself, other more powerful government actions, including the Fed's extraordinarily loose monetary policy, have boosted inflation and caused families to restrict purchases, especially in the case of higher-priced consumer durables. Overall, compared to last year, the quantity of consumer durables purchased has declined by 1.5%. Retail sales are sluggish. Contrary to Ms. Pelosi's confident prediction, the economy has shed 460,000 jobs since December.
Thanks to an increased rate of inflation compared to last year, the basic CPI market basket is now 1.6% higher than it otherwise would be. As a result, even before receiving its $1,200 stimulus check, a typical two-earner family with income of $75,000 will have already experienced a $1,200 decline in its purchasing power since last year. So much for the stimulus plan; it's been wiped out by extra inflation. Worse, the hole in the family's budget from inflation is permanent. It will be there next year and thereafter, even if the rate of increase in future inflation slows -- although many economists predict higher, not lower, rates of inflation.
On net, members of Congress seem to be the only beneficiaries of the stimulus. They got to posture and pose, and send out to voters untold millions of press releases and mailings extolling themselves and the stimulus checks.
None mentioned the government's low interest rates which touched off the housing bubble that's led to the economic turndown, or the inflation that's undermined the very expensive remedy that hasn't worked as planned. But that didn't stop Ms. Pelosi from proposing another $50 billion "stimulus" package on Thursday.
Mr. Christian, an attorney, was a deputy assistant secretary of the Treasury in the Ford administration. Mr. Robbins, an economist, served at the Treasury Department in the Reagan administration.
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The Fannie Mae Gang
By PAUL A. GIGOT
July 23, 2008; Page A17
Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for The Wall Street Journal's editorials raising doubts about the accounting of Fannie Mae. I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels.
Mr. Mozilo loudly declared that I didn't know what I was talking about, that I didn't understand accounting or the mortgage markets, and that I was in the pocket of Fannie's competitors, among other insults. Mr. Raines, always smoother than Mr. Mozilo, politely intervened to avoid an extended argument, and Countrywide's bantam rooster strutted off.
AP
Clockwise from top left: Barney Frank, Franklin Raines, Mike Oxley, Angelo Mozilo and Paul Krugman.
I've thought about that episode more than once recently amid the meltdown and government rescue of Fannie and its sibling, Freddie Mac. Trying to defend the mortgage giants, Paul Krugman of the New York Times recently wrote, "What you need to know here is that the right -- the WSJ editorial page, Heritage, etc. -- hates, hates, hates Fannie and Freddie. Why? Because they don't want quasi-public entities competing with Angelo Mozilo."
That's a howler even by Mr. Krugman's standards. Fannie Mae and Mr. Mozilo weren't competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines -- following predecessor Jim Johnson -- and Mr. Mozilo made each other rich. Which explains why Mr. Johnson could feel so comfortable asking Sen. Kent Conrad (D., N.D.) to discuss a sweetheart mortgage with Mr. Mozilo, and also explains the Mozilo-Raines tag team in 2003.
FANNIE MAYHEM: A HISTORY
Click here for a compendium of The Wall Street Journal's recent editorial coverage of Fannie and Freddie.I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.
I know this because for more than six years I've been one of their antagonists. Any editor worth his expense account makes enemies, and complaints from CEOs, politicians and World Bank presidents are common. But Fannie Mae and Freddie Mac are unique in their thuggery, and their response to critics may help readers appreciate why taxpayers are now explicitly on the hook to rescue companies that some of us have spent years warning about.
THE GANG RESPONDS
• Sen. Kent Conrad (D. N.D.) – 06/23/08
• Rep. Michael G. Oxley (R. Ohio) – 05/11/06
• Franklin Raines – 02/25/02My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie's derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, "Fannie Mae Enron?", sent Fannie's shares down nearly 4% in a day. In retrospect, my only regret is the question mark.
Mr. Raines reacted with immediate fury, denouncing us in a letter to the editor as "glib, disingenuous, contorted, even irresponsible," and that was the subtle part. He turned up on CNBC to say, in essence, that we had made it all up because we didn't want poor people to own houses, while Freddie issued its own denunciation.
The companies also mobilized their Wall Street allies, who benefited both from promoting their shares and from selling their mortgage-backed securities, or MBSs. The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. The Street can hawk Fan and Fred MBSs as nearly as safe as Treasurys but with a higher yield. They make a bundle in fees.
At the time, Wall Street's Fannie apologists outdid themselves with their counterattack. One of the most slavish was Jonathan Gray, of Sanford C. Bernstein, who wrote to clients that the editorial was "unfounded and unsubstantiated" and "discredits the paper." My favorite point in his Feb. 20, 2002, Bernstein Research Call was this rebuttal to our point that "Taxpayers Are on The Hook: This is incorrect. The agencies' debt is not guaranteed by the U.S. Treasury or any agency of the Federal Government." Oops.
Mr. Gray's memo made its way to Wall Street Journal management via Michael Ellmann, a research analyst who had covered Dow Jones and was then at Grantham, Mayo, Van Otterloo & Co. "I think Gray is far more accurate than your editorial writer. Your subscribers deserve better," he wrote to one senior executive.
I also received several interventions from friends and even Dow Jones colleagues on behalf of the companies. But I was especially startled one day to find in my mail a personal letter from George Gould, an acquaintance about whom I'd written a favorable column when he was Treasury undersecretary for finance in 1988.
Mr. Gould's letter assailed our editorials and me in nasty personal terms, and I quickly discovered the root of his vitriol: Though his letter didn't say so, he had become a director of Freddie Mac. He was still on the board when Freddie's accounting lapses finally exploded into a scandal some months later.
The companies eased their assaults when they concluded we weren't about to stop, and in any case they soon had bigger problems. Freddie's accounting fiasco became public in 2003, while Fannie's accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.
Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie's implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004.
He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred's accounting and giving it to Mike Oxley's Financial Services Committee. "It was because of all their lobbying work," explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.
Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP's bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.
On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn't sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately -- not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.
When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn't oversee Fannie, he received a personal note from Mr. Raines congratulating him. "He meant good riddance," says Mr. Ryan.
Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.
Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.
So here we are this week, with the House and Senate preparing to commit taxpayer money to save Fannie and Freddie. The implicit taxpayer guarantee that Messrs. Gray and Raines and so many others said didn't exist has become explicit. Taxpayers may end up having to inject capital into the companies, in addition to guaranteeing their debt.
The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.
Mr. Gigot is the Journal's editorial page editor.
See all of today's editorials and op-eds, plus video commentary
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http://www.321gold.com/editorials/shedlock/shedlock072408.html
You Know The Banking System Is Unsound When...
Mike "Mish" Shedlock
Jul 24, 2008
1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.
2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?
3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.
4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?
5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.
6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".
7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?
8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?
9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.
10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.
11. The SEC takes emergency action during options expirations week regarding short sales.
12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).
13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form.
14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?
15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?
16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?
17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.
18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?
19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.
20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $8.75 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.
21. Shares of Ambac (ABK) fell from $90 to $2.50. Shares of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.
22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.
23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.
24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.
25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.
What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.
Mike Shedlock / Mish
blog: http://globaleconomicanalysis.blogspot.com/
email: Mish
321gold Ltd
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Obamanomics Is a Recipe for Recession
By MICHAEL J. BOSKIN
July 29, 2008; Page A17
What if I told you that a prominent global political figure in recent months has proposed: abrogating key features of his government's contracts with energy companies; unilaterally renegotiating his country's international economic treaties; dramatically raising marginal tax rates on the "rich" to levels not seen in his country in three decades (which would make them among the highest in the world); and changing his country's social insurance system into explicit welfare by severing the link between taxes and benefits?
AP
The first name that came to mind would probably not be Barack Obama, possibly our nation's next president. Yet despite his obvious general intelligence, and uplifting and motivational eloquence, Sen. Obama reveals this startling economic illiteracy in his policy proposals and economic pronouncements. From the property rights and rule of (contract) law foundations of a successful market economy to the specifics of tax, spending, energy, regulatory and trade policy, if the proposals espoused by candidate Obama ever became law, the American economy would suffer a serious setback.
To be sure, Mr. Obama has been clouding these positions as he heads into the general election and, once elected, presidents sometimes see the world differently than when they are running. Some cite Bill Clinton's move to the economic policy center following his Hillary health-care and 1994 Congressional election debacles as a possible Obama model. But candidate Obama starts much further left on spending, taxes, trade and regulation than candidate Clinton. A move as large as Mr. Clinton's toward the center would still leave Mr. Obama on the economic left.
Also, by 1995 the country had a Republican Congress to limit President Clinton's big government agenda, whereas most political pundits predict strengthened Democratic majorities in both Houses in 2009. Because newly elected presidents usually try to implement the policies they campaigned on, Mr. Obama's proposals are worth exploring in some depth. I'll discuss taxes and trade, although the story on his other proposals is similar.
First, taxes. The table nearby demonstrates what could happen to marginal tax rates in an Obama administration. Mr. Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003, and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102,000 of earnings. The result is a remarkable reduction in work incentives for our most economically productive citizens.
The top 35% marginal income tax rate rises to 39.6%; adding the state income tax, the Medicare tax, the effect of the deduction phase-out and Mr. Obama's new Social Security tax (of up to 12.4%) increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.8%. People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.2 cents -- a reduction of one-third in the after-tax wage!
Despite the rhetoric, that's not just on "rich" individuals. It's also on a lot of small businesses and two-earner middle-aged middle-class couples in their peak earnings years in high cost-of-living areas. (His large increase in energy taxes, not documented here, would disproportionately harm low-income Americans. And, while he says he will not raise taxes on the middle class, he'll need many more tax hikes to pay for his big increase in spending.)
On dividends the story is about as bad, with rates rising from 50.4% to 65.6%, and after-tax returns falling over 30%. Even a small response of work and investment to these lower returns means such tax rates, sooner or later, would seriously damage the economy.
On economic policy, the president proposes and Congress disposes, so presidents often wind up getting the favorite policy of powerful senators or congressmen. Thus, while Mr. Obama also proposes an alternative minimum tax (AMT) patch, he could instead wind up with the permanent abolition plan for the AMT proposed by the Ways and Means Committee Chairman Charlie Rangel (D., N.Y.) -- a 4.6% additional hike in the marginal rate with no deductibility of state income taxes. Marginal tax rates would then approach 70%, levels not seen since the 1970s and among the highest in the world. The after-tax return to work -- the take-home wage for more time or effort -- would be cut by more than 40%.
Now trade. In the primaries, Sen. Obama was famously protectionist, claiming he would rip up and renegotiate the North American Free Trade Agreement (Nafta). Since its passage (for which former President Bill Clinton ran a brave anchor leg, given opposition to trade liberalization in his party), Nafta has risen to almost mythological proportions as a metaphor for the alleged harm done by trade, globalization and the pace of technological change.
Yet since Nafta was passed (relative to the comparable period before passage), U.S. manufacturing output grew more rapidly and reached an all-time high last year; the average unemployment rate declined as employment grew 24%; real hourly compensation in the business sector grew twice as fast as before; agricultural exports destined for Canada and Mexico have grown substantially and trade among the three nations has tripled; Mexican wages have risen each year since the peso crisis of 1994; and the two binational Nafta environmental institutions have provided nearly $1 billion for 135 environmental infrastructure projects along the U.S.-Mexico border.
In short, it would be hard, on balance, for any objective person to argue that Nafta has injured the U.S. economy, reduced U.S. wages, destroyed American manufacturing, harmed our agriculture, damaged Mexican labor, failed to expand trade, or worsened the border environment. But perhaps I am not objective, since Nafta originated in meetings James Baker and I had early in the Bush 41 administration with Pepe Cordoba, chief of staff to Mexico's President Carlos Salinas.
Mr. Obama has also opposed other important free-trade agreements, including those with Colombia, South Korea and Central America. He has spoken eloquently about America's responsibility to help alleviate global poverty -- even to the point of saying it would help defeat terrorism -- but he has yet to endorse, let alone forcefully advocate, the single most potent policy for doing so: a successful completion of the Doha round of global trade liberalization. Worse yet, he wants to put restrictions into trade treaties that would damage the ability of poor countries to compete. And he seems to see no inconsistency in his desire to improve America's standing in the eyes of the rest of the world and turning his back on more than six decades of bipartisan American presidential leadership on global trade expansion. When trade rules are not being improved, nontariff barriers develop to offset the liberalization from the current rules. So no trade liberalization means creeping protectionism.
History teaches us that high taxes and protectionism are not conducive to a thriving economy, the extreme case being the higher taxes and tariffs that deepened the Great Depression. While such a policy mix would be a real change, as philosophers remind us, change is not always progress.
Mr. Boskin, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of the Council of Economic Advisers under President George H.W. Bush.
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Hank Paulson's Fannie Gamble
By LAWRENCE B. LINDSEY
August 1, 2008
Our housing finance system has been broken for quite some time, creating perverse incentives for borrowers and lenders. We have now reaped the consequences, and a major financial bailout of the system is probably inevitable.
Conservatives can rightly argue that had Congressional Democrats not blocked the various initiatives of the Bush administration to reform Fannie Mae and Freddie Mac for the past five years, we would not be sitting at the precipice like we are today. But that does not change the need for a government injection of funds to fill the financial hole in those two enterprises. The institutional arrangements in the American mortgage market cannot be changed overnight, and the risks of a breakdown in that market at some point over the next 18 months are still quite real.
Chad Crowe
The trouble is, the legislation that just passed Congress indicates that Washington has learned nothing from our recent troubles. And, as this bailout bill is likely to be followed by at least one additional bill next year, the evident inability or unwillingness of Congress to move up the learning curve and abandon its past practices will make the ultimate cost to the taxpayer far higher than it might have been.
The 700 pages of legislation, which I doubt many members of Congress have even attempted to read, contains many egregious provisions, some of which are unrelated to the trouble at hand. But the pork designed to buy votes for the legislation pales before the blunders directly related to the problem at hand.
First, Congress rejected a proposal that Fannie and Freddie be barred from paying dividends if they are receiving injections of capital from the federal government. This idea would seem to be the first lesson in a course on Government Bailout 101. The government shouldn't be shoveling taxpayer money in the front door while the company is shoveling dividends to shareholders out the back door.
Freddie Mac paid $1.6 billion in dividends last year while Fannie Mae paid $2.5 billion. Both have dividend yields that are many times higher than the norm. Congress chose to protect the shareholders at the expense of the taxpayer.
Second, Congress did not give the taxpayer any of the upside from a potential recovery of Fannie and Freddie, leaving it all with existing management and existing shareholders. This breaks with past bailout or workout traditions in both the public sector and the private sector. In the Chrysler bailout of the 1980s, the government gave itself warrants that paid off when the company recovered. In most private-sector deals, existing common shareholders get virtually wiped out (Bear Stearns, for example) while preferred shareholders at least get a haircut. Fannie and Freddie shareholders were untouched by this bill. Congress bailed them out on the downside and preserved their upside potential.
Third, the legislation did not produce any substantive reforms in the home-lending area, particularly the problems which became endemic in the recent bubble. For example, President Bush asked for authority to allow for risk-based pricing in government-generated mortgages. That idea is based on the commonsense view that higher-risk customers should pay higher interest rates.
Congress rejected this, despite the lessons of the recent housing boom and bust associated with risky lending. And when it came to controlling risk through minimum down payments by homebuyers, the legislation set the required down payment for a government mortgage at only 3½%.
Fourth, the legislation included a special tax on mortgages originated by Fannie and Freddie to go into a fund for "affordable housing" run by politicians and community activists. It may seem natural for politicians to help out their colleagues and the people who turn out the votes on election day with newly dedicated taxes. But whatever logic there is in boosting taxes on entities that need public funds escapes me.
The list of such nonsensical provisions goes on and on. The examples mentioned above were not surprises snuck into the legislation in the dark of night. The president threatened to veto the bill in a formal Statement of Administration Policy issued on July 11 because it contained such objectionable items. The veto threat was reiterated by the White House just days before the House passed the legislation, but Treasury Secretary Henry Paulson reversed the veto threat in time for the vote.
The usual reason given for monstrosities such as this is that these provisions were needed to secure passage and that the need to pass the bill was pressing. But was it really that pressing? Fannie and Freddie declared during the congressional debate that they were both adequately capitalized and had no problem obtaining liquidity. If they were telling the truth, then certainly there was plenty of time for more serious deliberation.
If they were not telling the truth -- and the GSEs just got out of a five-year habit of issuing reports that were late or "qualified" by the auditors -- then Congress just created a blank check for a bailout of two institutions with dubious credibility. Either way, prudence would dictate a little more caution and time should have been taken.
The more plausible reason for the bill's structure is that the decades of coziness between politicians and Fannie and Freddie is paying off. Not only were there campaign contributions, but their "foundations" contributed huge sums to think tanks, and many political figures made the transition from government to the GSEs. The list of their connections reads like a combined Washington-New York phone book, and undoubtedly gives the appearance that both Wall Street and politicians close to Fannie and Freddie had key seats at the bargaining table over this bill. The taxpayer was not adequately represented.
Nor was the homeowner an obvious beneficiary. Both conforming and jumbo mortgage rates have risen about a quarter point during July. The new law actually reduces the amount of competition in the mortgage securitization business going forward by solidifying the special position for the two leading players, Fannie and Freddie, while competitors scramble to get capital.
The legislation also creates long-term uncertainty with regard to the extent and form of government assistance. In effect, Treasury Secretary Paulson now has an open-ended mandate to bail out the nation's troubled housing finance market, the largest single capital market in the world.
If any other country announced that its finance minister could print unlimited debt to do something similar, financial markets around the world would dump both the country's debt and the country's currency. It may well be different because this is the United States of America. But certainly, to take such a risky and unprecedented step, a better crafted and considered piece of legislation should have been created.
Mr. Lindsey, former assistant to the president for economic policy, is president and CEO of the Lindsey Group, and author of "What a President Should Know . . . But Most Learn too Late" (Rowman & Littlefield, 2008).
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Obamanomics Clarified
By MICHAEL J. BOSKIN
August 4, 2008; Page A13
In my July 29 op-ed ("Obamanomics Is a Recipe for Recession"), I was among the many who took Barack Obama's statements that he would "end the Bush tax cuts for the top incomes" too literally. I interpreted this to mean a return to the pre-Bush tax rates of 39.6% on ordinary income and 20% on capital gains.
The Obama campaign has now clarified that he proposes to do this for labor earnings, but not for capital gains and dividends. I am told that Mr. Obama declared last year that he would raise these rates to "no more than the Reagan rate," by which he apparently means to 28%, from the current 15%. Mr. Obama would thus raise the tax rate on capital gains by about three times as much as President Bush cut it, but he'd preserve at least some of the Bush reduction in the double-taxation of dividends.
(Continued below.)
The 28% rate on capital gains was the price President Ronald Reagan paid to pass the 1986 Tax Reform Act that lowered the top marginal tax rate on ordinary income (including dividends) to 28%. The capital gains rate was cut to 20% in 1997 under President Bill Clinton, and again to 15% in 2003.
However, Mr. Obama is proposing to raise the top marginal rate on wages (also interest, rent and royalties, etc.) more than 40% above the corresponding Reagan rate of 28%. Mr. Obama would thus give us the worst of both worlds: tax rates on ordinary income 40% higher than Reagan and on capital gains 40% higher than Clinton.
Raising the rate on capital gains to 28% would greatly reduce the ability of firms to minimize double taxation by returning cash to their shareholders through repurchases. As for dividends, the Obama plan would nearly double the tax to 28% from 15%.
I have revised the table that accompanied my op-ed showing the negative effects on the after-tax returns on investments to reflect the clarification. It is also available at http://www.stanford.edu/~boskin/. Please use the new table for reference purposes.
I'm glad to hear that Mr. Obama is willing to retain at least a portion of the Bush tax cuts on dividends. But nearly doubling the tax rates on capital gains and dividends to 28% is a terrible idea that would damage fragile financial markets and the economy.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution; he was chairman of the President's Council of Economic Advisers in the George H.W. Bush White House. (The Journal has frequently invited the Obama campaign to explain its tax plans in our pages, and we gladly repeat the invitation publicly here today.)
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Wesbury is an outstanding economist-- one of the very best.
=================================================
Inflation Is a Clear and Present Danger
By BRIAN WESBURY
August 19, 2008; Page A17
The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82), all the while eroding living standards and seriously undermining confidence in America.
It was also deeply frustrating. Despite the teaching of Milton Friedman -- which clearly explained that inflation was caused by too much money chasing too few goods -- a combination of bad economic models, denial and political expediency allowed it to happen.
Corbis
President Reagan meets with Paul Volcker, chairman of the Federal Reserve Board, 1981.
One would think that the odds of a repeat were low, and for 20 years, after Ronald Reagan and his Fed Chairman Paul Volcker had the courage to get inflation under control with tight money and tax cuts, this was true. Unfortunately, the lessons seem to be fading. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.
Today's problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s. The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly.
As is so often the case, after the Fed has acted, but before the typical lag in monetary policy has fully played out, conventional wisdom argues that the Fed has become impotent. Back in 2002 and 2003, the logic was that the Fed was powerless over globalization, and low-cost labor would continue to feed deflation. In addition, because long-term rates were rising as the Fed cut short-term rates, many thought that markets were undermining Fed intentions.
But, as always, when the Fed injects excess liquidity into the system, inflation begins to rise. As early as 2002, soaring commodity prices and a falling dollar became the canaries in the coal mine of excessively loose monetary policy.
In their wake, almost every measure of inflation in the U.S. has moved significantly higher. In the past year, producer prices have increased 9.2%, while consumer prices are up 5.6%. Yet, because there are so many measures of inflation it is possible to focus on some, for instance consumer prices excluding food and energy (aka, "core" CPI), which remain benign. This allows many to say there is no inflation.
But oil and food are absorbing a large part of excess Fed liquidity. When consumers spend more on energy, they have less to spend in other arenas. This reduces demand for other goods, keeping prices lower than they would be otherwise. This helps explain the divergence between overall and core measures of inflation.
This divergence is now coming to an end. If the recent decline in energy and food prices continues, that money will be released and other prices will start to rise more quickly. The July jump of 0.3% in "core" CPI inflation is likely one of the first signs.
Some argue that the recent drop in commodity prices indicates lessening inflationary pressures. But nothing could be further from the truth. Commodity prices had reached levels that were not justified by current monetary policy. As a result, their pullback is just a correction, not the beginning of a new trend. If this pullback had occurred as the Fed was lifting the federal-funds rate, like back in 1999, it would be a different story. Excluding food and energy from the CPI is sometimes justified because their price movements are often volatile and short-lived. But the five-year average annual growth rate of the CPI, which should smooth out any short run issues, is now 3.6% -- its highest level since 1994. Moreover, the Cleveland Fed's trimmed mean CPI, which excludes the 8% of prices growing the fastest and the 8% growing the slowest, is also up 3.6% in the past year -- its fastest growth since 1991.
When investors hear comparisons of today with the 1970s, they immediately think double-digit inflation. But, it's not that bad -- yet. It took 20 years of accommodative monetary policy in the 1960s and '70s to create the Great Inflation. A more accurate comparison on the inflation front would be the late 1960s, when consumer price inflation accelerated to 6% from about 1%. This period was the precursor of the 1970s. Except for catch-up after the wage and price controls of 1971, the actual move into double-digit inflation did not occur until the late '70s.
With the real (or inflation-adjusted) federal-funds rate now negative, the signals are clear. The Fed is still adding more money to the system than is demanded, and this suggests that the general increase in inflationary pressures will continue. The only question is whether policy makers will get the courage to fight inflation before it gets out of control.
And this is the rub. Much like the 1970s, there is a widespread denial that inflation is a problem today. Some argue that Fed policy is not easy, either because the money supply is not growing, or that banks are deleveraging, which counteracts any attempt by the Fed to inject money.
The first argument hits at the root of Friedman's monetary theory. If money is not growing, then how can inflation be a problem? But money is growing. No measure of money is declining, despite bank deleveraging, and Reserve Bank Credit (the Fed's balance sheet) has expanded at a 14.4% annual rate in the past three months.
Another sign of easy money is that every country that pegs to the dollar, including China and the United Arab Emirates, is experiencing a rapid acceleration in its inflation rates as it imports inflationary U.S. monetary policy.
The second argument is belied by history. Between 1983 and 1994, exactly 2,747 U.S. banks and S&L's failed, representing total assets of $894 billion. During that period of deleveraging, real GDP in the U.S. expanded at an annual average of 3.5%. The Great Depression is the only period of sharp economic contraction in the U.S. correlated with bank failures. But that was clearly related to a deflationary mistake in Fed policy. Real interest rates were outrageously high in the late 1920s, and much of the '30s, which is not true today.
One of the reasons that monetary policy is so loose today is that our economy is addicted once again to easy money and low interest rates. We hear over and over that the Fed cannot tighten because the housing market and the economy are vulnerable. This was the same argument made in the pre-Volcker 1970s, when the U.S. bounced from one economic crisis to the next.
But a look back at the past 40 years clearly shows that the economy was much healthier in the 1980s and '90s, when real interest rates were high, rather than low as they were in the 1960s and '70s.
The Fed's "dual mandate" -- to keep the economy strong and prices stable -- serves to support this mistake. In contrast, the European Central Bank has a single mandate: price stability. No wonder the dollar has been so weak relative to the euro. Imagine two football teams. One with a single mandate: win. The other with a dual mandate: win and keep your uniforms clean. It's clear that the one with the single mandate will have more success in achieving its goals over time.
It is this combination of denial of actual inflation, bad economic models and the political expediency of keeping interest rates low that makes a repeat of past policy mistakes likely. In the end, inflation can be controlled -- the Volcker-Reagan strategy of tight monetary policy and tax cuts still holds the key -- but only if policy makers find the courage.
Mr. Wesbury is chief economist at First Trust Advisors, L.P.
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This from internet friend and superb economist of supply side orientation Scott Grannis:
The NY Times published a lengthy article on Obama's economic policies
a few days ago: "How Obama Reconciles Dueling Views on Economy." One
friend has summarized the article like this: "Barack Obama, a Free-
Market Loving, Big-Spending, Fiscally Conservative Wealth
Redistributionist." The article goes to great lengths to sound fair
and unbiased, but in typical NYT fashion, it is neither. I've take
some time to rebut some of the points raised in the article, since I
think it's very important to understand the faulty logic and lack of
economic understanding that informs many liberal notions of how weak
the economy supposedly is and what the best ways to fix it are.
To begin with, the opening section of this article is just plain wrong
about how bad the economy is. A well-respected UCLA professor, Ed
Leamer, says that, using the using the criteria developed by the NBER
for classifying recessions, the economy is not currently in a
recession. In order for this to be a recession, he says, "things would
have to get a lot worse." This is hardly a situation where one might
claim, as the article does, that "the economy has stopped working."
The article's claim that most families are making less today than they
did in 2000 is simply not true, and it is also not true that family
income has failed, for the first time, to rise substantially in an
economic expansion. Real disposable personal income has risen 17.5% in
the current expansion. I'll take that to the bank any day as a sign of
progress. This is a shameless misrepresentation of the facts, but it
is not surprising given that the article was supposedly fact-checked
by the economic geniuses at the NY Times.
The article implies that people have only been able to keep buying
things thanks to assuming massive amounts of new debt. But according
to the Federal Reserve, debt service burdens for US households (the
ratio of debt payments to disposable personal income) have risen from
13.0% to 14.1% in the current expansion. That's not my definition of
huge or even significant.
Yes, there are significant debt defaults occurring, but the article
neglects to mention one very important fact: a debt default involves a
transfer of wealth. The defaulting party is relieved of a debt burden,
while the creditor loses a future income stream. In addition, for
every house that was bought and financed at the peak of the real
estate cycle a few years ago, there was a seller that walked away with
a small fortune.
And by all means this remains a very prosperous country. The net worth
(total assets minus total liabilities) of US households has risen from
$40 trillion in 2001 to almost $60 trillion today. How in the world
the NY Times fact-checkers could square that statistic with the doom
and gloom in the article is beyond my ability to understand or
justify. Even if defaulted mortgages total $1 trillion (way up at the
upper end of estimates), that would only equate to less than 2% of
households' aggregate net worth.
Then the article goes on to imply that since the economy is already a
shambles and McCain's economic policies are basically a rehash of
Bush's policies, we can't expect things to get a lot better. Obama
"has more-detailed proposals but a less obvious ideology." And that
presumably is a good thing.
One of the most important things for Obama is to redistribute income
from rich to not-rich, because he believes that income inequality is a
new and serious problem, and likely the most serious problem the
economy faces today. Yet serious researchers (Alan Reynolds being one)
have pointed out that what looks like a growing gap between rich and
poor is actually not. And if it looks like the upper income earners
have gained a disproportionately larger share of the income pie in the
past decade, that overlooks the fact that those who were upper income
earners 10 years ago are for the most part not upper income earners
today; this is a very fluid economy.
Obama puts income redistribution ahead of deficit reduction. But he
also plans to reduce the deficit, mainly by cutting military spending.
This was in fact one of the two keys behind Clinton's deficit
reduction (the other being a windfall of tax receipts thanks to the
tech sector boom). I would simply note that the massive reduction in
military spending during the Clinton years left us extremely
vulnerable by 2001. I would argue that McCain is the only candidate
who can credibly promise to make significant reductions in non-defense
spending.
The article praises Obama for his general acceptance of free-market
principles that he picked up while at Chicago. But, it gushes, he
still realizes that markets aren't perfect and need fixing. This is
the position that all liberals are forced to adopt, since free market
economies have been wildly successful over time. Critics of the free
market point to its failures: budget deficits, income inequality, and
the current financial crisis. In essence, this is like saying that you
like freedom, but only in limited quantities. Where do you draw the
line? In any event, most of the liberal arguments against the free
market are based on faulty logic. For example, the deficit has nothing
to do with the free market, but everything to do with politicians that
can't stop spending money. I've already argued, as have many others,
that income inequality is not only misleading, but not even a bad
thing to begin with as along as all incomes are rising. The current
financial crisis has a lot to do with mistakes made by the Federal
Reserve years ago, and to the failure of borrowers to realize that
they were paying way too much for their homes and taking on way too
much debt in the process. So Obama is going to apply all sorts of
remedies for the economy's supposed ills, but he has misdiagnosed the
problem. And let's not forget that for every new government program
designed to "fix" some supposed failing of the free market, there are
at least a few unintended consequences that typically show up.
As a case in point, Obama's tax proposals are designed to reduce the
burden of taxes on the lower and middle class, but they would actually
make things worse for those people because his proposals will sharply
increase marginal tax rates. This will make it much harder for the
poor to get rich, a perfect example of unintended consequences to tax-
rate engineering. See this article for proof, it is really impressive.
"Obama’s give-and-take tax policy results in marginal tax rates of 34
percent to 39 percent in the $31,000 to $45,000 income range for this
family. That’s an increase of 13 percentage points or more from the
current rates"
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Great points made by Scott Grannis on the economic drivel from the NY Times. Writing corrections to MSM is thankless work but someone needs to do it, and more people need to read it IMO.
There seems to be a demographic trend that family sizes are getting smaller with an aging population and more single households. Liberals turn that around to say that family incomes are stagnant, cleverly ignoring - as Grannis points out - a 17.5% increase in real, personal, disposable income. (If two working people marry or divorce, family income is increased by 200% or decreased by 50% but personal income didn't change. They just made different choices.)
--
Quoting: "As a case in point, Obama's tax proposals are designed to reduce the burden of taxes on the lower and middle class, but they would actually
make things worse for those people because his proposals will sharply
increase marginal tax rates. This will make it much harder for the
poor to get rich, a perfect example of unintended consequences to tax-
rate engineering. See this article for proof, it is really impressive. "
Marc, where he says "See THIS article for proof" I think there was a link in the original that didn't come through. Please post if you have it. TIA.
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Whoops! :oops: That said, I am on the road and do not know it I will be able to find it.
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The Recessionistas Were Decisively Wrong
The story behind 3.3 percent second-quarter GDP growth.
By Jerry Bowyer
I’ve spent much of the past year both on Kudlow & Co. and in columns arguing with Jared Bernstein, Robert Reich, Barry Ritholz, Jonathan Chait, and others about whether or not we’re in a recession. These folks (some of whome are members of the “Kudlow Caucus”) were certain we were, while I, along with Larry and other supply-siders, thought we were not. As of this week, and a revised GDP-growth number of 3.3 percent for the second quarter, we now know most authoritatively that the recessionistas were wrong.
Bernstein and Reich, in particular, were flatly wrong. They argued that tax cuts favoring the rich worsened income inequality; that this inequality, coupled with the excessive volatility of free-market capitalism, led to plunging home prices that not only made people feel poorer, but in a reverse “wealth effect” caused a plunge in consumer confidence; and that all this presaged a plunge in consumer spending, which ultimately drove the economy into recession.
The way out of this spiral, they said, can only be a combination of massive government spending and some form of consumer-rebate “stimulus package” to restore spending and, through spending, economic growth. This scenario was, and is, nonsense on stilts.
The housing crisis wasn’t created by free-market capitalism, but by government meddling. In particular, the crisis is rooted in a raft of government regulations that forced banks to ignore traditional lending standards — such as credit history, income, and neighborhood economic conditions — and instead embrace non-culturally “discriminatory” lending practices based on racial-identity politics. Once the banks were forced to make loans based on political, rather than financial, criteria, and once Fannie and Freddie were forced to buy these loans in the secondary mortgage market, collapse was inevitable.
In addition, there is no wealth effect from falling home prices. People generally don’t spend based on the value of their homes, partly because people almost never know the value of their homes. Furthermore, for every seller taking a bath during a down market there is a buyer getting the deal of a lifetime. Predictions about consumer attrition simply have not materialized because, as Milton Freedman taught us, spending patterns are based on long-term income expectations. For this and many other reasons the much-heralded consumer collapse has yet to appear.
Now let’s look at what did happen. The 2003 tax cuts increased wealth in every segment of the economy, sparking a multi-year boom. But these tax cuts were passed with expiration dates, and the first Bush-tax-cut expiration occurred at the end of last year when small businesses lost some of their ability to take a tax deduction on purchases of business equipment. As the chart shows, this event coincided with a trough in the economic cycle. This past winter, congressional Republicans successfully fought to add the small-business tax breaks to what otherwise was a useless stimulus package, and the market for business equipment recovered in the spring. Voilà — the economy snaps back to 3.3 percent GDP growth.
Will the New York Times and the rest of the media storm-crows who spent most of the spring and summer cackling the “recession” word admit their error and reverse course? I think you already know the answer to that question.
— Jerry Bowyer is the chief economist of Benchmark Financial Network.
National Review Online - http://article.nationalreview.com/?q=NmQ5ZGE1YWFhOTMwYTdiNzRiODljZmQwODBmZDlmYzQ=
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Detroit's Blackmail Attempt
Is Beyond Shameless
By PAUL INGRASSIA
September 8, 2008; Page A19
It was only a matter of time, unfortunately. And now that Michigan is an election-year swing state and Detroit's auto makers are posting sales declines topping 20% each month, the time has arrived. The issue of a government bailout for General Motors, Ford and Chrysler is moving to center stage.
Barack Obama has said yes to this proposal early on, and last week John McCain climbed on board. So much for change and fighting pork-barrel spending. We're moving beyond moral hazard here, folks, and into a moral quagmire. At least the Chrysler bailout of 1980 was structured so that taxpayers could reap a reward for taking a financial risk on the company's future. That's not what's happening now.
David Gothard
Late last year, in its energy bill, Congress authorized $25 billion of low-interest loans to high-risk borrowers -- a strategy perfected by home-mortgage lenders in recent years. In this case the high-risk borrowers are the loss-plagued Detroit car companies. The loans are supposed to help them develop new, fuel-efficient cars, and retool their factories to produce them. Detroit, not being satisfied with this taxpayer largess, wants $50 billion.
This is bad public policy for reasons of philosophy, practicality and precedent. And by the way, this is a dumb idea for the car companies too, simply in terms of their own self-interest.
Philosophically, if the Freddie Mac and Fannie Mae debacles teach us any lesson, it is that subsidizing private profits with public risk is a terrible idea. Implicit government backing has led the managements of these two companies to make reckless investments that have backfired badly. Now government backing has become explicit, and under the plan announced by Treasury Secretary Henry Paulson yesterday, taxpayers likely will pay billions to keep Fannie and Freddie solvent -- with the exact amount uncertain.
The Detroit Three got into their current quandary by making decades of bad decisions, with some help from the United Auto Workers union. Yet despite the current crisis, General Motors is still paying dividends to shareholders, the car companies are paying bonuses to executives, and the private-equity billionaires at Cerberus who bought Chrysler are trying to reap enormous rewards from their risky investment. Meanwhile the UAW's Jobs Bank -- which pays laid-off workers for doing nothing -- remains in place.
Of course, we can all hope that shareholders do well, that executives reap handsome rewards for work well done, that the Cerberus billionaires make more billions on Chrysler, and that workers get paid on whatever terms the car companies agree. But we taxpayers shouldn't subsidize any of this.
The only reason we should bail out any private company is the risk that its demise would wreak havoc on the entire economy. Bear Stearns conceivably passed the test; its collapse could have threatened the U.S. financial system, and the government didn't make the mistake of bailing out shareholders or management.
But just what calamity are we trying to avoid by subsidizing loans to Detroit? That we'll all be sentenced to the indignities of driving Hondas, Mazdas or BMWs? Toyota and Honda, the current leaders in hybrids and alternative-fuel technology, did their research and development on their own dimes.
Even if Ford, GM and Chrysler were to go out of business -- and it's highly unlikely that all three will simply cease to exist -- there will be plenty of good cars for Americans to buy. And many will be made in America, even if they carry foreign nameplates. Toyota, Nissan, Honda, Hyundai and other foreign car companies have expanded greatly their U.S. manufacturing operations in recent years. They're doing so because Americans are buying their cars.
As a practical matter, Americans could choose to buy more Detroit cars. Frankly, they should -- considering such outstanding products as the Ford Focus, a fuel-efficient and comfortable compact, and the Chevrolet Malibu, a terrific new mid-sized sedan. But they're not. Americans are voting with their dollars, which is their right.
And what about the precedent the government would set? If we bail out Detroit, where do we stop? The newspaper industry is in financial trouble because more readers and advertisers are turning to the Internet. Newspapers are good for democracy -- Thomas Jefferson said he would choose newspapers over government, after all -- so shouldn't they get low-interest government loans to help them adjust to the Internet? Of course not, and ditto for Detroit.
If Detroit's auto makers would apply more than knee-jerk analysis to what's being proposed, they would reject it quickly. No matter what their spin, including the patently absurd claim that government-guaranteed, below-market loans aren't a bailout, loan subsidies will paint them in the public mind as corporate welfare recipients that can't compete on their own. That can't be good for sales.
More fundamentally, the last thing these companies need just now is more debt. They are leveraged to the hilt, and risk climbing into a financial hole from which they'll never recover. Better to raise money by selling more assets (e.g., Ford's recent sale of Jaguar and Land Rover) or raising more equity -- even if new investors would require management changes or other measures.
All this said, if Detroit's short-sightedness and political expediency make a bailout inevitable, let's make sure taxpayers stand to get rewarded for their risk. In 1980, the government didn't lend any money directly to Chrysler, instead guaranteeing loans to the company made by private lenders, mostly banks, in the amount of $1.2 billion (bailouts, like everything else, were cheaper back then). But in return, the government got warrants to buy Chrysler stock at a very low price. When Chrysler staged its spectacular recovery and paid off the bank loans seven years early, the warrants soared in value and the government earned some $400 million.
Then CEO Lee Iacocca tried to get the government to forego its profits -- he even got into a telephone shouting match with Treasury Secretary Donald Regan. But Regan, backed by President Reagan, stuck to his guns.
One other stipulation: any low-interest loans to develop fuel-efficient cars should be made available to all car companies, not just the Detroit Three. The law passed by Congress last year is framed to make this highly unlikely. But if developing fuel-efficient and alternative-energy cars is deemed worthy of taxpayer subsidies for public-policy purposes, it's just common sense not to put all our eggs in Detroit's basket.
Mr. Ingrassia, a former Detroit bureau chief for this newspaper, won a Pulitzer Prize in 1993 for his automotive coverage. He writes on automotive issues for The Journal, Condé Nast Portfolio and other publications.
Write to Paul Ingrassia at paul.ingrassia
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The Spending Explosion
September 10, 2008; Page A14
Here's a prediction: The media will report today that the federal budget deficit is big and getting bigger. What most of them won't report, alas, is that the cause of these deficits is an explosion in federal spending. The era of big government is back, bigger than ever.
The real news in yesterday's Congressional Budget Office semiannual report is that federal expenditures on everything from roads to homeland security to health care will on present trends reach 21.5% of GDP next year. That's a larger share of national output than at anytime since 1992. If the cost of the federal takeover of Fannie Mae and Freddie Mac prove to be large and are taken into account, next year federal outlays could be higher as a share of the economy than at anytime since World War II. In this decade alone, federal spending has increased by almost $1.2 trillion, or 57%.
The federal deficit is expected to hit $407 billion for fiscal 2008 (which ends at the end of this month) and $438 billion next year. Still, the deficit is expected to be only 3% of GDP, which is in line with the average of the last 30 years. We hope Congress and the Presidential candidates don't obsess over the deficit per se, because the real fiscal drag from government comes from how much it spends, not how much it borrows.
The Bush tax cuts also aren't the budget problem. Until this year federal tax collections have been surging. In the four years after the 2003 tax cuts become law, tax receipts exploded by $785 billion. This year revenues have declined by 0.8%, but a major reason is the $150 billion bipartisan tax rebate that has hit the Treasury without spurring the economy. Without these nonstimulating rebates, federal tax payments would have climbed another 2.5%, according to CBO. Revenue is expected to be a healthy 18.5% of GDP next year without any tax increase.
Another myth is that the war on terror has busted the budget. While operations in Iraq and Afghanistan are expensive, defense spending is $605 billion this year, or about 4.5% of GDP. That only seems large by comparison to the holiday from history of the 1990s, when defense fell to 3% of GDP. As recently as 1986, defense spending was 6.2% of GDP.
The real runaway train is what CBO calls a "substantial increase in spending" that is "on an unsustainable path." That's for sure. The nearby chart shows how much some federal accounts have expanded since 2001, and in inflation-adjusted dollars. This year alone, federal agencies have lifted their spending by 8.1%, with another 7% raise expected for 2009. There's certainly no recession in Washington. The CBO says that, merely in the two years that Democrats have run Congress, federal expenditures are up $429 billion -- to $3.158 trillion.
The fiscal blowouts have included a record farm bill, notwithstanding record farm income; an aid bill for distressed homeowners, extended unemployment benefits, and more generous veterans benefits. Next up: votes on $50 billion for Detroit auto firms, an $80 billion energy bill, as much as $50 billion for spending masked as a "second stimulus," plus $100 billion or more for the Fannie and Freddie rescue. Rather than sort through priorities, Congress is spending more on just about everything.
Meanwhile, remember that "pay as you go" spending promise that Speaker Nancy Pelosi made in 2006? We called it a ruse at the time, and the last two years have proved it. Senator Judd Gregg (R., N.H.) has tallied up at least $398 billion in "paygo" violations so far. Earmarks were also supposed to be cut in half by this Congress. In 2008 there were some 11,000 at a cost of $17 billion, the second most ever, and far more than half the peak of 14,000 in 2006.
The point to keep in mind is that this big spending blitz is coming even before a new President and Congress arrive next year with far more spending promises in tow. As they contemplate their choice for President, voters might want to consider which of the candidates is likely to be a check on Congressional appetites, rather than a facilitator.
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Are You Ready for a Bailout
Matthew Swibel, 09.10.08, 6:00 AM ET
Call it a Washington pile-on.
A normal taxpayer might think that since the Treasury Department has just committed the government to spending an unknown (but possibly very large) amount taking over Fannie Mae and Freddie Mac, Congress would be in a tightfisted mood.
But that's not the way some Washington lobbyists and politicians think. Instead, they're viewing the bailout as an invitation to push through other taxpayer-financed bailouts and aid in the few weeks that Congress will work before members break to campaign full time for the November elections.
"We're talking about the next New Deal," enthuses William McNary, president of USAction, a national coalition of grass-roots community organizers. He wants more money from Congress for everything from food stamps to inspecting and fixing bridges and roads.
U.S. automakers General Motors, Ford Motor and Chrysler, for their part, are pushing Congress to appropriate by the end of this month $3.75 billion of $25 billion in loans authorized last December to help the money-bleeding companies overhaul their plants so they can build more fuel-efficient vehicles.
They want another $25 billion in low-cost loans authorized for when they've run through the first $25 billion. Pete Davis, president of Davis Capital Investment Ideas, predicts the government's budget wonks will estimate that the added $25 billion loan package will cost taxpayers $900 million.
Hey, that's less than $1 billion. Plus, it will play well politically in Michigan, where more than 260,000 manufacturing jobs have been lost since 2000, and in Detroit, where one in every 10 workers is without a job.
Meanwhile, Democrats in Congress are itching to pass a second economic stimulus package to benefit American consumers before they make their way to the ballot box--except that it won't go directly into Americans' bank accounts this time around, as it did with the tax rebates in round one.
Reports say the measure, not written yet, will total $50 billion in the form of grants to help state and local governments with infrastructure projects, Medicaid costs and local law enforcement, as well as relief for Gulf Coast residents struggling with flood costs and those in the Northeast and upper Midwest straining to pay winter heating bills.
Politics plays a part in this of course. "I got a four-letter word: j-o-b-s," said U.S. Rep. Rahm Emanuel, D-Ill. "That's the focus of the second stimulus. We want to own the issue that we are the party of a jobs agenda. We will take it up as soon as we are done with the energy bill."
But the demand for more infrastructure spending isn't coming from just Democrats. Desmond Lachmann, a resident fellow from the conservative American Enterprise Institute, has advocated it too.
Also with her hand out is Bush administration Transportation Secretary Mary Peters, who told Congress last week she wants it to inject $8 billion into the federal Highway Trust Fund. The trust's main source of funding is the flat, 18.4-cents-per-gallon gas tax. The rising price of gas has led Americans to drive tens of billions of miles less this year--meaning less money going into the trust fund.
All this is in addition to the $70 billion to $100 billion that Congress is expected to pass in supplemental funding for the wars in Iraq and Afghanistan.
Then, of course, there's the Fannie and Freddie rescue. The Congressional Budget Office estimates the bailout could cost taxpayers $25 billion in the long run. But rescuing the mortgage giants--which together have roughly $6 trillion in liabilities--might also cost zilch. Or, if the housing market worsens, the bill could be much bigger.
William Poole, former president of the Federal Reserve Bank of St. Louis, calculates that should Fannie's and Freddie's loan books suffer 5% losses, the bailout would cost the taxpayers about $300 billion.
http://www.forbes.com/home/2008/09/09/bailouts-congress-automakers-biz-cz_ms_0910beltway.html
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Excerpting from analysis published at politco:
"What makes me laugh – ruefully, I assure you – is when our office seekers trot around the country promising “accountability” for Wall Street. Lehman just went bankrupt – in a market economy, things don’t get more “accountable” than that."
http://www.politico.com/news/stories/0908/13486.html
With Washington looking to point fingers in regards to the fall of Lehman, it’s worth recounting the chain of events that led us to today (or rather Sunday):
1) Alan Greenspan’s Fed made loads of cheap money available.
2) Money will be put to use. It does not wind up in enormous mattresses gathering dust. After all the smart uses were exhausted, Wall Street began looking to dumbers uses, or riskier uses if you will. Foremost among these riskier uses was issuing subprime mortgages.
3) The availability of subprime mortgages had two immediate effects. First, it created a whole new class of potential homeowners. As this new class of homeowners drove demand through the roof, the value of your house (and mine) increased dramatically.
4) Unfortunately for everyone involved, a lot of these people defaulted on their subprime loans. Thus, the subprime mortgage market disappeared while foreclosed homes glutted the housing market. That meant a sharp decline in demand and a sharp increase in supply hit the housing market simultaneously, making the value of your house (and mine) decrease dramatically. In terms of where this crisis hits the typical American, this item is the bogey. The typical American lost a huge chunk of his net worth thanks to the housing crisis, and it won't fully bounce back until…well, nobody knows when.
5) The erstwhile homeowners who took out loans they couldn’t afford lost their homes and faced financial ruin. The firms who issued subprime loans and the firms who purchased subprime mortgage backed securities that the erstwhile homeowners couldn’t make good on also faced financial ruin.
So what can the government and its various agencies do in such a situation? Fannie and Freddie had to be saved – “too big to fail” was right, and that’s what made the shenanigans of those quasi-governmental agencies so scandalous. But Lehman? Life and the economy will go one.
Fed Governors will study for years the original Greenspan sins that set this course of events in motion. Meanwhile, Greenpsan will probably be taking to the airwaves to defend his tattered legacy. As far as the subprime lending industry that proximately triggered the crisis, theoretically the government in the future could set up a regulatory regime that puts mortgages out of reach for certain risky home buyers. Happily, I bet that idea sounds as noxious to liberals as it does to conservatives.
So government and politicians can only do what they do best – blindly cast blame on a matter that they don’t fully understand. Let’s not forget we have two presidential candidates who have spent a combined fifteen minutes in the private sector. I would love to see Charlie Gibson have a few minutes on camera with Barack Obama and ask in his impatient schoolmarm way, “Exactly what did Lehman Brothers do on a day in/day out basis?” I would expect an irrelevant homily on the virtues of “Main Street” as opposed to “Wall Street” in response.
In a free market, good decisions will be rewarded and poor decisions will be punished. That happens at the individual level when a person takes a mortgage that they can’t afford. And it happens at a bigger level when a company like Lehman pursues an “aggressive” strategy that ultimately proves imprudent.
What makes me laugh – ruefully, I assure you – is when our office seekers trot around the country promising “accountability” for Wall Street. Lehman just went bankrupt – in a market economy, things don’t get more “accountable” than that.
What everyone wants to know is how serious the current situation is. Step back from the ledge, and for goodness sakes ignore Senator Obama’s ignorant hysterics. What we have now is a market correction. Firms that made poor decisions are being devoured by the market’s unforgiving nature. Today the Dow is steady, the American economy having easily withstood the shock of the weekend’s events. Most salubriously, the moral hazard that the government sponsored with past bailouts and craven enabling (see Fannie and Freddie) is now a memory. In evaluating future risks, finance houses will no longer consider the moving target of federal intervention if/when things don’t work out.
The weekend’s events were terrible news for Lehman’s employees not to mention the countless vendors who depended on the firm. The bad news also extends to New York City, which will have the burden of a moribund financial sector to lug around for the foreseeable future. It stinks that things work out this way sometimes. But so it goes in a free market economy.
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“[Barack] Obama... blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the ‘trickle-down’ economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend. But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions. Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties. The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but ‘predatory.’ Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ‘90s by Clinton and his social engineers.” —Investor’s Business Daily
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Bill Kristol's conservative bona fides are in good order, so , , ,
A Fine Mess
By WILLIAM KRISTOL
Published: September 21, 2008
NY Times
A friend serving in the Bush administration called Sunday to try to talk me out of my doubts about the $700 billion financial bailout the administration was asking Congress to approve. I picked up the phone, and made the mistake of good-naturedly remarking, in my best imitation of Oliver Hardy, “Well, this is a fine mess you’ve gotten us into.”
People who’ve been working 18-hour days trying to avert a meltdown are entitled to bristle at jocular comments from those of us not in public office. So he bristled. He then tried to persuade me that the only responsible course of action was to support the administration’s request.
I’m not convinced.
It’s not that I don’t believe the situation is dire. It’s not that I want to insist on some sort of ideological purity or free-market fastidiousness. I will stipulate that this is an emergency, and is a time for pragmatic problem-solving, perhaps even for violating some cherished economic or political principles. (What are cherished principles for but to be violated in emergencies?)
And I acknowledge that there are serious people who think the situation too urgent and the day too late to allow for a real public and Congressional debate on what should be done. But — based on conversations with economists, Wall Street types, businessmen and public officials — I’m doubtful that the only thing standing between us and a financial panic is for Congress to sign this week, on behalf of the American taxpayer, a $700 billion check over to the Treasury.
A huge speculative housing bubble has collapsed. We’re going to have a recession. Unemployment will go up. Credit is going to be tighter. The challenge is to contain the damage to a “normal” recession — and to prevent a devastating series of bank runs, a collapse of the credit markets and a full-bore depression.
Everyone seems to agree on the need for a big and comprehensive plan, and that the markets have to have some confidence that help is on the way. Funds need to be supplied, trading markets need to be stabilized, solvent institutions needs to be protected, and insolvent institutions need to be put on the path to a deliberate liquidation or reorganization.
But is the administration’s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.
And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.
But will political leaders dare oppose it? Barack Obama called Sunday for more accountability, and I imagine he’ll support the efforts of the Democratic Congressional leadership to try to add to the legislation a host of liberal spending provisions. He probably won’t want to run the risk of actually opposing it, or even of raising big questions and causing significant delay — lest he be attacked for risking the possible meltdown of the global financial system.
What about John McCain? He could play it safe, going along with whatever the Bush administration and the Congress are able to negotiate.
If he wants to be critical, but concludes that Congress has to pass something quickly lest the markets fall apart again, and that he can’t reasonably insist that Congress come up with something fundamentally better, he could propose various amendments insisting on much more accountability and transparency in how Treasury handles this amazing grant of power.
Comments by McCain on Sunday suggest he might propose an amendment along the lines of one I received in an e-mail message from a fellow semi-populist conservative: “Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States.” This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.
Or McCain — more of a gambler than Obama — could take a big risk. While assuring the public and the financial markets that his administration will act forcefully and swiftly to deal with the crisis, he could decide that he must oppose the bailout as the panicked product of a discredited administration, an irresponsible Congress, and a feckless financial establishment, all of which got us into this fine mess.
Critics would charge that in opposing the bailout, in standing against an apparent bipartisan consensus, McCain was being irresponsible.
Or would this be an act of responsibility and courage?
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I usually find Krugman to be an ass, an idiot, or both-- but here I think he raises some fair questions.
Cash for Trash
PAUL KRUGMAN
Published: September 21, 2008
NY Times
Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.
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There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.
Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.
So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”
The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?
Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.
Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?
The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)
But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.
But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.
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***It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency***
Well that would be nuts. One could only imagine the billions that would be stolen.
:-o :? :x :roll: :-(
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I think this gets it exactly right:
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Once upon a time, in the land that FDR built, there was the rule of "regulation" and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America's Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker's balance sheet, and nary a crisis did we have.
Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for "market fundamentalists." Reagan's apprentice, Gramm of Texas and later of McCain, unleashed the scourge of "deregulation," and thus were "greed," short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.
Now, however, comes Obama of Illinois, Schumer of New York and others in the fellowship of the Beltway to slay the Orcs and restore the rule of the regulator. So once more will the Hobbits be able to sleep peacefully in the shire.
AP
From left: Christopher Cox, Henry Paulson, Harry Reid, Richard Shelby, Nancy Pelosi, Chris Dodd and Ben Bernanke.
With apologies to Tolkien, or at least Peter Jackson, something like this tale is now being sold to the American people to explain the financial panic of the past year. It is truly a fable from start to finish. Yet we are likely to hear some version of it often in the coming months as the barons of Congress try to absolve themselves of any responsibility for the housing and mortgage meltdowns.
Yes, greed is ever with us, at least until Washington transforms human nature. The wizards of Wall Street and London became ever more inventive in finding ways to sell mortgages and finance housing. Some of those peddling subprime loans were crooks, as were some of the borrowers who lied about their incomes. This is what happens in a credit bubble that becomes a societal mania.
A Look Back at the Crisis Unfolding
Stopping the Panic 09/20/08 – Now the task is to protect taxpayers and restore markets.Be It Resolved 09/19/08 – Paulson and Bernanke ask Congress for a resolution agency.The Fed and AIG 09/18/08 – Nationalizations aren't stopping the financial panic.McCain and the Markets 09/17/08 – Denouncing 'greed' and Wall Street isn't a growth agenda.The Fed's Epic Day 09/17/08 – It's only fair to praise the central bank when it does the right thing.Surviving the Panic 09/16/08 – A resolution agency, steady monetary policy, and a big tax cut.Wall Street Reckoning 09/15/08 – Treasury Secretary Hank Paulson's refusal to blink won't get any second guessing from us.But Washington is as deeply implicated in this meltdown as anyone on Wall Street or at Countrywide Financial. Going back decades, but especially in the past 15 or so years, our politicians have promoted housing and easy credit with a variety of subsidies and policies that helped to create and feed the mania. Let us take the roll of political cause and financial effect:
- The Federal Reserve. The original sin of this crisis was easy money. For too long this decade, especially from 2003 to 2005, the Fed held interest rates below the level of expected inflation, thus creating a vast subsidy for debt that both households and financial firms exploited. The housing bubble was a result, along with its financial counterparts, the subprime loan and the mortgage SIV.
Fed Chairmen Alan Greenspan and Ben Bernanke prefer to blame "a global savings glut" that began when the Cold War ended. But Communism was dead for more than a decade before the housing mania took off. The savings glut was in large part a creation of the Fed, which flooded the world with too many dollars that often found their way back into housing markets in the U.S., the U.K. and elsewhere.
- Fannie Mae and Freddie Mac. Created by government, and able to borrow at rates lower than fully private corporations because of the implied backing from taxpayers, these firms turbocharged the credit mania. They channeled far more liquidity into the market than would have been the case otherwise, especially from the Chinese, who thought (rightly) that they were investing in mortgage securities that were as safe as Treasurys but with a higher yield.
These are the firms that bought the increasingly questionable mortgages originated by Angelo Mozilo's Countrywide and others. Even as the bubble was popping, they dived into pools of subprime and Alt-A ("liar") loans to meet Congressional demand to finance "affordable" housing. And they were both the cause and beneficiary of the great interest-group army that lobbied for ever more housing subsidies.
Fan and Fred's patrons on Capitol Hill didn't care about the risks inherent in their combined trillion-dollar-plus mortgage portfolios, so long as they helped meet political goals on housing. Even after taxpayers have had to pick up a bailout tab that may grow as large as $200 billion, House Financial Services Chairman Barney Frank still won't back a reduction in their mortgage portfolios.
- A credit-rating oligopoly. Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets. Many of these judgments turned out to be wrong, and this goes to the root of the credit crisis: Assets officially deemed rock-solid by the government's favored risk experts have lately been recognized as nothing of the kind.
When debt instruments are downgraded, banks must then recognize a paper loss on these assets. In a bitter irony, the losses cause the same credit raters whose judgments allowed the banks to hold these dodgy assets to then lower their ratings on the banks, requiring the banks to raise more money, and pay more to raise it. The major government-anointed credit raters -- S&P, Moody's and Fitch -- were as asleep on mortgages as they were on Enron. Senator Richard Shelby (R., Ala.) tried to weaken this government-created oligopoly, but his reforms didn't begin to take effect until 2007, too late to stop the mania.
- Banking regulators. In the Beltway fable, bank supervision all but vanished in recent years. But the great irony is that the banks that made some of the worst mortgage investments are the most highly regulated. The Fed's regulators blessed, or overlooked, Citigroup's off-balance-sheet SIVs, while the SEC tolerated leverage of 30 or 40 to 1 by Lehman and Bear Stearns.
The New York Sun reports that an SEC rule change that allowed more leverage was made in 2004 under then Chairman William Donaldson, one of the most aggressive regulators in SEC history. Of course the SEC's task was only to protect the investor assets at the broker-dealers, not the holding companies themselves, which everyone thought were not too big to fail. Now we know differently (see Bear Stearns below).
Meanwhile, the least regulated firms -- hedge funds and private-equity companies -- have had the fewest problems, or have folded up their mistakes with the least amount of trauma. All of this reaffirms the historical truth that regulators almost always discover financial excesses only after the fact.
- The Bear Stearns rescue. In retrospect, the Fed-Treasury intervention only delayed a necessary day of reckoning for Wall Street. While Bear was punished for its sins, the Fed opened its discount window to the other big investment banks and thus sent a signal that they would provide a creditor safety net for bad debt.
Morgan Stanley, Lehman and Goldman Sachs all concluded that they could ride out the panic without changing their business models or reducing their leverage. John Thain at Merrill Lynch was the only CEO willing to sell his bad mortgage paper -- at 22 cents on the dollar. Treasury and the Fed should have followed the Bear trauma with more than additional liquidity. Once they were on the taxpayer dime, the banks needed a thorough scrubbing that might have avoided last week's stampede.
- The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.
Robert Litan, an economist at the Brookings Institution, told the Washington Post this year that banks "had to show they were making a conscious effort to make loans to subprime borrowers." The much-maligned Phil Gramm fought to limit these CRA requirements in the 1990s, albeit to little effect and much political jeering.
We could cite other Washington policies, including the political agitation for "mark-to-market" accounting that has forced firms to record losses after ratings downgrades even if the assets haven't been sold. But these are some of the main lowlights.
Our point here isn't to absolve Wall Street or pretend there weren't private excesses. But the investment mistakes would surely have been less extreme, and ultimately their damage more containable, if not for the enormous political support and subsidy for mortgage credit. Beware politicians who peddle fables that cast themselves as the heroes.
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AR is one of America's finest economists.
WSJ
'Wall Street' No Longer Exists
By ALAN REYNOLDSArticle
With Goldman Sachs and Morgan Stanley becoming commercial banks, and the other three big investment banks/brokerage houses being acquired by commercial banks, politicians and the press won't have Wall Street to kick around anymore. Headlines now shout about a $700 billion "Bailout for Wall Street." Yet strictly speaking, Wall Street as we knew it no longer exists.
The conversion or absorption of all five of Wall Street's big investment banks into commercial banks raises several intriguing issues.
First of all, the financial storms over the past year have -- before last week -- been largely confined to securities markets and to interbank loans among commercial and investment banks. Bank loans to commercial and industrial business, real estate and consumers continued to expand nearly every month. Commercial and industrial loans exceeded $1.5 trillion this August, up from less than $1.2 trillion a year earlier. Real-estate loans exceeded $3.6 trillion, up from less than $3.4 trillion a year ago. Consumer loans were $845 billion, up from $737 billion. Credit standards are tougher, which is surely a good thing, but interest rates for creditworthy borrowers remain low.
The ongoing slow but steady availability of bank credit helps explain the much-remarked contrast between Wall Street and Main Street -- the shaky condition of exotic financial markets compared with relatively benign statistics for industrial production, retail sales, employment and the rest of the nonhousing economy. Most people go about their business without depending on investment banks or exotic varieties of commercial paper.
Second, recent events highlight the absurdity of the attempt by several pundits to blame recent problems on "financial deregulation." That complaint was aimed at the Financial Modernization Act of 1999, which passed the House by a vote of 362-57 and the Senate by 90-8, yanking the last brick out of the 1933 Glass-Steagall Act's regulatory wall between commercial banks and investment banks.
If it was somehow possible in today's world of global electronic finance to the rebuild such a wall, that would mean J.P. Morgan could not have bought Bear Stearns, Bank of America could not have bought Merrill Lynch, Barclays could not buy most of Lehman, and Goldman Sachs and Morgan Stanley could not become bank holding companies. It is hard to imagine how things would have worked out in that situation, but it surely would not have been an improvement.
Since the 1933 regulatory wall has collapsed as definitively as the Berlin Wall, all the giant financial conglomerates now face oversight and regulation by the Federal Reserve, the Securities and Exchange Commission, the Comptroller of the Currency and the Federal Deposit Insurance Corp. Innocents who seek security in regulation need to recall, however, that not one of those august agencies exhibited timely foresight or concern about the default risk among even prime mortgages in some locations, or about any lack of transparency with respect to bundling mortgages into securities. People do not become wiser, more selfless or more omniscient simply because they work for government agencies.
Wall Street was always a metaphor, of course, but so are words like "bailout" and "toxic" debt. Nationalization of Fannie Mae and Freddie Mac was a bailout for creditors (who received windfall gains), not for stockholders or executives. The federally enforced shotgun marriage between J.P. Morgan and Bear Stearns at the initially ridiculous price of $2 a share was no bailout for Bear. The 11.3% federal loan to AIG, contingent on the potential expropriation of 80% of shareholder value, is no bailout either.
By contrast, what was done to stop a run on the money-market funds is a real bailout which could encourage them to hold risky paper and also make it tougher for commercial banks to attract deposits. The proposal to buy up mortgage-backed securities is a bailout too, though the beneficiaries are not just the tattered remains of Wall Street. The bailout consists of shifting the risk of loss to taxpayers. Actual losses could not reach $700 billion unless the securities were literally worthless, which would mean the value of the underlying real estate fell to zero.
What was "toxic" for investment banks is not equally toxic for the Treasury Department because the government does not even bother to keep a balance sheet, much less abide by mark-to-market accounting rules. A powerful motive for converting investment banks into commercial banks is to get around those onerous balance-sheet rules that required fire-sale pricing of securities that were virtually unmarketable during a panicky scramble for liquidity. Strict adherence to those rules made patience a vice and a "buy and hold" approach impossible. This confirms what many of us have long been saying about the foolishness of letting arbitrary bookkeeping rules dominate economic reality.
Turning Wall Street into a bunch of commercial banks is a solution of sorts to a problem aggravated by foolish mark-to-market regulations, not by the inevitable demise of the 1933 wall between investment banks and commercial banks. Something good may yet come out of all this, because that wall never made much sense in the first place.
Mr. Reynolds, a senior fellow with the Cato Institute, is the author, most recently, of "Income and Wealth" (Greenwood Press, 2006).
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BTW, yes and Greenspan has a new book. I wondeer what Scott Grannis thinks of Greenspan. I do not have the background to evaluate him one way or the other. I would think he did his best and hindsight is always the best opinion even if it is right that he bears some responsibility for the present problems. Gotta love all the political books that always seem to make the circuit just before a national election.
The endless parade of Woodward books before every election is boring.
Anyway the main reason for my post:
Here it comes. The Hillary/Dem dream of socialism gets a boost. The end of our free capatilist system as we know it:
**** Sep 23, 2008 10:10 am US/Eastern
Sen. Clinton: 'No Doubt' Obama Will Win
New York Democrat Says Taxpayers 'Could Be Left Holding The Bag' With $700 Billion Government Program
Suggests Country Look At Some Great Depression-Era Type Of Governmental Entity
NEW YORK (CBS) ― Sen. Hillary Rodham Clinton said Tuesday she worries that taxpayers could be left "holding the bag" with plans for a $700 billion government program to stabilize the country's distressed financial markets.
Interviewed on Tuesday morning on CBS's "The Early Show," she said she agrees that the situation is critical and that something must be done quickly. She said, "the house is on fire and we've got to call the fire department and put the fire out." But Clinton also said that Congress should not "give the Treasury a blank check" to straighten out the problem.
"What we also have to do is make sure that homeowners get some relief, that it's not just for the banks and the lenders," she said. Clinton added that "we also must begin to look at the root cause of this, which is these mortgages that people cannot afford."
The senator said she didn't think all responsibility for solving these problems should be vested in the Treasury Department, suggesting that "once we get through this immediate crisis," the country should look at some Great Depression-era type of governmental entity to deal with it.
"If we just turn this over to Treasury, I worry about what the outcome would be," she said in an interview on NBC's "Today" show.
She blamed part of the problem on "predatory lending and subprime lending" in the housing market.
Clinton said Tuesday that Barack Obama is going to be elected the next president and that she has "no doubt" about it.
"Barack Obama is being advised by the same peopole who got us out of the ditch in 1993," she said. "I think our ticket is well-equipped for handling the mess that they're going to inherit. Let's make no mistake about it: this is going to be one of the most difficult presidential transitions."
Clinton also said that while she recognizes that race and gender play a role in the minds of voters as they make their presidential choices, she believes enough people want change from Republican policies to put Obama over the top in November.
On CBS's "The Early Show," she was asked what she thought about Republican Sarah Palin's vice presidential candidacy. She said she thought any woman is going to face certain issues and questions but that "the bottom line is who is on top of the ticket."
Clinton called Republican presidential nominee John McCain a friend, but said that he has a record of supporting deregulationof business.
"Barack Obama's going to win. No doubt ... if anybody looks at the mess we're in today," she said.
She also said that she thinks Obama is best suited to straighten out the country's economic problems.
(© 2008 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)*****
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As I figure it, $700,000,000,000 divided by a population of 300,000,000 equals $2333 each. Before our government commits each of us to a share of this handout, it has some questions to answer:
Sunday, September 21, 2008
Before D.C. Gets Our Money, It Owes Us Some Answers [Newt Gingrich]
Watching Washington rush to throw taxpayer money at Wall Street has been sobering and a little frightening.
We are being told Treasury Secretary Henry Paulson has a plan which will shift $700 billion in obligations from private companies to the taxpayer.
We are being warned that this $700 billion bailout is the only answer to a crisis.
We are being reassured that we can trust Secretary Paulson "because he knows what he is doing".
Congress had better ask a lot of questions before it shifts this much burden to the taxpayer and shifts this much power to a Washington bureaucracy.
Imagine that the political balance of power in Washington were different.
If this were a Democratic administration the Republicans in the House and Senate would be demanding answers and would be organizing for a “no” vote.
If a Democratic administration were proposing this plan, Republicans would realize that having Connecticut Democratic senator Chris Dodd (the largest recipient of political funds from Fannie Mae and Freddie Mac) as chairman of the Banking Committee guarantees that the Obama-Reid-Pelosi-Paulson plan that will emerge will be much worse as legislation than it started out as the Paulson proposal.
If this were a Democratic proposal, Republicans would remember that the Democrats wrote a grotesque housing bailout bill this summer that paid off their left-wing allies with taxpayer money, which despite its price tag of $300 billion has apparently failed as of last week, and could expect even more damage in this bill.
But because this gigantic power shift to Washington and this avalanche of taxpayer money is being proposed by a Republican administration, the normal conservative voices have been silent or confused.
It’s time to end the silence and clear up the confusion.
Congress has an obligation to protect the taxpayer.
Congress has an obligation to limit the executive branch to the rule of law.
Congress has an obligation to perform oversight.
Congress was designed by the Founding Fathers to move slowly, precisely to avoid the sudden panic of a one-week solution that becomes a 20-year mess.
There are four major questions that have to be answered before Congress adopts a new $700 billion burden for the American taxpayer. On each of these questions, I believe Congress’s answer will be “no” if it slows down long enough to examine the facts.
Question One: Is the current financial crisis the only crisis affecting the economy?
Answer: There are actually multiple crises hurting the economy.
There is an immediate crisis of liquidity on Wall Street.
There is a longer time crisis of a bad energy policy transferring $700 billion a year to foreign countries (so foreign sovereign capital funds are now using our energy payments to buy our companies).
There is a longer term crisis of Sarbanes-Oxley (the last "crisis"-inspired congressional disaster) crippling entrepreneurial start ups, driving public companies private, driving smart business people off public boards, and driving offerings from New York to London.
There is a long term crisis of a high corporate tax rate driving business out of the United States.
No solution to the immediate liquidity crisis should further cripple the American economy for the long run. Instead, the liquidity solution should be designed to strengthen the economy for competition in the world market.
Question Two: Is a big bureaucracy solution the only answer?
Answer: There is a non-bureaucratic solution that would stop the liquidity crisis almost overnight and do it using private capital rather than taxpayer money.
Four reform steps will have capital flowing with no government bureaucracy and no taxpayer burden.
First, suspend the mark-to-market rule which is insanely driving companies to unnecessary bankruptcy. If short selling can be suspended on 799 stocks (an arbitrary number and a warning of the rule by bureaucrats which is coming under the Paulson plan), the mark-to-market rule can be suspended for six months and then replaced with a more accurate three year rolling average mark-to-market.
Second, repeal Sarbanes-Oxley. It failed with Freddy Mac. It failed with Fannie Mae. It failed with Bear Stearns. It failed with Lehman Brothers. It failed with AIG. It is crippling our entrepreneurial economy. I spent three days this week in Silicon Valley. Everyone agreed Sarbanes-Oxley was crippling the economy. One firm told me they would bring more than 20 companies public in the next year if the law was repealed. Its Sarbanes-Oxley’s $3 million per startup annual accounting fee that is keeping these companies private.
Third, match our competitors in China and Singapore by going to a zero capital gains tax. Private capital will flood into Wall Street with zero capital gains and it will come at no cost to the taxpayer. Even if you believe in a static analytical model in which lower capital gains taxes mean lower revenues for the Treasury, a zero capital gains tax costs much less than the Paulson plan. And if you believe in a historic model (as I do), a zero capital gains tax would lead to a dramatic increase in federal revenue through a larger, more competitive and more prosperous economy.
Fourth, immediately pass an “all of the above” energy plan designed to bring home $500 billion of the $700 billion a year we are sending overseas. With that much energy income the American economy would boom and government revenues would grow.
Question Three: Will the Paulson plan be implemented with transparency and oversight?
Answer: Implementation of the Paulson plan is going to be a mess. It is going to be a great opportunity for lobbyists and lawyers to make a lot of money. Who are the financial magicians Paulson is going to hire? Are they from Wall Street? If they’re from Wall Street, aren't they the very people we are saving? And doesn’t that mean that we’re using the taxpayers’ money to hire people to save their friends with even more taxpayer money? Won't this inevitably lead to crony capitalism? Who is going to do oversight? How much transparency is there going to be? We still haven't seen the report which led to bailing out Fannie Mae and Freddie Mac. It is "secret". Is our $700 billion going to be spent in "secret" too? In practical terms, will a bill be written in public so people can analyze it? Or will it be written in a closed room by the very people who have been collecting money from the institutions they are now going to use our money to bail out?
Question Four: In two months we will have an election and then there will be a new administration. Is this plan something we want to trust to a post-Paulson Treasury?
Answer: We don’t know who will inherit this plan.
The balance of power on election day will shift to either McCain or Obama. Who will they pick for Treasury Secretary? What will their allies want done? We are about to give the next administration a level of detailed control over big companies on a scale even FDR did not exercise during the Great Depression. Is this really wise?
For these reasons I hope Congress will slow down and have an open debate.
And in the course of that debate, I hope someone will introduce an economic recovery act that makes America a better place to grow jobs. I hope the details will be made public before the vote.
For more details on my action plan for getting the American economy back on track and building long-term economic prosperity, you can read this message recorded yesterday to American Solutions members.
This is a very important week for the integrity of the Congress.
This is a very important week for the future of America.
If Washington wants our money, then it owes us some answers.
http://corner.nationalreview.com/post/?q=ZGE5MmE0YmRiODA3YTRiNzFlN2FmNDU5N2I0ZDc3YTE=
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The Paulson Plan
Will Make Money
For Taxpayers
By ANDY KESSLER
In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson's Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs.
But these are small-time deals. My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.
[The Paulson Plan Will Make Money for Taxpayers] Chad Crowe
Here's what's happened so far. New technology like electronic trading meant that Wall Street's bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves -- lots of them, often at 30-to-1 leverage. The financial products were made "safe" by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.
Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit.
There is a saying on Wall Street that goes, "The market can stay irrational longer than you can stay solvent." Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.
Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.
Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.
Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.
Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.
Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.
So the U.S. will be stuck with a portfolio in the trillions of dollars in bad loans and last-to-be-paid derivatives. Where is the trade in that?
Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.
First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.
Europe is threatened by an angry Russian bear. The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with. Interest rates will tick up as the economy expands -- a plus for the dollar. Finally, a stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.
You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.
Over 10 years this could change the budget scenario in D.C., which can also strengthen the dollar. The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward's purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson's Folly.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).
Please add your comments to the
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And now for an opposing view. . . .
Stop the Socialist Spendathon
Try pro-market, pro-growth solutions instead.
By Deroy Murdock
It is beyond irritating to watch President Bush, Treasury Secretary Henry Paulson, and Federal Reserve Chairman Ben Bernanke gift-wrap their $700-billion early Christmas present for financially irresponsible bankers and the overleveraged borrowers who love them. These “three wise men” consider theirs the only method to stop the turmoil roiling trading desks from Gotham to Tokyo.
“Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy,” Bernanke told the Senate Banking Committee Tuesday.
But this mother of all government interventions is unlike a long, cold hypodermic needle in the belly: an inescapable misery, but preferable to death by rabies. There actually are desirable alternatives to building socialism and saddling every American man, woman, and child with another $2,300 in unjustified federal spending.
One option is to instruct the geniuses from Fannie Mae to Wall Street to deal with it. They made this mess; they should mop it up. Cut back, sell assets, develop fresh services, or get new jobs. Absent a federal bailout, Lehman Brothers sold parts of itself to Barclay’s Bank. Facing Uncle Sam’s cold shoulder, Merrill Lynch ran into the loving arms of Bank of America. Merrill’s customers will survive, and its employees will work for B of A or seek their fortunes elsewhere.
It may take time and tightened belts, but padlocking Washington’s bailout window will offer a generation of “masters of the universe” lessons that America’s Mr. Rogers-in-Chief cannot teach: Keep your winnings, but own your losses. If you fall on your face, especially after dancing drunk on the roof, Uncle Sam may empathize, but he no longer will rush in to swaddle you in silk sheets and place your bruised head on pillows stuffed with crisp $100 bills.
Other options exist, of course — and while they lack the bracing appeal of this sort of financial Darwinism, they remain far more attractive than our current policy of “survival of the fattest.”
Rep. Jeb Hensarling (R., Texas) chairs the Republican Study Committee, the congressional caucus of idea-driven, free-market stalwarts. These practicing Reaganites seem appalled to watch their GOP president morph before their eyes from GWB to LBJ to FDR. At a Capitol Hill press conference at high noon on Tuesday, Hensarling and a dozen RSC members expressed deep misgivings about Bush’s $700-billion baby. Preferring to drown it in the bathwater, Hensarling and his band of true believers rejected Bush’s collectivism and offered their own proposals for escaping this rubble — and returning America to a path of robust growth:
Give the capital-gains tax a two-year vacation. “Suspending capital gains taxes would bring as much as a trillion dollars of capital sitting on the sidelines back into the market,” Hensarling predicts. Also, as the Tax Foundation proposes, cutting America’s 35-percent corporate tax — the industrialized world’s second highest, after Japan’s — would boost U.S. global competitiveness. Since equity prices partially reflect long-term after-tax profits, lowering corporate levies should buoy stock markets.
Denationalize, then privatize Fannie and Freddie. “These troubled financial Frankensteins — created in a government laboratory — are not creatures of the free enterprise system,” Hensarling said. “We must ultimately take their monopoly powers away and return them to the marketplace.” Why not array Fannie’s and Freddie’s loans according to mortgage holders’ surnames? They then could be divided alphabetically into 26 units and auctioned off.
Waive “mark-to-market” accounting. As the Competitive Enterprise Institute’s John Berlau argues, when distressed mortgage-backed securities sell at bargain-basement prices, unhelpful new bookkeeping regulations require that similar instruments elsewhere — including viable loans — be valued at equally low prices. This needlessly stains balance sheets.
Strengthen the dollar. Bernanke should boost U.S. currency, not pose as America’s uber-stock broker. A strong dollar lowers inflation, cheapens oil, and soothes world markets.
Bush’s bailout bonanza began with $29 billion for Bear Sterns. Then came the taxpayer-financed purchase of an 80-percent stake in AIG. And while the public and press gaped open-mouthed at the $700 billion request to rescue the financial-services sector, Washington quietly passed $25 billion to the auto industry. Doubtless, credit-card companies now await their slab of bacon. This cavalcade of giveaways and takeovers monumentally betrays the Republican Party’s most sacred tenets.
Even worse, Bush’s hyper-statism offers nothing imaginative. It takes brains to generate interesting ideas like Hensarling & Co.’s. It takes mere muscle to nationalize companies and toss handfuls of cash into the air. Just ask Eva Peron.
— New York commentator Deroy Murdock is a columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution.
National Review Online - http://article.nationalreview.com/?q=YmMxNTg0Mjk3MmM3YmExNTI3MzY0NDVjYWMxMDE2ODI=
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Second post:
Why We're Floundering
And a better way forward.
by Lawrence B. Lindsey
09/24/2008 7:45:00 PM
LAST THURSDAY NIGHT Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke stood surrounded by the bipartisan leadership of Congress to announce that a consensus had emerged that drastic action was needed to save our financial system. On Saturday the first vague details of that action began to emerge. By the time of the first hearings on Tuesday a groundswell of popular opposition produced some of the most broad-based skeptical questioning of the nation's economic leadership that I can remember. What happened?
First, it is now obvious that the Thursday consensus to pass a bill was not backed by the reality of legislation, or even a coherent plan of action. When Washington let Lehman Brothers fail (after a century and a half of operations), many in Washington said that Lehman had had six months to get its problems revolved--since being put on notice when its sister firm Bear Stearns was bailed out--and had not done so. Hence it was denied the assistance Bear had gotten. But what had Washington been doing in the intervening six months to get ahead of the developing financial crisis? By the weekend it appeared that the answer was: about as much as Lehman.
Second, when the first details emerged, the focus of the plan was for the government to buy the assets in the financial system that were not easily valued and therefore could not be sold. They were clogging up the books and thereby consuming most of the spare capital in the system. Those that could be sold were being sold out of desperation at fire sale prices. For example, Merrill Lynch had sold assets at 22 cents on the dollar, and had to lend three-quarters of that amount to the buyer. Trouble was, if the government bought at those prices, the financial industry would take massive losses and many firms might go under. That meant that the only way the plan made sense was for the government to buy assets at prices well above current market values. Not even the most talented wordsmith could find a way of getting around the word "bailout" for this type of action. This meant bailing out the same gigantic firms which government regulators and prosecutors had been saying for months had used shady accounting practices and paid their CEOs tens of millions of dollars per year. I'm just an economist, but that hardly seems like a political winner to me.
Third, to make these purchases the government would have to set a price on assets that are so opaque and differentiated that no market price had been determined for over a year. This opacity led Wall Street to employ some of the smartest people in the world to come up with computer models to determine these prices, and when they did, the prices were so subject to small changes in underlying assumptions that they proved wildly volatile. Passing the plan meant asking members of Congress, most of whom would have to ask a staffer what the formula was for compound interest, to either figure out a fair price or trust the same geeks who got us into this mess in the first place to figure one out instead.
The most likely end game of this approach is passage of a bill that hands the job over to the geeks with so many constraints and conflicting objectives that the entire enterprise runs up against Arrow's Impossibility Theorem. (Kenneth Arrow got a Nobel Prize for formalizing a way of saying "you can't get there from here.") The resulting process would be open to manipulation by private players who could hire their own geeks to figure it out, and therefore almost certain to produce instant billionaires in the process. But, this outcome will still allow congressmen to go home to campaign and tell voters that they have both solved the problem and protected the taxpayer. After the process collapses and the Congress returns in January, the blame will be dumped on the appointed officials who were supposed to oversee the geeks assigned to complete the impossible task. A new process will then be created in January by people with even less experience and with the deterioration in the system much further advanced.
One likely way the new folks could proceed is to stay away from the tar pit of trying to bail out institutions directly and instead opt for an indirect approach. Specifically, the government might choose to bail out homeowners instead. Suppose all homeowners were allowed to refinance their existing mortgage at some low subsidized rate that was also extended to all new buyers, say 4 percent. One catch--the government would have recourse to the borrower and not just the house in the case of default. This is a huge broadening of the plan originally suggested by Martin Feldstein. Not everyone would take this up because it would mean they would have to pay the money back and not just default on their mortgage. So, it would quickly separate the good mortgages from the bad ones that are creating problems in the system.
For those who did take up the plan, a wave of prepayments would begin that would trigger positive cash flow and reduce the risk to all that derivative paper the financial service industry now holds. Prices on that paper would quickly rise and firms would enjoy both more liquidity and more capital. For those who did not refinance, the expectation would be that the house was so far under water that it will ultimately produce a loss. This would help clarify precisely just how much the losses were in the system and on each of the many securitized products and mortgage derivatives as well.
But the biggest advantage is that it avoids the quagmire in which the political class now finds itself. No need for direct bailouts, no need to warehouse paper, no need to hire geeks to figure it all out, and no instant billionaires who simply gamed the system. Better yet for those up for election, no political complaints since it is the voters themselves who were being bailed out.
Lawrence B. Lindsey, a former governor of the Federal Reserve, was special assistant to President Bush for economic policy and director of the National Economic Council at the White House. His most recent book is What a President Should Know . . . but Most Learn Too Late (Rowman and Littlefield).
http://www.weeklystandard.com/Utilities/printer_preview.asp?idArticle=15604&R=13C1D1B46D
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What We Learned
From Resolution Trust
By L. WILLIAM SEIDMAN and DAVID C. COOKE
As individuals who were intimately involved in the resolution of this country's last financial crisis, we follow with great interest Treasury Secretary Henry Paulson's proposal to acquire distressed real-estate assets from financial institutions.
The current situation threatens our economy more than the savings and loan and banking crisis of the 1980s and early 1990s. The Treasury secretary should be congratulated for moving quickly and decisively.
We would like to offer some thoughts based on our experiences in starting up and operating the government-owned Resolution Trust Corporation, as well as a similar type of operation undertaken by the Federal Deposit Insurance Corporation for dealing with failed banks.
The RTC was charged with resolving nearly 750 failing savings and loan institutions holding $400 billion in assets, and the FDIC had an additional $200 billion from failed banks. Most of these assets were loans to homeowners, builders and developers. Many of the assets, especially construction and development loans, had no established market or "fair value."
The major difference between then and now is that the RTC was, with only a couple of exceptions, dealing with S&Ls closed by their chartering agency. This meant the RTC took over the assets after the institution failed, not before. So the RTC did not have to first negotiate a "fair value purchase price" with a troubled seller. Our experience with past U.S. bank and S&L assistance efforts, as well as those of other countries, leads us to believe that deciding what price to pay -- and which institution to "assist" by buying their assets -- will not be easy.
Guidelines should be established regarding which institutions will be assisted, and how the government will minimize losses, should "fair value" prices prove too high. One option is to not pay all cash upfront. Another method of protecting the taxpayer against overpayment would be for the government to have the right to recover some part of losses suffered on the later sale of assets. Other countries with asset-acquisition programs found themselves conflicted between paying too much to help the bank and trying to avoid losses eventually realized.
Clear guidelines for the management process should be established as promptly as possible for the real-estate loans and/or mortgage-backed securities acquired by Treasury. Like those owned by the RTC, all will require some level of active management.
Buying and managing home mortgages acquired by Treasury will be very challenging. Valuation will be heavily influenced by local real-estate markets and the actions available to the lenders. Restrictions on lender actions or sale prices should be avoided to help maximize recoveries and minimize taxpayers' losses. Restructuring loans often provides an attractive option that avoids foreclosure and keeps families in their homes. But it is important that the lender be allowed to pursue other options when determined to be in the best interest of the taxpayer.
The most difficult loans for the RTC to manage were loans to developers and builders. Our guess is such loans are a looming problem that has not yet been fully recognized. While it is not clear if the proposal currently addresses such loans, it should. Their treatment will impact the property values underlying loans acquired by Treasury.
The RTC started a number of sales initiatives. For the more difficult real-estate loans and properties, we started hiring contractors to manage and sell the assets. But aligning the interests of contractors with the RTC proved very difficult.
The RTC saw that the larger its inventory of distressed assets became, the more the overhang impeded the ability of the markets to determine value and function effectively. We concluded that the only way to stimulate markets as well as avoid conflicting mandates was to quickly move assets into private-sector ownership and expertise, by selling them in bulk in an open and competitive manner.
Here are the most important lessons we learned from our experiences in the late '80s and early '90s:
- Acquired assets require active management. Assets tend to lose value while in government hands, as the government seldom can duplicate a private owner's interest in enhancing value. The RTC employed over 10,000 people in the first year of operation.
- Holding large inventories of assets will lead to depressed prices. No one wants to buy when the market has a large overhang of assets just waiting to be dumped when prices improve.
- To get the market started, assets have to be sold at very low prices. Such sales will attract buyers, with a resulting increase in prices. At the same time, selling at low prices could trigger accusations that the agency is "depressing the market."
- Every government sale or purchase creates winners and losers. This results in intense political and economic pressures to influence the actions of the agency. The RTC's independent governance and operations protected against fraud and political influence.
The Treasury proposal will undoubtedly raise many conflicts similar to those seen by the RTC. In our experience, government ownership and management of assets rarely increases value. Moving assets openly, fairly and promptly to sound private-sector owners is the best way to minimize taxpayers' losses. If the RTC hadn't adopted this approach, it might still be around today.
Mr. Seidman is former FDIC and RTC chairman. Mr. Cooke is former deputy FDIC chairman and RTC executive director.
Please add your comments to the Opinion Journal forum
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Another piece raising questions , , ,
The Public Deserves a Better Deal
By JOHN PAULSON
The Treasury plan to buy illiquid financial assets has been widely criticized as being unfair to taxpayers, who will have to bear losses ahead of shareholders of the institutions that will be bailed out.
[The Public Deserves a Better Deal] Corbis
There is a better alternative to stabilize the markets: Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. Let's call this the "Preferred plan." In fact, it is the Fannie Mae and Freddie Mac model -- which the Treasury Department has already endorsed and used in practice. It is also the approach Warren Buffett used for his investment in Goldman Sachs.
There are major problems with the Treasury plan. First, by buying banks' worst assets at above-market prices, taxpayers take an immediate economic loss -- while transferring wealth to shareholders and executives of the very institutions that brought on the financial crisis.
Second, this plan puts too much discretionary power in the hands of Treasury officials. Who determines what financial assets are purchased and at what prices? Who determines which bank gets to benefit from these taxpayer subsidies? Will bank shareholders continue to receive dividends, and executives continue to get paid huge bonuses?
When financial institutions borrow massive amounts of money to invest in assets that are now found to be illiquid and poorly performing, it is not the responsibility of taxpayers to bear the resulting losses. These losses should be borne by the shareholders.
If taxpayers have to step in and provide capital to keep operating enterprises that the government decides are key to the functioning of the economy as a whole, taxpayers must receive protection.
Treasury Secretary Henry Paulson said at the Senate Banking Committee hearing this week, "[the] Fannie Mae and Freddie Mac [interventions] worked the way they were supposed to." These enterprises continued to function, maintaining homeowner access to and lowering the cost of mortgage financing. However, managements of these companies had to leave and forfeit the compensation packages they had negotiated.
Shareholders had their dividends blocked and remain first in line to bear losses, as they should have been. Taxpayers came both first and last -- first to get paid back, as the new preferred stock is senior to all shareholders; and last in realizing losses, as common and other preferred equity would be extinguished before the taxpayers would be at risk.
This mechanism -- purchases of senior preferred stock with warrants in troubled institutions -- addresses the problems with the Treasury plan. The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.
The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.
The Treasury plan would also entail larger outlays than the Preferred plan. By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have a private alternative. But under a Preferred plan, only banks that don't have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.
Few people familiar with the issues deny that Treasury action is needed to stabilize the financial markets. However, the question is who should bear the cost?
Under the Treasury plan the taxpayer pays the price. Under a Preferred plan, the shareholders of the firms who created the problems bear the first loss. Who do you think should pay?
Before committing $700 billion of our money, we should encourage Congress to take a few extra days to get this legislation right.
Mr. Paulson is president and portfolio manager of Paulson & Co. Inc., a New York-based investment management firm.
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Published by The Heritage Foundation
No. 2079 September 24, 2008
This paper, in its entirety, can be found at: www.heritage.org/Research/Economy/wm2079.cfm Produced by the Center for Legal and Judicial Studies Published by The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002–4999 (202) 546-4400 • heritage.org
Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress.
All Deliberate Speed: Constitutional Fidelity and Prudent Policy Go Hand in Hand in Fixing the Credit Crisis
Todd F. Gaziano and Andrew M. Grossman
Even in times of difficulty or crisis, the constitutional design for legislation requires careful, bicameral deliberation and presentment to the President. For sound policy and constitutional reasons, Congress should not recess until it acts on a solution to the credit crisis, but it should also be mindful of the virtues of calm deliberation and the dangers to liberty of a crisis mentality. The mounting resistance to the Administration’s proposal presents an opportunity for careful deliberation. The constitutional and policy concerns expressed by many Members of Congress and thoughtful scholars this past week must be thoroughly considered.
No one doubts the importance of Treasury Secretary Henry Paulson’s call for immediate legislative action to calm the financial markets, which have the potential to wreak long-term damage to the world economy, but the initial deadline with which he urged Congress to act on a dramatic bail- out plan raises risks that Congress must avoid: either acting imprudently (and with serious constitutional consequences) or not acting at all before it recesses.
Members of Congress had planned to depart Washington on Friday to spend the month campaigning for votes, but they should stay in session around the clock if that is necessary to complete action before the end of the month. The exigencies of electoral politics should not be allowed to keep Congress from its constitutional duties. That result—Members of Congress abandoning Washington in a time of crisis to campaign for their own reelections—would be irresponsible. It is also, in all likelihood, unnecessary: What statesman would believe that his constituents would exact punishment for staying a few extra days to do the people’s work? In the minds of true statesmen, this con- test between constitutional values and politicking should not present a conflict.
Constitutional and Policy Concerns Converge.
As many have come to realize this week, there are some fundamental constitutional values at stake in the present debate. The Paulson proposal, and the several congressional proposals based upon it, raise substantial constitutional questions regarding: (1) Congress’s enumerated power—or lack thereof—to intervene with private markets in the manner contemplated, (2) the lack of meaningful standards to guide the extremely broad grant of discretion to the Treasury secretary (the “legislative delegation” problem), (3) limitations on judicial review over the exercise of that almost limitless discretion, and (4) related separation of powers concerns. From a constitutional standpoint, the current versions of the legislation are different in scope, and especially in kind, from almost any federal legislation that has come before. In short, many analogies to past emergency economic powers, such as those exercised in response to the thrift failures of the 1980s, are not on point with regard to these central constitutional concerns. Rather than rely on these precedents, Congress must take the time to work through these constitutional concerns.
And these concerns are serious, regardless of how the courts might resolve them. Some would treat the Constitution as a legalistic document and employ narrow legalistic arguments to circumvent its strictures and protections. The substance of this debate, however, should not turn on what provisions might or might not pass muster with the courts under a pinched conception of our fundamental law. Rather, it is the principles the Constitution embodies, which have served us well through so many crises, that should be the focus of debate. In short, Americans should take little comfort that legislation might barely pass muster in the courts if the legislation does serious damage to the underlying constitutional principles that were designed to protect our individual rights against governmental usurpations.
In particular, legal scholars across the ideological spectrum recognize that, with regard to sweeping and seemingly standardless delegations of discretion to the executive branch, the courts have not been assertive in policing this aspect of the constitutional separation of powers. Yet even under the courts’ permissive, modern approach to such delegations, the delegation of authority in the legislation that some recommend for swift passage is question- able. This counsels caution.
Moreover, fidelity to our constitutional principles also coincides with prudent policy prescriptions. Those who argue that we need to suspend the fundamental charter in order to save it (or the economy) have it backward. Our fundamental charter has always been a bulwark for the free market. The recommendations below to address constitutional concerns should not only improve the short-term value of any emergency legislation; it should also support the long-term viability of free markets and, ultimately, free people.
Needed Constitutional Changes. To satisfy the substantial constitutional and policy concerns— if not the Constitution itself—the draft legislation must cabin the scope and character of the Treasury secretary’s discretion, connect the exercise of that discretion to legitimate government purposes, and allow Americans adversely affected to seek meaningful judicial review. If the bailout is to pass constitutional muster, lawmakers must concern themselves with at least the following specifics, while keeping in mind the broader outlines of its constitutional authority:
• Type and Scope of Indebtedness. The type of financial instruments or debt that the secretary can purchase, as well as the industries that may seek relief, should be defined by statute carefully so as to limit the secretary’s discretion. There are various ways to do this that would preserve the discretion necessary for the secretary to achieve the goals of the legislation and provide the limits necessary to protect the taxpayers. For instance, the legislation could expressly cover defined mortgage-related, non-equity securities of the type normally held by financial institutions. In addition, Congress and the administration could work together to identify other relevant, non- debt securities and set forth the circumstances under which the secretary could acquire them. If the nature of the economic problems changes, Congress may choose to expand the scope of authority in specific ways rather than granting a blank check at the outset. This and future Administrations should bear the burden of defining and limiting the necessary financial instruments or debt that they are seeking power to manage. Indeed, Congress should exercise a healthy suspicion if the Administration cannot define the scope of the authority it needs. The revolving nature of expenditures should also be capped. In the Administration proposal, the only limitation was the total value of securities the government could hold at any one time, which was $700 billion. The House bill con- verted that figure into an overall cap. Congress should impose some overall limit and stand ready to reconsider the cap if additional expenditures prove necessary.
• Standards to Guide the Secretary’s Discretion. It is questionable whether the current bills satisfy the court-created test of providing an “intelligible principle” to guide the secretary’s discretion (see, e.g., Whitman v. American Trucking Association), but that minimum standard is woefully inadequate for citizens and Members of Congress who care about the constitutional order. Congress must undertake the hard work of crafting legislative alternatives that achieve vital ends without straining our constitutional structure. In order to do so, the legislation itself must contain an objective set of criteria that would guide the secretary’s exercise of discretion in practice and not just in theory. The criteria that the government has employed in deciding when to act (e.g., Bear Stearns, AIG, etc.) and when not to act (e.g., Lehman Brothers) suggest that some guiding principle is necessary, and the Administration should be made to articulate it expressly and ex- pose it to the process of democratic consideration. In contrast, the existing drafts provide almost no meaningful standards to cabin the secretary’s discretion on what debt he may buy, for what purposes, to whom he may sell it, and on what terms. The definition of “troubled” assets is also unreasonably open-ended and not subject to judicial review. The two sweeping, subjective findings the secretary must make in the Administration proposal (three in the House bill) do not seriously limit his subsequent actions. Coupled with the existing limitation on judicial review, his discretion to manage “troubled” markets, “pro- vide stability,” or “prevent disruption” is almost limitless. Equally important, that a particular market is “troubled” or that there is a risk of “disruption” is still a questionable ground for action if there is no legitimate government interest involved. The statute should set forth some objective criteria that connect the particular market problem with a traditional government purpose—e.g., currency stabilization. That connection should not be fictionalized or unreason- ably tenuous, or it will simply serve as a bad precedent for other questionable delegations. With regard to all of these factors, the objective criteria must actually operate to guide and some- times limit the secretary’s exercise of discretion and not merely serve as a hortatory preamble for congressional action.
• Meaningful Judicial Review. It might be reason- able to subject particular factual determinations made by the secretary to a deferential standard of review and to limit certain types of judicial remedies (e.g., injunctions and other equitable relief). But citizens adversely affected by the government’s actions must be able to seek a redress in the courts for fundamental constitutional violations or damages at law.
• Sunset of All Regulatory Authority. Congress can codify or expand regulatory authority within two years if it proves necessary and prudent. How- ever, there is no sound reason to sunset some of the authorities under the proposed legislation but allow unlimited discretion to issue market regulations that will never sunset, as the current proposals provide. All regulations promulgated under the authority of the emergency legislation should sunset with the rest of the statute absent subsequent congressional action.
This combination of changes will go far to addressing the substantial constitutional questions about the existing proposals. If the scope of the authority is carefully defined, the standards for proper action are set forth in the statute, and those two limits are subject to meaningful court review, then citizens can at least know whom to hold accountable and where to go for redress of grievances. The ensuing changes will also move the proposals in the right policy direction as well.
Bicameral for a Reason. As Alexis De Tocqueville observed: “To divide legislative strength, thus to slow the movement of political assemblies…are the sole advantages” of our system of legislative bicameralism. Congress needs to act swiftly to address the financial crisis, but it also needs to deliberate.
—Todd F. Gaziano is the Director of, and Andrew M. Grossman is Senior Legal Policy Analyst in, the Center for Legal and Judicial Studies. They wish to thank Heritage colleagues James L. Gattuso and David C. John for their contributions.
http://www.heritage.org/Research/Economy/upload/wm_2079.pdf
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Seems like a pretty potent description of the problem to me:
http://www.youtube.com/watch?v=H5tZc8oH--o
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In a similar vein:
http://www.youtube.com/watch?v=w1BOj6kTPgE&feature=iv&annotation_id=event_352711
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Link to a very lengthy IMF paper examining 42 banking crises in 37 countries. An excerpt:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions' liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
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***But the investment mistakes would surely have been less extreme, and ultimately their damage more containable, if not for the enormous political support and subsidy for mortgage credit. Beware politicians who peddle fables that cast themselves as the heroes***
Have you seen Pelosi, Dodd, and Frank come out fo their weedend meetings congratulating themselves and of course pointing out how *they* fixed Bush's bill? And The two gentlemen praise the madam speaker on how *she* and she alone came oup with the solution to an impasse.
I doubt I was not the only one enraged by this circus.
The Financial mess is a Godsend for BO. Perhaps Israel will not wait for the election to bomb Iran to try to focus the attention more on foreign policy threats and help (?) McCain. Not that I think they should but just wondering.
While our country is distracted N. Korea is back to making bombs, Venezuela is now starting a nuclear energy program. The timing is perfect for our enemies. And best of all for them we have BO looking like he is going to cruise in and spend the next 4- 8 years weakening our country abroad. But the good news is more of us will speak French and we will be loved by all.
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Prophetic piece first published in late July. The original is well annotated with links.
Fannie Mae’s Thugs Vilified Whistleblowers, Told Avalanche of Lies
Posted by Hans Bader
A $25 billion bailout of government-backed mortgage giant Fannie Mae is now planned. But Fannie Mae has such political power that its crooked managers will probably never be held accountable for their fraud in any way, unlike the Enron executives who went to jail. Instead, its lending authority will likely expand under federal mortgage bailout bills.
Paul Gigot, a Wall Street Journal editor, describes the personal vilification he has received over the years after the Journal began warning, prophetically, that Fannie Mae was engaged in fraudulent accounting, and that the taxpayers might some day have to pick up the tab. (To award themselves millions of dollars in bonuses, Fannie Mae’s managers used Enron-style fraudulent accounting). Fannie Mae’s managers, he notes, were ”unique in their thuggery” and arrogance.
When conservative Congressmen tried to rein it in, Fannie Mae responded with an avalanche of lies and political reprisals. It told Wisconsin Congressman Paul Ryan’s constituents that he wanted to raise the rates on their existing mortgages, a complete fabrication. And when Florida Congressman Cliff Stearns began investigating its fraudulent accounting, it got jurisdiction over its accounting practices transferred to another committee run by Michael G. Oxley, who worked in tandem with liberal stalwart Barney Frank to cover up the abuses at Fannie Mae and kill any reform legislation.
(Congressman Michael Oxley was the co-author of the devastatingly-costly and wasteful Sarbanes-Oxley Act, which ”created more busywork for accountants than real protection against abuses,” according to David Ignatius in the Washington Post. Oxley received generous donations from the big accounting firms, which were responsible for failing to detect Enron’s fraudulent accounting. The Sarbanes-Oxley law has made those firms fabulously wealthy, increasing the volume of work they receive by making auditing of public companies needlessly complicated. The big accounting firms now must be paid to evaluate and supervise companies’ “internal controls,” such as which employee has access to which computer password. The Sarbanes-Oxley Act has cost the stock market over a trillion dollars in value, and imposed ongoing compliance costs exceeding $35 billion per year, while diverting attention away from corporate incompetence at mortgage lender Countrywide Financial, a close Fannie Mae ally. It also created an unaccountable agency, the Public Company Accounting Oversight Board, to create mountains of red tape to enrich big accounting firms at the expense of productive businesses. Like Fannie Mae, it is nominally “private” to evade accountability and open-government laws (even though in reality, it is a governmental agency, and unlike Fannie, qualifies as such under the Supreme Court’s Lebron decision).
Fannie Mae was run by liberal power brokers like Franklin D. Raines who even now are unrepentant about their thuggery and accounting fraud. Franklin Raines recently took to the pages of the Washington Post to attack as “ideologues” the banking experts in the Bush Administration who had long and prophetically warned about the dangers of Fannie Mae’s risky practices. I published a letter to the editor in response criticizing Raines for his utter gall in lecturing whistleblowers about how Fannie should be managed. But amazingly enough, he continues to be treated like a financial hotshot. Law Professor James Lindgren has a post about Fannie Mae aptly entitled “Fannie Mae’s Thugs.”
http://www.openmarket.org/2008/07/23/fannie-maes-thugs-vilified-whistleblowers-told-avalanche-of-lies/
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http://www.rgemonitor.com/roubini-monitor/253801/the_us_and_global_financial_crisis_is_becoming_much_more_severe_in_spite_of_the_treasury_rescue_plan_the_risk_of_a_total_systemic_meltdown_is_now_as_high_as_ever
The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever
Nouriel Roubini | Sep 29, 2008
It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening).
Let me explain now in more detail why we are now back to the risk of a total systemic financial meltdown…
It is no surprise as financial institutions in the US and around advanced economies are going bust: in the US the latest victims were WaMu (the largest US S&L) and today Wachovia (the sixth largest US bank); in the UK after Northern Rock and the acquisition of HBOS by Lloyds TSB you now have the bust and rescue of B&B; in Belgium you had Fortis going bust and being rescued over the weekend; in German HRE, a major financial institution is also near bust and in need of a government rescue. So this is not just a US financial crisis; it is a global financial crisis hitting institutions in the US, UK, Eurozone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).
And the strains in financial markets – especially short term interbank markets - are becoming more severe in spite of the Fed and other central banks having literally injected about $300 billion of liquidity in the financial system last week alone including massive liquidity lending to Morgan and Goldman. In a solvency crisis and credit crisis that goes well beyond illiquidity no one is lending to counterparties as no one trusts any counterparty (even the safest ones) and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker dealers the rest of the shadow banking system has not access to this liquidity as the credit transmission mechanisms is blocked.
After the bust of Bear and Lehman and the merger of Merrill with BofA I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnite liabilities. Instead Morgan and Goldman went for the cosmetic approach of converting into bank holding companies as a way to get further liquidity support – and regulation as banks – of the Fed and as a way to acquire safe deposits. But neither institution can create in a short time a franchise of branches and neither one has the time and resources to acquire smaller banks. And the injection of $8 b of Japanese capital into Morgan and $5 b of capital from Buffett into Goldman is a drop in the ocean as both institutions need much more capital. Thus, the gambit of converting into bank while not being banks yet has not worked and the run against them has accelerated in the last week: Morgan’s CDS spread went through the roof on Friday to over 1200 and the firm has already lost over a third of its hedge funds clients together with their highly profitable prime brokering business (this is really a kiss of death for Morgan); and the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress losing business, losing money, experiencing a severe widening of its CDS spreads and at risk of losing most of its values most of its lines of business (including trading) are now losing money.
Both institutions are highly recommended to stop dithering and playing for time as delay will be destructive: they should merge now with a large foreign financial institution as no US institution is sound enough and large enough to be a sound merger partner. If Mack and Blankfein don’t want to end up like Fuld they should do today a Thain and merge as fast as they can with another large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan; in Europe Barclays has its share of capital trouble and has just swallowed part of Lehman; while most other UK banks are too weak to take over Goldman. The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way Mack and Blankfein should sell at a major discount of current price their firm before they end up like Bear and be offered in a few weeks a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up as they are both much bigger than Bear or Lehman and their collapse would have severe systemic effects.
When investors don’t trust any more even venerable institutions such as Morgan Stanley and Goldman Sachs you know that the financial crisis is as severe as ever and the fear of collapse of counterparties does not spare anyone. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets (as they are all in free fall today) you know this is a global crisis of confidence in the financial system. We were literally close to a total meltdown of the system on Wednesday (and Thursday morning) two weeks ago when the $85 b bailout of AIG led to a 5% fall in US stock markets (instead of a rally). Then the US authorities went for the nuclear option of the $700 billion plan as a way to avoid the meltdown together with bans on short sales, a guarantee of money market funds and an injection of over $300 billion in the financial system. Now the prospect of this plan passing (but there is some lingering deal risk the votes in the House are not certain) -as well as the other massive policy actions taken to stop short selling “speculation” and support interbank markets and money market funds - is not sufficient to make the markets rally as there is a generalized loss of confidence in financial markets and in financial institutions that no policy action seem to be able to control.
The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.
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Failed Vote
By the Editors
The $700 billion bailout bill is palatable to no one. It’s a huge price tag. It was originally presented to Congress as all but a fait accompli. Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke have been underwhelming in selling the plan on Capitol Hill. And it’s hated by a public suspicious of the country’s elites, whether in Washington or on Wall Street.
Put that all together with a reflex against such a massive governmental intervention among House Republicans, and it’s understandable that so many of them voted against it and the bill went down yesterday. They were immediately the targets in the Beltway blame game, although there’s plenty of it to go around. House Speaker Nancy Pelosi, who has been acrimoniously partisan over the last few days (calling Republicans “unpatriotic” over the weekend), delivered an obstreperous anti-Republican speech on the House floor prior to the vote, apparently unaware of the delicacy of the moment. She didn’t deliver five of her own committee chairmen and lost more than a dozen of her fellow California Democrats. Ninety-five Democrats voted against the plan; if 13 more had voted “aye,” the bailout would have passed.
But as a practical matter, Democrats wanted as much political cover as possible to pass the unpopular Bush administration proposal. The Republican leadership delivered only a third of its caucus. The Republican opponents marshaled arguments that ordinarily would win us over, for instance, about the plan representing “the slippery slope to socialism.” But we believe these arguments fall down in the current crisis. If the crunch that Paulson and Bernanke are warning about comes, it will squeeze off credit — the very lifeblood of capitalism — to businesses, entrepreneurs, and consumers all around the country. The Paulson plan is an intervention designed to keep capitalism functioning rather than supplant it. If it is successful, the assets the government buys will be sold back on the market (perhaps at a profit), after the panic passes.
There are alternatives to the Paulson plan, some of which are better or worse from a free-market perspective. But all of them involve major government action because in a financial crisis like this — originally stoked by misbegotten government policies — only the government has enough capital to backstop the system. It is the nature of financial panics to destroy institutions and wealth willy-nilly. Insisting only on private action in a crisis this large is like counting on private emergency response to a hurricane or on a private military to fight the country’s wars.
Swallowing hard, some of the most impressive Republicans in the House realize this, not just top leaders John Boehner and Roy Blunt, but the next generation of conservative leaders, members like Eric Cantor of Virginia, Adam Putnam of Florida, and Paul Ryan of Wisconsin. These aren’t socialists, creeping or otherwise. Paul Ryan, a principled conservative who has taken upon himself the lonely task of sponsoring legislation to tackle the nation’s entitlement programs, hated having to support the Paulson plan. But on the House floor Monday, he called it a “Herbert Hoover” moment. He noted the calculation of many of his colleagues: “We’re all worried about losing our jobs. Most of us say, ‘I want this thing to pass, but I want you to vote for it — not me.’ ” That, of course, is a formula for the legislation going down. “We’re in this moment, and if we fail to do the right thing,” he said, “heaven help us.”
Just so.
National Review Online - http://article.nationalreview.com/?q=ZDVmM2E5NzM2MzhlMjJjMjU2MWRmM2Q2OWQ4NGVhNjA=
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http://scottgrannis.blogspot.com/
Scott Grannis is an outstanding economist whose commentary I have had the pleasure to follow in real time for several years now. I recommend him in the highest terms.
Great insight, clearly expressed.
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updated 4:06 p.m. EDT, Mon September 29, 2008
Commentary: Bankruptcy, not bailout, is the right answer
STORY HIGHLIGHTS
Jeffrey Miron: Government encouraged lenders to relax their standards
Mortgages were given to people unqualified to repay them, he says
Miron: Rather than a bailout, government should let firms go bankrupt
Talk of economic Armageddon is scare-mongering, Miron says
By Jeffrey A. Miron
Special to CNN
Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.
CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.
This bailout was a terrible idea. Here's why.
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.
Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.
If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.
The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.
Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.
The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview
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Did poor and minority borrowers cause the housing crisis?
That seemed to be the consensus from the fight over the failed $700 billion bailout bill. As Congress and the Treasury Dept. debated how to fix the mortgage mess, the battle over what caused it took hold.
A prime suspect soon emerged: The government forced banks, lenders and Fannie Mae and Freddie Mac to make loans in poor neighborhoods to meet affordable housing goals and regulations. The loans went bad, setting off the market meltdown.
Illustration by: Matt Mahurin
Illustration by: Matt Mahurin
As a measure of how widespread that idea became, House Republicans revolted at an plan to give 20 percent of any government profits from the sale of toxic mortgage securities to affordable housing groups — asserting that ACORN and others like it caused the problem in the first place.
On Sunday, as it reported on the bailout bill negotiations in Congress, Fox News continually explained that ACORN and other community groups pushed for government regulations that caused the foreclosure crisis, citing this Wall Street Journal editorial as a source.
In the end, the proposal for money for housing groups was dropped, confirming that most lawmakers probably agreed with that theory — which has taken hold on the Internet, in conservative circles and in the business press. Last week, Investor’s Business Daily ran a front page story: “How a Clinton-era Rule Rewrite Made Subprime Crisis Inevitable.”
The only problem with all this: it’s completely wrong.
Neither the Community Reinvestment Act — the law most cited as the culprit — nor other affordable housing goals set by the government forced Fannie, Freddie or any other lender to make loans they didn’t want to. The lure of the subprime market was high yields and healthy profit margins — it’s as simple as that.
“The rest is a lie — and it’s industry propaganda,” said William Brennan, director of the Home Defense Program of the Atlanta Legal Aid Society, who, in 1991, began raising the alarm over predatory lending in poor neighborhoods. “It’s also racist.”
Popular belief now holds that government regulators ordered Fannie and Freddie to buy more loans made to low-income borrowers, and that housing advocates applauded the agencies’ move to enter the subprime market. In fact, the exact opposite is true, Brennan said.
He was among many advocates, back in 2000, who warned that subprime loans were dangerous and decried Fannie and Freddie’s decisions. By purchasing subprime mortgage-backed securities, the two agencies ended up providing capital to predatory lenders — leading to the foreclosures of borrowers Brennan and others saw in increasing numbers coming to them for help.
It makes no sense that housing advocates would have pressured the agencies. They were stuck with cleaning up Fannie and Freddie’s mess.
“They weren’t forced to do it,” Brennan said of Fannie and Freddie’s entry into subprime. “They wanted to do it. They were looking at raising their profit margins; and they wanted to please their shareholders.”
Everyone’s pointing fingers at Fannie and Freddie now because it’s convenient — they are down and out, seized by the government and they can’t defend themselves, said Guy Cecala, publisher of Inside Mortgage Finance, which follows the subprime industry. It’s all part of larger search for villains in a saga where everyone is guilty, he said.
“Basically, everybody’s rewriting history now,” Cecala said. “One thing that’s difficult is that there is no villain when everyone can be blamed.”
To Gregory Squires, a sociologist at George Washington University who studies banking practices, the motivation in the blame game is more nefarious. “My guess is that there are some observers out there who view any targeted effort to serve under-served communities as problematic,” Squires said, “and are quick to point to such initiatives today to try to explain away our problems. Better to point to low-income blacks than high-income executives, perhaps.”
The main initiative usually cited is the Community Reinvestment Act, a 1977 law that required banks to provide credit to the communities they served. The law was an attempt to offset years of redlining in poor neighborhoods and in minority communities, some of which were middle-to-high income, that had been cut off from conventional credit. In the late 1980s and mid-1990s, the law was strengthened so that banks pursuing mergers or takeovers had to show their compliance with the CRA to get federal approval.
In recent months, the idea that the CRA caused the housing crisis took hold, as proponents of the theory argued that lenders were forced to make bad loans to poor borrowers to meet their CRA requirements. That expanded into blaming the poor and minority borrowers, and the community organizers who helped them:
“I always listen to Mark Levin while making Friday night dinner … Funnily enough, he has explained just what it is community organizers do. Advocating, for instance, for affordable housing for the poor — the poor who traditionally rent, because they are bad loan risks. The day that reasoning by banks was junked as “racist,” was the day this crisis became a possibility.,” - Lisa Schiffren, NRO.
But despite its current portrayal as a burdensome regulation, CRA rules were always viewed as loose guidelines within the industry, said Cecala, of Inside Mortgage Finance. Banks were routinely found in compliance with the CRA, and an insider joke among bankers was that you’d have to mug a disabled, elderly, minority homeowner to lose your outstanding CRA rating, Cecala said.
Beyond that, as the housing boom grew, so did the number of unregulated mortgage lenders, who made the bulk of subprime loans and who didn’t even have to comply with CRA rules, said John Taylor, president of the National Community Reinvestment Coalition, which represents housing and community development groups. Some 75 percent of subprime loans were made by independent mortgage banks and lenders not covered by the CRA, he said.
Taylor’s group met with Federal Reserve Chairman Ben Bernanke last week, and he was “aghast” that the CRA was being fingered as a culprit, Taylor said.
“People see an opportunity here, because the economy’s in trouble,” Taylor said. ” The easiest thing to say is, ‘Oh, it was all those poor people.’ It’s easier to try to shift the focus, and to blame the victims and blame the government.”
Banks that were making CRA loans profited from them, and they had few complaints, said Squires of George Washington. If they had tried to sell high-rate subprime loans and count them toward their CRA goals, it wouldn’t have worked.
“The CRA explicitly calls for safe and sound lending,” Squires said. “It does not call for lenders to engage in riskier lending than they would normally practice. A few years ago, both the Fed and Treasury conducted studies which found that CRA-related lending was profitable. If a lender is making bad loans, or a compliance officer is encouraging a lender to do so, neither party understands the CRA. That is not the fault of the legislation — but of those who do not understand it.”
When it comes to Fannie and Freddie, there’s also a lot that’s been misunderstood.
The two agencies were created by Congress but privately run, until their takeover. They’ve always had dual missions — to serve their shareholders and increase homeownership.
Like the CRA rules, requirements for either agency to provide affordable housing were pretty loose, Cecala said. At the end of the year, both agencies usually would meet their goals by purchasing some loans for multi-family dwellings, he said. In 2004, the agency that regulated their housing efforts, the U.S. Dept. of Housing and Urban Development, informed both entities they needed to increase affordable housing efforts, with the mortgage market so strong.
But HUD never told Fannie and Freddie to jump into the subprime market. Both chose to dive into subprime mortgage securities, and the purpose wasn’t to satisfy regulators — it was to increase market share, Cecala said. Afterward, they asked HUD if some of the securities they purchased could count toward their affordable housing goals. HUD agreed.
Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals. They continued to buy loans made to multi-family dwellings, as in the past, to satisfy regulators.
Despite claims to the contrary, the two did not rely, for the most part, on subprime securities to meet their regulator’s goals. In any case, the majority of subprime loans were refinancings, which wouldn’t have counted anyway.
“Everybody and their dog had refinanced their prime-rate mortgage” by 2003, Cecala said. And there was no way to make money except by aggressively moving into subprime — meaning it was a business decision by Fannie and Freddie, not a government-mandated one.
The arguments over who caused the crisis go beyond politics alone.
In the last two decades, non-profit community development groups across the country have been making strides in helping increase home ownership among under-served populations - but not through subprime lending. Groups like Manna, Inc. in Washington counseled homeowners through Homebuyer’s Clubs, a support group for borrowers that helped them to clean up credit problems, save for a downpayment and prepare for homeownership.
The default rate on Manna’s prime, fixed-rate loans is zero. There are streets in Washington’s tough Anacostia neighborhood, once abandoned and dangerous, that have been rebuilt entirely by Manna, one house at a time. Banks like working with these groups because it’s profitable for them while it increases homeownership.
That all this success could become sullied by partisanship and finger-pointing worries many housing advocates. “The facts don’t support the people who are trying to undermine fair lending,” NCRC’s Taylor said.
But in the bitter politics of bailing out, the search for a scapegoat is only likely to continue.
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Deriviates played a huge role in the credit cries
http://www.thestreet.com/print/story/10380613.html
The Credit Crisis Could Be Just Beginning
Jon Markman
09/21/07 - 06:40 AM EDT
Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.
One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?" Still too optimistic.
Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.
Ursa Major
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.
The cause: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.
He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors, hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.
"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
The Liquidity Factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and to create collateral during an era of a flat interest rate curve.
Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out that these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlies derivative securities that are many, many times their size.
Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheets for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.
The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers that are now accused of predatory lending practices.
Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the U.S., these managers leveraged up their bets by buying the CDOs with borrowed funds.
So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.
In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.
Turning $1 Into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.
These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.
According to Das' figures, up to 53% of the $2.2 trillion of commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.
When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.
Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.
A Painful Unwinding
Here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because these instruments were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.
Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.
One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle.
In this context, banks' objective was to prevent customers from selling their derivates at a discount, because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers who are already thin on cash.
Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments that go under the heading of "structured finance." I'm talking about private-equity private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.
So the structured finance market is coming undone; not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.
That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.
While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as it did Wednesday, the evidence is not at all clear.
The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Lower rates will not help that. "At best," Das says, "they help smooth the transition."
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**I can't help but think that we are seeing the start of dark times.**
October 02, 2008, 0:00 a.m.
America’s Nervous Breakdown
Should it continue, a world breakdown may follow.
By Victor Davis Hanson
Ancient thinkers from Thucydides to Cicero insisted that money was the real source of military power and national influence. We’ve been reminded of that classical wisdom these last three weeks.
In a manner not seen since the Great Depression, Wall Street went into panic mode from too many bad debts. The symbolic pillars of American monetary strength for years — AIG, Goldman Sachs, Merrill Lynch, Shearson-Lehman, and Washington Mutual — in a matter of hours either went broke, were absorbed, or were reconstituted. Fannie Mae and Freddie Mac collapsed like the house of cards that they were.
Even though the U.S. government rushed to restore trust, hundreds of billions of dollars in paper assets simply vanished. Friends and enemies abroad were unsure whether the irregular American heartbeat was a major coronary or a mere cardiac murmur. How strong — really — was the world’s greatest economy? Was this panic the tab for years of borrowing abroad for out-of-control consumer spending? Had America finally gone too far enriching dictators by buying energy that it either could not or would not produce itself? Had the chickens of lavishing rewards on Wall Street and Washington speculators rather than Main Street producers finally come home to roost?
Allies trust that the United States is the ultimate guarantor of free communication and commerce — and they want immediate reassurance that their old America will still be there. In contrast, opportunistic predators — such as rogue oil-rich regimes — suddenly sniff new openings.
We’ve seen the connection between American economic crisis and world upheaval before. In the 1930s, the United States and its democratic allies — in the midst of financial collapse — disarmed and largely withdrew from foreign affairs. That isolation allowed totalitarian regimes in Germany, Italy, Japan, and Russia to swallow their smaller neighbors and replace the rule of law with that of the jungle. World War II followed.
During the stagflation and economic malaise of the Jimmy Carter years, the Russians invaded Afghanistan, the Iranians stormed our embassy in Tehran, the communists sought to spread influence in Central America, and a holocaust raged unchecked in Cambodia.
It was no surprise that an emboldened Iranian President Mahmoud Ahmadinejad once again last week called for the elimination of Israel. He’s done that several times before. But rarely has he felt brazen enough to blame world financial problems on the Jews in general rather than on just Israelis. And he spouted his Hitlerian hatred in front of the United Nations General Assembly — in New York, just a few blocks away from the ground zero of the Wall Street meltdown.
Flush with petrodollar cash, a cocky Iran thinks our government will be so sidetracked borrowing money for Wall Street that disheartened taxpayers won’t care to stop Teheran from going nuclear.
At about the same time, a Russian flotilla was off Venezuela to announce new cooperation with the loud anti-American Hugo Chavez and his fellow Latin American communists. The move was a poke in the eye at the Monroe Doctrine — and a warning that from now on, the oil-rich Russians will boldly support dictatorships in our hemisphere as much as we encourage democratic Georgia and Ukraine in theirs. Chavez himself called for a revolution in the United States to replace our “capitalist” Constitution.
The lunatics running North Korea predictably smelled blood, as well. So it announced that it was reversing course and reprocessing fuel rods to restart its supposedly dismantled nuclear weapons program.
Meanwhile, some shell-shocked American bankers looked to our “friend” China, which holds billions in American government securities, for emergency loans. But the Chinese — basking in their successful hosting of the Olympics, their first foray into outer space, and a massive rearmament — showed no interest in sending cash to reeling Wall Street firms.
During this Wall Street arrhythmia, Islamic suicide bombers attacked the American embassy in Yemen and the Marriott Hotel in Islamabad, Pakistan. Suspected Islamic terrorists were caught boarding a Dutch airliner in Germany. And suicide bombers were busy again in Afghanistan and Iraq.
The natural order of the world is chaos, not calm. Like it or not, for over a half-century the United States alone restrained nuclear bullies, kept the sea lanes free from outlaws, and corralled rogue nations. America alone could provide that deterrence because we produced a fourth of the world’s goods and services, and became the richest country in the history of civilization.
But the bill for years of massive borrowing for oil, for imported consumer goods, and for speculation has now has finally come due on Wall Street — and for the rest of us as well.
Should that heart of American financial power in New York falter — or even appear to falter — then eventually the sinews of the American military will likewise slacken. And then things could get ugly — real fast.
— Victor Davis Hanson is a senior fellow at the Hoover Institution and a recipient of the 2007 National Humanities Medal and the 2008 Bradley Prize.
© 2008 TRIBUNE MEDIA SERVICES, INC.
National Review Online - http://article.nationalreview.com/?q=MzFhNDU0NmNkNDZkZGI4MDQ1YzM2NmJmZjQ3M2Y1ZTk=
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http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
Community Reinvestment Act had nothing to do with subprime crisis
Posted by: Aaron Pressman on September 29
Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.
Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)
There’s plenty more good reading on the CRA and the subprime crisis out in the blogosphere. Ellen Seidman, who headed the Office of Thrift Supervision in the late 90s, has written several fact-filled posts about the CRA controversey, including one just last week. University of Oregon professor and economist Mark Thoma has also defended the CRA on his blog. I also learned something from a post back in April by Robert Gordon, a senior fellow at the Center for American Progress, which ends with this ditty:
It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness.
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I couldn't source the piece Rachel posted, and the white font made it hard to read about half, but with that said, seeing how evil businessmen are cited the source of the woes I guess it was written by a evening TV drama script writer or their ilk.
Here's another take:
How The Fed, Media And Academia Aided And Abetted Lending Debacle
By STEVEN MALANGA | Posted Wednesday, October 01, 2008 4:30 PM PT
In the early 1990s, I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting.
One of the hottest sessions explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages.
One newspaper, the Atlanta Journal-Constitution, had won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and Detroit Free Press, had also weighed in with their own analyses based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.
Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels and higher loan default rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue — mostly because newspaper reporters and editors in this pre-talk-radio, pre-blogging era were determined to make it so.
Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.
Eventually the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study concluding that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed.
This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed's conclusions showed serious deficiencies in the original work.
For instance, one economist for the Federal Deposit Insurance Corp. who looked more deeply into the data found that the difference in denial rates on loans for whites and minorities could be accounted for by such factors as higher rates of delinquencies on prior loans for minorities, or the inability of lenders to verify information provided to them by some minority applicants.
Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled "Closing the Gap: A Guide to Equal Opportunity Lending."
Quoting from a study declaring that "underwriting guidelines . . . may be unintentionally racially biased," the Boston Fed then called for what amounted to undermining many of the lending criteria that banks had used for decades:
• It told banks they should consider junking the traditional debt-to-income ratio used by the industry to determine whether an applicant's income was sufficient to cover housing costs plus loan payments.
• It instructed banks that an applicant's "lack of credit history should not be seen as a negative factor" in obtaining a mortgage, though a mortgage is the biggest financial obligation most individuals will undertake.
• In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to "consider extenuating circumstances" that might still make the borrower creditworthy.
• When applicants didn't have enough savings to make a down payment, the Boston Fed urged banks to allow loans from nonprofits or government assistance agencies to count toward a down payment, even though banks had traditionally disallowed such sources because applicants who have little of their own savings invested in a home are more likely to walk away from a loan when they have trouble paying.
Of course, the new federal standards couldn't just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, in other words, these became the new standards in the industry.
In 1999, the New York Times reported that Fannie Mae and Freddie Mac were easing credit requirements for mortgages it purchased from lenders, and as the housing market boomed, banks embraced these new standards with a vengeance.
Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on the lending standards promoted by the government.
Meanwhile, those who raced to make these mortgages were lionized. Harvard University's Joint Center for Housing Studies even invited Angelo Mozilo, CEO of the lender that made more loans purchased by Fannie and Freddie than anyone else, Countrywide Financial, to give its prestigious 2003 Dunlop Lecture on the subject of "The American Dream of Homeownership: From Cliche to Mission."
Many defenders of the government's efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren't even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.
But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought.
These justifications became the basis for a whole new set of values (or lack of values), as no-down-payment loans and loans to people with poor credit or to those who were already loaded up with debt became more common throughout the entire industry.
What happened in the mortgage industry is an example of how, in trying to eliminate discrimination from our society, we turned logic on its head. Instead of nobly trying to ensure equality of opportunity for everyone, many civil rights advocates tried to use the government to ensure equality of outcomes for everyone in the housing market.
And so when faced with the idea that minorities weren't getting approved for enough mortgages because they didn't measure up as often to lending standards, the advocates told us that the standards must be discriminatory and needed to be junked. When lenders did that, we made heroes out of those who led the way, like Angelo Mozilo, before we made villains of them.
Now we all have to pay.
Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute.
http://www.ibdeditorials.com/IBDArticles.aspx?id=307752533636403
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WSJ
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
AP
Clockwise from top left: Sen. Thomas Carper, Rep. Barney Frank, Sen. Robert Bennett, Rep. Maxine Waters, Sen. Chris Dodd and Sen. Charles Schumer.
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
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House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.
Fannie Mayhem: A History
A compendium of The Wall Street Journal's recent editorial coverage of Fannie and Freddie.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
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Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.
Please add your comments to the Opinion Journal forum.
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How the Democrats created the meltdown on Wall Street
Oct. 2, 2008
Bloomberg , THE JERUSALEM POST
The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.
Why did Bear Stearns fail, and how does that relate to AIG?
It all seems so complex.
But really, it isn't. Enough cards on this table have been turned over so that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.
Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.
In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.
The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.
Turning point
Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
It is easy to identify the historical turning point that marked the beginning of the end.
Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Commission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page" of allowable interpretations.
Then legislative momentum emerged for an attempt to create a "world-class regulator" that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
Greenspan's warning
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Fed chairman Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest-rate risk aversion, they potentially create ever-growing potential systemic risk down the road," he said. "We are placing the total financial system of the future at a substantial risk."
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
Different world
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: "It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing."
Mounds of materials
Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.
But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.
Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and November 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.
Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Sen. John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.
This article can also be read at http://www.jpost.com /servlet/Satellite?cid=1222017442844&pagename=JPost%2FJPArticle%2FShowFull
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How Fannie, Freddie sank
By Byron York
Posted: 10/02/08 05:43 PM [ET]
“If your neighbor’s house is burning, you’re not going to spend a whole lot of time saying, ‘Well, that guy was always irresponsible, he always left the stove on, he always was smoking in bed’ … There will be time to punish those who set this fire, but now is the moment for us to come together and put the fire out.”
So says Sen. Barack Obama (D-Ill.) about the Great Financial Crisis. And he’s right. But once the fire is out, I want to learn a lot more about what happened at Fannie Mae and Freddie Mac.
We know that in May 2006, the Office of Federal Housing Enterprise Oversight released a report detailing extensive fraud at Fannie Mae under Franklin Raines, the former Clinton White House budget chief who ran Fannie from 1999 to 2004.
We know that many lawmakers ignored signs of trouble at Fannie and Freddie before that. In a 2004 video now playing on YouTube, California Democratic Rep. Maxine Waters lit into a regulator, saying, “We do not have a crisis at Freddie Mac, and in particular at Fannie Mae under the outstanding leadership of Mr. Frank Raines.”
We know that in 2005, some lawmakers tried hard, but unsuccessfully, to impose discipline on Fannie and Freddie. “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole,” said Sen. John McCain (R-Ariz.), a co-sponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005.
And we know that Fannie and Freddie, with significant support on the Hill, stiff-armed all who questioned them. And as they did, they took more and more risks.
Last week, Federal Housing Finance Agency director James Lockhart testified before the Senate Banking Committee.
He told the panel that in 2006 and 2007, Fannie Mae and Freddie Mac ignored “repeated warnings about credit risk.” In those years, Lockhart said, Fannie and Freddie “bought or guaranteed many more low-documentation, low-verification and non-standard [adjustable-rate] mortgages than they had in the past.”
In the first half of 2007, Lockhart continued, 33 percent of Fannie’s and Freddie’s new business was in funky mortgages — compared to 14 percent in 2005.
That suggests that executives from Fannie and Freddie — and mind you, these were the people who came after Franklin Raines — became more brazen even as they faced harsh assessments from regulators and calls for reform from lawmakers.
And then, it all went to hell. “The capacity to raise capital to absorb further losses without Treasury Department support vanished,” Lockhart testified.
As we come to terms with all this, some lawmakers are facing up to what has happened.
Criticized for his role in that 2004 hearing, Alabama Democratic Rep. Artur Davis released an extraordinary statement to Fox News.
“Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie Mae and Freddie Mac,” Davis said. “I defended their efforts to encourage affordable homeownership, when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit that when it comes to Fannie and Freddie, we were wrong.”
Now, that is a stand-up thing to say.
Davis also sent some blame Republicans’ way, which is surely deserved.
After the fire is put out, there’s going to be a lot more of it.
York is a White House correspondent for National Review. His column appears in The Hill each week.
E-mail: byork@nationalreview.com
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In alignment with its agenda, the NY Times seeks to share the blame. Is the point fair?
=============
y STEPHEN LABATON
Published: October 2, 2008
“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.
As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.
Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.
Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.
How could Mr. Cox have been so wrong?
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”
Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.
Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.
“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”
The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.
But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.
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Page 2 of 3)
The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.
The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.
The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”
Drive to Deregulate
The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.
A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.
“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”
As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.
The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.
A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.
The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.
“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).
“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.
In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.
“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”
He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.
Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.
He said in a recent interview that he was never called by anyone from the commission.
“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”
Policing Wall Street
A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”
The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”
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Page 3 of 3)
Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.
Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.
Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.
In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.
‘Stakes in the Ground’
Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.
“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.
The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.
Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.
“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.
Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”
He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.
“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”
But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”
“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”
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60 Minitues Sunday Oct 5
http://www.cbsnews.com/video/watch/?id=4502673n
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How to Ruin the U.S. Economy
by Ben Stein
Posted on Monday, October 6, 2008, 12:00AM
1) Have a fiscal policy that creates immense deficits in good times and bad, burdening America's posterity with staggering burdens of repaying the debt.
2) Eliminate regulation of Wall Street and/or fail to enforce the regulations that already exist, instead trusting Wall Street and other money managers and speculators to manage other people's money with few or no regulations and little oversight.
3) Have an energy policy that disallows producing our own energy and instead requires that we buy energy from abroad, thus making our oil prices highly volatile and creating large balance of payments deficits, lowering the value of the dollar and thus making the problem get progressively worse.
4) Have Congress mandate that banks and other financial entities lend money to persons they know in advance to have poor credit ratings or none at all.
5) Allow investment banks, insurers, and banks to bet their entire net worth and then some on the premise that borrowers known to be improvident will in fact repay those loans.
6) Allow the creation of large betting pools called "hedge funds" that can move markets and control the outcome of trading, thus taking a forum for savings and retirement for families and making it into a rigged casino game that exists primarily to fleece suckers like ordinary working men and women.
7) Have laws that protect corporate officers from being sued for misconduct but at the same time punish lawyers in the private sector who ferret out such misconduct and try to make accountable the people responsible for shareholder and investor losses. If one of those lawyers gets particularly aggressive in protecting stockholders, put him in prison.
8) Appoint as head of the United States Treasury Department a man whose whole life was spent on Wall Street, who became fantastically rich through his peddling of junk bonds at his firm while the firm later sold short those same sorts of bonds.
9) Scare Americans into putting up $750 billion of their hard earned money to bail out the billionaires and their friends who created the market for loans to poor credit risks (The "subprime" market) and the unbelievably large side bets on those loans, promising that such a bailout would save the retirement savings of Americans, then allow the immense hedge funds to make the market crater immediately afterwards.
10) Propose to save the situation by surtaxing the oil industry, which is owned by our fellow Americans, mostly in their retirement plans, thus penalizing Americans for investing in companies that efficiently and legally produce an indispensable product.
11) Insist that the free market requires that banks and insurers with friends of the Secretary of the Treasury be saved but allow other entities not so fortunate to fail, thus creating total uncertainty and terror among financial institutions, and demolishing all of the confidence built up in financial circles since the days of FDR.
12) Then have the Republican candidate say he would keep on the job the Treasury Secretary who facilitated the crisis, failed to protect the nation from the crisis, got the taxpayers to pony up to save his Wall Street buddies, and have the Democratic candidate, as noted, say he would save the day by taxing the stockholders of energy companies.
There, that should do it.
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Maybe I didn't hear correctly tonight, but I thought McCain (Republican) said that we need to buy up mortgages and re-price them to their current much lower market value. I don't get it; I and most of my friends bought a house and put 20% down. We worked hard for this deposit and have worked hard to made our payments ever since, but it's not always easy. You crimp and save, and somehow make it happen. So I don't quite understand why the Republican Party (fiscal conservatives?) is going to give a free ride to someone who buying a house put near or nothing down, bought a house that logic says they can never now or ever will afford, and now you are going to forgive a large portion of their debt? So they can live in a house that they never should have bought, had no business buying, nor could have afforded in the first place? How about the people who are financially responsible? With our tax dollars we are suppose to pay for this free ride? I must be missing something here. Maybe I should go buy a Ferrari on borrowed money; maybe the government will re-price my loan and give me a free ride when the dealer figures out I can't afford the payments. Cool.
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JDN:
As best as I can tell, your assessment of McCain's populist pandering is dead on. :x :cry: :-(
TAC,
Marc
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Briefing: Wall Street’s hidden time bombs
The WEEK magazine (link embedded) offers a brief, but excellent, primer on the derivative securities that caused, and cause, the maelstrom on Wall Street.
Briefing: Wall Street’s hidden time bombs
The financial meltdown engulfing Wall Street would not have happened without the advent of complex financial contracts known as derivatives. Why were they created, and why were so many supposedly smart people fooled?
What is a derivative?
In a very real sense, it’s a bet. A derivative is a contract in which an investor agrees to pay for either a commodity or financial instrument at a set price today, in return for the right to take profits if that asset’s value rises. Some derivatives, such as stock options and commodities futures, have been used for years and are considered completely benign. A farmer, for example, can agree to sell a ton of wheat he’ll harvest in three months to a major grain buyer for $1,000. That deal enables the farmer to lock in the price of wheat as he’s growing it. In exchange for that guarantee, the grain buyer gets an assurance he’ll have a steady supply of grain while also safeguarding against future price increases. Both sides, in other words, reduce risk and future uncertainties. But in recent years, a new, highly toxic form of financial derivative has spread like wildfire throughout the financial system, ultimately laying waste to some of Wall Street’s oldest and most prestigious firms.
What are these new derivatives?
They’re called credit derivatives, and were designed to serve as a kind of insurance against borrowers defaulting on their debts. Credit derivatives first appeared on the scene in the boom of the 1990s, but really became popular in the early 2000s, when Federal Reserve Chairman Alan Greenspan sought to stave off a post-9/11 recession by slashing interest rates from 6.5 percent to 1 percent. Money became very easy to borrow, and tens of millions of people bought homes or took out second mortgages, many of which were offered to financially shaky buyers at “subprime’’ rates. Those mortgages were then bundled into securities, and firms such as Lehman Brothers and Merrill Lynch created credit derivatives to protect investors in case the securities defaulted.
Why were these securities so popular?
They provided above-market rates of return, and because these complex instruments were so poorly understood, they seemed more solid—and less risky—than they really were. Investors thought that they were getting AAA-rated securities. The sellers—caught up in the assumption that housing prices would continue to rise indefinitely—also thought they were safe from losses. Each security involved hundreds or thousands of individual mortgages, chopped into pieces, so that the risk of default appeared small. And by selling them, investment banks and brokerage firms made hundreds of millions in upfront fees and premium payments. That’s why global insurance giant AIG also jumped into the derivatives game. “It is hard for us, without being flippant, to see us losing even one dollar in any of those transactions,” Joseph Cassano, then AIG’s head of credit derivatives, declared last year, expressing a common sentiment.
Was everyone so clueless?
No. Concern about financial derivatives first surfaced in the late 1990s, and congressional Democrats launched a drive to bring them under federal oversight. The effort was beaten back by Republicans led by then–Sen. Phil Gramm of Texas, who pushed through a law that explicitly exempted financial derivatives from federal regulation. By 2003, the pace of derivatives trading had exploded, leading Warren Buffett, one of the world’s most successful investors, to call derivatives “financial weapons of mass destruction.”
Why was Buffett alarmed?
Because the well-being of the entire global financial system rested in part on a hidden world of multitrillion-dollar bets that financial regulators couldn’t control or even monitor. Indeed, since 2000, credit default swaps became one of Wall Street’s most popular products, with firms such as AIG, Lehman Brothers, and Bear Stearns selling swaps covering trillions of dollars in bonds. At Cassano’s urging, AIG became the biggest player in the field, selling protection on $527 billion in bonds.
So what went wrong?
Home prices started to fall and interest rates started to rise. When rates rose, many subprime borrowers with adjustable-rate mortgages found themselves unable to make their monthly payments. They also couldn’t sell, because the demand for houses began to crash. Very quickly, as defaults mounted, the derivatives that had made so many bankers and investors rich lost their value. In turn, firms such as AIG and Lehman, which had guaranteed these securities, couldn’t meet their debts. It was a worst-case scenario, causing the collapse of many banks and investment firms. Despite the federal government’s rescue efforts, many financial executives worry that further damage is yet to come, because of bad debt hidden in other banks’ derivative holdings. “It’s not the corpses you can see that scare you,” says one Wall Street banker. “It’s the corpses you can’t see that could pop out at any time.”
Can derivatives be brought under control?
Washington and Wall Street are struggling to find a way. One of the most popular ideas is to set up a clearinghouse for all financial derivatives trades. Regulators would monitor the clearinghouse to be sure that no market player took on more risk than it could afford. And firms would have to keep money on deposit to show that they could honor their guarantees. The question now is whether safeguards can be put in place before another AIG-style meltdown unfolds. “If it all goes horribly wrong, it will not be just Wall Street that suffers,” says veteran investor Michael Panzer, who has warned against derivatives for years. “Those seeking a mortgage, a college education, a job, or even day-to-day sustenance will be left wanting.”
The derivatives in your portfolio
If some of your savings are in a mutual fund, you’re probably an investor in derivatives. Many bond funds, including the nine most widely held funds, use derivatives both to protect against losses and to increase returns, because these swaps can appreciate in value when the prospects for a company and the overall economy improve. Funds aren’t required to disclose derivatives holdings, although those that make them a major part of their strategy typically do so. To see if your fund holds derivatives, check its prospectus and the listing of holdings contained in Securities and Exchange Commission form NQ. Those forms can be accessed at http://www.sec.gov/. If you’re still unsure about your fund’s holdings and don’t want to take the chance, financial advisors say, don’t hesitate to switch to an ultra-safe government bond fund. “Don’t be complacent,” says financial advisor Lawrence Glazer. “If you are uncomfortable with something, don’t be afraid to make a change.”
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Interesting video, linked below, about the perverse incentives embodied in the bailout.
What You Need to Know About the Bailout (and Why You Should Be Really Worried)
Nick Gillespie | October 8, 2008, 9:05am
George Mason University economist and author Russell Roberts, who blogs at the always interesting Cafe Hayek, sat down with reason.tv to talk about the nation's shakey economy and the government's bailout plan. Watch this six-minute interview to learn where the problems came from, why the bailout won't address them, and what sort of hurt we're in for over the next several weeks, months, and years. "The real cost of this," warns Roberts, "is that we have said to people, 'Risk taking is not as risky as it used to be.' That's a mistake. It's a horrible mistake and it will lead to a lower standard of living down the road because investment will be more cavalier and less prudent."
http://www.reason.com/blog/show/129344.html
[youtube]http://www.youtube.com/watch?v=JEniEYD59EE[/youtube]
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McCain mortgage plan shifts costs to taxpayers
Under McCain's newly announced plan, the government would take the hit for writing down mortgage balances for at-risk borrowers.
By Les Christie, CNNMoney..com staff writer
October 8, 2008: 11:58 AM ET
NEW YORK (CNNMoney.com) -- Under a mortgage rescue plan announced at the debate Tuesday night by Senator John McCain, much of the burden of paying to keep troubled borrowers in their homes will shift to taxpayers.
McCain's original plan called for lenders to write down the value of these mortgages, and take those losses. McCain unveiled the new $300 billion plan in response to the first question of the debate.
He said, "I would order the Secretary of Treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished values of those homes, and let people make those - be able to make those payments and stay in their homes."
The government would convert failing mortgages into low-interest, FHA-insured loans.
"Millions of borrowers" would be eligible for the program, dubbed the American Homeownership Resurgence Plan, according to McCain economic advisor, Doug Holtz-Eakin.
To qualify, homeowners would have to be delinquent in their payments already, or be likely to fall behind in the near future. They would have to live in the home in question - no investment properties would be eligible - and have had demonstrated their credit-worthiness when they purchased the property by putting down a substantial down payment and by providing documentation of their income and assets - no liar loans.
Holtz-Eakin said on a conference call Wednesday that the McCain plan could be put into place quickly because the groundwork and the authority for it has already been provided by last week's $700 billion bailout bill, the Hope for Homeowners program authorized by the housing rescue bill passed in July, and the government takeover of mortgage giants Fannie Mae and Freddie Mac.
This proposal is strikingly different from both McCain's original idea, and from the housing rescue bill adopted by Congress in July.
Congress struggled for months to pass the Hope for Homeowners rescue plan for mortgage borrowers. To make it palatable to both conservative Republicans and ordinary taxpayers, Hope for Homeowners requires that lenders write down mortgage balances to 90% of a home's the current market value it they could qualify for a FHA-insured refinancing. The lenders would then take the loss on the difference between the current value and the mortgage balance.
"[McCain's] original plan relied on lenders taking the hit," said Holtz-Eakin. "This bypasses that step."
Instead, taxpayers pay for it, under the funding already provided by the $700 billion bailout bill.
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As I understand it, McCain and Obama's plans are essentially the same, so I guess the same measure of opprobrium should be addressed to each?
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I didn't know that; it was my understanding that Obama's position was that of McCain's before the debate, the loans should be bought up and that the lender's (the lenders were in the risk business) should be responsible for the loss, not the taxpayers. But maybe I am wrong? If you are right then I am upset at both of them.
While I may be a social liberal, I am a financial conservative. But even if you are right, one of the reasons I vacillate between McCain and Obama is that I thought McCain, the Republicans, wouldn't give away the store and charge the taxpayer and reward individuals for their reckless spending and reward the lenders for failure. What you sow is what you reap; seems fair to me. Lately, I am having my difficulty differentiating between Democrat and Republican. They both seem to be pandering and rushing to give away money.
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Pathetic unprincipled populist pandering by McCain as he tries to poach on BO's natural turf. It is no coincidence that he is diving in the polls.
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Pandering and giving away money is indeed what's going on. One hopes a principled politician or two will rise from this maelstrom.
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As I understand it, McCain and Obama's plans are essentially the same, so I guess the same measure of opprobrium should be addressed to each?
Maybe not.
updated 3 hours, 12 minutes ago
McCain faces conservative backlash over mortgage plan
STORY HIGHLIGHTS
GOP candidate meets resistance from within own party on mortgage plan
McCain proposes government buying and refinancing bad mortgages
Editorial: Plan a "gift to lenders who abandoned any sense of prudence"
McCain hopes plan will resonate with moderate and undecided voters
Next Article in Politics »
By Alexander Mooney
CNN
(CNN) -- John McCain is facing a fresh round of anger from members of his own party deeply opposed to the Arizona senator's proposal for the federal government to purchase troubled mortgage loans.
John McCain first mentioned his mortgage relief plan during Tuesday's town-hall debate with Barack Obama.
The pointed backlash from several economic conservatives -- many of whom already distrust McCain's commitment to free-market principles -- couldn't come at a worse time for the Republican presidential nominee less than four weeks before Election Day as he stares at a significant deficit in national and state polls.
But at a time when McCain can't afford to worry about a lack of support from his party's base, several conservatives are openly criticizing the plan as a flagrant reward for reckless behavior among lenders.
In a sharply worded editorial on its Web site Thursday, the editors of The National Review -- an influential bastion of conservative thought -- derided the plan as "creating a level of moral hazard that is unacceptable" and called it a "gift to lenders who abandoned any sense of prudence during the boom years." Watch the candidates' plans get the 'no bull' test »
Prominent conservative blogger Michelle Malkin went one step further, calling the plan "rotten" and declaring on her blog, "We're Screwed '08."
Matt Lewis, a contributing writer for the conservative Web site Townhall.com, told CNN the plan only further riles conservatives upset with McCain's backing of the massive government bailout plan passed last week.
"Fundamentally, the problem is John McCain accepts a lot of liberal notions, unfortunately. There is somewhat of a populist streak," he said. "Most conservatives really did not like the bailout to begin with, and this was really kind of picking at the scab."
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It's not just the plan conservatives are unhappy with, but how it was first unveiled as well -- out of the blue at Tuesday's town-hall debate during which Republicans were instead hoping McCain would present a spirited attack on what they view as Obama's overly liberal positions.
"Here we are watching the debate hoping this is a good format for John McCain to excel at, and the first thing he does is spring this on us," Lewis said. "This is not a good way to win friends and influence people."
"He spent the entire debate assailing massive government spending -- while his featured proposal of the right was to heap on more massive government spending to pursue home ownership retention at all costs," Malkin said.
It's a proposal that is fundamentally at odds with the conservative principle of individual responsibility, and is the latest in a string of public spats conservatives have had over the years and in this election with their party's standard bearer.
But for McCain, the move is another gamble for a candidate in need of a game-changer and one that lends credence to the self-proclaimed maverick's repeated claim that he's unafraid of bucking his own party.
Under the plan, the government would buy up bad mortgage loans, converting them into low-interest, FHA-insured loans. To qualify, homeowners would have to be delinquent in their payments or be likely to fall behind in the near future.
They also would have to live in the home in question -- no investment properties would be eligible. They would need to have demonstrated their creditworthiness when they purchased the property by making a substantial down payment and by providing documentation of their income and other assets.
McCain economic adviser Douglas Holtz-Eakin said on a conference call Wednesday that the McCain plan could start quickly because the authority was granted by last week's passage of the $700 billion economic bailout bill. The plan could also fall under the umbrella of the Hope for Homeowners program authorized by the housing rescue bill passed in July and the government takeover of mortgage giants Fannie Mae and Freddie Mac.
But the plan, which the McCain campaign appeared to be finalizing even after the candidate announced it, significantly departs from the Arizona senator's original proposal and has left many conservatives scratching their heads:
"The original plan relied on lenders taking the hit," Holtz-Eakin said on the conference call. "This bypasses that step."
Instead the estimated $300 billion tab essentially gets transferred to taxpayers, among the funding already provided by the bailout bill -- a proposal that may rile not only fiscal conservatives, but also struggling homeowners who have worked to keep up their mortgage payments.
"The guy who works two jobs and struggles to actually pay his mortgage is penalized. He would be better off under this plan to just quit paying his mortgage," Lewis said. "And this fundamentally goes against a lot of conservative principles and individual responsibility."
This was my point I was trying to make it goes against individual responsibility! And Body-by-Guiness; note in the next sentence even Obama comments that McCain's Plan goes beyond the Democratic Plan and that the taxpayers will lose and lenders will be rewarded.
Barack Obama is counting on McCain's proposal not playing well with a broad swath of middle-class voters. Obama said at a rally Thursday morning it guarantees "the taxpayers would lose," and banks and lenders would be rewarded.
But McCain is hoping the plan will resonate with moderate and undecided voters, many of whom viewed the bailout as a giveaway to Wall Street CEOs. This plan, the McCain campaign argues, better steers the money to Main Street, where struggling homeowners need immediate relief.
"John McCain's plan represents absolutely no new expense to the taxpayer, but simply refocuses priorities to more directly assist the homeowners who are hurting instead of greed on Wall Street," said Tucker Bounds, a spokesman for the McCain campaign.
But it remains to be seen if the Arizona senator's latest roll of the dice will pay off.
"Liberals who might actually be inclined to support a welfare check such as this are already going to vote for Barack Obama, and conservatives, who view this as irresponsible and even apostasy, are turned off by it," Lewis said. "This is both bad policy and bad politics." E-mail to a friend | Mixx it | Share
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Crafty,
"Pathetic unprincipled populist pandering by McCain as he tries to poach on BO's natural turf. It is no coincidence that he is diving in the polls"
I agree with you but this is how elections in the US in 2008 are won.
We have a gigantic class of people who rely on government, many who work for government, and have who increasing power at the polls.
It appears the only other option Repubs have had is to go negative and try to scare this gigantic "what are you (gov.) going to do for me" segment of our populous away from the Crat candidates who promise to rob the successful to give to them.
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This reminds me of my macroeconomic professor once said "When it comes to politicians when times are bad everyone is a Keynesian and when times are good classical"
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We have the credit crunch and we have the stock (and real estate) sell-offs. Therefore one caused the other??? Not necessarily. I would add in the other development of the day, that Democrats are about to take over the House, Senate - perhaps the magic 60 vote senate, the Presidency (and of course the Supreme Court).
Obama isn't going to lower marginal tax rates for anyone as near as I can tell. He just going to 'let' some keep their Bush tax cut, but not for the people he thinks are "rich" enough already.
Obama IS going to dramatically raise the capital gains tax rate, so you are now RICH if you have investments you ever want to sell.
Obama is also hellbent on keeping our tax rate on employers at the second highest rate of the developed world. For a basketball player, you would think he would shy away from having his team compete with heavy ankle weights.
Soaking the rich sounds great unless you happen to share an economy with them.
Let's say you are 'rich' and you know that Democrats are taking over government next year. You know they will double or at least increase significantly the tax rate on capital gains next year depending on which version of the Obama tax plan you think is the real one. What would you do? What should you do???
First thought would be to to sell off your assets on the last day before the rate increase goes into effect. But that isn't good enough because everyone else will sell off their assets first - as soon as they smell an electoral victory for the party who wants to punish wealth and achievement. So if you want to sell off your assets - real estate, stocks, whatever, you need to get to the front of the line and sell faster, harder and sooner than the other investors, before the values plummet from the rush to sell.
So, how is your 401k looking as regime change in America starts to take shape?
Blame it all on Bush if you want but investment decisions are based on the outlook for future, AFTER-TAX returns, not on the past. As Obama's election goes from possible to certain, all I see is a mad rush of investors to the exit. And they all got ahead of me! The only real question is - why are we all so surprised???
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Doug,
I hear you, but please consider this,
Are there more small business owners than government employees, union people, and citizens who rely on government doles (or want more thereof) and immigrants who come in a jump on the dole bandwagon (of course not all of them - but enough)? I doubt it. McCain is preaching to the minority. BO is preaching to the majority. End of story.
I just don't think simply saying we need to cut taxes is enough with BO out there preaching his lies for months with "I am cutting taxes for 90% of the folks in this country". I have yet to hear McCain or anyone else come out with enough of a response to that simple line that is going to turn the undecideds from the BO. I did hear Dick Morris fianlly say something to this effect on O'Reilly the other night. Whatever one wants to say about him, he is very nimble at adjusting the arguments to the polls. McCains advisors or perhaps McCain himself still have not gotten it.
The BO campaign has done a MUCH better job of responding to and countering the Repubs arguments than the other way around.
Are there more small business owners than government employees, union people, and immigrants who come in a jump on the dole bandwagon (of course not all of them - but enough)? I doubt it. McCain is preaching to the minority. BO is preaching to the majority. End of story.
McCain either better have a great case to squash the "I am going to cut taxes for 90%", and "what has been done for the last eight years is not working" arguments in this last debate or it is definitely over.
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OCTOBER 10, 2008
OPEC War against America’s Economic Independence?
By Walid Phares
According to economic analysis the severe financial crisis ravaging the US and hitting the international community on all continents has its economic roots in two major realms: One was the overbearing political pressure put on Wall Street to release loans into unprepared sectors of society and two, was the miscalculation -some say the drunkenness- of Wall Street in accepting these immense risks. But according to Political Economy assessment, there may have been a third player in the crisis: OPEC, or more precisely, radical circles within Oil Producing regimes in the Peninsula. The thesis argue that combined Salafist-Wahabi and Muslim Brotherhood circles in the Gulf -with consent from the Iranian side on this particular issue, used the escalating pricing of Oil over the past year to push the financial crisis in the US over the cliff. The “high point” in this analysis is the timing between the skyrocketing of the prices at the pumps and the widening of the real estate crisis. In short the “Oil-push” put the market out of balance hitting back at Wall Street. Basically, there was certainly a crisis in mismanagement domestically (with its two above mentioned roots), but the possible OPEC economic “offensive” crumbled the defenses of US economy in few months.
The link between this analysis and our counter terrorism interests is dual. One, if the forthcoming investigation will demonstrate that there was a war room manipulated by the “radicals” within OPEC striking at US and Western economies, we would be witnessing the rise of the concept of “economic terrorism.” Two, and as the forthcoming investigation is progressing, a re-reading of al Qaeda and other Jihadi literature, speeches and statements about the Silah al Naft (Weapon of Oil) and more particularly the calls by Ayman Zawahiri on “selling US dollars and buying Gold, ahead of American economic collapse” seems to be necessary. Zawahiri’s statements most likely aren’t coordinated with the OPEC “hard core” push but his knowledge of the “push” is more than likely because of his ties to the Wahabi-Salafi circles inside the Kingdom. Moreover, such a finding would shed light on the analysis of commentary on the web and on Satellite media about "the necessity for Americans to feel the pain of economic pressures, to put political pressures on their Government to change course in the region."
I am posting here two pieces on the subject.
Is There A Foreign Force Waging War Against the US Economy? (Part One)
Dr. Walid Phares
In the fog of economic mayhem ravaging American and international economies, experts are having a hard time determining the root causes of the current financial crisis. One parameter is established: The Ground Zero of this economic fear is located in Wall Street, a few blocks away from the other Ground Zero, where al Qaeda destroyed the World Trade Center and massacred thousands of Americans and other nationals.
While we know who caused the destruction of the twin towers and why they did it, the question of who is causing the crumbling of the world economy, starting with America, and why, remains unanswered. It will take probably years and the best economists to investigate the web that led to the most dangerous crisis in international finance since the late 1920s. But to political economists and international relations analysts, there are some leads to explore while pure economists are proceeding with only their reconstruction of the crisis.
The latter may not ever reach definitive conclusions, and for political reasons. Too many strategic interests are at stake in the convulsions we are witnessing. From a stratospheric view, we see a US economy bleeding intensely; and as its government, in the midst of an electoral transition, is trying to administer some financial medicine, we can see that serious illnesses are breaking out in several economies around the world. The international community is waking up to watch another dimension of globalization: the lethal domino effect. When the greatest economy goes down, the international economic system follows.
But strategic analysts cannot avoid asking the following questions: Was the crisis system-induced or was it provoked or at least helped to spread? The main answer is found in the American genesis of the collapse. In sum, experts say, a huge mismanagement by both Wall Street and Washington ended up flooding Main Street with loans impossible to pay back. The mechanisms of the problem seem to be simple: American bankers and lenders messed up. They overestimated the ability of the markets to absorb these monies destined to help small consumers to leap into a higher social level, and to return their loans on time. And since millions of real estate buyers weren’t actually able to afford what they bought, the financial tidal wave hit back at the banking institutions, crumbling them. And as the financial giants were falling on Wall Street, a Tsunami was unleashed on all continents, hitting monetary institutions from Tokyo to London. This equation - in a micro nutshell - is the official story of the beginnings of the crisis, but certainly not the end of it.
As we continue to watch the economic spasms, we proceed along another line of basic questions. Other than raw capitalist greed, why did the lenders initially increase their offers into the markets? Who or what led the flood of cash? Many argue that the trend of pushing out-of-control loans to unqualified segments of society emanated from political operatives on the Left. Meaning that pressure groups, including national politicians, induced Wall Street to cross the fine line of appropriate banking policy to grant almost any loan seeker, regardless of his capacity to pay back the mortgage loan. But even if that were true, market analysts would have figured out the weaknesses of such a plan. So the next question is: on what grounds was the huge release of funds rationalized?
One answer could be that an assumption was made that jobs would always provide income for the payments of such mortgages. So, up to this stage, blame can be leveled in two directions. First, towards those politicians who threatened political retaliation if the financial system didn’t lend beyond rational limits; and second, Wall Street financiers who risked breaking the financial system by relying on poor judgment regarding the public’s ability to overcome economic challenges. Economists and those investigative committees expected to be formed will tell us more about the American roots of this economic debacle.
A thorough psycho-economic observation of the public’s financial behavior, however, tells us that there may be more to the crisis. It reveals that an outside “push” - I now coin it economic terrorism - may have been the tipping point of the collapse. For monitoring how and why buyers massively abandoned their plans shows that it followed, or coincided, with an abrupt rise in the cost of gas dividends. With the numbers at the pumps going ballistic, the cost of living suddenly rose, goods became less attainable and the price of enjoying, let alone using, the newly purchased properties soared. Hence, undoubtedly the lifestyle that was sought by the tens of millions of homes buyers wasn’t possible to achieve anymore; thus they surrendered financially in droves, taking the system down with them.
Economists will tell us if this diagnosis stands up. But if it does, then we cannot avoid investigating the factor that caused the strategic stress in real estate, which turned into economic chaos. In bypassing a narrow economic analysis, we can detect clearly the connection between the dizzying ups in petrol pricing and the slowing of American buying capacity. Stunningly, one can conclude that while it is sadly true that both Wall Street’s corruption and politicians’ abuse of the system handed the tools of doom to the middle class, Main Street’s rapid disenfranchisement was manufactured overseas, thousands of miles away, at the hands of OPEC, or perhaps in some quarters of the oil-producing Cartel.
Indeed, as economic commentators tell us (including a strong accusation leveled by real estate tycoon Donald Trump on Fox News against OPEC), oil powers are behind the instability that crumbled the will of millions of middle class Americans over the past three years. If we go back in time, we can see that oil pricing by OPEC’s hard core shows clearly that US leadership wasn’t able to convince the top producers from the Gulf to give American oil consumers a chance. Most producing regimes replied that demand - mostly from China and India - was putting pressure on production. Pressed by Washington to produce more, the “regimes” alleged it would affect the selling price and thus minimize their profits, but promised they would try to “be understanding” of US needs in energy.
This attitude gave the producers discretion over price, while Jihadi propagandists roamed the media accusing Washington of putting unbearable pressure “on the region” to follow American injunctions in setting petrol’s prices. Was there a connection between the oil regimes and the Jihadi propagandist machine? We have no answer to that now, but clearly an oil strategy was in the works with a calculated impact on the US economy. This charge is still in its early stages, it will be challenged ferociously, but it will stand as long as limpid answers are not provided.
Dr. Walid Phares is the Director of the Future Terrorism Project at the Foundation for the Defense of Democracies and a visiting scholar at the European Foundation for Democracy. He is the author of The Confrontation: Winning the War against Future Jihad.
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OPEC's HEAVY HAND
by Walid Phares
Who manufactured the financial meltdown? It wasn’t only Wall Street: OPEC’s heavy hand is felt but unseen by the media and our politicians.
In bypassing a narrow economic analysis of the ongoing crisis, we can detect clearly the connection between the dizzying ups in petrol pricing and the slowing of American buying capacity. Though we have to conclude that while it is due largely to both Wall Street’s corruption and politicians’ abuse of the system handed the tools of doom to the middle class, Main Street’s rapid disenfranchisement was manufactured overseas, thousands of miles away, at the hands of many of the members of OPEC, the oil-producing Cartel.
Indeed, as economic commentators tell us (including a strong accusation leveled by real estate tycoon Donald Trump on Fox News against OPEC), the oil powers are behind the instability that crumbled the will of millions of middle class Americans over the past three years.
If we go back in time, we can see that oil pricing by OPEC’s hard core shows clearly that US leadership wasn’t able to convince the top producers from the Gulf to give American oil consumers a chance. Most producing regimes replied that demand -- mostly from China and India -- was putting pressure on production. Pressed by Washington to produce more, the “regimes” alleged it would affect the selling price and thus minimize their profits, but promised they would try to “be understanding” of US needs in energy.
This attitude gave the producers discretion over price, while Jihadi propagandists roamed the media accusing Washington of putting unbearable pressure “on the region” to follow American injunctions in setting petrol’s prices. Was there a direct connection between the oil regimes and the Jihadi propagandist machine? We have no answer to that now, but clearly an oil strategy was in the works with a calculated impact on the US economy. This charge is still in its early stages, it will be challenged ferociously, but it will stand as long as convincing answers are not provided.
What adds to the inquiry into the OPEC destabilization factor are the many indicators that strategic political motives have appeared to be behind the pricing maneuvers. Over a period of half a decade, many voices heard on the region’s airwaves have intimated that the US economy will be made to pay for what America’s leadership is doing. Commentators, some funded by oil producers on several outlets including on al Jazeera, underlined that as long as average citizens in the United States (and eventually in the West) don’t feel financial pain, the war on terror and spreading of Democracy won’t be stopped.
Sheikh Yussuf al Qardawi, Muslim Brotherhood ideologue and mentor of the Qatari-funded channel, spoke openly of Silah al Naft, i.e, “the weapon of oil.” Indeed, it was called a weapon - as in a warfare situation -- and most likely it was used as such. Of course, the producing “regimes” will deny the existence of a real strategy to bring the US to its knees by striking at its pumps. They will dismiss statements made by emirs and commentators in this regard. The “field Jihadists”, however, won’t deny the existence of such a battlefield.
For years now, Salafist web sites and al Qaeda spokespersons have loudly called for an “oil Jihad against infidel America and its lackeys.” Online material is still circulating. But more revealing are the official speeches by Osama Bin Laden and his deputy on the “absolute necessity to use that weapon.”
Ayman Zawahiri called expressly and repetitively on the public to sell their US dollars and buy gold instead (Be’u al dullar washtaru al zahab). These were stunning statements ignored by most analysts at the time but that are making sense today. He predicted a collapse in the infidels’ economy, starting from American markets. Was he a part of the lobbying effort in the OPEC game? Most likely not, but he seems to have been privy to the game, having insiders in the Wahhabi radical circles in the Peninsula: in the end there are too many political signs to dismiss and the analysis of price warfare is too evident to ignore.
OPEC’s manipulation of the markets did hit Americans hard in their pockets. Hundreds of millions of John and Jane Does were intimidated, terrorized really, into abandoning their lifelong dreams of owning properties because of the aggressive stance of petro-regimes towards the US and its campaign to spread democracy in the Greater Middle East. In historical terms, America was punished for daring to change the status quo in the Arab and Muslim world to the advantage of the weakest and the suppressed: Shia and Kurds in Iraq, Syrian reformers, Lebanese civil society, Africans in Darfur, Iranian women and students, artists and liberals across the Arabian Peninsula. In return, the U.S was submitted to economic destabilization, steady, gradual and by small doses.
Let’s not underestimate the power of the Jihadi-oil lobby in America: it has decades of influence and it has long arms into the system, and it has powerful political allies. It knows when Americans are messing up their own system, and it knows very well how to push them over the cliff, into the abyss of economic calamity.
A counterpoint to this thesis would vigorously argue that the alleged OPEC destabilization over the US economy is illogical, as many countries in the Gulf are experiencing a recession as a result of Wall Street’s crunch. In other words, they wouldn’t do it to themselves. Yet the ideological forces manning the oil weapon aren’t particularly concerned about economic stability. Their driving factor is Jihadism. We’ve heard their ideologues stating that even if they were to incur losses among their own societies in order to defeat the infidel powers, then let it be.
Ten percent losses in local companies and markets are a price that radicals would absorb if the final prize is an earth-shattering change in US policy in the region and a triumphant return to pre-9/11 status. I find the rationale of this policy very Jihadist: if a world economic crisis is needed to remove the US democratization efforts from the region and to end its post 9/11 campaigns, the end justifies the means. In addition, how intriguing to see that Saudi Arabia and other producers are among the very few who didn’t have to pump much cash into their markets yet (Per news Agencies, today).
What some oil regimes -- or the ideological forces within -- want to accomplish from this alleged interference in US economics is to provoke a “regime change” in Washington, D.C., so that regimes in their region are not challenged anymore. But another issue is also coming to the surface: pressures against America’s financial structures seem to have escalated in parallel to increasing US talk and commitment to achieving energy independence. Since last April, the American debate finally reached a dramatic conclusion: “We’re sending 700 Billion Dollars a year to regimes that dislike us;” agree most national leaders; “and furthermore some of that money is ending up in the hands or accounts of Terrorists” affirm some among them.
This revolutionary conclusion is a direct affront to the multi-decades-long dominance of petro-dollars in US politics. What America is readying itself to do is to achieve its most dramatic war of independence since 1776: ending the dependence on Middle East Oil. Therefore, let’s not be surprised that these gigantic interests would strike at the heart of this economic revolution, as I coined it in my latest book, The Confrontation.
Back to the ongoing crisis on these shores, we nevertheless must admit that the original sins are domestic first: financial drunkenness and economic recklessness. Without these plagues, outside forces wouldn’t have been able to shake up America’s stability. But assuming that most capitalist societies travel through rough patches, it is vital to realize that America’s economy is under attack by forces aiming to maintain US dependency on foreign energy, as a means to obstruct the rise of democracy.
Seven years after 9/11, Americans are paying the price of liberty from their own economic flesh.
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Dr Walid Phares, author of Future Jihad: Terrorist Strategies against America, of The war of Ideas: Jihadism against democracy and of the forthcoming book, The Confrontation. He is also the Director of the Future Terrorism Project at the Foundation for Defense of Democracies.
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Another example of what a stupid leadership we have in this country and how we give it away is that the election is probably being influenced big time by foreigners. BO's campaign is flooded with donations from foreigners. How much is unclear but it is probably quite large. AS Bob Grant the radio host from NY would point out here is an article to this effect. He also asks that we contemplate why our enemies including Hamas and Hugo Chavez support BO? Do I need say more. Just like we *give* away citizenship to children born here of illegals we are giving foreing powers access to controlling our elections via small campaign donations that don't have to be reported. We already know Chinese are funneling tons of small donations through surrogates.
God this country is going down the garbage can and even simple fixes can't get done due to politics, political correctness, and pandering for votes.
Foreign Money FLOODS Obama Campaign
Secret, Foreign Money Floods Into Obama Campaign
Monday, September 29, 2008 9:23 PM
By: Kenneth R.
Timmerman Font Size
More than half of the whopping $426.9 million Barack Obama has raised has come from small donors whose names the Obama campaign won't disclose.
And questions have arisen about millions more in foreign donations the Obama campaign has received that apparently have not been vetted as legitimate.
Obama has raised nearly twice that of John McCain's campaign, according to new campaign finance report.
But because of Obama's high expenses during the hotly contested Democratic primary season and an early decision to forgo public campaign money and the spending limits it imposes, all that cash has not translated into a financial advantage - at least, not yet.
The Obama campaign and the Democratic National Committee began September with $95 million in cash, according to reports filed with the Federal Election Commission (FEC).
The McCain camp and the Republican National Committee had $94 million, because of an influx of $84 million in public money.
But Obama easily could outpace McCain by $50 million to $100 million or more in new donations before Election Day, thanks to a legion of small contributors whose names and addresses have been kept secret.
Unlike the McCain campaign, which has made its complete donor database available online, the Obama campaign has not identified donors for nearly half the amount he has raised, according to the Center for Responsive Politics (CRP).
Federal law does not require the campaigns to identify donors who give less than $200 during the election cycle. However, it does require that campaigns calculate running totals for each donor and report them once they go beyond the $200 mark.
Surprisingly, the great majority of Obama donors never break the $200 threshold.
"Contributions that come under $200 aggregated per person are not listed," said Bob Biersack, a spokesman for the FEC. "They don't appear anywhere, so there's no way of knowing who they are.
"
The FEC breakdown of the Obama campaign has identified a staggering $222.7 million as coming from contributions of $200 or less. Only $39.6 million of that amount comes from donors the Obama campaign has identified.
It is the largest pool of unidentified money that has ever flooded into the U.S. election system, before or after the McCain-Feingold campaign finance reforms of 2002.
Biersack would not comment on whether the FEC was investigating the huge amount of cash that has come into Obama's coffers with no public reporting.
But Massie Ritsch, a spokesman for CRP, a campaign-finance watchdog group, dismissed the scale of the unreported money.
"We feel comfortable that it isn't the $20 donations that are corrupting a campaign," he told Newsmax.
But those small donations have added up to more than $200 million, all of it from unknown and unreported donors.
Ritsch acknowledges that there is skepticism about all the unreported money, especially in the Obama campaign coffers.
"We and seven other watchdog groups asked both campaigns for more information on small donors," he said. "The Obama campaign never responded," whereas the McCain campaign "makes all its donor information, including the small donors, available online.
"
The rise of the Internet as a campaign funding tool raises new questions about the adequacy of FEC requirements on disclosure. In pre-Internet fundraising, almost all political donations, even small ones, were made by bank check, leaving a paper trail and limiting the amount of fraud.
But credit cards used to make donations on the Internet have allowed for far more abuse.
"While FEC practice is to do a post-election review of all presidential campaigns, given their sluggish metabolism, results can take three or four years," said Ken Boehm, the chairman of the conservative National Legal and Policy Center.
Already, the FEC has noted unusual patterns in Obama campaign donations among donors who have been disclosed because they have gone beyond the $200 minimum.
FEC and Mr.
Doodad Pro
When FEC auditors have questions about contributions, they send letters to the campaign's finance committee requesting additional information, such as the complete address or employment status of the donor.
Many of the FEC letters that Newsmax reviewed instructed the Obama campaign to "redesignate" contributions in excess of the finance limits.
Under campaign finance laws, an individual can donate $2,300 to a candidate for federal office in both the primary and general election, for a total of $4,600. If a donor has topped the limit in the primary, the campaign can "redesignate" the contribution to the general election on its books.
In a letter dated June 25, 2008, the FEC asked the Obama campaign to verify a series of $25 donations from a contributor identified as "Will, Good" from Austin, Texas.
Mr. Good Will listed his employer as "Loving" and his profession as "You.
"
A Newsmax analysis of the 1.4 million individual contributions in the latest master file for the Obama campaign discovered 1,000 separate entries for Mr. Good Will, most of them for $25.
In total, Mr. Good Will gave $17,375.
Following this and subsequent FEC requests, campaign records show that 330 contributions from Mr. Good Will were credited back to a credit card. But the most recent report, filed on Sept. 20, showed a net cumulative balance of $8,950 - still well over the $4,600 limit.
There can be no doubt that the Obama campaign noticed these contributions, since Obama's Sept. 20 report specified that Good Will's cumulative contributions since the beginning of the campaign were $9,375.
In an e-mailed response to a query from Newsmax, Obama campaign spokesman Ben LaBolt pledged that the campaign would return the donations. But given the slowness with which the campaign has responded to earlier FEC queries, there's no guarantee that the money will be returned before the Nov. 4 election.
Similarly, a donor identified as "Pro, Doodad," from "Nando, NY," gave $19,500 in 786 separate donations, most of them for $25. For most of these donations, Mr. Doodad Pro listed his employer as "Loving" and his profession as "You," just as Good Will had done.
But in some of them, he didn't even go this far, apparently picking letters at random to fill in the blanks on the credit card donation form. In these cases, he said he was employed by "VCX" and that his profession was "VCVC.
"
Following FEC requests, the Obama campaign began refunding money to Doodad Pro in February 2008. In all, about $8,425 was charged back to a credit card. But that still left a net total of $11,165 as of Sept. 20, way over the individual limit of $4,600.
Here again, LaBolt pledged that the contributions would be returned but gave no date.
In February, after just 93 donations, Doodad Pro had already gone over the $2,300 limit for the primary. He was over the $4,600 limit for the general election one month later.
In response to FEC complaints, the Obama campaign began refunding money to Doodad Pro even before he reached these limits. But his credit card was the gift that kept on giving. His most recent un-refunded contributions were on July 7, when he made 14 separate donations, apparently by credit card, of $25 each.
Just as with Mr. Good Will, there can be no doubt that the Obama campaign noticed the contributions, since its Sept. 20 report specified that Doodad's cumulative contributions since the beginning of the campaign were $10,965.
Foreign Donations
And then there are the overseas donations - at least, the ones that we know about.
The FEC has compiled a separate database of potentially questionable overseas donations that contains more than 11,500 contributions totaling $33.8 million. More than 520 listed their "state" as "IR," often an abbreviation for Iran. Another 63 listed it as "UK," the United Kingdom.
More than 1,400 of the overseas entries clearly were U.S. diplomats or military personnel, who gave an APO address overseas. Their total contributions came to just $201,680.
But others came from places as far afield as Abu Dhabi, Addis Ababa, Beijing, Fallujah, Florence, Italy, and a wide selection of towns and cities in France.
Until recently, the Obama Web site allowed a contributor to select the country where he resided from the entire membership of the United Nations, including such friendly places as North Korea and the Islamic Republic of Iran.
Unlike McCain's or Sen. Hillary Clinton's online donation pages, the Obama site did not ask for proof of citizenship until just recently. Clinton's presidential campaign required U.S. citizens living abroad to actually fax a copy of their passport before a donation would be accepted.
With such lax vetting of foreign contributions, the Obama campaign may have indirectly contributed to questionable fundraising by foreigners.
In July and August, the head of the Nigeria's stock market held a series of pro-Obama fundraisers in Lagos, Nigeria's largest city. The events attracted local Nigerian business owners.
At one event, a table for eight at one fundraising dinner went for $16,800. Nigerian press reports claimed sponsors raked in an estimated $900,000.
The sponsors said the fundraisers were held to help Nigerians attend the Democratic convention in Denver. But the Nigerian press expressed skepticism of that claim, and the Nigerian public anti-fraud commission is now investigating the matter.
Concerns about foreign fundraising have been raised by other anecdotal accounts of illegal activities.
In June, Libyan leader Moammar Gadhafi gave a public speech praising Obama, claiming foreign nationals were donating to his campaign.
"All the people in the Arab and Islamic world and in Africa applauded this man," the Libyan leader said. "They welcomed him and prayed for him and for his success, and they may have even been involved in legitimate contribution campaigns to enable him to win the American presidency..."
Though Gadhafi asserted that fundraising from Arab and African nations were "legitimate," the fact is that U.S. federal law bans any foreigner from donating to a U.S. election campaign.
The rise of the Internet and use of credit cards have made it easier for foreign nationals to donate to American campaigns, especially if they claim their donation is less than $200.
Campaign spokesman LaBolt cited several measures that the campaign has adopted to "root out fraud," including a requirement that anyone attending an Obama fundraising event overseas present a valid U.S. passport, and a new requirement that overseas contributors must provide a passport number when donating online.
One new measure that might not appear obvious at first could be frustrating to foreigners wanting to buy campaign paraphernalia such as T-shirts or bumper stickers through the online store.
In response to an investigation conducted by blogger Pamela Geller, who runs the blog Atlas Shrugs, the Obama campaign has locked down the store.
Geller first revealed on July 31 that donors from the Gaza strip had contributed $33,000 to the Obama campaign through bulk purchases of T-shirts they had shipped to Gaza.
The online campaign store allows buyers to complete their purchases by making an additional donation to the Obama campaign.
A pair of Palestinian brothers named Hosam and Monir Edwan contributed more than $31,300 to the Obama campaign in October and November 2007, FEC records show.
Their largesse attracted the attention of the FEC almost immediately. In an April 15, 2008, report that examined the Obama campaign's year-end figures for 2007, the FEC asked that some of these contributions be reassigned.
The Obama camp complied sluggishly, prompting a more detailed admonishment form the FEC on July 30.
The Edwan brothers listed their address as "GA," as in Georgia, although they entered "Gaza" or "Rafah Refugee camp" as their city of residence on most of the online contribution forms.
According to the Obama campaign, they wrongly identified themselves as U.S. citizens, via a voluntary check-off box at the time the donations were made.
Many of the Edwan brothers' contributions have been purged from the FEC database, but they still can be found in archived versions available for CRP and other watchdog groups.
The latest Obama campaign filing shows that $891.11 still has not been refunded to the Edwan brothers, despite repeated FEC warnings and campaign claims that all the money was refunded in December.
A Newsmax review of the Obama campaign finance filings found that the FEC had asked for the redesignation or refund of 53,828 donations, totaling just under $30 million.
But none involves the donors who never appear in the Obama campaign reports, which the CRP estimates at nearly half the $426.8 million the Obama campaign has raised to date.
Many of the small donors participated in online "matching" programs, which allows them to hook up with other Obama supporters and eventually share e-mail addresses and blogs.
The Obama Web site described the matching contribution program as similar to a public radio fundraising drive.
"Our goal is to bring 50,000 new donors into our movement by Friday at midnight," campaign manager David Plouffe e-mailed supporters on Sept. 15. "And if you make your first online donation today, your gift will go twice as far. A previous donor has promised to match every dollar you donate.
"
FEC spokesman Biersack said he was unfamiliar with the matching donation drive. But he said that if donations from another donor were going to be reassigned to a new donor, as the campaign suggested, "the two people must agree" to do so.
This type of matching drive probably would be legal as long as the matching donor had not exceeded the $2,300 per-election limit, he said.
Obama campaign spokesman LaBolt said, "We have more than 2.5 million donors overall, hundreds of thousands of which have participated in this program.
"
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CCP: "I just don't think simply saying we need to cut taxes is enough with BO out there preaching his lies for months with "I am cutting taxes for 90% of the folks in this country". ...The BO campaign has done a MUCH better job of responding to and countering the Repubs arguments than the other way around."
- Very true. Barack in his campaign is slick and slippery. His rhetoric doesn't at all match his record. If I were a centrist watching this only through mainstream sources I would probably join Obama and fight for hope and change. McCain should have set up a Bill Clinton style war room from the start and he should have gone ballistic immediately over Democrats blocking reforms on Fannie Mae and Freddie Mac. Instead voters think McCain and deregulation brought down the house. Remarkably, most voters think they will face lower tax rates if Democrats take full control all branches of government. The way things are going, I wish that were true :-(.
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CCP:"McCain either better have a great case to squash the "I am going to cut taxes for 90%", and "what has been done for the last eight years is not working" arguments in this last debate or it is definitely over."
True, he just can't undo later what was allowed to stand for so long as unchallenged fact.
This week allegedly McCain will unveil a 'new' economic plan. Even if he gets it perfectly right economically, he can only be perceived as a) pandering, b) desperate, c) unsteady in his leadership and d) irresponsible to the deficit and future generations.
My wish was to have an honest and consistent liberal run against an honest and consistent conservative and have them each strenuously argue their case to the people. Instead we have confusion-economics on both sides selling to a confused electorate.
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CCP: "Are there more small business owners than government employees, union people, and immigrants who come in a jump on the dole bandwagon (of course not all of them - but enough)? I doubt it. McCain is preaching to the minority. BO is preaching to the majority. End of story."
- You are obviously right in terms of numbers of voters. The counterpoint is that hurting your employer or taking down ANY major sector of our economy will hurt you and your family no matter who you are. Workers and even welfare recipients share the economy with investment capital, investors and business owners. My union friends who worked for Northwest airlines, like the GM workers in Michael Moore's movie, always had an 'us versus them', worker versus ownership attitude. Bringing down those businesses and damaging those investments wasn't helpful to those jobs. Same goes for the current market collapse. Someone needs to articulate win-win choices to counter the us versus them, class envy politics. McCain hasn't done that.
There is no narrative that runs through the McCain campaign. The economy should be America's biggest strength and whoever is the Republican nominee should be out front leading the charge. Instead, McCain is that hoping unknown events in the next 23 days will change the subject.
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The 1% Panic Our financial models were only meant to work 99% of the time.By L. GORDON CROVITZ
The Panic of 2008 is a crisis of trust. Investors don't trust the value of bad debts enough to offer market-clearing prices. Banks don't trust one another to stay in business long enough to do business together. And there's definitely no trust that Washington can avoid creating costly new moral hazards as it attempts to bail out the system.
But the most paralyzing loss of trust may be in Wall Street's system itself: How did the smartest people at the best banks running the most sophisticated financial models fail to forecast the collapse of mortgage-related securities? How did this unpredicted collapse devastate the system? And most of all, can we ever again trust the financial models on which value is supposed to be determined?
These questions matter because despite the current crisis, modern finance has delivered enormous benefits, from explaining to investors why they should diversify their investments to the creation of mutual and index funds. Related innovations helped financial institutions speed capital to its best use, fund new businesses and accelerate global prosperity. In other words, financial engineering worked beautifully -- until suddenly it didn't.
So what happened? Financial models take logic and historical data into account, but it's now clear that these elegant models have a serious weakness: They can't cope with illogical and uneconomic factors. Washington's insistence for years on artificial subsidies for mortgages through Freddie Mac, Fannie Mae and other programs led to a loud "Does not compute!" that is still rocking the financial system.
Here's how ill-conceived regulation poisoned the system. Until recently, bank CEOs and regulators slept well at night thanks to a financial model developed in the 1990s called "value at risk" or VaR. It assesses historical variances and covariances among different securities, informing financial institutions of the risks they're taking. By assessing risk factors across all securities, VaR can compare historical levels of risk for given portfolios, usually up to a 99% probability that banks would not lose more than a certain amount of money. In normal times, banks compare the VaR worst case with their capital to make sure their reserves can cover losses.
But VaR can't account for extreme unprecedented events -- the collapse of Barings in 1995 due to a rogue trader in Singapore, or today's government-mandated bad mortgages bundled into securities that are hard to value and unwind. The "1% likely" happened. And because the 1% literally didn't compute, there was no estimate of the stunning losses that have occurred.
Yale mathematician Benoit Mandelbrot pointed out the shortcomings of the VaR model in his "The (Mis)behavior of Markets," published in 2004. He noted that bell curves work for, say, disparities in the height of people. In markets, instead of flat tails of rare events at either end of the bell curve, there are "fat tails" of huge upsides and huge downsides. Markets are more complex than the neat shape of bell curves.
Last year's bestselling nonfiction book had a similar theme. In "The Black Swan," former trader Nassim Nicholas Taleb pointed out that extreme outcomes are actually common, warning that financial engineers -- "scientists," as he calls them -- ignore these unlikely outcomes at their peril. But today's credit panic was not entirely unpredictable. Mr. Taleb was prescient in writing, "The government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: Their large staffs of scientists deemed these events 'unlikely.'"
Likewise, the financial engineers at once high-flying hedge fund Long-Term Capital Management thought they had taken all risks into account, but the Russian financial crisis of 1998 blew their model. Last week the former general counsel of LTCM, James Rickards, reflected on how an incomplete VaR model undermined his firm. "Since we have scaled the system to unprecedented size, we should expect catastrophes of unprecedented size as well," he wrote in the Washington Post. "We're in the middle of one such catastrophe, and complexity theory says it will get much worse."
Global markets and new financial instruments are indeed complex. This complexity led to a fragility that made government meddling in markets more dangerous than ever before -- creating the 1% likely disaster. The good news for VaR and similar models is that the free market alone would not have allowed the bubble of subsidized mortgages, but the bad news is that it's far from clear that Congress has learned from the current crisis to pursue policy goals in ways that don't distort the fundamentals of markets.
Now the regulators trying to fix the damage in the financial system must also try to avoid more 1% likely crises. Transparent steps that restore market efficiency are better than complex, ad hoc policies that postpone market solutions. These programs should be judged on whether they make the financial models function better or function not at all. As we've learned, there's not much room in between.
Write to informationage@wsj.com
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Bernanke Is Fighting the Last War
'Everything works much better when wrong decisions are punished and good decisions make you rich.'
By BRIAN M. CARNEY
WSJ
New York
On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch.
Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, "Nothing," Anna Schwartz says, "seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market."
Randy JonesThe credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty -- if not a reality already.
Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees.
Federal Reserve Chairman Ben Bernanke has called the 888-page "Monetary History" "the leading and most persuasive explanation of the worst economic disaster in American history." Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.
To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.
This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.
But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."
The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.
Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."
Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."
Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.
Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."
It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.
"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant.
How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."
The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.
"Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."
Ms Schwartz adds, gently, "I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom." Policies based on such thinking only lead to a more damaging bust when the mania ends, as they all do. "In general, it's easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well."
Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."
Mr. Carney is a member of The Wall Street Journal's editorial board..
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it's nice to hear common sense in layman's terms.
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I too found the article genuinely insightful.
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So, my question would be, what policies should we adopt and what should we avoid to fix this current mess?
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What I infer from it is that precisely because the problem was caused by too much money and meddling the the Govt. in the market, it can't be fixed by too much money and meddling in the market for all the reasons that the Govt. shouldn't have been trying to manipulate the market (printing money, negative interest rates, the FMs, the CRA, Mark to Market Ruies, etc) to begin with.
In short, a clusterfcuk cometh.
Japan tried saving banks with bad loans with negative rates and they had (have?) a recession that has lasted a really, really long time. Are we about to be in the same boat? With His Glibness at the helm, the chances of following all the worst possible policies (taxes, printing money, the govt changing the terms of mortgage contracts, etc etc) become scarily possible.
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And this is what government meddling can look like:
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NY Times
Building Flawed American Dreams
DavID STREITFELD and GRETCHEN MORGENSON
Published: October 18, 2008
SAN ANTONIO — A grandson of Mexican immigrants and a former mayor of this town, Henry G. Cisneros has spent years trying to make the dream of homeownership come true for low-income families. As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.
Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices.
And Mr. Cisneros became a developer himself. The Lago Vista development here in his hometown once stood as a testament to his life’s work. Joining with KB, he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He often made the trip from downtown to ask residents if they were happy.
“People bought here because of Cisneros,” says Celia Morales, a Lago Vista resident. “There was a feeling of, ‘He’s got our back.’ ”
But Mr. Cisneros rarely comes around anymore. Lago Vista, like many communities born in the housing boom, is now under stress. Scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records.
While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.”
They were lured by “unscrupulous participants — bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.” (What a weasel!)
The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats. Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.
He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too. (Hmmm, why would that be? :x )
The Paydays During the Boom
After a sex scandal destroyed his promising political career and he left Washington, he eventually reinvented himself as a well-regarded advocate and builder of urban, working-class homes. He has financed the construction of more than 7,000 houses.
For the three years he was a director at KB Home, Mr. Cisneros received at least $70,000 in pay and more than $100,000 worth of stock. He also received $1.14 million in directors’ fees and stock grants during the six years he was a director at Countrywide. He made more than $5 million from Countrywide stock options, money he says he plowed into his company.
He says his development work provides an annual income of “several hundred thousand” dollars. All told, his paydays are modest relative to the windfalls some executives netted in the boom. Indeed, Mr. Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking and housing; it was unwavering belief.
It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance. (You fcuking moron!!! It was inevitable! It is precisely what happens when the government intervenes, and intervenes massively in the market!)
“You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.”
From people dizzily drawing home equity loans out of increasingly valuable houses to banks racking up huge fees, few wanted the party to end.
“I’m not sure you can regulate when we’re talking about an entire nation of 300 million people and this behavior becomes viral,” Mr. Cisneros says. (Well, duh! THIS IS PRECISELY WHY YOU SHOLD NOT START!)
Homeownership has deep roots in the American soul. But until recently getting a mortgage was a challenge for low-income families. Many of these families were minorities, which naturally made the subject of special interest to Mr. Cisneros, who, in 1993, became the first Hispanic head of the Department of Housing and Urban Development.
He had President Clinton’s ear, an easy charisma and a determination to increase a homeownership rate that had been stagnant for nearly three decades. Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all. “We were trying to be creative,” Mr. Cisneros recalls.
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(Page 2 of 4)
Under Mr. Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove they had five years of stable income; three years sufficed.
And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.) (I'm shocked! Absolutely shocked!)
“Henry did everything he could for home builders while he was at HUD,” says Janet Ahmad, president of Homeowners for Better Building, an advocacy group in San Antonio, who has known Mr. Cisneros since he was a city councilor. “That laid the groundwork for where we are now.”
Mr. Cisneros, who says he has no recollection that appraisal rules were relaxed when he ran HUD, disputes that notion. “I look back at HUD and feel my hands were clean,” he says.
Lenders applauded two more changes HUD made on Mr. Cisneros’s watch: they no longer had to interview most government-insured borrowers face to face or maintain physical branch offices. The industry changed, too. Lenders sprang up to serve those whose poor credit history made them ineligible for lower-interest “prime” loans. Countrywide, which Angelo R. Mozilo co-founded in 1969, set up a subprime unit in 1996.
Mr. Cisneros met Mr. Mozilo while he was HUD secretary, when Countrywide signed a government pledge to use “proactive creative efforts” to extend homeownership to minorities and low-income Americans. He met Bruce E. Karatz, the chief executive of KB Home, when both were helping Los Angeles rebuild after the Northridge earthquake in 1994.
There were real gains during the Clinton years, as homeownership rose to 67.4 percent in 2000 from 64 percent in 1994. Hispanics and African-Americans were the biggest beneficiaries. But as the boom later gathered steam, and as the Bush administration continued the Clinton administration’s push to amplify homeownership, some of those gains turned out to be built on sand.
Mr. Cisneros left government in 1997 after revelations that he had lied to federal investigators about payments to a former mistress. In the following years, HUD continued to draw attention in the news media and among consumer advocates for an overly lenient posture toward the housing industry.
In 2000, Mr. Cisneros returned to San Antonio, where he formed American CityVista, a developer, in partnership with KB, and became a KB director. KB’s board also included James A. Johnson, a prominent Democrat and the former chief executive of Fannie Mae, the mortgage giant now being run by the government. Mr. Johnson did not return a phone call seeking comment.
It made for a cozy network. Fannie bought or backed many mortgages received by home buyers in the KB Home/American CityVista partnership. And Fannie’s biggest mortgage client was Countrywide, whose board Mr. Cisneros had joined in 2001.
Because American CityVista was privately held, Mr. Cisneros’s earnings are not disclosed. He held a 65 percent stake, and KB had the rest. In 2002, KB paid $1.24 million to American CityVista for “services rendered.”
‘A Little Too Ambitious’
One of American CityVista’s first projects, unveiled in late 2000, was Lago Vista — Spanish for “Lake View.” The location was unusual: San Antonio’s proud and insular South Side, a Hispanic area home to secondhand car dealers, light industry and pawnshops. Mr. Cisneros and KB pledged to transform an overgrown patch of land into a showcase. Homes were initially priced from $70,000 to about $95,000, and Mr. Cisneros promised that Lago Vista would be ringed with jogging paths and maple trees.
The paths were never built, and few trees provide shade from the Texas sun. The adjoining “lake” — at one point a run-off pit for an asphalt plant — is fenced off, a hazard to neighborhood children. The houses are gaily painted in pink, blue, yellow or tan, and most owners keep their yards green and tidy.
KB considers Lago Vista a “model community,” a spokeswoman said.
To get things rolling in Lago Vista, traditional bars to homeownership were lowered to the ground. Fannie Mae, CityVista and KB promoted a program allowing police officers, firefighters, teachers and others to get loans with nothing down and no closing costs.
KB marketed its developments in videos. In one from 2003, Mr. Karatz declared: “One of the greatest misconceptions today is people who sit back and think, ‘I can’t afford to buy.’ ” Mr. Cisneros appeared — identified as a former HUD director — saying the time was ripe to buy a home. Many agreed.
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(Page 3 of 4)
Victor Ramirez and Lorraine Pulido-Ramirez bought a house in Lago Vista in 2002. “This was our first home. I had nothing to compare it to,” Mr. Ramirez says. “I was a student making $17,000 a year, my wife was between jobs. In retrospect, how in hell did we qualify?”
The majority of buyers in Lago Vista “were duped into believing it was easier than it was,” Mr. Ramirez says. “The attitude was, ‘Sign here, sign here, don’t read the fine print.’ ” He added that some fault lay with buyers: “We were definitely willing victims.” (The Ramirez family veered close to foreclosure, but the couple now have good jobs and can make their payments.)
KB and Mr. Cisneros eventually built more than a dozen developments, primarily in Texas. But the shine slowly came off Lago Vista.
“It started off fabulously,” Mr. Karatz recalled. Then sales slowed considerably. “It was probably, looking back, a little too ambitious to think that there would be sufficient local demand.”
And then the foreclosures started. “A lot of people got approved for big amounts,” says Patricia Flores, another Lago Vista homeowner. “They bit off more than they could chew.” Families split up under the strain of mortgage payments. One residence had so much marital turmoil that neighbors nicknamed it “The House of Broken Love.”
Some homes were taken over and sold at a loss by HUD, which had insured them. KB was also a mortgage lender, a business many home builders pursued because it was so profitable. At times, it was also problematic.
Officials at HUD uncovered problems with KB’s lending. In 2005, about two years after Mr. Cisneros left the KB board, the agency filed an administrative action against KB for approving loans based on overstated or improperly documented borrower income, and for charging excessive fees. Because HUD does not specify where improprieties take place, it is not clear if this occurred at Lago Vista.
KB Home paid $3.2 million to settle the HUD action without admitting liability or fault, one of the largest settlements collected by the agency’s mortgagee review board. Shortly afterward, KB sold its lending unit to Countrywide. Then they set up a joint venture: KB installed Countrywide sales representatives in its developments.
By 2007, almost three-quarters of the loans to KB buyers were made by the joint venture. In Lago Vista, residents secured loans from a spectrum of federal agencies and lenders.
During years of heady growth, and then during a deep financial slide, Countrywide became a lightning rod for criticism about excesses and abuses leading to the housing bust — which Countrywide routinely brushed off.
Mr. Cisneros says he was never aware of improprieties at KB or Countrywide, and worked with them because he was impressed by Mr. Karatz and Mr. Mozilo. Mr. Mozilo could not be reached for comment.
Still, Countrywide expanded subprime lending aggressively while Mr. Cisneros served on its board. In September 2004, according to documents provided by a former employee, lending audits in six of Countrywide’s largest regions showed about one in eight loans was “severely unsatisfactory” because of shoddy underwriting.
HUD required such audits and lenders were expected to address problems. Mr. Cisneros was a member of the Countrywide committee that oversaw compliance with legal and regulatory requirements. But he says he did not recall seeing or receiving the reports.
Nor, he says, was there ever a board vote about the wisdom of subprime lending.
“The irresistible temptation to engage in subprime was Countrywide’s fatal error,” he says. “I fault myself for not having seen it and, since it was not something I could change, having left.”
Mr. Cisneros left Countrywide’s board last year. At the time, he expressed “enormous confidence in the leadership.” In 2003, Mr. Cisneros ended his partnership with KB because, he says, he felt constrained working with just one builder. He formed a new company with the same mission, CityView, that has raised $725 million.
Mr. Karatz has a different recollection of why the partnership ended.
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Page 4 of 4)
“It didn’t become an important part of KB’s business,” he says. “It was profitable but I don’t think as profitable in those initial years as Henry’s group wanted it to be.”
Troubles in Lago Vista
Today in Lago Vista, many are just trying to get by. Residents say crime has risen, and with association dues unpaid, they cannot hire security. Salvador Gutierrez, a truck driver, woke up recently to see four men stealing the tires off his pickup. Seventeen houses are for sale, but there are few buyers.
Hugo Martinez, who got a pair of Countrywide loans to buy a two-bedroom house with no down payment, recently lost his job with a car dealership. He has a lower-paying job as a mechanic and can’t refinance or sell his house.
“They make it easy when you buy,” Mr. Martinez says. “But after a while, the interest rate goes up. KB Home says they cannot help us at all.”
Five years ago, Carlo Lee and Patricia Reyes bought their first home, a three-bedroom house in Lago Vista. After Mrs. Reyes became ill last year and lost her job, they fell behind on their payments. Last month, Mr. Reyes was laid off from one of his jobs, assembling cabinets. He still works part time at a hospital, but unless the couple come up with missed payments and fees, they will lose their home.
“Everyone isn’t happy here in Lago Vista,” Mr. Reyes says. “Everyone has a lot of problems.”
Countrywide was bought recently at a fire-sale price by Bank of America. Mr. Cisneros describes Mr. Mozilo as “sick with stress — the final chapter of his life is the infamy that’s been brought on him, or that he brought on himself.”
Mr. Karatz was forced out of KB two years ago amid a compensation scandal. Last month, without admitting or denying the allegations, he settled government charges that he illegally backdated stock options worth $6 million.
For his part, Mr. Cisneros says he is proud of Lago Vista. “It is inaccurate to say that we put people into homes that they couldn’t afford,” he says. “No one was forcing people into homes.”
He also remains bullish on home building, despite the current carnage.
“We’re not selling cigarettes,” he says. “We’re not drawing people into casino gambling. We’re building the homes they’re going to raise their families in.”
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The Carter years return , , ,
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WSJ:
Ben Bernanke apparently wants four more years as Federal Reserve Chairman. At least that's a reasonable conclusion after Mr. Bernanke all but submitted his job application to Barack Obama yesterday by endorsing the Democratic version of fiscal "stimulus."
While the Fed chief said any stimulus should be "well targeted," even a general endorsement amounts to a political green light. Mr. Bernanke certainly knows that Mr. Obama and Democrats on Capitol Hill are talking about some $300 billion in new "stimulus" spending, while President Bush and Republicans are resisting. And by saying any help should "limit longer-term effects" on the federal deficit, he had to know he was reinforcing Democratic opposition to permanent tax cuts.
Mr. Bernanke could have begged off -- and would have been wiser to do so -- given how much the Fed has already made itself a political lightning rod with its many Wall Street interventions. He might also have thought twice about endorsing one party's policy preferences a mere two weeks before Election Day given his obligation to preserve the Fed's independence. We can remember when tougher Fed chairmen used to refrain from adjusting interest rates close to an election for fear of seeming to be political; they would never have dreamed of meddling in campaign tax and spending debates.
Perhaps Mr. Bernanke's blunderbuss political intrusion will win him more Democrat friends, and maybe even Mr. Obama's goodwill. To the rest of the world, he has harmed the Fed and made himself less credible.
Please add your comments to the Opinion Journal forum.
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Isn't it refreshing for a high profile person to admit he made a mistake?
My opinion of Greenspan just went up ten fold. Just a little honesty. That's all it takes sometimes. We so rarely get that from people we vote to be our "leaders".
Compare that to most of the coward politicians, Frank, Dodd et al.
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October 26, 2008
US Special Forces Launch Rare Attack Inside Syria
By THE ASSOCIATED PRESS
Filed at 10:06 p.m. ET
DAMASCUS, Syria (AP) -- U.S. military helicopters launched an extremely rare attack Sunday on Syrian territory close to the border with Iraq, killing eight people in a strike the government in Damascus condemned as ''serious aggression.''
A U.S. military official said the raid by special forces targeted the network of al-Qaida-linked foreign fighters moving through Syria into Iraq. The Americans have been unable to shut the network down in the area struck because Syria was out of the military's reach.
''We are taking matters into our own hands,'' the official told The Associated Press in Washington, speaking on condition of anonymity because of the political sensitivity of cross-border raids.
The attack came just days after the commander of U.S. forces in western Iraq said American troops were redoubling efforts to secure the Syrian border, which he called an ''uncontrolled'' gateway for fighters entering Iraq.
A Syrian government statement said the helicopters attacked the Sukkariyeh Farm near the town of Abu Kamal, five miles inside the Syrian border. Four helicopters attacked a civilian building under construction shortly before sundown and fired on workers inside, the statement said.
The government said civilians were among the dead, including four children.
A resident of the nearby village of Hwijeh said some of the helicopters landed and troops exited the aircraft and fired on a building. He said the aircraft flew along the Euphrates River into the area of farms and several brick factories. The witness spoke on condition of anonymity because of the sensitivity of the information.
Another witness said four helicopters were used in the attack.
Since the invasion of Iraq in 2003, there have been some instances in which American troops crossed areas of the 370-mile Syria-Iraq border in pursuit of militants, or warplanes violated Syria's airspace. But Sunday's raid was the first conducted by aircraft and on such a large scale. In May 2005, Syria said American fire killed a border guard.
Syria's Foreign Ministry said it summoned the U.S. and Iraqi charges d'affaires to protest against the strike.
''Syria condemns this aggression and holds the American forces responsible for this aggression and all its repercussions. Syria also calls on the Iraqi government to shoulder its responsibilities and launch and immediate investigation into this serious violation and prevent the use of Iraqi territory for aggression against Syria,'' the government statement said.
Syrian state television late Sunday aired footage that showed blood stains on the floor of a site under construction, with wooden beams used to mold concrete strewn on the ground. Akram Hameed, one of the injured, told the television he was fishing in the Euphrates and saw four helicopters coming from the border area under a heavy blanket of fire.
''One of the helicopters landed in an agricultural area and eight members disembarked,'' the man in his 40s said. ''The firing lasted about 15 minutes and when I tried to leave the area on my motorcycle, I was hit by a bullet in the right arm about 20 meters (yards) away,'' he said.
The injured wife of the building's guard, in bed in hospital with a tube in her nose, told Syria TV that two helicopters landed and two remained in the air during the attack.
''I ran to bring my child who was going to his father and I was hit,'' she said. The TV did not identify her by name.
The area targeted is near the Iraqi border city of Qaim, which had been a major crossing point for fighters, weapons and money coming into Iraq to fuel the Sunni insurgency.
Iraqi travelers making their way home across the border reported hearing many explosions, said Qaim Mayor Farhan al-Mahalawi.
The foreign fighters network sends militants from North Africa and elsewhere in the Middle East to Syria, where elements of the Syrian military are in league with al-Qaida and loyalists of Saddam Hussein's Baath party, the U.S. military official said.
He said that while American forces have had considerable success, with Iraqi help, in shutting down the ''rat lines'' in Iraq, and with foreign government help in North Africa, the Syrian node has been out of reach.
''The one piece of the puzzle we have not been showing success on is the nexus in Syria,'' the official said.
On Thursday, U.S. Maj. Gen. John Kelly said Iraq's western borders with Saudi Arabia and Jordan were fairly tight as a result of good policing by security forces in those countries but that Syria was a ''different story.''
''The Syrian side is, I guess, uncontrolled by their side,'' Kelly said. ''We still have a certain level of foreign fighter movement.''
He added that the U.S. was helping construct a sand berm and ditches along the border.
''There hasn't been much, in the way of a physical barrier, along that border for years,'' Kelly said.
The White House in August approved similar special forces raids from Afghanistan across the border of Pakistan to target al-Qaida and Taliban operatives. At least one has been carried out.
The flow of foreign fighters into Iraq has been cut to an estimated 20 a month, a senior U.S. military intelligence official told the Associated Press in July. That's a 50 percent decline from six months ago, and just a fifth of the estimated 100 foreign fighters who were infiltrating Iraq a year ago, according to the official.
Ninety percent of the foreign fighters enter through Syria, according to U.S. intelligence. Foreigners are some of the most deadly fighters in Iraq, trained in bomb-making and with small-arms expertise and more likely to be willing suicide bombers than Iraqis.
Foreign fighters toting cash have been al-Qaida in Iraq's chief source of income. They contributed more than 70 percent of operating budgets in one sector in Iraq, according to documents captured in September 2007 on the Syrian border. Most of the fighters were conveyed through professional smuggling networks, according to the report.
Iraqi insurgents seized Qaim in April 2005, forcing U.S. Marines to recapture the town the following month in heavy fighting. The area became secure only after Sunni tribes in Anbar turned against al-Qaida in late 2006 and joined forces with the Americans.
Syrian Foreign Minister Walid al-Moallem accused the United States earlier this year of not giving his country the equipment needed to prevent foreign fighters from crossing into Iraq. He said Washington feared Syria could use such equipment against Israel.
Though Syria has long been viewed by the U.S. as a destabilizing country in the Middle East, in recent months, Damascus has been trying to change its image and end years of global seclusion.
Its president, Bashar Assad, has pursued indirect peace talks with Israel, mediated by Turkey, and says he wants direct talks next year. Syria also has agreed to establish diplomatic ties with Lebanon, a country it used to dominate both politically and militarily, and has worked harder at stemming the flow of militants into Iraq.
The U.S. military in Baghdad did not immediately respond to a request for comment after Sunday's raid.
http://www.nytimes.com/aponline/worl...=1&oref=slogin
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The Markets Are Weak Because the Candidates Are Lousy
The good news is that an Obama victory is already priced in.By GEORGE NEWMANArticle
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A lot has been said about the causes of the drastic drops -- and extreme volatility -- in stock prices and the impending recession. Blame has been heaped on low interest rates and dubious mortgage practices, and on the subsequent collapse of real-estate prices and the freeze in financial markets. But one other major factor has largely escaped attention.
To state the obvious: The valuation of an individual stock reflects the collective expectation of investors about a company's future profits, dividends and appreciation, and the same is true of the market as a whole. These profits, in turn, are greatly influenced by government policy on taxes, spending, subsidies, environmental and other regulations, labor laws, and the corporate legal climate. Investors have heard enough from both candidates in the last month or two to conclude that prospects for a flourishing, competitive, growing and reasonably free economy in a McCain administration are bad, and in an Obama administration far worse. (In fact, the market's bearish behavior over the last couple of months pretty closely tracks Barack Obama's gains.)
If you don't believe me, please answer a few questions:
- Have you thought of what a gradual doubling (and indexation) of the minimum wage, sailing through a veto-proof and filibuster-proof Congress, would do to inflation, unemployment and corporate profits? The market now has.
- Have you thought of how easily a Labor Department headed by a militant union boss would push through a "Transparency in Labor Relations" law that does away with secret ballots in strike votes, and what this would do to industrial peace? The market now has.
- Have you thought of how a Treasury Secretary George Soros would engineer the double taxation of the multinationals' world-wide profits, and what this would mean for investors (to say nothing of full-scale industrial flight from the U.S.)? The market now has.
- Have you thought of how an Attorney General Charles J. Ogletree would champion a trillion-dollar reparations-for-slavery project (whittled down, to be fair, to a mere $800-billion, over-10-years compromise), and what this would do to the economy? The market now has.
- Have you thought of what the virtual outlawing of arbitration -- exposing all industries to the fate of asbestos producers -- would do to corporate liability and legal bills? The market now has.
- Have you thought of how a Health and Human Services Secretary Hillary Clinton would fix drug prices (generously allowing 10% over the cost of raw materials), and what this would do to the financial health of the pharmaceutical industry (not to mention the nondiscovery of lifesaving drugs)? The market now has.
- Have you thought of a Secretary of the newly established Department of Equal Opportunity for Women mandating "comparable worth" pay practices for every company doing any business with government at any level -- where any residual gap between the average pay of men and women is an eo ipso violation? Have you thought about what this would do to administrative and legal costs, hiring practices, productivity and wage bills? The market now has.
- Have you thought of what confiscatory "windfall profits" taxes on oil companies would do to exploration, supply and prices? The market now has.
- Have you thought of how the nationalization of health insurance, the mandated coverage of ever more -- and more exotic -- risks, the forced reimbursement for excluded events, and the diminished freedom to match premium to risk would affect the insurance industry? The market now has.
- Have you thought of Energy Czar Al Gore's five million new green jobs -- high-paying, unionized and subsidized -- to replace, at five times the cost, what we are now producing without those five million workers, and what this will do to our productivity, deficit and competitiveness? The market now has.
I could go on, but you get the point. Nothing reveals Mr. Obama's visceral hostility to business more than the constant urging of our best and brightest to desert the productive private sector ("greed") and go into public service like politics or community organizing (i.e., organizing people to press government for more handouts). Who in his ideal world would bake our bread, make our shoes and computers, and pilot our airplanes is not clear.
And if you think all this comes from an ardent John McCain fan, you couldn't be more wrong. The Arizona Senator has made some terrible mistakes, one of them trying to out-demagogue Mr. Obama to the economic illiterates. This kind of pandering never works. Such populists and other economic illiterates will always go for the genuine article.
Mr. McCain should have asked some simple questions -- pertinent, educational and easily understood by ordinary voters. Such as:
- If the rise in the price of oil from $70 to $140 was due to "greed" (the all-purpose explanation of the other side for every economic problem), was the fall from $140 to $70 due to a sudden outbreak of altruism?
- If a bank is guilty both for rejecting a mortgage ("redlining") and for approving it ("greed" -- see above), how might a bank president keep his business out of trouble with the law?
- If the financial turmoil of the last year or so was caused by inadequate regulation, which party has controlled both Houses of Congress and all of its financial committees and subcommittees (where such regulation would originate) in the last two years?
- If we bemoan the sending of $750 billion a year to our enemies for imported oil, which party has prevented domestic drilling for decades that would have made us more self-sufficient?
- You were unhappy with Congress, and in 2006 you cast your lot with those who, like Mr. Obama now, promised "change." Are you happy with the changes that have taken place in the last two years?
None of these questions have been asked loudly or often enough, while the other message -- everything is bad, it's all Bush's fault, and McCain=Bush -- has sunk in. So given his own penchant for business bashing, a McCain win would merely count as damage control.
The market is forward looking. If it is unhappy with a president, it does not wait almost eight years before the numbers reflect it. If it really anticipated good times under Mr. Obama, the market would have gained 40% in anticipation of the transition. By losing that much, it seems to be saying the opposite.
The silver lining in all this is that the market has already "discounted" an Obama win, so if that happens you won't wake up on Nov. 5 to find your remaining savings down the drain. If the unexpected happens, you may be in for a pleasant surprise.
Mr. Newman is an economist and retired business executive.
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BO states:
***"The point is, though, that -- and it’s not just charity, it’s not just that I want to help the middle class and working people who are trying to get in the middle class -- it’s that when we actually make sure that everybody’s got a shot – when young people can all go to college, when everybody’s got decent health care, when everybody’s got a little more money at the end of the month – then guess what? Everybody starts spending that money, they decide maybe I can afford a new car, maybe I can afford a computer for my child. They can buy the products and services that businesses are selling and everybody is better off. All boats rise. That’s what happened in the 1990s, that’s what we need to restore. And that’s what I’m gonna do as president of the United States of America***
I don't see how giving households a few extra bucks is going to stimulate long term growth. Other than a quick boost in spending as soon as the cash runs out paying off the mortgage, the bills, the cigaretters etc that we will be right back where we started.
His whole argument seems based on a fallicious argument to start with. But this is not really about "raising all boats" anyway. This is smoke and mirrors for what he really intends which is just to take others money to give to whomever he deems is appropriate.
Yea it is essentially "reparations". BO won't say it like it is. He'll pretend the country as a whole benefits. I don't see it.
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http://www.washingtontimes.com/news/2008/nov/04/treasury-submits-to-shariah/
GAFFNEY: Treasury submits to Shariah
Tuesday, November 4, 2008
COMMENTARY:
The U.S. Treasury Department is submitting to Shariah - the seditious religio-political-legal code authoritative Islam seeks to impose worldwide under a global theocracy.
As reported in this space last week, Deputy Secretary of the Treasury Robert Kimmitt set the stage with his recent visit to Saudi Arabia and other oil-rich Persian Gulf states. His stated purpose was to promote the recycling of petrodollars in the form of foreign investment here.
Evidently, the price demanded by his hosts is that the U.S. government get with the Islamist financial program. While in Riyadh, Mr. Kimmitt announced: "The U.S. government is currently studying the salient features of Islamic banking to ascertain how far it could be useful in fighting the ongoing world economic crisis."
"Islamic banking" is a euphemism for a practice better known as "Shariah-Compliant Finance (SFC)." And it turns out that this week the Treasury will be taking officials from various federal agencies literally to school on SFC.
The department is hosting a half-day course entitled "Islamic Finance 101" on Thursday at its headquarters building. Treasury's self-described "seminar for the policy community" is co-sponsored with the leading academic promoters of Shariah and SCF in the United States: Harvard University Law School's Project on Islamic Finance. At the very least, the U.S. government evidently hopes to emulate Harvard's success in securing immense amounts of Wahhabi money in exchange for conforming to the Islamists' agenda. Like Harvard, Treasury seems utterly disinterested in what Shariah actually is, and portends.
Unfortunately, such submission - the literal meaning of "Islam" - is not likely to remain confined long to the Treasury or its sister agencies. Thanks to the extraordinary authority conferred on Treasury since September, backed by the $700 billion Troubled Asset Relief Program (TARP), the department is now in a position to impose its embrace of Shariah on the U.S. financial sector. The nationalization of Fannie Mae and Freddie Mac, Treasury's purchase of - at last count - 17 banks and the ability to provide, or withhold, funds from its new slush-fund can translate into unprecedented coercive power.
Concerns in this regard are only heightened by the prominent role Assistant Treasury Secretary Neel Kashkari will be playing in "Islamic Finance 101." Mr. Kashkari, the official charged with administering the TARP fund, will provide welcoming remarks to participants. Presumably, in the process, he will convey the enthusiasm about Shariah-Compliant Finance that appears to be the current party line at Treasury.
As this enthusiasm for SCF ramps up in Washington officialdom, it is worth recalling a lesson from "across the pond." Earlier this year, the head of the Church of England, Archbishop of Canterbury Rowan Williams, provoked a brief but intense firestorm of controversy with his declaration that it was "unavoidable" that Shariah would be practiced in Britain. Largely unremarked was the reason he gave for such an ominous forecast: The U.K. had already accommodated itself to Shariah-Compliant Finance.
This statement provides an important insight for the incumbent U.S. administration and whomever succeeds it: Shariah-Compliant Finance serves as a leading edge of the spear for those seeking to insinuate Shariah into Western societies.
Regrettably, SCF is not the only instrument of the stealth jihad by which Shariah-promoting Islamists are seeking to achieve "parallel societies" here and elsewhere in the West. The British experience is instructive on this score, too. Her Majesty's government has allowed the establishment of at least five Shariah courts to hear (initially) family law cases. Polygamists in the U.K. can get welfare for each of their wives (as long as all the marriages beyond the first were performed overseas).
Thus far, we in this country may not have reached the point where evidence of this sort of creeping Shariah is so manifest. But Treasury's accommodation to SCF demonstrates that we are on the same trajectory - the one ordained and demanded by the promoters of Shariah, one to which we serially accommodate ourselves at our extreme peril.
After all, the object of Shariah is the supplanting of our government and Constitution, through violent means if possible and, until then, through stealthy ones. Islamists, having secured footholds via their parallel societies, inevitably use those to extend their influence over Muslims who have no more interest in living under authoritative Islam's Shariah than the rest of us do. Inexorably, it becomes the turn of non-Muslims to accommodate themselves to ever more intrusive demands from the Islamists. It is known as submission, or dhimmitude.
Soon - possibly as early as this Wednesday - the Treasury Department and the other federal agencies will be taking orders from representatives of Barack Obama or John McCain. It may be that the outgoing administration's determination to advance the Islamist agenda via "Islamic Finance 101," and what flows from it, may be the first, far-reaching policy decision inherited by the new president-elect. If he does not want to have his transition saddled with an implicit endorsement of submission to Shariah, the winner of the White House sweepstakes would be well-advised to pull the plug on Thursday's indoctrination program and the insidious industry it is meant to foist on the "policy community," our capital markets and our country.
Frank J. Gaffney, Jr. is president of the Center for Security Policy and a columnist for The Washington Times.
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Here's more on this: The U.S. Should Ban Shari’a Finance
By Rachel Ehrenfeld
The U.S. financial crisis is attributable, in part, to a lack of transparency. If the government adopts Shari’a-based financing, our financial system will be rendered even more opaque. Such a policy also entangles American finance with Islamic law in violation of the First Amendment’s Establishment Clause which mandates separation of State from Church or Mosque.
The Organization of the Islamic Conference (OIC) created by the Saudis in 1969 for the purpose of “liberating Jerusalem and Al-Aqsa from Zionist occupation” is leading the charge for global expansion of Shari’a-based financing. The OIC High Commissioner for the Boycott of Israel coordinates the efforts of OIC’s fifty-seven member states to economically isolate the Jewish state, a blacklisting policy first declared by the Arab League Council on December 2, 1945. The boycott is enforced via the Damascus-based Central Boycott Office.
Congress unanimously condemned Saudi Arabia on April 5, 2006, (H.Con.Res.370) for its continued enforcement of the boycott in violation of commitments it made to the World Trade Organization in 2005. The U.S. Commerce Department’s Bureau of Industry and Security reported a 20% increase in Arab boycott requests in 2006 from the previous year. In June 2006, the Saudi ambassador admitted his country still enforced the boycott, and the Saudis participated in the 2007 boycott conference in Syria.
Adopting Shari’a-based financing violates U.S. law which makes it illegal for American individuals or companies to cooperate with the Arab boycott, mandates reporting of boycott requests, and imposes civil and criminal penalties against violators.
Therefore, the American Center for Democracy and Dr. Rachel Ehrenfeld protest the Treasury Department's plan to subject America’s citizens and its financial industry to Islamic rule in violation of the Constitution and U.S. law.
http://www.terrorfinance.org/the_ter...a-finance.html
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Washington DC: Coalition to Stop Shariah Press Conference
By Jeffrey Immon November 6, 2008 TrackBacks (0)
November 6, 2008 - Washington DC: The Coalition to Stop Shariah held a press conference at the National Press Club to oppose actions by the U.S. Treasury Department today to hold a course titled "Islamic Finance 101" to "train" government employees on Sharia-Compliant Finance (SCF). The coalition, consisting of diverse groups with a shared interest in fighting Islamic supremacism, called for the U.S. Treasury Department to either cancel the training course this afternoon or to provide education on the full Islamic supremacist nature of Sharia.
Representative speakers for the coalition at the press conference included Frank Gaffney - Center for Security Policy, Robert Spencer - JihadWatch.org, Dan Pollak - Zionist Organization of America, Wendy Wright - Concerned Women for America, Faith J.H. McDonnell - The Institute on Research and Democracy, Kyle Scheindler of the Endowment for Middle East Truth (EMET), Jim Boulet of English First, and Warren Mendelson of the Unity Coalition for Israel.
Frank Gaffney described the Coalition to Stop Shariah as a group, assembled in just the past several days in reaction to the Treasury SCF training and other events, as an "interfaith, non-partisan group of individuals and organizations that have decided that this is the time to begin contesting seriously a seditious program that authoritative Islam describes as Sharia. We have come together to call attention to and to counter the insinuation of Sharia into our society and those of other freedom loving people through various means, both stealthy and nonviolent and through the use or threat of the use of force."
Frank Gaffney described the efforts to expand Sharia-Compliant Finance as a threat "aimed at the very heart of the American economy." He noted as efforts to combat Sharia have gained ground that the proponents of Sharia have renamed Sharia-Compliant Finance as "Islamic finance," "ethical finance," or "structured finance." Mr. Gaffney pointed to the efforts by the Center for Security Policy in studying Sharia-Compliant Finance that has resulted in a legal memorandum by David Yerushalmi titled "Shari'ah's Black Box: Civil Liability and Criminal: Exposure Surrounding Shari'ah-Compliant Finance." Senator Jon Kyl reviewed David Yerushalmi's report and Senator Kyl wrote SEC Chairman Chris Cox, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and Attorney General Michael Mukasey asking them to respond to this report.
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continued:
To date, only SEC Chairman Cox and Fed Chairman Bernanke have responded, but Frank Gaffney stated that "it is instructive that neither Chairman Cox nor Chairman Bernanke has addressed the fundamental question which is what is Sharia and why is it a problem that we have people who are promoting Sharia which is a seditious conspiracy to bring about the overthrow of the United States government and for that matter those of other secular democracies around the world in favor of a global theocracy under Sharia."
Mr. Gaffney also recommended a publication distributed at the press conference entitled "Shariah, Law and 'Financial Jihad': How Should America Respond?" that was co-sponsored by The McCormick Foundation and The Center for Security Policy.
Regarding the U.S. Treasury Sharia-Compliant Finance training course, Frank Gaffney stated that "its purpose seems unmistakable in the complexion of the speakers all of whom it appears support Sharia-Compliant Finance, none of whom it appears is prepared to talk to these government official about what Sharia is and what constitutes as a result - the problems with a financial program designed to advance this seditious conspiracy." Mr. Gaffney also referenced comments by the United Kingdom's Archbishop of Canterbury stating that Sharia would need to be tolerated in the UK, which were based on existing support for Sharia-Compliant Finance in the UK.
Mr. Gaffney stated that "we are determined not to let that happen here, and we are challenging the Treasury Department in its efforts to promote Sharia and Sharia-Compliant Finance." He also noted that the Treasury trainers include advocates of Sharia-Compliant Finance and are benefiting from that industry. He called for the Department of Treasury to have another course on Sharia "where people are allowed to talk about what Sharia is, why it is seditious, and why its manifestations in the form of Sharia-Compliant Finance must be opposed, not supported, not abetted, not implemented, especially as seems entirely possible the purpose of the Treasury Department is to use its new found leverage in the financial markets to do that kind of promotion inside our financial industry which is now owned by the Federal Government or is being influenced by the $700 billion being dangled in front of the industry."
Robert Spencer, author of Stealth Jihad and leader of JihadWatch.org, told the press conference that there has been a history of those who have sought to integrate Sharia into America's political policies. He provided the example of Harvard University's Noah Feldman as "one of the leading proponents of Sharia finance and of the spread of Sharia norms in framing of the Iraqi constitution as well as the spread of the idea of the acceptability of Sharia in the west." Mr. Spencer pointed to Feldman's New York Times magazine column on Sharia, which has been widely distributed and reprinted around the world. Mr. Spencer points out that Noah Feldman never addresses how Sharia "treats women and non-Muslims and that is getting to the heart of what is problematic about it and indeed seditious about it in many ways."
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Robert Spencer pointed out "the accommodation to the norms of Islamic law that goes under the name of Sharia cannot be separated from the accommodation of Islamic law in general. Sharia financial provisions are not in any sense within Islam juridically or in any other sense separate from or separable from the larger aggregate of Islamic laws." He continued "according to authoritative Islamic jurisprudence, the entirety of the provisions of Sharia that have been dictated by the Islamic holy book (the Qur'an), and Islamic traditions (the Sunna) and agreed upon by the principal scholars of all of the principal schools of Islamic law are all considered the laws of God himself, are not negotiable, are not subject to compromise or to mitigation." "Therefore in accepting the principle that Islamic law must be the subject of special accommodation in the financial sector, the Treasury Department has set a precedent that will allow for the assertion and the acceptance of the principle that Islamic law must be the subject of special accommodation in other sectors of American society as well. This is an extremely dangerous precedent to set for a large number of reasons. In its classic and authoritative formulations, formulations that have never been seriously challenged by modernist reforms and are extremely unlikely to be so challenged given the nature of their authority within Islamic theology and law, Sharia is at variance with numerous core principles of American society, including the principles of freedom of speech, freedom of conscience, and the equality of rights of all people before the law. Sharia institutionalizes discrimination against women and non-Muslims. It denies the right of the human person to make the choice to hear to what he has come to believe in good conscience is the truth. It muzzles its own critics and the critics of the Islamic religion and even forbids dispassionate analysis of how Islamic texts and teachings are being used by Islamic Jihadists to justify violence and Islamic supremacism, and to gain recruits for violent and supremacist Islamic groups."
Robert Spencer then referenced 20th century writer Sayyid Abul A'la Maududi (aka Mawdudi), whose writings have been collected in "Jihad in Islam". Mr. Spencer then quoted Maududi's comments that:
"Islam wishes to destroy all States and Governments anywhere on the face of the earth which are opposed to the ideology and programme of Islam regardless of the country or the Nation which rules it. The purpose of Islam is to set up a State on the basis of its own ideology and programme, regardless of which Nation assumes the role of the standard bearer of Islam or the rule of which nation is undermined in the process of the establishment of an ideological Islamic State."
"Islam does not intend to confine this revolution to a single State or a few countries; the aim of Islam is to bring about a universal revolution."
Robert Spencer indicated that such Sharia revolutionary thinking "strikes directly and explicitly, and not apologetically, against secular government or the idea of government where there is not establishment of a religion." He further addressed Sharia activist Maududi's commentary on the Qur'an that called for subjugation of Jews and Christians under Islamic law, and added that Maududi demanded that non-Muslims have absolutely no right to wield "the reins of power in any part of God's earth," and if they do then according to Maududi, "the believers" are responsible for dislodging them from such power using any means possible.
Robert Spencer stated that "this revolution has also come to the United States and is advancing here." He referenced the objective of International Muslim Brotherhood in undermining the United States, as has been previously stated in a Muslim Brotherhood memorandum, admitted in evidence during the first Holy Land Foundation terror finance trial, where the Muslim Brotherhood calls for "eliminating and destroying the Western civilization from within and 'sabotaging' its miserable house by their hands and the hands of the believers so that it is eliminated and Allah's religion is made victorious over all other religions." Robert Spencer also pointed out that this same Muslim Brotherhood memorandum also lists numerous Islamic groups, many of which are active in America today and viewed by many as "moderate," were to be involved in such infiltration of America. Many of these groups also support Sharia finance.
As an example of the challenge to America with such Islamic supremacist thinking, Robert Spencer also referenced ISNA Board member Ihsan Bagby who has stated: "we [Muslims] can never be full citizens of this country... because there is no way we can be fully committed to the institutions and ideologies of this country." Mr. Spencer stated that this type of thinking will only continue to grow with the accommodation to Sharia finance and Sharia norms. He views this as "the assumption that Islamic law is superior to American law and must one day supplant it." Mr. Spencer views that the U.S. Treasury Department's Sharia finance training, without providing the ideological background on what Sharia is and the threat it poses to human rights, will only "provide support for this kind of assumption." He stated that "Americans, both Muslim and non-Muslim, deserve better," and referenced that many Muslims came to America to escape the same Sharia that it now is finding once again America. He concluded that "Americans, Muslims and non-Muslims, who saw our nation brutally and gratuitously attacked on September 11, 2001 by adherence of the idea that Islamic law must be imposed over the entire world, they deserve better. Women deserve better. All free people deserve better." Mr. Spencer also called for the U.S Treasury to open an investigation into what Sharia means and intends to do, to provide full understanding to those being trained regarding Sharia Compliant-Finance. He also called for the U.S. Treasury to curb the spread of Sharia Compliant-Finance in our nation's financial institutions.
Dan Pollak of the Zionist Organization of America stated that his organization joins the coalition "to oppose the imposition of Sharia-Compliant financing on the American financial system." He stated that Sharia scholars "who determine where investments can be made in Sharia financing" have been united in condemning Israel and "all interactions with Israelis and Jews." Mr. Pollak pointed out that the U.S. Treasury Department should speak to the U.S. Department of Justice as it is "against U.S. law for any company to participate in the Arab-sponsored boycott of Israel." He further stated that the "division of a world where only Sharia is the guiding principle is actually the root of Arab-Israeli conflict," condemning the "intolerance of Sharia and the hatred it breeds."
Mr. Pollak implored that "our Constitutional guarantee of freedom of religion does not and should not allow for imposing Sharia on the U.S. financial system... the American people must become aware of the strategies of our enemies as well as their tactics." He further stated that "they mean to fundamentally change the paradigm of the West as a tolerant and liberal place to observe any religion without compulsion."
Faith McDonnell of The Institute on Religion & Democracy (IRD) also spoke out against Sharia-Compliant Finance. Within her organization, Ms. McDonnell is the Director, Religious Liberty Program and Church Alliance for a New Sudan. Faith McDonnell stated that "the Center for Security Policy has defined Shariah as 'authoritative Islam's theo-political-religious program for establishing a global theocracy.'" She indicated concerns that "such a theocracy does not come about through the use violent jihad alone. Islamists also use the less obvious forms of jihad, such as the economic jihad of Shariah-Compliant Finance."
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From her organization's experience as advocates for religious liberty around the world, she stated that "the IRD has seen the devastating effects of Shariah on Muslims and non-Muslims alike. Particularly egregious has been the imposition of Shariah as well as the brutal backlash against those who resist, on Christians in Sudan, Nigeria, Pakistan, Egypt, Iraq, Somalia, and elsewhere. And we have seen the use of stealth jihad in these nations, as well." Ms. McDonnell stated that "we fear that Shariah-Compliant Finance is only an entry level course in a much broader program of Shariah, the end goal of which is to supplant modern constitutionalism with archaic and undemocratic Islamic theocracy."
Regarding her experience in the challenges in Sudan, Mr. McDonnell pointed to Sharia finance representing a new form of Jihad against freedom.
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She stated that:
"The Islamist government in Sudan was finally forced into a peace agreement in 2005 that stopped its genocidal jihad against the Christians, followers of traditional religions, and Muslims who resisted Shariah. Immediately they began a financial jihad, backed by the same Arab governments who backed the genocide. They are currently seducing Southern Sudanese desperate for education, healthcare, employment, and infrastructure with Islamic-financed schools, hospitals, roads, and mosques. Those who have been paying with their lives to resist the jihad of bombs and bullets are in danger of succumbing to the jihad of money."
She called for "those responsible within the United States government to examine the evidence that if they submit to Shariah-Compliant Finance at any level, they are putting the United States in far greater danger than an economic crisis."
Kyle Scheindler of the Endowment for Middle East Truth (EMET) also spoke against Sharia-Compliant Finance, opposing "this act of dhimmitude by the U.S. Treasury Department that is represented by the Islamic Finance 101 meeting," and due to the recent bailouts and acquisitions, "the U.S. Treasury has a responsibility to U.S. taxpayers greater than it has possessed at any time prior to Alexander Hamilton."
He stated that "it is supremely ironic that the Treasury Department government agency responsible for prosecuting charities which fund Islamic terrorism is now considering a financial system which will mandate banks and investment products donate to those charities. Those donations will be directed by Sharia advisory boards brimming with individuals who belong to organizations that are unindicted co-conspirators" in the Holy Land Foundation terror finance retrial.
Jim Boulet of English First also joined in the condemnation of Shariah-Compliant Finance, issuing a written statement that read "in multicultural America, no one wishes to draw lines between reasoned dissent and what is effectively an effort to overthrow the American way of life." He referenced the "The Basics of the Political System in Islam" as stating that "Islam is a 'total way of life.'" Mr. Boulet stated that this ideology recognized "no separation of church and state," and "once America's financial systems is intertwined with the Islamic system of finance, other demands can be expected, demands which will transform American society." He also challenged those supporting Sharia Compliant-Finance to consider the impacts on single women seeking to have financial independence.
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Wendy Wright of Concerned Women for America also shared her concerns regarding Sharia-Compliant Finance. She stated that Sharia law's "intention is to control society," and expressed concerns that "accommodating Sharia through our financial system legitimizes a world view and life style that promotes the subjugation of women, the killing of infidels, the denial of human dignity, and the imposition of cruel and inhumane practices."
She challenged the representatives of the U.S. Treasury Department sponsoring the Sharia finance training to clarify what aspects of Sharia they seek to encourage in America society: "that husbands can use physical force against their wives, the early forced marriage of a girl as young as nine, that men can have multiple marriages and multiple wives, that men can have the right of custody of children and mothers have no rights of custody, that homosexuals should be stoned to death, that women accused of bringing dishonor to male relatives should be killed."
Wendy Wright stated that the "intellectuals at the Treasury Department need a shot of common sense. You can't play with fire and not get burned, and you can't accommodate Sharia without affecting society with its inhumane practices."
Warren Mendelson of the Unity Coalition for Israel also spoke to indicate his organization's support for the Coalition to Stop Shariah. He indicated that America's financial challenges leaves it vulnerable to "schemes being advanced to put our financial house in order with SCF which has the potential for far-reaching consequences more dangerous than we face today. We would make a grave mistake to adopt SCF. It is incumbent on all of us to gain a clear understanding of exactly what Sharia law means and how it will impact not only financial state of affairs but also the consequences that conflict with our Constitutional rights."
He further stated that Sharia "requries non-Muslims to live as dhimmis, second-class citizens... and be treated in a brutal and demeaning way... it mandates discrimination against women and non-Muslims, demands the murder of homosexuals, adulterers, and apostates, and requires violent jihad against all infidels, including Christians, Jews, Buddhists, and others." He continued that "Sharia law is seditious because it calls for the violent overthrow of governments like the United States and the replacement of democratic Constitutional law with its own bureaucratic code." He indicated that the nations practicing Sharia law today are "some of the most oppressive regimes in the world."
He pointed out that Sharia Compliant-Finance works by "returns on investments from companies that must be purified partially by donating a portion of their profits to charity. Charities that receive these donations are selected by Sharia experts who are members of an oversight board. There are allegations that some of the profits support major Muslim organizations suspected of having ties to terrorism." He further referenced the ongoing Holy Land Foundation retrial, as well as the Benevolence International Foundation "was closed in 2001 for allegedly supporting Islamic terrorism." He indicated that "some analysts are concerned that Islamic banking will open Western financial institutions to help further the broader Islamic agenda.. and pour in the billions and billions of petrodollars into the financial systems of the Western world."
Frank Gaffney also read a statement from coalition partner, Dr. Zuhdi Jasser, President of the American Islamic Forum for Democracy.
This statement included the following comments:
"Make no mistake, Sharia-Compliant Finance is neither about religion nor about God. It is about Islamist control and collectivization of Muslims against the West and free markets. SCF systems are nothing more than a ruse to give transnational Islamist movements and their controlling Muslim theocrats an economic power base. Attempts to appease requests by Islamists to provide so-called SCF are misguided. SCF provides sanction of a dangerous separatist economic system which incubates Islamist ideology among Muslims and keeps them apart from the general population. Islamist theocrats exploit Western deference to religious freedom in order to lay the foundations of a system which feigns religion in order to control the economic decisions of Muslims and non-Muslims alike. SCF allows governments and banks to empower Islamist theocrats who really only want to control Muslim economics rather than actually stimulate the open economic freedom of Muslims. This is the difference between theocracy and liberty, instead of lay citizens controlling their own economic transactions, the invisible hand becomes the hand of the Islamist cleric."
The Coalition to Stop Shariah also provided an expanded list of organizations that support their cause, which to date includes leaders of 25 organizations:
1. ACT for America - Brigitte Gabriel, President
2. American Center for Democracy - Rachel Ehrenfeld, President
3. American Islamic Forum for Democracy - Dr. Zuhdi Jasser, President
4. Center for Security Policy - Frank J. Gaffney, Jr., President
5. Christian Solidarity International - Father Keith Rodderick, Washington Representative
6. Committee on the Present Danger - Chet Nagle
7. Concerned Women for America - Wendy Wright, President
8. Endowment for Middle East Truth - Sarah Stern, President
9. English First - Jim Boulet, Jr. Executive Director
10. Family Security Matters - Carol Taber, founder
11. Florida Security Council - Tom Trento, President
12. Geostrategic Analysis - Peter Huessy
13. High Frontier - Hank Cooper, Chairman
14. Institute for the Study of Islam and Christianity - Patrick Sookhdeo, Director and Marshall Sana, Director of Communications
15. Institute on Religion & Democracy, Religious Liberty Program - Faith J. H. McDonnell, Director
16. Jewish Action Alliance
17. Jihadwatch.org, a project of the David Horowitz Freedom Center - Robert Spencer, renowned author and expert on Shariah law, Director
18. Let Freedom Ring - Colin Hanna, President
19. Society of Americans for National Existence - David Yerushalmi, President
20. Tradition, Property and Family - C. Preston Noelle III
21. Traditional Values Coalition - Andrea Lafferty, Executive Director
22. United American Committee
23. Unity Coalition for Israel - Esther Levens, President
24. Women United - Beth Gilinsky, President
25. Zionist Organization of America - Morton Klein, National President
In addition, the Anti-Jihad League of America supports the cause of this group in fighting Sharia and Islamic supremacism.
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Rachel Ehrenfeld is one of the unsung heroes of our time.
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Remember, the Sharia Compliant Finance theme is to be continued over at Sharia 101:
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In the Washington mind, there are two kinds of private companies. There are successful if "greedy" corporations, which can always afford to pay more taxes and tolerate more regulation. And then there are the corporate supplicants that need a handout. As the Detroit auto makers are proving, you can go from being the first to the second in the blink of an election.
For decades, Congress has never had a second thought as it imposed tighter emissions standards on GM, Ford and Chrysler, denouncing them for making evil SUVs. Yet now that the companies are bleeding cash, and may be heading for bankruptcy, suddenly the shrinking Big Three are the latest candidates for a taxpayer bailout. One $25 billion loan facility has already been signed into law, and Senator Debbie Stabenow (D., Mich.) wants another $25 billion, this time with no strings attached.
Speaker Nancy Pelosi and Senate Majority Leader Harry Reid met last week with company and union officials, and they later sent a letter urging Treasury Secretary Henry Paulson to bestow cash from the Troubled Asset Relief Program (Tarp) on the companies. Barack Obama implied at his Friday press conference that he too favors some kind of taxpayer rescue of Detroit, though no doubt he'd like to have President Bush's signature on the check so he won't have to take full political responsibility.
We hope Messrs. Bush and Paulson just say no. The Tarp was intended to save the financial system from collapse, not to be a honey pot for any industry running short of cash. The financial panic has hit Detroit hard, but its problems go back decades and are far deeper than reduced access to credit among car buyers. As a political matter, the Bush Administration is also long past the point where it might get any credit for helping Detroit. But it will earn the scorn of taxpayers if it refuses to set some limits on access to the Tarp. If Democrats want to change the rules next year, let them do it on their own political dime.
A bailout might avoid any near-term bankruptcy filing, but it won't address Detroit's fundamental problems of making cars that Americans won't buy and labor contracts that are too rich and inflexible to make them competitive. As Paul Ingrassia notes nearby, Detroit's costs are far too high for their market share. While GM has spent billions of dollars on labor buyouts in recent years, they are still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.
Rest assured that the politicians don't want to do a thing about those labor contracts or mileage standards. In their letter, Ms. Pelosi and Mr. Reid recommend such "taxpayer protections" as "limits on executive compensation and equity stakes" that would dilute shareholders. But they never mention the UAW contracts that have done so much to put Detroit on the road to ruin. In fact, the main point of any taxpayer rescue seems to be to postpone a day of reckoning on those contracts. That includes even the notorious UAW Jobs Bank that continues to pay workers not to work.
A Detroit bailout would also be unfair to other companies that make cars in the U.S. Yes, those are "foreign" companies in the narrow sense that they are headquartered overseas. But then so was Chrysler before Daimler sold most of the car maker to Cerberus, the private equity fund. Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee. Unlike Michigan, these states didn't vote for Mr. Obama.
But the very success of this U.S. auto industry indicates that highly skilled American workers can profitably churn out cars without being organized by the UAW. A bailout for Chrysler would in essence be assisting rich Cerberus investors at the expense of middle-class nonunion auto workers. Is this the new "progressive" era we keep reading so much about?
The car makers say that bankruptcy is unthinkable and "not an option." And bankruptcy would certainly be expensive, not least for Washington itself, which could be responsible for 600,000 or so retiree pensions through the Pension Benefit Guaranty Corp. In that sense, the bailout is intended to rescue the politicians from having to honor that earlier irresponsible guarantee. But at least that guarantee would be finite. If Uncle Sam buys into Detroit, $50 billion would only be the start of the outlays as taxpayers were obliged to protect their earlier investment in uncompetitive companies.
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If our politicians can't avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies.
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As President-elect Barack Obama prepares to enter the White House, he must ponder what to do about the world's trouble spots: Iran, Iraq, North Korea, the Caucasus. And, oh yes, Detroit.
On Friday, General Motors and Ford announced more multibillion-dollar losses in the third quarter; closely held Chrysler doesn't publicly report results. When GM, which seems in the worst shape, was 45 minutes late releasing its results, rumors spread that a bankruptcy filing was imminent. It wasn't, but the company says it could run out of cash in the first half of next year. Make that the first quarter if the current cash bleed continues. GM is lobbying furiously for emergency federal assistance, with Ford and Chrysler close behind.
Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.
Associated PressIn return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.
That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.
These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.
But giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.
The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.
A few years ago the UAW even waged a spirited fight to protect the "right" of workers to smoke on the assembly line, something that simply isn't allowed at, say, Honda's U.S. factories. Aside from the obvious health risk, what about cigarette ashes falling onto those fine leather seats being bolted into the cars? Why was this even an issue?
When GM's bond ratings plunged into junk territory a couple years ago the auto maker sold 51% of its financing arm, GMAC, to Cerberus, a private-equity powerhouse. Then last summer Cerberus bought 80% of Chrysler from Daimler for just 25% of what the German company paid for the company a decade earlier. It looked like a great deal at the time, like buying a "fixer upper" house at a steep discount. Until, that is, you have to shell out big bucks to shore up the foundation, repair the leaky roof, etc.
Cerberus tried hard in recent weeks to sell Chrysler to GM, with government financial assistance. Controlling GMAC's lending to GM dealers and customers gave Cerberus enormous leverage at the negotiating table. Cerberus squeezed hard, say industry analysts and insiders, but the GM board balked. Last Friday the companies said the talks were off -- "for the moment," as the company's chief operating officer put it.
For the moment? How about, like, forever? Buying Chrysler would just give GM an excuse to delay the fundamental task of putting its house in order. Management would turn its energy to producing pretty PowerPoint slides with all the requisite buzzwords: synergies, transformation, downsizing, rightsizing and exercising. What's needed, instead, is exorcising.
A thorough housecleaning at GM is the only way to give the company a fresh start. GM is structured for its glory days of the 1960s, when it had half the U.S. car market -- not for the first decade of this century, when it has just over 20% of the market. General Motors simply cannot support eight domestic brands (Cadillac, Buick, Pontiac, Chevrolet, GMC, Saturn, Saab and Hummer) with adequate product-development and marketing dollars. Even the good vehicles the company develops (for example, the Cadillac CTS and Chevy Malibu) get lost in the wash.
Nevertheless, the current board of directors and management have stuck stubbornly to this structure. The lone exception was a dissident director, Jerome B. York, who resigned a couple years ago. He warned that without fundamental changes the "unthinkable" might happen to GM. Well, here we are.
Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.
That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.
As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.
Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."
Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.
Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.
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October 01, 2008
The Long Road to Slack Lending Standards
By Steven Malanga
In the early 1990s I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting. One of the hottest sessions of the conference explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages. One newspaper, the Atlanta Journal-Constitution, had already won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and the Detroit Free Press, had also weighed in with their own analysis based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.
Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels, and higher loan defaults rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue?"mostly because newspaper reporters and editors in this pre-talk radio, pre-blogging era were determined to make it so. Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.
Eventually, the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study which concluded that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed. This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed’s conclusions showed serious deficiencies in the original work. One economist for the Federal Deposit Insurance Corp. who looked more deeply into the data, for instance, found that the difference in denial rates on loans for whites and minorities could be accounted for by such factors as higher rates of delinquencies on prior loans for minorities, or the inability of lenders to verify information provided to them by some minority applicants.
Ignoring the import of such data, federal officials went on a campaign to encourage banks to lower their lending standards in order to make more minority loans. One result of this campaign is a remarkable document produced by the Federal Reserve Bank of Boston in 1998 titled “Closing the Gap: A Guide to Equal Opportunity Lending”.
Quoting from a study which declared that “underwriting guidelines…may be unintentionally racially biased,” the Boston Fed then called for what amounted to undermining many of the lending criteria that banks had used for decades. It told banks they should consider junking the industry’s traditional debt-to-income ratio, which lenders used to determine whether an applicant’s income was sufficient to cover housing costs plus loan payments. It instructed banks that an applicant’s “lack of credit history should not be seen as a negative factor” in obtaining a mortgage, even though a mortgage is the biggest financial obligation most individuals will undertake in life. In cases where applicants had bad credit (as opposed to no credit), the Boston Fed told banks to “consider extenuating circumstances” that might still make the borrower creditworthy. When applicants didn’t have enough savings to make a down payment, the Boston Fed urged banks to allow loans from nonprofits or government assistance agencies to count toward a down payment, even though banks had traditionally disallowed such sources because applicants who have little of their own savings invested in a home are more likely to walk away from a loan when they have trouble paying.
Of course, the new federal standards couldn’t just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, in other words, these became the new standards in the industry. In 1999, the New York Times reported that Fannie Mae and Freddie Mac were easing credit requirements for mortgages it purchased from lenders, and as the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on the lending standards promoted by the government.
Meanwhile, those who raced to make these mortgages were lionized. Harvard University’s Joint Center for Housing Studies even invited Angelo Mozilo, CEO of the lender which made more loans purchased by Fannie and Freddie than anyone else, Countrywide Financial, to give its prestigious 2003 Dunlop Lecture on the subject of "The American Dream of Homeownership: From Cliché to Mission.” A brief, innocuous description of the event still exists online here.
Many defenders of the government’s efforts to prompt banks to lend more to minorities have claimed that this effort had little to do with the present mortgage mess. Specifically they point out that many institutions that made subprime mortgages during the market bubble weren’t even banks subject to the Community Reinvestment Act, the main vehicle that the feds used to cajole banks to loosen their lending.
But this defense misses the point. In order to push banks to lend more to minority borrowers, advocates like the Boston Fed put forward an entire new set of lending standards and explained to the industry just why loans based on these slacker standards were somehow safer than the industry previously thought. These justifications became the basis for a whole new set of values (or lack of values), as no-down payment loans and loans to people with poor credit history or to those who were already loaded up with debt became more common throughout the entire industry.
What happened in the mortgage industry is an example of how, in trying to eliminate discrimination from our society, we turned logic on its head. Instead of nobly trying to ensure equality of opportunity for everyone, many civil rights advocates tried to use the government to ensure equality of outcomes for everyone in the housing market. And so when faced with the idea that minorities weren’t getting approved for enough mortgages because they didn’t measure up as often to lending standards, the advocates told us that the standards must be discriminatory and needed to be junked. When lenders did that, we made heroes out of those who led the way, like Angelo Mozilo, before we made villains of them.
Now we all have to pay.
Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute
Page Printed from: http://www.realclearmarkets.com/articles/2008/10/the_long_road_to_slack_lending.html at November 10, 2008 - 06:01:24 PM CST
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Five Myths About the Great Depression
Herbert Hoover was no proponent of laissez-faire.
By ANDREW B. WILSON
The current financial crisis has revived powerful misconceptions about the Great Depression. Those who misinterpret the past are all too likely to repeat the exact same mistakes that made the Great Depression so deep and devastating.
Here are five interrelated and durable myths about the 1929-39 Depression:
- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting. The truth is more illuminating. Far from a free-market idealist, Hoover was an ardent believer in government intervention to support incomes and employment. This is critical to understanding the origins of the Great Depression. Franklin Roosevelt didn't reverse course upon moving into the White House in 1933; he went further down the path that Hoover had blazed over the previous four years. That was the path to disaster.
Hoover, a one-time business whiz and a would-be all-purpose social problem-solver in the Lee Iacocca mold, was a bowling ball looking for pins to scatter. He was a government activist fixated on the idea of running the country as an energetic CEO might run a giant corporation. It was Hoover, not Roosevelt, who initiated the practice of piling up big deficits to support huge public-works projects. After declining or holding steady through most of the 1920s, federal spending soared between 1929 and 1932 -- increasing by more than 50%, the biggest increase in federal spending ever recorded during peacetime.
Public projects undertaken by Hoover included the San Francisco Bay Bridge, the Los Angeles Aqueduct, and Hoover Dam. The Republican president won plaudits from the American Federation of Labor for his industrial policy, which included jawboning business leaders to refrain from cutting wages as the economy fell. Referring to counteracting the business cycle and propping up wages, Hoover said: "No president before has ever believed that there was a government responsibility in such cases . . . we had to pioneer a new field." Though he did not coin the phrase, Hoover championed many of the basic ideas -- such as central planning and control of the economy -- that came to be known as the New Deal.
- The stock market crash in October 1929 precipitated the Great Depression. What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy -- beginning with the disastrous retreat into protectionism marked by the passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell, Smoot-Hawley doubled the effective tariff duties on a wide range of manufactures and agricultural products. It triggered the beggar-thy-neighbor policies of countervailing tariffs that caused the international economy to collapse. Some have argued that the increasing likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the stock-market collapse in the fall of 1929.
- Where the market had failed, the government stepped in to protect ordinary people. Hoover's disastrous agricultural policies involved the know-it-all Hoover acting as his own agriculture secretary and in fact writing the original Agricultural Marketing Act that evolved into Smoot-Hawley. While exports accounted for 7% of U.S. GDP in 1929, trade accounted for about one-third of U.S. farm income. The loss of export markets caused by Smoot-Hawley devastated the agricultural sector. Following in Hoover's footsteps, FDR concentrated on trying to raise farm income by such tactics as setting quotas on production and paying farmers to remove acreage from production -- even though this meant higher prices for hard-pressed consumers and had the effect of both lowering productivity and driving farmers off their land.
- Greed caused the stock market to overshoot and then crash. The real culprit here -- as in the housing bubble in our own time -- is the one identified by the economic historian Charles Kindleberger in the classic book "Manias, Panics, and Crashes": a speculative fever induced by excessively easy credit and broken by the inevitable return to more realistic valuations.
In the late 1920s, cheap and easy money fueled a tremendous increase in margin trading and a proliferation of "investment trusts" that offered little in the way of dividends or demonstrable earnings per share, but still promised phenomenal capital gains. "Speculation," as Kindleberger neatly defined it, "involves buying for resale rather than use in the case of commodities, and for resale rather than income in the case of financial assets."
The last thing Hoover wanted to do upon coming to office was to rein in the stock market boom by allowing interest rates to rise to a more normal level. The key to prosperity, in his view, lay not in sound money and rising productivity, but in letting the good times roll -- through government action aimed at maintaining high wages and high stock market valuations.
- Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight. To the contrary, the Hoover and Roosevelt administrations -- in disregarding market signals at every turn -- were jointly responsible for turning a panic into the worst depression of modern times. As late as 1938, after almost a decade of governmental "pump priming," almost one out of five workers remained unemployed. What the government gave with one hand, through increased spending, it took away with the other, through increased taxation. But that was not an even trade-off. As the root cause of a great deal of mismanagement and inefficiency, government was responsible for a lost decade of economic growth.
Hoover was destined to fill the role of the left's designated scapegoat. Despite that, the one place where he and FDR truly "triumphed" was in enlisting the support of leading writers and intellectuals for government planning and intervention. This had a lasting effect on the way that generations of people think about the Great Depression. The antienterprise spirit among thought leaders of this time (and later) extended to top business publications. "Do you still believe in Lazy-Fairies?" Business Week asked derisively in 1931. "To plan or not to plan is no longer the question. The real question is who is to do it?"
In his economic policies and his incessant governmental activism, Hoover differed far more sharply with his Republican predecessor than he did with his Democratic successor. Calvin Coolidge, president from 1923 to 1929, made no secret of his disdain for Hoover, who served as his secretary of commerce and won praise from such highly regarded liberals as John Maynard Keynes and Jean Monnet. "That man has offered me unsolicited advice for six years, all of it bad," Coolidge said. He mockingly referred to Hoover as "Wonder Boy."
With the vitality of U.S. and world economies at stake, it is essential that the decisions of the coming months are shaped by the right lessons -- not the myths -- of the Great Depression.
Mr. Wilson, a former Business Week bureau chief, is a writer based in St. Louis.
http://online.wsj.com/article/SB122576077569495545.html
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BBG:
There are not many people I regard as both bright enough and educated enough to appreciate the book "The Way the World Works" by Jude Wanniski.
In his later years JW was something of a crank and an anti-semite, but in his prime (editorial writer for the WSJ, author of TWTWW) he was something else. This bold book assays to reduce political economics to a series of principles/laws much as physics seeks to explain the physical world.
Anyway, the chapter on the causes of the Great Depression is simply brilliant. It overlaps quite a bit with the points in the piece that you post, but offers much more.
Highly recommended.
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Crafty,
On to my reading list it goes.
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Bringing an economic question over from 'The Way Forward" for discussion here:
Crafty wrote: "I think one of the key variables is how the Fed has printed too much money and has kept interest rates too low (ROI should be greater than inflation + taxes). Too much money at too low a price has been sloshing around the global system."
"Ok, why is this bad?" - Excellent question.
My 2 cents: Too much money chasing too few goods is inflation. When money grows faster than real goods and services, prices rise. That effect was clear in tech stocks and then in real estate.
For too long, IMO, the geniuses at the Fed have been thinking they can cushion us from the downside of every business cycle when in fact their miscalculations are largely the cause of the cycle.
Federal Reserve interest rates are just one of the tools they have to affect money supply. We live in an electronic time when the Fed does NOT have complete control over money nor do we even have an accurate way of measuring money supply. But when they see signs of a slowdown, down go the rates.
Interest rates need to be right-sized, not manipulated for short term effects. When they are too low, it distorts choices and it is eventually followed by corrective rates that are too high. Who saves money when the rates approach zero and how do you resist excessive borrowing? My only borrowing is an equity line now at 3.5%. As a real estate investor it is hard not to use the cheap money to overbuy at today's fire-sale prices. (okay, I bought 2 foreclosures this past summer). As we head into something like Jimmy Carter's second term (the Obama Presidency) it is possible that short term rates will be up by 10 or 20% in 4 years. Then what? More defaults for the over-leveraged among us seems very likely. What did that solve?
Monetary policy is supposed to be about protecting the value of our currency, making it stable and predictable. Long forgotten is another goal that interest rates also should be reasonable, stable and predictable as well.
This Fed is trying right now to solve problems unrelated to interest rates by lowering interest rates. Do ya think that might backfire (again)? I do.
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Thanks Doug.
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Thank you Doug-- both for your answer and for posting here on this thread where the subject matter properly belongs.
FWIW I just posted a brief answer on the thread in question. If there are to be any rejoinders to it, please let them be here.
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Washington's $5 Trillion Tab
Elizabeth Moyer, 11.12.08, 5:15 PM ET
For all the fury over Treasury Secretary Henry Paulson's $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government's response to the credit crisis.
According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.
The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets.
The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.
The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group. It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG's residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps.
The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae and Freddie Mac, to the tune of $200 billion.
The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.
Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.
Paulson and Bernanke have tried any number of ways to stop the free fall in housing prices and unfreeze the credit markets, with limited success. Rates that banks charge each other for three-month loans have dropped to 2.1% over the corresponding Treasury security, from their high of 4.8% in October. But lending is contracting as banks brace for rising credit costs and corporate borrowers hunker down.
The Treasury has turned its focus from attempting to buy troubled assets from banks, which was the original intent of the October Emergency Economic Stabilization Act, to injecting capital in the form of preferred equity stakes.
It started out with $125 billion worth of investments in eight major U.S. banks and has since expanded the program to an increasingly broad range of financial and nonfinancial companies. And with just $60 billion left of its initial $350 billion authorization under the emergency act, the Treasury faces a growing number of companies--including Detroit's automakers--begging for assistance.
David Hendler, an analyst at CreditSights, says it looks as if government is left holding the bag, and of course that translates into everyone.
"The losses have to be taken, but no one wants to take them," Hendler said at a conference Wednesday, speaking about the banks and their handling of troubled assets. "It seems like the taxpayers are going to be taking a good portion of that."
http://www.forbes.com/home/2008/11/12/paulson-bernanke-fed-biz-wall-cx_lm_1112bailout.html
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Second post.
So it's not like we don't have a model for what can happen with soak the rich tax schemes. . . .
Empire State Implosion
The financial meltdown and the welfare state.
The global credit panic has swept away many illusions, and we're about to find out if that includes those of the politicians who have feasted for years on Wall Street tax revenues. Ground Zero is New York, which has lived a tax-and-spend fantasy thanks to the long bull market and "progressive" tax rates. Reality is now biting.
The financial services industry employs between 2% and 3% of nongovernment workers in New York, the same as it did in the late 1970s. What's changed is the share of total wages in the state represented by Wall Street jobs, which had skyrocketed to nearly 20% last year from a little over 2% in 1977.
"This is 212,000 people making nearly $80 billion in wages and salaries last year," explained E.J. McMahon of the Manhattan Institute at a recent panel discussion on the financial crisis. "This is all taxed at the margin, so it plays an outsized role in the state's finances." This is also the dirty little secret of highly "progressive" tax rates: They make a state dependent on relatively few taxpayers.
The financial industry doubled its percentage of the national economy in the 1980s, and did so again between 1990 and 2006. As Wall Street wages have grown, so has New York's dependence on revenue from the personal income tax. In 1977 personal income taxes represented less than 45% of all state taxes. In 2007 they represented about 60%. And for the past 30 years, inflation-adjusted state spending has tracked closely with booms and busts on Wall Street. According to John Cape, a former state budget director, about 45,000 New York taxpayers provide the state "with anywhere from 20% to 30% of total income tax receipts."
New York City has also done little to decrease its addiction to revenue from a single industry. Mayor Michael Bloomberg missed the chance to use 9/11 as an opportunity for reform, and he's declined to challenge public unions over pay and benefits. Bigger and bigger budgets have been submitted and approved as though record Wall Street profits would never end. The financial industry is 14% of gross city product. In 2006, New York City received 50% of its personal income tax revenue from the top 1% of earners, many of whom work in finance.
During previous downturns Albany has resisted structural reforms. Instead of lessening the state's dependence on this narrow slice of the tax base, lawmakers have been content to wait for Wall Street to come roaring back. To cover the rising costs of debt payments, school aid, Medicaid, pensions and other budget drivers, they've raised taxes, sometimes temporarily but often permanently.
It would be a tragic mistake to view the current downturn as merely another cyclical blip. It may take Wall Street years to come back, and once it does it certainly won't look the same. Fewer big global banks are likely to emerge from the ashes; and while they will be better capitalized, they will also be more highly regulated. More reasonable leverage ratios mean less risk-taking and less profit even in good times. Bonus pools are likely to be anemic for some time.
New York's revenue coffers are set to take a hit. The only question is how big. The state budget deficit is already projected to be $1.5 billion in the current fiscal year, and Governor David Paterson estimates it could grow to $14 billion over the next two years if nothing is done.
To his credit, the Democratic Governor is trying to force Albany to confront its addictions. He's said that a tax hike -- even one targeting only the "rich" -- would be damaging. Mr. Paterson is urging labor unions to renegotiate contracts on behalf of public employees. And he's proposed trimming as much as $2 billion from this year's budget, including cuts to health care and education.
Naturally, union officials and hospital advocacy groups are balking at the Governor's requests and pushing for tax increases, but out-of-control education and Medicaid spending is what has fed the state's structural deficit. New York spends more money per pupil ($14,000) than any other state. Its only rivals are New Jersey and Connecticut and all three are at least 40% above the national average. The state's Medicaid costs of $2,260 per resident are twice the national average and equal to what Texas and Florida spend combined.
If New York wants to make sure a rejuvenated financial industry returns to Wall Street, it should be looking to reform its steeply progressive tax code. A leaner, more risk-averse and heavily regulated finance industry will be all the more sensitive to the high cost of doing business in New York. The Big Apple already imposes the highest personal income tax rate of any jurisdiction in the country (10.5%). And it's significantly higher than neighboring New Jersey (8.97%) and Connecticut (5%).
The financial industry has been having a painful reckoning with more realistic assessments of risk. New York's politicians need a similarly rude awakening.
http://online.wsj.com/article/SB122653542508722577.html
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This is a looooooong article, but a great read. It covers everything from the Gold Standard to hedge funds and derivatives.
http://www.vanityfair.com/politics/features/2008/12/banks200812?printable=true¤tPage=all
Not so long ago, the dollar stood for a sum of gold, and bankers knew the people they lent to.
The author charts the emergence of an abstract, even absurd world—call it Planet Finance—where mathematical models ignored both history and human nature, and value had no meaning.
by Niall Ferguson December 2008
This year we have lived through something more than a financial crisis. We have witnessed the death of a planet. Call it Planet Finance. Two years ago, in 2006, the measured economic output of the entire world was worth around $48.6 trillion. The total market capitalization of the world’s stock markets was $50.6 trillion, 4 percent larger. The total value of domestic and international bonds was $67.9 trillion, 40 percent larger. Planet Finance was beginning to dwarf Planet Earth.
Planet Finance seemed to spin faster, too. Every day $3.1 trillion changed hands on foreign-exchange markets. Every month $5.8 trillion changed hands on global stock markets. And all the time new financial life-forms were evolving. The total annual issuance of mortgage-backed securities, including fancy new “collateralized debt obligations” (C.D.O.’s), rose to more than $1 trillion. The volume of “derivatives”—contracts such as options and swaps—grew even faster, so that by the end of 2006 their notional value was just over $400 trillion. Before the 1980s, such things were virtually unknown. In the space of a few years their populations exploded. On Planet Finance, the securities outnumbered the people; the transactions outnumbered the relationships.
Illustration by Brad Holland
Read Niall Ferguson’s prescient article on today’s financial woes, Empire Falls (November 2006).
New institutions also proliferated. In 1990 there were just 610 hedge funds, with $38.9 billion under management. At the end of 2006 there were 9,462, with $1.5 trillion under management. Private-equity partnerships also went forth and multiplied. Banks, meanwhile, set up a host of “conduits” and “structured investment vehicles” (sivs—surely the most apt acronym in financial history) to keep potentially risky assets off their balance sheets. It was as if an entire shadow banking system had come into being.
Then, beginning in the summer of 2007, Planet Finance began to self-destruct in what the International Monetary Fund soon acknowledged to be “the largest financial shock since the Great Depression.” Did the crisis of 2007–8 happen because American companies had gotten worse at designing new products? Had the pace of technological innovation or productivity growth suddenly slackened? No. The proximate cause of the economic uncertainty of 2008 was financial: to be precise, a crunch in the credit markets triggered by mounting defaults on a hitherto obscure species of housing loan known euphemistically as “subprime mortgages.”
Central banks in the United States and Europe sought to alleviate the pressure on the banks with interest-rate cuts and offers of funds through special “term auction facilities.” Yet the market rates at which banks could borrow money, whether by issuing commercial paper, selling bonds, or borrowing from one another, failed to follow the lead of the official federal-funds rate. The banks had to turn not only to Western central banks for short-term assistance to rebuild their reserves but also to Asian and Middle Eastern sovereign-wealth funds for equity injections. When these sources proved insufficient, investors—and speculative short-sellers—began to lose faith.
Beginning with Bear Stearns, Wall Street’s investment banks entered a death spiral that ended with their being either taken over by a commercial bank (as Bear was, followed by Merrill Lynch) or driven into bankruptcy (as Lehman Brothers was). In September the two survivors—Goldman Sachs and Morgan Stanley—formally ceased to be investment banks, signaling the death of a business model that dated back to the Depression. Other institutions deemed “too big to fail” by the U.S. Treasury were effectively taken over by the government, including the mortgage lenders and guarantors Fannie Mae and Freddie Mac and the insurance giant American International Group (A.I.G.).
By September 18 the U.S. financial system was gripped by such panic that the Treasury had to abandon this ad hoc policy. Treasury Secretary Henry Paulson hastily devised a plan whereby the government would be authorized to buy “troubled” securities with up to $700 billion of taxpayers’ money—a figure apparently plucked from the air. When a modified version of the measure was rejected by Congress 11 days later, there was panic. When it was passed four days after that, there was more panic. Now it wasn’t just bank stocks that were tanking. The entire stock market seemed to be in free fall as fears mounted that the credit crunch was going to trigger a recession. Moreover, the crisis was now clearly global in scale. European banks were in much the same trouble as their American counterparts, while emerging-market stock markets were crashing. A week of frenetic improvisation by national governments culminated on the weekend of October 11–12, when the United States reluctantly followed the British government’s lead, buying equity stakes in banks rather than just their dodgy assets and offering unprecedented guarantees of banks’ debt and deposits.
Since these events coincided with the final phase of a U.S. presidential-election campaign, it was not surprising that some rather simplistic lessons were soon being touted by candidates and commentators. The crisis, some said, was the result of excessive deregulation of financial markets. Others sought to lay the blame on unscrupulous speculators: short-sellers, who borrowed the stocks of vulnerable banks and sold them in the expectation of further price declines. Still other suspects in the frame were negligent regulators and corrupt congressmen.
This hunt for scapegoats is futile. To understand the downfall of Planet Finance, you need to take several steps back and locate this crisis in the long run of financial history. Only then will you see that we have all played a part in this latest sorry example of what the Victorian journalist Charles Mackay described in his 1841 book, Extraordinary Popular Delusions and the Madness of Crowds.
Nothing New
As long as there have been banks, bond markets, and stock markets, there have been financial crises. Banks went bust in the days of the Medici. There were bond-market panics in the Venice of Shylock’s day. And the world’s first stock-market crash happened in 1720, when the Mississippi Company—the Enron of its day—blew up. According to economists Carmen Reinhart and Kenneth Rogoff, the financial history of the past 800 years is a litany of debt defaults, banking crises, currency crises, and inflationary spikes. Moreover, financial crises seldom happen without inflicting pain on the wider economy. Another recent paper, co-authored by Rogoff’s Harvard colleague Robert Barro, has identified 148 crises since 1870 in which a country experienced a cumulative decline in gross domestic product (G.D.P.) of at least 10 percent, implying a probability of financial disaster of around 3.6 percent per year.
If stock-market movements followed the normal-distribution, or bell, curve, like human heights, an annual drop of 10 percent or more would happen only once every 500 years, whereas in the case of the Dow Jones Industrial Average it has happened in 20 of the last 100 years. And stock-market plunges of 20 percent or more would be unheard of—rather like people a foot and a half tall—whereas in fact there have been eight such crashes in the past century.
The most famous financial crisis—the Wall Street Crash—is conventionally said to have begun on “Black Thursday,” October 24, 1929, when the Dow declined by 2 percent, though in fact the market had been slipping since early September and had suffered a sharp, 6 percent drop on October 23. On “Black Monday,” October 28, it plunged by 13 percent, and the next day by a further 12 percent. In the course of the next three years the U.S. stock market declined by a staggering 89 percent, reaching its nadir in July 1932. The index did not regain its 1929 peak until November 1954.
That helps put our current troubles into perspective. From its peak of 14,164, on October 9, 2007, to a dismal level of 8,579, exactly a year later, the Dow declined by 39 percent. By contrast, on a single day just over two decades ago—October 19, 1987—the index fell by 23 percent, one of only four days in history when the index has fallen by more than 10 percent in a single trading session.
This crisis, however, is about much more than just the stock market. It needs to be understood as a fundamental breakdown of the entire financial system, extending from the monetary-and-banking system through the bond market, the stock market, the insurance market, and the real-estate market. It affects not only established financial institutions such as investment banks but also relatively novel ones such as hedge funds. It is global in scope and unfathomable in scale.
Had it not been for the frantic efforts of the Federal Reserve and the Treasury, to say nothing of their counterparts in almost equally afflicted Europe, there would by now have been a repeat of that “great contraction” of credit and economic activity that was the prime mover of the Depression. Back then, the Fed and the Treasury did next to nothing to prevent bank failures from translating into a drastic contraction of credit and hence of business activity and employment. If the more openhanded monetary and fiscal authorities of today are ultimately successful in preventing a comparable slump of output, future historians may end up calling this “the Great Repression.” This is the Depression they are hoping to bottle up—a Depression in denial.
To understand why we have come so close to a rerun of the 1930s, we need to begin at the beginning, with banks and the money they make. From the Middle Ages until the mid-20th century, most banks made their money by maximizing the difference between the costs of their liabilities (payments to depositors) and the earnings on their assets (interest and commissions on loans). Some banks also made money by financing trade, discounting the commercial bills issued by merchants. Others issued and traded bonds and stocks, or dealt in commodities (especially precious metals). But the core business of banking was simple. It consisted, as the third Lord Rothschild pithily put it, “essentially of facilitating the movement of money from Point A, where it is, to Point B, where it is needed.”
The system evolved gradually. First came the invention of cashless intra-bank and inter-bank transactions, which allowed debts to be settled between account holders without having money physically change hands. Then came the idea of fractional-reserve banking, whereby banks kept only a small proportion of their existing deposits on hand to satisfy the needs of depositors (who seldom wanted all their money simultaneously), allowing the rest to be lent out profitably. That was followed by the rise of special public banks with monopolies on the issuing of banknotes and other powers and privileges: the first central banks.
With these innovations, money ceased to be understood as precious metal minted into coins. Now it was the sum total of specific liabilities (deposits and reserves) incurred by banks. Credit was the other side of banks’ balance sheets: the total of their assets; in other words, the loans they made. Some of this money might still consist of precious metal, though a rising proportion of that would be held in the central bank’s vault. Most would be made up of banknotes and coins recognized as “legal tender,” along with money that was visible only in current- and deposit-account statements.
Until the late 20th century, the system of bank money retained an anchor in the pre-modern conception of money in the form of the gold standard: fixed ratios between units of account and quantities of precious metal. As early as 1924, the English economist John Maynard Keynes dismissed the gold standard as a “barbarous relic,” but the last vestige of the system did not disappear until August 15, 1971—the day President Richard Nixon closed the so-called gold window, through which foreign central banks could still exchange dollars for gold. With that, the centuries-old link between money and precious metal was broken.
Though we tend to think of money today as being made of paper, in reality most of it now consists of bank deposits. If we measure the ratio of actual money to output in developed economies, it becomes clear that the trend since the 1970s has been for that ratio to rise from around 70 percent, before the closing of the gold window, to more than 100 percent by 2005. The corollary has been a parallel growth of credit on the other side of bank balance sheets. A significant component of that credit growth has been a surge of lending to consumers. Back in 1952, the ratio of household debt to disposable income was less than 40 percent in the United States. At its peak in 2007, it reached 133 percent, up from 90 percent a decade before. Today Americans carry a total of $2.56 trillion in consumer debt, up by more than a fifth since 2000.
Even more spectacular, however, has been the rising indebtedness of banks themselves. In 1980, bank indebtedness was equivalent to 21 percent of U.S. gross domestic product. In 2007 the figure was 116 percent. Another measure of this was the declining capital adequacy of banks. On the eve of “the Great Repression,” average bank capital in Europe was equivalent to less than 10 percent of assets; at the beginning of the 20th century, it was around 25 percent. It was not unusual for investment banks’ balance sheets to be as much as 20 or 30 times larger than their capital, thanks in large part to a 2004 rule change by the Securities and Exchange Commission that exempted the five largest of those banks from the regulation that had capped their debt-to-capital ratio at 12 to 1. The Age of Leverage had truly arrived for Planet Finance.
Credit and money, in other words, have for decades been growing more rapidly than underlying economic activity. Is it any wonder, then, that money has ceased to hold its value the way it did in the era of the gold standard? The motto “In God we trust” was added to the dollar bill in 1957. Since then its purchasing power, relative to the consumer price index, has declined by a staggering 87 percent. Average annual inflation during that period has been more than 4 percent. A man who decided to put his savings into gold in 1970 could have bought just over 27.8 ounces of the precious metal for $1,000. At the time of writing, with gold trading at $900 an ounce, he could have sold it for around $25,000.
Those few goldbugs who always doubted the soundness of fiat money—paper currency without a metal anchor—have in large measure been vindicated. But why were the rest of us so blinded by money illusion?
Blowing Bubbles
In the immediate aftermath of the death of gold as the anchor of the monetary system, the problem of inflation affected mainly retail prices and wages. Today, only around one out of seven countries has an inflation rate above 10 percent, and only one, Zimbabwe, is afflicted with hyperinflation. But back in 1979 at least 7 countries had an annual inflation rate above 50 percent, and more than 60 countries—including Britain and the United States—had inflation in double digits.
Inflation has come down since then, partly because many of the items we buy—from clothes to computers—have gotten cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Federal Reserve in 1979. Just as important, some of the structural drivers of inflation, such as powerful trade unions, have also been weakened.
By the 1980s, in any case, more and more people had grasped how to protect their wealth from inflation: by investing it in assets they expected to appreciate in line with, or ahead of, the cost of living. These assets could take multiple forms, from modern art to vintage wine, but the most popular proved to be stocks and real estate. Once it became clear that this formula worked, the Age of Leverage could begin. For it clearly made sense to borrow to the hilt to maximize your holdings of stocks and real estate if these promised to generate higher rates of return than the interest payments on your borrowings. Between 1990 and 2004, most American households did not see an appreciable improvement in their incomes. Adjusted for inflation, the median household income rose by about 6 percent. But people could raise their living standards by borrowing and investing in stocks and housing.
Nearly all of us did it. And the bankers were there to help. Not only could they borrow more cheaply from one another than we could borrow from them; increasingly they devised all kinds of new mortgages that looked more attractive to us (and promised to be more lucrative to them) than boring old 30-year fixed-rate deals. Moreover, the banks were just as ready to play the asset markets as we were. Proprietary trading soon became the most profitable arm of investment banking: buying and selling assets on the bank’s own account.
Illustration by Barry Blitt
Losing our shirt? The problem is that our banks are also losing theirs. Illustration by Barry Blitt.
There was, however, a catch. The Age of Leverage was also an age of bubbles, beginning with the dot-com bubble of the irrationally exuberant 1990s and ending with the real-estate mania of the exuberantly irrational 2000s. Why was this?
The future is in large measure uncertain, so our assessments of future asset prices are bound to vary. If we were all calculating machines, we would simultaneously process all the available information and come to the same conclusion. But we are human beings, and as such are prone to myopia and mood swings. When asset prices surge upward in sync, it is as if investors are gripped by a kind of collective euphoria. Conversely, when their “animal spirits” flip from greed to fear, the bubble that their earlier euphoria inflated can burst with amazing suddenness. Zoological imagery is an integral part of the culture of Planet Finance. Optimistic buyers are “bulls,” pessimistic sellers are “bears.” The real point, however, is that stock markets are mirrors of the human psyche. Like Homo sapiens, they can become depressed. They can even suffer complete breakdowns.
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This is no new insight. In the 400 years since the first shares were bought and sold on the Amsterdam Beurs, there has been a long succession of financial bubbles. Time and again, asset prices have soared to unsustainable heights only to crash downward again. So familiar is this pattern—described by the economic historian Charles Kindleberger—that it is possible to distill it into five stages:
(1) Displacement: Some change in economic circumstances creates new and profitable opportunities. (2) Euphoria, or overtrading: A feedback process sets in whereby expectation of rising profits leads to rapid growth in asset prices. (3) Mania, or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money. (4) Distress: The insiders discern that profits cannot possibly justify the now exorbitant price of the assets and begin to take profits by selling. (5) Revulsion, or discredit: As asset prices fall, the outsiders stampede for the exits, causing the bubble to burst.
The key point is that without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.
The bubbles of our time had their origins in the aftermath of the 1987 stock-market crash, when then novice Federal Reserve chairman Alan Greenspan boldly affirmed the Fed’s “readiness to serve as a source of liquidity to support the economic and financial system.” This sent a signal to the markets, particularly the New York banks: if things got really bad, he stood ready to bail them out. Thus was born the “Greenspan put”—the implicit option the Fed gave traders to be able to sell their stocks at today’s prices even in the event of a meltdown tomorrow.
Having contained a panic once, Greenspan thereafter had a dilemma lurking in the back of his mind: whether or not to act pre-emptively the next time—to prevent a panic altogether. This dilemma came to the fore as a classic stock-market bubble took shape in the mid-90s. The displacement in this case was the explosion of innovation by the technology and software industry as personal computers met the Internet. But, as in all of history’s bubbles, an accommodative monetary policy also played a role. From a peak of 6 percent in February 1995, the federal-funds target rate had been reduced to 5.25 percent by January 1996. It was then cut in steps, in the fall of 1998, down to 4.75 percent, and it remained at that level until June 1999, by which time the Dow had passed the 10,000 mark.
Why did the Fed allow euphoria to run loose in the 1990s? Partly because Greenspan and his colleagues underestimated the momentum of the technology bubble; as early as December 1995, with the Dow just past the 5,000 mark, members of the Fed’s Open Market Committee speculated that the market might be approaching its peak. Partly, also, because Greenspan came to the conclusion that it was not the Fed’s responsibility to worry about asset-price inflation, only consumer-price inflation, and this, he believed, was being reduced by a major improvement in productivity due precisely to the tech boom.
Greenspan could not postpone a stock-exchange crash indefinitely. After Silicon Valley’s dot-com bubble peaked, in March 2000, the U.S. stock market fell by almost half over the next two and a half years. It was not until May 2007 that investors in the Standard & Poor’s 500 had recouped their losses. But the Fed’s response to the sell-off—and the massive shot of liquidity it injected into the financial markets after the 9/11 terrorist attacks—prevented the “correction” from precipitating a depression. Not only were the 1930s averted; so too, it seemed, was a repeat of the Japanese experience after 1989, when a conscious effort by the central bank to prick an asset bubble had ended up triggering an 80 percent stock-market sell-off, a real-estate collapse, and a decade of economic stagnation.
What was not immediately obvious was that Greenspan’s easy-money policy was already generating another bubble—this time in the financial market that a majority of Americans have been encouraged for generations to play: the real-estate market.
The American Dream
Real estate is the English-speaking world’s favorite economic game. No other facet of financial life has such a hold on the popular imagination. The real-estate market is unique. Every adult, no matter how economically illiterate, has a view on its future prospects. Through the evergreen board game Monopoly, even children are taught how to climb the property ladder.
Once upon a time, people saved a portion of their earnings for the proverbial rainy day, stowing the cash in a mattress or a bank safe. The Age of Leverage, as we have seen, brought a growing reliance on borrowing to buy assets in the expectation of their future appreciation in value. For a majority of families, this meant a leveraged investment in a house. That strategy had one very obvious flaw. It represented a one-way, totally unhedged bet on a single asset.
To be sure, investing in housing paid off handsomely for more than half a century, up until 2006. Suppose you had put $100,000 into the U.S. property market back in the first quarter of 1987. According to the Case-Shiller national home-price index, you would have nearly tripled your money by the first quarter of 2007, to $299,000. On the other hand, if you had put the same money into the S&P 500, and had continued to re-invest the dividend income in that index, you would have ended up with $772,000 to play with—more than double what you would have made on bricks and mortar.
There is, obviously, an important difference between a house and a stock-market index. You cannot live in a stock-market index. For the sake of a fair comparison, allowance must therefore be made for the rent you save by owning your house (or the rent you can collect if you own a second property). A simple way to proceed is just to leave out both dividends and rents. In that case the difference is somewhat reduced. In the two decades after 1987, the S&P 500, excluding dividends, rose by a factor of just over six, meaning that an investment of $100,000 would be worth some $600,000. But that still comfortably beat housing.
There are three other considerations to bear in mind when trying to compare housing with other forms of assets. The first is depreciation. Stocks do not wear out and require new roofs; houses do. The second is liquidity. As assets, houses are a great deal more expensive to convert into cash than stocks. The third is volatility. Housing markets since World War II have been far less volatile than stock markets. Yet that is not to say that house prices have never deviated from a steady upward path. In Britain between 1989 and 1995, for example, the average house price fell by 18 percent, or, in inflation-adjusted terms, by more than a third—37 percent. In London, the real decline was closer to 47 percent. In Japan between 1990 and 2000, property prices fell by more than 60 percent.
The recent decline of property prices in the United States should therefore have come as less of a shock than it did. Between July 2006 and June 2008, the Case-Shiller index of home prices in 20 big American cities declined on average by 19 percent. In some of these cities—Phoenix, San Diego, Los Angeles, and Miami—the total decline was as much as a third. Seen in international perspective, those are not unprecedented figures. Seen in the context of the post-2000 bubble, prices have yet to return to their starting point. On average, house prices are still 50 percent higher than they were at the beginning of this process.
So why were we oblivious to the likely bursting of the real-estate bubble? The answer is that for generations we have been brainwashed into thinking that borrowing to buy a house is the only rational financial strategy to pursue. Think of Frank Capra’s classic 1946 movie, It’s a Wonderful Life, which tells the story of the family-owned Bailey Building & Loan, a small-town mortgage firm that George Bailey (played by James Stewart) struggles to keep afloat in the teeth of the Depression. “You know, George,” his father tells him, “I feel that in a small way we are doing something important. It’s satisfying a fundamental urge. It’s deep in the race for a man to want his own roof and walls and fireplace, and we’re helping him get those things in our shabby little office.” George gets the message, as he passionately explains to the villainous slumlord Potter after Bailey Sr.’s death: “[My father] never once thought of himself.… But he did help a few people get out of your slums, Mr. Potter. And what’s wrong with that? … Doesn’t it make them better citizens? Doesn’t it make them better customers?”
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There, in a nutshell, is one of the key concepts of the 20th century: the notion that property ownership enhances citizenship, and that therefore a property-owning democracy is more socially and politically stable than a democracy divided into an elite of landlords and a majority of property-less tenants. So deeply rooted is this idea in our political culture that it comes as a surprise to learn that it was invented just 70 years ago.
Fannie, Ginnie, and Freddie
Prior to the 1930s, only a minority of Americans owned their homes. During the Depression, however, the Roosevelt administration created a whole complex of institutions to change that. A Federal Home Loan Bank Board was set up in 1932 to encourage and oversee local mortgage lenders known as savings-and-loans (S&Ls)—mutual associations that took in deposits and lent to homebuyers. Under the New Deal, the Home Owners’ Loan Corporation stepped in to refinance mortgages on longer terms, up to 15 years. To reassure depositors, who had been traumatized by the thousands of bank failures of the previous three years, Roosevelt introduced federal deposit insurance. And by providing federally backed insurance for mortgage lenders, the Federal Housing Administration (F.H.A.) sought to encourage large (up to 80 percent of the purchase price), long (20- to 25-year), fully amortized, low-interest loans.
By standardizing the long-term mortgage and creating a national system of official inspection and valuation, the F.H.A. laid the foundation for a secondary market in mortgages. This market came to life in 1938, when a new Federal National Mortgage Association—nicknamed Fannie Mae—was authorized to issue bonds and use the proceeds to buy mortgages from the local S&Ls, which were restricted by regulation both in terms of geography (they could not lend to borrowers more than 50 miles from their offices) and in terms of the rates they could offer (the so-called Regulation Q, which imposed a low ceiling on interest paid on deposits). Because these changes tended to reduce the average monthly payment on a mortgage, the F.H.A. made home ownership viable for many more Americans than ever before. Indeed, it is not too much to say that the modern United States, with its seductively samey suburbs, was born with Fannie Mae. Between 1940 and 1960, the home-ownership rate soared from 43 to 62 percent.
These were not the only ways in which the federal government sought to encourage Americans to own their own homes. Mortgage-interest payments were always tax-deductible, from the inception of the federal income tax in 1913. As Ronald Reagan said when the rationality of this tax break was challenged, mortgage-interest relief was “part of the American dream.”
In 1968, to broaden the secondary-mortgage market still further, Fannie Mae was split in two—the Government National Mortgage Association (Ginnie Mae), which was to cater to poor borrowers, and a rechartered Fannie Mae, now a privately owned government-sponsored enterprise (G.S.E.). Two years later, to provide competition for Fannie Mae, the Federal Home Loan Mortgage Corporation (Freddie Mac) was set up. In addition, Fannie Mae was permitted to buy conventional as well as government-guaranteed mortgages. Later, with the Community Reinvestment Act of 1977, American banks found themselves under pressure for the first time to lend to poor, minority communities.
These changes presaged a more radical modification to the New Deal system. In the late 1970s, the savings-and-loan industry was hit first by double-digit inflation and then by sharply rising interest rates. This double punch was potentially lethal. The S&Ls were simultaneously losing money on long-term, fixed-rate mortgages, due to inflation, and hemorrhaging deposits to higher-interest money-market funds. The response in Washington from both the Carter and Reagan administrations was to try to salvage the S&Ls with tax breaks and deregulation. When the new legislation was passed, President Reagan declared, “All in all, I think we hit the jackpot.” Some people certainly did.
On the one hand, S&Ls could now invest in whatever they liked, not just local long-term mortgages. Commercial property, stocks, junk bonds—anything was allowed. They could even issue credit cards. On the other, they could now pay whatever interest rate they liked to depositors. Yet all their deposits were still effectively insured, with the maximum covered amount raised from $40,000 to $100,000, thanks to a government regulation two years earlier. And if ordinary deposits did not suffice, the S&Ls could raise money in the form of brokered deposits from middlemen. What happened next perfectly illustrated the great financial precept first enunciated by William Crawford, the commissioner of the California Department of Savings and Loan: “The best way to rob a bank is to own one.” Some S&Ls bet their depositors’ money on highly dubious real-estate developments. Many simply stole the money, as if deregulation meant that the law no longer applied to them at all.
When the ensuing bubble burst, nearly 300 S&Ls collapsed, while another 747 were closed or reorganized under the auspices of the Resolution Trust Corporation, established by Congress in 1989 to clear up the mess. The final cost of the crisis was $153 billion (around 3 percent of the 1989 G.D.P.), of which taxpayers had to pay $124 billion.
But even as the S&Ls were going belly-up, they offered another, very different group of American financial institutions a fast track to megabucks. To the bond traders at Salomon Brothers, the New York investment bank, the breakdown of the New Deal mortgage system was not a crisis but a wonderful opportunity. As profit-hungry as their language was profane, the self-styled “Big Swinging Dicks” at Salomon saw a way of exploiting the gyrating interest rates of the early 1980s.
The idea was to re-invent mortgages by bundling thousands of them together as the backing for new and alluring securities that could be sold as alternatives to traditional government and corporate bonds—in short, to convert mortgages into bonds. Once lumped together, the interest payments due on the mortgages could be subdivided into strips with different maturities and credit risks. The first issue of this new kind of mortgage-backed security (known as a “collateralized mortgage obligation”) occurred in June 1983. The dawn of securitization was a necessary prelude to the Age of Leverage.
Once again, however, it was the federal government that stood ready to pick up the tab in a crisis. For the majority of mortgages continued to enjoy an implicit guarantee from the government-sponsored trio of Fannie, Freddie, and Ginnie, meaning that bonds which used those mortgages as collateral could be represented as virtual government bonds and considered “investment grade.” Between 1980 and 2007, the volume of such G.S.E.-backed mortgage-backed securities grew from less than $200 billion to more than $4 trillion. In 1980 only 10 percent of the home-mortgage market was securitized; by 2007, 56 percent of it was.
These changes swept away the last vestiges of the business model depicted in It’s a Wonderful Life. Once there had been meaningful social ties between mortgage lenders and borrowers. James Stewart’s character knew both the depositors and the debtors. By contrast, in a securitized market the interest you paid on your mortgage ultimately went to someone who had no idea you existed. The full implications of this transition for ordinary homeowners would become apparent only 25 years later.
The Lessons of Detroit
In July 2007, I paid a visit to Detroit, because I had the feeling that what was happening there was the shape of things to come in the United States as a whole. In the space of 10 years, house prices in Detroit, which probably possesses the worst housing stock of any American city other than New Orleans, had risen by more than a third—not much compared with the nationwide bubble, but still hard to explain, given the city’s chronically depressed economic state. As I discovered, the explanation lay in fundamental changes in the rules of the housing game.
I arrived at the end of a borrowing spree. For several years agents and brokers selling subprime mortgages had been flooding Detroit with radio, television, and direct-mail advertisements, offering what sounded like attractive deals. In 2006, for example, subprime lenders pumped more than a billion dollars into 22 Detroit Zip Codes.
These were not the old 30-year fixed-rate mortgages invented in the New Deal. On the contrary, a high proportion were adjustable-rate mortgages—in other words, the interest rate could vary according to changes in short-term lending rates. Many were also interest-only mortgages, without amortization (repayment of principal), even when the principal represented 100 percent of the assessed value of the mortgaged property. And most had introductory “teaser” periods, whereby the initial interest payments—usually for the first two years—were kept artificially low, with the cost of the loan backloaded. All of these devices were intended to allow an immediate reduction in the debt-servicing costs of the borrower.
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In Detroit only a minority of these loans were going to first-time buyers. They were nearly all refinancing deals, which allowed borrowers to treat their homes as cash machines, converting their existing equity into cash and using the proceeds to pay off credit-card debts, carry out renovations, or buy new consumer durables. However, the combination of declining long-term interest rates and ever more alluring mortgage deals did attract new buyers into the housing market. By 2005, 69 percent of all U.S. householders were homeowners; 10 years earlier it had been 64 percent. About half of that increase could be attributed to the subprime-lending boom.
Significantly, a disproportionate number of subprime borrowers belonged to ethnic minorities. Indeed, I found myself wondering, as I drove around Detroit, if “subprime” was in fact a new financial euphemism for “black.” This was no idle supposition. According to a joint study by, among others, the Massachusetts Affordable Housing Alliance, 55 percent of black and Latino borrowers in Boston who had obtained loans for single-family homes in 2005 had been given subprime mortgages; the figure for white borrowers was just 13 percent. More than three-quarters of black and Latino borrowers from Washington Mutual were classed as subprime, whereas only 17 percent of white borrowers were. According to a report in The Wall Street Journal, minority ownership increased by 3.1 million between 2002 and 2007.
Here, surely, was the zenith of the property-owning democracy. It was an achievement that the Bush administration was proud of. “We want everybody in America to own their own home,” President George W. Bush had said in October 2002. Having challenged lenders to create 5.5 million new minority homeowners by the end of the decade, Bush signed the American Dream Downpayment Act in 2003, a measure designed to subsidize first-time house purchases in low-income groups. Between 2000 and 2006, the share of undocumented subprime contracts rose from 17 to 44 percent. Fannie Mae and Freddie Mac also came under pressure from the Department of Housing and Urban Development to support the subprime market. As Bush put it in December 2003, “It is in our national interest that more people own their own home.” Few people dissented.
As a business model, subprime lending worked beautifully—as long, that is, as interest rates stayed low, people kept their jobs, and real-estate prices continued to rise. Such conditions could not be relied upon to last, however, least of all in a city like Detroit. But that did not worry the subprime lenders. They simply followed the trail blazed by mainstream mortgage lenders in the 1980s. Having pocketed fat commissions on the signing of the original loan contracts, they hastily resold their loans in bulk to Wall Street banks. The banks, in turn, bundled the loans into high-yielding mortgage-backed securities and sold them to investors around the world, all eager for a few hundredths of a percentage point more of return on their capital. Repackaged as C.D.O.’s, these subprime securities could be transformed from risky loans to flaky borrowers into triple-A-rated investment-grade securities. All that was required was certification from one of the rating agencies that at least the top tier of these securities was unlikely to go into default.
The risk was spread across the globe, from American state pension funds to public-hospital networks in Australia, to town councils near the Arctic Circle. In Norway, for example, eight municipalities, including Rana and Hemnes, invested some $120 million of their taxpayers’ money in C.D.O.’s secured on American subprime mortgages.
In Detroit the rise of subprime mortgages had in fact coincided with a new slump in the inexorably declining automobile industry. That anticipated a wider American slowdown, an almost inevitable consequence of a tightening of monetary policy as the Federal Reserve belatedly raised short-term interest rates from 1 percent to 5.25 percent. As soon as the teaser rates expired and mortgages were reset at new and much higher interest rates, hundreds of Detroit households swiftly fell behind in their mortgage payments. The effect was to burst the real-estate bubble, causing house prices to start falling significantly for the first time since the early 1990s. And the further house prices fell, the more homeowners found themselves with “negative equity”—in other words, owing more money than their homes were worth.
The rest—the chain reaction as defaults in Detroit and elsewhere unleashed huge losses on C.D.O.’s in financial institutions all around the world—you know.
Drunk on Derivatives
Do you, however, know about the second-order effects of this crisis in the markets for derivatives? Do you in fact know what a derivative is? Once excoriated by Warren Buffett as “financial weapons of mass destruction,” derivatives are what make this crisis both unique and unfathomable in its ramifications. To understand what they are, you need, literally, to go back to the future.
For a farmer planting a crop, nothing is more crucial than the future price it will fetch after it has been harvested and taken to market. A futures contract allows him to protect himself by committing a merchant to buy his crop when it comes to market at a price agreed upon when the seeds are being planted. If the market price on the day of delivery is lower than expected, the farmer is protected.
The earliest forms of protection for farmers were known as forward contracts, which were simply bilateral agreements between seller and buyer. A true futures contract, however, is a standardized instrument issued by a futures exchange and hence tradable. With the development of a standard “to arrive” futures contract, along with a set of rules to enforce settlement and, finally, an effective clearinghouse, the first true futures market was born.
Because they are derived from the value of underlying assets, all futures contracts are forms of derivatives. Closely related, though distinct from futures, are the contracts known as options. In essence, the buyer of a “call” option has the right, but not the obligation, to buy an agreed-upon quantity of a particular commodity or financial asset from the seller (“writer”) of the option at a certain time (the expiration date) for a certain price (known as the “strike price”). Clearly, the buyer of a call option expects the price of the underlying instrument to rise in the future. When the price passes the agreed-upon strike price, the option is “in the money”—and so is the smart guy who bought it. A “put” option is just the opposite: the buyer has the right but not the obligation to sell an agreed-upon quantity of something to the seller of the option at an agreed-upon price.
A third kind of derivative is the interest-rate “swap,” which is effectively a bet between two parties on the future path of interest rates. A pure interest-rate swap allows two parties already receiving interest payments literally to swap them, allowing someone receiving a variable rate of interest to exchange it for a fixed rate, in case interest rates decline. A credit-default swap (C.D.S.), meanwhile, offers protection against a company’s defaulting on its bonds.
There was a time when derivatives were standardized instruments traded on exchanges such as the Chicago Board of Trade. Now, however, the vast proportion are custom-made and sold “over the counter” (O.T.C.), often by banks, which charge attractive commissions for their services, but also by insurance companies (notably A.I.G.). According to the Bank for International Settlements, the total notional amounts outstanding of O.T.C. derivative contracts—arranged on an ad hoc basis between two parties—reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.
But how exactly do you price a derivative? What precisely is an option worth? The answers to those questions required a revolution in financial theory. From an academic point of view, what this revolution achieved was highly impressive. But the events of the 1990s, as the rise of quantitative finance replaced preppies with quants (quantitative analysts) all along Wall Street, revealed a new truth: those whom the gods want to destroy they first teach math.
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Working closely with Fischer Black, of the consulting firm Arthur D. Little, M.I.T.’s Myron Scholes invented a groundbreaking new theory of pricing options, to which his colleague Robert Merton also contributed. (Scholes and Merton would share the 1997 Nobel Prize in economics.) They reasoned that a call option’s value depended on six variables: the current market price of the stock (S), the agreed future price at which the stock could be bought (L), the time until the expiration date of the option (t), the risk-free rate of return in the economy as a whole (r), the probability that the option will be exercised (N), and—the crucial variable—the expected volatility of the stock, i.e., the likely fluctuations of its price between the time of purchase and the expiration date (s).
Feeling a bit baffled? Can’t follow the algebra? That was just fine by the quants. To make money from this magic formula, they needed markets to be full of people who didn’t have a clue about how to price options but relied instead on their (seldom accurate) gut instincts. They also needed a great deal of computing power, a force which had been transforming the financial markets since the early 1980s. Their final requirement was a partner with some market savvy in order to make the leap from the faculty club to the trading floor. Black, who would soon be struck down by cancer, could not be that partner. But John Meriwether could. The former head of the bond-arbitrage group at Salomon Brothers, Meriwether had made his first fortune in the wake of the S&L meltdown of the late 1980s. The hedge fund he created with Scholes and Merton in 1994 was called Long-Term Capital Management.
In its brief, four-year life, Long-Term was the brightest star in the hedge-fund firmament, generating mind-blowing returns for its elite club of investors and even more money for its founders. Needless to say, the firm did more than just trade options, though selling puts on the stock market became such a big part of its business that it was nicknamed “the central bank of volatility” by banks buying insurance against a big stock-market sell-off. In fact, the partners were simultaneously pursuing multiple trading strategies, about 100 of them, with a total of 7,600 positions. This conformed to a second key rule of the new mathematical finance: the virtue of diversification, a principle that had been formalized by Harry M. Markowitz, of the Rand Corporation. Diversification was all about having a multitude of uncorrelated positions. One might go wrong, or even two. But thousands just could not go wrong simultaneously.
The mathematics were reassuring. According to the firm’s “Value at Risk” models, it would take a 10-s (in other words, 10-standard-deviation) event to cause the firm to lose all its capital in a single year. But the probability of such an event, according to the quants, was 1 in 10,24—or effectively zero. Indeed, the models said the most Long-Term was likely to lose in a single day was $45 million. For that reason, the partners felt no compunction about leveraging their trades. At the end of August 1997, the fund’s capital was $6.7 billion, but the debt-financed assets on its balance sheet amounted to $126 billion, a ratio of assets to capital of 19 to 1.
There is no need to rehearse here the story of Long-Term’s downfall, which was precipitated by a Russian debt default. Suffice it to say that on Friday, August 21, 1998, the firm lost $550 million—15 percent of its entire capital, and vastly more than its mathematical models had said was possible. The key point is to appreciate why the quants were so wrong.
The problem lay with the assumptions that underlie so much of mathematical finance. In order to construct their models, the quants had to postulate a planet where the inhabitants were omniscient and perfectly rational; where they instantly absorbed all new information and used it to maximize profits; where they never stopped trading; where markets were continuous, frictionless, and completely liquid. Financial markets on this planet followed a “random walk,” meaning that each day’s prices were quite unrelated to the previous day’s, but reflected no more and no less than all the relevant information currently available. The returns on this planet’s stock market were normally distributed along the bell curve, with most years clustered closely around the mean, and two-thirds of them within one standard deviation of the mean. On such a planet, a “six standard deviation” sell-off would be about as common as a person shorter than one foot in our world. It would happen only once in four million years of trading.
But Long-Term was not located on Planet Finance. It was based in Greenwich, Connecticut, on Planet Earth, a place inhabited by emotional human beings, always capable of flipping suddenly and en masse from greed to fear. In the case of Long-Term, the herding problem was acute, because many other firms had begun trying to copy Long-Term’s strategies in the hope of replicating its stellar performance. When things began to go wrong, there was a truly bovine stampede for the exits. The result was a massive, synchronized downturn in virtually all asset markets. Diversification was no defense in such a crisis. As one leading London hedge-fund manager later put it to Meriwether, “John, you were the correlation.”
There was, however, another reason why Long-Term failed. The quants’ Value at Risk models had implied that the loss the firm suffered in August 1998 was so unlikely that it ought never to have happened in the entire life of the universe. But that was because the models were working with just five years of data. If they had gone back even 11 years, they would have captured the 1987 stock-market crash. If they had gone back 80 years they would have captured the last great Russian default, after the 1917 revolution. Meriwether himself, born in 1947, ruefully observed, “If I had lived through the Depression, I would have been in a better position to understand events.” To put it bluntly, the Nobel Prize winners knew plenty of mathematics but not enough history.
One might assume that, after the catastrophic failure of L.T.C.M., quantitative hedge funds would have vanished from the financial scene, and derivatives such as options would be sold a good deal more circumspectly. Yet the very reverse happened. Far from declining, in the past 10 years hedge funds of every type have exploded in number and in the volume of assets they manage, with quantitative hedge funds such as Renaissance, Citadel, and D. E. Shaw emerging as leading players. The growth of derivatives has also been spectacular—and it has continued despite the onset of the credit crunch. Between December 2005 and December 2007, the notional amounts outstanding for all derivatives increased from $298 trillion to $596 trillion. Credit-default swaps quadrupled, from $14 trillion to $58 trillion.
An intimation of the problems likely to arise came in September, when the government takeover of Fannie and Freddie cast doubt on the status of derivative contracts protecting the holders of more than $1.4 trillion of their bonds against default. The consequences of the failure of Lehman Brothers were substantially greater, because the firm was the counter-party in so many derivative contracts.
The big question is whether those active in the market waited too long to set up some kind of clearing mechanism. If, as seems inevitable, there is an upsurge in corporate defaults as the U.S. slides into recession, the whole system could completely seize up.
The China Syndrome
Just 10 years ago, during the Asian crisis of 1997–98, it was conventional wisdom that financial crises were more likely to happen on the periphery of the world economy—in the so-called emerging markets of East Asia and Latin America. Yet the biggest threats to the global financial system in this new century have come not from the periphery but from the core. The explanation for this strange role reversal may in fact lie in the way emerging markets changed their behavior after 1998.
For many decades it was assumed that poor countries could become rich only by borrowing capital from wealthy countries. Recurrent debt crises and currency crises associated with sudden withdrawals of Western money led to a rethinking, inspired largely by the Chinese example.
When the Chinese wanted to attract foreign capital, they insisted that it take the form of direct investment. That meant that instead of borrowing from Western banks to finance its industrial development, as many emerging markets did, China got foreigners to build factories in Chinese enterprise zones—large, lumpy assets that could not easily be withdrawn in a crisis.
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The crucial point, though, is that the bulk of Chinese investment has been financed from China’s own savings. Cautious after years of instability and unused to the panoply of credit facilities we have in the West, Chinese households save a high proportion of their rising incomes, in marked contrast to Americans, who in recent years have saved almost none at all. Chinese corporations save an even larger proportion of their soaring profits. The remarkable thing is that a growing share of that savings surplus has ended up being lent to the United States. In effect, the People’s Republic of China has become banker to the United States of America.
The Chinese have not been acting out of altruism. Until very recently, the best way for China to employ its vast population was by exporting manufactured goods to the spendthrift U.S. consumer. To ensure that those exports were irresistibly cheap, China had to fight the tendency for its currency to strengthen against the dollar by buying literally billions of dollars on world markets. In 2006, Chinese holdings of dollars reached 700 billion. Other Asian and Middle Eastern economies adopted much the same strategy.
The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs. Above all, Asian savings kept down U.S. interest rates. But there was a catch. The more Asia was willing to lend to the United States, the more Americans were willing to borrow. The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge-fund population explosion. It was the underlying reason why private-equity partnerships were able to borrow money left, right, and center to finance leveraged buyouts. And it was the underlying reason why the U.S. mortgage market was so awash with cash by 2006 that you could get a 100 percent mortgage with no income, no job, and no assets.
Whether or not China is now sufficiently “decoupled” from the United States that it can insulate itself from our credit crunch remains to be seen. At the time of writing, however, it looks very doubtful.
Back to Reality
The modern financial system is the product of centuries of economic evolution. Banks transformed money from metal coins into accounts, allowing ever larger aggregations of borrowing and lending. From the Renaissance on, government bonds introduced the securitization of streams of interest payments. From the 17th century on, equity in corporations could be bought and sold in public stock markets. From the 18th century on, central banks slowly learned how to moderate or exacerbate the business cycle. From the 19th century on, insurance was supplemented by futures, the first derivatives. And from the 20th century on, households were encouraged by government to skew their portfolios in favor of real estate.
Illustration by Brad Holland
Read Niall Ferguson’s prescient article on today’s financial woes, Empire Falls (November 2006).
Economies that combined all these institutional innovations performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.
Yet money’s ascent has not been, and can never be, a smooth one. On the contrary, financial history is a roller-coaster ride of ups and downs, bubbles and busts, manias and panics, shocks and crashes. The excesses of the Age of Leverage—the deluge of paper money, the asset-price inflation, the explosion of consumer and bank debt, and the hypertrophic growth of derivatives—were bound sooner or later to produce a really big crisis.
It remains unclear whether this crisis will have economic and social effects as disastrous as those of the Great Depression, or whether the monetary and fiscal authorities will succeed in achieving a Great Repression, averting a 1930s-style “great contraction” of credit and output by transferring the as yet unquantifiable losses from banks to taxpayers.
Either way, Planet Finance has now returned to Planet Earth with a bang. The key figures of the Age of Leverage—the lax central bankers, the reckless investment bankers, the hubristic quants—are now feeling the full force of this planet’s gravity.
But what about the rest of us, the rank-and-file members of the deluded crowd? Well, we shall now have to question some of our most deeply rooted assumptions—not only about the benefits of paper money but also about the rationale of the property-owning democracy itself.
On Planet Finance it may have made sense to borrow billions of dollars to finance a massive speculation on the future prices of American houses, and then to erect on the back of this trade a vast inverted pyramid of incomprehensible securities and derivatives.
But back here on Planet Earth it suddenly seems like an extraordinary popular delusion.
Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University and a Senior Fellow of the Hoover Institution at Stanford, and the author of The War of the World: Twentieth-Century Conflict and the Descent of the West.
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I confess to having just skimmed that long read, but towards the end caught the idea about the role of the Chinese savings glut. This idea I find very interesting and will think about it.
A bit briefer is this from today's WSJ:
OPINION NOVEMBER 14, 2008 Stable Money Is the Key to Recovery
How the G-20 can rebuild the 'capitalism of the future.'By JUDY SHELTON
Tomorrow's "Summit on Financial Markets and the World Economy" in Washington will have a stellar cast. Leaders of the Group of 20 industrialized and emerging nations will be there, including Chinese President Hu Jintao, Brazilian President Luiz Inacio Lula da Silva, King Abdullah of Saudi Arabia and Russian President Dmitry Medvedev. French President Nicolas Sarkozy, who initiated the whole affair, in order, as he put it, "to build together the capitalism of the future," will be in attendance, along with the host, our own President George W. Bush, and the chiefs of the World Bank, the International Monetary Fund and the United Nations.
Martin KozlowskiOne thing is guaranteed: Most attendees will take the view that Wall Street greed and inadequate regulatory oversight by U.S. authorities caused the global financial crisis -- never mind that their own regulatory agencies missed the boat and that their own governments eagerly bought up Fannie Mae and Freddie Mac securities for the higher yield over Treasurys.
But whatever they agree to pursue, whether new transnational regulatory authority or globally mandated limits on executive remuneration, would only stultify prospects for economic recovery -- and completely miss the point.
At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence.
Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry. Entrepreneurs in countries with overvalued currencies are unable to attract the foreign investment that should logically flow in their direction, while scam artists in countries with undervalued currencies lure global financial resources into brackish puddles.
To speak of "overvalued" or "undervalued" currencies is to raise the question: Why can't we just have money that works -- a meaningful unit of account to provide accurate price signals to producers and consumers across the globe?
Consider this: The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) -- over 12 times the world's nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts.
In other words, some three-quarters of the massive derivatives market, which has wreaked the most havoc across global financial markets, derives its investment allure from the capricious monetary policies of central banks and the chaotic movements of currencies.
In the absence of a rational monetary system, investment responds to the perverse incentives of paper profits. Meanwhile, price signals in the global marketplace are hopelessly distorted.
For his part, British Prime Minister Gordon Brown says his essential goal is "to root out the irresponsible and often undisclosed lending at the heart of our problems." But if anyone has demonstrated irresponsibility, it is not those who chased misleading price signals in pursuit of false profits -- but rather global authorities who have failed to provide an appropriate international monetary system to serve the needs of honest entrepreneurs in an open world economy.
When President Richard Nixon closed the gold window some 37 years ago, it marked the end of a golden age of robust trade and unprecedented global economic growth. The Bretton Woods system derived its strength from a commitment by the U.S. to redeem dollars for gold on demand.
True, the right of convertibility at a pre-established rate was granted only to foreign central banks, not to individual dollar holders; therein lies the distinction between the Bretton Woods gold exchange system and a classical gold standard. Under Bretton Woods, participating nations agreed to maintain their own currencies at a fixed exchange rate relative to the dollar.
Since the value of the dollar was fixed to gold at $35 per ounce of gold -- guaranteed by the redemption privilege -- it was as if all currencies were anchored to gold. It also meant all currencies were convertible into each other at fixed rates.
Paul Volcker, former Fed chairman, was at Camp David with Nixon on that fateful day, Aug. 15, when the system was ended. Mr. Volcker, serving as Treasury undersecretary for monetary affairs at the time, had misgivings; and he has since noted that the inflationary pressures which caused us to go off the gold standard in the first place have only worsened. Moreover, he suggests, floating rates undermine the fundamental tenets of comparative advantage.
"What can an exchange rate really mean," he wrote in "Changing Fortunes" (1992), "in terms of everything a textbook teaches about rational economic decision making, when it changes by 30% or more in the space of 12 months only to reverse itself? What kind of signals does that send about where a businessman should intelligently invest his capital for long-term profitability? In the grand scheme of economic life first described by Adam Smith, in which nations like individuals should concentrate on the things they do best, how can anyone decide which country produces what most efficiently when the prices change so fast? The answer, to me, must be that such large swings are a symptom of a system in disarray."
If we are to "build together the capitalism of the future," as Mr. Sarkozy puts it, the world needs sound money. Does that mean going back to a gold standard, or gold-based international monetary system? Perhaps so; it's hard to imagine a more universally accepted standard of value.
Gold has occupied a primary place in the world's monetary history and continues to be widely held as a reserve asset. The central banks of the G-20 nations hold two-thirds of official world gold reserves; include the gold reserves of the International Monetary Fund, the European Central Bank and the Bank for International Settlements, and the figure goes to nearly 80%, representing about 15% of all the gold ever mined.
Ironically, it was French President Charles de Gaulle who best made the case in the 1960s. Worried that the U.S. would be tempted to abuse its role as key currency issuer by exporting domestic inflation, he called for the return to a classical international gold standard. "Gold," he observed, "has no nationality."
Mr. Sarkozy might build on that legacy if he can look beyond the immediacy of the crisis and work toward a future global economy based on monetary integrity. This would indeed help to restore the values of democratic capitalism. And Mr. Volcker, an influential adviser to President-elect Barack Obama, could turn out to be a powerful ally in the pursuit of a new stable monetary order.
Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).
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I was originally for auto co. bailout but now that mayors are asking for money, and more and more companies coming forward and government can't even account for the billions already allocated for give aways I have changed my mine. No more bailouts. This has to stop.
If people who didn't belong in homes before may need to look for apartments and auto workers will need to retrain or their families will have to get health insurance from their own jobs or commerically than so be it.
Government cannot be trusted.
I didn't want my savings to go to zero but I took that risk and now must face the consequences.
What is worse is paying for a lifeline for everyone else deserving or not.
And we all know billions will get stolen.
Just my rambling thoughts.
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http://hotair.com/archives/2008/11/14/video-blogger-stocking-up-on-ammunition-canned-goods-for-recession/
Recession, Depression, TEOTWAWKI?
Where will we be a year from now?
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I've come around to Charles' view. I now suspect the Dem push to bailout Detroit is a union ballout. That said. Let them declare bankruptcy and start over.
I am not in favor of tax money for this endless stream to industries that will make for ever bigger and bigger Democratic party machine government. The Dems talk """bipartisanship""". Now I realize why. Because they need this deal now before the Carmakers run out of cash. It can't wait till Jan 20.
Furthermore they can always blame the Reps if something goes wrong. Come Jan 20 """bipartisanship""" calls and phrases will no longer be heard.
****A lemon of a bailout
By Charles Krauthammer
http://www.JewishWorldReview.com | Finally, the outlines of a coherent debate on the federal bailout. This comes as welcome relief from a campaign season that gave us the House Republicans' know-nothing rejectionism, John McCain's mindless railing against "greed and corruption," and Barack Obama's detached enunciation of vacuous bailout "principles" that allowed him to be all things to all people.
Now clarity is emerging. The fault line is the auto industry bailout. The Democrats are pushing hard for it. The White House is resisting.
Underlying the policy differences is a philosophical divide. The Bush administration sees the $700 billion rescue as an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.
Treasury Secretary Henry Paulson is willing to stretch the meaning of "bank" by extending protection to such entities as American Express. But fundamentally, he sees government as saving institutions that deal in money, not other stuff.
Democrats have a larger canvas, with government intervening in other sectors of the economy to prevent the cascade effect of mass unemployment leading to more mortgage defaults and business failures (as consumer spending plummets), in turn dragging down more businesses and financial institutions, producing more unemployment, etc. — the death spiral of the 1930s.
President Bush is trying to move the Libor or the TED spread, which measure credit flows. The Democrats' index is the unemployment rate.
With almost 5 million workers supported by the auto industry, Democrats are pressing for a federal rescue. But the problems are obvious.
First, the arbitrariness. Where do you stop? Once you've gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?
The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?
Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as "job banks," a euphemism for paying vast numbers of employees not to work.
The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It's the ultimate in lemon socialism.
Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is "retool" Detroit to make cars for the coming green economy.
Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.
In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer. Will hybrids? One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them.
If you think we have economic troubles today, consider the effects of nationalizing an industry of this size, but now run by bureaucrats issuing production quotas to fit five-year plans to meet politically mandated fuel-efficiency standards — to lift us to the sunny uplands of the coming green utopia.
Republican minimalism — saving the credit-issuing utilities — certainly risks not doing enough. But the Democratic drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism.
In this crisis, we agree to suspend the invisible hand of Adam Smith — but not in order to be crushed by the heavy hand of government.*** :x
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http://www.europac.net/#
November 7, 2008
The Reagan Counterrevolution
In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution. His message resonated with voters, propelling him into the White House to implement an agenda of lowering marginal tax rates, reducing government spending and business regulations, restoring sound money, abolishing entire government departments, and basically allowing free market vibrancy to unshackle an economy burdened by big government. Though in practice much of the Reagan revolution never materialized, at least in theory his basic premise was sound.
In contrast, the country has now hitched its wagon to the views of Barack Obama. We don’t know much about what he truly believes about economics, but the little that we do know is not encouraging. Obama has repeatedly heaped the blame for the current crisis on the excesses of unregulated capitalism and the greed of the wealthy. For him, the free market is the problem and government is the solution.
The President-elect has promised to cage the destructive forces of capitalism, impose more regulation, raise marginal tax rates, increase government spending, and restore prosperity by redistributing wealth from those who earned it to those considered to be more deserving. Like most of his generation, Obama believes that economic growth results from consumer spending, primarily from the middle class. Any policy that keeps the consumers headed to the mall will be promoted.
Unfortunately, while Reagan had a hard time getting his full agenda through Congress, Obama will likely be much more successful. The effort to concentrate more power in Washington will be far more appealing to Congress then Reagan’s idea of restoring it to the people.
This sharp contrast in philosophy should not be taken lightly. Reagan looked to unleash the pent-up free market forces that had been smothered by a generation of Great Society reforms and uninterrupted Democratic control of Congress. Today, the public is looking for the Obama Administration to create the growth that the free market has apparently destroyed. The hope that our economy will grow as a result of government spending and micro-management is the most seminal shift in political philosophy since the New Deal.
Despite the absence of Reagan’s promised spending cuts, the economy generally did well during his presidency (The growth would have been more genuine if the cuts had been delivered). However, Obama’s policies will immediately make the current situation worse and the nation will suffer severely as a result. Rather than a sharp recession at the beginning of his term followed by a significant expansion (as occurred under Reagan), the recession that Obama inherits will be far worse when his first term ends.
What nearly all politicians on both sides of the aisle fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection. America’s borrow and spend economy, and the bloated service sector that evolved around it, must be allowed to topple, so that a more sustainable economy grounded in savings and production can rise in its place. Any government efforts to delay the adjustment and spare us the pain will backfire, turning this recession into an inflationary depression.
Of broader concern however is the sharp turn in ideology, and what it means for the future of our nation. If this is a permanent shift, then America will lose any resemblance to the economic titan it was in the 20th Century. Our standard of living will decline sharply, our economy will be ravaged by inflation, tens of millions will be unemployed, more individual liberties will be surrendered, and rugged individualism will be supplanted by the nanny state. In short, Latin America may extend north to the Canadian border.
However, if this shift proves temporary and Obama’s reign either ends in one term, or he summons the intelligence and courage to reverse course once the situation deteriorates, then perhaps one day there will be light at the end of a very long tunnel.
While all of us can certainly hope for the best, prudence suggests that we had better prepare for the worst. Not only does that mean divesting our portfolios of U.S. dollar denominated investments but preparing for the possibility of emigration. With economic conditions at home becoming increasingly intolerable, the call of freer economies and greater prosperity abroad may be too tempting to resist.
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eneral Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.
APConsider the costs of tackling GM's problems with some kind of bailout plan. After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of "change," GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.
GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota's.
Foreign-owned manufacturers who build cars with American workers pay wages similar to GM's. But their expenses for benefits are a fraction of GM's. GM is contractually required to support thousands of workers in the UAW's "Jobs Bank" program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it's not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.
And therein lies the problem: The cost of terminating dealers is only a fraction of what it would cost to rebuild GM to become a company sized and marketed appropriately for its market share. Contracts would have to be bought out. The company would have to shed many of its fixed obligations. Some obligations will be impossible to cut by voluntary agreement. GM will run out of cash and out of time.
GM's solution is to ask the federal government for the cash that will allow it to do all of this piece by piece. But much of the cash will be thrown at unproductive commitments. And the sense of urgency that would enable GM to make choices painful to its management, its workers, its retirees, its suppliers and its localities will simply not be there if federal money is available. Like AIG, it will be back for more, and at the same time it will be telling us that it's doing a great job under difficult circumstances.
Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM's viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn't be easy but, unlike trying to bail out GM as it is, it wouldn't be impossible.
The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it'll be just as large and there will be less money to soften the blow and even more blame to go around. The PBGC will probably need money to guarantee GM's pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won't help executives much). Unemployment insurance will have to be extended and offered to many people, perhaps millions if you include dealers, suppliers and communities dependent on GM as it exists now. A GM bankruptcy will make addressing health-care coverage more urgent, which is probably a good thing. It would require job-retraining money and community assistance to affected localities.
But unless we are willing to support GM as it is indefinitely, the downsizing and asset-shedding will have to come anyway. Even if it builds cars as attractive and environmentally responsible as those Honda and Toyota will be building, they won't be able to carry the weight of GM's past.
GM CEO Rick Wagoner says "bankruptcy is not an option." Critics of a bankruptcy say that GM won't be able to get the loans it will need to guarantee warranties, pay its operating losses while it restructures, and preserve customers' ability to finance purchases. While consumers buy tickets from bankrupt airlines, electronics from bankrupt retailers, and apartments from bankrupt builders, they say consumers won't buy cars from a bankrupt auto maker. But bankruptcy no longer means "liquidation" or "out of business" to a generation of consumers used to buying from firms in reorganization.
Today in Opinion Journal
REVIEW & OUTLOOK
Spitzer as VictimThe $639 Million LoopholeChina's News Concession
TODAY'S COLUMNISTS
The Americas: Dodd's 'Democrat' Tightens His Grip
– Mary Anastasia O'GradyInformation Age: Markets Declare Truce in Copyright Wars
– L. Gordon Crovitz
COMMENTARY
Why Bankruptcy Is the Best Option for GM
– Michael E. LevineTo Prevent Bubbles, Restrain the Fed
– Gerald P. O'Driscoll Jr.Democrats Shouldn't Rush on Labor Legislation
– Ariella BernsteinGM would guarantee warranty support with a segregated fund if necessary. And debtor-in-possession (DIP) financing -- loans that provide the near-term cash for reorganizing companies -- is very safe, because the DIP lender has priority over all other claimants. In normal markets, it would certainly be available to a GM that has assets to sell, including a viable overseas business. Such financing is probably available even now.
In any event, it would be lined up before a filing, not after, so any problems wouldn't be a surprise. As a last resort, we could at least consider a public DIP loan to support a reorganizing GM with a good chance to survive -- as opposed to subsidizing a GM slowly deflating.
The fate of Daewoo -- the Korean auto maker that collapsed in 2000 after filing for bankruptcy, leaving about 500 dealers stranded in the U.S. -- is often cited as "proof" that a GM bankruptcy won't work. But Daewoo was headquartered in a part of the world where bankruptcy still carries a major stigma and usually means liquidation. Daewoo's experience is largely irrelevant to a major U.S. company undergoing a well-publicized positive transformation, almost certainly under new management.
GM as it is cannot survive without long-term government life support. If it gets that support, it can't change enough and won't change fast enough. Contrary to Mr. Wagoner's brave declaration, bankruptcy is an option. In fact, it's the only option that merits public support and actually has a chance at succeeding.
Mr. Levine, a former airline executive, is a distinguished research scholar and senior lecturer at NYU School of Law.
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Scott Grannis writes:
A better bailout proposal
Grover Norquist has a brilliant suggestion for a much better way to spend $700 billion of taxpayers' money. In my view, this proposal would guarantee a quick recovery. And with Laffer-Curve effects taken into account, they might end up costing almost nothing:
Cut the corporate income tax rate from 35% to 15%, giving us one of the lowest corporate income tax rates in the developed world. We currently have the second-highest rate in the world (behind only Japan). This new 15% rate would give us the third-lowest rate in the world (ahead of only Ireland and Iceland). It would put us well below the Euro-zone average rate of 25%. Companies would be dying to set up shop in the United States. Estimated JCT cost: $170 billion
Eliminate the capital gains and dividends tax. These rates are currently 15%, but actually represent a double-tax on corporate profits. When combined with the new, lower 15% rate on corporate income, capital costs would be at their lowest levels in nearly a century. Tax something less, and get more of it. Estimated JCT cost: $35 billion
Cut the top personal income tax rate from 35% to a flat 15%. This would give the U.S. the lowest personal income tax rate in the developed world. Estimated JCT score: $235 billion
Kill the death tax. Almost nothing is more capital-killing for small businesses and family farms than the estate, gift, and generation-skipping transfer taxes. Estimated JCT score: $24 billion
Allow companies to fully-expense capital assets purchased the first year. Under current law, businesses and other taxpayers must usually “depreciate,” or slowly-deduct, capital asset purchases the first year. This capital-boosting proposal would allow taxpayers to deduct 100% of the purchase price from their taxes in year one. Estimated JCT score: $240 billion
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Of course he is right, but given that this electorate has chosen the furthest left liberal and Pelosi-Reid supermajorities over the furthest center of conservatives by a clear margin, right in the face of stagnation/collapse, perhaps this serious proposal for pro-growth policies should be moved to the good humor thread. :-( :x :cry:
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We're on the "Leaving Las Vegas" path to resolution to our "debtoholicism". Obama and congress can double up on the shots to "fix" the economy.
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http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/ (http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/)
Corporations versus the Market; or, Whip Conflation Now
by Roderick Long
Lead Essay
November 10th, 2008
Defenders of the free market are often accused of being apologists for big business and shills for the corporate elite. Is this a fair charge?
No and yes. Emphatically no—because corporate power and the free market are actually antithetical; genuine competition is big business’s worst nightmare. But also, in all too many cases, yes —because although liberty and plutocracy cannot coexist, simultaneous advocacy of both is all too possible.
First, the no. Corporations tend to fear competition, because competition exerts downward pressure on prices and upward pressure on salaries; moreover, success on the market comes with no guarantee of permanency, depending as it does on outdoing other firms at correctly figuring out how best to satisfy forever-changing consumer preferences, and that kind of vulnerability to loss is no picnic. It is no surprise, then, that throughout U.S. history corporations have been overwhelmingly hostile to the free market. Indeed, most of the existing regulatory apparatus—including those regulations widely misperceived as restraints on corporate power—were vigorously supported, lobbied for, and in some cases even drafted by the corporate elite.
Corporate power depends crucially on government intervention in the marketplace. This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts, and other forms of corporate welfare; protectionist tariffs; explicit grants of monopoly privilege; and the seizing of private property for corporate use via eminent domain (as in Kelo v. New London). But these direct forms of pro-business intervention are supplemented by a swarm of indirect forms whose impact is arguably greater still.
As I have written elsewhere:
One especially useful service that the state can render the corporate elite is cartel enforcement. Price-fixing agreements are unstable on a free market, since while all parties to the agreement have a collective interest in seeing the agreement generally hold, each has an individual interest in breaking the agreement by underselling the other parties in order to win away their customers; and even if the cartel manages to maintain discipline over its own membership, the oligopolistic prices tend to attract new competitors into the market. Hence the advantage to business of state-enforced cartelisation. Often this is done directly, but there are indirect ways too, such as imposing uniform quality standards that relieve firms from having to compete in quality. (And when the quality standards are high, lower-quality but cheaper competitors are priced out of the market.)
The ability of colossal firms to exploit economies of scale is also limited in a free market, since beyond a certain point the benefits of size (e.g., reduced transaction costs) get outweighed by diseconomies of scale (e.g., calculational chaos stemming from absence of price feedback)—unless the state enables them to socialise these costs by immunising them from competition – e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.
Nor does the list end there. Tax breaks to favored corporations represent yet another non-obvious form of government intervention. There is of course nothing anti-market about tax breaks per se; quite the contrary. But when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.
Intellectual property laws also function to bolster the power of big business. Even those who accept the intellectual property as a legitimate form of private property can agree that the ever-expanding temporal horizon of copyright protection, along with disproportionately steep fines for violations (measures for which publishers, recording firms, software companies, and film studios have lobbied so effectively), are excessive from an incentival point of view, stand in tension with the express intent of the Constitution’s patents-and-copyrights clause, and have more to do with maximizing corporate profits than with securing a fair return to the original creators.
Government favoritism also underwrites environmental irresponsibility on the part of big business. Polluters often enjoy protection against lawsuits, for example, despite the pollution’s status as a violation of private property rights. When timber companies engage in logging on public lands, the access roads are generally tax-funded, thus reducing the cost of logging below its market rate; moreover, since the loggers do not own the forests they have little incentive to log sustainably.
In addition, inflationary monetary policies on the part of central banks also tend to benefit those businesses that receive the inflated money first in the form of loans and investments, when they are still facing the old, lower prices, while those to whom the new money trickles down later, only after they have already begun facing higher prices, systematically lose out.
And of course corporations have been frequent beneficiaries of U.S. military interventions abroad, from the United Fruit Company in 1950s Guatemala to Halliburton in Iraq today.
Vast corporate empires like Wal-Mart are often either hailed or condemned (depending on the speaker’s perspective) as products of the free market. But not only is Wal-Mart a direct beneficiary of (usually local) government intervention in the form of such measures as eminent domain and tax breaks, but it also reaps less obvious benefits from policies of wider application. The funding of public highways through tax revenues, for example, constitutes a de facto transportation subsidy, allowing Wal-Mart and similar chains to socialize the costs of shipping and so enabling them to compete more successfully against local businesses; the low prices we enjoy at Wal-Mart in our capacity as consumers are thus made possible in part by our having already indirectly subsidized Wal-Mart’s operating costs in our capacity as taxpayers.
Wal-Mart also keeps its costs low by paying low salaries; but what makes those low salaries possible is the absence of more lucrative alternatives for its employees—and that fact in turn owes much to government intervention. The existence of regulations, fees, licensure requirements, et cetera does not affect all market participants equally; it’s much easier for wealthy, well-established companies to jump through these hoops than it is for new firms just starting up. Hence such regulations both decrease the number of employers bidding for employees’ services (thus keeping salaries low) and make it harder for the less affluent to start enterprises of their own. Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf.
I don’t mean to suggest that Wal-Mart and similar firms owe their success solely to governmental privilege; genuine entrepreneurial talent has doubtless been involved as well. But given the enormous governmental contribution to that success, it’s doubtful that in the absence of government intervention such firms would be in anything like the position they are today.
In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles. Small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.
So where does this idea come from that advocates of free-market libertarianism must be carrying water for big business interests? Whence the pervasive conflation of corporatist plutocracy with libertarian laissez-faire? Who is responsible for promoting this confusion?
There are three different groups that must shoulder their share of the blame. (Note: in speaking of “blame” I am not necessarily saying that the “culprits” have deliberately promulgated what they knew to be a confusion; in most cases the failing is rather one of negligence, of inadequate attention to inconsistencies in their worldview. And as we’ll see, these three groups have systematically reinforced one another’s confusions.)
Culprit #1: the left. Across the spectrum from the squishiest mainstream liberal to the bomb-throwingest radical leftist, there is widespread (though not, it should be noted, universal) agreement that laissez-faire and corporate plutocracy are virtually synonymous. David Korten, for example, describes advocates of unrestricted markets, private property, and individual rights as “corporate libertarians” who champion a “globalized free market that leaves resource allocation decisions in the hands of giant corporations”—as though these giant corporations were creatures of the free market rather than of the state—while Noam Chomsky, though savvy enough to recognize that the corporate elite are terrified of genuine free markets, yet in the same breath will turn around and say that we must at all costs avoid free markets lest we unduly empower the corporate elite.
Culprit #2: the right. If libertarians’ left-wing opponents have conflated free markets with pro-business intervention, libertarians’ right-wing opponents have done all they can to foster precisely this confusion; for there is a widespread (though again not universal) tendency for conservatives to cloak corporatist policies in free-market rhetoric. This is how conservative politicians in their presumptuous Adam Smith neckties have managed to get themselves perceived—perhaps have even managed to perceive themselves—as proponents of tax cuts, spending cuts, and unhampered competition despite endlessly raising taxes, raising spending, and promoting “government-business partnerships.”
Consider the conservative virtue-term “privatization,” which has two distinct, indeed opposed, meanings. On the one hand, it can mean returning some service or industry from the monopolistic government sector to the competitive private sector—getting government out of it; this would be the libertarian meaning. On the other hand, it can mean “contracting out,” i.e., granting to some private firm a monopoly privilege in the provision some service previously provided by government directly. There is nothing free-market about privatization in this latter sense, since the monopoly power is merely transferred from one set of hands to another; this is corporatism, or pro-business intervention, not laissez-faire. (To be sure, there may be competition in the bidding for such monopoly contracts, but competition to establish a legal monopoly is no more genuine market competition than voting—one last time—to establish a dictator is genuine democracy.)
Of these two meanings, the corporatist meaning may actually be older, dating back to fascist economic policies in Nazi Germany; but it was the libertarian meaning that was primarily intended when the term (coined independently, as the reverse of “nationalization”) first achieved widespread usage in recent decades. Yet conservatives have largely co-opted the term, turning it once again toward the corporatist sense.
Similar concerns apply to that other conservative virtue-term, “deregulation.” From a libertarian standpoint, deregulating should mean the removal of governmental directives and interventions from the sphere of voluntary exchange. But when a private entity is granted special governmental privileges, “deregulating” it amounts instead to an increase, not a decrease, in governmental intrusion into the economy. To take an example not exactly at random, if assurances of a tax-funded bailout lead banks to make riskier loans than they otherwise would, then the banks are being made freer to take risks with the money of unconsenting taxpayers. When conservatives advocate this kind of deregulation they are wrapping redistribution and privilege in the language of economic freedom. When conservatives market their plutocratic schemes as free-market policies, can we really blame liberals and leftists for conflating the two? (Well, okay, yes we can. Still, it is a mitigating factor.)
Culprit #3: libertarians themselves. Alas, libertarians are not innocent here—which is why the answer to my opening question (as to whether it’s fair to charge libertarians with being apologists for big business) was no and yes rather than a simple no. If libertarians are accused of carrying water for corporate interests, that may be at least in part because, well, they so often sound like that’s just what they’re doing (though here, as above, there are plenty of honorable exceptions to this tendency). Consider libertarian icon Ayn Rand’s description of big business as a “persecuted minority,” or the way libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people. Or again, note the alacrity with which so many libertarians rush to defend Wal-Mart and the like as heroic exemplars of the free market. Among such libertarians, criticisms of corporate power are routinely dismissed as anti-market ideology. (Of course such dismissiveness gets reinforced by the fact that many critics of corporate power are in the grip of anti-market ideology.) Thus when left-wing analysts complain about “corporate libertarians” they are not merely confused; they’re responding to a genuine tendency even if they’ve to some extent misunderstood it.
Kevin Carson has coined the term “vulgar libertarianism” for the tendency to treat the case for the free market as though it justified various unlovely features of actually existing corporatist society. (I find it preferable to talk of vulgar libertarianism rather than of vulgar libertarians, because very few libertarians are consistently vulgar; vulgar libertarianism is a tendency that can show up to varying degrees in thinkers who have many strong anti-corporatist tendencies also.) Likewise, “vulgar liberalism” is Carson’s term for the corresponding tendency to treat the undesirability of those features of actually existing corporatist society as though they constituted an objection to the free market. Both tendencies conflate free markets with corporatism, but draw opposite morals; as Murray Rothbard notes, “Both left and right have been persistently misled by the notion that intervention by the government is ipso facto leftish and antibusiness.”[18] And if many leftists tend to see dubious corporate advocacy in libertarian pronouncements even when it’s not there, so likewise many libertarians tend not to see dubious corporate advocacy in libertarian pronouncements even when it is there.
There is an obvious tendency for vulgar libertarianism and vulgar liberalism to reinforce each other, as each takes at face value the conflation of plutocracy with free markets assumed by the other. This conflation in turn tends to bolster the power of the political establishment by rendering genuine libertarianism invisible: Those who are attracted to free markets are lured into supporting plutocracy, thus helping to prop up statism’s right or corporatist wing; those who are repelled by plutocracy are lured into opposing free markets, thus helping to prop up statism’s left or social-democratic wing. But as these two wings have more in common than not, the political establishment wins either way. The perception that libertarians are shills for big business thus has two bad effects: First, it tends to make it harder to attract converts to libertarianism, and so hinders its success; second, those converts its does attract may end up reinforcing corporate power through their advocacy of a muddled version of the doctrine.
In the nineteenth century, it was far more common than it is today for libertarians to see themselves as opponents of big business. The long 20th-century alliance of libertarians with conservatives against the common enemy of state-socialism probably had much to do with reorienting libertarian thought toward the right; and the brief rapprochement between libertarians and the left during the 1960s foundered when the New Left imploded. As a result, libertarians have been ill-placed to combat left-wing and right-wing conflation of markets with privilege, because they have not been entirely free of the conflation themselves.
Happily, the left/libertarian coalition is now beginning to re-emerge; and with it is emerging a new emphasis on the distinction between free markets and prevailing corporatism. In addition, many libertarians are beginning to rethink the way they present their views, and in particular their use of terminology. Take, for example, the word “capitalism,” which libertarians during the past century have tended to apply to the system they favor. As I’ve argued elsewhere, this term is somewhat problematic; some use it to mean free markets, others to mean corporate privilege, and still others (perhaps the majority) to mean some confused amalgamation of the two:
By “capitalism” most people mean neither the free market simpliciter nor the prevailing neomercantilist system simpliciter. Rather, what most people mean by “capitalism” is this free-market system that currently prevails in the western world. In short, the term “capitalism” as generally used conceals an assumption that the prevailing system is a free market. And since the prevailing system is in fact one of government favoritism toward business, the ordinary use of the term carries with it the assumption that the free market is government favoritism toward business.
Hence clinging to the term “capitalism” may be one of the factors reinforcing the conflation of libertarianism with corporatist advocacy. In any case, if libertarianism advocacy is not to be misperceived—or worse yet, correctly perceived! —as pro-corporate apologetics, the antithetical relationship between free markets and corporate power must be continually highlighted.
Roderick Long is Associate Professor of Philosophy at Auburn University.
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Good read Mig.
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I agree, nice read. The professor correctly points out the problem with definitions and words. Words like liberal, conservative and capitalism have a wide range of meanings. The one who defines the issue early tends to win it. Watch how our reproductive issue advocate won't call her opponents pro-life, they are only anti-choice or anti women's rights.
A selection I appreciated from the piece: "...libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people."
He articulates a point I keep attempting to make - when we hear how free markets have failed, critics always point to the sectors that are the furthest from free, bungled up with endless, incompetent government meddling. They keep winning the argument that the 'market' is messed up, the result is then another left turn toward even greater government bungling, and the cycle continues.
It is very hard to articulate a positive, free market position when the key terms have been flipped upside down.
There are endless other examples, another is affordable housing which refers to housing in need of public subsidy, i.e. NOT affordable. Or the fairness doctrine which means losing your freedom of speech and having your rights handed over to a government oversight board. What's fair about that? And 'spreading the wealth'. Since when does receiving welfare make you wealthy???
Hard to win the argument if you first have to convince people that the words we use have no meaning.
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Heck yes, Doug. For my part, I've concluded we could clean up all current fiscal messes by enacting a $5.00 "fair share" tax. Every time some demagogue utters the term "fair share," we charge 'em 5 bucks. Ought to handle the deficit in a couple months, and empty union slush funds, too boot.
How 'bout that Employee Free Choice Act, eh?
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I am not inclined to bailout the Big three. The one thing that does bother me is the loss of manufacturing industry. Could Detroit be consolidated and converted into a manufacturing force that will lead the world into making only fuel efficient cars akin to there bieng used to make tanks during WW2?
We are an economy of fast food and government employees.
I am not sure what this means. Pat brings up some good concerns though I do not hear any ideas about what should be doing about it now. Pat kind of strikes me as more finger pointing by the right. I suspect most Americans are kind of tired about this. We don't hear anything about solutions going forward. Until we start hearing about ideas to help us get out of our messes the Republicans will remain where they rightly find themselves.
Comments Who Killed Detroit?
by Patrick J. Buchanan
11/21/2008 Print This
Who killed the U.S. auto industry?
To hear the media tell it, arrogant corporate chiefs failed to foresee the demand for small, fuel-efficient cars and made gas-guzzling road-hog SUVs no one wanted, while the clever, far-sighted Japanese, Germans and Koreans prepared and built for the future.
I dissent. What killed Detroit was Washington, the government of the United States, politicians, journalists and muckrakers who have long harbored a deep animus against the manufacturing class that ran the smokestack industries that won World War II.
As far back as the 1950s, an intellectual elite that produces mostly methane had its knives out for the auto industry of which Ike's treasury secretary, ex-GM chief Charles Wilson, had boasted, "What's good for America is good for General Motors, and vice versa."
"Engine Charlie" was relentlessly mocked, even in Al Capp's L'il Abner cartoon strip, where a bloviating "General Bullmoose" had as his motto, "What's good for Bullmoose is good for America!"
How did Big Government do in the U.S. auto industry?
Washington imposed a minimum wage higher than the average wage in war-devastated Germany and Japan. The Feds ordered that U.S. plants be made the healthiest and safest worksites in the world, creating OSHA to see to it. It enacted civil rights laws to ensure the labor force reflected our diversity. Environmental laws came next, to ensure U.S. factories became the most pollution-free on earth.
It then clamped fuel efficiency standards on the entire U.S. car fleet.
Next, Washington imposed a corporate tax rate of 35 percent, raking off another 15 percent of autoworkers' wages in Social Security payroll taxes
State governments imposed income and sales taxes, and local governments property taxes to subsidize services and schools.
The United Auto Workers struck repeatedly to win the highest wages and most generous benefits on earth -- vacations, holidays, work breaks, health care, pensions -- for workers and their families, and retirees.
Now there is nothing wrong with making U.S. plants the cleanest and safest on earth or having U.S. autoworkers the highest-paid wage earners.
That is the dream, what we all wanted for America.
And under the 14th Amendment, GM, Ford and Chrysler had to obey the same U.S. laws and pay at the same tax rates. Outside the United States, however, there was and is no equality of standards or taxes.
Thus when America was thrust into the Global Economy, GM and Ford had to compete with cars made overseas in factories in postwar Japan and Germany, then Korea, where health and safety standards were much lower, wages were a fraction of those paid U.S. workers, and taxes were and are often forgiven on exports to the United States.
All three nations built "export-driven" economies.
The Beetle and early Japanese imports were made in factories where wages were far beneath U.S. wages and working conditions would have gotten U.S. auto executives sent to prison.
The competition was manifestly unfair, like forcing Secretariat to carry 100 pounds in his saddlebags in the Derby.
Japan, China and South Korea do not believe in free trade as we understand it. To us, they are our "trading partners." To them, the relationship is not like that of Evans & Novak or Fred Astaire and Ginger Rogers. It is not even like the Redskins and Cowboys. For the Cowboys only want to defeat the Redskins. They do not want to put their franchise out of business and end the competition -- as the Japanese did to our TV industry by dumping Sonys here until they killed it.
While we think the Global Economy is about what is best for the consumer, they think about what is best for the nation.
Like Alexander Hamilton, they understand that manufacturing is the key to national power. And they manipulate currencies, grant tax rebates to their exporters and thieve our technology to win. Last year, as trade expert Bill Hawkins writes, South Korea exported 700,000 cars to us, while importing 5,000 cars from us.
That's Asia's idea of free trade.
How has this Global Economy profited or prospered America?
In the 1950s, we made all our own toys, clothes, shoes, bikes, furniture, motorcycles, cars, cameras, telephones, TVs, etc. You name it. We made it.
Are we better off now that these things are made by foreigners? Are we better off now that we have ceased to be self-sufficient? Are we better off now that the real wages of our workers and median income of our families no longer grow as they once did? Are we better off now that manufacturing, for the first time in U.S. history, employs fewer workers than government?
We no longer build commercial ships. We have but one airplane company, and it outsources. China produces our computers. And if GM goes Chapter 11, America will soon be out of the auto business.
Our politicians and pundits may not understand what is going on. Historians will have no problem explaining the decline and fall of the Americans.
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Mr. Buchanan is a nationally syndicated columnist and author of Churchill, Hitler, and "The Unnecessary War": How Britain Lost Its Empire and the West Lost the World, "The Death of the West,", "The Great Betrayal," "A Republic, Not an Empire" and "Where the Right Went Wrong."
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Don't the Japanese profitably make cars here in the US? :?
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"I am not inclined to bailout the Big three." - Me neither.
"The one thing that does bother me is the loss of manufacturing industry." - Yes, but do we want government picking winners and losers.
"Could Detroit be consolidated and converted into a manufacturing force that will lead the world into making only fuel efficient cars akin to there being used to make tanks during WW2?" - And there is the beauty of business failure and bankruptcy, allowing assets from failed firms to flow to their most productive and valuable use. (Why do the basic tenets of free enterprise sound like a foreign language in this political environment?)
"We are an economy of fast food and government employees." - NO. Architecture, engineering and open heart surgery are service industry jobs as well. As we became more prosperous and automated, manufacturing jobs dropped in importance. Conversely, as we lost manufacturing jobs, we gained in total jobs and prosperity. Interestingly, China has lost more manufacturing jobs than the US.
Pat kind of strikes me as more finger pointing by the right. - PB is often not on the right with his views; I think he has opposed all free trade agreements as he implies in this piece.
"We don't hear anything about solutions going forward." - Letting failing enterprises fail just doesn't sound pretty. If it is government's job to rescue these manufacturers, we should first do a full admission of how it was government's FAULT that they are failing, Pat points out most of those. The other impediment to ever outgrowing their problems is the big, fat hold of the union. If we do nothing right now, that problem corrects itself. Why are we so desperate to prevent a much needed correction?
"Until we start hearing about ideas to help us get out of our messes the Republicans will remain where they rightly find themselves." - There isn't a government 'solution' for every problem especially when a large part of the problem in the first place was too many government solutions.
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Doug,
Until we start hearing about ideas to help us get out of our messes the Republicans will remain where they rightly find themselves."
Well I wasn't necessarily suggesting the government had to come up with *government* solutions.
But the main part of my initial premise is the rich keep getting richer and the rest stay in place. It is a problem when something to the effect of 1% of the people have 95% of the wealth.
The solution to this for me is unknown. But I recognize this as a problem. I guess you don't.
I don't complete laissez faire is possible with human nature the way it is.
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Hey All
I'm new to this forum andlive about an hour outside Detroit.
The way to think about the big 3 is easy.Think band aid.Tear that sucker of quick so the pain is here and gone any bailout is going to prolong the agony like taking a band aid off slowly.OUCH! :-DBy allowing the big 3 to file chapter 11vs loan/bailout they do a couple things
1 they dump the union contracts (this allows them to lower overhead)(NO MORE JOB BANK)
2 they can get out of a lot of dealership contracts without being sued (GM alone has like 7000 vs 1000 for toyota)
3 they can become more market responsive to the cars the CONSUMER wants not the cars that Pelosie and Reed think we should drive (mini coffins on wheels)I mean seriously who wants to drive a car designed for the most part by the govt.
Boyo
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***I don't complete laissez faire is possible with human nature the way it is.***
correction, I don't think strict laissez faire is possible....
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"I wasn't necessarily suggesting the government had to come up with *government* solutions." - I know and I don't mean to imply I support total laissez faire. I think that you can get away with a carrying a small anchor on business such as paying about to 17-19% of income in taxes and reasonable regulation. But when government starts to micromanage businesses or place disproportionate burdens, I think creativity and innovation get quashed.
I especially oppose unequal treatment under the law (everyone should oppose it; it's in the constitution) and these bailouts are great examples. We help one business and not another. Same with nearly all types of public private partnerships.
The credit bailout gives me a rotten feeling too, but at least there we are talking about part of the public infrastructure, like bridges and airports.
Back to wealth disparity. I know that plenty of people share your concern. I think it is 5% that pay >50% of the taxes. I don't begrudge them for that. More important IMO is to look at the gains of any individual, family or class of taxpayer and see how they are improving their lives rather to compare with others in other circumstances. If the middle class is not showing enough upward mobility, that is more of a concern to me than who or how many make more or have more.
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http://www.youtube.com/watch?v=U7YBjjLKLd0[youtube][/youtube]
Thaddeus McCotter on the Auto loans /Bailout
Boyo
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The original piece, linked below, contained numerous tables.
The Poverty of the Official Poverty Rate
By Nicholas Eberstadt
Posted: Wednesday, November 12, 2008
The proportion of people living in poverty has increased slightly since the 1970s, according to the official poverty measure. Since the "poverty threshold" used for counting the poor is fixed and unchanging, those numbers suggest a disturbing rise in absolute want. But data on household spending show consumption growth even for those with low incomes. The official poverty rate is seriously flawed, and many analysts are ready to scrap it.
Washington regularly collects vast amounts of data for hundreds upon hundreds of social and economic indicators bearing on poverty. But within that compendium, a single number is widely taken to be more important than the others--the so-called official poverty rate (OPR), which is based on the federal poverty measure established in the 1960s. For four decades, that rate has served as the benchmark for both policy analysis and public discourse regarding the national struggle to reduce the deprivation in our midst. Yet even a casual examination shows that this metric is deeply flawed and increasingly biased toward the overestimation of material poverty.
While the OPR numbers say that the proportion of the American population living in poverty has changed little--indeed, has slightly increased--since the early 1970s, data on household spending show substantial and continuing growth in consumption among those reporting very low incomes. Indeed, it is becoming increasingly clear that the OPR is of no help in figuring where we are today or even where we have come from. Signs are finally on the horizon that analysts on both the left and the right are prepared to scrap the official rate in favor of more realistic ways to track poverty.
A Little History
The poverty rate measure was introduced in 1965 in a landmark study by Mollie Orshansky, an economist and statistician at the Social Security Administration. Drawing on her own research, in which she had experimented with using household income thresholds to identify children living in impoverished conditions, Orshansky proposed a set of income criteria for setting a poverty threshold and determining who lived below it.
Orshansky's threshold was essentially a multiple of the cost of a nutritionally adequate--though humble--diet. For the food-budget anchor, Orshansky used the U.S. Department of Agriculture's "economy food plan," the lower of its two budgets for nonfarm families of modest means. She then applied a multiplier of roughly three--the number varied with family size--to calculate household poverty thresholds. The multiplier itself, incidentally, came from statistics on the ratio of after-tax income to food budgets for all Americans in the 1950s.
Since the early 1970s--the long decades of stagnation in the OPR--the correspondence between the statistic and median family income appears to have broken down altogether.
Using these new poverty thresholds, along with census data on income, Orshansky calculated the total population living below the poverty line for the United States as a whole, as well as for demographic subgroups, for 1963. Although Orshansky's study did not employ the term "poverty rate," talking instead about the "incidence of poverty," the term quickly came to mean the proportion of people or families below the poverty line.
Where's the Beef?
Little has changed since 1965 in the way the federal government measures poverty. The OPR is still calculated annually on the basis of poverty thresholds adjusted for inflation. The rate is and always has been a measure of absolute material poverty--one that intentionally ignores changes in the culture and the economy that influence popular perceptions of what constitutes deprivation.
Estimates of the OPR for the United States are thus available for the past forty-eight years. At first, they gratifyingly tracked the expectations of those who assumed that the rising tide of economic growth would carry all boats. The rate fell by roughly half between the late 1950s and the late 1960s for both families and individuals.
Strikingly, however, the numbers suggest virtually no improvement since then. The lowest OPR yet recorded was for 1973, when the index bottomed out at 11.1 percent. The OPR has since declined for older Americans, for people living alone, and for African Americans. But for most demographic slices--children under eighteen, families, and non-Hispanic whites--the OPR was higher at the start of the new century than it had been in the early 1970s. Low-income Hispanics were somewhat better off in 2006 than in 1973, but the difference is distressingly modest.
To go by the OPR, then, America, through three decades of both Democratic and Republican administrations, has utterly failed to improve the material lot of the more vulnerable elements of society--to raise them above the income line where, according to the author of the federal poverty measure, "everyday living implied choosing between an adequate diet of the most economical sort and some other necessity, because there was not money enough to have both."
Remember the all-boats-rising thesis? Experts on poverty long held that the OPR is largely driven by macroeconomic conditions--employment opportunities and wage rates. In a series of influential publications in the mid-1980s, for example, David Ellwood and Lawrence Summers of Harvard found that "almost all of the variation in the measured poverty rate is tracked by movements in median family income."
But their work only covered 1959–83. Since the early 1970s--the long decades of stagnation in the OPR--the correspondence between the statistic and median family income appears to have broken down altogether. In fact, over the past three-plus decades, data on the median income for American families have provided no clue to the OPR.
Additionally, since 1973, the behavior of the OPR looks increasingly aberrant when compared to other indices widely thought to bear on the risk of poverty in a modern urbanized society. In 1973, nearly 40 percent of adults over the age of twenty-five lacked a high school degree; by 2001, the figure was under 16 percent. Or consider trends in means-tested benefit programs--food stamps, housing subsidies, Medicaid, the Earned Income Tax Credit, and other programs that benefit the poor. Between the 1973 and 2001 fiscal years, spending on those programs more than tripled from $163 billion to $507 billion (in 2004 dollars) and increased by over 130 percent in real, per-capita terms.
The simplest and most plausible explanation for these seeming contradictions is that something is seriously wrong with the way the OPR is calculated. A variety of minor and major technical problems have been noted by specialists over the years--among them, the method for adjusting for inflation and the use of the food budget as the sole benchmark for income sufficiency. One other defect, however, fundamentally flaws the current approach.
The Income-Consumption Mystery
The rate calculation implicitly assumes that consumption by low-income Americans is accurately tracked by their reported incomes. In fact, there is good evidence that, for the lowest fifth of Americans on the income ladder, reported expenditures are almost twice their incomes.
Correcting for changes in household size, real expenditures per person for all Americans were 110 percent higher in 2005 than in 1960–61 for the country as a whole. We do not have precisely comparable figures for poor households, but we do know that the real expenditures of the poorest fifth of households were 112 percent higher in 2005 than the expenditures of the poorest fourth in 1960–61.
Put simply, consumption in low-income households has grown even faster than that of average American households. Moreover, other statistical evidence confirms that lower-income Americans are doing far better than the stagnation in the OPR suggests.
Food and Nutrition. In the early 1960s, inadequate caloric intake was hardly unusual among the officially defined poor. By the end of the century, however, the proportion of the adult population between twenty and seventy-four who were underweight (defined as a body mass index below 18.5) dropped from 4 percent to 1.9 percent.
By the same token, nutritional deprivation among children has been declining. According to the Centers for Disease Control and Prevention, the percentage of low-income children younger than five who were underweight dropped from 8 percent in 1973 to under 5 percent in 2005. (In the same period, the OPR for children rose from 14.4 percent to 17.6 percent.)
Housing and Home Appliances. In 1970, about 14 percent of poverty-level households were officially deemed "overcrowded," with more people than rooms to live in. By 2001, just 6 percent of poor households were overcrowded--a proportion lower than for nonpoor households as recently as 1970. Moreover, between 1980 and 2001, heated floor space per person in the homes of the officially poor increased by 27 percent. And in 2001, just 2.5 percent of poverty-level households lacked plumbing facilities--a lower share than for nonpoor households in 1970.
Trends in furnishings and appurtenances tell the same story: poor households' possession of modern conveniences has been growing rapidly. For many of these items--telephones, television sets, central air conditioning, and microwave ovens--prevalence in poverty-level households in 2001 exceeded that of median-income households in 1980.
Personal Transportation. In 1973, almost three-fifths of the households in the lowest income quintile lacked a car. In 2003, by contrast, over three-fifths of poverty-level households owned one or more cars. In that same year, moreover, 14 percent of households below the poverty line owned two or more cars, and 7 percent had two or more trucks.
Health Care. Between 1970 and 2004, the infant mortality rate fell by a remarkable two-thirds. And it continued its almost uninterrupted decline after 1973, even as the OPR for children began to rise. The disconnect is particularly striking for white infants. Between 1974 and 2004, their mortality rate fell by three-fifths, from 14.8 deaths per thousand to 5.7 deaths per thousand. Yet the OPR for white children rose from 11.2 percent to 14.3 percent.
The gains in access to medical care for infants extend to older children. The proportion of children who did not report a visit to a physician was significantly lower for the poor population in 2004 (12 percent) than it had been for the nonpoor population twenty-two years earlier (17.6 percent).
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Mystery Solved?
The more striking anomaly in the OPR that cries out for explanation is that the gap between reported income and personal spending has widened sharply. Between 1960–61 and 2005, the ratio of income to expenditures for all households remained fairly stable, with expenditures exceeding income by a significant amount. The subgroup of poorer households also seemingly overspent. But in contrast to households in general, the margin by which the spending of the poor exceeded reported income has moved steadily upward. In the early 1960s, the ratio was 1.12 for the lowest income quartile. By 1972–73, that ratio had reached 1.4 for the lowest income quintile. (Note again the lack of data on precisely comparable groups.) By 2005, the ratio for the bottom fifth had reached 1.98.
What accounts for the gap? One possible hypothesis is that low-income Americans are overspending at an increasing rate--that is, going ever deeper into debt. By this reasoning, the widening gap represents an unsustainable binge that must eventually come to an end, with doleful consequences for future living standards of the disadvantaged.
The overspending hypothesis, on its face, seems plausible. Luckily, it is confuted by evidence from U.S. Census Bureau and Federal Reserve surveys showing that the average net worth of households in the bottom fifth has actually grown in the last decade. Additionally, the gains in wealth have been broadly shared, with the portion of bottom fifth households reporting no assets whatever falling from 21 percent in 1989 to just 8 percent in 2004.
If the poor are not overspending, is it possible they are underreporting income? There is little doubt. For one thing, the OPR measure of income ignores tens of billions in tax rebates delivered by the Earned Income Tax Credit. By the same token, the poor surely supplement their incomes off the books. But to use the underreporting phenomenon to explain why the gap between spending and income has widened so much, one would also need to explain why underreporting was increasing rapidly. Hence, the explanation for the widening gap more likely lies elsewhere.
Might the growing disparity be explained by another big change in modern America--namely, the rise of illegal immigration? The argument would go like this: there has been a surge of undocumented immigration over the past generation, and illegal immigrants are understandably inclined to underreport their incomes. Yet they have no similar incentives to underreport their consumption in interview-based surveys. Thus, all other things equal, as the undocumented become an ever greater proportion of the lower-income population, the gap between spending and reported income should grow. (Immigrants, furthermore, tend to be savers--think remittance flows--a fact that could also help account for the reported increases in wealth among the poor in recent decades.)
The argument is plausible, but the actual magnitude of the effect is likely to be small. Undocumented immigrants are believed to comprise less than 3 percent of all U.S. residents. Moreover, they are probably undersampled by the survey techniques used by the Census Bureau to estimate the poverty rate.
But even if all illegal immigrants were fully represented in our income and expenditure surveys, if there had been no illegal immigrants in the country in the early 1970s, if all illegal immigrants now fall in the lowest quintile of the U.S. income distribution, and if this entire group reported no income at all, the illegal immigration effect could account for less than half of the rise in the ratio of spending to income that was actually reported by the bottom fifth of American households between 1972 and 2005. In reality, the impact is probably much smaller. If we want to understand the uncanny continuing divergence between reported spending levels and reported income levels for the lowest fifth of American households, then we are going to have to look into the economic circumstances of legal American residents--the overwhelming majority of whom are native-born.
To see where we are heading, note that poverty status is not a fixed, long-term condition for the overwhelming majority of Americans who are ever designated as poor. Quite the contrary: long-term poverty appears to be the lot of only a tiny minority counted as poor in any particular year by the OPR. For example, the Census Bureau found that from 1996 to 1999, fully 34 percent of all households spent two months or more below the poverty line--but only 2 percent stayed below the line in all forty-eight of those months. Both economic theory and common sense suggest that the temporarily poor would try to maintain their living standards in lean times by spending more than they earn.
But this alone would not explain why the spending-income gap increased so much in recent decades. What is needed is a reason to believe that household incomes are more variable than they used to be, sharply increasing the portion of the materially disadvantaged that are only temporarily poor. Here, the accumulating evidence is intriguing. For example, Jacob Hacker of Yale University found that, for households headed by people of working age, the odds of seeing income fall by half or more in the coming year rose from 7 percent in 1970 to 16 percent in 2002.
This unintuitive explanation for the growing income-consumption gap meshes neatly with another surprising bit of survey data. According to the Federal Reserve, differences in net worth for the bottom quintile and the next highest quintile of American families narrowed between 1989 and 2004--hardly what one would expect in light of evidence of growing income inequality since the 1960s. If year-to-year income volatility were on the rise, however, we would expect an increasing share of families permanently lodged in the second quintile to register temporarily in the bottom quintile in any given year--and conversely, we would also expect a rising share of lowest-quintile families to bounce up to the second quintile in any given year. Rising income volatility, in short, could be a key to explaining the seemingly paradoxical behavior of lower-income households with respect to both spending and the accumulation of wealth.
This is, arguably, both good news and bad. On the one hand, it suggests that lower-income Americans are not spending themselves into oblivion. On the other, it implies that income volatility is a large and growing concern for ever more Americans at the short end of the income stick.
What It All Means
We would surely discard a statistical measure that showed life expectancy was falling during a time of ever-increasing longevity, or one that suggested our national finances were balanced in a period of rising budget deficits. Central as the OPR has become to antipoverty policies--or, more precisely, especially because of its central role in such policies--it should likewise be discarded in favor of a more accurate way (or ways) of describing trends in material deprivation.
Do not misinterpret this dismissal of the OPR. Nothing about the analysis here leads me to conclude that poverty is a thing of the past--or even that the general plight of the poor in America is markedly better today than in 1965 when Lyndon Johnson's "War on Poverty" was ramping up. To the contrary, I think that in many tragic respects, the misery and degradation suffered by America's most disadvantaged may well be more acute today than it was forty years ago.
For example, no matter how you measure it, family structure is far more frayed than it was in 1965. While the consequences of family breakdown are seldom auspicious, they tend to be most severe for the poor. By the same token, despite the past decade and a half of decline in major urban areas, crime rates in America remain far higher today than in 1965. And it is no secret that the greatest burden of crime falls directly on the very poorest. The corollary of that crime explosion--today's historically unprecedented levels of prison incarceration for the country's young men--not only reflects on misery in modern America, but contributes to it.
Nor does this study suggest that America's long war on poverty has been a failure. It does not even attempt an overall assessment of the material impact of those policies. At the risk of beating a dead horse, the only issue here is the reliability of the OPR as a measure of poverty. And, whereas the rate shows no progress in reducing poverty over the past three and a half decades, practically every other available statistical indicator points to major improvements in material living standards.
Accommodating such findings will require a fairly major recasting of the conventional narrative about long-term progress against poverty. Yet rethinking what has happened is hardly likely to end disputes over the value of the welfare reform plan of the 1990s or of the efficiency of the government's antipoverty programs. Our contentious, ongoing national debate about the adequacy and efficacy of the social safety net is at its core a dispute over first principles and underlying premises--not the simple facts of how many people go hungry or lack access to a telephone.
New Directions
This study points to some promising avenues for inquiry in the years ahead. Consumption is, without doubt, a more faithful measure of material deprivation than income. Further, the complex (and, for our purposes, crucial) interplay between consumption and income can be much better captured by surveys that track specific households or individuals over time than by "snapshot" measures at a single date. Yet the government's capacity to follow the long-term dynamics of household income and consumption in America is woefully limited--a curious oversight for an information-rich society.
Equally curious is the fact that the first efforts to create an alternative poverty metric are not coming from federal antipoverty agencies, but from New York City, whose mayor, Michael R. Bloomberg, decided that the OPR was all but useless in determining how to spend the city's limited antipoverty resources. So New York City created a new poverty measure. It does not tackle the inherently difficult problem of accounting for year-to-year variability in individual household resources, but it is plainly a step up because it focuses on consumption rather than income.
The first results, released in mid-July, are provocative. The new measure implies that 23 percent of New York's population is poor, as opposed to the OPR's 19 percent. But a much smaller proportion of the recorded poor is shown to be in extreme poverty because the new measure takes into account food stamps and housing subsidies. Conversely, the number of elderly poor is much higher (32 percent) than previously recognized, apparently because of increases in the cost of medical services not covered by government insurance. For now, the New York City metric offers only a snapshot of poverty--a picture of a single point in time--but it should be possible to use this framework to estimate long-term poverty trends.
On the same day New York released its first estimates, the House Ways and Means Subcommittee on Income Security and Family Support held hearings to explore the idea of modernizing the federal measurement of poverty. The subcommittee's chairman, Jim McDermott (D-Wash.), has submitted a bill calling for a new consumption-based metric for poverty derived from decade-old recommendations from the National Academy of Sciences. As with the New York City approach, it does not account for the role of year-to-year income variability in poverty. But it is a start: the process of rethinking the federal government's obsolete official poverty measure has begun.
Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI.
http://www.aei.org/publications/pubID.28926/pub_detail.asp
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Thanks BBG for a great post. I agree with their analysis and learned some details I didn't know. I've complained here and elsewhere about the taxpayer-billed farce of the Census Bureau mis-measuring poverty. This study shows that the poor are spending double what we measure for their income which means we are NOT measuring their income, just paying for the studies and basing policies and politics on false information.
My beef is that the Census Bureau does not count non-cash subsidies as income. They don't count the food stamp debit card, the free clothing, free health care and they don't count Section 8 voucher paid housing. We pay it by the trillion. They receive it. And none of it counts. Then the 'experts' just keep telling us the disparity keeps getting worse, we aren't doing enough and they point to 'unimpeachable' sources like the Census Bureau.
FWIW I don't think the non-counting of non-cash subsidies explains the 100% error the study found in comparing income with consumption. I think it is an additional defect making the total error perhaps 200% or more. All about something I think is none of our business, how much money other people make.
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With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.
Chad CroweThose who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."
The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.
The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.
In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.
True, this will change one day. But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.
It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.
But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.
Monetarist Bernanke and others blame Japan's postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR's New Deal did not end the Great Depression.
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.
Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.
The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.
Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.
Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.
In today's Opinion Journal
REVIEW & OUTLOOK
Secretary of BailoutsJindal's MedicineThe Sidwell Choice
TODAY'S COLUMNISTS
The Americas: Election Fraud in Nicaragua
– Mary Anastasia O'GradyInformation Age: When Even Good News Worsens a Panic
– L. Gordon Crovitz
COMMENTARY
The Fed Is Out of Ammunition
– Christopher WoodWhat a Single Nuclear Warhead Could Do
– Brian T. KennedyChange Our Public Schools Need
– Terry M. MoeBush Does the Right Thing for Darfur
– Kenneth RothWhat happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.
It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.
In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
Mr. Wood, equity strategist for CLSA Ltd. in Hong Kong, is the author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s" (Solstice Publishing, 2005).
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**Possible, or just Russian wishful thinking?**
http://www.bloomberg.com/apps/news?pid=20601103&sid=a3sayDZz.QKc&refer=us
Russian Professor Says U.S. Will Break Up After Economic Crisis
By Robin Stringer
Nov. 24 (Bloomberg) -- A professor at the diplomatic academy of Russia’s Ministry of Foreign Affairs said the U.S. will break into six parts because of the nation’s financial crisis.
“The dollar isn’t secured by anything,” Igor Panarin said in an interview transcribed by Russian newspaper Izvestia today. “The country’s foreign debt has grown like an avalanche; this is a pyramid, which has to collapse.”
Panarin said in the interview that the financial crisis will worsen, unemployment will rise and people will lose their savings -- factors that will cause the country’s breakup.
“Dissatisfaction is growing, and it is only being held back at the moment by the elections, and the hope” that President- elect Barack Obama “can work miracles,” he said. “But when spring comes, it will be clear that there are no miracles.”
The U.S. will fracture into six parts: the Pacific coast; the South; Texas; the Atlantic coast, central states and the northern states.
“Now we will see a change to the regulatory system on a global financial scale: America will cease to be the world’s regulator,” to be replaced by China and Russia, he said.
To contact the reporter on this story: Robin Stringer in New York at rstringer@bloomberg.net.
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Should this happen, it will bode ominously for the role of the dollar in the world economy.
http://www.atimes.com/atimes/Japan/JK19Dh01.html
Japan economists call for 'Obama bonds'
By Kosuke Takahashi
TOKYO - Japanese economists, increasingly concerned that the United States might seek to pay its enormous and growing debt obligations in a weakened US dollar, are looking to the possibility of US Treasuries being issued in yen.
The US government needs to borrow at least US$1 trillion in the coming year, excluding the US Treasury's $700 billion plan to bail out the financial and other industries, said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities Co, a unit of Japan's largest publicly traded lender by assets. That amount is likely to grow as the US government continues to rescue failed parts of the economy and has to raise more debt - that is, issue government bonds, or Treasuries - to fund such rescues.
Since 2004, when the amount of the government bond issuance reached an annual average of $400 billion, 94% of new buyers of US government bonds have been foreigners, Mizuno told Asia Times Online.
One measure of the increased concern at the ability of the United States to finance its enormous deficits in the future is the rising cost of credit default swaps bought as protection of Treasury debt. These traded near a record high on Tuesday, with benchmark 10-year contracts on Treasuries increased to 42 basis points, or 0.42 percentage points, from around 20 in early September. The contracts have also risen from below two basis points at the start of the credit crisis in July 2007.
While it remains unlikely that the US government will default on its debt, a weaker dollar would ease the burden of payment on existing debt.
In the past few months, the US dollar has strengthened against other major currencies, with the notable exception of the yen, even as the country has been at the epicenter of the deepening financial crisis. That dollar strength is not expected to last.
"There is no wonder the dollar will weaken," said Eisuke Sakakibara, Japan's former top currency official and now a professor at Waseda University. "The dollar now looks strong for a technical reason. The money the US financial firms had invested in the world is being repatriated into the homeland, causing dollar-buying. But once this conversion into the dollars is done, the currency will head south," Sakakibara said at a forum in Tokyo on Sunday.
Faced with the unprecedented growth of the US budget deficit and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of president-elect Barack Obama to issue US Treasuries denominated in yen and other currencies. The issuance of foreign currency-denominated US Treasures would reduce the perceived risk of holding the debt.
The idea of issuing foreign currency-denominated US Treasures is not new. The Jimmy Carter administration, buffeted by the two oil crises of the 1970s, sold "Carter bonds", denominated in German marks and Swiss francs, in 1978 to attract foreign investors into Treasuries.
"The US will be forced to issue foreign currency-denominated US Treasures in its hour of need," said Mizuno. "The US cannot finance its deficit by itself. The US financial system cannot survive without foreign investors. We will see 'Obama Bonds' in the future."
With the US owing increasing amounts to foreign nations, the confidence in US Treasuries continues to be shaken, said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co in Tokyo, said. "This will push up long-term yields, and the dollar will be sold," said Kanno, speaking at the forum in Tokyo on Sunday.
So far, the Japanese yen has been the biggest winner out of the current financial turmoil as investors increasingly unwind the so-called yen carry trade, in which yen borrowed at low interest is changed into other currencies and invested for higher yields than the interest charged on the yen loan.
The yen has advanced 15% versus the dollar this year, 33% against the euro and 53% against the pound sterling. The yen may rise to 85 per dollar this year, predicted Masaki Fukui, senior market economist in Tokyo at Mizuho Corporate Bank Ltd, a unit of Japan's second-largest financial group by market value. The Japanese currency at present is trading at about 96.28 to the US dollar.
"Japan’s financial authorities may intervene in the foreign exchange markets only when the yen breaks 90 per dollar," Sakakibara said.
As the yen strengthens, the effective value of debt held in dollars will decline, a fate that yen-denominated Treasuries would escape.
"Yen-denominated US Treasuries would reduce currency risks for Japanese and Chinese buyers of US Treasuries," said Fukui. "If concerns over US Treasuries continue to grow, no one will want to buy them. Yen-denominated US Treasuries would make it easy for foreign investors to buy them."
Looking ahead to 2009, foreign buyers such as Japan, China and other emerging market central banks are likely to reduce their holdings of US Treasuries rather than increase them, as their own countries face massive funding needs to buoy their economies at home and as America will continue to face financial instability and deteriorating economic fundamentals.
Japan holds the world's second-largest foreign reserves, totaling about $1 trillion, following China, which has about $2 trillion in forex reserves, including some $600 billion worth of US Treasuries. Japan plans to provide up to $100 billion to the International Monetary Fund, which would reduce the nation’s holding of short-term US Treasury bills.
China on November 9 announced its sweeping economic stimulus package valued at about 4 trillion yuan ($586 billion), to be spent over the next two years. Market players are speculating China, to secure financial resources, would reduce its holding of US Treasury securities rather than increase them.
Kosuke Takahashi is a freelance correspondent based in Tokyo. He can be contacted at letters@kosuke.net.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
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Anatomy of a Breakdown
Concerted government policy helped trigger the financial meltdown—and will almost certainly extend it.
Michael Flynn | January 2009 Print Edition
It was not an absence of federal intervention that produced the Great Financial Panic of 2008. Contrary to the assertions of those clamoring for new regulations (see "Is Deregulation to Blame?," page 36), the liquidity shortage and credit freeze that triggered Washington's biggest intrusion into the economy since Richard Nixon's wage and price controls were caused by bad government policy and worse crisis management.
As the housing bubble inflated from 1997 to 2006, banks, fueled by the Federal Reserve, prodded by activists, and egged on by Wall Street, created ever more exotic mortgage loans that pushed up housing prices and extended mortgage debt to families vulnerable to economic downturns. Several layers of financial products were tied to these mortgages. As some of the derivative instruments and underlying mortgages collapsed, collateral damage raced through the entire system.
In 2008 the Bush administration took a series of frantic steps to stop the bleeding. It backed a hostile takeover of the investment bank Bear Stearns. It took over home lending behemoths Fannie Mae and Freddie Mac, an act that put $5 trillion worth of mortgages—more than $1 trillion of which are subprime—on the federal government's books, not to mention the $200 billion it had to commit to guarantee Fannie and Freddie's debts. It made hundreds of billions of dollars available to banks through the Fed's "discount window," its mechanism to make short-term loans to certain institutions, put up $85 billion to take over the insurance giant AIG, and offered another $250 billion to individual banks to rebuild their balance sheets.
In October the administration convinced Congress to authorize the Treasury Department to spend upward of $700 billion buying up toxic mortgage-backed securities, most of which contain sizeable numbers of subprime mortgages. Each step not only failed to calm the market but seemed to increase the sense of impending doom (also fanned by sky-is-falling pronouncements from President Bush on down). After a month of U.S. government action, the mortgage crisis had grown into a global financial panic, the repercussions of which we'll be living with for decades.
The Roots of the Crisis
Throughout the 1990s and the early years of this century, both major political parties became intoxicated with the idea of promoting "affordable" housing. By the time the crisis blew up, Congress was mandating that roughly 50 percent of the mortgages issued by Fannie and Freddie go to households making below their area's median income.
Many conservative commentators have blamed the housing mess on the 1977 Community Reinvestment Act (CRA), which essentially required banks to increase lending in low-income areas. While the CRA was a bad law, its role in recent events has been overblown. After all, it was on the books for decades before the bubble began. The law's worst legacy is the permanent network of "affordable housing" advocates that sprang up after it passed. These groups, which were intended to facilitate lending in poor areas, continually called for increased activity by banks and additional government support for affordable housing initiatives. The CRA also helped create a climate in which lending to low-income households was a key metric and condition regulators used in approving bank mergers.
Other, more recent developments played a bigger role in the financial crisis. In 1993 the Federal Reserve Bank of Boston published "Closing the Gap: A Guide to Equal Opportunity Lending." The report recommended a series of measures to better serve low-income and minority households. Most of the recommendations were routine and mundane: better staff training, improved outreach and communication, and the like. But the report also urged banks to loosen their income thresholds for receiving a mortgage. In the years after the report was published, activists and officials—especially in the Department of Housing and Urban Development, under both Bill Clinton and George W. Bush—used its findings to pressure banks to increase their lending to low-income households. By the turn of the century, other changes in federal policy made those demands more achievable.
You can't lend money if you don't have it. And beginning in 2001, the Federal Reserve made sure lots of people had it. In January 2001, when President Bush took office, the federal funds rate, the key benchmark for all interest rates in this country, was 6.5 percent. Then, in response to the meltdown in the technology sector, the Fed began cutting the rate. By August 2001, it was at 3.75 percent. And after the terrorist attacks of September 11, the Fed opened the spigot. By the summer of 2002, the federal funds rate was 1 percent.
The central bank's efforts went so far that, at one point in 2003, we had interest rates below the rate of inflation, or effectively negative. Institutional investors, looking at low yields on Treasury securities, needed a place to park money and earn some kind of return. Mortgage-backed securities became a favorite investment vehicle. Under traditional models, they were very safe and, because of Fed policy, even the most conservative fund could earn better returns than they could on Treasury notes.
Investment houses would bundle individual mortgages from several banks together into bond-like products that they would sell to individual investors. Mortgages historically have been seen as among the safest investments, and the era of rising house values transformed "safe" into "guaranteed returns."
For the first half of this decade, trading in mortgage-backed securities exploded. Their growth provided unprecedented levels of capital in the mortgage market. At the same time, investment houses were looking to replace the healthy fees earned during the dot-com bubble. Mortgage-backed securities had fat margins, so everyone jumped into the game.
The additional capital to underwrite mortgages was a good thing—up to a point. Homeownership expanded throughout most of Bush's presidency. During the last few decades, the American homeownership rate has been around 60 percent of adult households. At the height of the bubble, it reached almost 70 percent. It is clear now that many people who got mortgages at the high-water mark should not have. But Wall Street needed to feed the stream of mortgage-backed securities.
Fannie and Freddie
It's hard to overstate the role Fannie Mae and Freddie Mac played in creating this crisis. Chartered by Congress, Fannie in 1938 and Freddie in 1970, the two government-sponsored enterprises provided much of the liquidity for the nation's housing market. Because investors believed—correctly, it turns out—that Fannie Mae and Freddie Mac were backed by an implicit guarantee from the federal government, the companies were able to raise money more cheaply than their competitors. They were also exempt from federal, state, and local taxes.
The chief mission of Fannie Mae and Freddie Mac was to buy up mortgages issued by banks, freeing up bank money for additional mortgages. Fannie and Freddie would package these mortgages into mortgage-backed securities and sell those on the secondary mortgage market, providing cash to continue the cycle. Even when selling these securities, they often retained the full risk for any default, pocketing a portion of the interest payments in return.
Fannie and Freddie would also keep a portion of these mortgages in their own investment portfolios, providing a constant influx of interest payments. Starting in the 1990s, they increasingly created and traded in complex derivatives, financial instruments designed to insulate them, through hedging, from mortgage loan defaults and interest rate increases. From the mid-'90s through the early 2000s, Fannie Mae and Freddie Mac were the darlings of Wall Street, with steady earnings growth and solid credit ratings. Fannie's share priced peaked in 2001 almost 400 percent above its 1995 level; Freddie peaked in 2004, almost 500 percent higher than in 1995. This growth would not last.
In June 2003, Freddie Mac surprised Washington and Wall Street with a management shakeup. The top executives were sent packing, and a new auditor, PricewaterhouseCoopers, identified several accounting irregularities on the company's books, especially related to its portfolio of derivatives. The company would have to restate earnings for the previous several years.
Just days before, the agency responsible for regulating Freddie, the Office of Federal Housing Enterprise Oversight, had reported to Congress that the company's management "effectively conveys an appropriate message of integrity and ethical values." Just how wrong this assessment was would soon become abundantly clear.
As the extent of the accounting irregularities emerged, federal regulators descended on the company and quickly determined that the accounting troubles extended to Fannie Mae as well. With concerns about the companies growing, the Bush administration unveiled proposals to rein them in. Then-Treasury Secretary John Snow proposed putting Fannie and Freddie under his department's oversight and subjecting them to the kind of controls over risk and capital reserves that apply to commercial banks. (Fannie's debt-to-capital ratio was 30 to 1, whereas conventional banks have debt-to-capital ratios of around 11 to 1.)
But Fannie and Freddie by this point were political powerhouses. When the accounting scandal first emerged, Fannie's chairman was Franklin Raines, former director of the Office of Management and Budget under President Bill Clinton. Its vice chairman was Jamie Gorelick, a former Justice Department official who had served on the 9/11 commission. The two companies provided tens of millions of dollars in annual campaign contributions and spent more than $10 million a year combined on outside lobbyists.
Fannie and Freddie rallied their friends on Capitol Hill, who immediately pushed back against the Bush proposals. Rep. Barney Frank (D-Mass.), the ranking Democrat on the House Financial Services Committee, said, "These two entities-Fannie Mae and Freddie Mac-are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." The reform effort fizzled.
In 2006 the Office of Federal Housing Enterprise Oversight issued the blistering results of its investigation. The irregularities, investigators concluded, amounted to "extensive financial fraud." The purpose of the deception was clear: to "smooth" earnings from year to year in order to maintain increasing returns and maximize executive bonuses. Raines, for example, earned more than $50 million in bonuses tied to earnings growth during his six-year tenure.
Interestingly, the report noted two questionable transactions Fannie conducted with the investment bank Goldman Sachs in 2001 and 2002 that pushed more than $100 million of existing profits into the future, creating a kind of cushion for future earnings. The chairman of Goldman Sachs when the dodgy transactions took place was the man behind the 2008 bailout: Treasury Secretary Henry Paulson.
In the end, Fannie and Freddie had to restate more than $15 billion in earnings. The Office of Federal Housing Enterprise Oversight and the Securities and Exchange Commission fined Fannie $400 million and Freddie $125 million. There was a new push for tighter oversight on the Hill, but this too withered as Fannie and Freddie rallied support through increased lending to low-income borrowers.
Then Fannie and Freddie went on a subprime bender. The companies made it clear they wanted to buy up all the subprime mortgages—and Alt-A mortgages, whose risk is somewhere between prime and subprime—that they could find. They eventually acquired around $1 trillion of the paper. The market responded. In 2003 less than 8 percent of all mortgages were subprime. By 2006 the number was more than 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever-increasing amounts of subprime mortgages into mortgage-backed securities, they could add slightly higher levels of risk and, as a result, boost the returns and earn bigger fees. The ratings agencies, thinking they were simply dealing with traditionally appreciating mortgages, didn't look under the hood.
But after several years of a housing boom, the pool of households that could responsibly use the more exotic financing products had dried up. Essentially, there were no more people who qualified for even a subprime mortgage.
Banks realized they could make ever more exotic loan products (such as interest-only loans), get the affordable housing activists off their backs, and immediately diffuse their risks by folding the mortgages into mortgage-backed securities. After all, Fannie and Freddie would buy anything.
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The Crash
Everything worked as long as housing prices continued to rise. Suddenly, though, there weren't enough buyers. (See "Houses of Pain," page 40.) At the same time, the first wave of the more exotic mortgages began to falter. Interest rates on adjustable-rate mortgages moved higher; the Fed was finally constricting the money flow, with the federal funds rate peaking at 5.25 percent in July 2006. Mortgages that were initially interestonly were close to resetting, with monthly payments jumping to include principal. A significant number of these mortgages moved into default and foreclosure, which further dampened housing prices.
The overall foreclosure numbers were small; someone simply looking at housing statistics could be forgiven for wondering what all the fuss was about. Nationally, throughout 2007 and 2008, the number of mortgages moving into foreclosure was only about 1 percent to 2 percent, suggesting that 98 percent to 99 percent of mortgages are sound. But the foreclosed mortgages punched way above their weight class; they were laced throughout the mortgage-backed securities owned by most financial institutions.
The complexity of these financial products cannot be overstated. They usually had two or three "tranches," different baskets of mortgages that paid out in different ways. Worse, as different firms bought and sold them, they were sliced and diced in varying ways. A mortgage-backed security owned by one company could be very different when it was sold to another.
No one fully understood how exposed the mortgage-backed securities were to the rising foreclosures. Because of this uncertainty, it was hard to place a value on them, and the market for the instruments dried up. Accounting regulations required firms to value their assets using the "mark-to-market" rule, i.e., based on the price they could fetch that very day. Because no one was trading mortgage-backed securities anymore, most had to be "marked" at something close to zero.
This threw off banks' capital-to-loan ratios. The law requires banks to hold assets equal to a certain percentage of the loans they give out. Lots of financial institutions had mortgage-backed securities on their books. With the value of these securities moving to zero (at least in accounting terms), banks didn't have enough capital on hand for the loans that were outstanding. So banks rushed to raise money, which raised self-fulfilling fears about their solvency.
Two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (using a five-year rolling average valuation instead, for example) would have helped shore up the balance sheets of some banks. And a temporary easing of capital requirements would have given banks the breathing room to sort out the mortgage-backed security mess. Although it is hard to fix an exact price for these securities in this market, given that 98 percent of underlying mortgages are sound, they clearly aren't worth zero. (For more proposed solutions, see "Better Than a Bailout," page 30.)
Alas, the Fed and the Treasury Department, in full crisis mode, decided to provide their own capital to meet the regulatory requirements. The first misstep, in March, was to force a hostile takeover of Bear Stearns, putting up $30 billion to $40 billion to back J.P. Morgan's purchase of the distressed investment bank. In the long term, it probably would have been better to let Bear Stearns fail and go into bankruptcy. That would have set in motion legal proceedings that would have established a baseline price for mortgage-backed securities. From this established price, banks could have begun to sort out their balance sheets.
Immediately after the collapse of Bear Stearns, rumors circulated on Wall Street of trouble at another investment bank, Lehman Brothers. Lehman went on a P.R. offensive to beat back those rumors. The company was successful in the short term but then did nothing during the next several months to shore up its balance sheet. Its demise in September-the only major bankruptcy allowed during bailout season-was largely self-inflicted.
The collapse of the mortgage-backed security market now started to pollute other financial products. Collateralized debt obligations and credit default swaps are complicated financial products intended to help spread the risk of defaults. An investor holding a bond or mortgage-backed security may purchase one of these products so that, in the event the bond or mortgage-backed security defaults, they would recoup their investment. Bonds rarely default, so collateralized debt obligations and credit default swaps had traditionally been a fairly safe and conservative market.
But like the underlying bonds and mortgage-backed securities, these instruments became more exotic. Companies sold credit default swaps on an individual bond or security to multiple investors. If there was a default, each one of these investors would have to be paid up to the full amount of the bond or security. Imagine if you bought fire insurance on your house and all your neighbors did too. If your house burned, everyone would be compensated for the loss of your house.
Suddenly, stable firms such as AIG, which aggressively sold credit default swaps, were over-exposed. These developments threw off the accounting in one division of AIG, threatening the rest of the firm. Given a few days, AIG could have sold enough assets to cover the spread, but ironclad accounting regulations precluded this. So the government stepped in.
The Bailout
The one-two punch of Lehman's failure and the government's $85 billion bailout of AIG on September 16 spooked both Wall Street and the White House. With Fannie Mae and Freddie Mac already in government receivership, there were fears that the weakness stemming from mortgage-backed securities would spread through the entire financial system. Money began leaving the markets to seek the security of Treasury bonds.
Then, on September 18, it was reported that the Reserve Primary Fund and the Reserve International Liquidity Fund, two commercial paper money market funds, "broke the buck," meaning they lost money. The commercial paper market is supposed to be boring. Every day, companies around the world borrow hundreds of billions to smooth cash flows; the next day they pay it back, giving the bank that lent the money a very small return. When these money market funds lost money, it was a signal that the commercial paper market was drying up, that banks were hesitant to make even these very safe loans.
That's when the market freaked out. The Dow Jones Industrial Average fell over 600 points on September 19. When the government announced that there would be a rescue plan, the market temporarily rebounded. After some details of the plan emerged over the weekend, the Dow had another selloff. A roller-coaster of selloffs and rallies followed, as the market waited to see what the government would do. Every gyration, up or down, was used as an argument for the bailout. If the market moved lower, it was because Congress hadn't approved the bailout. If it moved higher, it was because the market was convinced the bailout would happen. On October 2, after initially defeating the package, the House of Representatives bowed to pressure and passed it.
The original plan crafted by the Treasury Department would have authorized the government to spend up to $700 billion on mortgage-backed securities and other "toxic" debt, thereby removing them from banks' balance sheets. With the "bad loans" off the books, the banks would become sound. Because it was assumed that the mortgage-backed security market was "illiquid," the government would become the buyer of last resort for these products. There was a certain simple elegance to the plan. To paraphrase H.L. Mencken, the solution was neat, plausible, and wrong.
No market is truly illiquid. Last summer, Merrill Lynch unloaded a bunch of bad debt at 22 cents on the dollar. There are likely plenty of buyers for the banks' toxic debt, just not at the price the banks would prefer. Enter the government, which clearly intended to purchase mortgage-backed securities at some premium above the market price.
We don't know yet what the premium will be nor how it will be determined. Well, in a sense we do. It will mostly be determined by politics, not economics. This is the foundational flaw in the Treasury Department plan.
The department has begun a process to determine the assets it will buy and the manner it will set a price. As with everything in government, these are lobbyable moments, a time when swarms of financial service firms, investor groups, and housing advocates try to game the system for their clients or members. The further away from economics these decisions are made, the more risk there is for taxpayers. The higher the premium over any current market price, the longer the government will have to hold the assets and the more exposure there will be for taxpayers.
The risk here is particularly high given the complicated and opaque nature of the financial instruments involved. Few on Wall Street truly understand these products. The bailout authorizes the Treasury Department to bypass normal contracting rules and hire outside private firms to handle the purchases and manage the toxic assets. The fact that these private firms have ongoing relationships with the banks selling the bad assets creates a serious conflict of interest.
Some commentators have drawn parallels to the savings and loan bailout in the 1980s, when the government established the Resolution Trust Corporation to dispose of the assets of failed thrifts. But the Resolution Trust Corporation took on those assets only as thrifts went bankrupt. Under the new plan, by contrast, federal bureaucrats and their outside contractors decide which assets to buy, including equity stakes in commercial banks that aren't particularly happy about having Uncle Sam as a major shareholder. Bureaucrats will be actively investing taxpayer funds in individual securities and then managing the portfolio until they decide to sell. You don't have to be paranoid to fear the political dynamics that will shape these decisions.
More to Come
We have crossed a financial Rubicon. The bailout is just the beginning of Washington's increased involvement in the economy. The government has now taken partial ownership of the nation's nine largest banks. There is talk of bailouts for other weak industries, including the carmakers and the airlines. There certainly will be a host of new regulations that will likely be with us long after the government has sold off the last of the bad debt. We could be entering an era where the financial services sector evolves into a kind of regulated utility.
Libertarians used to joke that we were on the verge of another rerun of That '70s Show, with a return to old regulations and high taxation. We should be so lucky. The events of the last several months presage a return to the 1930s, with a new surge of direct federal involvement in the economy. If we fail to beat back these new controls, future historians may mark this time as the beginning of a long winter of statism and stagnation.
Mike Flynn is director of government affairs at the Reason Foundation.
http://www.reason.com/news/show/130330.html
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AUTO BAILOUT: HELP MISSISSIPPI, NOT MICHIGAN
by Joel Kotkin 12/05/2008
We should be getting used to the depressing spectacle of once-great corporations begging for assistance from Washington. Yet perhaps nothing is more painful than to see General Motors and other big U.S.-based car companies – once exemplars of both American economic supremacy and middle-class aspirations – fall to such an appalling state.
Yet if GM represents all that is bad about the American economy, particularly manufacturing, it does not represent the breadth of our industrial landscape. Indeed, even as the dull-witted leviathan sinks, many nimble companies have shown remarkable resiliency.
These include a series of small and mid-sized firms – in fields as diverse as garments and agricultural machinery, steel and energy equipment – that have managed to thrive in recent years. It also includes a growing contingent of foreign-owned firms, notably in the automobile industry, that have found that "Made in America" is not necessarily uncompetitive, unprofitable or impossible.
Indeed, until the globalization of the financial crisis, American manufacturing exports were reaching record levels. Overall, U.S. industry has become among the most productive in the world – output has doubled over the past 25 years, and productivity has grown at a rate twice that of the rest of the economy. Far from dead, our manufacturing sector is the world's largest, with 5% of the world's population producing five times their share in industrial goods.
So what is the problem then? If it is not the effort and ingenuity of American workers or our infrastructure, Detroit's problems must lie somewhere else, largely with almost insanely bad management.
We have to remember that the Big Three have been losing market share through even the best of times. Their litany of excuses is as tiresome as their product lines. Back in the 1970s it was "cheap" Japanese labor, something that can no longer be cited as an excuse. European car makers, if anything, have even higher wage costs.
Then there is high gas prices – a good excuse, it appears, back in the 1970s, as well as more recently. But the Detroit auto industry has now had three decades to come up with fuel efficient products that are also fun to drive and reliable. While they have slumbered, the Japanese, Koreans and now the Europeans – with products like the new Volkswagen Jetta – have made enormous strides.
Now it is the credit crunch, the car makers say. OK. Will increased credit mean that people will suddenly scoop up the same products they have been deserting in droves for decades? Keep in mind that the desertion could get even worse if the congressional greens – led by new Energy and Commerce Committee Chairman Rep. Henry Waxman – impose stiffer taxes on gas, which will hurt the guzzlers that have generated most of Big Three profits.
So why the push to bail out the Big Three? It's basically about regional politics. The deindustrializing states of California and New York may not care much, but the big car companies' operations are overwhelmingly concentrated in the politically volatile Great Lakes region, an area that proved decisive in President-elect Obama's victory. Another big reason may be that up to 240,000 jobs in Illinois, the nation's new political epicenter, are tied to the big automakers.
Sadly, dependence on the Big Three has had long-term tragic results for this entire region. Between 2000 and 2007 – before the onset of the financial crisis – the nation's largest percentage losses of manufacturing jobs were concentrated in Big Three bastions like Detroit, Warren-Farmington Hills, Saginaw, Flint and Cleveland. In the five years before the onset of the financial crisis, Michigan alone had lost one-third of its auto manufacturing jobs. Now that figure is up to half.
Worse still has been the psychological dependency that has grown from this troubled relationship. By their very nature, declining businesses – particularly unionized ones – tend to protect their older members and encrusted bureaucracies more than they look to the future. This also creates a political environment where the incentive is not to spur innovation, but to protect the already established.
Michigan, for example, has met the challenge of its Big Three habit with a combination of farce and failure. Under the clueless leadership of its governor, Jennifer Granholm, the state first hoped its "cool cities" program would keep young, educated workers close to home. After that failed to work, the governor then pushed the highest tax boost in state history, a reliable job-killer.
So let us be clear. It did not take a world financial crisis to sink Michigan; it was getting there very well on its own. Nearly one in three residents, according to a July 2006 Detroit News poll, believe that Michigan is "a dying state." Two in five of the state's residents under 35 said they were seriously considering leaving the state.
Fortunately, the Big Three do not represent the entire picture of American manufacturing. Even within the Great Lakes region, Wisconsin, which ranks second in per capita employment in manufacturing, has held onto most of its industrial employment due to its large, highly diversified base of smaller-scale specialized manufacturers.
If Congress and President Obama want to figure out how to restart our industrial economy, they need to travel not to Detroit but to an alternative universe that includes the South and Appalachia, where most of the new foreign-owned auto manufacturers have clustered. States like Alabama, with the second-largest per capita concentration of auto-related jobs, as well as South Carolina, Tennessee, Kentucky, Georgia and Mississippi, have been growing these high-wage jobs for a new generation. In the process, they have brought unprecedented opportunity to some of the nation's historically poorest regions.
Nor are these states looking to remain mere assembly centers. For example, they have launched bold new research initiatives, such as the recently formed International Automotive Research Center at Clemson University, which offers the nation's only Ph.D. in automotive engineering, to make their region a major center of technological innovation for the industry. And the fact that the region will likely be producing the majority of the most low-mileage and low-emission cars certainly cannot hurt their future prospects.
However, it is also critical to see beyond merely autos. If you look at the period between 2000 and 2007, as we did at the Praxis Strategy Group, much of the fastest growth in manufacturing was taking place in areas tied to energy production like Midland and Longview, Texas, and Morgantown, W.Va., all of which enjoyed 15% or more increases in manufacturing jobs. Already states like Arkansas, Alabama, Iowa and Mississippi boast more per capita industrial jobs than either Michigan or Ohio.
Another strong performer has been the Great Plains. Places like Dubuque, Iowa, and Fargo and Grand Forks, N.D., experienced substantial growth in industrial jobs during the past decade. The base here, as in Wisconsin, is highly diverse and includes agricultural and construction equipment, electronics as well as a burgeoning sector in the renewable fuels sector, such as LM Glasfibre, a Danish firm with a large operation in Grand Forks. Washington state has been another bright spot, powered by Boeing and other manufacturers attracted to its low-cost, low-emission hydropower.
If the country is serious about enhancing U.S. industrial might – as it should be – it might want to ask executives and entrepreneurs in these areas, as well as foreign investors, what they need to keep growing and expanding exports. There is clearly a demonstrated global market for Boeing airplanes and Caterpillar construction and agricultural machinery, as well as a host of high-tech and fashion-related products now being churned out in factories scattered across the country.
The people running these firms should be those at the congressional hearings, not the pathetic losers from companies like General Motors. They might even have some helpful ideas, like streamlining regulations, investing in critical infrastructure and research facilities, expanding support for training a new generation of skilled blue collar workers and using incentives to encourage firms to improve their energy efficiency. These are the steps we can expect our competitors in Europe, Asia and the developing world to take as well.
Rather than looking for ways to bail out the most egregious serial failures, let us find ways to provide incentives for those successful at creating new jobs and saving existing ones.
This article originally appeared at Forbes.com.
Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.
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"Oh, but he's different"
So the big news today is that the governor of Illinois has been caught doing explicitly what most politicians do with more subtlety every single day: selling off their power to the highest bidder. I can't help but note that yet another politician is indicted on corruption charges at the very same time we are handing over unprecedented power to the political class as we partially nationalize the banking system and, apparently, the Big Three auto companies.
I simply do not understand how those who are in favor of giving government all of these new powers because they sincerely believe that doing so will work out the way their blackboard designs intended can keep a straight face. What kind of cognitive dissonance must it take to believe that the people YOU are handing power over to are "not like" Ted Stevens or Rod Blagojevich? How deeply must one be in denial or engage in rationalization to believe that they are "different?" How blind must one be to think that trillions of dollars in bailout money won't go to the highest bidder (as the lobbyists line up on K Street...) in a process different only in its wink-and-a-nod courtesies than Blagojevich's auctioning off of a Senate seat?
For me, the key insight of public choice is the same insight that underlies Austrian economics: it is the institutional framework that is the key to understanding the choices people make and the unintended outcomes they produce. As I said to a class last week: "Governments can't act like businesses because businesses only act like businesses because they operate in the institutional environment of private property, monetary exchange, and competition." In the same way, getting politicians to stop selling off their power isn't a matter of ethics or psychology, rather it's about changing the rules of the game such that they do not have as much power to sell. Unfortunately, the current bailout mania is changing those rules in utterly the wrong direction.
Look at it this way: the bailouts are already becoming just a legal form of the essentially the same behavior for which the governor has been indicted.
http://austrianeconomists.typepad.com/weblog/2008/12/oh-but-hes-different.html
Why should we ever accept "Oh, but he's different" as an answer to the claim that explicit bribery and selling off power are just a less subtle form of politics as usual?
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Henry Waxman's House Committee on Oversight and Government Reform met Tuesday to examine "The Role of Fannie Mae and Freddie Mac in the Financial Crisis." Alas, Mr. Waxman didn't come to bury Fan and Fred, but to bury the truth.
The two government-sponsored mortgage giants have long maintained they were merely unwitting victims of a financial act of God. That is, while the rest of the market went crazy over subprime and "liar" loans, Fan and Fred claimed to be the grownups of the mortgage market. There they were, the fable goes, quietly underwriting their 80% fixed-rate 30-year mortgages when -- Ka-Pow! -- they were blindsided by the greedy excesses of the subprime lenders who lacked their scruples.
But previously undisclosed internal documents that are now in Mr. Waxman's possession and that we've seen tell a different story. Memos and emails at the highest levels of Fannie and Freddie management in 2004 and 2005 paint a picture of two companies that saw their market share eroded by such products as option-ARMs and interest-only mortgages. The two companies were prepared to walk ever further out on the risk curve to maintain their market position.
The companies understood the risks they were running. But squeezed between the need to meet affordable-housing goals set by HUD and the desire to sustain their growth and profits, they took the leap anyway. As a result, by the middle of this year, the two companies were responsible for some $1.6 trillion worth of subprime credit of one form or another. The answer to Mr. Waxman's question about their role in the crisis, in other words, is that they were central players, if not the central players, in the creation of the housing boom and the credit bust. Mr. Waxman released some of these documents Tuesday but kept others under wraps.
In early 2004, Freddie's executive team was engaged in a heated debate over whether to start acquiring "stated income, stated assets" mortgages. And in April of that year, David Andrukonis, the head of risk management, wrote to his colleagues, "This is not an affordable product, as I understand it, but a product necessary to recapture [market] share. . . . In 1990 we called this product 'dangerous' and eliminated it from the marketplace." Freddie went ahead anyway.
At Tuesday's hearing, both Mr. Waxman and former Fannie CEO Franklin Raines argued that Fan and Fred were following the market, not leading it, as if this was exculpatory. The documents plainly show that people at both Fan and Fred clearly understood that these mortgages were risky, thought many homeowners didn't understand them and that they were putting their business at risk by buying up Alt-A and subprime mortgage-backed securities.
One Fannie Mae document from March 2005 notes dryly, "Although we invest almost exclusively in AAA-rated securities, there is a concern that the rating agencies may not be properly assessing the risk in these securities." But they bought them anyway, both to maintain their market share and to show people like Democrat Barney Frank that they were promoting affordable housing.
By April 2008, according to a document prepared for then-Fannie Mae CEO Daniel Mudd and marked "Confidential -- Highly Restricted," Fannie's $312 billion in Alt-A mortgages represented "12% of single-family credit exposure." This book of business, the document notes, "was originated to maintain relevance in market with customers -- main originators were Countrywide, Lehman, Indymac, Washington Mutual, Amtrust." The first four need no introduction; regulators ordered Ohio-based Amtrust to stop lending two weeks ago.
Remember that one of Fannie's roles was supposed to be to buy up mortgage-backed securities in the secondary market and keep that market "liquid." This was, they always argued, the rationale for their $1 trillion-plus MBS portfolios. By becoming buyers of private-label subprime and Alt-A-backed MBS, they did just that -- they liquified and helped legitimize products that they now claim others irresponsibly sold.
In today's Opinion Journal
REVIEW & OUTLOOK
Whitewashing Fannie MaePolitical Favors at the FCC
TODAY'S COLUMNIST
Wonder Land: U.S. Says It Will Bail Out Christmas
– Daniel Henninger
COMMENTARY
We Need a Bailout Exit Strategy
– Christopher CoxObama Was Mute on Illinois Corruption
– John FundHow the GOP Should Prepare for a Comeback
– Karl RoveBankruptcy Doesn't Equal Death
– Don boudreauxMr. Raines even suggested that Fan and Fred's regulator was to blame for allowing them to get into trouble. "It is remarkable," he told the committee, "that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible effort to enforce any limits."
What Mr. Raines failed to mention was that, all along, Fannie and Freddie were spending millions on lobbying to ensure that regulators did not get in their way. As the AP reported Sunday night, Freddie spent $11.7 million in lobbying in 2006 alone, with Newt Gingrich, for example, getting $300,000 that year for talking up the benefits of Freddie's business model. (Apologies welcome, Newt.)
Other Republicans on Freddie's payroll included former Senator Al D'Amato and Congressman Vin Weber, and then House Majority Leader Tom DeLay's former chief of staff, Susan Hirschmann. As we know by now, Fan and Fred tried to buy everybody in town from both political parties, and the companies did it well enough to make themselves immune from regulatory scrutiny.
Mr. Waxman calls it a "myth" that Fannie and Freddie were the originators of the crisis. That's a red herring. Mr. Waxman's documents prove beyond doubt that Fan and Fred turbocharged the housing mania with a taxpayer-backed, Congressionally protected business model that has cost America dearly.
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How does the current bailout compare to other large US purchases?
And This Time We Didn't Even Get New Orleans!
Matt Welch | December 15, 2008, 9:13am
How big is the $8.5 trillion bailout? According to James Bianco of the Chicago-based analysis firm Bianco Research, when you adjust previous mammoth Washington expenditures for inflation, the 2008 bailout dwarfs them all. Combined.
• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion
Hat tip: Fred Unger.
http://www.reason.com/blog/show/130565.html
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WSJ
Bankruptcy Is the Perfect Remedy for Detroit
Washington hates the idea because it would lose leverage.Article
By TODD J. ZYWICKI
While Washington tries to arrange a bailout, the Detroit Three auto makers and their union, the United Auto Workers, keep insisting that bankruptcy would be the kiss of death. Not so: a Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.
To understand why, consider that the fundamental question to ask of any firm facing bankruptcy is whether it is "economically failed" or simply "financially failed."
If a typewriter manufacturer were to file for bankruptcy today it likely would be considered an economically failed enterprise. The market for typewriters is small and shrinking, and the manufacturer's financial, physical and human capital would probably be better redeployed elsewhere, such as making computers.
A financially failed enterprise, on the other hand, is worth more alive than dead. Chapter 11 exists to allow it to continue in business while reorganizing. Reorganization arose in the late 19th century when creditors of railroads unable to meet their debt obligations threatened to tear up their tracks, melt them down, and sell the steel as scrap. But innovative judges, lawyers and businessmen recognized that creditors would collect more if they all agreed to reduce their claims and keep the railroads running and producing revenues to pay them off. The same logic animates Chapter 11 today.
General Motors looks like a financially failed rather than an economically failed enterprise -- in need of reorganization not liquidation. It needs to shed labor contracts, retirement contracts, and modernize its distribution systems by closing many dealerships. This will give rise to many current and future liabilities that may be worked out in bankruptcy. It may need new management as well. Bankruptcy provides an opportunity to do all that. Consumers have little to fear. Reorganization will pare the weakest dealers while strengthening those who remain.
So why do the Detroit Three managements and the UAW insist that "bankruptcy is not an option"? Perhaps because of the pain that would be inflicted upon both.
The bankruptcy code places severe limitations on the compensation that can be paid to a manager unless there is a "bona fide job offer from another business at the same or greater rate of compensation." Given the dismal performance of the Detroit Three in recent years, it seems unlikely that their senior management will be highly coveted on the open market. Incumbent management is also likely to find its prospects for continued employment less-secure.
Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules. The process for adjusting a collective bargaining agreement is somewhat complicated and begins with a sort of compulsory mediation process. But if this fails a company can (with court permission) nullify the agreement. This doomsday scenario is rarely triggered, however, as its threat casts a large shadow over negotiations, providing a stick to force concessions.
Those Washington politicians who repeat the mantra that "bankruptcy is not an option" probably do so because they want to use free taxpayer money to bribe Detroit into manufacturing the green cars favored by Nancy Pelosi and Harry Reid, rather than those cars American consumers want to buy. A Chapter 11 filing would remove these politicians' leverage, thus explaining their desperation to avoid a bankruptcy.
In short, Detroit and the public has little to fear from a bankruptcy filing, but much to fear from the corrupt bargain that is emerging among incumbent management, the UAW and Capitol Hill to spend our money to avoid their reality check.
Mr. Zywicki is a professor of law at George Mason University School of Law.
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You know it doesn't matter. The unions have won.
W who has sorely disappointed me here is caving because he doesn't want to be known as the President who allowed Detroit to fail. It is now all about his legacy.
The left mocks him no matter what he does. Here is our leader literally being assaulted by that punk throwing shoes at him and I am outraged and agree he needs to do hard time. Could you imagine if he did that here in the US. Yet the left *laughs* and sides with the Iraqi punk. They already joke he will get a stint in Hollywood.
This newsman must have been in Saddams party and pissed his little group of thugs can't go around looting, raping, and shoving everyone else around. The Iraqis should be thanking us from saving them from that butcher. Some probably do but we never hear them. As always the MSM goes for those that complain about America because that is what they think - that America is to blame.
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The Last Thing Calif. Needs: Tax Increases
By CHUCK DEVORE | Posted Thursday, December 18, 2008 4:20 PM PT
In the past 10 years, under both Republican and Democratic governors, legislative Democrats have presided over a doubling of the California budget, from $72 billion in 1998 to $145 billion. This is double the rate of population and inflation growth, and it is unsustainable.
How unsustainable? California may have a $42 billion deficit over the next 18 months, an astonishing 30% of revenue expected just a few months earlier. California may run out of cash by the end of February, causing state financial officials to vote on Wednesday to halt $4 billion in construction spending. A California bond maturing in 30 years yields about 6.89% — 1.8 percentage points more than three months ago.
California has the nation's highest income taxes, the highest state sales tax rate, the highest gas tax and the highest corporate tax in the western U.S. And contrary to popular mythology about Proposition 13 (passed by the voters in 1978), the state's property taxes are at the national average.
Forbes magazine ranks California as having the highest business costs (taking into account taxes, labor and energy). The Tax Foundation ranks California as having the 48th worst business-tax climate, down from 38th just three years earlier. Only New Jersey and New York are assessed as more hostile to business.
Clearly, California does not have a yawning budget deficit because of a light, business-friendly tax burden. California has a spending problem, not a revenue problem.
Yet, in spite of all the overspending, majority Democrats are only offering one-time reductions in the spending of $8 billion. There is no talk of government reform without which any solution would last no more than a year.
California has America's most generous welfare rules. We have not fully implemented the historic welfare-to-work reforms signed into law by President Clinton in 1996, risking federal sanctions as a result. California even spends hundreds of millions of dollars on optional benefits for those in the U.S. illegally. Some state health and welfare programs are growing at a 7%-8% annual clip, with no letup in sight.
Further, California's heavy-handed regulations act as a hidden, added tax on productivity. For instance, California regulates 177 occupations, nearly twice the national average, forcing many residents to pay fees, take tests, and get additional schooling just to put food on the table.
California's housing regulations shackled urban homeowners with added costs of $2.7 trillion, according to one 2006 study by the Reason Foundation, accounting for almost half of the entire nation's regulatory burden of $5.5 trillion. Restrictions on drilling for oil keep over a billion barrels of crude in state coastal waters off-limits to even slant drilling from inland areas, taking a billion dollars a year in royalties off the table.
Gov. Schwarzenegger has rightly called for an easing of the regulatory burden, both environmental and labor laws, to stimulate the sagging economy. Unfortunately, the greatest new regulatory costs have been championed by the governor himself, with new global warming and renewable energy rules set to add about $1,700 in annual costs for a California family of four over the next 10 years.
With an 8.2% unemployment rate, America's third-highest, California workers are likely to see far greater pain in the months ahead as lawmakers resist reducing taxes on capital and wealth generation, and instead seek to increase taxes by $11 billion over the next 18 months.
This includes a 2.5% income-tax surcharge, a 10% increase in sales tax collections by increasing the base rate from 7.25% to 8%, and a $2.1 billion increase in the gasoline tax and others — all on top of what are already the nation's highest income, sales and gas taxes.
There are two problems with this massive Democratic tax increase plan: It will throw more working Californians into the unemployment line, and it's unconstitutional.
In 1978, California voters kicked off a national tax revolt by passing Proposition 13, and in the process boosting the political career of a former California governor by the name of Ronald Reagan. Proposition 13 created Article XIII of the state constitution, which says the legislature cannot raise taxes except by a two-thirds majority vote in each house.
Democrats are a few votes short of two-thirds in each house, giving Republicans, who understand that increasing taxes in this economic climate is tantamount to economic suicide, leverage to call for government reform.
At this writing, Democrats may give the governor some regulatory reforms in the hope that he will sign their illegal $11 billion tax increase. Legislative Republicans encourage Gov. Schwarzenegger to veto the package and uphold his oath to defend the constitution while defending the hardworking taxpayers of the Golden State.
DeVore, a California state assemblyman (R-Irvine), is also a candidate for the U.S. Senate in 2010.
http://www.ibdeditorials.com/IBDArticles.aspx?id=314496039321337&kw=chuck,davore
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The GDP Adjustment
Matt Welch | December 23, 2008, 11:40am
A week-plus ago I posted some data compiled by Bianco Research analyst James Bianco indicating that our $8.4 trillion-and-counting bailout dwarfs just about every huge government project you can think of, combined. Reader domoarrigato argued that re-casting those numbers as a percentage of their contemporaneous GDP might be more illuminating, and then he went ahead and did the math himself. After sending the informatics to our top experts, we are now prepared to publish them in a hopefully easy-on-the-eyes chart. Here goes:
(http://www.reason.com/UserFiles/Image/kmw/bailoutgdp.jpg)
Speaking of bailout graphics, try this more colorful one from Pro Publica–a bubble-chart of post-1970 bailouts, adjusted for 2008 dollars (though not as a percentage of GDP!).
A tangential topic for discussion: What do you all think of the argument that percent-of-GDP is the real way one should ponder stuff like the size of various government programs, or defense spending, or the whole state apparatus itself? I've always thought it extremely helpful for personal context (thanks again, domoarrigato!), and extremely dangerous for the purposes of deciding how to spend.
Here's why: The biggest chunk of GDP, and certainly the most dynamic, is the stuff produced by the private sector. Pegging a public-sector program to a private-sector number basically rewards inefficient non-innovators with the innovators' gains. Put another way, if it cost 4 shekels a year to adequately defend a country with a 100-shekel economy (let's say that 77 of those 100 shekels were produced by the private sector), why on earth should we increase the defense budget to 8 shekels when (as inevitably happens) the profit-seeking privates double their money? I understand that labor and materials can become more expensive in a growing economy, thus adding costs to guvmint operations, but essentially this is about making the booming size of government look rational, just because the private sector is (or was) booming as well. Where am I wrong here?
http://www.reason.com/blog/show/130724.html
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“Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.”
— Niall Ferguson
WASHINGTON — In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.
This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, “we probably have little choice except to be patient.”
Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.
In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.
China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.
“This was a blinking red light,” said Kenneth S. Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. “We should have reacted to it.”
In hindsight, many economists say, the United States should have recognized that borrowing from abroad for consumption and deficit spending at home was not a formula for economic success. Even as that weakness is becoming more widely recognized, however, the United States is likely to be more addicted than ever to foreign creditors to finance record government spending to revive the broken economy.
To be sure, there were few ready remedies. Some critics argue that the United States could have pushed Beijing harder to abandon its policy of keeping the value of its currency weak — a policy that made its exports less expensive and helped turn it into the world’s leading manufacturing power. If China had allowed its currency to float according to market demand in the past decade, its export growth probably would have moderated. And it would not have acquired the same vast hoard of dollars to invest abroad.
Others say the Federal Reserve and the Treasury Department should have seen the Chinese lending for what it was: a giant stimulus to the American economy, not unlike interest rate cuts by the Fed. These critics say the Fed under Alan Greenspan contributed to the creation of the housing bubble by leaving interest rates too low for too long, even as Chinese investment further stoked an easy-money economy. The Fed should have cut interest rates less in the middle of this decade, they say, and started raising them sooner, to help reduce speculation in real estate.
Today, with the wreckage around him, Mr. Bernanke said he regretted that more was not done to regulate financial institutions and mortgage providers, which might have prevented the flood of investment, including that from China, from being so badly used. But the Fed’s role in regulation is limited to banks. And stricter regulation by itself would not have been enough, he insisted.
“Achieving a better balance of international capital flows early on could have significantly reduced the risks to the financial system,” Mr. Bernanke said in an interview in his office overlooking the Washington Mall.
“However,” he continued, “this could only have been done through international cooperation, not by the United States alone. The problem was recognized, but sufficient international cooperation was not forthcoming.”
The inaction was because of a range of factors, political and economic. By the yardsticks that appeared to matter most — prosperity and growth — the relationship between China and the United States also seemed to be paying off for both countries. Neither had a strong incentive to break an addiction: China to strong export growth and financial stability; the United States to cheap imports and low-cost foreign loans.
In Washington, China was treated as a threat by some people, but mostly because it lured away manufacturing jobs. Others argued that China’s heavy lending to this country was risky because Chinese leaders could decide to withdraw money at a moment’s notice, creating a panicky run on the dollar.
Mr. Bernanke viewed such international investment flows through a different lens. He argued that Chinese invested savings abroad because consumers in China did not have enough confidence to spend. Changing that situation would take years, and did not amount to a pressing problem for the Americans.
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age 2 of 3)
“The global savings glut story did us a collective disservice,” said Edwin M. Truman, a former Fed and Treasury official. “It created the idea that the world was doing it to us and we couldn’t do anything about it.”
But Mr. Bernanke’s theory fit the prevailing hands-off, pro-market ideology of recent years. Mr. Greenspan and the Bush administration treated the record American trade deficit and heavy foreign borrowing as an abstract threat, not an urgent problem.
Mr. Bernanke, after he took charge of the Fed, warned that the imbalances between the countries were growing more serious. By then, however, it was too late to do much about them. And the White House still regarded imbalances as an arcane subject best left to economists.
By itself, money from China is not a bad thing. As American officials like to note, it speaks to the attractiveness of the United States as a destination for foreign investment. In the 19th century, the United States built its railroads with capital borrowed from the British.
In the past decade, China arguably enabled an American boom. Low-cost Chinese goods helped keep a lid on inflation, while the flood of Chinese investment helped the government finance mortgages and a public debt of close to $11 trillion.
But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.
“Nobody wanted to get off this drug,” said Senator Lindsey Graham, the South Carolina Republican who pushed legislation to punish China by imposing stiff tariffs. “Their drug was an endless line of customers for made-in-China products. Our drug was the Chinese products and cash.”
Mr. Graham said he understood the addiction: he was speaking by phone from a Wal-Mart store in Anderson, S.C., where he was Christmas shopping in aisles lined with items from China.
A New Economic Dance
The United States has been here before. In the 1980s, it ran heavy trade deficits with Japan, which recycled some of its trading profits into American government bonds.
At that time, the deficits were viewed as a grave threat to America’s economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world’s major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.
The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan’s rapid growth. The lesson of the Plaza Accord was not lost on China, which at that time was just emerging as an export power.
China tied itself even more tightly to the United States than did Japan. In 1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to the dollar, a level that remained fixed for a decade.
During the Asian financial crisis of 1997-98, China clung firmly to its currency policy, earning praise from the Clinton administration for helping check the spiral of devaluation sweeping Asia. Its low wages attracted hundreds of billions of dollars in foreign investment.
By the early part of this decade, the United States was importing huge amounts of Chinese-made goods — toys, shoes, flat-screen televisions and auto parts — while selling much less to China in return.
“For consumers, this was a net benefit because of the availability of cheaper goods,” said Laurence H. Meyer, a former Fed governor. “There’s no question that China put downward pressure on inflation rates.”
But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.
It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency — primarily dollars — that they earned from foreign trade and investment.
As foreign trade surged, this hoard of dollars became enormous. In 2000, the reserves were less than $200 billion; today they are about $2 trillion.
Chinese leaders chose to park the bulk of that in safe securities backed by the American government, including Treasury bonds and the debt of Fannie Mae and Freddie Mac, which had implicit government backing.
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Dollar Shift: Chinese Pockets Filled as Americans’ Emptied
published: December 25, 2008
(Page 3 of 3)
This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise have been. For years, China’s government was eager to buy American debt at yields many in the private sector felt were too low.
This financial and trade embrace between the United States and China grew so tight that Niall Ferguson, a financial historian, has dubbed the two countries Chimerica.
‘Tiptoeing’ Around a Partner
Being attached at the hip was not entirely comfortable for either side, though for widely differing reasons.
In the United States, more people worried about cheap Chinese goods than cheap Chinese loans. By 2003, China’s trade surplus with the United States was ballooning, and lawmakers in Congress were restive. Senator Graham and Senator Charles E. Schumer, Democrat of New York, introduced a bill threatening to impose a 27 percent duty on Chinese goods.
“We had a moment where we caught everyone’s attention: the White House and China,” Mr. Graham recalled.
At the People’s Bank of China, the central bank, a consensus was also emerging in late 2004: China should break its tight link to the dollar, which would make its exports more expensive. Yu Yongding, a leading economic adviser, pressed the case. The American trade and budget deficits were not sustainable, he warned. China was wrong to keep its currency artificially depressed and depend too much on selling cheap goods.
Proponents of revaluation in China argued that the country’s currency policies denied the fruits of prosperity to Chinese consumers. Beijing was investing their savings in low-yielding American government securities. And with a weak currency, they said, Chinese could not afford many imported goods.
The central bank’s English-speaking governor, Zhou Xiaochuan, was among those who favored a sizable revaluation.
But when Beijing acted to amend its currency policy in 2005, under heavy pressure from Congress and the White House, it moved cautiously. The renminbi was allowed to climb only 2 percent. The Communist Party opted for only incremental adjustments to its economic model after a decade of fast growth. Little changed: China’s exports kept soaring and investment poured into steel mills and garment factories.
But American officials eased the pressure. They decided to put more emphasis on urging Chinese consumers to spend more of their savings, which they hoped would eventually bring the two economies into better balance. On a tour of China, John W. Snow, the Treasury secretary at the time, even urged the Chinese to start using credit cards.
China kicked off its own campaign to encourage domestic consumption, which it hoped would provide a new source. But Chinese save with the same zeal that, until recently, Americans spent. Shorn of the social safety net of the old Communist state, they squirrel away money to pay for hospital visits, housing or retirement. This accounts for the savings glut identified by Mr. Bernanke.
Privately, Chinese officials confided to visiting Americans that the effort was not achieving much.
“It is sometimes hard to change successful models,” said Robert B. Zoellick, who negotiated with the Chinese as a deputy secretary of state. “It is prototypically American to say, ‘This worked well, but now you’ve got to change it.’ ”
In Washington, some critics say too little was done. A former Treasury official, Timothy D. Adams, tried to get the I.M.F. to act as a watchdog for currency manipulation by China, which would have subjected Beijing to more global pressure.
Yet when Mr. Snow was succeeded as Treasury secretary by Henry M. Paulson Jr. in 2006, the I.M.F. was sidelined, according to several officials, and Mr. Paulson took command of China policy.
He was not shy about his credentials. As an investment banker with Goldman Sachs, Mr. Paulson made 70 trips to China. In his office hangs a watercolor depicting the hometown of Zhu Rongji, a forceful former prime minister.
“I pushed very hard on currency because I believed it was important for China to get to a market-determined currency,” Mr. Paulson said in an interview. But he conceded he did not get what he wanted.
In late 2006, Mr. Paulson invited Mr. Bernanke to accompany him to Beijing. Mr. Bernanke used the occasion to deliver a blunt speech to the Chinese Academy of Social Sciences, in which he advised the Chinese to reorient their economy and revalue their currency.
At the last minute, however, Mr. Bernanke deleted a reference to the exchange rate being an “effective subsidy” for Chinese exports, out of fear that it could be used as a pretext for a trade lawsuit against China.
Critics detected a pattern. They noted that in its twice-yearly reports to Congress about trading partners, the Treasury Department had never branded China a currency manipulator.
“We’re tiptoeing around, desperately trying not to irritate or offend the Chinese,” said Thea M. Lee, public policy director of the A.F.L.-C.I.O. “But to get concrete results, you have to be confrontational.”
An Embrace That Won’t Let Go
For China, too, this crisis has been a time of reckoning. Americans are buying fewer Chinese DVD players and microwave ovens. Trade is collapsing, and thousands of workers are losing their jobs. Chinese leaders are terrified of social unrest.
Having allowed the renminbi to rise a little after 2005, the Chinese government is now under intense pressure domestically to reverse course and depreciate it. China’s fortunes remain tethered to those of the United States. And the reverse is equally true.
In a glassed-in room in a nondescript office building in Washington, the Treasury conducts nearly daily auctions of billions of dollars’ worth of government bonds. An old Army helmet sits on a shelf: as a lark, Treasury officials have been known to strap it on while they monitor incoming bids.
For the past five years, China has been one of the most prolific bidders. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America’s public debt.
The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration’s stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American habit.
Even so, Mr. Paulson said he viewed the debate over global imbalances as hopelessly academic. He expressed doubt that Mr. Bernanke or anyone else could have solved the problem as it was germinating.
“One lesson that I have clearly learned,” said Mr. Paulson, sitting beneath his Chinese watercolor. “You don’t get dramatic change, or reform, or action unless there is a crisis.”
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http://online.wsj.com/article/SB123033898448336541.html#
There's No Pain-Free Cure for Recession
Belt-tightening is required by all, including government.
By PETER SCHIFF
As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug.
With faith in the free markets now taking a back seat to fear and expediency, nearly the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible. The few who maintain free-market views have been largely marginalized.
Taking the theories of economist John Maynard Keynes as gospel, our most highly respected contemporary economists imagine a complex world in which economics at the personal, corporate and municipal levels are governed by laws far different from those in effect at the national level.
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Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system. In their view, absent the stimuli of the New Deal and World War II, the Depression would never have ended.
On a gut level, we have a hard time with this concept. There is a vague sense of smoke and mirrors, of something being magically created out of nothing. But economics, we are told, is complicated.
It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.
I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice.
As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, including government.
Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn't have a surplus, then it must come from taxes. If taxes don't go up, then it must come from increased borrowing. If lenders won't lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.
Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.
If we look at government market interventions through this pragmatic lens, what can we expect from the coming avalanche of federal activism?
By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation.
The good news is that economics is not all that complicated. The bad news is that our economy is broken and there is nothing the government can do to fix it. However, the free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.
Mr. Schiff is president of Euro Pacific Capital and author of "The Little Book of Bull Moves in Bear Markets" (Wiley, 2008).
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That article is profoundly and tragically true. :cry: :cry: :cry:
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Start this by noting Crafty's reference to Jude Wanniski's book and Guiness' Nov. post regarding 5 myths of the great depression. I heard a television commentator, I think it was an Obama adviser, saying that the reason the great depression won't be repeated is because we don't suffer from the same economic ignorance of the 1920s-1930s... I beg to differ.
This piece, "A tale of two pundits: Sowell v. Huffington" by Roger Kimball
http://www.pajamasmedia.com/rogerkimball/2008/12/23/a-tale-of-two-pundits-sowell-v-huffington/?print=1
takes a look at 2 sides of an important argument. He links and quotes Ariana Huffington who perpetuates the myth that the great depression was the result of the failure of free market capitalism. Then he contrasts that with a counter-view from Thomas Sowell that the economy could have survived the financial crash if not for the blundering of the government policies that followed, perpetuating, worsening and deepening the economic damage.
So here we are again, trying in every way possible to block the market forces that strive to correct the prices of assets and allow the flow of resources to their most productive use.
-------------------------
December 23, 2008
Another Great Depression?
By Thomas Sowell
With both Barack Obama's supporters and the media looking forward to the new administration's policies being similar to President Franklin D. Roosevelt's policies during the 1930s depression, it may be useful to look at just what those policies were and-- more important-- what their consequences were.
The prevailing view in many quarters is that the stock market crash of 1929 was a failure of the free market that led to massive unemployment in the 1930s-- and that it was intervention of Roosevelt's New Deal policies that rescued the economy.
It is such a good story that it seems a pity to spoil it with facts. Yet there is something to be said for not repeating the catastrophes of the past.
Let's start at square one, with the stock market crash in October 1929. Was this what led to massive unemployment?
Official government statistics suggest otherwise. So do new statistics on unemployment by two current scholars, Richard Vedder and Lowell Gallaway, in their book "Out of Work."
The Vedder and Gallaway statistics allow us to follow unemployment month by month. They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December-- but then began a generally downward trend, subsiding to 6.3 percent in June 1930.
That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.
Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.
This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.
Before the Great Depression, it was not considered to be the business of the federal government to try to get the economy out of a depression. But the Smoot-Hawley tariff-- designed to save American jobs by restricting imports-- was one of Hoover's interventions, followed by even bigger interventions by FDR.
The rise in unemployment after the stock market crash of 1929 was a blip on the screen compared to the soaring unemployment rates reached later, after a series of government interventions.
For nearly three consecutive years, beginning in February 1932, the unemployment rate never fell below 20 percent for any month before January 1935, when it fell to 19.3 percent, according to the Vedder and Gallaway statistics.
In other words, the evidence suggests that it was not the "problem" of the financial crisis in 1929 that caused massive unemployment but politicians' attempted "solutions." Is that the history that we seem to be ready to repeat?
The stock market crash, which has been blamed for the widespread suffering during the Great Depression of the 1930s, created no unemployment rate that was even half of what was created in the wake of the government interventions of Hoover and FDR.
Politically, however, Franklin D. Roosevelt could not have been more successful. After all, he was the only President of the United States elected four times in a row. He was a master of political rhetoric.
If Barack Obama wants political success, following in the footsteps of FDR looks like the way to go. But people who are concerned about the economy need to take a closer look at history. We deserve something better than repeating the 1930s disasters.
There is yet another factor that provides a parallel to what happened during the Great Depression. No matter how much worse things got after government intervention under Roosevelt's New Deal policies, the party line was that he had to "do something" to get us out of the disaster created by the failure of the unregulated market and Hoover's "do nothing" policies.
Today, increasing numbers of scholars recognize that FDR's own policies were a further extension of interventions begun under Hoover. Moreover, the temporary rise in unemployment after the stock market crash was nowhere near the massive and long-lasting unemployment after government interventions.
Barack Obama already has his Herbert Hoover to blame for any and all disasters that his policies create: George W. Bush.
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5 States ask for a trillion:
Govs, including Patrick, seek $1 trillion bailout
By Associated Press | Friday, January 2, 2009 | http://www.bostonherald.com | U.S. Politics
MADISON, Wis. - Five Democratic governors are asking the federal government for a $1 trillion bailout package, including $250 billion for education and $150 billion in middle class tax cuts.
The governors from Wisconsin, Massachusetts, New Jersey, New York and Ohio on Friday said they have presented their plan to President-elect Barack Obama’s transition team as well as congressional leaders.
They said that level of federal aid is needed to deal with unprecedented state budget shortfalls in 41 states and Washington, D.C., that the Center on Budget and Policy Priorities pegged at $42 billion for the current fiscal year alone.
Wisconsin Gov. Jim Doyle said congressional leaders and the Obama team have been receptive to the governors’ ideas.
"That’s not to say they’ve told us this is what they’ll do or they’re with us all the way," Doyle said. He also said other governors were involved in creating the plan, which grew out of an early December meeting that Obama had with the nation’s governors.
Obama’s aides and congressional leaders have been talking about a package roughly half the size of the two-year plan the five governors proposed Friday.
A $1 trillion package is equal to 6.7 percent of the gross domestic product, the U.S. economy’s total output in a single year. A package of that size is likely to draw significant opposition from congressional Republicans and concern from moderate and conservative Democratic lawmakers who oppose large budget deficits.
In addition to the money for education and tax cuts, the governors said their plan includes $250 billion for social service programs such as Medicaid and $350 billion for road construction and other infrastructure projects.
"The idea is to put people to work and to put them to work in ways that build on a stronger, long-term economic platform for future growth," said Massachusetts Gov. Deval Patrick. "Any economic recovery bill in our view passed by Congress should be bold enough to have a psychological impact and well as an economic one."
The governors all said their states are facing unprecedented budget shortfalls that will require deep cuts to services and possibly irreparably harm their education systems.
"We aren’t crying wolf," Ohio Gov. Ted Strickland said. "These are real circumstances, unprecedented situations we are facing."
Ohio’s budget deficit could grow to $7.3 billion even after $1.9 billion was cut from its current budget, Strickland said.
In Massachusetts, Patrick has already made $1.1 billion in budget cuts and said Tuesday an additional $1 billion in cuts may be needed in what started as a $28.1 billion budget for the 2008-2009 fiscal year.
New York Gov. David Paterson said his state faces a $15.4 billion deficit. Wisconsin’s budget is expected to be $5.4 billion short by mid-2011.
New Jersey Gov. John Corzine said he had just left a meeting with state legislative leaders where he proposed $2.1 billion in cuts on top of $600 million that’s already been cut from the budget.
Strickland said the federal stimulus is needed to help bridge the gap from the current recession to when there’s a rebound. Even with the money, states will have to make deep cuts, he said.
"We are not, any of us, talking about federal money to expand spending, expand programs, to do new things," Patrick said.
A forecast from Global Insight shows that the economy hasn’t hit bottom yet.
National economic growth is now expected to drop 1.8 percent this year, rather than increase 1 percent. The U.S. labor market is expected to lose 3.7 million jobs during the downturn, with unemployment reaching 8.7 percent in the first half of 2010, it said.
That forecast assumes there will be a $550 billion federal stimulus package, roughly half of what the governors requested.
Article URL: http://www.bostonherald.com/news/us_politics/view.bg?articleid=1142689
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"Thomas Sowell that the economy could have survived the financial crash if not for the blundering of the government policies that followed, perpetuating, worsening and deepening the economic damage."
I don't have a solution to the current economic crisis, and I don't have a deep background in econ, but I have a question:
Is there any hard proof (besides the author quoted) that solutions other than Roosevelt's would have worked to turn around the economy? I'm talking about non-editorial, researched data.
If someone can direct me to the info, I'd love to check it out.
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Is there any hard proof (besides the author quoted) that solutions other than Roosevelt's would have worked to turn around the economy? I'm talking about non-editorial, researched data.
Don't know about a source, but I think the question contain a false premise, specifically that Roosevelt's policies turned the economy around. Most of the reading I've done suggest WWII industrial production had far more to do w/ it.
Edited to add:
I see Amazon lists this book:
FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression
Product Description
“Admirers of FDR credit his New Deal with restoring the American economy after the disastrous contraction of 1929—33. Truth to tell–as Powell demonstrates without a shadow of a doubt–the New Deal hampered recovery from the contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government. Powell’s analysis is thoroughly documented, relying on an impressive variety of popular and academic literature both contemporary and historical.”
–Milton Friedman, Nobel Laureate, Hoover Institution
“There is a critical and often forgotten difference between disaster and tragedy. Disasters happen to us all, no matter what we do. Tragedies are brought upon ourselves by hubris. The Depression of the 1930s would have been a brief disaster if it hadn’t been for the national tragedy of the New Deal. Jim Powell has proven this.”
–P.J. O’Rourke, author of Parliament of Whores and Eat the Rich
“The material laid out in this book desperately needs to be available to a much wider audience than the ranks of professional economists and economic historians, if policy confusion similar to the New Deal is to be avoided in the future.”
–James M. Buchanan, Nobel Laureate, George Mason University
“I found Jim Powell’s book fascinating. I think he has written an important story, one that definitely needs telling.”
–Thomas Fleming, author of The New Dealers’ War
“Jim Powell is one tough-minded historian, willing to let the chips fall where they may. That’s a rare quality these days, hence more valuable than ever. He lets the history do the talking.”
–David Landes, Professor of History Emeritus, Harvard University
“Jim Powell draws together voluminous economic research on the effects of all of Roosevelt’s major policies. Along the way, Powell gives fascinating thumbnail sketches of the major players. The result is a devastating indictment, compellingly told. Those who think that government intervention helped get the U.S. economy out of the depression should read this book.”
–David R. Henderson, editor of The Fortune Encyclopedia of Economics and author of The Joy of Freedom
The Great Depression and the New Deal. For generations, the collective American consciousness has believed that the former ruined the country and the latter saved it. Endless praise has been heaped upon President Franklin Delano Roosevelt for masterfully reining in the Depression’s destructive effects and propping up the
country on his New Deal platform. In fact, FDR has achieved mythical status in American history and is considered to be, along with Washington, Jefferson, and Lincoln, one of the greatest presidents of all time. But would the Great Depression have been so catastrophic had the New Deal never been implemented?
In FDR’s Folly, historian Jim Powell argues that it was in fact the New Deal itself, with its shortsighted programs, that deepened the Great Depression, swelled the federal government, and prevented the country from turning around quickly. You’ll discover in alarming detail how FDR’s federal programs hurt America more than helped it, with effects we still feel today, including:
• How Social Security actually increased unemployment
• How higher taxes undermined good businesses
• How new labor laws threw people out of work
• And much more
This groundbreaking book pulls back the shroud of awe and the cloak of time enveloping FDR to prove convincingly how flawed his economic policies actually were, despite his good intentions and the astounding intellect of his circle of advisers. In today’s turbulent domestic and global environment, eerily similar to that of the 1930s, it’s more important than ever before to uncover and understand the truth of our history, lest we be doomed to repeat it.
And this one:
The Forgotten Man: A New History of the Great Depression
From Publishers Weekly
This breezy narrative comes from the pen of a veteran journalist and economics reporter. Rather than telling a new story, she tells an old one (scarcely lacking for historians) in a fresh way. Shlaes brings to the tale an emphasis on economic realities and consequences, especially when seen from the perspective of monetarist theory, and a focus on particular individuals and events, both celebrated and forgotten (at least relatively so). Thus the spotlight plays not only on Andrew Mellon, Wendell Wilkie and Rexford Tugwell but also on Father Divine and the Schechter brothers—kosher butcher wholesalers prosecuted by the federal National Recovery Administration for selling "sick chickens." As befits a former writer for the Wall Street Journal, Shlaes is sensitive to the dangers of government intervention in the economy—but also to the danger of the government's not intervening. In her telling, policymakers of the 1920s weren't so incompetent as they're often made out to be—everyone in the 1930s was floundering and all made errors—and WWII, not the New Deal, ended the Depression. This is plausible history, if not authoritative, novel or deeply analytical. It's also a thoughtful, even-tempered corrective to too often unbalanced celebrations of FDR and his administration's pathbreaking policies. 16 pages of b&w photos. (June 12)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to the Hardcover edition.
From Booklist
Its duration and depth made the Depression "Great," and Shlaes, a prominent conservative economics journalist, considers why a decade of government intervention ameliorated but never tamed it. With vitality uncommon for an economics history, Shlaes chronicles the projects of Herbert Hoover and Franklin Roosevelt as well as these projects' effect on those who paid for them. Reminding readers that the reputedly do-nothing Hoover pulled hard on the fiscal levers (raising tariffs, increasing government spending), Shlaes nevertheless emphasizes that his enthusiasm for intervention paled against the ebullient FDR's glee in experimentation. She focuses closely on the influence of his fabled Brain Trust, her narrative shifting among Raymond Moley, Rexford Tugwell, and other prominent New Dealers. Businesses that litigated their resistance to New Deal regulations attract Shlaes' attention, as do individuals who coped with the despair of the 1930s through self-help, such as Alcoholics Anonymous cofounder Bill Wilson. The book culminates in the rise of Wendell Willkie, and Shlaes' accent on personalities is an appealing avenue into her skeptical critique of the New Deal. Gilbert Taylor
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Generally I agree with BBG's comments. The best explanation I have read of the Great Depression can be found in Jude Wanniski's "The Way the World Works".
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Another clusterfcuk cometh:
Mortgage 'Cram-Downs' Loom as Foreclosures Mount
Mortgage lenders who wake up Thursday with a New Year's hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam.
The banking industry hoped the mortgage "cram-down" measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short.
In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb ...
http://online.wsj.com/article/SB123068005350543971.html
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By JONATHAN WEISMAN and NAFTALI BENDAVID
WASHINGTON -- President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.
The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.
The Obama tax-cut proposals, if enacted, could pack more punch in two years than either of President George W. Bush's tax cuts did in their first two years. Mr. Bush's 10-year, $1.35 trillion tax cut of 2001, considered the largest in history, contained $174 billion of cuts during its first two full years, according to Congress's Joint Committee on Taxation. The second-largest tax cut -- the 10-year, $350 billion package engineered by Mr. Bush in 2003 -- contained $231 billion in 2004 and 2005.
Republicans and business leaders hadn't seen specifics of the proposals Sunday night, but welcomed the idea of basing a bigger proportion of the stimulus plan on tax cuts. Their response suggests the legislation could attract relatively broad support, and it highlighted the Obama team's determination to win backing from varied interests.
Some Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), have warned against a careless stimulus plan that enables unfettered spending.
The largest piece of tax relief in the new plan would involve cuts for people who pay income taxes or who claim the earned-income credit, a refund designed to lessen the impact of payroll taxes on low- and moderate-income workers. This component would serve as a down payment on the "Making Work Pay" proposal Mr. Obama outlined during his election campaign, giving a credit of $500 per individual or $1,000 per family.
On the campaign trail, Mr. Obama said he would phase out a similar tax-credit proposal at around $200,000 per household, but aides said they haven't settled on an income cap for the latest proposal. This part of the plan is similar to a bipartisan initiative launched in early 2008, which sent out checks worth $131 billion.
Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it. But Obama aides wanted a provision that could get money into consumers' hands fast, and hope they will be persuaded to spend money this time if the credit is made a permanent feature of the tax code.
As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.
A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don't sit on their money until after Congress passes the measure.
Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.
William Gale, a tax-policy analyst at the Brookings Institution think tank in Washington, said the scale of the whole package is larger than expected. He called the business offerings a true surprise, since most attention has been focused on the spending side of the equation, especially the hundreds of billions of dollars being discussed for infrastructure and aid to state and local governments.
"On the other hand, it was hard to figure out how they were going to spend all that money in intelligent ways, so it makes sense to do more on the tax side," Mr. Gale said. His biggest question about the latest proposal concerns the credits for hiring new workers or refraining from layoffs. Much of that money would likely go to companies that would have hired more people anyway, he said, adding that it is impossible to know what firms would have done without such a credit.
Business lobbyists are pushing hard for Congress to allow companies that haven't paid corporate income taxes to get a break, too. Start-up companies, alternative-energy firms and large corporations that have been swallowing losses for years -- such as automotive and steel companies and some airlines -- have already begun lobbying for such "refundability."
They argue that a provision to claim losses on back taxes will have little effect on the economy if firms that need it most -- struggling companies that weren't obligated to pay any taxes -- can't benefit from a tax break.
Mr. Obama, however, doesn't back payments to companies that haven't paid taxes, aides said. Instead, businesses that haven't been paying taxes would be able to get payments from tax credits they would have taken in 2008 and 2009 for incentives offered by Congress, such as the production tax credit offered to renewable-energy firms. These amounts would likely be relatively small.
"We're working with Congress to develop a tax-cut package based on a simple principle: What will have the biggest and most immediate impact on creating private-sector jobs and strengthening the middle class?" said transition-team spokeswoman Stephanie Cutter. "We're guided by what works, not by any ideology or special interests."
As these details are being worked out, Mr. Obama and his family left Chicago during the weekend for Washington. He will be on Capitol Hill Monday, first to meet with House Speaker Nancy Pelosi (D., Calif.) and Senate Majority Leader Harry Reid (D., Nev.), then with the broader bipartisan leadership of Congress. The stimulus package will be front-and-center in those discussions.
Democratic leaders and Obama aides acknowledge that congressional Democrats' initial goal of passing the recovery package before Mr. Obama's Jan. 20 inauguration is unrealistic. Now, they hope for passage before the Feb. 13 congressional recess.
Republicans are already criticizing parts of the stimulus package. Sen. McConnell, speaking Sunday on ABC's "This Week," questioned one of the biggest items, which would send as much as $200 billion to states largely to expand the federal share of Medicaid, the health program for the poor. He suggested structuring that aid as a loan, saying it would encourage states to "spend it more wisely."
An array of business tax cuts could help overcome such GOP opposition, enabling the Democrats to present their plan as a balanced mix of tax cuts and spending. It also would likely encourage business interests to lobby hard for its enactment.
Mr. Obama's team has spoken of wanting to attract significant Republican support, not simply picking up votes from a Republican moderate or two.
Obama aides have already enlisted business groups to rally behind spending for public-works projects. Norman R. Augustine, a former chairman and chief executive of Lockheed Martin Corp., will testify before the House Democrats' Steering and Policy Committee Wednesday in favor of an infusion of federal infrastructure spending. But the tax cuts may hold more sway with Republicans.
—Amy Chozick contributed to this article.
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He Can Always Resume His Baseball Career
Warning signs that New Mexico Governor Bill Richardson would have trouble in his confirmation hearings to become Barack Obama's Commerce Secretary had been multiplying for weeks. It doesn't surprise seasoned New Mexico political observers that the two-term governor withdrew from his chance to join Mr. Obama's cabinet yesterday.
Mr. Richardson was caught up in what has become a major grand jury investigation into possible connections between the state's awarding of a lucrative contract and sizeable contributions a California company made to political action committees created by Governor Richardson. While the governor himself has not been publicly implicated so far, many of his political employees have given testimony to the grand jury.
Aides to President-elect Obama are already blaming Governor Richardson for the mess, saying that when his staff was asked for information on the grand jury probe "nothing" was forthcoming. But that's exactly the kind of answer a team of vetters for a future president isn't supposed to accept.
The problems with Mr. Richardson should have been evident to anyone with experience in machine-run Chicago. "Corruption is a way of life in New Mexico," says local blogger and novelist S.J. Reidhead, who maintains that the state's Democratic Party has been controlled by a corrupt machine for many decades. Perhaps it takes someone like Mr. Obama's Chicago pals to imagine Mr. Richardson's tainted backyard wasn't worthy of asking blunt questions about.
Another sign Mr. Richardson was in trouble came only a few days after he was appointed Commerce Secretary last month. On December 16, he abruptly ended a news conference by refusing to answer questions about the grand-jury probe of his office. Trip Jennings of the New Mexican Independent reported that Mr. Richardson's "abrupt departure was out of character for a governor who usually lingers at the end of news conferences to shake hands and mingle with individuals in the room. But on Tuesday he never made eye contact with the reporters."
Mr. Richardson's departure leaves Mr. Obama with a political dilemma, as Hispanic groups are already demanding that the Commerce Department vacancy be filled with another prominent Latino. Mr. Obama may feel he has checked off that diversity box with his appointment of California Rep. Hilda Solis as Labor Secretary. But he will face intense political pressure to make sure the Commerce Secretary post is held by an Hispanic too, especially since George W. Bush has had former Kellogg CEO Carlos Gutierrez in the job for the last four years.
-- John Fund
Richardson's Flameout and the Bush DOJ
The international etiquette expert he put on his staff; the large entourage he travels with in seeming practice for an international leadership post; the welcoming of North Korean emissaries to New Mexico's governor's mansion to solidify his diplomatic credentials; the careful cultivation of Barack Obama, for which he earned the rebuke of "Judas" from Clinton acolyte James Carville -- all these gestures and extravagances have been for naught, it seems. Bill Richardson will not be winging his way to Washington in style in anticipation of a cabinet post in the Obama administration.
Federal investigators are looking into why Beverly Hills-based CDR Financial Products won a contract to oversee a New Mexico bond offering shortly after the company donated $100,000 to a political campaign Mr. Richardson was running in 2004 to register Hispanic and American Indian voters. It is still too early to know if the investigation will find credible evidence against the governor himself, but one detail will likely escape intense media scrutiny: The investigation is a vindication for the Bush White House in its decision two years ago to fire David Iglesias, the U.S. Attorney for the district of New Mexico.
At the time, the firing of Mr. Iglesias and a handful of other U.S. attorneys became a hot button issue when Democrats and certain media outlets went wild with accusations that the White House was "playing politics" with law enforcement. Mr. Iglesias himself became a focal point in the controversy when it emerged that New Mexico Sen. Pete Domenici had pushed for his firing after finding the U.S. attorney slow in investigating political corruption in the state.
Amid the controversy, the White House never filled Mr. Iglesias's post, allowing Mr. Iglesias's deputy to hold the position on an interim basis. But about a year ago, a panel of federal judges acted on its own to appoint Greg Fouratt, a veteran federal prosecutor and former officer in the U.S. Air Force with New Mexico roots. Mr. Fouratt's office isn't commenting on the current investigation, but his willingness to press forward is a clear indication that New Mexico now has a robust anti-corruption unit in its U.S. attorney's office, something it didn't seem to have under Mr. Iglesias.
-- Brendan Miniter
Quote of the Day I
"[Fidel] Castro is as much a hero to the Left as [the late Chilean dictator Augusto] Pinochet was a bogeyman. At first blush, this is puzzling. Castro has executed 16,000 people and imprisoned more than 100,000 in labor camps. While liberals around the globe agonize over Guantanamo, they do not even know the names of the camps in Castro's gulag: Kilo 5.5, Pinar del Rio, Kilo 7, the Capitiolo, for children up to age 10 (political incorrectness can manifest itself at a very early age). Two million of Fidel's ungrateful subjects have fled his socialist paradise, more than 30,000 have died in the attempt. . . . Castro, who killed many times the number that Pinochet did -- and in cold blood -- remains a hero to the useful idiots of the western commentariat because murdering members of the bourgeoisie is just breaking eggs to make the Marxist omelet" -- Scottish columnist Gerald Warner, on the 50th anniversary of Fidel Castro's Cuban revolution.
Quote of the Day II
"Israel -- assuming it succeeds -- is doing the United States a favor by taking on Hamas now. . . . [A] defeat of Hamas in Gaza -- following on the heels of our success in Iraq -- would be a real setback for Iran. It would make it easier to assemble regional and international coalitions to pressure Iran. It might positively affect the Iranian elections in June. It might make the Iranian regime more amenable to dealing. With respect to Iran, Obama may well face -- as the Israeli government did with Hamas -- a moment when the use of force seems to be the only responsible option. But Israel's willingness to fight makes it more possible that the United States may not have to" -- New York Times columnist Bill Kristol.
How Burris and Franken Became a Matched Set
There was a reason that Senate Majority Leader Harry Reid told NBC News yesterday he is willing to "negotiate" a solution to the seating of Roland Burris, the Illinois Democrat appointed to take the vacant Senate seat held by Barack Obama until November.
"I'm an old trial lawyer," Mr. Reid said. "There's always room to negotiate." That's curious, given Mr. Reid's formerly adamant stance that Mr. Burris's appointment is fatally tainted because it was made by disgraced Gov. Rod Blagojevich.
One explanation for Mr. Reid's flexibility may be the political heat Senate Democrats would take for failing to seat an African-American in a body that currently has no blacks as members. But another is that Democrats might face charges of hypocrisy if on the same day they refuse to seat Mr. Burris, they move to seat Democrat Al Franken as the senator from Minnesota. A key argument Democrats are using to justify not seating Mr. Burris is that the Illinois Secretary of State is refusing to issue a certificate of appointment. But Mr. Franken, who currently leads Republican Norm Coleman by 225 votes, will lack a certificate of election from his state's Secretary of State when the Senate convenes tomorrow. While the state's canvassing board will likely declare Mr. Franken the winner today, Minnesota law holds that the Secretary of State can't certify Mr. Franken as the official winner until Mr. Coleman's expected legal challenge of the result is resolved.
But that hasn't stopped leading Democrats from moving to have Mr. Franken seated anyway. "With the Minnesota recount complete, it is now clear that Al Franken won the election. The Canvassing Board will meet tomorrow to wrap up its work and certify him the winner, and while there are still possible legal issues that will run their course, there is no longer any doubt who will be the next Senator from Minnesota," New York Senator Chuck Schumer said yesterday, echoing comments made last week by Minnesota's own Senator Amy Klobuchar.
If Democrats want to seat Mr. Franken despite the cloud hanging over the disputed recount that gave him a narrow lead only last week, they will have trouble explaining why they are denying Mr. Burris his seat, even though he had no role in Governor Blagojevich's alleged attempts to sell a Senate appointment. That's why Senator Reid now says the Senate could accept Mr. Burris if the appointment were made by a new Illinois governor or by Lt. Governor Pat Quinn, who is expected to become governor after Mr. Blagojevich is removed from office.
That says to me Mr. Quinn is being leaned on by Mr. Reid to signal that he would choose Mr. Burris if he becomes governor, thereby giving Democrats an out. But Mr. Quinn would simply be rubber-stamping the same choice that Senate Democrats thought unacceptable just last week. Senate Democrats should not be allowed to wiggle free of their previous position so easily, especially if they simultaneously try to seat Mr. Franken over the objections of Senate Republicans.
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http://www.msnbc.msn.com/id/28476798/
U.S. could be facing debt 'time bomb' this year
Investors' thirst for American securities could finally be quenched
By Lori Montgomery
updated 12:29 a.m. ET, Sat., Jan. 3, 2009
WASHINGTON - With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world's appetite for financing U.S. government spending.
For now, investors are frantically stuffing money into the relative safety of the U.S. Treasury, which has come to serve as the world's mattress in troubled times. Interest rates on Treasury bills have plummeted to historic lows, with some short-term investors literally giving the government money for free.
But about 40 percent of the debt held by private investors will mature in a year or less, according to Treasury officials. When those loans come due, the Treasury will have to borrow more money to repay them, even as it launches perhaps the most aggressive expansion of U.S. debt in modern history.
With the government planning to roll over its short-term loans into more stable, long-term securities, experts say investors are likely to demand a greater return on their money, saddling taxpayers with huge new interest payments for years to come. Some analysts also worry that foreign investors, the largest U.S. creditors, may prove unable to absorb the skyrocketing debt, undermining confidence in the United States as the bedrock of the global financial system.
While the current market for Treasurys is booming, it's unclear whether demand for debt can be sustained, said Lou Crandall, chief economist at Wrightson ICAP, which analyzes Treasury financing trends.
"There's a time bomb in there somewhere," Crandall said, "but we don't know exactly where on the calendar it's planted."
The government's hunger for cash began growing exponentially as the nation slipped into recession in the wake of a housing foreclosure crisis a year ago. Washington has since approved $168 billion in spending to stimulate economic activity, $700 billion to prevent the collapse of the U.S. financial system, and multibillion-dollar bailouts for a variety of financial institutions, including insurance giant American International Group and mortgage financiers Fannie Mae and Freddie Mac.
Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.
Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.
Some of the borrowing was done during the fiscal year that ended in September, when the Treasury added nearly $720 billion to the national debt. But the big borrowing binge will come during the current fiscal year, when the cost of the bailouts plus another stimulus package combined with slowing tax revenues will force the government to increase the debt by as much as $2 trillion to finance its obligations, according to a Treasury survey of bond dealers and other market analysts.
As of yesterday, the debt stood at nearly $10.7 trillion, of which about $4.3 trillion is owed to other government institutions, such as the Social Security trust fund. Debt held by private investors totals nearly $6.4 trillion, or a little over 40 percent of gross domestic product.
According to the most recent figures, foreign investors held about $3 trillion in U.S. debt at the end of October. China, which in October replaced Japan as the United States' largest creditor, has increased its holdings by 42 percent over the past year; Britain and the Caribbean banking countries more than doubled their holdings.
Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression. The United States is in relatively good financial shape compared with other industrial nations, such as Japan, where the public debt equaled 182 percent of GDP in 2007, or Germany, where the debt was 65 percent of GDP, according to a forthcoming report by Scott Lilly, a senior fellow at the Center for American Progress.
Even a $2 trillion increase would push the U.S. debt to about 53 percent of the overall economy, "only a few percentage points above where it was in the early 1990s," Lilly writes, noting that plummeting interest rates show that "much of the world seems not only willing but anxious to invest in U.S. Treasurys, which are seen as the safest security that an investor can own in a risky world economy."
Still, some analysts are concerned that the deepening global recession will force some of the largest U.S. creditors to divert cash to domestic needs, such as investing in their own banks and economies. Even if demand for U.S. debt keeps pace with supply, investors are likely to demand higher interest rates, these analysts said, driving up debt-service payments, which last year stood at $250 billion.
"When you accumulate this amount of debt that we're moving into, it's not a given that our foreign friends are going to continue on the path they've been on," said G. William Hoagland, a longtime Republican budget analyst who now serves as vice president for public policy at the health insurer Cigna. "There's going to come a time when we can't even pay the interest on the money we've borrowed. That's default."
Others say those fears are overblown. The market for U.S. Treasurys is by far the largest and most liquid bond market in the world, and big institutional investors have few other places to safely invest large sums of reserve cash.
Despite their growing domestic needs, "China and the oil countries are going to continue running large surpluses," said C. Fred Bergsten, director of the Peterson Institute for International Economics. "They certainly will be using money elsewhere, but I don't think that means they won't give it to us."
As for the specter of default, Steven Hess, lead U.S. analyst for Moody's Investors Service, said even a $2 trillion increase in borrowing would not greatly diminish the U.S. financial condition. "It's not alarmingly high by our AAA standards," he said. "So we don't think there's pressure on the rating yet."
But that could change, Hess said. Nearly a year ago, Moody's raised an alarm about the skyrocketing costs of Social Security and Medicare as the baby-boom generation retires, saying the resulting budget deficits could endanger the U.S. bond rating. Even as the nation sinks deeper into debt to finance its own economic recovery, several analysts said it will be critical for Obama to begin to address the looming costs of the entitlement programs and signal that he has no intention of letting the debt spiral out of control.
Failure to do so, Bergsten said, would "create dangers . . . in market psychology and continued confidence in the dollar."
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http://hotair.com/archives/2009/01/07/turning-off-the-entitlement-meltdown-warning-light/
Turning off the entitlement-meltdown warning light
posted at 8:44 am on January 7, 2009 by Ed Morrissey
Democrats in Congress, led by Harry Reid and Nancy Pelosi, plan on a spending spree that will push budget deficits to a trillion dollars while an entitlement-system crash awaits us in the next two decades. Until now, a House rule has forced the lower chamber each year to acknowledge the disaster awaiting the largest entitlement program by debating Medicare’s funding and direction. Now, according to CQ Today (subscription required), Pelosi and the Democrats have a solution to Medicare’s collapse — change the rule to skip the debate:
House Democrats are planning to deal with one of their annual headaches early this year, using a rules package to turn off the Medicare “trigger” that each year forces an at least perfunctory debate on the entitlement program’s costs.
Buried in the package of operating rules that will govern the House in the 111th Congress is a provision saying the Medicare trigger “shall not apply.”
In a release accompanying the rules package, House Majority Leader Steny H. Hoyer, D-Md., called the Medicare trigger “an ideologically-driven target based on a misleading measure of Medicare’s financial health.”
The trigger is part of the 2003 Medicare overhaul law that also created the prescription drug benefit. According to the law, if for two years in a row, 45 percent or more of Medicare’s funding comes from general tax revenues, the president has to submit — and Congress debate — legislation to slow excess spending over a seven-year period and restore fiscal stability to the program.
The trigger went into effect for the first time last year. President Bush submitted a proposal to cut spending which House Democrats promptly dismissed. They then killed the requirement for debate in 2008 with a rule similar to the one they plan to adopt Tuesday.
In an interesting twist, the rule change will still require Barack Obama to submit proposals to fix Medicare, as required by the statute. The House will simply ignore them. This anomaly will exist because Democrats won’t propose this as an amendment to the 2003 law, but only as a simple rule change, which they can use to govern only their own behavior. They cannot use a rule change to let Obama off the hook.
Steny Hoyer says that ending the trigger “will allow Congress to consider all options for improving Medicare financing to provide a balanced and equitable solution.” That’s exactly what the trigger prompts Congress to do. Killing the Medicare trigger allows Congress to ignore Medicare and the looming financial crisis coming our way. Hoyer, Pelosi, and the rest of the Democrats in the House don’t want to be reminded that while they spend money like there’s no tomorrow in the 111th Session, tomorrow will eventually come — and their upcoming spending spree will have made the situation exponentially worse.
Basically, this is the same as fixing the ENGINE TROUBLE light on your car by covering it with electrical tape and then launching a 3,000 mile road trip. What could go wrong?
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The TARP That Covers Everything
The GMAC bailout highlights the lawlessness of the Bush administration
Jacob Sullum | January 7, 2009
http://www.reason.com/news/show/130916.html
Last week the Treasury Department bought a $5 billion stake in GMAC as part of a plan to transform the lender, formerly the financial arm of General Motors, into a bank holding company. The New York Times reported that GMAC wanted to become a bank mainly so it could be considered a "financial institution" and thereby qualify for money from the $700 billion Troubled Asset Relief Program (TARP).
Yet the Treasury used TARP funds to invest in GMAC. In other words, if the Times has the story right, GMAC received TARP money so it could be eligible for TARP money.
This paradox highlights the lawlessness of the Bush administration, which has ignored statutory restrictions on TARP and treated it as a slush fund for politically favored supplicants. Although he has strongly criticized President Bush for flouting the law and exceeding his constitutional powers, President-elect Obama has applauded the latest manifestation of that tendency.
GMAC, which lends money to car dealers and buyers and also has dabbled disastrously in mortgages, has been bleeding billions for more than a year. In November, when it asked the Federal Reserve Board for permission to become a bank, the decision was based largely on the understanding that only financial institutions could receive help from TARP.
That was the Treasury's position, and it's not hard to understand why. The Emergency Economic Stabilization Act, which created TARP, authorized Treasury Secretary Henry Paulson "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution," the aim being "to restore liquidity and stability to the financial system."
But by the time the Federal Reserve approved GMAC's application, Paulson had decided that G.M. and Chrysler, which make not loans but cars, nevertheless could receive $17.4 billion from TARP to tide them over until Congress approves more aid. His epiphany about the meaning of the TARP law came immediately after Congress declined to approve emergency short-term assistance for the carmakers.
"While the purpose of [TARP] and the enabling legislation is to stabilize our financial sector," Paulson said, "the authority allows us to take this action. Absent Congressional action, no other authorities existed to stave off a disorderly bankruptcy of one or more auto companies."
To Paulson's mind, a "disorderly bankruptcy" of G.M. or Chrysler was unthinkable. Since Congress had not authorized a bailout of the automakers, he decided to pretend it had.
Under Paulson's new interpretation of the law, a "financial institution" is whatever he says it is. Having decided that carmakers qualify, the Treasury last week declared that businesses tied to carmakers, such as parts suppliers, also can be covered by TARP.
In fact, the official rationale for the GMAC bailout, which included another $1 billion for G.M. to help it buy equity in the new bank holding company, was not GMAC's restructuring but its role in "a broader program to assist the domestic automotive industry in becoming financially viable." As far as Paulson is concerned, TARP aid to a money-losing lender is justified not by its relationship to restoring the financial system's liquidity and stability, the purpose for which Congress created TARP, but by its relationship to helping carmakers, a purpose not covered by the law that authorized the program.
You might think Obama—who proudly told The Boston Globe a year ago, "I reject the view...that the President may do whatever he deems necessary to protect national security"—would have something to say about the misuse of TARP. He does. He likes it.
Obama endorsed Paulson's illegal loans to G.M. and Chrysler, saying they were "a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers." Evidently Obama opposes only the unnecessary abuse of executive power. All the debate over what form the Obama-backed stimulus package should take may be pointless, since our next president seems to think he may do whatever he deems necessary to protect economic security, no matter what Congress says.
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Prediction:
You ain't seen nothing yet!
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January 07, 2009
Are Tax Revolts a Thing of the Past?
By Steven Malanga
After I wrote a recent column on the fiscal mess in some states, I got an e-mail from a beleaguered New Jersey resident asking what I thought were the prospects for a tax revolt in the Garden State. It is an interesting and pertinent question because tax uprisings tend to occur during difficult and uncertain economic times, especially in places where the first impulse of state and local governments is to raise taxes to make up for shortfalls in revenues.
The two most notable tax revolts in recent memory, for instance, occurred in the mid-to-late 1970s and again in the early 1990s. Tax increases during those difficult years pushed the state and local government tax burden above 10 percent of income, on average, across the country and even higher in some places, like California, where it topped out at 11.7 percent in 1977. That helped spark perhaps the most notable of all state anti-tax campaigns, the Proposition 13 initiative of 1978, which capped property tax increases in the Golden State and inspired taxpayer uprisings elsewhere, leading to 13 similar tax caps, including Proposition 2½ in Massachusetts. Though expressed entirely in local initiatives, the anti-tax sentiment stirred up in those years was so powerful that it’s often credited with helping elect Ronald Reagan president in 1980.
Memories are short in government, however, and a decade later, when the American economy was again slowing, governors, mayors and legislatures began hiking taxes again, sparking the next tax revolt. One of the most visible victims of this uprising was New Jersey Gov. Jim Florio, who faced a $3 billion budget deficit in 1991 and promptly asked for $2.8 billion in new taxes--at the time the largest single-year tax increase ever imposed by a state. Although Jersey had been, as recently as the 1960s, one of the country’s most lightly taxed states, Florio’s tax increases, the culmination of a series of rises over the years, helped push the state and local tax burden in Jersey to 11.6 percent of total income — one of the highest in the nation. Since the Garden State didn’t have (and still doesn’t) California-style initiative and referendum, taxpayers displayed their ire by handing control of the state legislature to Republicans in mid-term elections and then dumping Florio two years later — the first sitting governor to be defeated in a reelection bid since Jersey had adopted its modern constitution in 1947.
In other states, meanwhile, the early 1990s tax revolt took the form of ballot initiatives to cap state spending levels, such as Amendment I in Colorado, which required that new tax increases be approved directly by voters.
Today, 44 states are facing budget woes that amount to a projected $90 billion in collective deficits in the coming fiscal year. Again, many governors and legislatures are pondering tax increases even as unemployment rises and people try to work themselves out of debt. New York tops the list with a whopping 88 new taxes and fees proposed by Gov. David Paterson, but he’s not alone. After raising taxes by about $1.1 billion in 2006, New Jersey Gov. Jon Corzine is hinting at new tax increases. California, Florida, Kentucky, Maryland, Nevada and Oregon are just some of the states that have either raised taxes or are considering such a move. The stage would seem to be set, in other words, for the next tax revolt in the states.
But the political climate has also changed dramatically since the early 1990s, and the next year or so may show whether state and local tax revolts are even possible anymore. Opponents of tax revolts—especially public sector unions, social service advocacy organizations that rely on government funds, and other groups that consume government resources—have grown much more powerful, and much savvier at fighting back efforts to trim the growth of government. After voters recalled California Gov. Gray Davis in 2003, startled public sector unions mobilized to derail a set of voter initiatives supported by his successor, Arnold Schwarzenegger, including one that would have limited the growth of the state’s budget. Public sector unions spent north of $50 million in the 2005 campaign against the initiatives, with the state’s teachers’ union alone kicking in $41.8 million.
In New Jersey that same year, public unions worked to derail a budding taxpayer revolt when they used their clout in the state legislature to water down a bill that would have created a constitutional convention to enact property tax reform. Under union pressure, legislators approved the convention but barred it from addressing government spending, which rendered a potential gathering useless.
In New York State, unions have been running ominous radio ads warning of sharp declines in services unless Albany raises taxes. Such ads can be devastatingly effective. A similar advertising campaign by health care interests in 1999, which warned of massive hospital closings unless the state increased aid to health care institutions, prompted worried New Yorkers to barrage hospitals with phone calls asking if they were about to shut their doors and provoked the head of one hospital association to accuse other health care groups in the state of employing scare tactics to further their goals.
Meanwhile, state politicians have quietly been working to make the initiative process tougher and thus limit the number of radical proposals like Proposition 13 that ever make it on the ballot. In 2007 alone, according to Governing Magazine, states enacted some 33 bills regulating the initiative process. In Florida, 60 percent of voters must now vote in favor of a ballot initiative in order for it to become law. In other states, those who gather signatures supporting ballot initiatives must now go through state-mandated training. Such rules will make in more difficult for ad hoc taxpayer groups that arise in response to political developments to be effective.
Still, one gets the feeling that most state politicians would not like to test the new, tougher systems that they’ve put in place. They’d rather have a President Obama come to their aid with direct federal funding for hard-pressed budgets, such as higher reimbursements for Medicaid, increases in federal dollars for local law enforcement, and more aid for K-through-12 education. Obama has, at one time or another in his run for the presidency, promised all of the above, although that was before the federal government committed $700 billion to bail out financial institutions. Recently Obama has offered states stimulus in the form of more infrastructure spending, which will do little to bolster budgets in the coming year.
So the stage may be set for a series of face-offs between beleaguered taxpayers and tax-eaters. If so, we’ll learn just how much the landscape has shifted since the last wave of tax revolts.
Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute
http://www.realclearmarkets.com/articles/2009/01/are_tax_revolts_a_thing_of_the.html
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Interesting article BBG. Where are those people now who pushed Prop 13 to the forefront? On my local front (Twin Cities, MN) in the past year we had 1) a tax increase handed to us by our county board to build a new MN Twins stadium. Strangely, it is a county tax for a state resource - actually a private business - and I live further from the stadium site than 100% of the residents of St. Paul where the tax does not apply. If you buy items outside the county and use them inside the county you are to file and send in the usage tax!!! We had 2) a gas tax hike from the state Dem. legislature, and worst of all 3) we had a statewide sales tax increase passed by the voters! If you opposed the tax increase then you are opposing clean water and wanting our lakes to become filth (even though we already pay a state agency to ensure water purity. Not exactly a tax revolt when a tax increase passes statewide by I think 8 points. My property taxes on my home in Minnesota are 20 times higher than on my home in Colorado.
(Meanwhile, 'Communist China' cut business tax rates in 2008 from less than ours to way less than ours...)
In the case of Obama, I know he said he would cut taxes on 95% of the people. I personally don't think his voters relied much on that as their reason for choosing him. I think he was pre-empting the promises that would come from his R. opponent. But in the case of tax increases on the rich he had to actually promise tax hikes to get elected and then back off from a governing perspective at least temporarily to keep from continuing to crash the economy. Unbelievable. My point is that I unfortunately don't see a tax revolt environment.
I frankly see more of a chance for revolt based on reckless use of public funds or play money from the Treasury - see SB Mig's post just preceding that characterizes Bush use of TARP funds as "lawlessness". Apart from the allegation of unlawfulness in process, what about the constitutionality (equal protection?) of government helping individual businesses, punishing others and the economic system ignorance of not letting failing enterprises fail. I think the revolt should be based this time on public spending and a turn back toward limits on government. Once we decide to contain spending - at ALL levels, we can look at funding.
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Marginal tax rates IMHO are a matter of the deepest import.
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Remember when Dick Cheney was pilloried for reportedly saying, earlier this decade, that "deficits don't matter"? We recall reading any number of press releases denouncing the Vice President for supporting tax cuts that contributed to short-term deficits but also helped the economy grow until the deficits shrank nearly away. Yet somehow none of those same voices are objecting now that the government is spending its way into deficits that are so large they dwarf any during peacetime in U.S. history.
The Congressional Budget Office released its latest budget forecast yesterday, and we now really do have red ink as far as the eye can see. Thanks to a 6.6% decline in revenues due to recession, a spending increase of some $500 billion or 19%, and assorted federal bailouts, the U.S. deficit for fiscal 2009 (ending September 30) will nearly triple to $1.19 trillion. That's 8.3% of GDP, which CBO says "will most likely shatter the previous post-World War II record high of 6.0 percent posted in 1983." It certainly blows away any deficit this decade, not to mention the Reagan years when smaller deficits were the media cause celebre.
But there's more. None of that includes the new fiscal "stimulus" that President-elect Obama has promised to introduce upon taking office in two weeks. The details aren't known, but Mr. Obama and Democrats have been talking about at least $800 billion, and probably $1 trillion, in new spending or various tax credits and reductions over two years. Toss that in and add more expected bailout cash, and if the economy stays slow the deficit could reach $1.8 trillion, or a gargantuan 12.5% of GDP. That 2006 Democratic vow to pass "pay as you go" budgets seems like a lifetime ago, which in political terms it was.
We've long argued that deficits per se are not worth losing sleep over, though we do recall when Robert Rubin and Larry Summers claimed that reducing them was itself an economic virtue because it reduced interest rates. With their acquiescence in the magnitude of these deficits, we trust they will now admit to burying Rubinomics as a serious economic philosophy. Democrats are once again all Keynesians now -- at least until they want to use the deficits as an argument to raise taxes in a year or two.
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As an economic matter, it does make sense to run deficits in a recession rather than to raise taxes in a way that would delay any recovery. Borrowing money to finance a war (Reagan's aircraft carriers in the 1980s) or to pay for tax cuts that promote growth (Reagan and Bush's tax cuts) is often money well spent. Had bipartisan Washington passed a big pro-growth tax cut a year ago, rather than settle in February for $165 billion in no-growth rebates and spending, the economy would be stronger and the deficit lower today.
The economically crucial issue for the long term is how much the government spends, because that is what becomes a claim on current or future taxpayers. This is where the CBO forecast gets scary. Including the Obama stimulus spending and assuming the full $700 billion of bailout money for the banks, insurance companies, auto firms and so forth gets fully spent, federal outlays could approach $4 trillion in 2009. That's double the $2 trillion Congress spent only seven years ago.
Federal expenditures are now rapidly outpacing the growth of the economy, which is expected to be negative this year. CBO estimates that even before the stimulus federal spending will climb to an all-time high 24.9% of GDP, up from the previous post-World War II high of 23.5% in 1985. Add the stimulus and bailout cash and we estimate the federal spending share of GDP will climb to 27.5%. All of this is fast pushing the U.S. to European spending levels, and that's before Mr. Obama's new health-care entitlements.
The problem with most of this spending is that it will be hard to stop once it becomes part of the annual CBO baseline. Congress never reduces spending year over year. While much of the $700 billion in Troubled Asset Relief Program money will probably be returned to the Treasury as banks redeem the government's preferred shares, Congress will want to turn around and spend that cash on other things unless the Obama Administration says no.
CBO also reports that some $240 billion of the new spending is for the bailout of Fannie Mae and Freddie Mac, which Congress will also want to keep in business as part of its nationalization of the mortgage market. So that $240 billion may never be repaid, though only last year our Solons and Treasury Secretary Hank Paulson were assuring us that Fan and Fred were no threat to taxpayers. Think of this as Congress having stolen from taxpayers as a result of its Fannie scam nearly five times what Bernard Madoff may have stolen from his clients.
Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington -- and fast.
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"Remember when Dick Cheney was pilloried for reportedly saying, earlier this decade, that "deficits don't matter"? "
Yes. I am still confused about this. This is just against all common sense.
It reminds me of Gilder preaching that debt is good.
I just don't get it. How can one argue we are not pushing our bills down the road onto future gnereations?
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My understanding is that the true point is not deficit or not, but governmental burden on the economy. Taxes might be paying for all spending, but if the overall % of GDP is too high, that is the problem.
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Crafty wrote: "Marginal tax rates IMHO are a matter of the deepest import."
- Absolutely true and people like Bush, McCain, even Palin forget or don't understand the other key words besides tax - 'marginal' and 'rate'. It isn't (just) taxes - the money - they take, it's the incentive to produce that gets badly eroded.
I wrote that the coming revolt should be based on limits on spending and limits on government based on my view of where the electorate might be. The bailouts and slush funds going into the trillions aren't wearing well on the people IMO. I still agree that marginal tax rates are extremely important. But marginal rates today are not where Reagan found them so the opportunity to cut further and the political opportunity to get a groundswell of support for that is smaller. OTOH, opposing increases in marginal tax rates is hugely important. I believe that just Obama's INTENT to raise investment taxes was one big factor in the asset selloff that collapsed values of everything from real estate to stocks, to bonds, to commodities, to money.
Cheney once said something like 'deficits don't matter'...
- I take that to be a partial sentence or partial thought, like getting Osama bin Laden is not important, meaning that it is not the only thing, the main thing or the first thing. It is still important!
Cheney was alleged to say in a policy argument that "Reagan proved that deficits don't matter". That was a quote comes from the writer who took it from an interview from the recollection of the person who was arguing tax cut proposals with Cheney, who also admitted they were interrupting each other, Paul O'Neill the former Treasury Secretary and a book about his service by Ron Suskind. The quote is also suspiciously provocative, as if to sell books, even if it might be exact or close to what was actually said. In fact, revenues again surged at double digit rates when the marginal tax rates were cut, surpassing CBO projections by hundreds of billions of dollars, and again th deficits were caused by excess spending. There is no indication that growth ended before the first phase-out of the 'temporary' cuts started Jan. 1 2008. Also growth did not end until investors and producers could see that the likelihood of tax cuts expiring was imminent and inevitable.
What Cheney should have said and I believe has said on explanation was that deficits in the 1980s did NOT have ANY of the effects on the economy that were predicted. In fact, interest rates and inflation both fell during that time. It did not crowd out private borrowing because we had a simultaneous explosion of growth. The cutting of marginal tax rates did NOT cause the deficits. Across the board tax cuts in the early 1980s resulted in revenues to the Treasury DOUBLING in the 1980s. The deficits were caused by excess spending in the form of a) compromises that Reagan had to make with a Democratic congress on domestic spending and caused by b) increased defense spending that was needed to bring down the Soviet empire, a worthwhile endeavor.
Deficits do matter. As CCP correctly points out they put a burden on the budget for interest costs and a burden on taxpayers of future years that carry the debt forward.
But deficits aren't the first thing in economic importance. As Crafty correctly points out, public spending takes resources away from the private sector and creates a burden whether you tax to pay for it or you borrow or you print the money. Bloated public sector spending is a burden holding back growth whether you tax, borrow or inflate. What people like Cheney or Gilder might point out is that a public sector taking half the resources of the economy using pay as you go and a zero deficit is a much larger burden on the economy than having the public sector take 20% of the resources but running a deficit at 1% of GDP. Gilder has made that point saying you could have a zero tax rate, but that IMO is for illustration and absurd in practice. I think all sides at least say we want to minimize borrowing and avoid runaway inflation.
'Debt is Good'. It means that you can do more and go further if you are not totally restrained by the timing of income and outflows of funds. That doesn't mean more debt is better or that what you invest in doesn't matter. Most families take on debt to live in a home while they pay for it. Alternatively, they could wait until accumulating 200k for a median home and then buy it. By then most families won't need the yard or the swingset because the kids will be turning 50. Same goes for a bridge over the Mississippi River and all the other public sector infrastructure projects that we need. We could tax now, put away the money and build the bridges later when we have all the money. Meanwhile, no one can reasonably commute across the river. Goods don't move and goods don't get sold across the river, etc. If we waited to pay for defense spending we might be speaking a Soviet language by now. Debt, properly used and structured, can be good.
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Excellent discussion Doug.
I might add that the nature of the spending matters too. Maintaining and developing infrastructure (our electrical system is BADLY out of date for example, deep problems loom with water supplies as well) is very different than handing out money to people who pay no income taxes as President BO intends to do with his "tax cuts".
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At first glance, Citigroup's endorsement last week of a Senate plan to allow bankruptcy judges to break mortgage contracts looks like a scene from "Goodfellas."
APSince October, the government has invested $52 billion in Citi, while agreeing to eat up to $249 billion in losses on the bank's toxic real estate portfolio. And so it's really hard to say no when those Washington "investors" call for a favor. In the 1990 Martin Scorsese movie, a restaurant owner realizes too late that a partner big enough to protect him is big enough to take everything he has. As Ray Liotta narrates, "Now he's got Paulie as a partner. Any problems, he goes to Paulie. Trouble with a bill, to Paulie . . . But now he has to pay Paulie."
The problem with Citi's capitulation is that it means that not just Citi will have to pay the Beltway outfit if the bill passes. Other banks, borrowers and taxpayers will also suffer. In fact, this deal is looking more and more like a case of Citi colluding with its new political owners in order to force competing banks to break contracts and take more losses. This kind of politicized banking is precisely why the Bank of the United States was shut down in the 19th century.
After years of resisting, Citi has suddenly signed off on Senator Dick Durbin's plan to allow judges to rewrite mortgage contracts for borrowers in Chapter 13 bankruptcy. Under the Illinois Democrat's plan, which is earmarked for inclusion in the pending stimulus bill, judges could reduce the amount of principal, lower the interest rate, and change the length of the mortgage term.
Until Washington embraced the politics of housing panic, even sensible Democrats recognized that allowing such mortgage "cramdowns" was a terrible idea, sure to punish future borrowers with higher rates as lenders calculate the increased risk. The Congressional Budget Office warned in January 2008 that such a change could result in higher interest rates for homeowners and bigger caseloads in bankruptcy courts. In 2007, 16 House Democrats signed a letter opposing similar legislation.
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They realized that the consequences would fall hardest on those hoping to buy a home, if markets logically respond by setting mortgage interest rates closer to those on, for example, auto loans or credit cards. A bankruptcy judge is now free to reduce amounts owed on many types of consumer debt. For mortgages, the iron-clad requirement to pay off the loan or lose the house is precisely to encourage lower rates on a less risky investment.
Supreme Court Justice John Paul Stevens described the importance of this principle in 1993 in Nobelman v. American Savings Bank: "At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual's interest in retaining possession of his or her home than of other assets. The anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market."
Mr. Durbin argues that borrowers won't be able to enjoy the benefits of a cramdown until they first make an effort to negotiate new terms with their lenders before declaring bankruptcy. Also, to counter the perception that they are harming the mortgage market, Mr. Durbin and Senate colleagues Chris Dodd and Chuck Schumer are proposing that cramdowns only be available for mortgage contracts signed before their bill becomes law. But of course lenders will have every reason to assume that, whenever the going gets tough, Washington will let future borrowers break contracts too.
Mr. Durbin and his allies have tried and failed several times to break the cramdown opposition, and they believe Citi finally gives them the club to prevail. As Mr. Schumer noted in a press release, "Citigroup's support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly." Talking point number one for Democrats is that if giant Citigroup is for this plan, why would anyone oppose it?
In Today's Opinion Journal
REVIEW & OUTLOOK
Tehran's Strip Club
TODAY'S COLUMNISTS
The Americas: Dictatorship for Dummies
– Mary Anastasia O'GradyInformation Age: How the Music Industry Can Get Digital Satisfaction
– L. Gordon Crovitz
COMMENTARY
Charter Schools Can Close the Education Gap
– Joel I. Klein and Al SharptonTake It From McCain's Advisers: The GOP Would Raise Taxes
– Matt MillerWhy Russia Stokes Mideast Mayhem
– Garry KasparovThe U.S. Votes 'Present' at the U.N.
– John R. BoltonIn fact, Citigroup may support this plan precisely because it isn't a big player in the mortgage market. Sure, it has some dodgy mortgage-backed securities on its books, but they've been written down and the feds cover 90% of losses beyond $29 billion in any case. When it comes to making loans, however, Citi originates less than 10% of American mortgages.
Citi is falling further behind J.P. Morgan Chase, which acquired Washington Mutual; Wells Fargo, which acquired Wachovia; and Bank of America, which bought Countrywide. J.P. Morgan's mortgage business is now twice the size of Citi's, while Wells and BofA each originate almost three times as much dollar volume as Citi. So in agreeing to Mr. Durbin's offer, Citi is also volunteering its competitors to write down more mortgages, giving Citi a comparative advantage.
But the unintended consequences could make even Citi rue the day it got in bed with the goodfellas on Capitol Hill. If the possibility of this refinancing-via-bankruptcy encourages more people to declare bankruptcy, that would mean additional losses on Citi's credit cards and auto loans.
Having spent the past year committing taxpayer trillions to support American banks, Washington now seems not to mind at all if its latest bailout drives up bank losses on mortgages, credit cards and other loans. The Senate could soon make Paulie look like a reasonable business partner.
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PETER WEHNER and PAUL RYAN
For most of our nation's history, our approach to economics has favored enterprise, self-reliance and the free market. While the American economy has never been entirely laissez-faire, we have historically cared more about equality of opportunity than equality of results. And while Americans have embraced elements of the New Deal, the Great Society and progressive taxation, we have traditionally viewed welfare as a way to help those in dire need, not as a way of life for the middle class. We have grasped, perhaps more than any other nation, that there is a long-run cost to dependency on the state, including an aversion to risk that eventually enervates the entrepreneurial spirit necessary for innovation and prosperity.
Chad CroweThis outlook, once assumed, is now under attack due to a recent series of political and economic events.
The first is the unprecedented intervention by the federal government, in the form of a $700 billion relief package intended for our financial institutions after the credit crisis last September. This was followed by extending billions of dollars of federal assistance to America's auto makers in order to prevent their imminent bankruptcy -- the first emergency bailout that went to companies outside the financial sector. We understand why the federal government did this, and even supported legislation that, while hardly perfect, prevented an economic meltdown.
Nonetheless, the consequences of this undertaking are enormous. Not only has the size of the expenditures been staggering -- there is talk of another stimulus package worth an estimated $825 billion -- but we are witnessing a fundamental transformation of government's relationship with the polity and the economy.
The last several months are a foreshadowing of a new era of government activism, rather than an unfortunate but necessary (and anomalous) emergency action. We will soon shift from a market-based economy to a political one in which the government picks winners and losers and extends its reach and power in unprecedented ways.
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This shift is exemplified by the desire of President-elect Barack Obama and the Democratic Congress to push us toward government-run health care.
For all his talk of allowing consumers to select their own health-care coverage, Mr. Obama's proposal, as he laid it out in his campaign, will provide strong financial incentives for employers and individuals to sign up with a new, Medicare-style government plan for working-age people and their families. This plan will almost certainly use a price-control system similar to the one in place for Medicare, allowing it to charge artificially low premiums by paying fees well below private rates. These low premiums will serve as a magnet for enrollment and will devastate the private companies trying to compete in the health-insurance market. The result will be the nationalization of the health-care sector, which today accounts for 16% of U.S. gross domestic product.
Nationalizing health care will be profoundly detrimental to the quality of American medicine. In the name of cost control, the government would make private investment in medical innovation far riskier, and thus delay the development of potentially lifesaving treatments.
It will also put America on a glide path toward European-style socialism. We need only look to Great Britain and elsewhere to see the effects of socialized health care on the broader economy. Once a large number of citizens get their health care from the state, it dramatically alters their attachment to government. Every time a tax cut is proposed, the guardians of the new medical-welfare state will argue that tax cuts would come at the expense of health care -- an argument that would resonate with middle-class families entirely dependent on the government for access to doctors and hospitals.
Of course, this health-care plan is occurring against our particular fiscal backdrop: Without major reform, our federal entitlement programs will soon double the size of government. The result will be a crushing burden of debt and taxes.
In short, we may be approaching a tipping point for democratic capitalism.
While the scope of the challenge should not be underestimated, those of us worried about this fundamental reorientation of politics and economics have several things working in our favor. Among them is that a public accustomed to iTunes, Facebook, Google, eBay, Amazon and WebMD is not clamoring for centralized, bureaucratic government. The strong American instinct for individual initiative and entrepreneurship remains intact.
In addition, confidence in government -- from Congress to those responsible for oversight of the financial system -- is quite low.
Our sense is that at the moment, the public is not thinking in terms of "big government" or "small government." Instead, Americans want efficient government -- one that is modern, responsive and adaptive. People want government to act as a fair referee, providing guardrails that allow individuals to rise without intrusively dictating individual decisions.
If conservatives hope to win converts to our cause, we need to understand this new moment and put forward an agenda that reforms key institutions in a way that advances individual freedom, without creating an unacceptable level of insecurity.
This is no easy task, and it must begin with providing a compelling alternative to what contemporary liberalism and Mr. Obama are about to offer. This especially includes health care, where we must start by recalling that our current health-insurance system was designed to meet the needs of a 20th century economy and World War II-era employment laws. It is hopelessly outdated, yet the Obama plan would make the system even more sclerotic.
The core of our message needs to be a commitment to creating a health-care plan that meets the demands of the modern economy. We need to convince concerned citizens that we can help the uninsured find coverage in the private sector and use market incentives to contain costs. The result will be a system that makes it possible for everyone to afford health insurance, including those with pre-existing conditions.
Tax credits, high-risk pools, insurance choice and regulatory reform can form the basis of a transformation from today's enormously costly and inefficient third-party system into one driven by ownership, choice and competition. And at the nucleus of this redesigned system will be the patient-doctor relationship.
If we hope to succeed in making our case, it will require a concerted education campaign that relies on hard data and facts, rigorous and accessible public arguments, and persuasive public advocates.
This is quite a tall order. But if we do not succeed in resisting greater state involvement in the economy -- and health care is meant to be the beachhead of this effort -- we will move from a limited welfare state into a full-blown one. This will reshape, in deep and enduring ways, our nation's historic sensibilities. It will lead here, as it has elsewhere, to passivity and dependence on the state. Such habits, once acquired, are hard to shake.
Between now and the end of this decade may be one of those rare moments in which among other things will turn decisively one way or the other. The stakes could hardly be higher for our way of life.
Mr. Wehner, a former deputy assistant to President George W. Bush, is a senior fellow at the Ethics and Public Policy Center. Mr. Ryan, a Republican congressman from Wisconsin, is a member of the Budget Committee and the Ways and Means Committee.
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"Intelligence is the amount of time it takes to forget a lesson" (me, I think)
We are so fcuked! Take a look at what the Committee on Appropriations envisions for the United States: http://www.obey.house.gov/index.php?option=com_content&task=view&id=678&Itemid=194
Looks like a Soviet Ten Year Plan, quickly cobbled together.
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Crafty, thanks for posting the piece by Wehner and Ryan. 'Paul Ryan, congressman from Wisconsin, member of the Budget Committee and the Ways and Means Committee' - is one of the potential up and coming voices IMO for electable conservatism - beyond Wisconsin. Also thanks for posting the Soviet plan from the current powers of the country. In my view, if we want growth, we just lean a little toward pro-growth policies, not rip up the best economic system in the history of the planet and replace it with what you aptly describe as a copy of the failed Soviet, centrally planned economy. As we contemplate further bailouts and phony 'stimuli', these contrasting views need to be studied side by side. I recommend re-reading the Wehner/Ryan piece point by point after the soviet plan and also I recommend the following piece of common sense from Victor Davis Hanson. He is not as pretty as the governor of our largest state but McCain would also have shocked the world by nominating VDH as running mate. The MSM would have imploded trying knock down his wisdom:
January 15, 2009
Don't Waste a Crisis?
By Victor Davis Hanson
Euphemism comes from the Greek word euphemia , which means "using the good word" -- usually in place of the accurate bad one. Recently we've become experts at it.
Printing trillions more dollars and growing government to cover new debts isn't so bad if we call it "stimulus." That is far smarter than saying something honest like, "I propose a new $1 trillion debt program."
The old-fashioned spendthrift policies we used to ridicule as congressional pork and "earmarks" are now justified under that ubiquitous nice word "stimulus." If funding another questionable museum in your district was once congressional pork barreling, it will now be a patriotic act to get the national economy moving again.
Yet much of what is driving this national hysteria in our reaction to the current economic downturn is psychological. After all, no plagues, wars or earthquakes have killed our workforce, destroyed our infrastructure or wiped out our computer banks.
Instead, for years now we have overspent and over-borrowed -- and must naturally pay up. And like any chastised debtor, panicked Americans logically have temporarily clammed up and are holding on to what money they have left.
In response, the government apparently doesn't only want to free up credit to get us back to our profligate habits of borrowing what we don't have so we can buy what we don't need. It also would like to create new programs to build infrastructure; guarantee new loans; and offer additional credits, bailouts and entitlements.
Or in the words of incoming White House Chief of Staff Rahm Emanuel, "You never want a serious crisis to go to waste."
Traditional conservative custodians of the budget can't say much. They are largely discredited on matters of finance. During the last eight years of Republican prominence in Congress and the White House, the government borrowed as never before.
Liberals in turn have suddenly rewritten their own economic history. They used to claim the great surge in government under President Franklin Delano Roosevelt got us out of the Great Depression with deficit spending and federal jobs programs.
But many historians have argued instead that unemployment and slow growth remained high throughout Roosevelt's first two terms -- until the Second World War scared us all into a fit of national mobilization that alone ended the ongoing 13-year depression between 1929 and 1941.
Now here's the irony: Liberals suddenly agree that only the Second World War stopped the Depression, after all! So they now argue that we need a new New Deal far greater than the old New Deal. In other words, they want to re-create the urgency of World War II to get government to grow and spend big-time.
Their argument is that if FDR failed to stop the Depression, it wasn't, as conservatives insist, because he turned to unworkable government solutions, but rather because he didn't try big enough ones.
The government-affiliated, under-regulated and corrupt Fannie Mae may have collapsed. And it may have helped to cause the sub-prime mortgage meltdown. No matter -- the proposed "don't waste a crisis" cure seems to use that model of government-guaranteed corporations to absorb as much of the economy as possible.
Still, no one knows whether the present borrowing and printing of money to give short-term credits, cash grants and jobs to Americans will get the economy moving again -- or simply reinforce the bad habits that got us here in the first place.
But consider a few facts: Even in the current mess, recent unemployment figures are around 7 percent -- not the 10 percent of the recession of the early 1980s, much less the 25 percent rate that peaked in the Great Depression.
Meanwhile, energy prices have plunged, saving consumers and the country hundreds of billions of dollars. The existing pre-stimulus annual budget was already set to run about a half-trillion-dollar deficit. The present government debt, much of it to Asia and Europe, was nearing $13 trillion even before the latest borrowing plans.
We are going to have to pay these debts back by cutting federal spending and entitlements or raising taxes -- or both. Or we can convince panicky debt holders abroad to loan us even more money for years at near-zero interest rates. Or we can try simply printing trillions of new dollars to inflate the economy while hoping that creditors don't mind being paid with funny money.
What got us in this debacle was the lack of self-control on the part of consumers who borrowed to spend more than they could pay back, rapid growth in government debt, and Wall Street speculators who wanted obscene returns they had not earned.
It would be a pity if the government now trumped these bad examples and turned some helpful federal loan guarantees of troubled banks into a permanent state-run economy with crushing debt for generations to come.
Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author.
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Mention of the ten year plan and vote counting shenanigans in the Minnesota senatorial election reminds me of a joke I haven't been able to tell for many years:
Did you hear about the burglary at the Kremlin? They stole the results for the next 3 elections.
The DC area is going absolutely batfeces over the impending coronation: They are closing all Virginia entry points into DC, all sorts of National Guardsmen called up, can't get to the mall with anything bigger than a fanny pack, hospitals are concerned about how their staff will get into the city, and so on. With the trillion dollar debt they are talking about racking up and the messianic intensity being pointed BHO's way, it sure is seeming like all the elements are in place for some incredible folly.
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http://fabiusmaximus.wordpress.com/2009/01/20/milestone/
Tragic milestone.
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Besides last year's 'stimulus', we already had a $400 billion dollar stimulus from the reduction in energy costs. That boost could have occurred much sooner or we could have avoided the energy crunch altogether if government could have reduced its stranglehold on American energy production.
Everything today (Obama-Pelosi et al) is Keynesian. Pass a stimulus, the larger the better, what we spend it on isn't as important as how much... When you fund a government project for 12-18 months, what do you get at the end of the project? Let me guess, continued government funding or construction worker layoffs - AGAIN.
Wikipedia re. Keynes: "He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms."
Keynesian interventions were applied to the so called 'Phillips curve' that stated basically that there is an inverse relationship between inflation and unemployment. Use inflationary policies for example to curb unemployment.
By the end of the 1970's, because of failed interventionist government policies, both inflation and unemployment were spiking, not offsetting each other. The activist government ran out of Keynesian interventionist tricks.
Then in the early 1980's both evils were contained with a non-Keynsian, two pronged approach, tight money to control inflation and lower marginal tax rates to restore the incentive to produce.
Now we head back to Keynes hayday, the prosperity of the 1930s. :oops:
In the late 70s or early 80s the WSJ published an editorial called "Keynes is Dead." I would like to find that and see if any of that wisdom might help our new leaders today.
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From Bushanan post under the future (or lack thereof of the Republican party)
I can't post a reply it keeps coming up "notify".
So I'll post here:
***Philosophically, too, the country is turning away from the GOP creed of small government and low taxes. Why?
Nearly 90 percent of immigrants, legal and illegal, are Third World poor or working-class and believe in and rely on government for help with health and housing, education and welfare. Second, tax cuts have dropped nearly 40 percent of wage earners from the tax rolls.
If one pays no federal income tax but reaps a cornucopia of benefits, it makes no sense to vote for the party of less government.***
Yes, like I pointed out the immigrants of today are not the immigrants of our forefathers. Today they expect and we are stupid enough to give to them benefits or like they like to say, "entitlements".
And as long as 40 % don't pay taxes the cans have that 40% who will never vote for them from day one.
W tried to pull some of these to the can party with the compassionate conservatism.
IT might have worked if not for Iraq, incredible Can spending from the houses, and the housing mess thanks to both parties.
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This piece makes some interesting points. Comments?
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As bank shares plunge to new lows around the world, it seems we have entered the next stage of the financial crisis -- most likely the last chapter in this horror story. The final word will probably be nationalization of the major financial institutions in the United States and the United Kingdom and in many other countries.
How has it come to this? The global credit crisis and the ensuing economic slump we are now entering have both ultimate and proximate causes. The ultimate cause was the ingrained social behavior of the U.S., the U.K. and many other economies over the past two decades that put instant gratification of consumption over the ability to pay for it. Thrift gave way to borrowing and excessive spending. That in turn led to huge global imbalances and distortions. The proximate cause of the crisis was how these excesses were financed through liquidity creation in innovative ways and in huge proportions.
Understanding these causes can explain why it has become so difficult to solve the crisis. Desperate to preserve the value of asset prices inflated by this huge liquidity bubble, policy makers have avoided the painful solution. The liquidity injections, the bailout programs, and the fiscal-stimulus packages try to sustain asset prices, when these prices need to fall to market levels so they can be cleared. The policy makers have just prolonged the crisis.
I am reminded of the clear conclusions of the World Bank's thorough analysis in a 2002 paper "Managing the Real and Fiscal Costs of Banking Crises," which examined banking crises over the past 50 years: "Accommodating measures such as open-ended liquidity support, blanket deposit guarantees, regulatory forbearance, repeated recapitalizations and debtor bailouts appear to increase significantly the costs of banking crises. Did these accommodating policies achieve faster economic recovery? We failed to uncover evidence that they did. Indeed, they seem to have prolonged crises because recovery took longer."
As we saw in Japan in the 1990s, if the market is not allowed to clear, the financial crisis will be prolonged. Although debt deflation may be avoided, the economic recession will be longer and the recovery weaker.
There is nothing mysterious about the policy steps that need to be taken to get us out of this mess as quickly as possible. It is not rocket science. In fact, it was successfully carried out by the Scandinavian authorities back in 1991. The banks must be forced to disclose their "toxic" assets (the German banks have about 300 billion euros, the U.K. banks probably 200 billion pounds, and the U.S. banks maybe $800 billion). Then these must be written down to market prices with the hit being taken by shareholders and bondholders -- but not depositors. If that means most banks become insolvent, then so be it.
In effect, this function can be executed by the setting up of a "bad bank," as the Swedes did in the early 1990s. The bad bank clears the toxic assets off the books of banking systems by buying them at market prices and forcing write downs by the banks. A good bad bank forces banks to write down their bad assets and cleanse their balance sheets with those made insolvent being recapitalized, nationalized or liquidated by the state. But it is equally possible to use a bad bank to buy the banks' toxic waste at inflated prices so that the bank can start lending again. That's when it becomes a bad bad bank.
Unfortunately, so far, all the policy makers in the U.S., the U.K. and Europe have rejected the good bad-bank approach and we are now entering the third year of credit crunch with most banks already on their knees. Both the new U.S. administration and the current U.K. leadership are still in denial.
Last October, when the U.K. came up with a better blueprint for dealing with the credit crisis through recapitalization than the Bush administration's poorly conceived Troubled Asset Relief Program (TARP), I gave the Brown government credit for doing so, but faulted it for omitting the good bad-bank function. And now the latest U.K. bailout program, introduced because the October bailout is not working, has also eschewed the good bad-bank option and opted instead for an insurance guarantee scheme.
This new bailout package proposes to insure banks against losses on their remaining toxic assets. Banks will pay a 10% insurance fee, payable with either cash or equity. The taxpayers will take on the risk of losses on 90% of the toxic assets insured. The toxic assets remain on the banks' books, but the banks no longer have any risk in their exposure to them.
The government shied away from the good bad-bank solution because if toxic assets had been written down, most of the U.K. banking system would have been bust and forced into nationalization. In the U.S., the Obama administration is also apparently considering both the bad bank and the insurance solution. I fear they will opt for the latter.
It's natural for policy makers to say, "We know where the problem at the heart of the credit crisis is: it is a lack of lending and we must get credit flowing." If only it were that simple. What policy makers on both sides of the Atlantic desire is to sustain household leverage and consumption at any price, when the only exit from the credit crisis involves a return to thrift by the overleveraged. That cannot be achieved painlessly.
Indeed, household debt in the U.S. and much of Europe reached such extremes that today it is lack of demand -- rather than the impaired supply of credit -- that is driving the deleveraging process and deepening the economic recession. So it is unlikely that even politically decreed credit expansion would be effective in turning the economy around.
By not adopting the good bad-bank solution, the system remains as corrupted as before. The bad assets will continue to suck resources out of the economic system in the form of zombie borrowers, misallocation and mispricing of capital, public sector debt, and budget deficits. And as the reaction to the U.K. scheme is showing, avoiding the core problem fails to inspire confidence, so it is unlikely to result in any increase in aggregate credit or even forestall the inevitable nationalization of insolvent banks for long.
In today's money, the U.S. government alone has spent (counting fiscal spending, not Fed liquidity injections) a sufficient amount of money on the credit crisis to fund two Vietnam Wars. Around 90% of this spending has been to sustain lending and consumption, rather than to tackle the root causes of the credit crisis: overleveraged assets financed by excessive credit creation.
I suppose it is possible that the sheer weight of all this largesse will eventually overcome the structural failures of the financial system and produce economic recovery. (I doubt it, but I can't be sure because we've never been here before.) But if such profligate policies do produce economic recovery, they will do so by creating more bubbles, with the same ultimate consequences of collapse, though on an even grander scale.
Such a recovery would be welcomed by the markets and send traders back to the champagne bars of Wall Street and London. Eventually, however, the second crash would make today's look like kids' stuff.
Mr. Roche is president of Independent Strategy (www.instrategy.com), a London-based consultancy, and co-author of "New Monetarism" (Lulu Enterprises, 2007).
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Timothy Geithner's tax oversights drew most of the media attention at his confirmation hearing, but the biggest news is the Treasury Secretary-designate's testimony Thursday that he'll ratchet up one of the Bush Administration's worst habits: China currency bashing.
APIn a written submission to the Senate Finance Committee, Mr. Geithner said the Obama Administration "believes that China is manipulating its currency." He says he wants Treasury to make "the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth." The dollar promptly fell and gold jumped $40 on the news.
We're not sure what Mr. Geithner means by "market exchange rates," given that the supply of any modern currency is set by a monopoly known as the central bank. When Mr. Geithner says China is "manipulating" its currency, what investors around the world hear is that he really wants Beijing to restrain the number of yuan in circulation and increase its value vis-a-vis the dollar. That's a call for a dollar devaluation to help U.S. exporters.
This would seem to be an especially crazy time to undermine the dollar, given that the Treasury will have to issue some $2 trillion to $3 trillion in new dollar debt in the next couple of years. A stronger yuan would also contribute to Chinese deflation and slower growth, which would only mean a deeper world recession. Even the Bush Treasury never formally declared China to be a currency "manipulator" in its periodic reports to Congress. If the Obama Treasury is now going to take that step, hold on to those gold bars. We're in for an even scarier ride than the Fun Slide of the last few months.
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I fear this is the direction the US may be headed:
January 25, 2009
‘Soviet’ Britain swells amid the recession
Abul Taher
PARTS of the United Kingdom have become so heavily dependent on government spending that the private sector is generating less than a third of the regional economy, a new analysis has found.
The study of “Soviet Britain” has found the government’s share of output and expenditure has now surged to more than 60% in some areas of England and over 70% elsewhere.
Experts believe the recession will tighten the state’s grip still further as benefit handouts soar and Labour directs public sector organisations to create jobs to soak up unemployment.
In the northeast of England the state is expected to be responsible for 66.4% of the economy this year, up from 58.7% when a similar study was carried out four years ago. When Labour came to power, the figure was 53.8%.
The northwest has seen a similarly relentless advance by the state, according to the research commissioned by The Sunday Times from the Centre for Economics and Business Research (CEBR).
“Labour has failed to encourage private sector investment across the country. Instead of supporting enterprise and small businesses, Gordon Brown has used the public sector to cover up his failures,” said Theresa May, the shadow work and pensions secretary.
The CEBR reached its estimates for 2008-9 by applying the 6.68% state spending increase announced in November’s prebudget report evenly across the country, although in practice some regions will receive more than others.
Across the whole of the UK, 49% of the economy will consist of state spending, while in Wales, the figure will be 71.6% – up from 59% in 2004-5. Nowhere in mainland Britain, however, comes close to Northern Ireland, where the state is responsible for 77.6% of spending, despite the supposed resurgence of the economy after the end of the Troubles.
Even in southern England, the government’s share of spending is growing relentlessly. In the southeast, it has gone up from 33% to 36% of the economy in four years.
The state now looms far larger in many parts of Britain than it did in former Soviet satellite states such as Hungary and Slovakia as they emerged from communism in the 1990s, when state spending accounted for about 60% of their economies.
Large-scale layoffs in the northeast will mean a rise in benefit payments. Newcastle-based Northern Rock was nationalised last year and has shed 1,500 jobs. Nissan announced three weeks ago that it was to cut its workforce in Sunderland by 1,200.
Many are finding new jobs in the public sector, according to One North East, the state development agency.
One of the biggest public sector employers in the northeast is the Department of Work and Pensions, which employs 13,400 there, hundreds of them in jobcentres.
“It’s not that the public sector in the northeast is too big, it is that the private sector is too small,” said Malcolm Page, deputy chief executive of One North East. “The decline of traditional industries in the past means we need to establish more big private-sector companies in the region.”
Latest figures from the Office for National Statistics show that since Labour came into power in 1997 jobs in the public sector have swelled by more than 500,000. In 1997, more than 5.1m people were employed in the public sector. The figure for 2008 is 5.7m.
However, Vince Cable, the Liberal Democrat Treasury spokesman, said that the state’s grip on the regions was likely to soften the impact of recession there.
“Newcastle and areas like that have a large public sector which will at least shield traditionally very depressed areas from the battering that southeast England is going to get.
“In the long term we need to do something about it. This does suggest the crowding-out phenomenon of the private sector and it also suggests there is a lack of entrepreneurial activity.”
http://business.timesonline.co.uk/tol/business/economics/article5581225.ece
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:-o :-o :-o
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January 26, 2009
"Making Work Pay" Credit Will Not Stimulate the Economy
by Curtis S. Dubay
WebMemo #2240
President Barack Obama's "Making Work Pay" tax credit is a major piece of the fiscal stimulus plan currently being debated in Congress. The new credit is being touted as a tax cut, but in reality it is just more spending through the tax code. Moreover, since it is also "refundable," it would send money directly to low-income taxpayers who pay no income taxes.
This Making Work Pay credit does nothing to create jobs. A better approach would be growth-promoting tax cuts that increase taxpayers' incentives to work, save, invest, and take on risk.[1] The best way to do that is to lower rates on individual income, capital gains, and corporate taxes and to eliminate the death tax.[2]
Spending Through the Tax Code
The Making Work Pay credit would fulfill President Obama's campaign promise to cut taxes for 95 percent of working families. It is worth $500 for an individual or $1,000 for a couple. The credit is refundable, so if it is greater than the total that the taxpayer owes in income taxes, they will get a check from the government for the remaining amount of the credit. For instance, if a couple has an income tax liability of $800 (after all other credits and deductions in the tax code), the new Making Work Pay credit would completely wipe out their tax liability. Then, they would receive a $200 check from the IRS from the refundable portion of the credit.
This kind of credit is actually a spending program because it directs money to a targeted group based on political considerations. Economically, it is no different than if Congress passed a spending bill that simply sent checks in the same amount to the same people. The only difference is that it is run through the tax code.
Using the tax code for this kind of spending is favored politically because spending is unpopular with the American public. Tax cuts, however, are popular. This misleading brand of spending as a tax cut gives lawmakers a freer hand to institute, through the tax code, the same programs that would be unpopular if rightly called spending. Moreover, spending through the tax code is a stealth off-budget expansion of the federal government and circumvents the standard budgetary process where spending would ordinarily receive intense scrutiny.
Paying Those Who Pay No Income Taxes
The Making Work Pay credit will send money directly to millions of taxpayers who pay no income taxes at all. It is impossible to cut taxes for a taxpayer who pays no taxes. Thus, refunds to taxpayers who pay no income taxes cannot, by definition, be a tax cut. This is spending pure and simple, and it is misleading to pretend otherwise.
In 2009 alone, the IRS will already mail checks worth an estimated $57.8 billion to taxpayers who pay no income taxes but still get a refund from the two largest refundable credits--the Earned Income Tax Credit and the Child Tax Credit.[3]
The tax code should not be used to direct payments to targeted groups. The merits of such programs should be discussed and debated in the budgeting process instead of obscured in the tax code and misnamed a tax cut. This would increase the transparency of government and give taxpayers a better sense of how their money is spent.
Credits Reward Politically Favored Activities
More tax credits in addition to the Making Work Pay credit are likely to be proposed in the near future. It is important to remember that tax credits are often misused to influence behavior and achieve political goals. This is not a new development, as the very first income tax in 1913 had a deduction for interest paid to encourage home ownership. Tax credits designed to influence behavior are not tax cuts, however. They are social or political policy implemented through the tax code. If taxpayers must undertake a certain behavior to receive a reduction of their tax bills, they are being paid to engage in a politically favored activity.
There are already countless provisions in the tax code that pay taxpayers to engage in behavior deemed beneficial by Washington. The federal government spends almost $1 trillion annually through 161 different credits or deductions for education, energy production, energy use, the environment, agriculture, housing, transportation, community development, health care, and many others. These are no different economically than if the government directly paid taxpayers through spending programs to undertake the politically favored activities. Such policies, therefore, should be regarded for what they are: spending, not tax cuts.
Thus, the Making Work Pay credit is another step down an increasingly slippery slope.
Making Work Pay Credit Will Not Boost the Economy
The Making Work Pay credit, or any new credit, will fail to stimulate the economy because government spending cannot create new purchasing power out of thin air.[4] The money that would go out through this credit would have to be taken out of the private sector by either taxing or borrowing, negating any effect of new government spending. The only sure way to stimulate the economy is through permanently lower tax rates, because they improve taxpayers' incentives to create income through working, saving, and investing.
The Heritage Foundation recently released a plan that would create 3.6 million jobs through 2012 by lowering tax rates. The plan calls for making the 2001 and 2003 tax cuts permanent, an additional cut of 10 percentage points in the top individual income and corporate income tax rates, and reductions of other income tax rates by similar amounts from their current levels.[5] The plan would cost less than half of the current stimulus package, would actually create new private sector jobs, and would really be a tax cut.
Spending in Disguise
Congress should do away with the Making Work Pay credit, but at the very least it should limit its damage by making the credit non-refundable. Not only would this prevent non-taxpayers from getting government handouts through the tax code, but it would also reverse the trend of using the tax code as a spending mechanism.
The Making Work Pay tax credit now in the stimulus is not a tax cut at all. It is spending through the tax code. It will function like a spending program and send checks to taxpayers who pay no income taxes. Even worse, it will not stimulate the economy. Lawmakers should focus instead on real tax cuts such as cutting tax rates.
Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
[1]Stuart Butler, "Permanent Tax Relief--Not Tax 'Holidays'--Stimulates Economic Growth," Heritage Foundation WebMemo No. 2152, December 3, 2008, at http://www.heritage.org/Research/Taxes/wm2152.cfm.
[2]Alison Acosta Fraser and Curtis Dubay, "Cutting Taxes to Promote Growth and Restore Fairness: A Memo to President Obama," Heritage Foundation Special Report No. 29, December 2, 2008, at http://www.heritage.org/Research/Taxes/sr29.cfm.
[3]Office of Management and Budget, Analytical Perspectives, Fiscal Year 2009, p. 291, at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (January 8, 2009).
[4]Brian Riedl, "Why Government Spending Does Not Stimulate Economic Growth," Heritage Foundation Backgrounder No. 2208, November 12, 2008, at http://www.heritage.org/Research/Budget/bg2208.cfm.
[5]J. D. Foster and William W. Beach, "Economic Recovery: How Best to End the Recession," Heritage Foundation WebMemo No. 2191, January 7, 2009, at http://www.heritage.org/Research/Economy/wm2191.cfm.
http://www.heritage.org/Research/Taxes/wm2240.cfm
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http://www.latimes.com/business/la-fi-cleantrucks27-2009jan27,0,4024214.story?track=rss
From the Los Angeles Times
TRANSPORTATION
L.A. port's clean-truck program running on empty
Funding for a $20,000 incentive for buyers of clean-fuel trucks has dried up. Some trucking firms have spent millions of dollars on greener fleets, expecting the cash.
By Ronald D. White
January 27, 2009
It sounded like a good deal: The Port of Los Angeles offered to pay $20,000 incentives as part of its Clean Trucks Program, launched Oct. 1 in conjunction with the neighboring Long Beach port to reduce pollution from trucking fleets serving the harbor.
That sent Vic La Rosa into overdrive.
The owner of Total Transportation Services Inc. ordered 111 trucks, some powered by cleaner-burning diesel and some by liquefied natural gas, each eligible for the $20,000 because they meet 2007 emissions standards.
Then came the roadblocks.
Port officials were expecting only modest interest in the incentive program -- maybe 1,000 rigs -- because eligibility hinged on far surpassing the requirements of the Clean Trucks Program, which initially bans all trucks built before 1989. Instead, more than 100 large and small trucking companies turned out, with as many as 7,500 trucks requiring grant money over the course of the next year.
On top of that, state officials nixed funding assistance and a federal agency blocked the collection of fees to support the program, forcing the L.A. port to dip into its strained budget for $44 million to cover the first 2,200 trucks.
That's leaving Total Transportation Services of Rancho Dominguez and other motor carriers short of a full load.
"It's like no good deed goes unpunished," said La Rosa, who spent an average of $130,000 on his trucks. "We followed their directions and their plans. We felt it was the port's responsibility to follow through on this. We're out over $15 million on these truck purchases."
Some carriers are worried they could go under if they don't get all of the help they had anticipated.
Overseas Freight Inc. of Long Beach has committed to overhauling two-thirds of its 80-truck fleet and says it needs the $20,000 it expected for each new vehicle.
"Without the $20,000 promised by the Port of Los Angeles, it will be very difficult for us to get through the tough economic times ahead," Joseph Wang, president of Overseas Freight, said in a recent letter to S. David Freeman, president of L.A.'s Board of Harbor Commissioners. The family-owned business has ordered 54 clean trucks, Wang said.
Brian Griley, president of Southern Counties Express Inc., a Rancho Dominguez company, has purchased 50 LNG trucks and 55 new diesel trucks. Without the port's incentives, "my cash flow cannot support these start-up costs, and I fear we many not survive these ugly financial times," he said.
Experts said that the hiccups in the Clean Trucks Program might be only the first in a series of unanticipated problems that will result from the biggest and most controversial effort any seaport has made to clean the air. Other ports are also pursuing green goals -- such as the Northwest Ports Clean Air Strategy in Vancouver, Canada; Seattle and Tacoma, Wash. -- but nothing on the scale of that in Southern California.
"Everything you are seeing in Los Angeles and Long Beach you will see happening at every other port around the nation as they attempt to clean up their acts," said John Husing of consulting firm Economics & Politics Inc., an expert on goods movement. "But because they are the biggest, the busiest and most important ports, Los Angeles and Long Beach get to go first. They get to turn over all of the stones and find all the creepy crawly things hiding underneath."
Los Angeles and Long Beach port officials initially had planned to use an electronic system at terminal gates beginning Oct. 1 to assess a fee of $70 for every 40-foot container. The fees would be used to help finance the purchase of newer, cleaner trucks. Los Angeles came up with the additional incentive of $20,000 for each of the cleanest trucks and exempted them from the $70 container fee.
But the fees were blocked by the Federal Maritime Commission, which also has filed a federal lawsuit against parts of the clean-truck plan and has claimed that the ports have overreached their authority and are interfering with interstate commerce.
The commissioners have repeatedly made requests for more information from the ports, and each request begins a new 45-day period in which the ports are blocked from charging the fees.
In addition, the ports have been told not to count on the state for funding, given the swelling budget deficit.
Growing concern from La Rosa, Wang, Griley and seven other trucking company executives who had, in total, purchased $126.5 million in new trucks convinced port officials that their reputation was on the line. The worst thing they could do was tell the trucking companies that they would have to wait until they were able to collect the fees meant to fund the program.
"The impact on large companies that maintain fleets of several thousand trucks would not have been fatal," said John Holmes, deputy director of operations for the Port of Los Angeles, "but all some of the smaller companies do is drayage in and out of the ports. They have spent a lot of money procuring new trucks. If they don't get these incentives, particularly in this economy, they will be exposed."
Officials at both ports have decided to begin collecting the fees next month and are hoping that federal officials won't try to thwart them again.
"The fee collection is essential to fully realize the environmental benefits of the program," said Richard Steinke, executive director of the Port of Long Beach. Port of Los Angeles Executive Director Geraldine Knatz echoed that sentiment, saying: "It's imperative that we start the program."
With 2009 shaping up as an even slower year for trade at the ports than 2008 was, port officials are hoping that the Obama administration will fill the two vacancies at the five-member Federal Maritime Commission with appointees who are sympathetic to their efforts. But with so much more on the new administration's plate than the ports, it's not clear when or whether that will happen.
"We have to do everything we can to keep the clean-truck program going and everything we can to collect the fees for these incentives," Holmes said.
La Rosa is happy that some of the money is on the way. But even with the $20,000-a-truck incentive, he says it won't be easy to pay off and maintain the new fleet.
"Our business is down across the board from between 20% to 30% because of the economy. Our earnings have plummeted," La Rosa said.
"We are heavily committed to this clean-air program. We want this to work."
ron.white@latimes.com
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2nd post.
10 Reasons to Whack Obama's Stimulus Plan
January 27, 2009 02:10 PM ET | James Pethokoukis | Permanent Link | Print
Some people are going to oppose President Obama's ginormous stimulus package just because they're on a different political team. But when you look at the economic evidence, it sure seems like an economic recovery package that's heavy on government spending and light on tax cuts is just the opposite of what we should be doing right now. Try this closing argument on for size:
1) A 2005 study by Andrew Mountford and Harald Uhlig "analyzed three types of policy shocks: a deficit-financed spending increase, a balanced budget spending increase (financed with higher taxes) and a deficit-financed tax cut, in which revenues increase but government spending stays unchanged. We found that a deficit-spending shock stimulates the economy for the first 4 quarters but only weakly compared to that for a deficit-financed tax cut." In other words, FDR vs. Clinton vs. Reagan, Reagan wins.
2) Harvard economist Robert Barro looked at the multiplier effect of World War II military spending -- supposedly the Mother of All Stimulus Plans and found that "wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier." Barro prefers eliminating the corporate income tax to massive government spending.
3) Alberto Alesina of Harvard and Luigi Zingales of the University of Chicago want to adress the fear and confidence issue by creating "the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years."
4) An initial CBO analysis found that a mere $26 billion out of $274 billion in infrastructure spending, just 7 percent, would be delivered into the economy by next fall. An update determined that just 64 percent of the stimulus would reach the economy by 2011.
5) University of Chicago economist and Nobel laureate Gary Becker doubts whether all this stimulus spending will do much to lower unemployment: "For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative."
6) Christina Romer, the new head of the Council of Economic Advisers, coauthored a paper in which the following was written about taxes: "Tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects." And former Bush economic adviser Lawrence Lindsey tack on this addendum: "The macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet."
7) Economists Susan Woodward and Robert Hall find that the multiplier effect from infrastructure spending maybe just 1-for-1, less than that 3-to-1 ratio for tax cuts that Romer found: "We believe that the one-for-one rule derived from wartime increases in military spending would also apply to increases in infrastructure spending in a stimulus package. We should not count on any inducement of higher consumption from the infrastructure stimulus."
8) Economist John Taylor thinks it better to let the Federal Reserve deal with the short-term problems in the economy, while fiscal policy should attend to long-term issues: "In the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizer ... It seems hard to improve on this performance with a more active discretionary fiscal policy, and an activist discretionary fiscal policy might even make the job of monetary authorities more difficult. It would be appropriate in the present American context, for discretionary fiscal policy to be saved explicitly for longer-term issues, requiring less frequent changes. Examples of such a longer-term focus include fiscal policy proposals to balance the non-Social Security budget over the next ten years, to reduce marginal tax rates for long run economic efficiency, or even to reform the tax system and Social Security."
9) Massive stimulus didn't work in the Great Depression. As this Heritage Foundation study notes: "After the stock market collapse in 1929, the Hoover Administration increased federal spending by 47 percent over the following three years. As a result, federal spending increased from 3.4 percent of GDP in 1930 to 6.9 percent in 1932 and reached 9.8 percent by 1940. That same year-- 10 years into the Great Depression--America's unemployment rate stood at 14.6 percent." Same goes for Japan and its Great Stagnation of the 1990s.
10) Olivier Blanchard, the chief economist of the International Monetary Fund, coauthored a paper which found "that both increases in taxes and increases in government spending have a strong negative effect on private investment spending."
Bottom line: There is another model out there. One that worked in 2003, 1997 and 1981. But will America use it?
Sources:
1) http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-039.pdf
2) http://online.wsj.com/article/SB123258618204604599.html
3) http://online.wsj.com/article/SB123249646698200289.html
4) http://cboblog.cbo.gov/
5)http://www.becker-posner-blog.com/archives/2009/01/on_the_obama_st.htm
6)http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf
7)http://woodwardhall.wordpress.com/2008/12/11/measuring-the-effect-of-infrastructure-spending-on-gdp/
8)http://www.stanford.edu/~johntayl/Papers/Reassessing+Revised.pdf
9) http://www.heritage.org/research/economy/bg2222.cf
10) http://www.mitpressjournals.org/doi/abs/10.1162/003355302320935043?cookieSet=1&journalCode=qjec
11) http://www.weeklystandard.com/Content/Public/Articles/000/000/015/951hvyxc.asp?pg=
http://www.usnews.com/blogs/capital-commerce/2009/1/27/10-reasons-to-nix-the-stimulus-plan.html
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The economic stimulus plan is a gigantic boondoggle
Read all about it here. Paraphrasing the immortal words of P. J. O'Rourke, someone should take this bill out behind the barn and kill it with an axe. (Obama already killed Nancy Pelosi's embarrassing proposal to stimulate the economy by spending more on contraceptives.) It does very little to stimulate new economic activity, and way too much to create new goverment programs (36 new programs costing over $136 billion). Only 3% of the bill is directed to road and highway spending. The CBO estimates that only 25% of infrastructure dollars can be spent in the first year.
http://scottgrannis.blogspot.com/2009/01/economic-stimulus-plan-is-gigantic.html
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Scott Grannis's blog is a north star of clear headed economic and stock market analysis. I'm over there every day the market is open.
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Scott Grannis's blog is a north star of clear headed economic and stock market analysis. I'm over there every day the market is open.
I visit his site everyday as well. I think you were the one who put me on to him in the first place.
As of late though i have noticed he is becoming less and less optimistic about recovery in the near future.
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Which makes sense to me-- Keynesian is wrong and does not work- and Scott is a stellar Supply Sider. Artificially low interest rates are a huge part of how we get ourselves into this mess and continuing the foolishness is only going to take us down the road to Japan.
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continuing the foolishness is only going to take us down the road to Japan.
I think that unless Obama makes a drastic change to his current philosophy and stops pandering to liberal special interest groups we are screwed way beyond what happened to Japan.
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Relax: There Will Be No Depression
Kenneth J. Gerbino
Archives
Kenneth J. Gerbino & Company
Jan 27, 2009
I want everyone to relax. You are being bombarded with numerous facts and figures that look pretty bad, but the facts are being interpreted with emotion and hype and hysteria. The predictive value of mis-emotion is usually chaos. There will be no Great Depression.
First, let's review what happened in the last few years in simple terms:
The Federal Reserve manipulated interest rates below the real market rate for over a decade, creating dislocations in the normal markets.
Low interest rates forced retirees and savers to abandon safe investments and buy into all sorts of higher risk investments, including the stock market. (As a grandmother of one of my employees said many years ago, "I can't afford to live on 3% interest when I use to get 6%"... a sad but true story).
Easy money created speculation and an artificial business expansion as the good times rolled.
The dot.com bubble was the first sign of trouble from the recent easy money regime. The solution: more easy money to bail out Wall Street and avert further panic.
Commercial banks are allowed to become investment banks as Glass-Steagall is repealed. Commercial banks can now invest and speculate globally outside of their normal areas of expertise.
Real estate booms, as new and creative ways to lend money appeared. Lending became a no brainer as loan packages could be sold away to another institution covered by a new insurance scheme (Credit Default Swaps). Therefore credit worthiness of customers became less important. Lenders became undisciplined. Who cared if the loan defaulted if the loan was "insured?"
Other exotic derivatives were concocted by the investment banks and commercial banks to make more fees and profits. Tried and true centuries old banking policies 101 were thrown out the window.
The government pressured financial institutions to lend money for homes to millions of borrowers who were not only unqualified but high credit risks.
The excessive and low interest rate loans for homes fueled an even more over-heated and extended housing boom and housing price inflation - creating a housing bubble.
The over-the-counter derivative market went beyond $300 trillion and no one cared. $400 trillion - no problem. $500 trillion - no big deal.
Wall Street and the establishment press and authorities did not pay attention to the hard money newsletter writers who were screaming bloody murder about derivatives: Schultz, Skousen, Dines, Wood, Daughty, Sinclair, Russell, Mauldin, Casey, Katz, Turk, Taylor, Adens, Coffins, Lundin, Morgan, Ruff, Roulston, Grandich, Nadler, Bonner, Day and others.
Complacency was everywhere. The Dow was over 14,000. Wall Street and Main Street thought the economy was "fine," paper money was "working" and debt levels were high but no big deal, the Fed was in control. So far so good.
The banking industry usually gets hit hard when the economy gets hit hard. But this time the major commercial banks were also speculating along with the investment banks.
Huge losses from leveraging and speculating in stock and bond markets as well as derivatives start showing up at the largest commercial and investment banks in the U.S. and abroad.
A national nightmare now is confronting Washington.
Global stock markets collapse and credit markets seize up everywhere. Many foreign countries are as bad off as the U.S.
The financial pyramid was brought on by easy money. We are now faced with global investment losses and economic numbers that are at dangerous levels, and foretell a drastic future.
But the future will be the exact opposite to what Wall Street and Main Street think will happen.
Why There Will be No Depression
The Fed, U.S. Treasury and foreign central banks will print their way out of the problem. A bad solution to a bad problem.
The U.S. is in a recession. This is the natural reaction following the huge economic paper money binge that has taken place the last 15 years. The major banks, insurance companies and investment houses are in real trouble. The pain is too much and the government will print the money to bail these institutions out.
3 million people are losing their homes. They should never have bought the homes in the first place. These people will go back to being renters. The homes are still there, they have economic value.
Investment bankers that busted Lehman, Bear Stearns and Merrill and lost their jobs will form hedge funds and buy many of these homes for 30 cents on the dollar. Then they will sell them in a few years for 50 cents on the dollar to people and other funds. Some people will move into a home and get a good bargain. Funds that buy these 50 cents on the dollar homes will sell them in 2-3 years for 70 cents on the dollar. Life goes on.
Banks and investment houses that lost money on these homes are already being bailed out. The losses are being covered by the printing press or debt from Washington.
Unemployment: This is bad. In the U.S. we are at 7.2% and going higher. We are not at 10.8% ('82 recession) or 9% ('74-'75 recession) and may not even get to these levels. Sophisticated investors say, "Unemployment is being low-balled by the government, it's much higher". I agree. But check out Shadow Government Statistics' website run by brilliant economist John Williams (who should be a White House Adviser). This shows that the "shadow or real" unemployment number could actually be 17%. Sounds like a disaster. But back in 1994, the "shadow" unemployment number was 15%. So what happened in 1994? GDP was up 6.2%. The S&P 500 the following year was up 34%. There was no Depression from this horrendous unemployment. Official U.S. unemployment hit an 8-year high in 1992 at 7.8%. The solution to this was a 14% increase in the money supply (M1) and the stock market went up 6%. Do not panic because of unemployment.
There are still 144 million people getting paychecks. This means the economy is not dead yet. They will either spend the money or save some of it. When they save it, sooner or later the banks will lend to someone to buy or build or invest in something.
The average wage earner in the U.S. makes $47,000 a year. Multiply this by a possible 12% official unemployment rate which would be considered a disaster in this country, and you have the following: 18 million people out of work. Using $47,000 per person, this would equal about $850 billion a year of lost income and GDP. That would be a huge hit to the economy.
But wait a minute. Unemployment insurance for a $47,000 worker is about $400 a week. That reduces the $850 billion considerably. Also, the Government will simply print more money to handle this. They could print half the amount of the possible lost GDP - $425 billion. Using Washington logic, this would effectively handle half the consequences of 18 million unemployed people. Then it would be like there were only 6% unemployed. Printing or borrowing $425 billion would not be difficult compared to what they are already doing.
The great recessions of 1974-5 and 1981-82 resulted in the following: GDP increasing on average 15% within 36 months, the stock market booming the following year, and unemployment going down dramatically the following two years. Why? Because they increased the money supply and "bailed out" everyone with paper money.
The 74-75 recession had an 85% (that is eighty five % and not a typo) decrease in the price of the average NYSE stock from the previous high in 1973 and the Dow was down 41%. In 1982, the Dow Jones dropped 34% from its previous high. Both these market wipe outs were handled by the money supply being increased by 12.6% in 18 months in 74-75 and 14% in the 81-82 period.
The money supply increases in 2009 and 2010 could reach 50%!
So far, with bailouts, guarantees, the stimulus packages, $2-3 trillion of new money is already a foregone conclusion. This will equal a 25-35% increase in the money supply. The U.S. government will print as much money as is needed. They have panicked and are now going overboard. It is obvious that whatever happened in the past is going to happen again.
This means that we are not going to have a Depression but a huge paper money induced boom. It will be artificial and inflationary. It is all in the works right now.
Finally, if we were going to have a so-called Depression, why is copper above $1.50? Copper for delivery in December of 2009 and 2010 is above $1.60! You have heard the expression Dr. Copper. It is because as this commodity goes - goes the industrial world. It has always been a great economic indicator. Copper prices would be at 60 cents if a Depression was coming. Copper above $1.50 is saying, despite all the horrendous layoffs and headlines, that there is a lot of life left in the global economic patient.
The financial system will be temporarily "saved" by paper money but working people and savers will be eventually crushed by this currency depreciation. Capitalism and free enterprise will get another bad rap when inflation rips through the system. Honest capitalism and classic free enterprise does not include paper money... the cause of all modern day economic problems.
What to Do
Expect Inflation not a Depression.
Expect a boom to start sooner than later.
Know the past and respect logic, not headlines.
Am I telling you all is OK? No. I am telling you things are as bad as you think. But the authorities are using this crisis to bail out the system with paper money and because of that, the economy will once again go into a so-called boom that will be very inflationary. If you think a Depression is coming you will have your assets in the wrong place at the wrong time.
What Happens Next
The economy stagnates for another 9-12 months then turns around.
Unemployment goes down with the induced economic upturn.
The stock market rallies but never gets above its old highs.
Inflation comes back with a vengeance.
Commodities resume their bull market and turn the deflationistas into inflation believers.
Interest rates will go up with inflation and probably to much higher levels.
The stock market will go down when interest rates start going up.
Long term bonds will become the worst investment in the world.
The dollar will go down but so will other currencies as many world governments print their way out of their economic woes as well.
Gold will go to new highs.
Housing and real estate will recover but higher interest rates will slow this sector down considerably in the future.
The gold and silver mining stocks will become the best performing sector on Wall Street for many years.
The price of oil will go up due to inflation and global production declines of 5-8% per year from most of the largest oil fields in the world.
The U.S. "recovery" will help the world recover and almost all countries will have another artificial economic expansion from all the paper money they have printed as well.
China and India will create more shortages of basic materials and commodities by the sheer size of the populations and their economic and industrial progress.
The U.S. will have even more economic dislocations from all the new paper money and debt taken on by Washington.
The country gets set up for the next horrible recession some time in about 3-4 years.
A Depression is impossible in the old sense of the word. If one describes a depression as the loss of purchasing power of the wage earner (a correct definition), then we have been in one for the past 50 years since wages have not kept up with the cost of living. But since everyone is thinking breadlines and the 1930's, I will stay with that picture for our definition. It is not going to happen.
Also, remember that the $2-3 trillion bail out numbers you are reading about can easily be bumped up to $4-5 trillion. Why not? The reason for the increase is simple... "We are heading into the Greatest Depression in history." As long as this misguided concept gets press and the NY Times, the media and politicians buy into it, then the government has a green light to create as much money as is needed.
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Good stuff from CATO: Speaking Facts and Truth to Power:
http://www.cato.org/fiscalreality
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More from CATO:
Economists against the Stimulus
Posted by David Boaz
Cato has just published a full-page ad in the New York Times with the names of some 200 economists, including some Nobel laureates and other highly respected scholars, who “do not believe that more government spending is a way to improve economic performance” — contrary to widespread claims that “Economists from across the political spectrum agree” on a massive fiscal stimulus package. Of course, many economists don’t like to sign joint statements, so this is only a fraction of stimulus opponents in the profession. Greg Mankiw pointed to a few noted skeptics last week:
In a TV interview last month, Vice President Joe Biden said the following:
Every economist, as I’ve said, from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.
That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Greg Mankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.
And of course Mankiw’s list isn’t comprehensive. There’s also former Treasury economist Bruce Bartlett, former Yale professor Philip Levy, former Ohio State and Federal Reserve economist Alan Viard, Russell Roberts of George Mason, and many more. Under the current circumstances, plenty of economists are endorsing large fiscal stimulus programs. But it’s just not correct to claim that there’s any consensus or that “every economist . . . from conservative to liberal” supports the kind of massive spending program that the Obama-Biden administration has proposed.
http://www.cato-at-liberty.org/2009/01/28/economists-against-the-stimulus/
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And this from Supply Side Maestro Alan Reynolds:
$646,214 Per Government Job
by Alan Reynolds
Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth (Greenwood Press, 2006).
Added to cato.org on January 28, 2009
This article appeared in The Wall Street Journal on January 28, 2009.
House Democrats propose to spend $550 billion of their two-year, $825 billion "stimulus bill" (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.
The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education -- sectors where relatively secure government jobs are also prevalent.
If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest? Another 22.5% of the $550 billion would go to social programs, such as expanding food stamps and extending benefits for the unemployed and subsidizing their health insurance.
After subtracting what House Democrats hope to spend on government payrolls, health, education and welfare, only a fifth of the original $550 billion is left for notoriously slow infrastructure projects, such as rebuilding highways and the electricity grid.
The Obama administration claims the stimulus bill will "create or save three or four million jobs over the next two years . . . with over 90% [of those jobs] in the private sector." To prove it, they issued a report from Christina Romer, chairman of the Council of Economic Advisers, and Jared Bernstein, chief economic adviser to Vice President Joe Biden. Its key estimates, however, were simply lifted from an outdated paper by Mark Zandi of Moody's economy.com.
Mr. Zandi's current estimates have government employment growing by 330,400 over two years as a result of the House bill (compared with 244,000 in Bernstein-Romer paper). Yet even that updated figure still amounts to only 8.3% of total jobs added, even though state and local governments are to receive 39% of the funds ($214.5 billion). Spending $214.5 billion to create or save 330,400 government jobs implies that taxpayers are being asked to spend $646,214 per job.
Does that make sense?
Simulations with his macroeconomic model, according to Mr. Zandi, reveal that "every dollar spent on unemployment benefits generates an estimated $1.63 in near-term GDP." By contrast, such "multipliers" simulate that tax cuts for business or investors would add only 30-38 cents on the dollar.
But econometric models are parables, not facts. The big multipliers for transfer payments and tiny multipliers for capital taxes in Mr. Zandi's model reveal more about the way the model was constructed than about the way the economy works. If model builders make Keynesian assumptions, their model will generate Keynesian results. Yet as Harvard economist Robert Barro recently pointed out on this page, contemporary academic economic research does not support the multipliers used to justify the House stimulus bill.
In the March 2006 IMF Research Bulletin, economist Giovanni Ganelli summarized recent International Monetary Fund research on fiscal policy. Several studies find that reductions in government spending "can have expansionary effects, since they can contribute to a consumption and investment boom owing to altered expectations regarding future taxation."
A 2002 study of U.S. data by Roberto Perotti of Università Bocconi did find that the effect of debt-financed spending increases was somewhat positive, but the multiplier effect was much less than one. A 2004 IMF study of recessions in advanced economies likewise found that "multipliers are unlikely to exceed unity." A 2006 study of U.S. data by IMF economist Magda Kandil found the effect of "fiscal expansion appears insignificant on aggregate demand and economic activity."
In December 2008, the National Bureau of Economic Research published "What are the Effects of Fiscal Policy Shocks?" by Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago. "The best fiscal policy to stimulate the economy," they report, "is a deficit-financed tax cut," and "the long term costs of fiscal expansion through government spending are probably greater than the short term gains."
That's because "government spending shocks crowd out both residential and non-residential investment," while "the [positive] response of consumption is small and only significantly different from zero on impact" (i.e., temporarily). But suppose all of these recent studies were mistaken, and the House Democrats' spending spree worked as advertised. We're still left with three million jobs added or saved at a cost of $825 billion -- $275,000 per job.
In short, a growing body of evidence suggests that a dollar of extra spending is likely to lift nominal income by less than a dollar, arguably much less. Several studies suggest the multiplier may be less than zero after a couple of years, because private investment (including housing) eventually falls by more than government spending rises. Another $550 billion of deficit spending on top of a deficit already above $1 trillion is likely to prove more dangerous than helpful to an economy already overloaded with risky debt.
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Thoughts on the market
Lots of things going on today. The Fed confirmed its intention to keep short-term interest rates very low for quite some time. The House is supposed to vote on a mega "stimulus" bill today. Bond yields rose sharply, and the Treasury-TIPS spread widened further as inflation expectations increased. 3-mo. T-bill yields are now up to 0.17%. Volatility fell and swap, agency, and credit spreads fell. Commodity prices and the Baltic Dry Index rose, but gold fell and the dollar strengthened. The S&P 500 index only needs to rise as much tomorrow as it rose today (3.4%) in order to be in positive territory for the month of January. (And if that happens, the technical guys say that will be a very bullish sign for the rest of the year.)
Without trying to read too much into one day's market action, though, I think the message the market is sending us over the past month or two is that the economy is on the mend; that we have likely seen the worst of the economic news.
I don't think the stimulus bill is going to stimulate anything. Indeed, I think if it passes as is, then it will prove to be a drag on the economy because it will waste enormous amounts of economic resources. Plus, it will end up making the economy less efficient because government will control a larger portion of the economy. But since the market has been fearful of a massive expansion of government since before the election, the passage of a faux-stimulus bill won't necessarily be a negative for the market.
In the final analysis, the only way that government policy can make a significant difference to the economy is by changing incentives (e.g., raising or lowering tax rates in order to change the after-tax rewards to work, investment, and risk-taking). The stimulus bill currently under consideration won't do any of that. There's still a chance for some last-minute compromise that might prove significant—a cut in corporate tax rates, for example, would be hugely positive. But barring that, I think it's time to accept that many hundreds of billions of dollars are going to go down a rat-hole and we are going to be burdened by more government in the future. We are also likely to be burdened with higher inflation in the future, because it is likely that the Fed will not be able to reverse its massive monetary accommodation in a timely or proactive manner.
But we need to remember that Fed policy has been terribly erratic and misguided for at least the past decade, so this is nothing very new. The politicians will want the credit for an eventual recovery, but they will forget that bad policies (e.g., Freddie and Fannie, the Community Reinvestment Act, failures to exercise regulatory oversight, bungled takeovers of Wall Street firms and banks) are what got us into this mess in the first place.The stock market has made zero progress since 1997, and it wouldn't be crazy to blame it on a decade of bad fiscal and monetary policy.
If one is to be optimistic about the future, optimism must be based on an improvement in the economic fundamentals. This economy has an incredible ability to grow and overcome adversity. Recall, for example, that the 9/11 tragedy came almost at the very tail-end of the 2001 recession—it hardly registered on the GDP scale.
I've been documenting improvements in the fundamentals for quite some time now, and I think the seeds for a recovery have already been sown. Financial markets have digested the bulk of the subprime losses; massive deleveraging has already taken place; all measures of financial stress have declined significantly; housing prices have erased almost all of their excesses; asset prices in many markets have gone through wrenching adjustments; new signs of life are appearing every day.
So I still think we're on the path to recovery, and I am still optimistic, even though I view the stimulus bill as a massive boondoggle, a massive waste, a fountain of corruption, etc. It just means the future won't be as bright as it otherwise could have been. We are going to pay the price of decades of bad policies, and that price will be slower growth and living standards that don't rise as high as they otherwise might have. It's not a rosy picture, but it's not the end of the world by any stretch.
http://scottgrannis.blogspot.com/
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January 27, 2009 2 Shevat 5769
What are they buying?
By Thomas Sowell
Everyone is talking about how much money the government is spending, but very little attention is being paid to where they are spending it or what they are buying with it.
The government is putting money into banks, even when the banks don't want it, in hopes that the banks will put it into circulation. But the latest statistics shows that banks are lending even less money now than they were before the government dumped all that cash on them.
Even if it had worked, putting cash into banks, in hopes that they would put it into circulation, seems a rather roundabout way of doing things, especially when the staggering sums of money involved are being justified as an "emergency" measure.
Spending money for infrastructure is another time-consuming way of dealing with what is called an immediate crisis. Infrastructure takes forever to plan, debate, and go through all sorts of hearings and adjudications, before getting approval to build from all the regulatory agencies involved.
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Out of $355 billion newly appropriated, the Congressional Budget Office estimates that only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010.
Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.
If you cut taxes tomorrow, people would have more money in their next paycheck, and it would probably be spent by the time they got that paycheck, through increased credit card purchases beforehand.
If all this sound and fury in Washington was about getting an economic crisis behind us, tax cuts could do that a lot faster.
None of this is rocket science. And Washington politicians are not all crazy, even if sometimes it looks that way. Often, what they say makes no sense because what they claim to be doing is not what they are actually doing.
No matter how many times President Barack Obama tells us that these "extraordinary times" call for "swift action," the kind of economic policies he is promoting take effect very slowly, no matter how quickly the legislation is rushed through Congress. It is the old Army game of hurry up and wait.
If the Beltway politicians aren't really trying to solve this crisis as quickly as they could, what are they trying to do?
One important clue may be a recent statement by President Obama's chief of staff, Rahm Emmanuel, that "A crisis is a terrible thing to waste."
This is the kind of cynical revelation that sometimes slips out, despite all the political pieties and spin. Crises have long been seen as great opportunities to expand the federal government's power while the people are too scared to object and before any opposition can get organized.
That is why there is such haste to do things that will take effect slowly.
What are the Beltway politicians buying with all the hundreds of billions of dollars they are spending? They are buying what politicians are most interested in— power.
In the name of protecting the taxpayers' investment, they are buying the power to tell General Motors how to make cars, banks how to bank and, before it is all over with, all sorts of other people how to do the work they specialize in, and for which members of Congress have no competence, much less expertise.
This administration and Congress are now in a position to do what Franklin D. Roosevelt did during the Great Depression of the 1930s— use a crisis of the times to create new institutions that will last for generations.
To this day, we are still subsidizing millionaires in agriculture because farmers were having a tough time in the 1930s. We have the Federal National Mortgage Association ("Fannie Mae") taking reckless chances in the housing market that have blown up in our faces today, because FDR decided to create a new federal housing agency in 1938.
Who knows what bright ideas this administration will turn into permanent institutions for our children and grandchildren to try to cope with?
http://www.jewishworldreview.com/cols/sowell012709.php3
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http://www.youtube.com/watch?v=TGuPKqbTZZE How long til this happens here????
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SEMA eNews, Vol. 12, No. 4 - Jan 29, 2009
Politicians Want to Use Tax Dollars to Crush Newer-Model Trucks and SUVs
SEMA Warns Lawmakers This Boondoggle Will Cost American Jobs
SEMA is opposing an effort by some Washington lawmakers to include a national car crushing program in the upcoming economic stimulus package. Vehicles targeted for the scrap pile will likely include Chevy Blazers, Silverados, S-10s and Tahoes; Dodge Dakotas and Rams; Ford Explorers and F-Series; Jeep Cherokees and Wranglers; and any other SUV or truck that obtains less than 18 mpg.
Under the plan, the federal government would pay a premium for '99 and newer cars. Click here to oppose the legislation.
The so-called “Accelerated Retirement of Inefficient Vehicles Act” is "Cash for Clunkers" with a twist. Instead of focusing exclusively on old cars as is typical with scrappage programs, this bill will target any vehicle with lower fuel-economy ratings. Participants will receive a cash voucher to purchase a more fuel-efficient new car or used car (model year 2004 or later) or receive credit for the purchase of public transportation tickets.
Under the legislation, “fuel efficient” means at least 25% better mileage than the CAFE standard. It will be illegal to resell the scrapped vehicles. Bill sponsors want to destroy 4 million pickups and SUVs over the next four years.
The program will fail to achieve its goal of improving fuel efficiency and stimulating car sales, but will increase unemployment and the cost of used cars and parts. Here’s why:
Given the minimal $1,500–$4,500 voucher value, the program will lure rarely driven second and third vehicles that have minimal impact on overall fuel economy and air pollution. This is not a wise investment of tax dollars.
The program will reduce the number of vehicles available for low-income individuals and drive up the cost of the remaining vehicles and repair parts. This is a basic supply-and-demand reality.
The program will remove the opportunity to market specialty products that are designed exclusively for the targeted pickups and SUVs, including equipment that increases engine performance and fuel mileage. Congress will be enacting a program to eliminate jobs and reduce business revenues in the automotive aftermarket.
The idea that the trucks and SUVs must be scrapped in order to save energy is irrational. The program’s “carbon footprint” does not factor in the amount of energy and natural resources expended in manufacturing the existing car, spent scrapping it and manufacturing a replacement car.
The program fails to acknowledge driver needs, such as the ability to transport a family, tow a trailer or rely upon the performance, safety and utility characteristics associated with the larger vehicles. Instead, these vehicles will be destroyed.
There is no evidence that the program will achieve the goal of boosting new-car sales or increasing fuel mileage. Many states have considered scrappage programs in the past as a way to help clean the air or increase mpg, but abandoned the effort because they simply don’t work. The programs are not cost-effective and do not achieve verifiable fuel economy or air-quality benefits.
The program will hurt thousands of independent repair shops, auto restorers, customizers and their customers across the country that depend on the used-car market. This industry provides thousands of American jobs and generates millions of dollars in local, state and federal tax revenues.
“Our members, like all business entities, are suffering the effects of the stalled economy,” said Steve McDonald, SEMA vice president of government affairs. “In fact, for our members that market product for newer vehicles, we depend on a thriving and vibrant auto industry to create new business opportunities. We support efforts to spur new-car sales. We don’t, however, support public policy efforts that we are convinced don’t work and will waste tax dollars in the process.”
SEMA Urges You to Oppose This Legislation
Two lawmakers—Senator Diane Feinstein (D-CA) and Representative Henry Waxman (D-CA)—need to hear from SEMA members that their vehicle scrappage legislation is a waste of U.S. taxpayer dollars that will cost American jobs in the specialty auto market.
Click here for talking points and complete information to oppose the legislation.
Email a friend
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What not to do: The British example
Americans are increasingly being caught between two irreconcilable schools of economics. The Keynesian-European Socialist school of thought that believes in government regulation, massive transfers of wealth via burdensome taxation, and a command-and-control economy dictated by politicians and bureaucrats; and the Friedrich Hayek-Capitalist school, which favors decreased regulation and taxation, incentives for markets and businesses, and leaving consumers to choose how they will spend (or save) their hard-earned money. The recent election of Barack Obama and large congressional majorities of Democrats has ushered in a new, and we hope short-lived, era of Keynesian thought whereby the government should stimulate economic growth and improve stability in the private sector (that was originally built through capitalism) by increasing government spending.
Britain, a follower of the Keynesian school of economics, experienced its first-ever economic contraction in 2008 (even considering the Great Depression) despite massive public spending. Indeed, in a thorough repudiation of Keynesian economics, the British government has outspent that of the United States and yet Britain still faces national bankruptcy, roiling unemployment and devastated commercial industries. Is it surprising, then, that no country has ever, in more than a century, successfully followed the Keynesian model and remained solvent?
Former British Prime Minister Margaret Thatcher once pithily noted that the primary problem with Keynesian Socialism is that eventually you run out of other people's money. The Keynesian Socialism that American Democrats are so eager to bring to our shores only hastens the depletion of funds and brings us closer to national bankruptcy. More telling still, when Thatcher came to power in 1979, she employed the Hayek model and dragged Britain out of an extended economic malaise that the Keynesians were unable to stop
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The silver lining to the faux-stimulus bill
It looks to me like the "stimulus" bill that passed the House is rapidly losing support. That's not surprising, since it was so absolutely awful. If this disgraceful display of politics run wild does not cast serious doubt on the seriousness of Congress and the intelligence of our new president, nothing will. And that is the good news, because only something this bad can mobilize support for something that does make sense. The Senate needs to do its job now, and recast this effort to help the economy using reason, experience and logic, rather than pure partisan politics. Above all, our senators need to focus on the fact that simply handing out money to favored constituents and creating vast new spending programs that will take years to deploy is the worst possible way to stimulate the economy. True stimulus needs to focus on changing people's incentives to work, invest, and take risk. That means tax cuts, not tax rebates, and any changes should apply to anyone or any company that pays taxes.
If we're lucky, the debate in the Senate might last long enough that we discover that a stimulus bill is not really necessary after all.
Ben Stein reminds us just how awful the current bill was:
Eight hours of debate in the HR to pass a bill spending $820 billion, or roughly $102 billion per hour of debate.
Only ten per cent of the "stimulus" to be spent on 2009.
Close to half goes to entities that sponsor or employ or both members of the Service Employees International Union, federal, state, and municipal employee unions, or other Democrat-controlled unions.
This bill is sent to Congress after Obama has been in office for seven days. It is 680 pages long. According to my calculations, not one member of Congress read the entire bill before this vote. Obviously, it would have been impossible, given his schedule, for President Obama to have read the entire bill.
For the amount spent we could have given every unemployed person in the United States roughly $75,000. We could give every person who had lost a job and is now passing through long-term unemployment of six months or longer roughly $300,000.
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Rich got richer as their tax rates fell in Bush years, data show
Through the first six years of the Bush administration, the average rate paid by the 400 richest Americans dropped by a third to 17.2%, figures show.
Bloomberg News
January 31, 2009
The average tax rate paid by the richest 400 Americans fell by a third to 17.2% through the first six years of the Bush administration, and their average income doubled to $263.3 million, new data show.
The 17.2% in 2006 was the lowest since the Internal Revenue Service began tracking the 400 largest taxpayers in 1992, although they paid more tax on an inflation-adjusted basis than for any year since 2000.
The drop from 2001's tax rate of 22.9% was largely because of President Bush's push to cut tax rates on most capital gains to 15% in 2003.
Capital gains made up 63% of the richest 400 Americans' adjusted gross income in 2006, or a combined $66.1 billion, according to the data. In all, those taxpayers reported a combined $105.3 billion in adjusted gross income in 2006, the most recent year for which the IRS has data.
"The big explosion in income for this group is clearly on the capital gains side, although there are also sharp increases in dividend and interest income," said Dean Baker, co-director of the Center for Economic Policy and Research in Washington.
In addition, "they are realizing more of their gains due to the lower tax rate," Baker said.
The data may provide ammunition for Democrats such as House Speaker Nancy Pelosi of San Francisco who say they intend to increase the capital gains tax rate even as the credit crunch roils markets and is producing more investment losses than gains.
President Obama pledged during the presidential campaign to increase the rate.
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March 5, 2001
The Truth About Tax Rates and The Politics of Class Warfare
by Daniel J. Mitchell, Ph.D.
Backgrounder #1415
President George W. Bush, holding firmly to his campaign commitment, has proposed a tax reform package that will strengthen America's economy. The across-the-board reductions in personal income tax rates he is seeking will increase incentives to work, save, and invest; and repealing the death tax will eliminate a pernicious form of double taxation while encouraging entrepreneurs and small-business owners to make decisions based on economic value instead of tax considerations.
These commonsense tax reforms are being criticized, however, by opponents of tax relief who claim that "only the rich" will benefit. Policymakers should ignore this class-warfare rhetoric. Unlike European welfare states crippled by redistributionist policies, the United States has prospered because success is admired rather than envied. But more needs to be done to redesign America's tax code so that barriers to upward mobility that remain are reduced. In other words, cutting taxes is not a policy for the rich, but a strategy that will help everyone else become rich or at least rise as far and as fast as their talent, ability, and willingness to work will take them.
The debate over tax "fairness" is not just an ethical battle between those who support a free-market economy and those who desire a welfare state. It is also an empirical battle based on numbers that often can be verified or disqualified. Not surprisingly, it turns out that many of the claims made by opponents of tax cuts do not withstand close scrutiny. For instance:
Myth: The rich do not pay their fair share of taxes and therefore should not get a significant share of a tax cut.
Reality: According to data from the Internal Revenue Service, 1 the top 1 percent of income earners pay nearly 35 percent of the income tax burden; the top 10 percent pay 65 percent; and the top 25 percent pay nearly 83 percent. The bottom 50 percent of income earners, on the other hand, pay barely 4 percent of income taxes. By definition, then, it is impossible to cut taxes without the so-called rich receiving a share of the benefits.
(http://www.heritage.org/Research/Taxes/images/bg1415cht1.gif)
Myth: Lower tax rates will mean that the rich pay less.
Reality: This outcome depends on how much tax rates are reduced. History indicates that the revenue-maximizing rate is less than 30 percent. 2 In other words, when marginal rates are higher than 30 percent, the rich probably will pay more taxes if rates are lowered. The reason? There is less incentive to hide, shelter, or underreport income.
Consider what happened in the years following each of the three times Americans enjoyed significant tax rate reductions.
The 1920s: The top tax rate fell from 73 percent to 25 percent, yet the rich (in those days, individuals earning $50,000 or more) went from paying 44.2 percent of the tax burden in 1921 to paying more than 78 percent in 1928. 3
The 1960s: After President John F. Kennedy slashed the top tax rate from 91 percent to 70 percent, those making more than $50,000 annually saw their tax payments rise during the next three years by 57 percent and their share of the tax burden climb from 11.6 percent to 15.1 percent. 4
The 1980s: The top tax rate fell from 70 percent in 1980 to 28 percent in 1988 during the Reagan years. What happened to the "rich"? The top 1 percent went from shouldering 17.6 percent of the income tax burden in 1981 to paying 27.5 percent of the total in 1988. The top 10 percent saw their share of the burden climb from 48 percent in 1981 to 57.2 percent in 1988. 5
(http://www.heritage.org/Research/Taxes/images/bg1415cht2.gif)
Myth: Reducing income tax rates will not help the poor.
Reality: It is true that the poor will not receive a tax cut when tax rates are reduced, but the reason is that they do not pay income taxes. This does not mean, however, that they will receive no benefits from a tax cut. Indeed, because they are on the lowest rungs of the economic ladder, they will be the biggest beneficiaries of the faster growth that follows a tax cut.
Myth: The payroll tax is the biggest imposition on low-income workers, so reducing income taxes will have little effect on their tax burden.
Reality: This actually is true, but it is not an argument against reducing income tax rates. Instead, it is a reason to reform the Social Security system so that lower-income workers can build wealth and enjoy a more comfortable retirement.
Myth: Only millionaires are concerned about the tax-the-rich issue.
Reality: Like fairness, "rich" is a subjective term, but the most common definition of "rich" in Washington is someone in the top 20 percent (or quintile) of income. Many Americans in this quintile hardly would qualify as rich, though, since the cutoff in 1999 for the top 20 percent of tax returns is $79,375 of household income. This quintile also includes many businesses--such as partnerships, sole proprietorships, and Subchapter S corporations--that use the personal income tax instead of the corporate income tax to file their returns. Most of these small-business owners do not satisfy the conventional definitions of wealthy, but most of them care greatly about tax reform and lowering tax rates. So do millions of middle-class families that are mischaracterized as rich by proponents of class warfare.
Myth: Lower tax rates mean the rich will get richer while the poor get poorer.
Reality: President Kennedy was right: A rising tide lifts all boats. Census Bureau data show that earnings for all income classes tend to rise and fall in unison. 6 In other words, economic policy either generates positive results, in which case all income classes benefit, or causes stagnation and decline, in which case all groups suffer. As Chart 3 illustrates, the high tax policies of the late 1970s and early 1990s are associated with weak economic performance, while the low tax rates of the 1980s are correlated with rising incomes for all quintiles. Likewise, all income groups enjoyed increases in income after the 1997 capital gains tax cut.
(http://www.heritage.org/Research/Taxes/images/bg1415cht3.gif)
Myth: Lower tax rates will lead to a repeat of the failed policies of the 1980s.
Reality: In the 1980s, tax revenues climbed by 99.4 percent, much faster than was needed to keep pace with inflation. More important, the economy rebounded from the malaise of the 1970s. Indeed, the prosperity Americans enjoy today is a continuing legacy of the economic renaissance triggered by President Reagan's tax rate reductions. 7
Myth: Eliminating capital gains taxes, death taxes, the double taxation of dividends, or the double taxation of savings will merely create loopholes for the rich to exploit.
Reality: Existing provisions of the tax code dealing with capital have the effect of taxing income more than once. More specifically, they impose multiple layers of taxation on savings and investment. Defenders of the status quo can argue that these provisions are desirable. They can claim that the goal of income redistribution necessitates double taxation. They can even say that there is nothing morally wrong or economically destructive about discriminating against taxpayers who save and invest. They cannot argue legitimately, however, that elimination of double taxation
creates loopholes. Double taxation is a bias; adopting policies that tax income only once will institute fairness in the code.
Myth: Lower taxes on capital--savings and investment--represent "trickle down" economics.
Reality: Every economic theory, including Marxism, agrees that capital formation is the key to faster growth and higher standards of living. Increases in real wages over time are closely correlated with the average amount of capital available per worker. (See Chart 4.) In other words, if workers are paid on the basis of what they produce, it makes sense to adopt tax policies that encourage investment in the tools, equipment, machinery, and technology that help them produce more.
(http://www.heritage.org/Research/Taxes/images/bg1415cht4.gif)
Myth: The death tax affects only the very rich.
Reality: Only 2 percent of deaths may result in an estate tax liability, but many more families are forced to engage in costly and inefficient tax planning in order to avoid the tax. The burden of the tax, however, extends beyond those who either face the tax or take steps to avoid it. The death tax affects every family that lives in a community where a family-owned business must be liquidated to pay the tax. The death tax affects every worker when investments are sent offshore as families seek to protect their assets from this unfair form of double taxation. And the death tax affects everyone who loses income because a significant amount of money is invested for tax-minimization and tax-avoidance purposes instead of wealth-creation purposes.
CONCLUSION
When politicians pit one group against another, the only winners are those who believe that more power should be concentrated in the federal government. The economic evidence clearly demonstrates that the U.S. economy will produce significant income gains for all Americans as long as appropriate policies are followed.
Marginal tax rate reductions and death tax repeal are examples of those policies. Yes, taxpayers will benefit, including some upper-income taxpayers, but the real winners will be Americans on the lower rungs of the economic ladder.
Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Endnotes
1. Tax Foundation, "Distribution of the Federal Individual Income Tax," Special Report No. 101, November 2000.
2. The goal of legislators should not be to set the rate at the revenue-maximizing level; instead, they should lower rates even further to maximize growth. Regardless of the goal, however, it is self-defeating to set the top rate above the revenue-maximizing level.
3. Joint Economic Committee, "The Mellon and Kennedy Tax Cuts: A Review and Analysis," June 18, 1962.
4. Ibid.
5. Daniel J. Mitchell, "The Historical Lessons of Lower Tax Rates," Heritage Foundation Backgrounder No. 1086, July 19, 1996, p. 7.
6. U.S. Bureau of the Census, "Historical Income Tables--Families," Table F-3, Mean Income Received by Each Fifth and Top 5 Percent of Families (All Races): 1966 to 1999, at http://www.census.gov/hhes/income/histinc/f03.html.
7. Peter Sperry, "The Real Reagan Economic Record: Responsible and Successful Fiscal Policy," Heritage Foundation Backgrounder No. 1414, March 1, 2001.
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Interesting...
Do you have anything recent? I mean your article was published by the Heritage Foundation in 2001; early Bush
in response to critics of Bush's proposed income tax rate reduction plan.
My post was put out this week by Bloomberg News. It simply evaluated the results (after the fact) of the first six years of Bush's tax cuts.
It seems what Dr. Mitchell thought would happen, didn't. In fact, the truly rich benefited the most by Bush's tax cuts.
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Yes, and it didn't omit more than half the story, that being that the "rich" pay a disproportionate percentage of taxes, and that disproportion rises as tax burden falls, and has done so for quite some time. Do you dispute the data?
If I find a more recent analysis I'll certainly post it, but, as you ought to know, it takes several years for tax and other economic data to be fully collated and hence you don't often see a thoughtful analysis until quite a few years after the reporting date. Perhaps you have more recent data that supports the soak the rich side?
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I don't have more recent data that supports the soak the rich side; however my post's recent data implies that Bush soaked the poor and middle class.
As for "disproportionate percentage of taxes" that is a rather subjective term. As an example, I have a friend who makes over 5 million a year.
IF we had a 50% tax bracket, his take home (excluding other taxes and deductions for simplification) would be $2.5 million per year. And you could
say he paid $2.5 million in taxes.
I also have a friend who makes approximately $20k per year. Let's say you had a flat tax system and charged him 50% too; his tax would then be 10K.
As a percentage, it is proportional. But as a total dollar amount, obviously disproportionate. It depends upon how you want to analyze the numbers.
But take it one step further. Fair; I am not sure. My rich friend drives a Bentley; raise his taxes 10% and he would still drive a Bentley. My "poor" friend
drives a Honda Civic and can barely make the payments. "Proportionate" as to ability to pay? Or? I don't know the answer, but it is complicated.
And yes, I understand that my rich friend employees quite a few people and his wealth trickles down; but ... I still say the answer is not easy... But it is easy
for either side to slant the numbers to favor their argument.
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Out of Gaps In Treaties, First Salvos Of Trade War
By Anthony Faiola
Washington Post Staff Writer
Sunday, February 1, 2009; A01
The world may be on the brink of a gentler kind of trade war.
In 1930, Congress fired the first shot in a protectionist battle that prolonged and deepened the Great Depression. After passing a bill aimed at saving American jobs by effectively barring 20,000 imported goods, including French dresses and Argentine butter, other nations retaliated by raising their own barriers on U.S. products, effectively bringing global commerce to a halt.
In the aftermath, organizations like the World Trade Organization sought to ensure that never happened again. Nations agreed to put on economic straitjackets permitting them to raise tariffs within hard-fought limits. That is likely to help prevent a repeat of the devastating and overt trade wars seen during the Great Depression, since it is now far harder for nations to increase tariffs on a wide array of imports at once.
But there remains a surprising amount of wiggle room in international trade and commerce treaties, and that, analysts say, is where the battle is now being fought as leaders worldwide face intense pressure at home to protect domestic jobs in the deepening financial crisis. They are engaging in a more subtle form of protectionism that often skirts those rules.
This weekend at the World Economic Forum in Davos, Switzerland, the annual event drawing the world's leaders, luminaries of industry, commerce and philanthropy, a host of dignitaries raised a crescendo of alarm over growing economic nationalism. "We will resolutely fight protectionism," Japanese Prime Minister Taro Aso told reporters there, giving voice to the general sentiment.
Yet even as leaders call for nations to do the right thing on the international stage, actually doing it at home is proving far tougher.
British Prime Minister Gordon Brown, for instance, delivered a particularly impassioned plea for nations to remain on the path of free trade yesterday. "This is not like the 1930s. The world can come together," he said. However, back in Britain, the government is directing British banks with global operations now being rescued with taxpayers' dollars to boost lending to British businesses and citizens first.
Although that may violate the spirit of globalization, current laws regulating financial commerce remain far behind those regulating manufactured goods. It is leaving countries where British banks did big business in the past -- particularly in Eastern Europe -- facing fewer and fewer options to cope with the global credit crunch.
"You're going to see a lot more rhetoric out of leaders against protectionism, but what really matters is their policies," said Simon Johnson, former chief economist at the International Monetary Fund and a professor of economics at MIT. "And there are worrying signs right now that they may not be so serious about stopping protectionism."
Additionally, the European Commission is reinstating subsidies on some dairy products to protect its farmers, targeting an area of trade law that remains highly contentious, open to interpretation and potentially damaging to developing countries. Analysts are also bracing for nations to make excessive use of the legal tools now available to them to fight unfair trade, such as filing anti-dumping cases before the WTO.
The nations that signed a Nov. 15 agreement at the G-20 summit in Washington promised to refrain from imposing "protectionist" measures for at least 12 months. Since then, however, a large number of signatory nations have broken that promise.
Current trade law is more strict on rich countries, granting more flexibility to developing nations to raise tariffs. Many are exercising those rights with gusto now. Indonesia last month raised new trade barriers on electronics, garments, toys, footwear and other imports. That is happening at a time when the IMF and World Bank say that global trade is set to shrink for the first time since 1982.
In the United States, a move to greatly expand Buy American provisions as part of the $819 billion fiscal stimulus package has generated shock waves in other countries, with Canadian and European officials in particular rising up in protest. The provision, passed by the House on Wednesday, would mostly bar foreign steel and iron from the infrastructure projects laid out in the stimulus package. A Senate version still being considered goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.
Yet depending on how the language on a Buy American provision may ultimately read, experts on trade law say it remains unclear whether it would categorically violate a WTO agreement on government procurement the United States signed in 1996.
"There are lots of institutional firewalls to prevent trade wars that exist today that did not exist during the Great Depression," said Gary Hufbauer, senior fellow with the Peterson Institute for International Economics. "That could help now. But there is still a lot of room for damage, maybe pretty bad damage, that can be done in the gray area of the rules."
Although the legality of the Buy American provision may be in question, that might not prevent a potentially dramatic series of countermeasures by America's trading partners if it is passed and signed by President Obama. For that reason, analysts are seeing it as a major test for Obama, arguing it could signal that the United States may be changing course from a decades-long embrace of free trade because times are now too tough to maintain that path.
"I hope the senators will be wise enough . . . to make sure the U.S. complies with its international obligations," said Pascal Lamy, the head of the World Trade Organization, in Davos yesterday.
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/31/AR2009013101895.html?hpid=topnews
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http://www.guardian.co.uk/business/dan-roberts-on-business-blog/interactive/2009/jan/29/financial-pyramid
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Woof Huss:
Local custom is to put a sentence or three with a URL describing its contents and why you think it worthy of our time, etc.
Thanks,
Marc
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$3 Trillion Gov't Overdose Must Be Stopped
By LAWRENCE KUDLOW | Posted Friday, January 30, 2009 4:20 PM PT
Last week's House tally on the Democratic stimulus package, where not a single Republican voted in favor, was another shot across the bow for this incredibly unmanageable $900 billion behemoth of a program that truly will not stimulate the economy.
Sure, the Democrats won on a party-line count. But Team Obama is now regrouping in the face of mounting criticism of this package.
GOP economist Martin Feldstein revoked his prior support of a stimulus plan in Wednesday's Washington Post.
"In its current form," Feldstein wrote, "(The plan) does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that's what it takes to produce a much better bill. We cannot afford an $800 billion mistake."
Clinton economic adviser Alice Rivlin made the same point in testimony before the House Budget Committee. Her message: Divide up the package and slow down the process.
And Sen. Richard Shelby told CNBC that Washington should "shelve the stimulus package" and instead attack the banking and credit problem first — probably with a government-sponsored bad bank that would relieve financial institutions from their toxic-asset problem. Mr. Shelby believes the credit crunch remains the biggest obstacle to economic recovery.
Later in the day when I interviewed Senate Republican leader Mitch McConnell, he agreed with Shelby that the stimulus plan should be shelved.
For the first time — as far as I know — McConnell pledged to vote no on the package. Instead he wants larger tax cuts and smaller spending. McConnell might be willing to change his mind if the package changes, but he told me he didn't expect that to happen.
And in what may prove to be the biggest stimulus-package hurdle of all, news reports suggest that Team Obama is contemplating as much as $2 trillion in TARP additions to rescue the banking system in one form or another. That would be $2 trillion on top of the nearly $1 trillion stimulus package.
Government spending, deficits and debt creation of this magnitude are simply unheard of. So the added TARP money will surely imperil the entire stimulus package as taxpayers around the country begin to digest the enormity of these proposed government actions.
Financing of this type would not only destroy the U.S. fiscal position for years to come, it could destroy the dollar in the process.
What's more, the likelihood of massive tax increases — which at some point will become front and center in this gargantuan funding operation — would doom the economy for decades.
By the way, Scott Rasmussen's latest poll shows that already — before the new TARP money is included — public support for the humongous stimulus package has dropped to 42%.
It remains to be seen whether Republicans can in fact stop the stimulus package, but that certainly would be a very good idea. The long-run financial consequences will certainly force higher future tax rates — a prosperity killer feared by Arthur Laffer.
And while all the social spending gets baked into the long-run budget baseline, the short-run implications of the plan have little economic-growth potential.
Meanwhile, there's no shortage of alternative tax proposals that would truly re-ignite the economy.
Former Ronald Reagan and George W. Bush economist Larry Lindsey criticized the Democrat package in Wednesday's Wall Street Journal, describing it as "heavily weighted toward direct government spending, transfers to state and local governments, and tax changes that have virtually no effect on marginal tax rates."
Instead, Lindsey proposes a big payroll tax cut that would slice three points off the rate for both employer and employee.
Rush Limbaugh also made an appearance in the Journal. He has a clever idea to give Obama 54% of the $900 billion package — equating that amount to the new president's electoral majority — while 46%, which was John McCain's electoral tally, would go to a plan that would halve the U.S. corporate tax rate and provide a capital-gains tax holiday for one year, after which the investment tax would drop to 10%.
It was Sen. McCain on Fox News a week ago Sunday who started the stimulus revolt when he said he couldn't support the package and called for less spending along with a large corporate tax cut.
Over in the House, Republican leaders John Boehner and Eric Cantor have successfully launched an opposition drumbeat by attacking congressional Democrats rather than directly hitting President Obama.
Now all eyes will turn to Republican Senate leader Mitch McConnell to see if he can keep up this drumbeat.
Will common-sense Americans really support a massive overdose of government run amok? I seriously doubt it. This whole story has to be completely rethought.
Copyright 2008 Creators Syndicate, Inc
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How Government Prolonged the Depression
Policies that decreased competition in product and labor markets were especially destructive.
By HAROLD L. COLE and LEE E. OHANIAN
The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.
The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.
Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.
Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.
So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.
These codes distorted the economy by artificially raising wages and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment. Following government approval of each industry code, industry prices and wages increased substantially, while prices and wages in sectors that weren't covered by the NIRA, such as agriculture, did not. We have calculated that manufacturing wages were as much as 25% above the level that would have prevailed without the New Deal. And while the artificially high wages created by the NIRA benefited the few that were fortunate to have a job in those industries, they significantly depressed production and employment, as the growth in wage costs far exceeded productivity growth.
These policies continued even after the NIRA was declared unconstitutional in 1935. There was no antitrust activity after the NIRA, despite overwhelming FTC evidence of price-fixing and production limits in many industries, and the National Labor Relations Act of 1935 gave unions substantial collective-bargaining power. While not permitted under federal law, the sit-down strike, in which workers were occupied factories and shut down production, was tolerated by governors in a number of states and was used with great success against major employers, including General Motors in 1937.
The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing. The "recession in a depression" thus was not the result of a reversal of New Deal policies, as argued by some, but rather a deepening of New Deal polices that raised wages even further above their competitive levels, and which further prevented the normal forces of supply and demand from restoring full employment. Our research indicates that New Deal labor and industrial policies prolonged the Depression by seven years.
By the late 1930s, New Deal policies did begin to reverse, which coincided with the beginning of the recovery. In a 1938 speech, FDR acknowledged that the American economy had become a "concealed cartel system like Europe," which led the Justice Department to reinitiate antitrust prosecution. And union bargaining power was significantly reduced, first by the Supreme Court's ruling that the sit-down strike was illegal, and further reduced during World War II by the National War Labor Board (NWLB), in which large union wage settlements were limited by the NWLB to cost-of-living increases. The wartime economic boom reflected not only the enormous resource drain of military spending, but also the erosion of New Deal labor and industrial policies.
By 1947, through a combination of NWLB wage restrictions and rapid productivity growth, we have calculated that the large gap between manufacturing wages and productivity that emerged during the New Deal had nearly been eliminated. And since that time, wages have never approached the severely distorted levels that prevailed under the New Deal, nor has the country suffered from such abysmally low employment.
The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.
President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.
Mr. Cole is professor of economics at the University of Pennsylvania. Mr. Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.
http://online.wsj.com/article/SB123353276749137485.html
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Obama Should Channel Harding, Not FDR
By Matt Kibbe
In the first half of last century two presidents inherited recessionary economies from their predecessors. Both campaigned on smaller government, and both blamed the profligate ways of the previous president for their economic problems. One ended the recession in less than three years; the other lengthened it by seven. One responded with laissez-faire capitalism; the other with unprecedented government expansion. Scholars rank one among the worst presidents ever; the other they rank as one of the best. These two men are Warren Harding and Franklin D. Roosevelt.
Warren Harding was elected president in 1920 at the end of World War I, directly following the popular Woodrow Wilson. Harding inherited an economy transitioning away from wartime production as well as decreasing international demand for many American goods that had driven economic growth during the war. American factories were retooling and soldiers were coming home looking for work. The nation's output, by some measures, fell as much as 24 percent and unemployment more than doubled between 1920 and 1921. Between 1919 and 1921, farm income had dropped by 40 percent. The country was falling deep into recession.
Instead of bailing out failing businesses, expanding government, and redistributing taxpayer money with a "stimulus" plan, Harding responded by cutting spending and removing burdensome regulations and taxes. During his campaign, he argued, "We need vastly more freedom than we do regulation." In stark contrast with the Bush-Obama response of ever-more government spending and debt, Harding had federal spending cut in half between 1920 and 1922 and ultimately ran a surplus.
As a result, the recession that started in 1920 ended before 1923. Lower taxes and reduced regulation helped America's economy quickly adjust after the war as entrepreneurs and capital were freed to create jobs and push the economy to recover. Harding's free market policies lead to the Roaring Twenties, known for technological advances, women's rights, the explosion of the middle class, and some of the most rapid economic growth in American history. Still, he is ranked as one of the worst presidents by many in academia's ivory tower.
Franklin D. Roosevelt became president in 1933, following Herbert Hoover. Hoover raised taxes, increased government spending, regulated industry, and increased tariffs as the country went into recession. Despite this long list of big government, anti-market policies, Hoover is often mistakenly thought of as a laissez-faire capitalist. Government spending skyrocketed during Hoover's term in office from just 11 percent of GDP in 1928 to over 20 percent before he was done. FDR simply followed in Hoover's anti-market pro-spending footsteps and maintained the size of government around 19 percent of GDP until World War II, when it went much higher.
A recent study by UCLA economists Harold L. Cole and Lee E. Ohanian show that FDR lengthened the Great Depression by seven years with his anti-market "stimulus" policies. They write that prior to FDR's interventions, "The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies." Somehow, though, FDR is considered one of the best presidents in the history of the country, despite the millions of people out of work and in the breadlines. Hoover is rightfully considered one of the worst, but perhaps FDR should be, too. As Rexford Guy Tugwell, one of Roosevelt's top advisors commented, "We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started."
President Obama has taken office as our country stands at a crossroads where the laws enacted in the next few weeks could lead our country to prosperity or to ruin. Whose steps will he follow? Warren Harding got government out of the way of business in 1920 to unleash the market economy and launch the Roaring Twenties. FDR tripled taxes, regulated business, and massively expanded the role of government in our lives resulting in the longest and deepest recession this country has ever experienced.
President Obama has mentioned his fondness for FDR. Let's hope he soon comes to prefer Harding.
Matt Kibbe is president of the FreedomWorks Foundation.
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Finally getting to the post recently from BBG - Daniel J. Mitchell is spot-on. He provides the data that demonstrates that the plight of the poor and the plight of the middle class and the plight of the rich are infinitely and irreversibly intertwined. The mantra that the 'rich are getting richer' is a meaningless, selective judgment. More accurate would be to notice that 'these are good economic times, all groups are prospering'.
Look at the chart. Who gets hurt the most when that rich aren't getting richer? The line consistently shows that the lower incomes earners gets hurt later, deeper and longer during downturns than the higher income earners. Pro-growth policies help the poor the most, assuming the goal is to avoid being poor!
The criticism was whether the data was up to date. IT WAS A HALF CENTURY STUDY. Do we need more recent data for the Law of Gravity?
Meanwhile, the Bloomberg piece twists a good story upside down. The rich got richer during good economic times. Really!? Do you know anyone who thought the second million was not easier and faster than their first - especially during good economic times. Maybe the kids finished college and they had more to invest, maybe they learned something with the earlier business or investment success. Maybe because of past success they had more to invest. WHY IS IT BAD that they made more money?
And why is it any of our business? Which article in the constitution says spread the wealth and limit people's upside?????
Specifically, Bloomberg wrote: "Rich got richer as their tax rates fell in Bush years, data show"
- That is 100% media spin. Fact is that the "America got Wealthier Because Punitive Marginal Tax Rates Were Eased - Across the Board!" It wasn't just the rich that got richer. Who are they trying to fool?
Next we hear about the richest Americans. The increased income and increased revenue to the Treasury is a HUGE success story. The revenues were beating forecasts by more than $100 Billion per year, growing at as much as 15% per year! How do you spin that into BAD NEWS???
Bloomberg tells you the change in income for "the richest 400", but they don't tell you that the people who make up the richest 400 changes very quickly, as do the magic quintiles. They hate telling you that it isn't the same people just a few years later. The new rich make more money, more quickly than in the past because they inventing for, or selling into, a more prosperous world. Why is that a bad thing?
Capital Gains reductions accounted for most of the economic surge, according to Bloomberg. No worry:
Candidate Obama promised to restore the punitive rates.
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IT WAS A HALF CENTURY STUDY.
Heh. Rock on, Doug
While launching their soak the rich schemes, save for those members of their ranks whose oversights are suddenly reconciled upon nomination, and spending hundreds of billions of dollars they don't have, the Democrats have a third prong with which to address the current economic climate: Trade War! I say we award them the hat trick and hope they, dare I say, move on.
Good News and Bad News on Trade
Matt Welch | February 4, 2009, 8:24am
The good news: "President Obama to water down 'Buy American' plan after EU trade war threat," headlines The Times of London.
"I agree that we can't send a protectionist message," he said in an interview with Fox TV. "I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we're just looking after ourselves and not concerned with world trade."
The bad news: What kind of historically illiterate, economically retrograde, and bogusly populist jerktards would even CONSIDER, for just one second, that a reasonable approach to this Great Depression 2.0 they keep telling us about is reviving the ghost of Smoot-Hawley? Not only are Democrats and their already unbearable apologists grossly misusing the analogy of Herbert Hoover (much in the way many continue to pretend that George W. Bush was a deregulation zealot), they're now going ahead and aping the 31st president's worst policies.
And don't let Obama's above-it-all filibustering fool you: As Reason has been documenting for two years, the president ran and won a campaign that on a daily basis bashed trade agreements, particularly with troubled Mexico and anxious China. And his party found success swapping its pro-trade stance of the mid-'90s for cheapjack "Buy America" bullshit in the late aughts. Former Reason editor Virginia Postrel points to one of many truly horrible possible consequences of a more protectionist America:
A trade war threatens to exacerbate the single largest danger in the worldwide downturn: that a serious contraction in China will lead to domestic unrest and that that the Chinese government will engage in military aggression to focus frustration outward.
http://www.reason.com/blog/show/131484.html
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I agree strongly about the risks of protectionism, trade wars, beggar-thy-neighbor devaluations.
In his brilliant "The War the World Works" Jude Wanniski has the most insightful analysis of the causes of the Great Depression that I have ever seen. Bottom line-- fragmentation of the world economy via protectionism, trade wars, beggar-thy-neighbor devaluations and FDR's liberal fascist economic policies.
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http://www.reason.com/news/show/131487.html
No New Deals
Let entrepreneurs and innovation stimulate the economy
Shikha Dalmia | February 4, 2009
There is one thing that's giving political momentum to the Bush-Obama multi-trillion bailout/stimulus spending spree, and it is not a superior understanding of how to fix the ailing economy. It is fear. "Nameless, unreasoning, unjustified terror," as FDR once said.
The economy is in terrible shape. Financial markets are in a deep freeze. The stock market has lost over 40 percent of its value from the Dow's peak last year and 401(k) portfolios are shrinking. Unemployment is rising to levels not seen in 25 years. Companies—big and small—are downsizing or, worse, shuttering their doors completely. And home foreclosure rates are reaching record highs.
Under such circumstances, the fear is that we might well reach the point of no return—or, as a CNN anchor recently put it, face permanent "economic catastrophe."
But it's as likely that government intervention might well delay the recovery process, just as it did in the 1930s when a combination of spending and regulations unleashed by FDR's New Deal turned a recession into a prolonged depression.
Rather than a time for panicked reactions, this is the time to fully understand a lesson of history: The rubble of every recession contains the seeds of its own regeneration. Physical and human capital of dying economic sectors don't vanish with them. These assets—equipment, property, workers—are re-released into the economy, where entrepreneurs, unless thwarted by taxes and regulations, scoop them up and inevitably find more productive uses for them. In the process, new companies are born and new jobs created—offering, over time, far better returns and wages than before.
This is not idle, theoretical speculation.
On a micro level, consider the Pony Express, which was the UPS of 1860. The company cut down delivery time for coast-to-coast mail from six weeks to 10 days by using horse riders instead of ships going around South America. It was wildly successful, but only for about a year. Then commercial telegraph came along, and the company went belly up. Hundreds of workers lost their jobs at a time when civil war was starting, a major recession was brewing after a European bubble in railroads burst, and unemployment was soaring as immigrants from Ireland and elsewhere were coming in droves. But according to Saddles and Spurs, a rare group biography that traces the fortunes of the laid-off riders, all of them found equal or better jobs, in the burgeoning telegraph industry, rodeos and other shows, and as scouts in the Union Army.
On the macro level, consider the experience of the U.S. steel industry in the 20th century and the tech sector at the start of the 21st century. Both went through brutal downsizings that eventually strengthened the American economy and led to generally higher living standards.
Until about 1945, Big Steel—consisting of companies such as U.S. Steel that produced steel from iron ore in large mills—dominated the world market, producing about half of the global steel output. This hegemony, notes University of Dayton economic historain Larry Schweikart, led the industry to precisely the same vices that are responsible for torpedoing the Detroit-based car makers today: bloated corporate bureaucracies; a pampered, unionized workforce with unsustainable legacy costs; and inefficient production methods.
By the 1960s, Big Steel was facing stiff competition from overseas producers, first from Japan and Europe and then from Third World countries such as Brazil. About a quarter of American steel producers went bankrupt between 1974 and 1987. The industry's global market share shrank to 11 percent and employment dropped from 2.5 million in 1974 to 1 million in 1997. But this fight for survival, spanning decades and several recessions, eventually restored the overall industry to profitability. Led by companies such as Nucor, domestic steel makers discovered new ways to turn scrap into steel in sleeker, smaller factories called "mini-mills," using non-unionized workers and a leaner management team.
The physical and human resources that the steel industry squeezed out in its quest for more efficiency didn't simply go up in smoke. They were utilized by other sectors of the economy. For example, employment in the plastics industry, which replaced steel for some uses, grew over 18 percent between 1980 and 2006.
If American-owned automakers are among the loudest voices demanding a bailout from the Bush administration right now, American steel makers are among the loudest voices demanding massive stimulus spending (on schools, roads, bridges, rapid transit, and other steel-intensive projects) from the Obama administration. But if the industry emerged stronger without artificial measures to boost demand for steel once, there is no reason to believe that it won't do so now.
An arguably more stunning comeback involves the dot-com industry. After the 2000 stock market crash, hundreds of Silicon Valley startups collapsed, throwing thousands of highly paid computer professionals out of work. However, within a few short years the industry began to recover, reabsorbing many of the laid-off workers.
One reason for the industry's quick recovery, according to Todd Zywicki, an economist at the George Mason University, was that it was able to rapidly redeploy its resources away from failing enterprises toward more promising ones. Unlike traditional industries, much of the dot-com sector was financed not by debt from bond holders but venture capitalists with equity stakes. This meant that when these companies started showing signs of trouble, their financiers were able to cut their losses and seed other ventures without getting bogged down in time-consuming bankruptcy proceedings.
What's more, they did so at a time when there was a glut of computer talent, not to mention cheap office space, equipment, and other physical assets—all of which positioned them for future success. "If Washington had appointed itself in charge of saving the industry, it would have declared AOL too big to fail," comments Zywicki. "The net effect would have been to retard the advance of broadband and we would all still be using slow-speed dial up to access the Internet."
These are tough economic times and it is impossible to know in advance where the next telegraphic or broadband revolution will come from to drive us out of recession. But the American economy has demonstrated awesome powers of self-correction when its entrepreneurs are left alone to blaze new trails—without a panicked Washington pushing them off course.
FDR famously proclaimed that we have nothing to fear but fear itself. That, and a government that will get in the way of an economic recovery.
Shikha Dalmia is a senior analyst at Reason Foundation.
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http://hotair.com/archives/2009/02/04/obama-retreats-on-trade-war/
Run away-run away!
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Its just like during the Michigan primaries. Hot Air is right that is vapidity is showing. I fear we are in for one helluva ride.
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A column in today's Business section of the LA Times written by Michael Hilzik.
What in heaven's name does Senate Minority Leader Mitch McConnell have against honeybees?
That question haunted my days after I saw the Kentucky Republican on TV fulminating about a provision he found in the proposed government stimulus package. The provision, he said, would provide $150 million for "honeybee insurance."
"This is nonsense," he said, as if he took it personally. You had to think he got stung as a kid or maybe caught a local swarm in the act of recruiting aphids for Al Qaeda.
So I resolved to get to the bottom of this scandalous expenditure.
But first, a little background.
McConnell's Sunday appearance on CBS' "Face the Nation" was part of a full-scale GOP assault on the Obama administration's stimulus bill, which was passed last week by the House with zero Republican support. The package is being debated this week in the Senate. The GOP, as I write, is thinking about a filibuster.
Yet the Republicans seem to have trouble coming up with more than irrelevant or trivial arguments. Appearing on ABC on Sunday, Sen. Jim DeMint (R-S.C.), for instance, owned up to calling the stimulus plan the "worst plan since the 16th Amendment paved the way for the income tax."
Because the 16th Amendment was ratified in 1913, this rather dated DeMint's mind-set. In any event, he didn't offer a proposal on how to fund the government, including his paycheck, without an income tax. He just complained that the stimulus plan involved a lot of spending. He would prefer that it all be in tax cuts,apparently on the grounds that the tax cuts enacted under the Bush administration in 2001 bequeathed to us an economy that has performed so well.
On NBC, Sen. Kay Bailey Hutchison (R-Texas), said she wanted the bill to have more spending on infrastructure, but she wanted it to be on military infrastructure, even though much of that winds up as scrap metal in Iraq and Afghanistan, not bridges and schoolhouses in the United States.
She said she would strip from the bill all the "social spending that is not going to create jobs," but when pressed by Sen. John F. Kerry (D-Mass.), her on-air debating partner, she agreed to preserve some social spending, such as unemployment benefits. The effect of this exchange was to leave Hutchison sounding as though she made up her position as she went along.
Very little of these discussions addressed the principle underlying the stimulus bill. The idea is that when the private sector withdraws from the economy by cutting back on capital spending and laying off workers, it is up to the government to take up the slack, if necessary via deficit spending.
This isn't radical thinking. It's endorsed by, among others, Martin Feldstein, who was Ronald Reagan's chief economic advisor and is consistently voted by his peers as the Economist Least Likely to be Mistaken for a Democrat. Feldstein opposes most of the tax cuts favored by the GOP, especially business tax cuts. To be fair, he isn't entirely enamored of President Obama's proposal -- he thinks it should spend more on programs that will produce more short-term employment and less on open-ended programs.
Yet the plan before the Senate includes hundreds of billions of dollars in near-term programs and projects. There's $90 billion for school construction and renovation and educational grants and $79 billion for state educational programs, most of which would be spent within two years. Of the $27 billion for highway construction, most would be spent within four years.
The bill also appropriates billions for the kind of forward-looking projects we've neglected during the last two decades, such as broadband infrastructure, water and anti-pollution programs, and alternative energy research, which will produce long-term economic benefits for the entire country.
Is it possible to slip pork into a bill this massive? Well, duh. But pork is often in the eye of the beholder. House Republicans this week released a list of $19 billion in provisions they called "wasteful" (i.e., 2% of the total package). But the list includes numerous projects that many Americans would support and that would plainly stimulate our limping construction and manufacturing sectors. For example, the purchase of new computers and vehicles for federal agencies, the building of fire stations and other public facilities, and the upgrade of rail lines.
Is this the best the GOP can come up with? Or are Republicans just determined to undermine the recovery effort? It's hard to disagree with Obama's complaint that "modest differences" over the package are being inflated to stall the whole program.
That brings us to McConnell and his problem with "honeybee insurance." It turns out that the Senate minority leader took his cue from Neil Cavuto of Fox News, who has been carrying on about the topic for more than a week. Their campaign was joined Tuesday by Sen. David Vitter (R-La.), who stood on the floor of the chamber challenging "any member to come and explain what that provision was."
I'm no senator, but I'm pleased to inform Vitter that it is, in fact, a disaster insurance program for all livestock producers. Beekeepers obviously would be minor beneficiaries next to, say, cattle ranchers, so it's a tad bit dishonest to label the whole program "honeybee insurance."
The provision simply continues a program enacted by Congress last year, overriding a veto by President Bush. In other words, the Senate voted on it twice in 2008 -- once to enact and once to override. Connoisseurs of political comedy will see the punch line coming: McConnell and Vitter voted yea both times.
So it turns out that McConnell isn't really against honeybees. He's only using them to pretend that he's got a principled objection to a stimulus plan aimed at pulling the country out of the most severe recession in decades.
The honeybees, and the rest of us, are merely collateral damage.
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Oh it's just honey bees people are objecting to amid the 900 billion whatever that's being kicked around? Could have sworn I've seen other objections, like this one:
February 05, 2009, 4:00 a.m.
50 De-Stimulating Facts
Chapter and verse on a bad bill.
By Stephen Spruiell & Kevin Williamson
Senate Democrats acknowledged Wednesday that they do not have the votes to pass the stimulus bill in its current form. This is unexpected good news. The House passed the stimulus package with zero Republican votes (and even a few Democratic defections), but few expected Senate Republicans (of whom there are only 41) to present a unified front. A few moderate Democrats have reportedly joined them.
The idea that the government can spend the economy out of a recession is highly questionable, and even with Senate moderates pushing for changes, the current package is unlikely to see much improvement. Nevertheless, this presents an opportunity to remove some of the most egregious spending, to shrink some programs, and to add guidelines where the initial bill called for a blank check. Here are 50 of the most outrageous items in the stimulus package:
VARIOUS LEFT-WINGERY
The easiest targets in the stimulus bill are the ones that were clearly thrown in as a sop to one liberal cause or another, even though the proposed spending would have little to no stimulative effect. The National Endowment for the Arts, for example, is in line for $50 million, increasing its total budget by a third. The unemployed can fill their days attending abstract-film festivals and sitar concerts.
Then there are the usual welfare-expansion programs that sound nice but repeatedly fail cost-benefit analyses. The bill provides $380 million to set up a rainy-day fund for a nutrition program that serves low-income women and children, and $300 million for grants to combat violence against women. Laudable goals, perhaps, but where’s the economic stimulus? And the bill would double the amount spent on federal child-care subsidies. Brian Riedl, a budget expert with the Heritage Foundation, quips, “Maybe it’s to help future Obama cabinet secretaries, so that they don’t have to pay taxes on their nannies.”
Perhaps spending $6 billion on university building projects will put some unemployed construction workers to work, but how does a $15 billion expansion of the Pell Grant program meet the standard of “temporary, timely, and targeted”? Another provision would allocate an extra $1.2 billion to a “youth” summer-jobs program—and increase the age-eligibility limit from 21 to 24. Federal job-training programs—despite a long track record of failure—come in for $4 billion total in additional funding through the stimulus.
Of course, it wouldn’t be a liberal wish list if it didn’t include something for ACORN, and sure enough, there is $5.2 billion for community-development block grants and “neighborhood stabilization activities,” which ACORN is eligible to apply for. Finally, the bill allocates $650 million for activities related to the switch from analog to digital TV, including $90 million to educate “vulnerable populations” that they need to go out and get their converter boxes or lose their TV signals. Obviously, this is stimulative stuff: Any economist will tell you that you can’t get higher productivity and economic growth without access to reruns of Family Feud.
Summary:
$50 million for the National Endowment for the Arts
$380 million in the Senate bill for the Women, Infants and Children program
$300 million for grants to combat violence against women
$2 billion for federal child-care block grants
$6 billion for university building projects
$15 billion for boosting Pell Grant college scholarships
$4 billion for job-training programs, including $1.2 billion for “youths” up to the age of 24
$1 billion for community-development block grants
$4.2 billion for “neighborhood stabilization activities”
$650 million for digital-TV coupons; $90 million to educate “vulnerable populations”
POORLY DESIGNED TAX RELIEF
The stimulus package’s tax provisions are poorly designed and should be replaced with something closer to what the Republican Study Committee in the House has proposed. Obama would extend some of the business tax credits included in the stimulus bill Congress passed about a year ago, and this is good as far as it goes. The RSC plan, however, also calls for a cut in the corporate-tax rate that could be expected to boost wages, lower prices, and increase profits, stimulating economic activity across the board.
The RSC plan also calls for a 5 percent across-the-board income-tax cut, which would increase productivity by providing additional incentives to save, work, and invest. An across-the-board payroll-tax cut might make even more sense, especially for low- to middle-income workers who don’t make enough to pay income taxes. Obama’s “Making Work Pay” tax credit is aimed at helping these workers, but it uses a rebate check instead of a rate cut. Rebate checks are not effective stimulus, as we discovered last spring: They might boost consumption, a little, but that’s all they do.
Finally, the RSC proposal provides direct tax relief to strapped families by expanding the child tax credit, reducing taxes on parents’ investment in the next generation of taxpayers. Obama’s expansion of the child tax credit is not nearly as ambitious. Overall, his plan adds up to a lot of forgone revenue without much stimulus to show for it. Senators should push for the tax relief to be better designed.
Summary:
$15 billion for business-loss carry-backs
$145 billion for “Making Work Pay” tax credits
$83 billion for the earned income credit
STIMULUS FOR THE GOVERNMENT
Even as their budgets were growing robustly during the Bush administration, many federal agencies couldn’t find the money to keep up with repairs—at least that’s the conclusion one is forced to draw from looking at the stimulus bill. Apparently the entire capital is a shambles. Congress has already removed $200 million to fix up the National Mall after word of that provision leaked out and attracted scorn. But one fixture of the mall—the Smithsonian—dodged the ax: It’s slated to receive $150 million for renovations.
The stimulus package is packed with approximately $7 billion worth of federal building projects, including $34 million to fix up the Commerce Department, $500 million for improvements to National Institutes of Health facilities, and $44 million for repairs at the Department of Agriculture. The Agriculture Department would also get $350 million for new computers—the better to calculate all the new farm subsidies in the bill (see “Pure pork” below).
One theme in this bill is superfluous spending items coated with green sugar to make them more palatable. Both NASA and NOAA come in for appropriations that properly belong in the regular budget, but this spending apparently qualifies for the stimulus bill because part of the money from each allocation is reserved for climate-change research. For instance, the bill grants NASA $450 million, but it states that the agency must spend at least $200 million on “climate-research missions,” which raises the question: Is there global warming in space?
The bottom line is that there is a way to fund government agencies, and that is the federal budget, not an “emergency” stimulus package. As Riedl puts it, “Amount allocated to the Census Bureau? $1 billion. Jobs created? None.”
Summary:
$150 million for the Smithsonian
$34 million to renovate the Department of Commerce headquarters
$500 million for improvement projects for National Institutes of Health facilities
$44 million for repairs to Department of Agriculture headquarters
$350 million for Agriculture Department computers
$88 million to help move the Public Health Service into a new building
$448 million for constructing a new Homeland Security Department headquarters
$600 million to convert the federal auto fleet to hybrids
$450 million for NASA (carve-out for “climate-research missions”)
$600 million for NOAA (carve-out for “climate modeling”)
$1 billion for the Census Bureau
INCOME TRANSFERS
A big chunk of the stimulus package is designed not to create wealth but to spread it around. It contains $89 billion in Medicaid extensions and $36 billion in expanded unemployment benefits—and this is in addition to the state-budget bailout (see “Rewarding state irresponsibility” below).
The Medicaid extension is structured as a temporary increase in the federal match, but make no mistake: Like many spending increases in the stimulus package, this one has a good chance of becoming permanent. As for extending unemployment benefits through the downturn, it might be a good idea for other reasons, but it wouldn’t stimulate economic growth: It would provide an incentive for job-seekers to delay reentry into the workforce.
Summary:
$89 billion for Medicaid
$30 billion for COBRA insurance extension
$36 billion for expanded unemployment benefits
$20 billion for food stamps
PURE PORK
The problem with trying to spend $1 trillion quickly is that you end up wasting a lot of it. Take, for instance, the proposed $4.5 billion addition to the U.S. Army Corps of Engineers budget. Not only does this effectively double the Corps’ budget overnight, but it adds to the Corps’ $3.2 billion unobligated balance—money that has been appropriated, but that the Corps has not yet figured out how to spend. Keep in mind, this is an agency that is often criticized for wasting taxpayers’ money. “They cannot spend that money wisely,” says Steve Ellis of Taxpayers for Common Sense. “I don’t even think they can spend that much money unwisely.”
Speaking of spending money unwisely, the stimulus bill adds another $850 million for Amtrak, the railroad that can’t turn a profit. There’s also $1.7 billion for “critical deferred maintenance needs” in the National Park System, and $55 million for the preservation of historic landmarks. Also, the U.S. Coast Guard needs $87 million for a polar icebreaking ship—maybe global warming isn’t working fast enough.
It should come as no surprise that rural communities—those parts of the nation that were hardest hit by rampant real-estate speculation and the collapse of the investment-banking industry—are in dire need of an additional $7.6 billion for “advancement programs.” Congress passed a $300 billion farm bill last year, but apparently that wasn’t enough. This bill provides additional subsidies for farmers, including $150 million for producers of livestock, honeybees, and farm-raised fish.
Summary:
$4.5 billion for U.S. Army Corps of Engineers
$850 million for Amtrak
$87 million for a polar icebreaking ship
$1.7 billion for the National Park System
$55 million for Historic Preservation Fund
$7.6 billion for “rural community advancement programs”
$150 million for agricultural-commodity purchases
$150 million for “producers of livestock, honeybees, and farm-raised fish”
RENEWABLE WASTE
Open up the section of the stimulus devoted to renewable energy and what you find is anti-stimulus: billions of dollars allocated to money-losing technologies that have not proven cost-efficient despite decades of government support. “Green energy” is not a new idea, Riedl points out. The government has poured billions into loan-guarantees and subsidies and has even mandated the use of ethanol in gasoline, to no avail. “It is the triumph of hope over experience,” he says, “to think that the next $20 billion will magically transform the economy.”
Many of the renewable-energy projects in the stimulus bill are duplicative. It sets aside $3.5 billion for energy efficiency and conservation block grants, and $3.4 billion for the State Energy Program. What’s the difference? Well, energy efficiency and conservation block grants “assist eligible entities in implementing energy efficiency and conservation strategies,” while the State Energy Program “provides funding to states to design and carry out their own energy efficiency and renewable energy programs.”
While some programs would spend lavishly on technologies that are proven failures, others would spend too little to make a difference. The stimulus would spend $4.5 billion to modernize the nation’s electricity grid. But as Robert Samuelson has pointed out, “An industry study in 2004—surely outdated—put the price tag of modernizing the grid at $165 billion.” Most important, the stimulus bill is not the place to make these changes. There is a regular authorization process for energy spending; Obama is just trying to take a shortcut around it.
Summary:
$2 billion for renewable-energy research ($400 million for global-warming research)
$2 billion for a “clean coal” power plant in Illinois
$6.2 billion for the Weatherization Assistance Program
$3.5 billion for energy-efficiency and conservation block grants
$3.4 billion for the State Energy Program
$200 million for state and local electric-transport projects
$300 million for energy-efficient-appliance rebate programs
$400 million for hybrid cars for state and local governments
$1 billion for the manufacturing of advanced batteries
$1.5 billion for green-technology loan guarantees
$8 billion for innovative-technology loan-guarantee program
$2.4 billion for carbon-capture demonstration projects
$4.5 billion for electricity grid
REWARDING STATE IRRESPONSIBILITY
One of the ugliest aspects of the stimulus package is a bailout for spendthrift state legislatures. Remember the old fable about the ant and the grasshopper? In Aesop’s version, the happy-go-lucky grasshopper realizes the error of his ways when winter comes and he goes hungry while the industrious ant lives on his stores. In Obama’s version, the federal government levies a tax on the ant and redistributes his wealth to the party-hearty grasshopper, who just happens to belong to a government-employees’ union. This happens through something called the “State Fiscal Stabilization Fund,” by which taxpayers in the states that have exercised financial discipline are raided to subsidize Democratic-leaning Electoral College powerhouses—e.g., California—that have spent their way into big trouble.
The state-bailout fund has a built-in provision to channel the money to the Democrats’ most reliable group of campaign donors: the teachers’ unions. The current bill requires that a fixed percentage of the bailout money go toward ensuring that school budgets are not reduced below 2006 levels. Given that the fastest-growing segment of public-school expense is administrators’ salaries—not teachers’ pay, not direct spending on classroom learning—this is a requirement that has almost nothing to do with ensuring high-quality education and everything to do with ensuring that the school bureaucracy continues to be a cash cow for Democrats.
Setting aside this obvious sop to Democratic constituencies, the State Fiscal Stabilization Fund is problematic in that it creates a moral hazard by punishing the thrifty to subsidize the extravagant. California, which has suffered the fiscal one-two punch of a liberal, populist Republican governor and a spendthrift Democratic legislature, is in the worst shape, but even this fiduciary felon would have only to scale back spending to Gray Davis–era levels to eliminate its looming deficit. (The Davis years are not remembered as being especially austere.) Pennsylvania is looking to offload much of its bloated corrections-system budget onto Uncle Sam in order to shunt funds to Gov. Ed Rendell’s allies at the county-government level, who will use that largesse to put off making hard budgetary calls and necessary reforms. Alaska is looking for a billion bucks, including $630 million for transportation projects—not a great sign for the state that brought us the “Bridge to Nowhere” fiasco.
Other features leap out: Of the $4 billion set aside for the Community Oriented Policing Services—COPS—program, half is allocated for communities of fewer than 150,000 people. That’s $2 billion to fight nonexistent crime waves in places like Frog Suck, Wyo., and Hoople, N.D.
The great French economist Frédéric Bastiat called politics “the great fiction through which everybody endeavors to live at the expense of everybody else.” But who pays for the state bailout? Savers will pay to bail out spenders, and future generations will pay to bail out the undisciplined present.
In sum, this is an $80 billion boondoggle that is going to reward the irresponsible and help state governments evade a needed reordering of their financial priorities. And the money has to come from somewhere: At best, we’re just shifting money around from jurisdiction to jurisdiction, robbing a relatively prudent Cheyenne to pay an incontinent Albany. If we want more ants and fewer grasshoppers, let the prodigal governors get a little hungry.
Summary:
$79 billion for State Fiscal Stabilization Fund
— Stephen Spruiell is a staff reporter for National Review Online. Kevin Williamson is a deputy managing editor of National Review.
National Review Online - http://article.nationalreview.com/?q=YjcyODIyZGM2MGU1ZDdkNDgxZDc3OTNjYjM4ZDY1ODI=
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Second post.
And some economists who don't support the Keynesian pap BHO and the LA Times is spouting:
"There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy."
— PRESIDENT-ELECT BARACK OBAMA, JANUARY 9 , 2009
With all due respect Mr. President, that is not true.
Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
Burton Abrams, Univ. of Delaware
Douglas Adie, Ohio University
Ryan Amacher, Univ. of Texas at Arlington
J.J. Arias, Georgia College & State University
Howard Baetjer, Jr., Towson University
Stacie Beck, Univ. of Delaware
Don Bellante, Univ. of South Florida
James Bennett, George Mason University
Bruce Benson, Florida State University
Sanjai Bhagat, Univ. of Colorado at Boulder
Mark Bils, Univ. of Rochester
Alberto Bisin, New York University
Walter Block, Loyola University New Orleans
Cecil Bohanon, Ball State University
Michele Boldrin, Washington University in St. Louis
Donald Booth, Chapman University
Michael Bordo, Rutgers University
Samuel Bostaph, Univ. of Dallas
Scott Bradford, Brigham Young University
Genevieve Briand, Eastern Washington University
George Brower, Moravian College
James Buchanan, Nobel laureate
Richard Burdekin, Claremont McKenna College
Henry Butler, Northwestern University
William Butos, Trinity College
Peter Calcagno, College of Charleston
Bryan Caplan, George Mason University
Art Carden, Rhodes College
James Cardon, Brigham Young University
Dustin Chambers, Salisbury University
Emily Chamlee-Wright, Beloit College
V.V. Chari, Univ. of Minnesota
Barry Chiswick, Univ. of Illinois at Chicago
Lawrence Cima, John Carroll University
J.R. Clark, Univ. of Tennessee at Chattanooga
Gian Luca Clementi, New York University
R. Morris Coats, Nicholls State University
John Cochran, Metropolitan State College
John Cochrane, Univ. of Chicago
John Cogan, Hoover Institution, Stanford University
John Coleman, Duke University
Boyd Collier, Tarleton State University
Robert Collinge, Univ. of Texas at San Antonio
Lee Coppock, Univ. of Virginia
Mario Crucini, Vanderbilt University
Christopher Culp, Univ. of Chicago
Kirby Cundiff, Northeastern State University
Antony Davies, Duquesne University
John Dawson, Appalachian State University
Clarence Deitsch, Ball State University
Arthur Diamond, Jr., Univ. of Nebraska at Omaha
John Dobra, Univ. of Nevada, Reno
James Dorn, Towson University
Christopher Douglas, Univ. of Michigan, Flint
Floyd Duncan, Virginia Military Institute
Francis Egan, Trinity College
John Egger, Towson University
Kenneth Elzinga, Univ. of Virginia
Paul Evans, Ohio State University
Eugene Fama, Univ. of Chicago
W. Ken Farr, Georgia College & State University
Hartmut Fischer, Univ. of San Francisco
Fred Foldvary, Santa Clara University
Murray Frank, Univ. of Minnesota
Peter Frank, Wingate University
Timothy Fuerst, Bowling Green State University
B. Delworth Gardner, Brigham Young University
John Garen, Univ. of Kentucky
Rick Geddes, Cornell University
Aaron Gellman, Northwestern University
William Gerdes, Clarke College
Michael Gibbs, Univ. of Chicago
Stephan Gohmann, Univ. of Louisville
Rodolfo Gonzalez, San Jose State University
Richard Gordon, Penn State University
Peter Gordon, Univ. of Southern California
Ernie Goss, Creighton University
Paul Gregory, Univ. of Houston
Earl Grinols, Baylor University
Daniel Gropper, Auburn University
R.W. Hafer, Southern Illinois
University, Edwardsville
Arthur Hall, Univ. of Kansas
Steve Hanke, Johns Hopkins
Stephen Happel, Arizona State University
Frank Hefner, College of Charleston
Ronald Heiner, George Mason University
David Henderson, Hoover Institution, Stanford University
Robert Herren, North Dakota State University
Gailen Hite, Columbia University
Steven Horwitz, St. Lawrence University
John Howe, Univ. of Missouri, Columbia
Jeffrey Hummel, San Jose State University
Bruce Hutchinson, Univ. of Tennessee at Chattanooga
Brian Jacobsen, Wisconsin Lutheran College
Jason Johnston, Univ. of Pennsylvania
Boyan Jovanovic, New York University
Jonathan Karpoff, Univ. of Washington
Barry Keating, Univ. of Notre Dame
Naveen Khanna, Michigan State University
Nicholas Kiefer, Cornell University
Daniel Klein, George Mason University
Paul Koch, Univ. of Kansas
Narayana Kocherlakota, Univ. of Minnesota
Marek Kolar, Delta College
Roger Koppl, Fairleigh Dickinson University
Kishore Kulkarni, Metropolitan State College of Denver
Deepak Lal, UCLA
George Langelett, South Dakota State University
James Larriviere, Spring Hill College
Robert Lawson, Auburn University
John Levendis, Loyola University New Orleans
David Levine, Washington University in St. Louis
Peter Lewin, Univ. of Texas at Dallas
Dean Lillard, Cornell University
Zheng Liu, Emory University
Alan Lockard, Binghampton University
Edward Lopez, San Jose State University
John Lunn, Hope College
Glenn MacDonald, Washington
University in St. Louis
Michael Marlow, California
Polytechnic State University
Deryl Martin, Tennessee Tech University
Dale Matcheck, Northwood University
Deirdre McCloskey, Univ. of Illinois, Chicago
John McDermott, Univ. of South Carolina
Joseph McGarrity, Univ. of Central Arkansas
Roger Meiners, Univ. of Texas at Arlington
Allan Meltzer, Carnegie Mellon University
John Merrifield, Univ. of Texas at San Antonio
James Miller III, George Mason University
Jeffrey Miron, Harvard University
Thomas Moeller, Texas Christian University
John Moorhouse, Wake Forest University
Andrea Moro, Vanderbilt University
Andrew Morriss, Univ. of Illinois at Urbana-Champaign
Michael Munger, Duke University
Kevin Murphy, Univ. of Southern California
Richard Muth, Emory University
Charles Nelson, Univ. of Washington
Seth Norton, Wheaton College
Lee Ohanian, Univ. of California, Los Angeles
Lydia Ortega, San Jose State University
Evan Osborne, Wright State University
Randall Parker, East Carolina University
Donald Parsons, George Washington University
Sam Peltzman, Univ. of Chicago
Mark Perry, Univ. of Michigan, Flint
Christopher Phelan, Univ. of Minnesota
Gordon Phillips, Univ. of Maryland
Michael Pippenger, Univ. of Alaska, Fairbanks
Tomasz Piskorski, Columbia University
Brennan Platt, Brigham Young University
Joseph Pomykala, Towson University
William Poole, Univ. of Delaware
Barry Poulson, Univ. of Colorado at Boulder
Benjamin Powell, Suffolk University
Edward Prescott, Nobel laureate
Gary Quinlivan, Saint Vincent College
Reza Ramazani, Saint Michael's College
Adriano Rampini, Duke University
Eric Rasmusen, Indiana University
Mario Rizzo, New York University
Richard Roll, Univ. of California, Los Angeles
Robert Rossana, Wayne State University
James Roumasset, Univ. of Hawaii at Manoa
John Rowe, Univ. of South Florida
Charles Rowley, George Mason University
Juan Rubio-Ramirez, Duke University
Roy Ruffin, Univ. of Houston
Kevin Salyer, Univ. of California, Davis
Pavel Savor, Univ. of Pennsylvania
Ronald Schmidt, Univ. of Rochester
Carlos Seiglie, Rutgers University
William Shughart II, Univ. of Mississippi
Charles Skipton, Univ. of Tampa
James Smith, Western Carolina University
Vernon Smith, Nobel laureate
Lawrence Southwick, Jr., Univ. at Buffalo
Dean Stansel, Florida Gulf Coast University
Houston Stokes, Univ. of Illinois at Chicago
Brian Strow, Western Kentucky University
Shirley Svorny, California State
University, Northridge
John Tatom, Indiana State University
Wade Thomas, State University of New York at Oneonta
Henry Thompson, Auburn University
Alex Tokarev, The King's College
Edward Tower, Duke University
Leo Troy, Rutgers University
David Tuerck, Suffolk University
Charlotte Twight, Boise State University
Kamal Upadhyaya, Univ. of New Haven
Charles Upton, Kent State University
T. Norman Van Cott, Ball State University
Richard Vedder, Ohio University
Richard Wagner, George Mason University
Douglas M. Walker, College of Charleston
Douglas O. Walker, Regent University
Christopher Westley, Jacksonville State University
Lawrence White, Univ. of Missouri at St. Louis
Walter Williams, George Mason University
Doug Wills, Univ. of Washington Tacoma
Dennis Wilson, Western Kentucky University
Gary Wolfram, Hillsdale College
Huizhong Zhou, Western Michigan University
Additional economists who have signed the statement
Lee Adkins, Oklahoma State University
William Albrecht, Univ. of Iowa
Donald Alexander, Western Michigan University
Geoffrey Andron, Austin Community College
Nathan Ashby, Univ. of Texas at El Paso
George Averitt, Purdue North Central University
Charles Baird, California State University, East Bay
Timothy Bastian, Creighton University
John Bethune, Barton College
Robert Bise, Orange Coast College
Karl Borden, University of Nebraska
Donald Boudreaux, George Mason University
Ivan Brick, Rutgers University
Phil Bryson, Brigham Young University
Richard Burkhauser, Cornell University
Edwin Burton, Univ. of Virginia
Jim Butkiewicz, Univ. of Delaware
Richard Cebula, Armstrong Atlantic State University
Don Chance, Louisiana State University
Robert Chatfield, Univ. of Nevada, Las Vegas
Lloyd Cohen, George Mason University
Peter Colwell, Univ. of Illinois at Urbana-Champaign
Michael Connolly, Univ. of Miami
Jim Couch, Univ. of North Alabama
Eleanor Craig, Univ. of Delaware
Michael Daniels, Columbus State University
A. Edward Day, Univ. of Texas at Dallas
Stephen Dempsey, Univ. of Vermont
Allan DeSerpa, Arizona State University
William Dewald, Ohio State University
Jeff Dorfman, Univ. of Georgia
Lanny Ebenstein, Univ. of California, Santa Barbara
Michael Erickson, The College of Idaho
Jack Estill, San Jose State University
Dorla Evans, Univ. of Alabama in Huntsville
Frank Falero, California State University, Bakersfield
Daniel Feenberg, National Bureau of Economic Research
Eric Fisher, California Polytechnic State University
Arthur Fleisher, Metropolitan State College of Denver
William Ford, Middle Tennessee State University
Ralph Frasca, Univ. of Dayton
Joseph Giacalone, St. John's University
Adam Gifford, California State Unviersity, Northridge
Otis Gilley, Louisiana Tech University
J. Edward Graham, University of North Carolina at Wilmington
Richard Grant, Lipscomb University
Gauri-Shankar Guha, Arkansas State University
Darren Gulla, Univ. of Kentucky
Dennis Halcoussis, California State University, Northridge
Richard Hart, Miami University
James Hartley, Mount Holyoke College
Thomas Hazlett, George Mason University
Scott Hein, Texas Tech University
Bradley Hobbs, Florida Gulf Coast University
John Hoehn, Michigan State University
Daniel Houser, George Mason University
Thomas Howard, University of Denver
Chris Hughen, Univ. of Denver
Marcus Ingram, Univ. of Tampa
Joseph Jadlow, Oklahoma State University
Sherry Jarrell, Wake Forest University
Carrie Kerekes, Florida Gulf Coast University
Robert Krol, California State University, Northridge
James Kurre, Penn State Erie
Tom Lehman, Indiana Wesleyan University
W. Cris Lewis, Utah State University
Stan Liebowitz, Univ. of Texas at Dallas
Anthony Losasso, Univ. of Illinois at Chicago
John Lott, Jr., Univ. of Maryland
Keith Malone, Univ. of North Alabama
Henry Manne, George Mason University
Richard Marcus, Univ. of Wisconsin-Milwaukee
Timothy Mathews, Kennesaw State University
John Matsusaka, Univ. of Southern California
Thomas Mayor, Univ. of Houston
W. Douglas McMillin, Louisiana State University
Mario Miranda, The Ohio State University
Ed Miseta, Penn State Erie
James Moncur, Univ. of Hawaii at Manoa
Charles Moss, Univ. of Florida
Tim Muris, George Mason University
John Murray, Univ. of Toledo
David Mustard, Univ. of Georgia
Steven Myers, Univ. of Akron
Dhananjay Nanda, University of Miami
Stephen Parente, Univ. of Minnesota
Allen Parkman, Univ. of New Mexico
Douglas Patterson, Virginia Polytechnic Institute and University
Timothy Perri, Appalachian State University
Mark Pingle, Univ. of Nevada, Reno
Ivan Pongracic, Hillsdale College
Richard Rawlins, Missouri Southern State University
Thomas Rhee, California State University, Long Beach
Christine Ries, Georgia Institute of Technology
Nancy Roberts, Arizona State University
Larry Ross, Univ. of Alaska Anchorage
Timothy Roth, Univ. of Texas at El Paso
Atulya Sarin, Santa Clara University
Thomas Saving, Texas A&M University
Eric Schansberg, Indiana University Southeast
John Seater, North Carolina University
Alan Shapiro, Univ. of Southern California
Frank Spreng, McKendree University
Judith Staley Brenneke, John Carroll University
John E. Stapleford, Eastern University
Courtenay Stone, Ball State University
Avanidhar Subrahmanyam, UCLA
Scott Sumner, Bentley University
Clifford Thies, Shenandoah University
William Trumbull, West Virginia University
Gustavo Ventura, Univ. of Iowa
Marc Weidenmier, Claremont McKenna College
Robert Whaples, Wake Forest University
Gene Wunder, Washburn University
John Zdanowicz, Florida International University
Jerry Zimmerman, Univ. of Rochester
Joseph Zoric, Franciscan University of Steubenville
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And a third post from the economist mentioned in the LA Times Piece. Though it indeed calls for spending, the targeted, productive, and quickly introduced funds the author calls for are clearly lacking in what the Democrats seek to foist.
The Stimulus Plan We Need Now
The President-Elect Won't Have to Wait Till January to Act
By Martin Feldstein
Thursday, October 30, 2008; A23
Further legislation to deal with the economic crisis should not wait until the new president takes office. Fortunately, the president-elect will be a senator and can propose legislation without waiting to be sworn in as president. Immediately after Nov. 4, the winner could, and should, take the lead in the legislative process.
The economy faces two separate problems: the downward spiral of home prices, which hangs over the financial markets, and the decline in aggregate spending, which could cause a deep and prolonged recession.
Home prices have already fallen about 25 percent from their peak in 2006, and experts say they must fall an additional 10 to 15 percent to get back to pre-bubble levels. But they could fall much further than that as a result of mortgage defaults and foreclosures. Further declines from the current level would increase the number of homeowners whose mortgages exceed the value of their homes, creating a strong incentive to default. Defaults and the resulting foreclosures would put more homes on the market, driving down prices even more.
And this fear of a deep drop in home prices depresses the value of mortgage-backed securities, contributing to the difficulty that banks are having raising funds and to their reluctance to make loans.
Although home prices must get back to pre-bubble levels, Congress should enact policies to reduce defaults that could drive prices down much further. Direct help to the 12 million homeowners who already have negative equity in their homes could help to stop foreclosures. But it is important for Congress to go further and stop declining prices from pushing a large portion of the other 37 million homeowners with mortgages into negative equity, which could tempt them to default. The mortgage replacement loan plan that I suggested in June, essentially a congressionally enacted mortgage "firewall" to prevent prices from dropping too far, is one possible way to do that.
Falling home prices have already reduced homeowner wealth by about $3 trillion; the stock market decline has cut wealth by an additional $8 trillion. This reduced household wealth is causing consumers to cut spending, leading to lower employment, lower incomes and, therefore, further cuts in consumer spending.
Other components of aggregate demand are also falling. The decline in consumer spending will lead to less business investment in plants and equipment. And the recession in Europe and Japan will further reduce our net exports.
With the Fed's benchmark interest rate down to 1 percent, there is no scope for an easier monetary policy to stop the downward spiral in aggregate demand.
Another round of one-time tax rebates won't do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.
The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.
A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.
The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.
The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package.
Although the economy is facing severe challenges, the president-elect can turn the situation around by introducing legislation to deal with the downward spiral in home prices and with the declining level of aggregate demand. It is important that such legislation be enacted as quickly as possible.
The writer, an economics professor at Harvard University and an adviser to the McCain campaign, is president emeritus of the National Bureau of Economic Research.
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http://www.cnbc.com/id/29032370
"This recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse," Obama wrote in the op-ed titled, "The Action Americans Need."
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Go through and read the comments, its sad how many people are willing to give up their freedom to a larger govt in exchange for the perception of safety.
Is Britain running out of food? Is GM the only answer to reports of future food shortages in Britain, or would some sensible belt-tightening fix the problem?
Comments (14)
GM crops: a controversial answer to food shortages. Photograph: Barry Batchelor/PA
An end to cheap food and the likelihood of food crises hitting Britain unless we reform the agricultural sector, is the print media's take on the long-awaited report on food security from think-tank Chatham House, published yesterday.
But - predictably - it isn't as simple as that. The shock headline that Britain now imports 51% of its food doesn't actually say much about our self-sufficiency, or our ability to deal with a severe food crisis (and indeed, the report's authors say they have not predicted any such fate for Britain). We buy in food, but we export a lot too. Scotland turns 60% of its wheat into whisky - but that's not a bad thing for the food economy or for human happiness.
When it comes to meeting our food needs (see DEFRA's statistics) we are in fact a much healthier 60% self-sufficient, and if you look at foodstuffs which it is possible to produce in Britain that figure rises to 73%. These figures are higher now than in almost any decade in the 20th century.
There's no doubt that globally prices will continue to rise, and that food shortages are one of the grave, interlinked challenges that face us this century, but it really isn't as dire in Britain as it is in, say, parts of Africa. Is this report proof that we have to rush and embrace GM, as the Observer's science editor Robin McKie suggests?
Our food economy looks far less healthy than it could because of our demands for exotica (salad all year round, cheap fruit from the tropics, protein from the other side of the planet) and our fabulous capacity for waste. 30% of our food is thrown away according to the government's WRAP project - largely by supermarkets and food processors, but also by individuals, as Tony Naylor's piece for this blog today demonstrates. Sort these out and in this country we would be more capable of feeding ourselves.
And there may lie the most interesting potential solution: one of the Chatham House report's most striking statistics concerns the dire state of our agricultural economy, with 63% of our farms unable to make "good" profit margins. Who's to blame? The reports doesn't directly finger the big retailers, but it does point out the undesirability of having 4 companies control 75% of food retail and continually strive to drive down farm-gate prices.
This chimes with a piece in this month's Prospect magazine, where the right-wing thinker Phillip Blond's prescription for a radical "red Tory" manifesto includes breaking up Tesco for the good of consumers, producers, high streets and jobs.
So - is a Britain self-sufficient in food possible, or even desirable? Could you cut out Chilean asparagus and New Zealand lamb? How about bananas? A lot of poorer countries need to sell fresh food to us. Would you be prepared to pay more for your food if it guaranteed getting British farming back on its feet? And is GM really the answer?
http://www.guardian.co.uk/lifeandstyle/wordofmouth/2009/feb/03/chatham-house-britain-food-shortage
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There seems to be a massive push for global unity and the redistribution of wealth.
Fisheries Collapse Imperils Developing Nations’ Food, Jobs
http://www.bloomberg.com/apps/news?pid=20601086&sid=az0dHysHjvPs&refer=latin_america
By Jeremy van Loon and Alex Emery
Feb. 5 (Bloomberg) -- The risk of fisheries collapsing in Peru, the world’s largest fishmeal producer, and developing nations such as Senegal that depend on fish for both food and jobs means economic hardship as climate change threatens fishing grounds.
About 33 countries in Latin America, Africa and Asia are “highly vulnerable” to rising ocean temperatures, changes in river flows and less precipitation, said Allison Perry of the World Fish Center, who co-wrote a study that looked at the economic risks to fisheries in countries affected by changing weather.
The world’s poorest countries are less able to adapt to these changes because they lack the financial resources to replace a food source and an industry that contributes more to economic activity than in wealthier nations. “Many of these countries are simply not in a position to adapt and implement measures,” Perry said.
Peru exports mainly to China, Spain and the U.S. The South American nation boosted fishing exports last year by 23 percent to a record $2.4 billion, including $1.4 billion in fishmeal. While anchovy is its main export, Peru has been working to diversify into frozen, fresh and canned fish exports, including squid and shrimp.
Fishing is Peru’s fourth-biggest export earner after mining, oil and gas with about 145,000 people out of a population of 28 million making a living off the industry, government data shows.
Senegal, a country with a per capita gross domestic product of about $1,000, relies on its fishery for a fifth of its exports. At the same time, fish provides 43 percent of the animal protein for the average Senegalese, Perry said in an interview.
The bleaching of coral reefs, home to many species of tropical fish, rising temperatures in lakes and less precipitation are harming both freshwater and marine fisheries worldwide, she said.
Atlantic Sturgeon’s Extinction
Fisheries are already suffering from over-exploitation of fish stocks with the extinction of the Atlantic sturgeon in the U.S.’s Chesapeake Bay. While the impact of climate change on fisheries will be more severe in higher latitudes, it is poorer countries closer to the equator that are less prepared to cope, Perry said.
More than half of the world’s fisheries are exploited beyond their harvest capacity, threatening to reduce fish stocks to dangerous levels, the UN’s Environment Program said. About 2.6 billion people’s main source of protein comes from fish, UNEP said.
Global warming and climate change put additional stresses on fishing grounds and may destroy commercial fisheries in the coming years as ocean currents are disrupted and seas become more acidic, UNEP reported last year. Oceans are absorbing rising levels of carbon dioxide, raising their acidity levels, while global warming increases surface temperatures. Both harm fish populations.
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http://www.startribune.com/nation/39123382.html?elr=KArksLckD8EQDUoaEyqyP4O:DW3ckUiD3aPc:_Yyc:aUUsZ
China declares emergency in areas where drought threatens crops; 4 million lack drinking water
Associated Press
Last update: February 5, 2009 - 4:13 AM
BEIJING - China declared an emergency Thursday in eight provinces suffering a serious drought that has left nearly 4 million people without proper drinking water and is threatening millions of acres of crops.
The Office of State Flood Control and Drought Relief posted a notice on its Web site declaring the situation a level-two emergency on the country's four-level scale. It called it a drought "rarely seen in history."
The official Xinhua News Agency reported that President Hu Jintao and Premier Wen Jiabao had ordered all-out efforts to fight the drought at a Cabinet meeting Thursday. It said the government had allocated 400 million yuan ($58.5 million) for relief work.
China suffers from an uneven distribution of its water resources. Weather patterns in the arid north and flood-prone south cost the government tens of millions of dollars in lost productivity each year.
The latest drought began in November and has affected 24 million acres (9.73 million hectares) of crops, one-third of them seriously, Xinhua said. Most of the hardest-hit provinces were in northern China, with several in the east.
In recent days, news broadcasts have shown dry, cracked farm fields and crops withering in the ground.
Almost half of the wheat-growing areas in the eight provinces — Hebei, Shanxi, Anhui, Jiangsu, Henan, Shandong, Shaanxi and Gansu — were threatened, Xinhua said, while nearly 4 million people lacked proper drinking water.
The official China Daily newspaper, citing meteorological authorities in Henan, said it was the worst drought in Henan since 1951 and that the province, a major supplier of winter wheat, had gone 105 consecutive days without rain.
But some relief may be in sight. Weather forecasts call for rain and snow in some of the stricken areas beginning Saturday.
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http://www.youtube.com/watch?v=aOyyRhJRsy8
The British government faces an excruciating choice. It cannot let Royal Bank of Scotland and its fellow mega-banks go to the wall. Yet it risks being swamped by the massive foreign debts of these lenders if it takes on their dollar, euro and yen exposure by opting for full nationalisation. Britain has foreign reserves of under $61bn dollars (£43.7bn), less than Malaysia or Thailand. The foreign liabilities of the UK banks are $4.4 trillion – or twice annual GDP – according to the Bank of England. The mismatch is perilous.It is why sterling has crashed 10 cents from $1.49 to $1.39 against the dollar in two days. The markets have given their verdict on Gordon Brown’s latest effort to “save the world”.If Britain walked away from UK banks’ $4.4 trillion of foreign liabilities – worth eight times Lehman Brothers – it would destroy the credibility of the City and take the whole world into deeper depression.
“The UK cannot go down that route because it would set off an asset price death spiral,” said Marc Ostwald, a bond expert at Monument Securities. “The Western banking system is already on life support. That would turn it off altogether.”
http://www.timesonline.co.uk/tol/comment/article5559773.ece
Jim Rogers: 'Sell any sterling you might have. It's finished'
http://www.independent.co.uk/news/business/news/jim-rogers-sell-any-sterling-you-might-have-its-finished-1452384.html
They don’t know what they’re doing, do they? I am of the opinion they know exactly what they are doing! With every step taken by the Government as it tries frantically to prop up the British banking system, this central truth becomes ever more obvious.Yesterday marked a new low for all involved, even by the standards of this crisis.
Britons woke to news of the enormity of the fresh horrors in store. Despite all the sophistry and outdated boom-era terminology from experts, I think a far greater number of people than is imagined grasp at root what is happening here. If this is the way to implement a new world order, then it will be born from this economic catastrophe.
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Huss:
Sorry to be anal again, but wouldn't that post about China be better in the China thread? :lol:
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Huss:
Sorry to be anal again, but wouldn't that post about China be better in the China thread? :lol:
on its own, of course. But with in the context of the other articles it leads me to beleive that there are those out there that are attempting to tie all these events together into a super crisis in an effort to push a whole new system on us all.
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By GEORGE MELLOAN
As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?
Chad CroweThat might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.
Let's have a look at the credit market. Treasurys have been strong because the stock market collapse and the mortgage-backed securities fiasco sent the whole world running for safety. The best looking port in the storm, as usual, was U.S. Treasury paper. That is what gave the dollar and Treasury securities the lift they now enjoy.
But that surge was a one-time event and doesn't necessarily mean that a big new batch of Treasury securities will find an equally strong market. Most likely it won't as the global economy spirals downward.
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For one thing, a very important cycle has been interrupted by the crash. For years, the U.S. has run large trade deficits with China and Japan and those two countries have invested their surpluses mostly in U.S. Treasury securities. Their holdings are enormous: As of Nov. 30 last year, China held $682 billion in Treasurys, a sharp rise from $459 billion a year earlier. Japan had reduced its holdings, to $577 billion from $590 billion a year earlier, but remains a huge creditor. The two account for almost 65% of total Treasury securities held by foreign owners, 19% of the total U.S. national debt, and over 30% of Treasurys held by the public.
In the lush years of the U.S. credit boom, it was rationalized that this circular arrangement was good for all concerned. Exports fueled China's rapid economic growth and created jobs for its huge work force, American workers could raise their living standards by buying cheap Chinese goods. China's dollar surplus gave the U.S. Treasury a captive pool of investment to finance congressional deficits. It was argued, persuasively, that China and Japan had no choice but to buy U.S. bonds if they wanted to keep their exports to the U.S. flowing. They also would hurt their own interests if they tried to unload Treasurys because that would send the value of their remaining holdings down.
But what if they stopped buying bonds not out of choice but because they were out of money? The virtuous circle so much praised would be broken. Something like that seems to be happening now. As the recession deepens, U.S. consumers are spending less, even on cheap Chinese goods and certainly on Japanese cars and electronic products. Japan, already a smaller market for U.S. debt last November, is now suffering what some have described as "free fall" in industrial production. Its two champions, Toyota and Sony, are faltering badly. China's growth also is slowing, and it is plagued by rising unemployment.
American officials seem not to have noticed this abrupt and dangerous change in global patterns of trade and finance. The new Treasury secretary, Timothy Geithner, at his Senate confirmation hearing harped on that old Treasury mantra about China "manipulating" its currency to gain trade advantage. Vice President Joe Biden followed up with a further lecture to the Chinese but said the U.S. will not move "unilaterally" to keep out Chinese exports. One would hope not "unilaterally" or any other way if the U.S. hopes to keep flogging its Treasurys to the Chinese.
The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.
So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?
There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.
And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.
Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.
Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package.
Mr. Melloan is a former deputy editor of the Journal's editorial page.
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February 6, 2009
Welfare Spendathon: House Stimulus Bill Will Cost Taxpayers $787 Billion in New Welfare Spending
by Robert E. Rector
WebMemo #2276
The recently passed U.S. House of Representatives stimulus bill contains $816 billion in new spending and tax cuts. Of this sum, $264 billion (32 percent) is new means-tested welfare spending. This represents about $6,700 in new welfare spending for every poor person in the U.S.
But this welfare spending is only the tip of the iceberg. The bill sets in motion another $523 billion in new welfare spending that is hidden by budgetary gimmicks. If the bill is enacted, the total 10-year extra welfare cost is likely to be $787 billion.
The claim that Congress is temporarily increasing welfare spending for Keynesian purposes (to spark the economy by boosting consumer spending) is a red herring. The real goal is to get "the camel's nose under the tent" for a massive permanent expansion of the welfare state.
In the first year after enactment of the stimulus bill, federal welfare spending will explode upward by more than 20 percent, rising from $491 billion in FY 2008 to $601 billion in FY 2009. This one-year explosion in welfare spending is, by far, the largest in U.S. history. But spending will continue to rise even further in future years. The stimulus bill is a welfare spendathon, a massive down payment on Obama's promise to "spread the wealth."
Once the hidden welfare spending in the bill is counted, the total 10-year fiscal burden (added to the national debt) will not be $816 billion, as claimed, but $1.34 trillion. This amounts to $17,400 for each household paying income tax in the U.S.
Even without the extra spending in the stimulus bill, means-tested welfare spending is already at a historic high and growing rapidly. In 2008, federal, state, and local means-tested spending hit $679 billion per year. Without any legislative expansions, given historic rates of growth in welfare programs, federal, state, and local means-tested welfare spending over the next decade will total $8.97 trillion. The House stimulus bill adds another $787 billion to this total, yielding a 10-year total of $9.8 trillion. The total 10-year cost of means-tested welfare will then amount to $127,000 for each household paying federal income tax.
The Current Welfare System
Means-tested welfare spending programs give cash, food, housing, medical care, and targeted social services to poor and low income persons. In a means-tested program, benefits are limited to persons below a specified income level. The cutoff income level varies from program to program but is typically less than 150 percent of poverty, or around $33,000 per year for a family of four.
For example, food stamps and public housing are means-tested (or limited to lower-income persons) while Social Security and postal service are not. Means-tested welfare also includes "refundable" tax credits. With a refundable credit program, the government gives cash grants to persons who owe no income tax. Like conventional means-tested programs, refundable credits give aid to poor and lower income persons. Federal welfare spending also includes targeted grants to schools with large numbers of poor students. (This is a relatively small portion of overall federal welfare spending.)
The federal government runs over 50 means-tested welfare programs, including Temporary Assistance to Needy Families; Medicaid, food stamps; the Earned Income Tax Credit (EITC); the Women, Infants, and Children food program; public housing; Section 8 housing; the Community Development Block Grant; the Social Services Block Grant; and Head Start.
New Welfare in the Stimulus Bill
The House stimulus bill overtly increases federal welfare spending by $264 billion. Most of this spending will occur in the first two years after passage. For example, if enacted, the House stimulus bill will spend an additional $88 billion in means-tested welfare aid in FY 2009, an increase of more than 20 percent above prior spending levels. Federal welfare spending (including small increases built into existing law) will rise from $491 billion in FY 2008 to $601 billion in FY 2009. This one-year spending explosion (by far the largest in U.S. history) will not be a byproduct of unemployment generated by the recession but the result of a deliberate expansion of welfare eligibility and benefits by President Obama and Congress.
Camel's Nose in the Tent
While $264 billion in new welfare spending may seem like a lot, it is only the tip of the iceberg. If the stimulus bill is enacted, the real long-term increase will be far higher. This is because the stimulus bill pretends that most of its welfare benefit increases will lapse after two years. In fact, both Congress and President Obama intend for most of these increases to become permanent.[1] The claim that Congress is temporarily increasing welfare spending for Keynesian purposes (to spark the economy by boosting consumer spending) is a red herring. The real goal is a permanent expansion of the welfare system.
The notion that Congress intends to temporarily increase Pell grants and EITC benefit levels for just two years and then allow benefits to fall back to their original status is out of touch with Washington reality. Any Congressman who, two years from now, suggests that the new welfare spending be allowed to lapse to pre-stimulus levels would be pilloried for slashing welfare.
"Spread the Wealth" Tax Credit
A major new welfare program in the stimulus bill is Obama's "Make Work Pay" refundable tax credit. This credit represents a fundamental shift in welfare policy. At a cost of around $23 billion per year, this credit will provide up to $500 in cash to low income adults who pay no income taxes. For the first time, the government will give significant cash to able-bodied adults without dependent children. Since most of these individuals have little apparent need for assistance, the new credit represents "spreading the wealth" for its own sake.
The lack of connection between this credit and "economic stimulus" is evident in the fact that the first payments under the program will not be made until April 2010.[2] This refundable credit is not included in the stimulus bill because of its "stimulus" effect. Instead, the inclusion of this new welfare program makes good on an Obama presidential campaign promise. While the stimulus bill claims this new credit will terminate after two years, President Obama and the congressional leadership clearly intend it to be a permanent part of a new, much larger welfare state.
Hidden Welfare Spending
There are another six welfare expansions in the stimulus bill that will almost certainly become permanent if the bill is enacted. These include expansions to food stamps, the EITC, the refundable child credit, Medicaid eligibility standards, Pell grants, and Title I education grants. Added to the "Make Work Pay" refundable credit, the aggregate annual cost of these welfare expansions will be nearly $60 billion per year.
The claim that these welfare expansions in the stimulus bill will lapse after two years is a political gimmick designed to hide their true cost from the taxpayer. If these welfare expansions are made permanent--as history indicates they will--the welfare cost of the stimulus will rise another $523 billion over 10 years.[3] The total 10-year cost of welfare increases in the bill will not be $264 billion but $787 billion. The overall 10-year fiscal burden of the bill (added to the national debt) will not be $814 billion but $1.34 trillion.
Welfare Spending Already at Historic High
Even without the stimulus bill, means-tested welfare spending in the U.S. is already at a historic high and growing rapidly. In 2008, federal, state, and local means-tested spending hit $679 billion per year. This vast outlay was the result of a fairly steady growth in welfare spending over the last two decades and is not a temporary surge due to the recession.[4] Without any legislative expansions, given historic rates of growth in welfare programs, federal, state, and local means-tested welfare spending over the next decade will total $8.97 trillion.[5] The House stimulus bill will add another $787 billion to this total, yielding a 10-year total of $9.8 trillion. The total 10-year cost of means-tested welfare will amount to $127,000 for each household paying federal income tax.
A Trojan Horse
The welfare provisions in the Senate stimulus bill are very similar to those in the House bill. Both bills use the idea of economic stimulus as a Trojan horse to conceal massive, permanent increases in the U.S. welfare system. The goal of the bills is "spreading the wealth," not reviving the economy.
Robert E. Rector is Senior Research Fellow in the Domestic Policy Studies Department and Katherine Bradley is a Research Fellow in the DeVos Center for Religion and Civil Society, at The Heritage Foundation.
[1]The one exception is the increase Federal Medical Assistance Percentage (FMAP) in the Medicaid. The House bill temporarily increases the FMAP which determines the share of Medicaid spending paid by the federal government, resulting in a cost of $88 billion to the federal government over two years. This expenditure represents a massive financial bailout of state governments. It is likely to result in some increase in aggregate Medicaid spending and some displacement of state Medicaid spending; the increase in FMAP is unlikely to become permanent.
[2]The other refundable credits in the bill will also have little spending effect before 2010.
[3]Assumes a 4 percent annual increase in the outlays of these provisions.
[4]Many conservatives have fooled themselves into thinking that the growth of the welfare state was ended by the "welfare reform" of 1996. In fact, welfare reform affected only one federal welfare program out of 50; the rest of the welfare state was unaffected.
[5] Assumes a 5 percent annual growth in current outlays; this is less than the historic average.
http://www.heritage.org/Research/Economy/wm2276.cfm
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The right-wing New Deal conniption fit
For the editors of the Wall Street Journal, the spectacle of a major government spending program aimed at combating a severe recession is evidently a nightmare beyond belief, complete with a popular interventionist-leaning president, Democratic majorities in both the Senate and the House, and, scariest of all, a legion of zombie back-from-the-dead Keynesian economist holy warriors. How else to explain the paper's increasingly shrill declarations that the New Deal absolutely, positively did not work?
The latest salvo came Monday morning in a piece by two economists, Harold L. Cole and Lee. E. Ohanian: "How Government Prolonged the Depression."
Defenders of the New Deal will find much to argue with in Cole and Ohanion's account, but for simplicity's sake, I am going to zero in on just one point -- the impact of the New Deal on unemployment.
Cole and Ohanian:
The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office.
How can one make this claim? Unemployment reached 25 percent in the Great Depression, and fell steadily until World War II (although there were some bumps up along the way). Ah, but the revisionist position is that unemployment did not fall as much as it should have. And this argument is based on an interesting interpretation of the available data. As Amity Shlaes, currently the premier anti-New Deal historical revisionist writing for a popular audience, explained proudly in her own Wall Street Journal opinion piece in November, "The Krugman Recipe for Depression," a necessary step is to not count as employed those people in "temporary jobs in emergency programs."
That means, everyone who got a job during the Great Depression via the Works Progress Administration (WPA) or Civilian Conservation Corps (CCC), or any other of Roosevelt's popular New Deal workfare programs, doesn't get counted as employed in the statistics used by Cole, Ohanian and Shlaes.
Let us reflect, for a moment, on what the men and women employed by those programs achieved (aside from earning cash to buy food and pay for shelter, of course). In his paper, "Time for a New, New Deal," Marshall Auerback (pointed to by economist James Galbraith) summarizes:
The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown.
It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country's entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.
In other words, millions of men and women earned a living wage and self-respect and contributed mightily to the national infrastructure. But, according to the statistics as interpreted on the Wall Street Journal editorial page, they were unemployed.
Way back in 1976, economist Michael Darby exposed the absurdity of not counting WPA workers as "employed" in his paper "Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941." More than 30 years ago, Darby observed that correctly counting those 3 and a half million people as employed workers effectively debunked "the 'un-fact' that recovery was extremely slow from 1934 through 1941. From 1933 to 1936, the corrected unemployment rate fell by nearly 5 percentage points per year..."
Shlaes dismisses Darby's reappraisal of Great Depression unemployment statistics by arguing that "to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects."
Of course, some would argue that "masking the anxiety" of workers who did not know how they were going to feed their children or put a roof over their heads is precisely the job of government in times of great economic turmoil. And that, really, is where the whole project of New Deal revisionism breaks down.
The bottom line conservative position on the New Deal is that, theoretically speaking, the economy would have returned to "normal" more quickly if FDR had refrained from interfering with the workings of the free market through his vast array of interventionist programs. Sadly for them, we never got a chance to find out, because the situation in 1933, when Roosevelt took office, demanded government action. Twenty-five percent of the nation was unemployed. Human suffering was immense. If the market had been left to work its problems out all by itself, further suffering in the near term would have been unimaginable. And not just unimaginable -- but also politically unacceptable.
If the New Deal actually extended the Great Depression, we might wonder, why was Roosevelt reelected three times? One explanation would be that the general public is an idiot, and I must confess, I've leaned toward that point of view myself after viewing the aftermath of Election Day in the U.S. on a number of occasions over the last three decades. But another explanation could be that a majority of voters experienced material improvements in the quality of their lives as a result of New Deal programs. This is a point of enduring frustration to conservatives, and they've expended vast effort over the years in their attempt to rewrite history and convince us that what our grandparents knew was wrong -- to the point that they've even tried to tell us that the people who built the fantastic Art Deco structures at the high school my daughter is currently attending were "unemployed."
I do not think those workers would have agreed.
Andrew Leonard
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If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well? Now that would be a stimulus!
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http://hotair.com/archives/2009/02/06/peter-schiff-the-stimulus-will-bring-about-economic-armageddon/
Obama-geddon!
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It's dark, gusty and rainy here at the beach, but I haven't lost my optimism. I'd recommend reading Jonah Goldberg's recent column about how Obama's overreach has been a fortunate mistake for those of us who believe in free markets and limited government. Some excerpts (and note the weather analogy at the end):
The stimulus bill was a bridge too far, an overplayed hand, ten pounds of manure in a five-pound bag. The legislation’s primary duty was never to stimulate the economy, but to stimulate the growth of government, the scope of the state.
By spending hundreds of billions on things that have absolutely nothing to do with providing an immediate stimulus for the economy, Democrats hoped to make a down payment on their dream government. The billions for student aid, expanded welfare and health-care benefits, and bailouts for profligate state governments; the hundreds of millions for better museums and prettier government buildings; and the millions for smoking-cessation programs and bee insurance aren’t just items on crapulent Democrats’ wish list. The budget bloating was deliberate.
The economic crisis was almost too good to be true. Like FDR and Lyndon Johnson, Obama was poised to act on Rahm’s Rule of Crisis Exploitation in a way that would not only guarantee a newer New Deal and an even greater Great Society, but would also receive bipartisan approval. That’s why Obama wanted so much GOP support—so as to ratify the left turn to European-style social democracy, particularly when voters cottoned on to the con.
Obama and his party were undone by their hubris. There was just too much muchness in the bill.
There is still probably bipartisan support for a stimulus bill, but only for a measure intended to stimulate our market-based economy rather than one that hastens its Swedenization.
Obama’s presidency has many victories ahead of it, and Democrats still run the show. But the perfect storm of liberalism has dissipated to mere scattered showers.
http://scottgrannis.blogspot.com/
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If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well?
Funny, I've actually considered that before. I certainly wouldn't complain... :wink:
And I love the past tense of HUSS post. Two weeks in and the administration is already part of the past, due to a bill that hasn't been passed.
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If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well?
Funny, I've actually considered that before. I certainly wouldn't complain... :wink:
And I love the past tense of HUSS post. Two weeks in and the administration is already part of the past, due to a bill that hasn't been passed.
Growing govt is an answer looking for a question. Any one willing to accept a free house and million dollars they didn't work for is a free loader, its that attitude that caused the housing bubble, credit bubble and every other bubble. People do not want to work hard, they want hand outs. I made fun of my friends who parroted "my home is my investment, its the new world we can spend out way into prosperity". Now when i mock them I'm the only one laughing.
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Looks like the Senate sold us out.... :cry: I might not have a job 6 months from now, but I'll have a really nice bridge to sleep under!
http://www.foxnews.com/politics/2009/02/06/senators-reach-tentative-deal-b-economic-stimulus/
Senators have reached a tentative deal on a version of President Obama's economic stimulus plan, including about $811 billion in spending and tax cuts, that will win enough Republican votes to move forward.
Sens. Arlen Specter of Pennsylvania and Susan Collins of Maine appeared to be the critical Republicans to sign onto the bill, giving Democrats the 60 votes needed to advance to a final vote. Democrats also voiced confidence that Republican Sen. Olympia Snow of Maine also would vote for the plan.
It isn't certain when a vote would come, but sources indicate Sunday is a likely bet.
As part of the deal, spending in the bill was reduced while tax cuts were increased, for a mix of 58 percent spending and 42 percent tax cuts. A senior Democratic leadership aide said the White House was on board.
But Republican leaders still worry the bill contains too much spending on programs that won't stimulate the economy, with Minority Leader Mitch McConnell saying Friday night on the floor of the Senate arguing that "the big spending programs of the New Deal did not work."
Obama is pushing for the massive spending plan to jump-start the economy, which otherwise, he says, could be headed for "catastrophe."
Specter said Friday night that action was "very necessary," and this bill, though not perfect, is better than inaction.
"I think no one could argue with the fact that the situation would be much worse without this bill," Specter said at a news conference.
The president has taken an increasingly public approach to advocating the bill's passage, sitting for TV interviews early this week and planning trips to Indian and Florida next week to promote the measure. Polls suggest taxpayers are skeptical about the effectiveness of the plan.
The two cities Obama will visit next week have struggled amid the crumbling economy. Elkhart, Ind., has seen its unemployment jump to 15.3 percent from 4.7 percent in the past year and unemployment in Fort Myers, Fla., has climbed to 10 percent.
The House passed a economic stimulus package of a little more than $800 billion last month with Republicans unified against the measure. In Senate deliberations, the price tag had risen higher than $900 billion, prompting Senate Republicans to complain that it contained too much spending and not enough tax relief.
Even Democratic Sen. Dianne Feinstein of California voiced opposition to the bill on Friday, saying it wouldn't do enough to stimulate the economy. But after news broke Friday night that a deal had been reached, Feinstein said, "This is as good a compromise as we are going to get."
White House press secretary Robert Gibbs said Friday's report showing the economy lost nearly 600,000 jobs in January "is the equivalent of losing every job in the state of Maine," possibly a direct appeal by Gibbs that state's two senators. And he noted: "In the past two months, the economy lost 1.2 million jobs. That's basically losing every job in Pittsburgh or in Cleveland," possibly appealing to Specter and his Ohio colleague.
FOX News' Trish Turner contributed to this report.
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If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well?
Funny, I've actually considered that before. I certainly wouldn't complain... :wink:
And I love the past tense of HUSS post. Two weeks in and the administration is already part of the past, due to a bill that hasn't been passed.
You can't see any problem with this?
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The original piece is well linked and sourced.
Economics, Evidence, Enlightenment [We know what works and not. We just prefer to ignore the truth]
americanthinker.com ^ | February 06, 2009 | Randall Hoven
With today's economy, wouldn't it be nice if we knew how to make an economy grow? To know what works and what doesn't? Well, we do. We just prefer to ignore the truth.
What works is economic freedom. What doesn't work is more government.
I'm sorry that those words sound simplistic and like Republican "ideology" (or at least what used to be Republican ideology - before the Bailout Fairy arrived). But they have the benefit of being true. If you were to start from scratch, ignoring all ideology and going simply by the evidence of what produces prosperity, you would come to that conclusion: more freedom and less government lead to greater wealth and prosperity.
It's not the ideology. It's the evidence.
Unfortunately, we are ignoring the evidence and rushing headlong in the wrong direction. Alec Baldwin and others threatened to move to France when George W. Bush became President. They didn't need to. France moved here.
Exhibit A is a thorough study of what works and what doesn't, conducted over 200 years ago, by Adam Smith. He examined the economies at the time and through history and came to the following conclusion.
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."
The government need not "manage" the economy, but just stay pretty much out of the way, beyond securing "life, liberty and property."
Exhibit B is the Heritage Foundation's Index of Economic Freedom. Every year the data support Adam Smith's conclusion: more economic freedom yields more prosperity, where economic freedom means secure property rights and limited government in terms of size and control of the economy.
"Previous editions of the Index have confirmed the tangible benefits of living in freer societies. Not only are the higher levels of economic freedom associated with higher per capita incomes and higher GDP growth rates, but those higher growth rates seem to create a virtuous cycle, triggering further improvements in economic freedom."
The average GDP per capita of those considered "Free" was $40,253, about 10 times greater than those considered "Mostly Unfree" ($4,359) or "Repressed" ($3,926). There is strong and undeniable statistical correlation between economic freedom (as scored by the Heritage Foundation) and GDP per capita. And it shows up year after year.
Exhibit C is the case of Presidents Reagan and Mitterrand. Reagan was President of the US from 1981 to 1989 and was considered a very right-wing, free-market zealot. Mitterrand was President of France from 1981 to 1995 and was a socialist, the first socialist president of France. This would be an apples-to-apples comparison of free-market vs. socialist governance. How did that work out?
France was behind the US in 1980 and would fall further behind it in the following years. In 1980, France's GDP per capita was 84% that of the US. By 1989 it was down to 79% and by 1995 it was 78%. (For the various international comparisons throughout this article, see the US Statistical Abstract.) In 2006, the latest year for which data is available, it was just 74%. All that wonderful socialism in France just set it back further and further from the US.
Exhibit D is Japan. Remember the Japanese miracle? From 1960 to 1991 its GDP per capita grew from 37% of the US's to 86%. It was closing in on us! By 1991 we were all afraid that the Japanese would outpace us in computer chips, high definition televisions, artificial intelligence, automobiles and overall economic growth. It would buy up all the US assets worth having and we would soon all be working for Japanese bosses.
At that point, 1991, the Japanese government spent just 31.6% of its GDP, lower than that of any European country, Canada or the US. The US was spending 37.8%. The "small government" US had an even smaller government competitor, and it was eating our lunch. Only the US, West Germany and Norway were richer than Japan at that time (GDP per capita).
But then Japan did us a great favor. It decided to grow its government. By 1996 its government was bigger than the US's as a fraction of GDP, and would remain so through 2005. In 2000 its government was bigger than that of Australia, Ireland, Luxembourg, Switzerland and the United Kingdom. It had definitely lost its "smallest government" title.
How did that work out for Japan? Its GDP per capita went from 86% that of the US to just 73% by 1995. It had fallen behind Canada, Australia, Austria, Belgium, Denmark, France, the Netherlands, Sweden and the United Kingdom by that same measure.
Exhibit E involves Japan again, but this piece of evidence is very relevant to today -- it has to do with economic stimuli. As described by Benjamin Powell at the Ludwig von Mises Institute in 2002:
"Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen."
Sound familiar? Yet from 1991 to 2006 Japan's economy grew slower than that of any of the other 16 countries listed in the US Statistical Abstract for comparison - even slower than Italy's. Over those 16 years its GDP per capita grew just 16%. That of its Asian counterpart, South Korea, grew 94% in that same period. The US, Canada and most European countries grew at least twice as fast. And today Japan's government debt is 182% of its GDP, by far the highest of any developed country .
Economic stimuli work -- if what you want to grow is debt rather than real GDP.
Exhibit F is Ireland. In 1987, Ireland's government was 52% of its GDP, a higher fraction than even that of France at the time (51.9%). But by 1998 it was only 34.5% -- lower than that of the US or any other European country. It had cut income taxes across the board. Its top corporate tax rate was the lowest of all OECD countries by 2003.
How did that work for Ireland? From 1990 to 2000, its per capita real GDP grew 86%. By comparison, the US's grew just 26% in that period. France's grew just 12%. In 1980, Ireland's GDP per capita was just 61% of France's, but by 1998 it had overtaken France and by 2000 it was 118% of France's.
Exhibit G is Sweden. In 1993, Sweden took the prize for big government. It spent 71% of GDP at a time when even France was spending less than 55%. By 2007 Sweden's spending was trimmed to 51% of GDP. Still not a small government by any means, but smaller than France's, at 52%.
Over that time, 1993 to 2006, its real GDP per capita grew 42% compared to France's 24%. As its government shrank below France's, it's GDP per capita swelled above it -- from 94% of France's to 108%. Sweden cut its government burden and saw its economy take off.
Exhibit H is communism. The idea that an economy can be managed from top to bottom has been tried -- multiple times. It never worked. Not in Russia. Not in China. Not in Cambodia. Not in Cuba. Not in North Korea. Not in Zimbabwe. Not anywhere. The results were widespread poverty, famine and war. The death count due to communism likely exceeds 100 million.
Exhibit I is US history. The US grew from a British colony to the richest and most powerful country on earth. It was founded on the very principle of freedom. After slavery was ended, the US had about as close to a truly laissez-faire free market as ever existed. During that time it enjoyed about 40 years of 4% real GDP growth per year (quintupling the size of the real economy) and absorbed millions of immigrants looking for freedom and opportunity, all while expanding westward and inventing or employing new technologies from steam engines to electricity, automobiles and airplanes.
In 1913 the US Constitution was changed to allow a federal income tax and the Federal Reserve System was established. Sixteen years later came the Great Depression. President Hoover at the time did almost everything counter to free-market principles: he raised taxes, increased federal spending, restricted free trade and encouraged faulty monetary policy.
President Roosevelt did much more of mostly the same: more federal spending, more regulation, more monetary manipulation. By the end of it, Henry Morgenthau Jr., close friend of FDR, FDR's Treasury Secretary and architect of the New Deal said this:
"We have tried spending money. We are spending more than we have ever spent before and it does not work... We have never made good on our promises. I say after eight years of this Administration we have just as much unemployment as when we started. ... And an enormous debt to boot!"
Federal spending went from 3.4% of GDP in 1930 to 10.7% in 1934 -- more than a tripling of such spending in only four years -- and it would remain at those elevated levels throughout the Depression. Yet the unemployment rate went above 10% in 1930 and would stay above that level until February of 1941; it was as high as 20% as late as 1938.
Exhibits J-Z. We could go on with country after country, era after era. Whether we are talking the extremes of all countries on the planet (e.g., Australia vs. Zimbabwe) or relatively small differences (e.g., Sweden vs. France), or whether we are talking 200 years ago (e.g. Adam Smith), 100 years ago (the US vs. Europe) or the last 20 years, the evidence always leads to the same conclusion: that government is best which governs least.
There might be some point at which government is too small, where anarchy or tribal behavior might destroy such things as secure property rights, life and liberty. But with government in the developed world averaging over 40% of GDP, we are nowhere near such a point. In fact, our problem is the opposite: where the government itself becomes the thief, rather than the protector of property and individual rights.
Learning Lessons. Europe seemed to take such lessons to heart. The examples of Ireland and Sweden, above, are standouts, but not alone. From 1993 to 2007, Sweden cut its government spending by over 19% of GDP. Canada, Finland, Norway and Spain all cut theirs by at least 10%. The Euro area average cut was 6% of GDP.
How much did the US cut in that period? One half of one percent (0.5%). Portugal was the only country of the 28 listed to cut less -- 0.3%. And Japan and South Korea were the only ones to grow government in that time period, but still came in under the US in government spending as a fraction of GDP, since they started so low.
Government in the US (federal, state and local) in 2007 spent a larger fraction of GDP than did Australia, Ireland, Japan, Slovakia, South Korea and Switzerland (among 28 listed countries). In the Heritage Foundation's latest Index, the US ranks only 6th, below Hong Kong, Singapore, Australia, Ireland and New Zealand, and its score is falling. Our score was 80.7, with Canada breathing down our neck at 80.5.
And that was before the trillion-dollar bailout Bacchanalian debacle.
In short, the US is rapidly losing its standing as the free-market, limited-government leader of the world. While Europe was shrinking its government, the US stood pat. The US is becoming just another European country -- a high-tax, welfare state with a large public sector and rigid work rules.
Unless President Obama governs counter to all his promises, campaign commercials and supporters' wishes, he will only accelerate this trend, not reverse it.
We already overtook Australia, Ireland and Switzerland by 2007. We'll soon overtake Canada, Spain, Luxembourg and the OECD average. Maybe with our trillion dollar bailouts and stimuli, we already did.
All through this time we have been lied to.
The media called it "laissez-faire capitalism" as the government continued to eat over one third of the economy and regulated us at the equivalent of over 30 New Deals as measured by pages of the Federal Register.
The media called President Bush a free-market extremist, while he increased federal spending from 18.4% of GDP in 2000 to 20.4% in 2006, added prescription coverage to Medicare, teamed up with Ted Kennedy to expand federal spending on education, subsidized ethanol, etc..
The media fed the lie that out-of-control imperialism and warfare increased our defense spending to irresponsible and unsustainable levels. Yet defense spending rose from an historically low 3% of GDP in 2000 to a still-low 4% of GDP as we fought wars in both Iraq and Afghanistan, a level lower than the country experienced for over 50 years, from 1941 to 1994.
The electorate swallowed those lies and elected a man with just 11 years total experience in elective office, only 3 years at the national level, zero military experience and zero executive experience, but the most liberal voting record in the US Senate in 2007.
The conclusion I come to is a sad one: the US is no more.
At least not the US of freedom, free markets and limited government. Just when we should be reinvigorating the US brand of freedom as it had been known for generations, we are accelerating in the exactly opposite direction: salvation through government programs.
Imitating North Korea, Zimbabwe or even France is one way to get "change." Just not the change I was hoping for.
Randall Hoven can be contacted at randall.hoven@gmail.com or via his web site, kulak.worldbreak.com/.
http://www.americanthinker.com/2009/02/economics_evidence_and_enlight.html
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This is an Excerpt from the book "The Fourth turning"
America feels like it’s unraveling.
Though we live in an era of relative peace and comfort, we have settled into a mood of pessimism about the long-term future, fearful that our superpower nation is somehow rotting from within.
Neither an epic victory over Communism nor an extended upswing of the business cycle can buoy our public spirit. The Cold War and New Deal struggles are plainly over, but we are of no mind to bask in their successes. The America of today feels worse, in its fundamentals, than the one many of us remember from youth, a society presided over by those of supposedly lesser consciousness. Wherever we look, from L.A. to D.C., from Oklahoma City to Sun City, we see paths to a foreboding future. We yearn for civic character but satisfy ourselves with symbolic gestures and celebrity circuses. We perceive no greatness in our leaders, a new meanness in ourselves. Small wonder that each new election brings a new jolt, its aftermath a new disappointment.
Gray Champions
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Excerpts
One afternoon in April 1689, as the American colonies boiled with rumors that King James II was about to strip them of their liberties, the King’s hand-picked governor of New England, Sir Edmund Andros, marched his troops menacingly through Boston. His purpose was to crush any thought of colonial self-rule. To everyone present, the future looked grim.
Just at that moment, seemingly from nowhere, there appeared on the streets “the figure of an ancient man” with “the eye, the face, the attitude of command.” His manner “combining the leader and the saint,” the old man planted himself directly in the path of the approaching British soldiers and demanded that they stop. “The solemn, yet warlike peal of that voice, fit either to rule a host in the battlefield or be raised to God in prayer, were irresistible. At the old man’s word and outstretched arm, the roll of the drum was hushed at once, and the advancing line stood still.” Inspired by this single act of defiance, the people of Boston roused their courage and acted. Within the day, Andros was deposed and jailed, the liberty of Boston saved, and the corner turned on the colonial Glorious Revolution.
“Who was this Gray Champion?” Nathaniel Hawthorne asked near the end of this story in his Twice-Told Tales. No one knew, except that he had once been among the fire-hearted young Puritans who had first settled New England more than a half century earlier. Later that evening, just before the old priest-warrior disappeared, the townspeople saw him embracing the 85-year-old Simon Bradstreet, a kindred spirit and one of the few original Puritans still alive. Would the Gray Champion ever return? “I have heard,” added Hawthorne, “that whenever the descendants of the Puritans are to show the spirit of their sires, the old man appears again.”
The Eternal Return
On the earthen floors of their rounded hogans, Navajo artists sift colored sand to depict the four seasons of life and time. Their ancestors have been doing this for centuries. They draw these sand circles in a counter-clockwise progression, one quadrant at a time, with decorative icons for the challenges of each age and season. When they near the end of the fourth season, they stop the circle, leaving a small gap just to the right of its top. This signifies the moment of death and rebirth, what the Hellenics called ekpyrosis. By Navajo custom, this moment can be provided (and the circle closed) only by God, never by mortal man. All the artist can do is rub out the painting, in reverse seasonal order, after which a new circle can be begun. Thus, in the Navajo tradition, does seasonal time stage its eternal return.
Like most traditional peoples, the Navaho accept not just the circularity of life, but also its perpetuity. Each generation knows its ancestors have drawn similar circles in the sand—and each expects its heirs to keep drawing them. The Navaho ritually reenact the past while anticipating the future. Thus do they transcend time.
Modern societies too often reject circles for straight lines between starts and finishes. Believers in linear progress, we feel the need to keep moving forward. The more we endeavor to defeat nature, the more profoundly we land at the mercy of its deeper rhythms. Unlike the Navajo, we cannot withstand the temptation to try closing the circle ourselves and in the manner of our own liking. Yet we cannot avoid history’s last quadrant. We cannot avoid the Fourth Turning, nor its ekpyrosis. Whether we welcome him or not, the Gray Champion will command our duty and sacrifice at a moment of Crisis. Whether we prepare wisely or not, we will complete the Millennial Saeculum. The epoch that began with V.J.-Day will reach a natural climax—and come to an end.
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Funny, I've actually considered that before. I certainly wouldn't complain... wink
Humor (n): That which is intended to induce laughter or amusement
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Ok, copy.
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stimulus break down...... The US is screwed and with it the rest of the western world.
http://2.bp.blogspot.com/_dZJ6SFB1ecE/SY8OJA4kmOI/AAAAAAAAAsA/aDRzmZJNvc0/s1600-h/wash.png
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I am getting only random snippets of news while on the road. What happened to the Republican resistance?
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What always happens with republican resistance? :roll:
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http://patterico.com/2009/02/07/feeling-unstimulated-watch-this/
A quick refresher from Milton Friedman on some eternal truths.
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By JOHN B. TAYLOR
Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.
David GothardThe classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.
Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.
The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.
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Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.
Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.
Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.
Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.
Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.
To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.
Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.
A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.
After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.
Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.
While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.
The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.
The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?
It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.
Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.
Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis," published later this month by Hoover Press.
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BO and his buddies in the House and Senate are getting their way to turning this country into a complete socialist state:
U.S. Taxpayers Risk $9.7 Trillion on Bailouts as Senate Votes
By Mark Pittman and Bob Ivry
Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.
The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps. The Senate is to vote early this week on a stimulus package totaling at least $780 billion that President Barack Obama says is needed to avert a deeper recession. That measure would need to be reconciled with an $819 billion plan the House approved last month.
Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.
“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”
Financial Rescue
The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid.
Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral.
The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp.
The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.
‘All the Stops’
“The Fed, Treasury and FDIC are pulling out all the stops to stop any widespread systemic damage to the economy,” said Dana Johnson, chief economist for Comerica Inc. in Dallas and a former senior economist at the central bank. “The federal government is on the hook for an awful lot of money but I think it’s needed to help the financial system recover.”
Bloomberg News tabulated data from the Fed, Treasury and FDIC and interviewed regulators, economists and academic researchers to gauge the full extent of the government’s rescue effort.
Commitments may expand again soon. Treasury Secretary Timothy Geithner postponed an announcement scheduled for today that was to focus on new guarantees for illiquid assets to insure against losses without taking them off banks’ balance sheets. The Treasury said it would delay the announcement until after the Senate votes on the stimulus package.
Program Delay
The government is already backing $301 billion of Citigroup Inc. securities and another $118 billion from Bank of America. The government hasn’t yet paid out on any of the guarantees.
The Fed said Friday that it is delaying the start a $200 billion program called the Term Asset-Backed Securities Loan Facility, or TALF, to revive the market for securities based on consumer loans such as credit-card, auto and student borrowings.
Most of the spending programs are run out of the Federal Reserve Bank of New York, where Geithner served as president. He was sworn in as Treasury secretary on Jan. 26.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return. Collateral is an asset pledged by a borrower in the event a loan payment isn’t made.
Fed Sued
Bloomberg requested details of Fed lending under the Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month, according to the court docket. Bloomberg asked the Treasury in an FOIA request Jan. 28 for a detailed list of the securities it planned to guarantee for Citigroup and Bank of America. Bloomberg hasn’t received a response to the request.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
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From ‘Hope and Change’ to ‘Fear and Loathing’
Posted By Rick Moran On February 9, 2009 @ 12:00 am In . Feature 01, . Positioning, Money, Politics, US News | 87 Comments
There is something surreal about the debate surrounding the stimulus bill which now appears headed for passage in the Senate. On the one hand, you have conservative Republican lawmakers railing against the bill’s pork-laden provisions with all the earnestness and fervor of the born-again, fiscally responsible politicians they have suddenly become. It’s as if we are getting lectures in morality from a pimp who, after seeing the light and embracing Christ as his savior, now feels compelled to preach against the evils of prostitution. You are happy for the transformation but leery about how long it will last.
Whether GOP legislators are now beating the tambourine for fiscal responsibility out of conviction is a matter open for debate, although being trounced at the polls may be reason enough for them to suddenly rediscover their conservative roots.
And what of the Democrats and their equally sudden metamorphosis from earmark crazy gigolos, bedding down any lobbyist who winks in their direction, to warriors for safeguarding the taxpayers’ money? Admittedly, the Democrats have a much harder sell given the blatant and sometimes comical fraud they are trying to perpetrate on a public scared out of its gourd by a president whose hyperbole and predictions of [1] “catastrophe” if the bill is not passed immediately is matched only by his cynical refutation of any semblance of the “bi-partisanship” he so blithely promised to bring to Washington during the campaign. No one doubts the economy is bad and getting worse. But when the president of the United States stands up and asks us to give in to our fears, to blindly obey his call to pass a bill with tens of billions of dollars in spending that even the bill’s proponents say is wasteful, one has to ask what happened to the party who once told us: “All we have to fear is fear itself.”
[2] Rep. David Obey (D-WI):
How money is spent should be far from the biggest concern about the stimulus package, its chief author, House Appropriations Committee Chairman David Obey (D-Wisc.) said Friday.
“So what?” Obey asked in response to a question on NPR’s “Morning Edition” about the perceived lack of direction from Congress as to how money in the stimulus should be spent. “This is an emergency. We’ve got to simply find a way to get this done as fast as possible and as well as possible, and that’s what we’re doing.”
Thus speaketh the voice of fiscal responsibility.
And thus speaketh a president who, for all his rhetorical gifts, can’t seem to muster the words that would give the American people the one thing desperately needed at this point in American history — hope.
That’s right. The candidate of “Hope and Change” has decided to be a president who espouses “Fear and Loathing.” Fear of financial Armageddon unless we do as we are told and blindly give in to his $900 billion panic panacea for the economy and loathing of the opposition — an opposition Obama unfairly portrays as opposing him out of spite and because a popular talk radio host is telling them what to do.
It is a far cry from the way Franklin Roosevelt and Ronald Reagan handled economic crises that in some ways were more dire than what Barack Obama is facing today. Both men came to office at a time when the American spirit was limping and lost. Both men were confronted with unprecedented economic problems (double digit inflation and interest rates in 1981 were an impossibility according to the books).
And yet, both men eschewed fear mongering and sought to lift the people out of themselves in order to bring back hope and allow the natural optimism of the American people to come to the fore. Arguments rage to this day whether FDR’s massive spending helped or hurt the economy. And Reagan’s tax cuts began a spiral of deficits that, save for a brief period in the 1990s, fostered a climate of “let the kids pay for it” on Capitol Hill.
But few can argue that FDR and the Gipper didn’t succeed in changing the dynamics of the crisis they were facing by inspiring the people to believe in themselves again and that better times were ahead.
Obama does not want Americans to believe in themselves. He wants them to [3] believe in him:
If we don’t move swiftly to put this plan in motion, our economic crisis could become a national catastrophe. Millions of Americans will lose their jobs, their homes, and their health care. Millions more will have to put their dreams on hold.
The truth should be dawning on all of us just about now that Democrats, Republicans, economists, Wall Street wizards, and even the high priests of monetary policy at the Federal Reserve have no idea how bad things are going to get or whether anything Congress does can improve the situation — much less stave off disaster. And that means that the only thing we have to hang our hats on is the credibility and trustworthiness of the president of the United States.
Instead of instilling confidence, Obama is selling fear. Instead of raising us up, he is crushing us with his rank appeal to partisanship. Instead of statesmanship, we get gimmicks like his stimulus bill that the [4] Congressional Budget Office tells us will harm the economy in the long run.
It is amazing and frightening to think that less than three weeks into his presidency, Barack Obama is at risk of losing his credibility as a leader by threatening disaster unless his will be done. He may very well get what he wants when Congress passes this monstrosity despite it monumental flaws.
But at what cost? And is Obama capable of being the kind of leader who can inspire hope rather than generate fear?
So far, he has failed in that regard.
Article printed from Pajamas Media: http://pajamasmedia.com
URL to article: http://pajamasmedia.com/blog/from-hope-and-change-to-fear-and-loathing/
URLs in this post:
[1] “catastrophe”: http://news.yahoo.com/s/mcclatchy/20090205/pl_mcclatchy/3161647
[2] Rep. David Obey (D-WI):: http://briefingroom.thehill.com/2009/02/06/obey-on-stimulus-waste-so-what/
[3] believe in him:: http://www.washingtontimes.com/news/2009/feb/07/obama-national-catastrophe-if-bill-fails/
[4] Congressional Budget Office: http://www.washingtontimes.com/news/2009/feb/04/cbo-obama-stimulus-harmful-over-long-haul/
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How Government Created the Financial Crisis
Research shows the failure to rescue Lehman did not trigger the fall panic.
By JOHN B. TAYLOR
Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.
The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.
Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.
The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.
Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.
Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.
Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.
Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.
Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.
To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.
Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.
A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.
After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.
Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.
While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.
The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.
The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?
It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.
Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.
Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis," published later this month by Hoover Press.
Please add your comments to the Opinion Journal forum.
Printed in The Wall Street Journal, page A19
http://online.wsj.com/article/SB123414310280561945.html
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By BENJAMIN E. SASSE and KERRY N. WEEMS
Twelve years ago, President Bill Clinton signed a law that he correctly proclaimed would end "welfare as we know it." That sweeping legislation, the Personal Responsibility and Work Opportunity Act, eliminated the open-ended entitlement that had existed since 1965, replacing it with a finite, block grant approach called the Temporary Assistance to Needy Families (TANF) program.
TANF has been a remarkable success. Welfare caseloads nationally fell from 12.6 million in 1997 to fewer than five million in 2007. And yet despite this achievement, House Democrats are seeking to undo Mr. Clinton's reforms under the cover of the stimulus bill.
Currently, welfare recipients are limited to a total of five years of federal benefits over a lifetime. They're also required to begin working after two years of government support. States are accountable for helping their needy citizens transition from handouts to self-sufficiency. Critically, the funds provided to states are fixed appropriations by the federal government.
Through a little noticed provision of the stimulus package that has passed the House of Representatives, the bill creates a fund for TANF that is open-ended -- the same way Medicare and Social Security are.
In the section of the House bill dealing with cash assistance to low-income families, the authors inserted the bombshell phrase: "such sums as are necessary." This is a profound departure from the current statutory scheme, despite the fact that, in this particular bill, state TANF spending would be capped. The "such sums" appropriation language is deliberately obscure. It is a camel's nose provision intended to reverse Clinton-era legislation and create a new template for future TANF reauthorizations.
Most liberals have always disliked welfare reform; critics of TANF believed Mr. Clinton supported it only to get re-elected. Some asserted it was racist or intended to punish the poor. Others claimed that the funds to assist single mothers with child care, transportation and job training were never as generous as were allegedly promised. Today, the fact that disqualification from the program is based on failing to secure a job within two years seems especially harsh given this economic crisis.
There are legitimate objections to the program that are worth debating. But this is not an open debate: It is a near secret provision buried deep in a more than 600-page piece of legislation.
The TANF provisions of the stimulus bill, like the nearly $100 billion Medicaid provisions, are less about stimulating the economy, and more about the federal government absorbing the states' budget problems. State budgets may be swamped with those needing temporary relief, and a contingency fund could help. But it should be a definite amount, not a precedent-setting, open-ended amount. (If the initial TANF allocation is not sufficient, Congress could appropriate another definite amount.)
The offending language is not in yesterday's Senate version of the bill, but that provides little comfort. The attempt to undo welfare reform has not been transparent, and the conference committee provides the perfect closed-door environment for slipping in "such sums" language into the final bill without public scrutiny.
Welfare reform was arguably the most important legislative development of the mid-1990s. It is bad policy to jettison it with five words during an economic crisis.
All who are concerned about our nation's unfunded obligations should be on guard against attempts to slip "such sums" language into any conference committee bill. Welfare policy is too important to change with a stealth maneuver.
Mr. Sasse, former U.S. assistant secretary of Health and Human services, teaches policy at the University of Texas. Mr. Weems, former vice chairman of the American Health Information Community, held the position of administrator of the Centers for Medicare and Medicaid services until last month.
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http://austrianeconomists.typepad.com/weblog/2009/02/how-corrupt-is-our-language-in-economic-discourse.html
How Corrupt is Our Language in Economic Discourse?
The vast majority has no clue what economic science is. To them economics is about political ideology or practical business. There are no laws of economics. We economists have permitted this to occur. We have allowed politicians and the public to demand of our discipline results which the discipline cannot produce but which nevertheless if we pretend we can produce those results will provide power and prestige. Hayek argued in the early 1930s that the fate of the economist was to be called upon to address questions of pressing political concern only to have his advice discounted as soon as it was uttered. Why? Because economics as a discipline puts parameters on people's utopias. It gives us primarily "negative" knowledge --- we live in a scarce world, there is no such thing as a free lunch, we cannot assume what it is we hope to prove, ought cannot presuppose can, and can doesn't mean we ought, etc. In the 1980s, Hayek wrote that: "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design."
But that is not the "economics" we heard about last night from President Obama. The economics is a POLITICAL economics. It is an economics that at the service of political parties in power --- either right or left. Conservative Keynesianism and Liberal Keynesianism, but it is still Keynesianism however you slice it. And as Deirdre McCloskey has put it, when your intellectual range is from M-N you think you are being open minded when you look at M and you look at N, but you certainly don't see A or Z. President Obama actually argued that no serious economist has argued against the need for government action with respect to the stimulus package. The leading economists, he argued, for Bush I and Bush II, as well as his team of economists all agree that only government can break the economy out of this vicious spiral downward. He must not have read the Christian Science Monitor yesterday. Robert Higgs's op-ed is best on his historical research, which is among the best on the subject, dealing with the 1920s-1940s.
President Obama presents himself as a pragmatist who wants us to get beyond the stale ideological debates of the past. But he is simply trapped in the conventional wisdom of Keynesian economics. Why not take a few minutes --- since we are talking about actions which will transform the economic landscape of the US --- and think in a "non-Whig" fashion about economic ideas. Consider once again the arguments that "lost" due not to intellectual defeat, but political expediency. What were those pre-Keynesian ideas regarding the economy and the proper role of monetary and fiscal policy? President Obama said he cannot take seriously criticisms of fiscal irresponsibility from politicians that when they were in power doubled the national debt. Good point. But does that mean that fiscal irresponsibility is off the table as a concern? How pragmatic is thtat, as opposed to how politically convenient is that excuse? If President Obama wants to break from the stale ideology of the past, then he should start with breaking with the policy path of the past. NOTHING he is doing is radically different from what President Bush did before him. It is the same strategy being pursued just on "steroids" (and he is disappointed with A-Rod?!). No answer has yet been given as to why President Bush's bailout package didn't work while his stimulus package will. In fact, when pushed on that question President Obama really just said, we might even need to spend more down the road when this doesn't give us the result we want. And the claim is just that confidence has to be restored to the market and only government can do that.
The belief that only government can do this is the real stale ideology of the past. What is really causing the problems in this economists opinion, is that government action has produced an uncertain investment environment. The rules of ownership and control are unclear, or clear but counter-productive for indiviudual initiative; monetary policy guided by the rhetoric of fighting inflation, but fearing deflation has been so loose that long term inflation that threatens the viability of the dollar should be a real concern to investors; and fiscal policy which is so out of control that US public debt will bankrupt the future generations with an astronomical tax burden and/or a monetization that will destroy the currency through hyper-inflation. Whatever way you slice it, our current policy path is the PROBLEM not the SOLUTION. But if your intellectual range is from M-N (lets say Larry Summers to Paul Krugman), then don't be surprised when in being "rational", examining the "evidence", weighing the "arguments" and assessing the "theories", you fail to consider the fiscal arguments of a James Buchanan, the monetary and capital theories of F. A. Hayek, the comparative institutional analysis of law and politics in Ronald Coase, and the monetary and fiscal policy arguments of Milton Friedman. Each of these gentlemen, President Obama, won the Nobel Prize in Economic Science. Their ideas may have been used by politicians in rhetoric, but none have been political appointees (well Friedman served as an economist during WWII, Hayek and Buchanan fought for their countries in WWI and WWII respectively) and their ideas have not been used in political practice --- no denationalization of money; no balanced budget ammendment; no full scale school voucher program, drug legalization, monetary rule, etc.. Friedman had more success than the others in carrying the day, but compare the policy prescriptions in Capitalism and Freedom and Free to Choose with the reality of public policy that we got even under Ronald Reagan, and compare the policy prescriptions in Hayek's The Constitution of Liberty with what was achieved under Margaret Thatcher. There is a far distance from the ideas in these books to the reality of the policy world. A really radical notion of hope and change might be to get government out of the business of attempting to manage the economy, stop demanding of economics results that it as a discipline cannot produce, and lets depoliticize political economy.
Economics is NOT social engineering, it is instead a phiosophical science. Political economy is the best label for it, but at its best it is not political in the ordinary meaning of that term. And the intellectual range is not limited to M-N, but instead travels at least from A-Z. Because President Obama has failed to grasp this, to him economics disagreements are inherently political, economics science is Keynesian, and economic policy is pro-active.
Posted by Peter Boettke on February 10, 2009 at 10:28 AM | Permalink
The artical mentioned above which is in the Christian Science Monotor is worth a look as well
http://www.csmonitor.com/2009/0209/p09s01-coop.html
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Nice Q & A about the Stimulus package:
http://www.reason.com/news/show/131632.html
The Reason.com Stimulus Symposium
Leading economists sound off on the $800 billion stimulus package
February 11, 2009
Yesterday, the United States Senate passed a sweeping $800 billion stimulus plan that President Barack Obama says he would like to sign into law as soon as possible. “There is no disagreement,” Obama has declared, “that we need action by our government, a recovery plan that will help jump-start the economy.”
Reason.com asked a panel of leading economists for their response to the stimulus package.
Robert Higgs
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
This legislation entails the addition of a huge increment to the burden of debt the public must bear, directly or indirectly. It redirects resources on a grand scale from uses consumers value to uses politicians value and thereby impoverishes the general public. I've written along these lines at greater length here and here.
2. Is there anything in the stimulus package that you think will work? If so, what?
All of it works. The trouble is what it works for, which is to reward virtually every special interest allied with the Democrats and to guarantee the recipients' future support for the pirates who are now sending the booty their way. It is eerily similar to the New Dealers' use of the Works Progress Administration and other big relief programs to buy votes and bulk up their political machine.
3. Obama says that doing nothing is not an option. Do you agree with that?
For the economy in general, doing nothing is vastly preferable to doing the stimulus package, but doing nothing is not a political option; indeed, it would be political suicide. Which shows that only by adopting economically destructive policies can politicians survive. Do you see something wrong in this picture? Given the dominant ideology and the political institutions that now exist, economically rational public policy is incompatible with political viability. See here. Having hit bottom, the politicians can only do one thing: keep digging. If Hell is down there, they'll reach it, sooner or later.
Robert Higgs is senior fellow in political economy for The Independent Institute and editor of the Institute's quarterly journal The Independent Review.
Jeffrey Rogers Hummel
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
The biggest problem with the stimulus package is the amount by which it increases total government spending, the national debt, and therefore future taxes.
2. Is there anything in the stimulus package that you think will work? If so, what?
If by "work," you mean alleviate the depression, there is nothing in the stimulus that will do so.
3. Obama says that doing nothing is not an option. Do you agree with that?
Not at all. The best thing the government could do is to cut spending and taxes. Doing nothing is a second-best option.
Jeffrey Rogers Hummel is associate professor of economics at San Jose State University and the author of Emancipating Slaves, Enslaving Free Men: A History of the American Civil War.
Megan McArdle
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
Even if you accept the theory of the stimulus, the package is not well-structured. A good stimulus package should be designed to move money out the door rapidly, then stop. This program is designed to move money out the door slowly, and keep going. Moreover, the vast size of the package is going to add big costs in the not-so-distant future which have barely been discussed.
2. Is there anything in the stimulus package that you think will work? If so, what?
Expanding unemployment benefits and food stamps—the "automatic fiscal stabilizers"—are relatively low cost and transparent. They target money to the people whose consumption is contracting the most, and they will naturally shrink as the economy recovers.
3. Obama says that doing nothing is not an option. Do you agree with that?
I would like to see more proof of the statement that doing something is better than doing nothing. The Keynesian arguments upon which Obama's statements are based work out neatly in the textbooks, but there's little proof that they actually make things better, in aggregate, in the real world. And the current situation is all the proof you need that there are massive holes in our old textbook models.
Megan McArdle writes about economics, business, and politics at The Atlantic.
Deirdre McCloskey
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
It's not targeted, not temporary, not timely. Especially the last. Too slow, too slow, alas.
2. Is there anything in the stimulus package that you think will work? If so, what?
At less than full employment the Keynesian stuff works. So the minority of the quickie expenditures will "put people back to work"—until we return to almost-full employment, which will happen pretty quickly in the recovery. At that point the stimulus will merely crowd out private investment. In the short run people might get more cheerful, too, always a good thing. But in two years the recession will be over. And the myth will grow up—rather similar to the ones about FDR and war expenditure—that Obama did it. Essentially, Obama will get credit for the self-adjusting character of the economy. I reckon we should start preparing that other face of Mount Rushmore.
3. Obama says that doing nothing is not an option. Do you agree with that?
I agree on the money and banking side, not on the real expenditure side. We are in a financial panic, which happens only in a few recessions (1907, 1929). In other words, the TARP is way, way more important than the stimulus. Truly, Something Must Be Done about the banks. That's a logic of second best—the government fouled up the banking system (the most regulated part of the economy), so maybe the government should help clean up the mess. Someone needs to, and I reckon it's not going to be the Icelandic government. J.P. Morgan, where are you when we need you?
Contributing Editor Deirdre McCloskey teaches economics, history, English, and communication at the University of Illinois at Chicago. Her latest book is The Myth of Statistical Significance.
Allan H. Meltzer
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
No thought is given to the medium and longer-term consequences. We are very likely to have large inflation in the next few years.
2. Is there anything in the stimulus package that you think will work? If so, what?
Yes, extending unemployment compensation, tax subsidy to homebuyers, some of the permanent tax cuts.
3. Obama says that doing nothing is not an option. Do you agree with that?
Yes. But doing the right things is the option.
Allan H. Meltzer is the Allan H. Meltzer University Professor of political economy and public policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.
Jeffrey A. Miron
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
The package is focused on increased spending and tax cuts that fail to improve incentives. I am extremely skeptical that the U.S. has $500 billion in additional productive spending, especially if done in a hurry. In most areas government spending is too high, not too low.
2. Is there anything in the stimulus package that you think will work? If so, what?
Roughly, no.
3. Obama says that doing nothing is not an option. Do you agree with that?
Doing nothing is always an option, and in my view it would be better than the stimulus. Better yet, we should fix those aspects of current policy that ought to be fixed independent of the crisis. See here and here.
Jeffrey A. Miron is a senior lecturer in economics at Harvard University.
Michael C. Munger
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
The creation of new bureaucratic and regulatory structures, restrictions on creation of liquidity. The genius of the American system, for all its flaws, has been that we can mobilize lots of liquidity quickly. Silicon Valley exists because you could sit down, make a pitch, and get $10 million that afternoon.
If we start governing finance like we govern universities, or city councils, we are going to lose that. Having committees, and a bunch of forms to sign off on, and stamps...Hernando de Soto wrote about systems like this. They strangle business, investment, and growth.
2. Is there anything in the stimulus package that you think will work? If so, what?
Keynes said that Y=C+I+G. Borrowing money to raise "G" (government spending) will work, I suppose. But the cost to future generations is enormous. I am amazed by the hypocrisy of both sides. John McCain calls the stimulus "intergenerational theft." Well, he's right, but he came late to this wisdom. The Republicans have been just pouring out new deficit spending since 2002.
And then Obama says he doesn't want to do tired old ideas, and failed economics. But he is doing exactly what the Republicans did: huge deficit-financed spending on largely useless or irrelevant programs designed to reward political friends. The only thing that's different is the identity of the "friends."
So, some of the spending may increase measured GDP slightly for 2009. But the price is increased inflationary pressures in 2010, and the squandering of the birthright of our children for decades.
3. Obama says that doing nothing is not an option. Do you agree with that?
This makes me furious. Doing nothing is not an option—anymore. Because first President Bush, and now President Obama, have engaged in a completely irresponsible fear campaign. "We must do something, or you should cower in helpless fear, behind locked doors, in darkened rooms!" Presidents should not use this kind of fear as a weapon to pass their pet projects. Roosevelt, for all his flaws, got it right: "The only thing we have to fear is fear itself." Well, not quite right: it turns out we need to fear fear itself, and also President Obama.
The sensible thing to do at this point would be to make an offer, at 40 cents on the dollar, for the "toxic" assets, both the collaterlized debt obligations packaged by Freddy and Fannie, and also the credit default swap "insurance" derivatives sold by AIG (and some other firms, but mostly AIG). Since AIG wrote so many "naked" CDSs, even for people who don't own the underlying, or "insured" asset, they are going to keep hemorrhaging until someone puts a floor on the value of the assets.
So, a one-time, take it or leave it, offer. One big reason that credit markets are frozen is the uncertainty created by Treasury indecision and vagueness. Asset owners are holding out for a better price, and they are trying to negotiate through the Senate, not the Treasury. Obama needs to lead here, and say, "Take this partial buyout, or hang on to the asset at your peril. There is no better deal coming tomorrow."
Michael C. Munger is professor of economics and chair of the department of political science at Duke University.
William A. Niskanen
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
Nothing in the package increases the incentive to work, save, invest, or increase productivity. Any spending stimulus should be limited to increasing the demand for housing, in order to increase the value of the mortgage-backed securities that are limiting the ability of the banks to lend.
2. Is there anything in the stimulus package that you think will work? If so, what?
No. Almost all of the tax cuts are welfare payments channeled through the tax system, not reductions in marginal rates.
3. Obama says that doing nothing is not an option. Do you agree with that?
No fiscal stimulus program is a viable option. Use monetary policy to stimulate demand. Consider an optional fiscal stimulus plan consisting only of selective marginal tax rate cuts and a temporary subsidy to increase the demand for housing.
William A. Niskanen is chairman emeritus and a distinguished senior economist at the Cato Institute.
Johan Norberg
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
The biggest problem is that it destroys savings by using them on projects that the majority did not think were reasonable a year ago. We take capital that would have been available to companies and poorer countries and use it to create a stimulus that will have its largest impact after the economy has already turned the corner—so that it will contribute to another round of boom and bust.
2. Is there anything in the stimulus package that you think will work? If so, what?
That depends on what the meaning of "works" is. The tax credit will work. Not as they intended it, though. But it gives people more money, which they will save because they can see that the government is building up a huge deficit that they will be forced to pay for in the future. And then those savings will come in handy.
3. Obama says that doing nothing is not an option. Do you agree with that?
No. Every single crisis in the last 100 years shows that doing nothing would have been preferable to doing bad things. But he is right that it is not an option in the current political climate. Now what applies is the politicians' logic from Yes, Prime Minister: "Something must be done. This is something. Therefore it must be done."
Johan Norberg is a Swedish author and historian of ideas, and a senior fellow at the Cato Institute. He is currently writing a book on the financial crisis.
Mark Perry
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?
There are many problems with the stimulus package, but there are several that stand out. First, like all fiscal stimulus packages in the past, the current one will not impact the economy at the right time for the intended stimulus effect, due to the inevitable problems of long lags. Much of the intended expansionary fiscal effects won't happen until next year and even 2011, and it's likely the economy will have recovered sufficiently by then so that the fiscal stimulus will be unnecessary, and might actually be destabilizing. Second, the fiscal stimulus has to be paid for eventually in the form of higher taxes, which will have a negative economic effect in the future, i.e. the "fiscal child abuse" effect. That is, any positive short-term effects of this stimulus package will be more than offset by future negative effects in the form of reduced future economic growth, decreased investments, and lower incomes.
2. Is there anything in the stimulus package that you think will work? If so, what?
The fiscal stimulus will work only in the sense that it will serve to stimulate the approval ratings of the President and other politicians.
3. Obama says that doing nothing is not an option. Do you agree with that?
No. The market economy has an underappreciated, but amazing ability to correct and reverse economic imbalances and problems on its own, and that economic self-correcting resiliency works best in the absence of government interference.
Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.
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This blurb, combined with a NYT table I'll post below, suggest we are stimulating an economy that will recover on its own.
U.S. retail sales jumped 1 percent in January, reversing a six-month declining trend and defying economists' expectations by posting the biggest increase in 14 months.
The Commerce Department says January retail sales rose a percent from December after having fallen for six straight months. Wall Street economists surveyed by Thomson Reuters had expected January sales to show a drop of 0.8 percent. They plunged 2.7 percent in December, which had the weakest holiday selling season since at least 1969.
The January report shows strong increases in sales of automobiles and in general merchandise stores -- the "big box" outlets -- though sales by department stores, carrying fewer varieties of items, posted a decline.
http://www.foxnews.com/politics/2009/02/12/commerce-department-says-retail-sales-unexpectedly-rebounded-january/
(http://graphics8.nytimes.com/images/2008/01/23/opinion/23opchart.600.jpg)
By BRUCE BARTLETT
Published: January 23, 2008
The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing. — Bruce Bartlett, author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.”
http://www.nytimes.com/2008/01/23/opinion/23bartlett.html
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As always, sound, pithy, and penetrating analysis from Scott Grannis:
http://scottgrannis.blogspot.com/2009/01/economic-stimulus-plan-is-gigantic.html
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"On Thursday Sept 15, 2008 at roughly 11 AM The Federal Reserve noticed a tremendous draw down of money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two. Money was being removed electronically.
The Treasury tried to help, opened their window and pumped in $150 Billion but quickly realized they could not stem the tide. We were having an electronic run on the banks. So they decided to closed down the accounts.
Had they not closed down the accounts they estimated that by 2 PM that afternoon. Within 3 hours. $5.5 Trillion would have been withdrawn and the entire economy of the United States would have collapsed, and within 24 hours the world economy would have collapsed."
This is scary stuff, folks. See the C-Span video at the link below:
http://atlasshrugs2000.typepad.com/atlas_shrugs/2009/02/tight-before-the-election-of-president-hussein-an-electronic-run-on-the-banks.html
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Chad:
How did you find out about this site? What is its track record?
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I've seen these same figures cited elsewhere on several occasions, along with laments that the MSM is ignoring the story. None of the sources, however, have struck me as particularly reliable and most go on to do a lot of Soros bashing. If true, I'd sure like to see a well sourced piece.
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@ Guro Crafty:
I only found the Atlas Shrugs site today doing research on this Jankorski interview. (it's in my favs now, tho.)
Here is Glenn Beck's commentary on the video: http://www.glennbeck.com/content/articles/article/198/21350/?ck=1
@ Guinness:
Why would a Democratic Represenative go on C-Span and make up this story? I would like to hear your take on it.
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Chad:
Although GB occassionally says things with which I agree, mostly I find him not to be worth the time it takes to listen to him.
As for the credibility and respect that should be given someone simply because they are a Dem Congressman? Surely you jest , , ,
TAC,
Marc
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found this: http://seekingalpha.com/article/120220-kanjorski-and-the-money-market-funds-the-facts seems to take the wind out of the story a bit. :|
Kanjorski and the Money Market Funds: The Facts (Felix Salmon)
With the Kanjorski Meme still spreading (see Ben Smith, Andrew Leonard, Moldbug, and more), I think I'm finally able to squash it with some hard figures: there never was a $500 billion outflow from any asset class in the space of a couple of hours or even weeks, and the Fed never shut down or froze any money-market accounts.
This is not the first time that Kanjorski has made these allegations. But first, it's worth going through the timeline.
On September 15, Lehman Brothers failed. The Reserve fund -- which was $64 billion that morning, and which had a substantial investment in Lehman debt -- saw $10 billion of withdrawals that day. The following day, September 16, it saw another $10 billion of withdrawals; on September 17, when withdrawals had reached a total of about $40 billion, it announced that redemptions would take "as long as seven days"; as we all know, that was massively overoptimistic.
The news from The Reserve was gruesome, and total withdrawals from money-market funds reached $104 billion that day, according to Crane Data. Another data provider, ICI, says that as of the close of business on the 17th, money-market funds had a total of $3,549.3 billion, which was a fall of just $30.3 billion from their level a week previously.
The following day, September 18, was bad but not quite as bad, with withdrawals of $57 billion, according to Crane Data. By the 24th, according to ICI, the total was $3,456.2 billion -- a drop of another $93.1 billion from the 17th.
On September 19, worried about outflows from money-market funds, the Treasury announced that, for a fee, it would guarantee -- not freeze -- eligible money-market mutual funds. But the details of the plan still weren't clear as of September 21, when Treasury said it was "continuing to develop the specific details surrounding the temporary guaranty program".
Substantially all of the outflows came from institutional accounts: retail investors never panicked. If you look at the weekly data for bank savings deposits, including money market deposit accounts, they stood at $3,167.4 billion on the 15th, and rose to $3,191.4 billion on the 22nd.
So where does the $500 billion outflow number come from? Would you believe: the Sunday New York Post, which on September 21 published a story headlined "Almost Armageddon" featuring this paragraph:
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening [on Thursday]. The total money-market capitalization was roughly $4 trillion that morning.
Remember where we're at here: the end of the longest week in financial-market history, when no one -- traders, reporters, Congressmen, you name it -- was getting much if any sleep. Simple errors can easily be made, numbers can get fuzzy, everything was moving very fast and confusingly.
In any case, three days later, on September 24, Kanjorski held a hearing on Capitol Hill with Treasury secretary Hank Paulson. Here's what he said:
I was talking to someone, one of my friends on Wall Street today, asking him to verify the money market run. It was anonymously reported in some of the New York papers, and I think I have evidence of it in some of our conversations, whether it was with you or with other experts, that between 11:00 and 11:30 on Thursday last, the money markets in the United States were hit by a run that amounted to about $500 billion of $4 trillion in accounts and that as I understand it, it was essential for the Federal Reserve to pump $105 billion into the system and to suspend operations or the money market accounts of the country would have, in fact, failed.
One, you should tell us that.
Kanjorski is clearly fishing here: he's talking about anonymous newspaper reports and vague "conversations" and anonymous Wall Street "friends", and basically asking Paulson to confirm his suspicions. Which, naturally, Paulson doesn't do, because the suspicions weren't actually true. That said, however, Paulson's being-polite-to-the-Congressman answer doesn't explicitly say that Kanjorski's numbers are false.
After that, we didn't hear much more about this meme until Kanjorski resuscitated it on C-Span, this time citing the Federal Reserve as his data source, and beefing up the numbers for good measure:
On Thursday at about 11 o'clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the United States to the tune of $550-billion was being drawn out in in a matter of an hour or two...
We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. ... If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.
This is all, frankly, fiction, and it's not clear where most of it came from, although maybe Kanjorski's "friends" on Wall Street are the same people as Michael Gray's sources at the New York Post. Thinking back to that crazy week it's easy to get details wrong, especially when you're speaking off the cuff on a call-in show. But let's stop treating it as though there's any substance to it. Please
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Anyone trying to understand why the credit mess keeps getting messier needs only to have sat through Wednesday's hearing of the House Financial Services Committee. The eight bank CEOs were mere props. The stars were the politicians, who managed to demand more loans for consumers while simultaneously giving lenders new cause to wonder if they'll ever be repaid. This gathering of the esteemed Committee on Doubt and Uncertainty occurred as markets desperately need less of both.
AP
Barney Frank.
Chairman Barney Frank's hearing was intended to flay the CEOs for not lending enough. It fell flat as political theater because banks have actually increased their lending in recent months. The people who aren't lending more are investors in nonbank financing such as asset-backed securities.
In fact, the nonbank credit market is normally much bigger than bank lending. But new issues backed by auto loans, credit cards and the like have been rare this year, as markets wonder how the government's next move will change the value of such investments. Buyers and sellers of existing securities are "sitting on the sidelines," according to Asset-Backed Alert, waiting for still another Washington recalibration of risk and reward.
Most investors who lend in these markets are not recipients of financial bailout money, so Congress can't simply browbeat them into making another big bet on the American consumer. They've been burned badly. They need reassurance that our capital markets operate with a consistent set of rules. The Committee on Doubt and Uncertainty offered only the assurance that the rules will keep changing.
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Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.
Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits.
The safest bet is a huge new rescue of those who borrowed too much, and Mr. Geithner has already promised another $50 billion of your tax dollars. Meanwhile, Mr. Frank made clear that Congress's obsession with promoting homeownership is alive and well. He explained that his foreclosure moratorium pending the Geithner plan is to avoid a circumstance akin to a soldier who is killed after a ceasefire agreement but before the news has reached the front. Readers who don't equate moving into a rental with death in combat should direct their comments to Mr. Frank's office.
Maxine Waters (D., Calif.), for her part, demanded to know why some banks don't modify loan terms until borrowers are 60-days delinquent. Heck, why stop at mortgages? Shouldn't lenders convert all of their money-making contracts into losers?
If potential investors weren't frightened enough, Nydia Velazquez (D., N.Y.) then seized the microphone. She demanded to know if the assembled CEOs would back "cramdown" legislation, which rewrites the bankruptcy code to allow judges to reduce the amount people owe on their mortgages. So investors who might have jumped back into housing now must calculate the odds that this provision will pass the Senate, and if it does, how much bankruptcy judges will reduce their overall returns.
Goldman Sachs CEO Lloyd Blankfein pointed out that a potential consequence of bankruptcy cramdowns is that "less capital flows into this market." The only CEO who sided with Rep. Velazquez was Citigroup's Vikram Pandit, who also agreed with nearly everything the politicians had to say. This is what a CEO does when his bank becomes a de facto ward of the state, as Citi now is. Unfortunately, Mr. Pandit's support for cramdowns will only discourage nongovernment investors in housing markets.
All in all, just another day's work for the Committee on Doubt and Uncertainty, which continues to believe that proposing more ways to punish lenders will somehow produce more lending.
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And Carter's second term begins....
http://www.nytimes.com/2009/02/14/opinion/14ryan.html?em
February 14, 2009
Op-Ed Contributor
Thirty Years Later, a Return to Stagflation
By PAUL D. RYAN
Washington
CONGRESS has made a terrible mistake. Amid a rhetorical debate centered on words like “crisis,” “emergency” and “catastrophe,” it acted too fast. While arguments were made about the stimulus bill’s specific components — taxpayer money for condoms, new green cars and golf carts for federal bureaucrats, another round of rebate checks — its more dangerous consequences were overlooked. And now the package threatens a return to the kind of stagflation last seen in the 1970s.
To get a sense of the pressures ahead, we must first assess our fiscal health. We started this year with a projected trillion-dollar budget deficit for the 2009 fiscal year. In 2008, we spent $451 billion just to pay the interest on our debt.
With the stimulus bill now becoming law, we’re digging even deeper into debt. The headline price tag of $787 billion doesn’t include the extra $348 billion it will take to finance the new debt, or what it will cost when Congress extends the spending programs in the bill, as is likely — as much as $2 trillion more. Add in the billions that are being used to prop up the financial system, and when the dust settles on 2009, with millions of baby boomers retiring and entitlement spending exploding, taxpayers will face a financial nightmare.
From a global perspective, the picture only looks worse. As we have debated how much money to borrow and spend in hopes of jump-starting our economy, we’ve ignored the worldwide stimulus binge. China, Europe and Japan are all spending hundreds of billions of dollars they don’t have in hopes of speeding up their economies, too. That means the very countries we have relied on to buy our bonds, notably China and Japan, are now putting their own bonds on the global credit markets.
American Treasury bonds have been selling briskly on the global credit markets because they have been the calm in the storm of the global credit crisis. This has allowed advocates of borrow-and-spend to argue that for the United States, borrowing is uniquely cheap. But what happens when there is an excess supply of bonds on the worldwide markets? The cost of borrowing will rise. Today we fear deflation, but eventually our fears will turn to inflation.
It seems that no one in Washington is discussing what happens when the world begins this gargantuan borrowing spree. How high will interest rates rise? And more fundamentally, who will have the money to buy our bonds? It is possible that the Federal Reserve will succumb to pressure to “monetize” our debt — that is, print new money to buy our bonds. In fact, the Fed is already suggesting that it will buy long-term Treasury securities in order to lower borrowing costs. If it does, then our money supply, which has already increased substantially over the past year, will grow even faster.
As Milton Friedman noted, “Inflation is always and everywhere a monetary phenomenon.” It is a situation in which too few goods are being chased by too much money.
To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of confidence. It calls into question the value of our money. And while we all share in the pain, the people whom inflation hits hardest are elderly people who live on fixed incomes, those in the middle class who are struggling to save for retirement and college and lower-income people who live paycheck to paycheck.
Combine high inflation and high unemployment and you have stagflation. Hindsight shows how the pain of the late 1970s and early 1980s could have been avoided, yet we’re now again planning to borrow and spend — and raise taxes — as President Jimmy Carter did. Soon we may again find ourselves watching a rising “misery index” of inflation and unemployment together. If that happens, individual earning power will evaporate, and our standard of living will decline.
To prevent stagflation, we should enact fiscal policy reforms that apply the lessons we learned from the 1970s. Keynesian stimuli based on borrowing and spending have not worked and will not work. One-time rebate checks do not increase the incentive to expand business operations and create jobs. But marginal cuts in tax rates do. We also must lower our job-killing corporate income tax rate, the highest in the industrialized world after Japan, and ease business worries by making it clear that there will be no tax increases in 2010.
We should also re-establish the sound dollar. For the past decade, the Federal Reserve has manipulated interest rates and vastly over-expanded the money supply — and in so doing fueled the housing bubble that precipitated our current crisis. To end uncertainty about the economy, to keep interest rates down, and to give Americans the confidence they need to take risks and ensure future growth, we should make price stability a priority, guaranteeing the value of the dollar.
Finally, we should tackle the entitlement crisis, which will be a $56 trillion liability that we have not figured out how to pay for. As members of the baby boom generation retire, and health care costs continue to spiral out of control, Social Security, Medicare and Medicaid will collapse. By reforming those programs and bringing their costs down to sustainable levels, we will show the world and the credit markets we are serious about reducing our debt. Then our credit will improve, the cost of necessary borrowing will drop, and we can stave off stagflation.
Paul D. Ryan is a Republican representative from Wisconsin.
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February 14, 2009, 8:00 a.m.
The Obamateur Hour
How long will it last?
By Mark Steyn
Few pieces of political “wisdom” are more tediously recycled than a well-retailed bon mot of British prime minister Harold Macmillan. Asked what he feared most in the months ahead, he gave an amused Edwardian response: “Events, dear boy, events.” In other words, you can plan all you want but next month, next year, some guy off the radar screen will launch a war, or there’ll be an earthquake, or something. Governments get thrown off course by “events.”
It suggests a perverse kind of genius that the 44th president did not wait for a single “event” to throw him off course. Instead he threw himself off: “Is Obama tanking already?” (Congressional Quarterly); “Has Barack Obama’s presidency already failed?” (the Financial Times). Whether or not it’s “already” failed or tanked, the monthly magazines still gazing out from their newsstands with their glossy inaugural covers of a smiling Barack and Michelle waltzing on the audacity of hope seem like musty historical artifacts from a lost age. The ship didn’t need to hit an iceberg; it stalled halfway down the slipway. This is still the phase before “events” come into play, when an incoming president has nothing to get in the way of his judgment and executive competence. President Obama chose to nominate Tim “Indispensable” Geithner and Tom “Home, James!” Daschle, men whose enthusiasm for the size of the federal budget is in inverse proportion to their urge to contribute to it. He chose to nominate as commerce secretary first the scandal-afflicted Bill Richardson and then the freakishly scandal-free Judd Gregg, and wound up losing both.
To be sure, the present state of the economy is an “event,” and has blown many governments around the world off course. But again: The hideous drooling blob of toxic pustules dignified as “stimulus” is something the incoming Obama had months to prepare for, with oodles of bipartisan goodwill and fawning press coverage to waft him along. Instead he chose to outsource it to Nancy Pelosi, Harry Reid, Barney Frank, and the rest of the congressional pork barons. So that too is not an “event” but merely, like his cabinet picks, a matter of judgment and executive competence.
Not to matter. When the going gets tough, the tough go campaigning. So, almost as if he were still running for office rather than actually running an office, the president arranges a photo-op or a town-hall meeting, where, for the moment, the hopeychangey shtick still plays. “I have an urgent need,” a freeborn citizen of the republic (I use the term loosely) beseeched the president in Fort Myers this week. “We need a home, our own kitchen, our own bathroom.”
As Michelle Malkin commented of the urgent needer: “If she had [had] more time, she probably would have remembered to ask Obama to fill up her gas tank, too.” Obama took her name — Henrietta Hughes — and ordered his staff to meet with her. Hopefully, he won’t insult her by dispatching some no-name deputy assistant associate secretary of whatever instead of flying in one of the bigtime tax-avoiding cabinet honchos to nationalize a Florida bank and convert one of its branches into a desirable family residence, with a swing set hanging where the drive-thru ATM used to be.
Still, the audience loved it. “Yes!” they yelped, and “Amen!” — and even “Gracious God, thank you so much!” In the words of Bob Hope: “Leave your name with the girl, and we may get to you for some crowd scenes.” Ah, but eventually the hosannas fade, and the community-organizer-in-chief has to return to Washington to attend to the drearier chores of being president. The “buy American” provisions in the “stimulus” will invite certain retaliation around the world, wrote Jagdish Bhagwati, the Columbia economics prof, in the New York Times. This is presumably the same Jagdish Bhagwati who reassured a Toronto audience last year that he was endorsing Obama despite the senator’s anti-NAFTA, anti-free-trade rhetoric because he didn’t think Obama really believed it. Today it’s even less clear what, if anything, Obama believes — and, even more critically, whether he has the wit or authority to impose those beliefs on a Congress whose operating procedure for the new era seems to be business as usual with three extra zeroes on the end.
Someday soon this inaugural Obamateur Hour (as one of my correspondents, John Gross, calls it) will end and the “events” phase will begin. Back last spring, some gloomy reflections of mine on multiculturalism prompted a reader to advise me to lighten up: “We’re rich enough that we can afford to be stupid.” A mere nine months later, the first part of that equation no longer seems quite so obvious. The market value of the U.S. banking sector is worth barely a quarter of what it was two years ago — from just north of $1.4 trillion in February 2007 to under $400 billion at the beginning of this month, and that due only to the “bailout.” The so-called Wall Street fat cats are, in fact, emaciated cadavers in the late stages of that feline version of HIV.
On the other hand, U.S. mortgage debt has more than quadrupled since 1990, from $2.5 trillion to over $10 trillion. On the other other hand — you may be running out of fingers by now — the IMF has increased its calculation of potential losses on U.S.-originated credit assets from $1.4 trillion last October to $2.2 trillion today, and that’s at the lowball end of estimates (others figure closer to $4 trillion). If you stick the community-organizer-in-chief in a room with Henrietta Hughes, he can play Bob Barker and tell her to “come on down!” But it’s not obvious that that technique will be quite so effective back in the Oval Office, poring over the smoldering ledgers.
2008: We’re rich enough that we can afford to be stupid.
2009: We’re not so rich so let’s be even more stupid.
The Obama narrative as packaged by the American media (another all-but-bankrupt industry, not coincidentally) is very appealing. Wouldn’t it be so much nicer if a benign paternalist sovereign could take care of all the beastly grown-up stuff like mortgages and health care, like he’s gonna do for Henrietta Hughes, while simultaneously blowing gazillions on “green” initiatives and other touchyfeely things?
America has a choice: It can reacquaint itself with socioeconomic reality, or it can buckle its mandatory seatbelt for the same decline most of the rest of the West embraced a couple of generations back. In 1897, troops from the greatest empire the world had ever seen marched down London’s mall for Queen Victoria’s diamond jubilee. Seventy years later, Britain had government health care, a government-owned car industry, massive government housing, and it was a shriveled high-unemployment socialist basket-case living off the dwindling cultural capital of its glorious past. In 1945, America emerged from the Second World War as the preeminent power on earth. Seventy years later . . .
Let’s not go there.
— Mark Steyn, a National Review columnist, is author of America Alone.
© 2009 Mark Steyn
National Review Online - http://article.nationalreview.com/?q=OTdjMzQ0MTg3MDZkMWM0YWE1MGNiOTZhZTVkN2JhZmY=
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Fox News is reporting that the UN is now lobbying the US for a portion of the stimulus money. Anyone wanna bet that Obama had a provision added to the stimulus that gives the UN some cash????
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"Let’s not go there."
Unfortunately we are. It is all getting rammed down our throats with a complicit media.
By the time the public gets it it will probably be too late.
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I did a search for "reparations" but no topic for this comes up so I will put here.
It is only natural for Black Americans to see this and think, "why not us". Why don't we get in on the action?
If I recall Elie Weisel thinks this form of reparations actually cheapens the memory of the Holocaust. To some degree I agree but not completely. In any case BO's policies are actually reparations in a stealth mode.
****February 17, 2009
'Jewish war victims have had enough compensation' French court saysCharles Bremner in Paris
The French State was responsible for deporting Jews during the Second World War, the top judicial authority ruled for the first time yesterday, but it dismayed families of victims by declaring that they had already been compensated.
The decision by the Council of State, the final arbiter on civil law matters, made formal a doctrine that has been accepted by successive governments since 1995.
It was advising on a case brought by Madeleine Hoffman-Glemane, 75, one of hundreds of victims who have sued recently for damages over their arrests and deportation during the Nazi occupation from 1940 to 1944.
The council called for a “solemn recognition of the responsibility of the State”. France was “responsible for damages caused by actions which did not result from the occupiers' direct orders but facilitated deportation from France of people who were victims of anti-Semitic persecution”, it said.
Related Links
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Charles Bremner's Paris blog
The ruling endorses a view that was proclaimed by the former President Jacques Chirac when he took office in 1995. Before that the crimes of the collaborationist Vichy Government had been acknowledged but they had been ascribed widely to an outlaw regime and not to the French State.
The late President Mitterrand who left office in 1995 and who served as an official of the Vichy regime, refused to accept the responsibility of the nation for more than 75,000 people who were taken to Nazi death camps. Most were arrested by French police on the orders of state officials and few survived.
Since taking office in 2007 President Sarkozy, whose mother is Jewish, has ordered acts of remembrance of the French role in the Holocaust but during his election campaign he said that France should stop apologising for itself because it had never been involved in a policy of genocide.
To the anger of campaigners the council advised the court dealing with Ms Hoffman-Glemane's case that deportees had already received enough compensation. “The different measures taken since the end of the Second World War have made reparation as much as possible,” it said.
The Paris court had sought the opinion of the council on the request of Ms Hoffman-Glemane, whose mother died at Auschwitz, for material and moral damages for the suffering of her and her father. She is suing the state and the SNCF, the national railways, for 200,000 euros (£180,000) for Joseph Kaplon, her father, and 80,000 euros for herself. Anne-Laure Archambault, the lawyer for Ms Hoffman-Glemane, said that she would appeal to the European Court of Human Rights.
Avi Bitton, another lawyer who represents 600 deportees and plaintiffs, said: “We are simply asking to be treated like any other citizen who is a victim of asbestos poisoning or a road accident. When you suffer damage, you should be able to seek recourse.”
For more than a decade Holocaust survivors and their families have been waging legal battles in French and US courts. In 2007, however, an appeal court reversed a Bordeaux court conviction against the railways for holding and robbing two Jews. The court ruled that the SNCF was not an arm of the State.
A New York Federal Court judge also ruled in December that France was shielded as a sovereign state from action in US courts over its wartime conduct. Since then Senator Charles Schumer of New York has tabled a Bill in Congress to exempt the SNCF from the sovereign immunity.****
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A detailed list of the "stimulus" hahahahaha. Good luck.
http://www.propublica.org/special/the-stimulus-plan-a-detailed-list-of-spending
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http://www.washingtonpost.com/wp-dyn/content/article/2009/02/16/AR2009021601180_pf.html
Late Change in Course Hobbled Rollout of Geithner's Bank Plan
By Neil Irwin and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, February 17, 2009; D01
Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.
According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.
They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.
The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.
Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were.
The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis.
Meanwhile, the sources said, Obama's senior economic advisers were hobbled in crafting the plan by a shortage of personnel. To date, the president has not nominated any assistant secretaries or undersecretaries at the Treasury, and the handful of mid-level staffers who have started work were still finding their offices and getting their building passes and BlackBerrys.
Moreover, the department made a strategic decision to limit input from the financial industry and other outsiders, aiming to prevent leaks and avoid a perception they were designing the plan for the benefit of big banks. But that also meant they were unable to vet their plan with the companies involved or set realistic expectations of what would be announced.
Though Geithner had been in his job for only two weeks, he had been thinking about the problem of troubled assets since the credit crisis erupted 19 months earlier, first as president of the Federal Reserve Bank of New York and then, since November, as Barack Obama's pick to head the Treasury.
His predecessor atop Treasury, Henry M. Paulson Jr., had drawn political fire after he unveiled the Bush administration's $700 billion bailout program in September, facing accusations that the money had been spent erratically.
Geithner, while still at the New York Fed, had been deeply involved in the discussions over crafting Paulson's program. The effort may have arrested a potentially devastating financial panic, but he sought to improve on its implementation by developing a more systemic plan for using billions of dollars, sources said.
Quickly, discussions got underway. Geithner set a Feb. 9 date to release a plan, creating an artificial deadline meant to focus internal debate and prevent an overly
prolonged period of what might come across publicly as indecisiveness.
At the center of the deliberations with Geithner were Lawrence H. Summers, chief White House economic adviser; Lee Sachs, a Clinton administration official likely to be named undersecretary for domestic finance; and Gene Sperling, another former Clinton aide. The debates among them were long and vigorous as they thrashed countless proposals and variations. Sometimes, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila C. Bair and Comptroller of the Currency John C. Dugan joined in.
The team concluded that the financial rescue effort would have to include several components. None would be more vital than an initiative for either removing or neutralizing the distressed assets on the banks of books -- many related to troubled mortgages -- so the banks would be freed to resume lending.
Senior economic officials had several approaches in mind, according to officials involved in the discussions. One would be to create an "aggregator bank," or bad bank, that would take government capital and use it to buy up the risky assets on banks' books. Another approach would be to offer banks a government guarantee against extreme losses on their assets, an approach already used to bolster Citigroup and Bank of America.
As the first week of February progressed, however, the problems with both approaches were becoming clearer to Geithner, said people involved in the talks. For one thing, the government would likely have to put trillions of dollars in taxpayer money at risk, a sum so huge it would anger members of Congress. Officials were also concerned that the program would be criticized as a pure giveaway to bank shareholders. And, finally, there continued to be the problem that had bedeviled the Bush administration's efforts to tackle toxic assets: There was little reason to believe government officials would be able to price these assets in a way that gave taxpayers a good deal.
By Wednesday, Feb. 4, Geithner was leaning toward a different approach that his former colleagues at the Federal Reserve had developed months earlier, the source said. This involved a joint public-private fund to buy up the assets. Private investors, likely hedge funds and private-equity funds, would put up capital, and the government would loan money to the fund. If the private investors made wise decisions about which assets they bought, they would be able to pay back the government and make money for themselves.
For the policymakers, the chief appeal of the public-private partnership is that it solves the problem of how to price assets. The private money managers who provide capital for the fund would decide which assets to buy, and at what price, taking government bureaucrats out of that difficult task.
Moreover, the private contribution lowers the total amount of money the government would need to put at risk. Also, the government would require private investors to incur any losses before the government does, reducing taxpayers' exposure to potential losses (but also potentially depriving them of any windfall profits).
But there were multiple complications: How much government financing would be needed? What other incentives would be needed to get private firms on board? Where would the government get the money? What assets would the fund buy? Would the government have a say in which banks they're bought from? Might there be more than one fund?
The clock was ticking. But Geithner wasn't ready to share his thoughts with senior government officials outside his narrow circle. He and his team worked on the plan through the weekend, with some of his staff working until 4 a.m. The team grew to about 20 officials, including lawyers, finance experts and public affairs staff.
One key element of the Treasury's new plan was to conduct "stress tests" of the 20 or so largest banks, figuring out what would happen to them if the economy worsens significantly more than most analysts forecast.
The information gathered from that process could help shape the public-private fund, said an administration source. But many in the banking industry are unclear what information the government could access beyond that already available to bank regulators or to Geithner himself, who until recently had been the chief regulator of the country's largest banks as the head of the New York Fed.
On Saturday, Feb. 7, the officials won a slight reprieve when the White House asked that Geithner's speech be postponed from Monday to Tuesday to allow Congress to focus a little longer on the on the massive economic stimulus package still pending.
But there still was not enough time to sculpt the detailed plan that the financial markets expected. In the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised. And ambiguity, the officials concluded, would make the plan an easier sell on Capitol Hill, as congressional leaders could be brought into the discussions of details rather than be presented a detailed plan as fait accompli.
Staff writers Lori Montgomery and David Cho contributed to this report.
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WSJ
The world has gone from the greatest synchronized global economic boom in history to the first synchronized global bust since the Great Depression. How we got here is not a cautionary tale of free markets gone wild. Rather, it's the story of what can happen when governments ignore market signals and central bankers believe in endless booms.
Following the March 2000 Nasdaq bust, the Federal Reserve began to slash the fed-funds rate from 6.5% in January 2001 to 1.75% by year-end and then to 1% in 2003. (This despite the fact that officially the U.S. economy had begun to recover in November 2001). Almost three years into the economic expansion, the Fed began to increase the fed-funds rate in baby steps beginning June 2004 from 1% to 5.25% in August 2006.
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But because interest rates during this time continuously lagged behind nominal GDP growth as well as cost of living increases, the Fed never truly implemented tight monetary policies. Indeed, total credit increased in the U.S. from an annual growth rate of 7% in the June 2004 quarter to over 16% in early 2007. It grew five-times faster than nominal GDP between 2001 and 2007.
The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages. A consumption boom followed, which was not accompanied by equal industrial production and capital spending increases. Consequently the U.S. trade and current-account deficit expanded -- the latter from 2% of GDP in 1998 to 7% in 2006, thus feeding the world with approximately $800 billion in excess liquidity that year.
When American consumption began to boom on the back of the housing bubble, the explosion of imports into the U.S. were largely provided by China and other Asian countries. Rising exports from China led to that country's strong domestic industrial production, income and consumption gains, as well as very high capital spending as capacities needed to be expanded in order to meet the export demand. An economic boom in China drove the demand for oil and other commodities up. Rapidly accumulating wealth allowed the resource producers in the Middle East, Latin America and elsewhere to go on a shopping binge for luxury goods and capital goods from Europe and Japan.
As a consequence of this expansionary cycle, the world experienced between 2001 and 2007 the greatest synchronized economic boom in the history of capitalism. Past booms -- of the 19th century under colonial economies, or after World War II when 40% of the world's population remained under communism, socialism, or was otherwise isolated -- were not nearly as global as this one.
Another unique feature of this synchronized boom was that nearly all asset prices skyrocketed around the world -- real estate, equities, commodities, art, even bonds. Meanwhile, the Fed continued to claim that it was impossible to identify any asset bubbles.
The cracks first appeared in the U.S. in 2006, when home prices became unaffordable and began to decline. The overleveraged housing sector brought about the first failures in the subprime market.
Sadly, the entire U.S. financial system, for which the Fed is largely responsible, turned out to be terribly overleveraged and badly in need of capital infusions. Investors grew apprehensive and risk averse, while financial institutions tightened lending standards. In other words, while the Fed cut the fed-funds rate to zero after September 2007, it had no impact -- except temporarily on oil, which soared between September 2007 and July 2008 from $75 per barrel to $150 (another Fed induced bubble) -- because the private sector tightened monetary conditions.
In 2008, a collapse in all asset prices led to lower U.S. consumption, which caused plunging exports, lower industrial production, and less capital spending in China. This led to a collapse in commodity prices and in the demand for luxury goods and capital goods from Europe and Japan. The virtuous up-cycle turned into a vicious down-cycle with an intensity not witnessed since before World War II.
Sadly, government policy responses -- not only in the U.S. -- are plainly wrong. It is not that the free market failed. The mistake was constant interventions in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them.
The bad policy started with the bailout of Mexico following the Tequila crisis in 1994. This prolonged the Asian bubble of the 1990s, because investors became convinced there was no risk in growing current-account deficits and continued to finance Asia's emerging economies until the bubble burst with the start of the Asian crisis in 1997-98.
Then came the ill-advised bailout of Long-Term Capital Management in 1998, which encouraged the financial sector to leverage up even more. This was followed by the ultra-expansionary monetary polices following the Nasdaq bubble in 2000, which led to rapid and unsustainable credit growth.
So what now? Unfortunately, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner were, as Fed officials, among the chief architects of easy money and are therefore largely responsible for the credit bubble that got us here. Worse, their commitment to meddling in markets has only intensified with the adoption of near-zero interest rates and massive bank bailouts.
The best policy response would be to do nothing and let the free market correct the excesses brought about by unforgivable policy errors. Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump -- possibly an inflationary depression with dire social consequences.
Mr. Faber is managing director of Marc Faber Ltd. and editor of "The Gloom, Boom & Doom Report."
http://www.youtube.com/watch?v=dEDIyztZGBA
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A succinct survey of Austrian perception of BHO's bailout.
Bailout Blues
by Mark Nugent | February 18, 2009
Barack Obama entered office backed by solid public support, the euphoria of his supporters, and even the heartfelt good wishes of many conservatives. But the economic catastrophe his administration faces may turn out to be more than even the putative savior of the world economy can handle: a deepening recession, mounting unemployment, an ongoing bank crisis, and the wipeout of trillions of dollars of stock market and real estate wealth.
The administration’s response is, to be sure, commensurate with these apocalyptic times. Obama has just successfully shepherded through Congress a gargantuan, $787 billion stimulus package of spending and tax cuts, in addition to the ongoing $700 billion bank bailout passed under Bush. The administration is even set to widen the scope of the bailout by putting more pressure on banks to lend and directing funds towards preventing home foreclosures. But banks remain reluctant to extend new credit despite the access to bailout funds and the Federal Reserve’s massive injections of funds into the system. Significant additional bailout money is likely, and the nationalization of banks is emerging as a real possibility. Meanwhile, the media frets that the stimulus package might even contain too little spending. Note that this is being said of a plan for which descriptors like “largest ever” don’t seem to capture the enormity of it all. How did we get to this point?
We are told that capitalism is inherently unstable, that its inevitable crises must be met with interventionist countermeasures, and that new regulation will prevent future shocks. Many also blame greedy financiers, who irresponsibly concocted exotic derivatives that no one fully understood, and which were traded in ill- or un-regulated markets. The emerging anti-market consensus was crystallized last year by Slate’s Jacob Weisberg, who has proclaimed libertarianism to be discredited by the financial meltdown, now and forever.
In short, a consensus has emerged that the crisis was caused by an excess of capitalism, abetted by bubble-era irrationality, from which only vigorous government action can save us: public works spending, aggressive monetary stimulus, a willingness to bail out distressed industries, re-regulation, and goodness knows what else.
Where is the response of the supposedly free-market side of the ideological divide? David Brooks bemoans the irrationality of markets and pegs blame for the financial mess on a cascade of psychological factors, which cannot possibly be grasped using tools of “classical economics.” In another column, he embraces stimulus as a solution while criticizing the Obama plan’s unfocused character. National Review, meanwhile, expresses skepticism at the effectiveness of any stimulus, but has hardly taken a consistently hard line against government intervention. In fact, in one blog post, Rich Lowry criticized congressional Republicans who opposed the massive TARP bailout as “extremely irresponsible.” Are there any voices left who can raise a compelling defense of free-market capitalism?
Enter the dogmatically free-market Austrian school of economics, and the Austrian theory of the business cycle, which holds real explanatory power over the current mess and convincingly places blame for financial panics and recessions firmly at the feet of government intervention.
According to the Austrians’ theory (despite their name, which dates back to the early twentieth century, today’s “Austrians” are mostly found in the United States), boom-and-bust cycles are, at root, not the consequence of rampaging greed, psychological mania, or insufficient regulation, but are the inevitable consequence of an excess of bank credit, which is the result of Federal Reserve policy.
The primary means of Fed expansion of the money supply is through buying government bonds on the open market. When it buys these bonds, the Fed pays for them by adding credit under its member banks’ accounts. These credits are created out of thin air; they are newly created money. It is through these “open market operations” that the Fed controls interest rates. Member banks, in turn, are only required by law to keep a small fraction of their deposits in reserve, and are free to lend out the rest, which multiplies the effects of the Fed’s purchases.
Interest rates are critical signals that tell businesses how much saving is available for investment in capital projects. When savings rates are low, the resulting high interest rates signal consumers’ preference for present over future consumption. Conversely, when savings rates are high, the resulting low interest rates show a preference of future consumption and a pool of savings available for investment. The low rates might then prompt business to invest in new projects, such as a new factory, subdivision, or online pet supply store. This is how the price of credit is set by the free market, resulting in the “natural” interest rate.
But when the Fed creates artificially cheap credit, businesses are misled into believing that riskier projects with more distant prospects of paying off will be profitable. A cluster of such projects will lead to a classic boom period, such as the dot-com bubble of the late 1990s. Cheap credit also leads to asset bubbles, such as the dot-com era stock market and the housing market in latter years. The distortions in the economy are exacerbated when consumers, believing themselves to be wealthier than they really are, decrease their savings and increase consumption.
Of course, there are also psychological aspects of the bubble economy that feed into the general irrationality, but this is more accurately seen as a follow-on effect of easy-money policies rather than as the cause of the bubbles.
The Fed can keep feeding the boom with continued low rates, but this only creates further mal-investments, and will deepen the inevitable crash when the irrationality of the boom-era projects becomes evident. When the party ends, bank credit contracts, unprofitable projects are liquidated, and economic resources shift to productive uses. Recessions, then, are a painful but necessary stage in the economy’s return to health.
The loose credit policies of the Greenspan years have lead to consequences that fit in well with the Austrian view. During Alan Greenspan’s reign as chairman of the Fed, he maintained a loose monetary policy punctuated with generous injections of extra cash in times of crisis, such as the Asian financial crisis of 1997 and the collapse of the hedge fund Long Term Capital Management. This easy credit fed into the excesses of the dot-com era, which lead directly to a stock market crash and recession in 2001.
Federal Reserve policy was also instrumental in inflating the housing bubble and creating the current recession. As the economist Mark Thornton points out, Alan Greenspan pushed interest rates down to unprecedented levels in the wake of the 9/11 attacks, which resulted in historically low mortgage rates. The fallout of the dot-com collapse led to massive losses, but the recession was mild, as the Fed’s easy money pumped up a real estate bubble just as the NASDAQ bubble unwound. The low rates led to increased borrowing for homes on a massive scale. House prices soared, but when reality eventually reasserted itself, they fell sharply, a process which culminated in last fall’s financial crisis.
Freddie Mac and Fannie Mae, which bought mortgages and resold them as securities under an implicit government guarantee, certainly abetted the housing bubble, as did the Community Reinvestment Act, which pressured banks into increased lending to disadvantaged groups at the cost of loosened lending standards. Perhaps these mechanisms helped to funnel cheap credit into the housing sector which would otherwise have created mal-investment elsewhere in the economy. But blame for the industry-wide decline in lending standards cannot be placed solely with the CRA: Lax credit standards are virtually inevitable when a massive amount of cheap money is looking for something to do.
Bolstering the Austrians’ credibility is the fact that Austrian school economists such as Mark Thornton, Frank Shostak, and Christopher Meyer warned of the housing bubble relatively early on in the process (in 2003-04). Likewise, Ludwig von Mises, the originator of Austrian business cycle theory, and his student F. A. Hayek warned of a coming depression during the boom years of the 1920s. Unfortunately, the parallels between the Great Depression and today’s troubles do not end there.
The Great Depression is often trotted out as an example of the failure of unfettered markets and the need for governmental regulation of the economy, and the same argument is being rehashed regarding today’s crisis. But like our housing bubble, the boom years of the 1920s were fueled with inflationary monetary policy. And just as in the 1920s, the current downturn is being exacerbated by misguided policy designed to alleviate the crisis.
The severity of recessions is determined by the heights reached in the boom period, but in the absence of government intervention, the adjustment process is relatively quick, and the economy can soon return to growth. As the economist Murray Rothbard taught, a serious recession in 1920–21 was met with a generally laissez-faire government response, the economy quickly returned to health, and it is now a historical footnote. The same can be said of the various panics and depressions of the 19th century.
But after the inflation-fueled boom of the 1920s, Herbert Hoover’s response to the 1929 stock market crash was aggressively interventionist from the start, as is documented exhaustively in Rothbard’s book America’s Great Depression. Hoover has been painted by historians as sitting impotently on the sidelines amid the deepening crisis, but in fact, the exact opposite is true: He had an expansive understanding of the role of government during a crisis, and he quickly set about to take aggressive action to rescue the economy.
What he actually did, though, was to take measures that seem expressly designed to thwart recovery by interfering with the economy’s ability to reallocate its resources to serve productive ends. Moreover, some of Hoover’s interventions in the wake of the 1929 crash show ominous parallels with policies being enacted to deal with the current crisis. Hoover initiated a program that kept failing businesses, including banks, afloat through emergency loans. Sickly banks on life support were pressured to expand lending despite a shortage of savings and viable projects. Measures were taken to save mortgaged property from foreclosure. Massive public works projects such as the Hoover Dam were initiated while large companies were pressured to retain staff at above-market wages. Such employment-boosting measures only served to divert capital and labor that could have been used productively by private industry into wealth-destroying make-work projects. Repeated bailouts of industry, moreover, forestalled the market’s correction process by propping up failed companies, rewarding poor decision-making, and keeping additional resources tied up unproductively.
Such measures were expanded upon by Franklin D. Roosevelt’s New Deal, and the depression predictably ground on. Like Obama, and despite the vaunted “brain trust” of policy intellectuals serving in his administration, Roosevelt entered office without any coherent economic philosophy, and experimentally created a hodgepodge of interventions in an effort to gain some kind of traction on the economy.
In recent years academics have come to acknowledge the ineffectiveness of New Deal programs, but have largely failed to come to terms with the New Deal’s role in extending and deepening the downturn. Saying that government intervention was ineffective in bringing the economy out of the Depression is like saying that despite repeated blows to the head, the patient failed to regain consciousness: It’s true enough, but evades the problem of causality.
Can we expect to see repeats of Roosevelt’s more nonsensically counterproductive measures, such as the slaughter of 6 million pigs and the plowing under of 10 million acres of crops amid widespread hunger, undertaken as an attempt to support agricultural prices? We can indeed, if a proposal of a Wall Street Journal editorialist for the government to bulldoze “surplus” homes is heeded. Expect renewed calls for the mindless destruction of wealth as the economy continues to sink.
In his inaugural speech, Barack Obama proclaimed that government should be judged by “whether it works.” Just so, and we should take this advice as we consider the likely effects of the stimulus bill and continuing bank bailouts. During the 1930s, Franklin Roosevelt, who enjoyed high popularity despite his dragging the nation through endless and miserable depression, somehow managed to escape being held to such a standard. Will today’s conservatives be able to hold our president accountable?
The tools to rescue the economy from recession are contained within the economy’s own self-corrective mechanisms, if only those in government could muster the discipline to refrain from intervening. Can conservatives articulate the case for an end to bailouts, destructive “stimulus” spending, counterproductive meddling, and the Fed’s incessant monetary pumping?
With Barack Obama’s soaring popularity, his solid Democratic majorities in Congress, and an atmosphere of crisis the passage of some sort of stimulus plan was probably inevitable. But the solid framework for understanding the economic crisis provided by the Austrian theory of the business cycle would provide a vastly improved intellectual grounding for a principled opposition than the inchoate, confused, and inconsistent defense of the free market we get from Republicans in the media and Congress.
Austrian economics, despite its focus on the free market as the only way to a stable and prosperous economy, enjoys scant popularity among establishment Republicans and movement conservatives. Part of the reason for this, perhaps, is its association with some antiwar “paleocons” and the insurgent presidential candidacy of Ron Paul. Moreover, spending, inflation and bailouts will always tempt those with access to the levers of power, regardless of party. But conservatives would be wise to resist the impulse towards intellectual tribalism and relearn the lessons of the Austrian school. With the tenets of true free-market economics, the causes of the economic crisis are brought into focus, as is the path to recovery.
-Mark Nugent is an attorney and Web designer living in Arlington, Virginia. He blogs at spinline.net/blog.
http://americasfuture.org/doublethink/2009/02/18/bailout-blues/
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http://hotair.com/archives/2009/02/19/smelling-a-rat/
GM: GREAT find. I've moved it to the Electoral Fraud and Corruption thread.
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http://campaignspot.nationalreview.com/post/?q=NTZlODFjYTM0Mzg5ZjNiN2I2Y2YyMDcwZmUwN2JiN2U=
Friday, February 20, 2009
BARACK OBAMA
The Obama Markets
On Election Day 2008, the Dow Jones Industrial Average closed at 9,625.
On Inauguration Day 2009, the DJIA closed at 7,949.09.
Today the Dow is at 7,342, down 124 points on the day, and down 600 points in the month since Obama became president. (By the time you read this, it will have changed, of course.)
Many factors affect stock prices on any given day, but to the extent that the market has responded to Obama's election and taking office, it has been in one steady direction: down.
Doesn't the message seem clear? With massive government borrowing, with higher taxes seen as inevitable, with the government taking from those who did pay their mortgages to bail out those who didn't, with details of much-touted financial rescues still sparse, with demonization of American businesses . . . who in their right mind would want to invest in a company right now? Why buy stock in companies that are going to be punished six ways to Sunday by an ever-growing government?
(Okay, those want to buy low and sell high would be buying now. But overall, investors are saying they see the nation's economic conditions as getting worse, with not much improvement in sight: shrinking or disappearing profits and dividends, continued drops in stock prices, and a bigger tax bite when you do make money. Why bother, then?)
02/20 12:44 PM
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Up until a couple weeks ago i thought things would begin to pick up. Im starting to have my doubts. Up until last week aerospace/defense manufacturing was still humming along.
IATA chief sees huge drop in plane deliveries for 2009
Both Boeing and rival Airbus could deliver fewer than half the planes they are scheduled to produce this year as a global credit crunch makes it impossible for customers to secure billions of dollars in needed financing. Giovanni Bisignani, CEO of the International Air Transport Association, made the grim assessment on Thursday, saying it was based on his private conversations with airline CEOs. As if to confirm Bisignani's outlook, Airbus announced Thursday it would trim production of its narrow-body A320 by two planes per month, beginning in October. FlightGlobal.com/Air Transport Intelligence (2/20) , The Wall Street Journal (subscription required) (2/20)
I used to make fun of a friend for reading this guys blog, i almost ran out of tinfoil pictures.
http://www.chrismartenson.com/blog/daily-digest-feb-21/13675
Daily Digest - Feb 21Saturday, February 21, 2009, 9:57 am, by Davos
- Volcker "Mother of all Financial Crisis"
- Crisis of "Credit"
- Breaking a Barrier to Lending (Proposed Solution to Shadow Banking)
- Soros, No Bottom, More Severe Than During the Great Depression
- Economic collapse severity intensifying
- Get Ready for Mass Retail Closings
- Gone in 60 Days: Citi and Bank of America Won't Live to See May
- Trade Surplus
- Hypo Real Estate: 600 billion in off-balance sheet assets
- Economic Trends in U.S. Health Care
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Swiss party wants to punish U.S. for UBS probe
Sat Feb 21, 2009 9:53am EST
Reuters
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSTHO15017420090221
ZURICH, Feb 21 (Reuters) - The right-wing Swiss People's Party (SVP) called on Saturday for retaliation against the United States over a U.S. tax probe into the country's biggest bank UBS that threatens prized banking secrecy.
The populist SVP, the country's biggest party, said Switzerland should not take in any detainees from the U.S. prison for terrorism suspects at Guantanamo Bay in Cuba, which the Swiss government said last month it could consider to help shut the camp down.
Switzerland should also reconsider its policy of representing the United States in countries where it has no diplomatic presence, the parliamentary SVP said in a statement.
The SVP said gold stored by the Swiss National Bank in the United States should be repatriated and Switzerland should ban the sale of U.S. funds in the country to protect Swiss investors after the failure of U.S. regulators.
The SVP has one minister in the seven-member Swiss government which is made up of the biggest four parties, but its populist policies have shaken up usually consensual Swiss politics.
The comments came after UBS agreed on Wednesday to pay a fine of $780 million and to disclose about 250 names of U.S. clients it said had committed tax fraud to settle U.S. criminal charges that it had helped rich Americans dodge taxes.
U.S. tax authorities said on Thursday they were still pursuing a civil case against UBS seeking access to thousands more names of U.S. citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts. [ID:nN19534438]
The SVP also said it would call for an urgent debate in parliament on ways to protect Swiss banking secrecy from "further foreign blackmail". (Reporting by Emma Thomasson)
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The New International Barter System by courtesy of the Russia and China.
http://www.financialsense.com/fsu/editorials/willie/2009/0219.html
Putin: Post-US World Blueprint
by Jim Willie, CB. Editor, Hat Trick Letter | February 19, 2009
Print
PROLOGUE & AFTERMATH
The World Economic Forum took place in Davos Switzerland last week. The global picture enabled a nice snapshot of sentiment, fault for the crisis, blame doled out, the vacuum of leadership, the perks for blunderers in a country club setting (instead of prison), and warnings on a potential situation that could spiral out of control. Amidst all the finger pointing, surprisingly little blame was given to themselves, the corporate chieftains in attendance. Let’s be clear! The Davos Forum was a funeral wake, and Putin rode in on a white horse to announce there is a new sheriff in town!! Davos afforded a unique opportunity for Russian self-styled leader Vladimir Putin to storm the forum stage and to steal the show. Putin presented a basic Blueprint for what should be called ‘The Post-US World’ as the United States and United Kingdom have lost the mantle of leadership and control. They lost it from failed economic policy, wrecked banking systems, fraud-ridden bond markets, corrupted debt ratings agencies, abuse of IMF & World Bank, and the severe backfire of economies that depended upon housing bubbles. Inflation turned on its haughty financial engineers! Nations with insolvent banks, insolvent households, corporations in liquidation, economies in near collapse, they tend not to be good owners and custodians of the global reserve currency!!!
Davos provided a flashpoint for a profound change in global leadership. The whimpering US-UK-EU bankers have been shamed. Then after the finger pointing, insults, hand wringing, and gut wrenching, Putin rode in on a white horse carrying a banner. Chinese Premier Wen Jiabao provided the confirmation to what Putin laid out, like a second of a formal motion. Wen Jiabao proceeded from the Davos stage to four European capitals to seal the new path and its legitimacy. The barter system has been launched in quiet, while the Western press continues not to comprehend a ruptured status quo limping along. It cannot; it will not; the transition is on. Not only will the USDollar not provide the global highway for all to travel, but new barter systems will be dominant soon in working around the commodity price systems dominated by the US-UK corrupt price discovery systems. The other painful consequence to the new system soon taking root is that the global commodity supply routes will bypass the US destinations, enough to create mammoth shortages. Such is the fate of a nation thrust to the Third World. Its people and its leaders still do not realize it, as denial is ensconced in hope. The US credit supply has already been severed and cut almost completely off. Reliance upon the printing press to finance its own debts is a primary trait of a Third World nation, a shocking fact soon to be recognized.
Since the autumn, the regular macro-economic reports and gold & currency reports have been accompanied by frequent reports on the crisis for unique coverage. The Crisis Update this month also covers Obama’s Opening Opus, not at all a promising start. He has surrounded himself with yet more Elite insiders who are in part responsible for the current failure and who are likely to continue the welfare raids for the Elite. The Crisis Update also covers many aspects of the Martial Law Threat. Those who think ‘Never in America’ need to catch up with what is happening, preparations being made, anecdotes from the field, hints of revolt from the states, and the dire straights that states find themselves, like in California. The martial law threat comes from economic disintegration more than anything else.
HOSPICE FOR US$, LAUNCH FOR GOLD
The USDollar is essentially dead, the Davos Forum its funeral wake. It is enjoying a physical erection in the medical morgue, a rise in a death dance ceremony. US leaders refuse to accept the reality. They desperately need its continuation for assistance in funding the USGovt monstrous deficits. Western leaders struggle to admit the reality. Russian leaders, Chinese leaders, and Arab leaders (more quietly) openly admit the reality. Read the billboards, as the Davos Forum offered an entire row of them to observe. THE BEST STRESS METER IS NOW GOLD. Notice how gold rose all through the Davos Forum gathering. Nothing was solved. The Putin Blueprint for the ‘Post-US World’ shook up the currency markets, as gold reacted. The gold price is breaking out in all major currencies, except in USDollar terms. It just hit a new euro high.
A cherished contact with deep global experience had some very strong words about Davos and the Putin Blueprint. He made additional comments about the Wen trip across major European capitals. In an important message, he said, “Read in between the lines of Putin’s speech and you find all the hints you want. The Chinese and Russians are burying the US alive. The Japanese, Germans, and Gulf States keep a very low profile for the moment. The decisions have been made: wait for 2010. They will use the unfolding chaos to introduce the new currency basket and trade rules… There is a brand new system being designed that will borrow from the past and apply 21st century tools for barter / counter trade / excess capacity etc. An Exchange Platform will cut out the banks altogether… [Chinese Premier] Wen delivered his speech in Davos and went straight to Berlin where they put the final touch on the new world currency basket, sponsored by Berlin-Moscow-Beijing-Tokyo-Riyadh. Moscow and Berlin already have a massive counter trade / barter trade agreement in place, and Beijing was eager to joint that platform as well.” The new global currencies are planned for launch in January 2010. They will be launched amidst growing chaos. Events up to that time will be tumultuous.
The gold price has completed an important U-shaped reversal. Its low of 710 and top at 980 indicate a target of 1250 next. Notice the crossovers of the crucial moving average series. Both the 50-day MA and 100-day MA have run above the 200-day MA, very bullish. Technical chart traders use them to direct traffic flow. The cyclicals are aligned with strength. The fundamentals could not be better for gold than at any time in a few decades. All major governments are ruining their currencies in a desperate attempt to avoid economic collapse after bank system insolvency has rendered their nations hostage to dangerous accommodative monetary policies. All major currencies are now at risk simultaneously. The gold price breakout over 1000 again could come when the Dow Jones Industrial Index and the S&P500 index each breach critical support. They have been dancing at that support for days. The USEconomic field has become a swamp, and it is sinking. It should sink the US stock market.
The USDollar should not be the true focus of attention. Paradoxically, as it dies a horrible death, its reserve currency status ensures it might be last to crumble. All other currencies are at risk, except perhaps the Japanese yen. The focus of attention should be directed to gold & silver. The pundits, anchors, and supposed experts believe that the rise in the gold price means that price inflation is an imminent but hidden threat. THEY ARE SO WRONG. The threat is of a collapsed global financial foundation, complete with rising chaos from no current viable alternative, as the Untied States finds itself tossed into a dungeon. The process is slow, but the pace is accelerating. The signpost in the dungeon is marked ‘Third World’ with full shame. The charges will go without trial, as the marketplace is brutal. But bank ruin, institutional corruption, exported bond fraud, permission of counterfeit rings, protection of crime syndicates, and abused global reserve currency custodial responsibility lie at the core. Most scrutiny of charges will be conducted much later, when too late, in an examination of the wreckage.
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http://www.ibdeditorials.com/IBDArticles.aspx?id=320027936229029
Is It Any Wonder The Market Continues To Sink?
By INVESTOR'S BUSINESS DAILY | Posted Friday, February 20, 2009 4:20 PM PT
Last Oct. 13, in trying to explain why the market had sold off 30% in six weeks, we acknowledged that the freeze-up of the financial system was a big concern. But we cited three other factors as well:
*The imminent election of "the most anti-capitalist politician ever nominated by a major party."
• The possibility of "a filibuster-proof Congress led by politicians who are almost as liberal."
• A "media establishment dedicated to the implementation of a liberal agenda, and the smothering of dissent wherever it arises."
No wonder, we said then, that panic had set in.
Today, as the market continues to sell off and we plumb 12-year lows, we wish we had a different explanation. But it still looks, as we said four months ago, "like the U.S., which built the mightiest, most prosperous economy the world has ever known, is about to turn its back on the free-enterprise system that made it all possible."
How else would you explain all that's happened in a few short weeks? How else would you expect the stock market, where millions cast daily votes and which is still the best indicator of what the future holds, to act when:
• Newsweek, a prominent national newsweekly, blares from its cover "We Are All Socialists Now," without a hint of recognition that socialism in its various forms has been repudiated by history — as communism's collapse in the USSR, Eastern Europe and China attest.
Even so, a $787 billion "stimulus," along with a $700 billion bank bailout, $75 billion to refinance bad mortgages, $50 billion for the automakers, and as much as $2 trillion in loans from the Fed and the Treasury are hardly confidence-builders for our free-enterprise system.
• Talk of "nationalizing" U.S.' troubled major banks comes not just from tarnished Democratic Sen. Chris Dodd, chairman of the Senate Finance Committee, but also from Republicans like Sen. Lindsey Graham of South Carolina and former Fed chief Alan Greenspan.
To be sure, bank shares have plunged along with home prices, and many have inadequate capital. But is nationalization really the only solution for an industry whose main product — loans to consumers and businesses — has expanded by over 5% annually so far this year?
• A stimulus bill laden with huge amounts of spending on pork and special interests is the best our Congress can come up with to get the economy back on track. Economists broadly agree that the legislation has little stimulative power, and in fact will be a drag on economic growth for years to come.
The failure to include any meaningful tax cuts for either individuals or small businesses, the true stimulators of job growth, while throwing hundreds of billions of dollars at profligate state governments and programs — such as $4.2 billion for "neighborhood stabilization activities" and $740 million to help viewers switch from analog to digital TV— has investors shaking their heads.
• A $75 billion bailout for 9 million Americans who face foreclosure, regardless of how they got into financial trouble, is the government's answer to the housing crunch. Many Americans who have scrupulously kept up with payments are steaming at the thought of subsidizing those who've been profligate or irresponsible.
With recent data showing that as much as 55% of those who get foreclosure aid end up defaulting anyway, a signal has been sent that America has gone from being "Land of the Free" to "Bailout Nation."
• Energy solutions ranging from the expansion of offshore drilling and the development of Alaska's bountiful arctic oil reserves to developing shale oil in America's Big Sky country, tar-sands crude in Canada and coal that provides half the nation's electric power, are taken off the table.
The market knows full well what drives the economy and that restraining energy supply will make us all poorer and investing less profitable. Taking domestic energy sources off the table makes us more reliant on sources from hostile and unstable regimes, breeding uncertainty in a capital system in which participants seek stability.
• Lawmakers who seem more interested in pleasing special interests than voters back home now control Congress. Some of the leading voices in crafting the massive bank bailout and stimulus packages — including Sen. Chris Dodd, Rep. Barney Frank and House Speaker Nancy Pelosi — were the very ones who helped get us in this mess.
They did so by loosening Fannie Mae and Freddie Mac's lending rules and pushing commercial banks to make bad loans. Both Dodd and Frank were recipients of hefty donations from Fannie, Freddie and other financial firms they were charged with regulating.
• Trade protectionism passes as policy, even amid the administration's lip service to free trade. Congress' vast stimulus bill and its "Buy American" provisions limit spending to U.S.-made products and will drive up costs, limit choices and alienate key allies.
Already, it has triggered rumblings of retaliation in a 1930s-style trade war from trading partners, just as the Smoot-Hawley tariffs prolonged the Great Depression. Several European partners have begun raising barriers. Meanwhile, three signed free-trade pacts with Colombia, Panama and Korea languish with no chance of passage. Free trade offers one way out of our problems, yet it's been sidetracked.
• A 1,000-plus page stimulus bill is bulled through Congress with no GOP input and not a single member of Congress reading it before passage. It borders on censorship.
GOP protests of the bill's spending and the speed it was passed at were dismissed by Obama and other Democrats as seeking to "do nothing" or "breaking the spirit of bipartisanship." But voters are angry.
Along with thousands of angry phone calls to Congress, new Facebook groups have emerged, and street protests have sprung up in Denver, Seattle and Mesa, Ariz., against the "porkulus." CNBC Chicago reporter Rick Santelli's on-air denunciation of federal bailouts for mortgage deadbeats attracted a record 1.5 million Internet hits.
• Business leaders are demonized. Yes, there are bad eggs out there like the Madoffs and Stanfords. But most CEOs are hugely talented, driven, highly intelligent people who make our corporations the most productive in the world and add trillions of dollars of value to our economy.
They don't deserve to be dragged before Congress, as they have been dozens of times in the past two years, for a ritual heaping of verbal abuse from the very people most responsible for our ills — our tragically inept, Democrat-led Congress.
• Words like "catastrophe," "crisis" and "depression" are coming from the mouth of the newly elected president, rather than words of hope and optimism. Instead of talking up America's capabilities and prospects, he talks them down — the exact opposite of our most successful recent president, Ronald Reagan, who came in vowing to restore that "shining city on a hill."
Even ex-President Clinton admonished Obama to return to his previous optimism, saying he would "just like him to end by saying that he is hopeful and completely convinced we're gonna come through this."
• The missile defense system that brought the Soviet Union to its knees, and which offers so much hope for future security, is being discussed as a "bargaining chip" with Russia. This, at the same time the regime in Iran is close to having a nuclear weapon and North Korea is readying an intermediate-range missile that can reach the U.S.
This sends a message of weakness abroad and contributes to a feeling of vulnerability at home. A strong economy begins and ends with a strong defense.
All this in barely a month's time. And to think that more of the same is on the way seems to be sinking in. Investors are watching closely and not caring for what they see. Sooner or later, the market will rally — but not without good reason to do so.
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The U.S. Didn’t Cause the World Recession
Posted by Alan Reynolds
In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.” Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular. “Already,” he says, “this illness has spread to the global economy.”
Already? Industrial in Japan production began collapsing in November 2007, two months ahead of the U.S. and the Japanese industrial decline has been twice as fast.
Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong. By no coincidence, that was when the price of oil rose as high as $145 a barrel. Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption. Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.
In a piece for the Claremont Review of Books (written last November), I conclude that, “This recession is not just a U.S. problem, not just about housing, and not just financial.”
Compare the decline in real GDP over the past 4 quarters (from The Economist):
U.S.
-0.2%
France
-1.0
Germany
-1.6
Britain
-1.8
Italy
-2.6
Japan
-4.6
Does it make sense to blame the largest declines in GDP on one country with the smallest decline? If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.
If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter). If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.
When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.
In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP. But falling exports subtracted 2.84 percentage points from fourth quarter GDP. Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.
After looking at which economies fell first and fastest, it might be more accurate to say that some foreign illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.
http://www.cato-at-liberty.org/2009/02/22/the-us-didnt-cause-the-world-recession/
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http://www.washingtonpost.com/wp-dyn/content/article/2009/02/21/AR2009022100911_pf.html
Obama's First Budget Seeks To Trim Deficit
Plan Would Cut War Spending, Increase Taxes on the Wealthy
By Lori Montgomery and Ceci Connolly
Washington Post Staff Writers
Sunday, February 22, 2009; A01
President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.
In addition to tackling a deficit swollen by the $787 billion stimulus package and other efforts to ease the nation's economic crisis, the budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that he hopes to enact later this year.
A summary of Obama's budget request for the fiscal year that begins in October will be delivered to Congress on Thursday, with the complete, multi-hundred-page document to follow in April. But Obama plans to unveil his goals for scaling back record deficits and rebuilding the nation's costly and inefficient health care system tomorrow, when he addresses lawmakers and budget experts at a White House summit on restoring "fiscal responsibility" to Washington.
Yesterday in his weekly radio and Internet address, Obama said he is determined to "get exploding deficits under control" and said his budget request is "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline."
Reducing the deficit, he said, is critical: "We can't generate sustained growth without getting our deficits under control."
Obama faces the long-term challenge of retirement and health programs that threaten to bankrupt the government years down the road, as well as the more immediate problem of deficits bloated by spending on the economy and financial system bailouts. His budget proposal takes aim at the short-term problem, administration officials said, but also would begin to address the nation's chronic budget imbalance by squeezing savings from federal health programs for the elderly and the poor.
Even before Congress approved the stimulus package this month, congressional budget analysts forecast that this year's deficit would approach $1.2 trillion -- 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say, the annual gap between federal spending and income could reach $2 trillion when the fiscal year ends in September.
Obama proposes to dramatically reduce those numbers, said White House budget director Peter Orszag: "We will cut the deficit in half by the end of the president's first term." The plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion by 2013, he said -- still high but a more manageable 3 percent of the economy.
To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes continued spending on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is lower than the nearly $190 billion budgeted for Iraq and Afghanistan last year.
Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.
Obama also proposes "a fairly aggressive effort on tax enforcement" that would target corporate loopholes, the official said. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate.
Overall, tax collections under the plan would rise from about 16 percent of the economy this year to 19 percent in 2013, while federal spending would drop from about 26 percent of the economy, another post-World War II high, to 22 percent.
Republicans, who are already painting Obama as a profligate spender, are laying plans to attack him on taxes as well. Even some nonpartisan observers question the wisdom of announcing a plan to raise taxes in the midst of a recession. But senior White House adviser David Axelrod said in an interview that the proposals reflect the ideas that won the election.
"This is consistent with what the president talked about throughout the campaign," and "restores some balance to the tax code in a way that protects the middle class," Axelrod said. "Most Americans will come out very well here."
The budget also puts in place the building blocks of what administration officials say will be a broad restructuring of the U.S. health system, an effort aimed at covering some of the estimated 46 million Americans who lack insurance while controlling costs and improving quality.
"The budget will kick off or facilitate a focus on getting health care done this year," the senior official said, adding that the White House is planning a health care summit. The event has been delayed by former senator Thomas A. Daschle's decision to withdraw from consideration as health secretary because of tax problems, a move that left Obama without a key member of his health team.
Administration officials and outside experts say the most likely path to revamping the health system is to begin with Medicare, the federal program for retirees and people with disabilities, and Medicaid, which serves the poor. Together, the two programs cover about 100 million people at a cost of $561 billion in 2007. Making policy changes in those programs -- such as rewarding physicians who computerize their medical records or paying doctors for results rather than procedures -- could improve care while generating long-term savings, experts say.
Obama's budget request would create "running room for health reform," the official said, by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.
The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans 13 to 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues.
Officials also are debating whether to permit people as young as 55 to purchase coverage through Medicare. That age group is particularly vulnerable in today's weakened economy, as many have lost jobs or seen insurance premiums rise rapidly. The cost would depend on whether recipients received a discount or were required to pay the full price.
In addition to the substantive proposals, Obama's team boasts of improving the budget process itself. For years, budget analysts complained that former president George W. Bush tried to make his deficits look smaller by excluding cost estimates for the war in Iraq and domestic disasters, minimizing the cost of payments to Medicare doctors and assuming that millions more families would pay the costly alternative minimum tax. Obama has banned those techniques, the senior official said.
Staff writer Shailagh Murray contributed to this report.
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Wonder how many hundreds the Dow will go down tomorrow? :cry:
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Put me down for 200 points at a minimum. Fraaaaaaaaak.....
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Good call. We are now at levels not seen since 1997. :cry: Look out below! :-o
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6000 by July.
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http://apnews.myway.com/article/20090223/D96HJ1GO1.html
Obama's deficit goals count on rosy assumptions
Feb 23, 6:27 PM (ET)
By JIM KUHNHENN
WASHINGTON (AP) - President Barack Obama's ambitious goal of cutting the federal deficit in half relies on a perfect - some might say improbable - convergence of factors: a recovered economy, a tax boost for the rich and success in easing foreign entanglements.
In calling for a deficit of about $530 billion in four years, Obama has established a marker by which to measure his first-term performance as president. The dollar figure could be his albatross or his badge of success.
"This will not be easy," Obama said Monday as he kicked off a fiscal summit at the White House. "It will require us to make difficult decisions and face challenges we've long neglected."
For Obama, the challenge is clear: He will have to increase spending on health care and energy if he wants to accomplish the policy overhaul he promised during his campaign, yet he also needs to cut spending elsewhere and increase revenue to meet his deficit goal.
All this, even as he employs accounting practices he says will more honestly depict the size of the federal budget.
For him to succeed, the economy will have to meet current forecasts that it will begin to turn around gradually during the second half of the year. Even so, Obama might still have to seek billions more to help rescue the beleaguered financial sector.
Administration officials say Obama will also achieve budget reductions through lower spending on the war in Iraq. However, it is unclear how much of those savings he will then devote to Afghanistan, where he already has agreed to boost troop strength.
Further budget assistance would come from increases in taxes for wealthier Americans. Administration officials have said Obama will meet his campaign pledge to end President George W. Bush's tax cuts for people who make more than $250,000. Those tax cuts are to expire at the end of 2010.
Obama plans other tax cuts for most Americans, but any tax hike is likely to meet stiff resistance from congressional Republicans. And if the economy has not improved, there will be pressure on him not to raise taxes on any segment of the population, no matter how rich.
Such a discussion about taxes would be especially charged in the middle of the 2010 midterm elections.
What's more, banks are paying dividends on the assets that the government purchased in its rescue effort. The government could see a return on its investment in later years if banks can buy those assets back. The government experienced a similar increase in spending in the 1990s when the Resolution Trust Corp. bailed out the savings and loan industry. Eventually the government got its money back and more, contributing to the low deficits of the era.
"A lot of things have to go right between now and then," Mark Zandi, chief economist for Moody's Economy.com, said in an interview before he addressed the White House summit. "The policy response to the crisis has to work for the budget to stick to the script."
Administration aides say they inherited a budget deficit of $1.3 trillion and project the deficit to grow to $1.5 trillion by Sept. 30, the end of the current fiscal year. But much of that is emergency spending designed to contain the economic crisis and assist banking institutions. Once that spending stops, the deficit will shrink on its own.
In fact, if the $787 billion economic stimulus package recently signed into law and the government's other billions spent on mortgages and banks amounted to the only additional spending undertaken between now and 2013, the deficit would be likely to dip in four years to a sum lower than Obama's goal.
"So the question is really can they do that (reduce the deficit) as well as implement the agenda that he was elected on," said William Gale, director of economic studies at the Brookings Institution.
Obama's target would place the deficit at about 3 percent of gross domestic product. The GDP is a measure of a country's economic activity and many economists say deficits during a stable economy should amount to no more than 2 to 2.5 percent. At $1.5 trillion, the deficit would hit a whopping 10.6 percent of GDP this year.
Obama's 3 percent goal would still only lower deficits to ranges similar to those under Bush. Zandi said the key is whether the deficits are on a falling path
The president is also counting on achieving his deficit target by reducing wasteful programs - a perennially elusive aim of many an administration. For instance, he said he wants to halt federal support for huge agriculture companies that don't need the help. He also would end tax breaks for companies shipping jobs abroad. Yet, such companies have staunch defenders in Congress who have fought off similar efforts in the past.
Obama also said Monday he would return to the pay-as-you-go rule the government used in the 1990s to help control federal deficits. Back then, the law required that any tax cut or increase in federal benefits like Medicare had to be paid for with a tax increase or spending reduction elsewhere in the budget.
Obama's embrace of that rule will take effect after enactment of the recent stimulus package.
The stimulus law includes language preventing the alternative minimum tax from raising levies on millions of middle-class families this year. If the pay-as-you-go rules were applied to that tax provision, it would have forced Obama and Congress to find $70 billion in savings to pay for it - an exercise none of them would have enjoyed.
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Associated Press Writer Alan Fram contributed to this article.
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Dr Paul to Introduce Legislation to Audit the Federal Reserve
Good news indeed - could the audit lead to an investigation under the ominous RICO laws? The private Federal Reserve cabal holds a monopoly to issue our currency and to secretly (behind closed doors) control our monetary policy - no wonder we're bankrupt!
Any nation that outsources its most important financial power and responsibility to private banks relinquishes its sovereignty; effectively becoming a client state. A blatant conflict of interests exists; they are choosing who is saved first - the people or the banks. They are THE bankers that are being saved and not surprisingly, we're paying the bill.
It's encouraging to finally see someone step forward to try and end the madness.
The Federal Reserve controls the flow of money and credit in our economy because Congress has abdicated its responsibility over the nation's currency. This process therefore occurs centrally, and almost completely outside the system of checks and balances. Because of legal tender laws, people are left with no real choice, except to build their lives and futures around this monopoly currency, vulnerable to powerful central bankers. The Founding Fathers intended only gold and silver to be used as currency, however, inch by inch over the decades, this country has backed away from this important restraint. Our money today has no link whatsoever to gold or silver. For many reasons, this is extremely dangerous, and has a lot to do with the boom and bust cycles that have resulted in the crisis in which we find ourselves today.
The Fed is now pledging to reveal to the public more about its economic predictions, and calls this greater transparency. This is little more than window-dressing, at best, utterly useless at worst. Many analysts, especially those familiar with the Austrian school of economics, saw the current economic crisis coming years ago when the Federal Reserve was still telling the American people their policies were as good as gold. So while it might be nice to know what fantasy-infused outlook the Fed has on the economy, I am much more interested in what they are doing as a result of their faulty, haphazard interpretation of data. For instance, what arrangements do they have with other foreign central banks? What the Fed does on that front could very well affect or undermine foreign policy, or even contribute to starting a war.
We also need to know the source and destination of funds provided through the Fed's emergency funding facilities. Information such as this will provide a more accurate and complete picture of the true cost of these endless bailouts and spending packages, and could very likely affect the decisions being made in Congress. But with so much of the Fed's business cloaked in secrecy, these latest initiatives will not even scratch the surface of the Fed's opaque operations. People are demanding answers and explanations for our economic malaise, and we should settle for nothing less than the whole truth on monetary policy.
The first step is to pass legislation I will soon introduce requiring an audit of the Federal Reserve so we can at least get an accurate picture of what is happening with our money. If this audit reveals what I suspect, and Congress has finally had enough, they can also pass my legislation to abolish the Federal Reserve and put control of the economy's lifeblood, the currency, back where it Constitutionally belongs. If Congress refuses to do these two things, the very least they could do is repeal legal tender laws and allow people to choose a different currency in which to operate. If the Fed refuses to open its books to an audit, and Congress refuses to demand this, the people should not be subject to the whims of this secretive and incompetent organization.
Dr. Ron Paul
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http://www.washingtonpost.com/wp-dyn/content/article/2009/02/22/AR2009022202006_pf.html
Obama's Stunted Stimulus
By Robert J. Samuelson
Monday, February 23, 2009; A19
Judged by his own standards, President Obama's $787 billion economic stimulus program is deeply disappointing. For weeks, Obama has described the economy in grim terms. "This is not your ordinary run-of-the-mill recession," he said at his Feb. 9 news conference. It's "the worst economic crisis since the Great Depression." Given these dire warnings, you'd expect the stimulus package to focus almost exclusively on reviving the economy. It doesn't, and for that, Obama bears much of the blame.
The case for a huge stimulus -- which I support -- is to prevent a devastating downward economic spiral. Spending is tumbling worldwide. In the fourth quarter of 2008, the U.S. economy contracted at a nearly 4 percent annual rate. In Japan, the economy fell at a nearly 13 percent rate; in Europe, the rate was about 6 percent. These are gruesome declines. If the economic outlook is as bleak as Obama says, there's no reason to dilute the upfront power of the stimulus. But that's what he's done.
His politics compromise the program's economics. Look at the numbers. The Congressional Budget Office (CBO) estimates that about $200 billion will be spent in 2011 or later -- after it would do the most good. For starters, there's $8 billion for high-speed rail. "Everyone is saying this is [for] high-speed rail between Los Angeles and Las Vegas -- I don't know," says Ray Scheppach, executive director of the National Governors Association. Whatever's done, the design and construction will occupy many years. It's not a quick stimulus.
Then there's $20.8 billion for improved health information technology -- more electronic records and the like. Probably most people regard this as desirable, but here, too, changes occur slowly. The CBO expects only 3 percent of the money ($595 million) to be spent in fiscal 2009 and 2010. The peak year of projected spending is 2014 at $14.2 billion.
Big projects take time. They're included in the stimulus because Obama and Democratic congressional leaders are using the legislation to advance many political priorities instead of just spurring the economy. At his news conference, Obama argued (inaccurately) that the two goals don't conflict. Consider, he said, the retrofitting of federal buildings to make them more energy efficient. "We're creating jobs immediately," he said.
Yes -- but not many. The stimulus package includes $5.5 billion for overhauling federal buildings. The CBO estimates that only 23 percent of that would be spent in 2009 and 2010.
Worse, the economic impact of the stimulus is already smaller than advertised. The package includes an obscure tax provision: a "patch" for the alternative minimum tax (AMT). This protects many middle-class Americans against higher taxes and, on paper, adds $85 billion of "stimulus" in 2009 and 2010. One problem: "It's not stimulus," says Len Burman of the nonpartisan Tax Policy Center. Congress was "going to do it anyway. They do it every year." Strip out the AMT patch, and the stimulus drops to about $700 billion, with almost 30 percent spent after 2010.
The purpose of the stimulus is to keep declines in one part of the economy from dragging down other sectors. The next big vulnerable sector seems to be state and local governments. Weakening tax payments create massive budget shortfalls. From now until the end of fiscal 2011, these may total $350 billion, says the Center on Budget and Policy Priorities (CBPP), a liberal advocacy group. Required to balance their budgets, states face huge pressures to cut spending and jobs or to raise taxes. All would worsen the recession and deepen pessimism.
Yet, the stimulus package offers only modest relief. Using funds from the stimulus, states might offset 40 percent of their looming deficits, says the CBPP's Nicholas Johnson. The effect on localities would probably be less. Congress might have done more by providing large, temporary block grants to states and localities and letting them decide how to spend the money. Instead, the stimulus provides most funds through specific programs. There's $90 billion more for Medicaid, $12 billion for special education, $2.8 billion for various policing programs. More power is being centralized in Washington.
No one knows the economic effects of all this; estimates vary. But Obama's political strategy stunts the impact from what it might have been. By using the stimulus for unrelated policy goals, spending will be delayed and diluted. There's another downside: "Temporary" spending increases for specific programs, as opposed to block grants, will be harder to undo, worsening the long-term budget outlook.
Politics cannot be removed from the political process. But here, partisan politics ran roughshod over pragmatic economic policy. Token concessions (including the AMT provision) to some Republicans weakened the package. Obama is gambling that his flawed stimulus will seem to work well enough that he'll receive credit for restarting the economy -- and not be blamed for engineering a colossal waste.
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I disagree with this piece. I disagree with "stimulus" in general.
Want to turn things around in a flash?
Abolish the capital gains tax.
Cut the corporate tax rate down to the level of other major economies (from 34% to low 20s) , or LESS!
Put the auto companies through Chapter 7-- let the unions make the same money as the workers at the Japanese factories here in America.
Let bankrupt banks go bankrupt. Keep the depositers whole via the FDIC, let the bond holder and the stockholders be wiped out.
Repeal the BO-Pelosi "Stimulus" law.
Done. Next problem?
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Agreed.
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California: A Casualty of the Left
By Dennis Prager
FrontPageMagazine.com | Tuesday, February 24, 2009
Virtually throughout its history, and certainly in the 20th century, California has been known as the place to go for dynamism and growth. It did not become the richest, most populous, and most productive state solely because of its weather and natural resources.
So it takes a lot to turn California around from growth to contraction, from people moving into the state to a net exodus from the state, from business moving into California to businesses leaving California.
It takes some doing.
And the Left has done it.
California’s Democratic legislature has been more or less able to do whatever it wants with California. The Wall Street Journal has described the result:
“The Golden State -- which a decade ago was the booming technology capital of the world -- has been done in by two decades of chronic overspending, overregulating and a hyperprogressive tax code.…”
One might argue that’s this is a politically biased assessment. So here are some facts, not assessments:
California’s state expenditures grew from $104 billion in 2003 to $145 billion in 2008.
California has the worst credit rating in the nation.
California has the fourth highest unemployment rate in the nation, 9.3 percent -- higher even than the car manufacturing state of Michigan.
California has the second highest home foreclosure rate.
California’s tax-paying middle class is leaving the state. California’s net loss last year in state-to-state migration exceeded every other state's. New York, another Left-run state, was second.
Since 2000, California’s job growth rate -- which in the late 1970s was many times higher than the national average -- has lagged behind the national average by almost 20 percent.
California has lost 25 percent of its industrial work force since 2001.
Joel Kotkin, one of the leading observers of urban America, the presidential fellow in urban futures at Chapman University, recently wrote an essay on California, “Sundown for California.” He begins with these words:
“Twenty-five years ago, along with another young journalist, I co-authored a book called “California, Inc.” about our adopted home state. The book described ‘California’s rise to economic, political, and cultural ascendancy’...But today our Golden State appears headed, if not for imminent disaster, then toward an unanticipated, maddening, and largely unnecessary mediocrity.”
That is what left-wing policies have done to California. In Kotkin’s words, “the state legislature decided to spend its money on public employees and impose ever more regulatory burdens on business.”
Last week, Intel, the world’s largest maker of computer chips, announced that it would invest $7 billion to expand its facilities. Where? In Arizona, Oregon, and New Mexico. But not in California, the state in which Intel is headquartered.
The Left is bringing the greatest state to its knees.
What generations created, the Left destroys. There are few productive and noble institutions in America that the Left has not hurt or attempted to hurt. But while the Left destroys a great deal, it constructs almost nothing (outside of government agencies, laws, and lawsuits).
Take the Boy Scouts. For generations, the Boy Scouts, founded and preserved by Americans of all political as well as ethnic backgrounds, has helped millions of American boys become good, productive men. The Left throughout America -- its politicians, its media, its stars, its academics -- have ganged up to deprive the Boy Scouts of oxygen. Everywhere possible, the Boy Scouts are vilified and deprived of places to meet.
But while the Left works to destroy the Boy Scouts -- unless the Boy Scouts adopt the Left’s views on openly gay scouts and scout leaders -- the Left has created nothing comparable to the Boy Scouts. The Left tries to destroy one of the greatest institutions ever made for boys, but it has built nothing for boys. There is no ACLU version of the Boy Scouts; there is only the ACLU versus the Boy Scouts.
The same holds true for the greatest character-building institution in American life: Judeo-Christian religions. Once again, the Left knows how to destroy. Everywhere possible the Left works to inhibit religious institutions and values -- from substituting “Happy Holidays” for “Merry Christmas” to removing the tiny cross from the Los Angeles County Seal to arguing that religious people must not bring their values into the political arena.
And, then there is education. Until the Left took over American public education in the second half of the 20th century, it was generally excellent -- look at the high level of eighth-grade exams from early in the 20th century and you will weep. The more money the Left has gotten for education -- America now spends more per student than any country in the world -- the worse the academic results. And the Left has removed God and dress codes from schools -- with socially disastrous results.
Of course, it is not entirely accurate to say that the Left builds nothing. It has built vast government bureaucracies, MTV, and post-1960s Hollywood, for example. But these are, to say the least, not positive achievements.
In his column this week, Thomas Friedman describes General Motors Corp., as “a giant wealth-destruction machine.” That perfectly describes the Left many times over. It is both a wealth-destruction machine and an ennobling-institution destruction machine.
Dennis Prager hosts a nationally syndicated radio talk show based in Los Angeles. He is the author of four books, most recently "Happiness is a Serious Problem" (HarperCollins). His website is www.dennisprager.com. To find out more about Dennis Prager, visit the Creators Syndicate Web page at www.creators.com.
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"I disagree with "stimulus" in general." - Crafty
This wisdom from Scott G's site sums up the rationale opposing govt stimulus superbly:
“The usual effect of attempts of government to encourage consumption, is merely to prevent savings; that is, to promote unproductive consumption at the expense of reproductive, and to diminish the national wealth by the very means which were intended to increase it.” - J.S. Mill
"Want to turn things around in a flash? Abolish the capital gains tax" - CD
Yes, but zero chance with the social justice crowd in power. But we should stop taxing the inflation component of the gains and, at the minimum, lock in current rates for today's investors to rely on. Even then you can't undo the panic that was caused by the transfer of power starting in Nov 2006 that promised to punish investors who don't rush to dispose of their assets.
"Put the auto companies through Chapter 7... Let bankrupt banks go bankrupt."
I would add, let foreclosed homes be foreclosed. How can resources flow to their most valuable and productive use when we constantly put up roadblocks to block the flow.
"Cut the corporate tax rate down to the level of other major economies (from 34% to low 20s) , or LESS!"
Amazing how the same politicians that are furious about corporations moving operations elsewhere keep coming up with proposals and policies to punish them if they stay here.
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I don't like to see misguided policies confused with criminality. Of course there should be oversight and any criminals jailed but I disagree with the idea that we would be better off if the politicians had even more direct control over the supply of money. I also think it is unrealistic to think that printed dollars will ever again have a direct redemption in gold. Most money and transaction value never sees a printed dollar.
The Fed is about as private as the Supreme Court. The President appoints the Directors, the senate confirms, and the profits all revert to the U.S.Treasury.
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You see, the guy who increased spending the fastest ever actually rejected some stuff, so we need half again as much of what we spent already to make sure we can throw money down ratholes all the more quickly. Jesus Freaking Christ.
February 24, 2009
House Dems want to spend $410 billion more
Yes, but this time, it's for a good cause; to keep the government running. Or maybe it should be members of Congress who should start with the running.
AP reports "House Democrats unveiled a $410 billion spending bill on Monday to keep the government running through the end of the fiscal year, setting up the second political struggle over federal funds in less than a month with Republicans."
Better not read this while eating breakfast. "The measure includes thousands of earmarks, the pet projects favored by lawmakers but often criticized by the public in opinion polls. There was no official total of the bill's earmarks, which accounted for at least $3.8 billion."
That's "thousands" of earmarks. Both Republicans and Democrats.
Not only that, this spending bill represents an 8% increase over last year's outlays. And get this, Democrats say "they were needed to make up for cuts enacted in recent years or proposed a year ago by then-President George W. Bush in health, education, energy and other programs."
That's right. We need to spend around $35 billion more than last year because the man who increased government spending faster and higher than any other president in the history of the United States didn't increase it ENOUGH.
Remind me again why we just spent $800 billion dollars...something about an economic crisis, yes? And yet, our lawmakers pretend that it's business as usual with nauseating amounts of taxdollars just being shoveled out the Capitol window.
My advice: Buy gold, don't panic when inflation spins out of control, and when the market hits bottom, buy like there's no tomorrow.
I weep for my country.
http://www.americanthinker.com/blog/2009/02/house_dems_want_to_spend_410_b.html
House Democrats propose $410B spending bill
House bill to keep govt. running totals $410 billion, features thousands of pet projects
David Espo, AP Special Correspondent
Tuesday February 24, 2009, 8:50 am EST
Yahoo! Buzz Print
WASHINGTON (AP) -- House Democrats unveiled a $410 billion spending bill on Monday to keep the government running through the end of the fiscal year, setting up the second political struggle over federal funds in less than a month with Republicans.
The measure includes thousands of earmarks, the pet projects favored by lawmakers but often criticized by the public in opinion polls. There was no official total of the bill's earmarks, which accounted for at least $3.8 billion.
The legislation, which includes an increase of roughly 8 percent over spending in the last fiscal year, is expected to clear the House later in the week.
Democrats defended the spending increases, saying they were needed to make up for cuts enacted in recent years or proposed a year ago by then-President George W. Bush in health, education, energy and other programs.
Republicans countered that the spending in the bill far outpaced inflation, and amounted to much higher increases when combined with spending in the stimulus legislation that President Barack Obama signed last week. In a letter to top Democratic leaders, the GOP leadership called for a spending freeze, a step they said would point toward a "new standard of fiscal discipline."
Either way, the bill advanced less than one week after Obama signed the $787 billion economic stimulus bill that all Republicans in Congress opposed except for three moderate GOP senators.
Apart from spending, the legislation provides Democrats in Congress and Obama an opportunity to reverse Bush-era policy on selected issues.
It loosens restrictions on travel to Cuba, as well as the sale of food and medicine to the communist island-nation.
In another change, the legislation bans Mexican-licensed trucks from operating outside commercial zones along the border with the United States. The Teamsters Union, which supported Obama's election last year, hailed the move.
The Bush administration backed a pilot program to permit up to 500 trucks from 100 Mexican motor carriers access to U.S. roads.
The legislation covers programs for numerous Cabinet-level and other agencies, and takes the place of regular annual spending bills that did not pass last year as a result of a deadlock between the Bush administration and the Democratic-controlled Congress.
Congressional expenses are included. The bill provides $500,000 for what is described as a Senate "pilot program" that will defray the cost of mass mail postcards to households notifying them of a nearby town meeting to be attended by any senator.
http://finance.yahoo.com/news/House-Democrats-propose-410B-apf-14450221.html
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Several calm and reasoned and well researched posts from Scott Grannis on his blog-- which is always a must read:
http://scottgrannis.blogspot.com/
For the record, I am not sure I agree, I fear the lunacies of His Glibness are driving things into deep and dangerous waters, but Scott is always to be considered seriously.
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Why Scott Grannis is wrong:
NOTE: Scott Grannis lives in a house that overlooks a beach. I live in an apartment that overlooks urban decay. My best chance for a decent retirement probably hinges on getting a job driving someone like Scott Grannis around.
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http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent of those families carried a balance. In 2001, 76.2 percent of families had creditcards, and 55 percent of those families carried a balance. (Source: Federal Reserve Bulletin, February 2006.)
Total U.S. consumer debt (which includes credit card debt and noncredit-card debt but not mortgage debt) reached $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006. (Source: Federal Reserve)
After an almost unbroken streak of increases, total U.S. consumer revolving debt fell $973.5 billion in November 2008. About 98 percent of that debt was credit card debt. (Source: Federal Reserve)
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43 out 50 states are running budget deficits. 43 out of 57 doesn't sound near as bad though, right Barry?
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**These assclowns are in charge**
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/23/AR2009022302595_pf.html
What if They Held Breakout Sessions and Everyone Broke Out?
By Dana Milbank
Tuesday, February 24, 2009; A03
Holding a "fiscal responsibility summit" at the White House in the middle of a government spending spree is a bit like having an Alcoholics Anonymous meeting at a frat house on homecoming weekend.
This could explain the sparse attendance at yesterday's session. Economic Recovery Advisory Board Chairman Paul Volcker, penciled in to lead the session on taxes, didn't come. Veterans Affairs Secretary Eric Shinseki, listed as a moderator of the health-care panel, was also missing, as was Deputy Defense Secretary William Lynn, who had been tapped as a leader of the procurement session. Another mysterious absence: CIA Director Leon Panetta, the Clinton budget director, who was expected to lead the budget panel.
"It is wonderful to see the speaker here," President Obama said at the start of his remarks. True: House Speaker Nancy Pelosi (D-Calif.) was in the first row, having walked in 10 minutes after the program began.
"And," the president continued, "we've got, uh, our representative -- I don't see Harry here." Also true: Senate Majority Leader Harry Reid (D-Nev.) had another engagement, across town at the Newseum.
The attendance list distributed by the White House came with excuses helpfully printed after the names. Senate Minority Leader Mitch McConnell (R-Ky.): "Will not join breakout sessions." Senate Minority Whip Jon Kyl (R-Ariz.): "Arriving at 2:30," 90 minutes late. Pelosi: "Will not join breakout sessions."
The president, assembling the summiteers in the East Room, gave them their orders: "I want you to question each other, challenge each other," he said. "I look forward to hearing the results when you report back."
The participants then filed out into the main foyer of the White House for juice, coffee and piano music. Sen. John Cornyn (Tex.), a member of the Republican leadership, was seen fleeing before the breakout sessions began.
The lawmakers got right to work. In the health-care session, Sen. Arlen Specter (R-Pa.) said he had considered giving up martinis to improve his health but "I was elated when I found it didn't make any difference." Alcohol was also a topic in the budget session, where Rep. David Obey (D-Wis.) proposed that the president solve the problem by locking everybody in a room with three bottles of gin.
When Obama announced the summit last month, it had the sound of something big. But the administration didn't settle on a date until recently, and some participants didn't receive invitations until Friday. According to one report, not denied by the White House, Obama dropped plans to announce a new Social Security task force at the gathering.
There were signs yesterday of the hasty arrangements. In the tax-reform session, Rep. David Price (D-N.C.) arrived to discover that his name tag identified him as Rep. Tom Price (R-Ga.). White House Chief of Staff Rahm Emanuel, listed as one of the moderators of the procurement panel, arrived just 10 minutes before the end.
"Oh, nice of you to join us," said Rep. Darrell Issa (R-Calif.). Emanuel said nothing.
But Emanuel didn't need to say anything. The summit was about symbolism -- conveying the sense that Obama, at a time of fiscal profligacy, cares about fiscal restraint -- and by that measure, it succeeded admirably.
"Today, I'm pledging to cut the deficit we inherited by half by the end of my first term in office," the president told the attendees. This remarkable feat would be made possible only by the fact that the current year's deficit was an eye-popping $1.3 trillion and rising when Obama took over; even half that amount would still be a record.
After two hours away from the cameras in their breakout sessions, the summit-goers rejoined Obama. To nobody's surprise, they announced no major breakthroughs. But, with television cameras rolling, they gave Obama something almost as valuable: lavish praise for the summit. It was "very, very productive" (Rep. Steny Hoyer, D-Md.), "a terrific start in the White House" (Sen. Kent Conrad, D-N.D.), and "all of us are enormously grateful" (Sen. Max Baucus, D-Mont.). Sen. Tom Carper (D-Del.) likened Obama's outreach to the biblical "Parable of the Sower."
Even Republicans gushed. "It's a great opportunity, I think, for us to really come together on some of these very, very big issues," said Rep. Eric Cantor (Va.), the No. 2 House Republican.
A couple of Republicans in the audience needled Obama, but the president, from the stage, easily put down their challenges.
"Your helicopter is now going to cost as much as Air Force One," Sen. John McCain (R-Ariz.) chided.
"The helicopter I have now seems perfectly adequate to me," Obama answered, to laughter. "Of course, I've never had a helicopter before."
Rep. Joe Barton (R-Tex.) complained that Pelosi had shut Republicans out from legislative talks. "This is a good first step," he said of the summit. "But if this is all we do, it's a sterile step."
"The minority has to be constructive," Obama told the congressman, and not "just want to blow the thing up."
For all the no-shows and the lack of planning, the summit had, in the end, provided something of value: a rare, public back-and-forth between the president, lawmakers and interest groups. No doubt some of the no-shows will wish they had been there -- and, luckily, they may get a second chance.
"We've scheduled a health-care summit next week," the president told the summiteers. "Not that I've got summititis here."
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http://blog.heritage.org/2009/02/05/retiring-boomers-where-the-bucks-are/
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http://www.washingtonpost.com/wp-dyn/content/article/2009/02/06/AR2009020601156.html?hpid=topnews
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http://www.washingtontimes.com/news/2009/feb/04/cbo-obama-stimulus-harmful-over-long-haul/
CBO: Obama stimulus harmful over long haul
Stephen Dinan (Contact)
Wednesday, February 4, 2009
President Obama's economic recovery package will actually hurt the economy more in the long run than if he were to do nothing, the nonpartisan Congressional Budget Office said Wednesday.
CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.
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WIRED MAGAZINE: 17.03
Tech Biz : IT
Recipe for Disaster: The Formula That Killed Wall Street
By Felix Salmon 02.23.09
In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly... until one of them devastated the global economy.
Photo: Jim Krantz/Gallery Stock
Road Map for Financial Recovery: Radical Transparency Now! A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.
A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates. If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them. The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.
Bond investors are very comfortable with the concept of probability. If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.
Bond investors also invest in pools of hundreds or even thousands of mortgages. The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes. But mortgage pools are messier than most bonds. There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted. There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house. And most problematic, there's no easy way to assign a single probability to the chance of default.
Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating. Investors in the first tranche, or slice, are first in line to be paid off. Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default. And so on.
"...correlation is charlatanism"
Photo: AP photo/Richard Drew The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.
Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.
Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.
To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.
But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.
If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.
But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.
In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?
Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.
Probability
Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer. Survival times
The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.
Equality
A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.
Copula
This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up.
Distribution functions
The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.
Gamma
The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.
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Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.
Li's trajectory is typical of the quant era, which began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.
In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.
If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.
When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).
It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.
As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.
The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.
At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.
"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.
The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.
David X. Li
Illustration: David A. Johnson In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.
In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.
Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.
Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.
"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."
Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number. They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?
They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.
"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says. For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high. But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative. And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again. It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.
No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.
"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.
Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."
Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.
In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.
As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."
— Felix Salmon (felix@felixsalmon.com) writes the Market Movers financial blog at Portfolio.com.
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Very interesting.
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Obama seeks $634B over 10 years for health care
By RICARDO ALONSO-ZALDIVAR, Associated Press Writer 2 mins ago
WASHINGTON – President Barack Obama wants a significant "down payment" for overhauling the health care system: $634 billion over 10 years. A senior administration official says Obama's budget calls for financing the overhaul by trimming Medicare spending and limiting tax deductions for upper-income earners. The official spoke on condition of anonymity because the budget won't be released until Thursday.
About 48 million Americans are uninsured, according to recent estimates. The cost of guaranteeing coverage for all could easily exceed $1 trillion over 10 years.
Obama has asked Congress for health reform this year, but senior members of both political parties say they are concerned about the cost.
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"You think health care is expensive now? Just wait until the govt. makes it free." PJ O'Rourke.
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https://cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html
World GDP: $ 70,650,000,000,000
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From the Wired article posted above:
The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.
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http://www.guardian.co.uk/business/2009/feb/24/cds-losses-warning
Banks in Europe and the US face a new wave of losses linked to contracts issued to insure against companies going bust and defaulting on their loans, City analysts have warned.
After the billions lost over the US subprime market and leveraged loans, investment banks such as Morgan Stanley, Deutsche Bank, Barclays, UBS and RBS face losses on credit default swaps (CDS) – contracts that allow an investor to be repaid if a company loan or a bond defaults.
CDS contracts became a favourite tool of speculators, mostly hedge funds, which bought the contracts without having any link to the original lending. They bought the contract to trade or in the expectation the company would in fact default, meaning they could claim back the full value of a loan they never made.
The CDS market exploded to be worth as much as $50tn, many times the size of the underlying assets. Each loan could have thousands of protection contracts, even if there were only a few lenders. Hedge funds accounted for about 60% of CDS trading, according to ratings agency Fitch.
But now that a rising number of companies are going bust, the issuers of the contracts could face significant losses, analysts say. US carmaker General Motors, which is seeking government aid, was the company that had most protection bought and sold on it by the end of 2006, according to Fitch.
Investment banks were attracted by the method as they didn't have to report any issuance data to any regulator and could issue as many contracts as they wanted.
At present, nobody knows which banks have issued which contracts. The uncertainty and the deepening recession have sent the cost of insurance protection to record highs this week. The itraxx index, which tracks the senior debt of 25 European financial institutions, closed at 165 basis points today, near its record yesterday of 166 points, according to financial information provider Markit.
CDS contracts have also gained on growing uncertainty over eastern European banks and after Citigroup asked the US government for aid.
The banks say they are protected as they have daily updates on the collateral needed for their CDS contracts.
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http://www.telegraph.co.uk/finance/economics/4800828/German-CDS-debt-spreads-hit-record-as-economy-crumbles.html
German CDS debt spreads hit record as economy crumbles
The cost of bankruptcy protection on German debt has reached an all-time high on spill-over from the financial crisis in Eastern Europe and mounting concerns about the stability of Germany's banking system.
Credit default swaps measuring risk on five-year sovereign debt touched 90 basis points on Tuesday and looks poised to rise above French debt for the first time.
The spike follows a warning by Deutsche Bank that Germany’s economy will contract by 5pc this year as industrial exports collapse at the fastest pace since the Great Depression.
Norbert Walter, the bank’s chief economist, said there was a risk of an even deeper slump if the economy fails to stabilize by the summer. “A bigger contraction can’t be ruled out,” he said.
The state governments of Hamburg and Schleswig-Holstein agreed on €3bn (£2.7bn) cash rescue on Tuesday for Landesbank HSH Nordbank, the world’s top source of finance for shipping, raising the public stake to 80pc. The bank has already drawn on a €10bn guarantee from the government’s bail-out fund Soffin. HSH lost €2.8bn last year, mostly on credit instruments and fall-out from the Lehman debacle.
“Of course these costs will weigh on the budget. We had no choice,” said Peter Harry Carstensen, the premier of Schleswig Holstein. He denied press reports that his own state was facing bankruptcy.
There are eleven state-owned Landesbanken in Germany and most are in trouble. While their mission is to boost regional industry and finance the family Mittelstand firms, they strayed disastrously into almost every form of leveraged excess through off-books `conduits’, many based in Dublin.
“The entire Landesbanken system is rotten,” said Hans Redeker, currency chief at BNP Paribas.”Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.”
“German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill,” he said.
The rating agency Standard & Poor’s said in a report on Tuesday that the region was “shuddering to a halt”, with a number of countries were “crumbling under the weight of high foreign currency debt.” It is unclear whether they can roll over debts as Western banks retreat to their home market.
S&P said foreign debt is 115pc of GDP in Estonia, 103pc in Bulgaria, 93pc in Hungary, all far above danger level. “All the ingredients of a major crisis are in place,” said Jean-Michel Six, the group’s Europe economist.
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http://online.wsj.com/article/SB123561551065378405.html?mod=djemEditorialPage#
The 2% Illusion
Take everything they earn, and it still won't be enough.
President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end "tax breaks for the wealthiest 2% of Americans," and he promised that households earning less than $250,000 won't see their taxes increased by "one single dime."
This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.
Note that federal income taxes are already "progressive" with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He'd also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won't come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.
But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.
Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.
Mr. Obama is of course counting on an economic recovery. And he's also assuming along with the new liberal economic consensus that taxes don't matter to growth or job creation. The truth, though, is that they do. Small- and medium-sized businesses are the nation's primary employers, and lower individual tax rates have induced thousands of them to shift from filing under the corporate tax system to the individual system, often as limited liability companies or Subchapter S corporations. The Tax Foundation calculates that merely restoring the higher, Clinton-era tax rates on the top two brackets would hit 45% to 55% of small-business income, depending on how inclusively "small business" is defined. These owners will find a way to declare less taxable income.
The bottom line is that Mr. Obama is selling the country on a 2% illusion. Unwinding the U.S. commitment in Iraq and allowing the Bush tax cuts to expire can't possibly pay for his agenda. Taxes on the not-so-rich will need to rise as well.
On that point, by the way, it's unclear why Mr. Obama thinks his climate-change scheme won't hit all Americans with higher taxes. Selling the right to emit greenhouse gases amounts to a steep new tax on most types of energy and, therefore, on all Americans who use energy. There's a reason that Charlie Rangel's Ways and Means panel, which writes tax law, is holding hearings this week on cap-and-trade regulation.
Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don't ignore the data. And the reality is that the only way to pay for Mr. Obama's ambitions is to reach ever deeper into the pockets of the American middle class.
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http://www.salon.com/opinion/feature/2009/02/26/klare/print.html
We're on the brink of disaster
Violent protests and riots are breaking out everywhere as economies collapse and governments fail. War is bound to follow.
By Michael Klare
Editor's note: This article has also appeared on TomDispatch.com.
Feb. 26, 2009 |
The global economic meltdown has already caused bank failures, bankruptcies, plant closings and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet. But another perilous consequence of the crash of 2008 has only recently made its appearance: increased civil unrest and ethnic strife. Someday, perhaps, war may follow.
As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Obama has referred to as a "lost decade," the result could be a global landscape filled with economically fueled upheavals.
Indeed, if you want to be grimly impressed, hang a world map on your wall and start inserting red pins where violent episodes have already occurred. Athens (Greece), Longnan (China), Port-au-Prince (Haiti), Riga (Latvia), Santa Cruz (Bolivia), Sofia (Bulgaria), Vilnius (Lithuania) and Vladivostok (Russia) would be a start. Many other cities from Reykjavik, Paris, Rome and Zaragoza to Moscow and Dublin have witnessed huge protests over rising unemployment and falling wages that remained orderly thanks in part to the presence of vast numbers of riot police. If you inserted orange pins at these locations -- none as yet in the United States -- your map would already look aflame with activity. And if you're a gambling man or woman, it's a safe bet that this map will soon be far better populated with red and orange pins.
For the most part, such upheavals, even when violent, are likely to remain localized in nature, and disorganized enough that government forces will be able to bring them under control within days or weeks, even if -- as with Athens for six days last December -- urban paralysis sets in due to rioting, tear gas and police cordons. That, at least, has been the case so far. It is entirely possible, however, that, as the economic crisis worsens, some of these incidents will metastasize into far more intense and long-lasting events: armed rebellions, military takeovers, civil conflicts, even economically fueled wars between states.
Every outbreak of violence has its own distinctive origins and characteristics. All, however, are driven by a similar combination of anxiety about the future and lack of confidence in the ability of established institutions to deal with the problems at hand. And just as the economic crisis has proven global in ways not seen before, so local incidents -- especially given the almost instantaneous nature of modern communications -- have a potential to spark others in far-off places, linked only in a virtual sense.
A global pandemic of economically driven violence
The riots that erupted in the spring of 2008 in response to rising food prices suggested the speed with which economically related violence can spread. It is unlikely that Western news sources captured all such incidents, but among those recorded in the New York Times and the Wall Street Journal were riots in Cameroon, Egypt, Ethiopia, Haiti, India, Indonesia, Ivory Coast and Senegal.
In Haiti, for example, thousands of protesters stormed the presidential palace in Port-au-Prince and demanded food handouts, only to be repelled by government troops and U.N. peacekeepers. Other countries, including Pakistan and Thailand, quickly sought to deter such assaults by deploying troops at farms and warehouses throughout the country.
The riots only abated at summer's end when falling energy costs brought food prices crashing down as well. (The cost of food is now closely tied to the price of oil and natural gas because petrochemicals are so widely and heavily used in the cultivation of grains.) Ominously, however, this is sure to prove but a temporary respite, given the epic droughts now gripping breadbasket regions of the United States, Argentina, Australia, China, the Middle East and Africa. Look for the prices of wheat, soybeans and possibly rice to rise in the coming months -- just when billions of people in the developing world are sure to see their already marginal incomes plunging due to the global economic collapse.
Food riots were but one form of economic violence that made its bloody appearance in 2008. As economic conditions worsened, protests against rising unemployment, government ineptitude and the unaddressed needs of the poor erupted as well. In India, for example, violent protests threatened stability in many key areas. Although usually described as ethnic, religious or caste disputes, these outbursts were typically driven by economic anxiety and a pervasive feeling that someone else's group was faring better than yours -- and at your expense.
In April, for example, six days of intense rioting in Indian-controlled Kashmir were largely blamed on religious animosity between the majority Muslim population and the Hindu-dominated Indian government; equally important, however, was a deep resentment over what many Kashmiri Muslims experienced as discrimination in jobs, housing and land use. Then, in May, thousands of nomadic shepherds known as Gujjars shut down roads and trains leading to the city of Agra, home of the Taj Mahal, in a drive to be awarded special economic rights; more than 30 people were killed when the police fired into crowds. In October, economically related violence erupted in Assam in the country's far northeast, where impoverished locals are resisting an influx of even poorer, mostly illegal immigrants from nearby Bangladesh.
Economically driven clashes also erupted across much of eastern China in 2008. Such events, labeled "mass incidents" by Chinese authorities, usually involve protests by workers over sudden plant shutdowns, lost pay or illegal land seizures. More often than not, protesters demanded compensation from company managers or government authorities, only to be greeted by club-wielding police.
Needless to say, the leaders of China's Communist Party have been reluctant to acknowledge such incidents. This January, however, the magazine Liaowang (Outlook Weekly) reported that layoffs and wage disputes had triggered a sharp increase in such "mass incidents," particularly along the country's eastern seaboard, where much of its manufacturing capacity is located.
By December, the epicenter of such sporadic incidents of violence had moved from the developing world to Western Europe and the former Soviet Union. Here, the protests have largely been driven by fears of prolonged unemployment, disgust at government malfeasance and ineptitude, and a sense that "the system," however defined, is incapable of satisfying the future aspirations of large groups of citizens.
One of the earliest of this new wave of upheavals occurred in Athens on Dec. 6, 2008, after police shot and killed a 15-year-old schoolboy during an altercation in a crowded downtown neighborhood. As news of the killing spread throughout the city, hundreds of students and young people surged into the city center and engaged in pitched battles with riot police, throwing stones and firebombs. Although government officials later apologized for the killing and charged the police officer involved with manslaughter, riots broke out repeatedly in the following days in Athens and other Greek cities. Angry youths attacked the police -- widely viewed as agents of the establishment -- as well as luxury shops and hotels, some of which were set on fire. By one estimate, the six days of riots caused $1.3 billion in damage to businesses at the height of the Christmas shopping season.
Russia also experienced a spate of violent protests in December, triggered by the imposition of high tariffs on imported automobiles. Instituted by Prime Minister Vladimir Putin to protect an endangered domestic auto industry (whose sales were expected to shrink by up to 50 percent in 2009), the tariffs were a blow to merchants in the Far Eastern port of Vladivostok who benefited from a nationwide commerce in used Japanese vehicles. When local police refused to crack down on anti-tariff protests, the authorities were evidently worried enough to fly in units of special forces from Moscow, 3,700 miles away.
In January, incidents of this sort seemed to be spreading through Eastern Europe. Between Jan. 13 and Jan. 16, anti-government protests involving violent clashes with the police erupted in the Latvian capital of Riga, the Bulgarian capital of Sofia, and the Lithuanian capital of Vilnius. It is already essentially impossible to keep track of all such episodes, suggesting that we are on the verge of a global pandemic of economically driven violence.
A perfect recipe for instability
While most such incidents are triggered by an immediate event -- a tariff, the closure of a local factory, the announcement of government austerity measures -- there are systemic factors at work as well. While economists now agree that we are in the midst of a recession deeper than any since the Great Depression of the 1930s, they generally assume that this downturn -- like all others since World War II -- will be followed in a year, or two, or three, by the beginning of a typical recovery.
There are good reasons to suspect that this might not be the case -- that poorer countries (along with many people in the richer countries) will have to wait far longer for such a recovery, or may see none at all. Even in the United States, 54 percent of Americans now believe that "the worst" is "yet to come" and only 7 percent that the economy has "turned the corner," according to a recent Ipsos/McClatchy poll; fully a quarter think the crisis will last more than four years. Whether in the U.S., Russia, China or Bangladesh, it is this underlying anxiety -- this suspicion that things are far worse than just about anyone is saying -- that is helping to fuel the global epidemic of violence.
The World Bank's most recent status report, Global Economic Prospects 2009, fulfills those anxieties in two ways. It refuses to state the worst, even while managing to hint, in terms too clear to be ignored, at the prospect of a long-term, or even permanent, decline in economic conditions for many in the world. Nominally upbeat -- as are so many media pundits -- regarding the likelihood of an economic recovery in the not-too-distant future, the report remains full of warnings about the potential for lasting damage in the developing world if things don't go exactly right.
Two worries, in particular, dominate Global Economic Prospects 2009: that banks and corporations in the wealthier countries will cease making investments in the developing world, choking off whatever growth possibilities remain; and that food costs will rise uncomfortably, while the use of farmlands for increased biofuels production will result in diminished food availability to hundreds of millions.
Despite its Pollyanna-ish passages on an economic rebound, the report does not mince words when discussing what the almost certain coming decline in First World investment in Third World countries would mean:
"Should credit markets fail to respond to the robust policy interventions taken so far, the consequences for developing countries could be very serious. Such a scenario would be characterized by ... substantial disruption and turmoil, including bank failures and currency crises, in a wide range of developing countries. Sharply negative growth in a number of developing countries and all of the attendant repercussions, including increased poverty and unemployment, would be inevitable."
In the fall of 2008, when the report was written, this was considered a "worst-case scenario." Since then, the situation has obviously worsened radically, with financial analysts reporting a virtual freeze in worldwide investment. Equally troubling, newly industrialized countries that rely on exporting manufactured goods to richer countries for much of their national income have reported stomach-wrenching plunges in sales, producing massive plant closings and layoffs.
The World Bank's 2008 survey also contains troubling data about the future availability of food. Although insisting that the planet is capable of producing enough foodstuffs to meet the needs of a growing world population, its analysts were far less confident that sufficient food would be available at prices people could afford, especially once hydrocarbon prices begin to rise again. With ever more farmland being set aside for biofuels production and efforts to increase crop yields through the use of "miracle seeds" losing steam, the Bank's analysts balanced their generally hopeful outlook with a caveat: "If biofuels-related demand for crops is much stronger or productivity performance disappoints, future food supplies may be much more expensive than in the past."
Combine these two World Bank findings -- zero economic growth in the developing world and rising food prices -- and you have a perfect recipe for unrelenting civil unrest and violence. The eruptions seen in 2008 and early 2009 will then be mere harbingers of a grim future in which, in a given week, any number of cities reel from riots and civil disturbances that could spread like multiple brush fires in a drought.
Mapping a world at the brink
Survey the present world, and it's all too easy to spot a plethora of potential sites for such multiple eruptions -- or far worse. Take China. So far, the authorities have managed to control individual "mass incidents," preventing them from coalescing into something larger. But in a country with a more than 2,000-year history of vast millenarian uprisings, the risk of such escalation has to be on the minds of every Chinese leader.
On Feb. 2, a top Chinese party official, Chen Xiwen, announced that, in the last few months of 2008 alone, a staggering 20 million migrant workers, who left rural areas for the country's booming cities in recent years, had lost their jobs. Worse yet, they had little prospect of regaining them in 2009. If many of these workers return to the countryside, they may find nothing there either, not even land to work.
Under such circumstances, and with further millions likely to be shut out of coastal factories in the coming year, the prospect of mass unrest is high. No wonder the government announced a $585 billion stimulus plan aimed at generating rural employment and, at the same time, called on security forces to exercise discipline and restraint when dealing with protesters. Many analysts now believe that, as exports continue to dry up, rising unemployment could lead to nationwide strikes and protests that might overwhelm ordinary police capabilities and require full-scale intervention by the military (as occurred in Beijing during the Tiananmen Square demonstrations of 1989).
Or take many of the Third World petro-states that experienced heady boosts in income when oil prices were high, allowing governments to buy off dissident groups or finance powerful internal security forces. With oil prices plunging from $147 per barrel of crude oil to less than $40, such countries, from Angola to shaky Iraq, now face severe instability.
Nigeria is a typical case in point: When oil prices were high, the central government in Abuja raked in billions every year, enough to enrich elites in key parts of the country and subsidize a large military establishment; now that prices are low, the government will have a hard time satisfying all these previously well-fed competing obligations, which means the risk of internal disequilibrium will escalate. An insurgency in the oil-producing Niger Delta region, fueled by popular discontent with the failure of oil wealth to trickle down from the capital, is already gaining momentum and is likely to grow stronger as government revenues shrivel; other regions, equally disadvantaged by national revenue-sharing policies, will be open to disruptions of all sorts, including heightened levels of internecine warfare.
Bolivia is another energy producer that seems poised at the brink of an escalation in economic violence. One of the poorest countries in the Western Hemisphere, it harbors substantial oil and natural gas reserves in its eastern, lowland regions. A majority of the population -- many of Indian descent -- supports President Evo Morales, who seeks to exercise strong state control over the reserves and use the proceeds to uplift the nation's poor. But a majority of those in the eastern part of the country, largely controlled by a European-descended elite, resent central government interference and seek to control the reserves themselves. Their efforts to achieve greater autonomy have led to repeated clashes with government troops and, in deteriorating times, could set the stage for a full-scale civil war.
Given a global situation in which one startling, often unexpected development follows another, prediction is perilous. At a popular level, however, the basic picture is clear enough: Continued economic decline combined with a pervasive sense that existing systems and institutions are incapable of setting things right is already producing a potentially lethal brew of anxiety, fear and rage. Popular explosions of one sort or another are inevitable.
Some sense of this new reality appears to have percolated up to the highest reaches of the U.S. intelligence community. In testimony before the Senate Select Committee on Intelligence on Feb. 12, Adm. Dennis C. Blair, the new director of national intelligence, declared, "The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications ... Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period" -- certain to be the case in the present situation.
Blair did not specify which countries he had in mind when he spoke of "regime-threatening instability" -- a new term in the American intelligence lexicon, at least when associated with economic crises -- but it is clear from his testimony that U.S. officials are closely watching dozens of shaky nations in Africa, the Middle East, Latin America and Central Asia.
Now go back to that map on your wall with all those red and orange pins in it and proceed to color in appropriate countries in various shades of red and orange to indicate recent striking declines in gross national product and rises in unemployment rates. Without 16 intelligence agencies under you, you'll still have a pretty good idea of the places that Blair and his associates are eyeing in terms of instability as the future darkens on a planet at the brink.
-- By Michael Klare
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Eighty Seven Percent of Housing Value Loss* in Just Four States
Ronald Bailey | February 26, 2009, 10:42am
President Barack Obama told a joint session of Congress earlier this week that his administration has a plan to prevent mortgage foreclosures for millions of Americans. In fact, the Department of Housing and Urban Development proudly says that it is shoveling money out the door as fast as it can.
Yesterday, researchers at the University of Virginia took an in-depth look at just where foreclosures are happening. It turns out that 87 percent of foreclosures housing value loss is taking place in just four states--California, Florida, Arizona and Nevada. According the press release describing the study:
National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz.
Their analysis shows that most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."
"California had only 10 percent of the nation's housing units, but it had 34 percent of foreclosures in 2008," Lucy and Herlitz reported.
It should be noted that the current average national foreclosure rate of 0.79 percent is about double the rate it was in 2000. What about the effect of foreclosures on the balance sheets of American banks?
Potential losses in housing values from 2008 foreclosures in all 50 states — if values decline to 2000 levels — were less than one-third of the $350 billion provided to banks and insurance companies to cope with losses in mortgage-backed securities, Lucy and Herlitz estimated.
See more of the UVA findings here.
*not "foreclosures" as originally headlined. Nevada, California, Arizona, and Florida do rank numbers 1, 2, 3, and 4 in foreclosure activity. All together the four states account for 55 percent of national foreclosure activity.
http://www.reason.com/blog/show/131890.html
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As the epic scale of spending sinks in, I expect a serious drop in the market tomorrow.
Thanks Obots!
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**Not a coincidence. Glad Scott Grannis and I are in agreement!** :-D
http://scottgrannis.blogspot.com/2009/02/coincidence.html
Friday, February 27, 2009
Coincidence?
No one can prove that the crash in global equity markets has anything to do with Obama becoming president, but there are reasons to think so.
Obama is seeking to implement virtually overnight a blueprint for an unprecedent expansion of government's size and power, and huge new tax burdens and deficits will be required to fund this. He justifies it all with the unproven and logic-lacking theory that more government spending and intervention can expand the economy. He is rushing to implement a massive shift in the way we use energy by putting in place a politically motivated tax on the cheapest energy available, based on an increasingly smaller "consensus" among scientists that reducing carbon emissions will "save the planet."
In short, Obama is taking monumental risks, not only with his own presidency, but with the future of our country, and ultimately with the well-being of the entire world. He wasn't kidding when he said he was audacious. But it's increasingly looking like his audacity is spinning out of control. In my view, that's what is worrying equity markets all over the world. This is far more serious than the subprime lending and related financial crisis, which is well on its way to getting fixed.
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http://kudlowsmoneypolitics.blogspot.com/
Obama Declares War on Investors, Entrepreneurs, Businesses, and More
Let me be very clear on the economics of President Obama’s State of the Union speech and his budget. He is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds. That is the meaning of his anti-growth tax-hike proposals, which make absolutely no sense at all -- either for this recession or from the standpoint of expanding our economy’s long-run potential to grow.
Raising the marginal tax rate on successful earners, capital, dividends, and all the private funds is a function of Obama’s left-wing social vision, and a repudiation of his economic-recovery statements. Ditto for his sweeping government-planning-and-spending program, which will wind up raising federal outlays as a share of GDP to at least 30 percent, if not more, over the next 10 years.
This is nearly double the government-spending low-point reached during the late 1990s by the Gingrich Congress and the Clinton administration. While not quite as high as spending levels in Western Europe, we regrettably will be gaining on this statist-planning approach.
Study after study over the past several decades has shown how countries that spend more produce less, while nations that tax less produce more. Obama is doing it wrong on both counts.
And as far as middle-class tax cuts are concerned, Obama’s cap-and-trade program will be a huge across-the-board tax increase on blue-collar workers, including unionized workers. Industrial production is plunging, but new carbon taxes will prevent production from ever recovering. While the country wants more fuel and power, cap-and-trade will deliver less.
The tax hikes will generate lower growth and fewer revenues. Yes, the economy will recover. But Obama’s rosy scenario of 4 percent recovery growth in the out years of his budget is not likely to occur. The combination of easy money from the Fed and below-potential economic growth is a prescription for stagflation. That’s one of the messages of the falling stock market.
Essentially, the Obama economic policies represent a major Democratic party relapse into Great Society social spending and taxing. It is a return to the LBJ/Nixon era, and a move away from the Reagan/Clinton period. House Republicans, fortunately, are 90 days sober, as they are putting up a valiant fight to stop the big-government onslaught and move the GOP back to first principles.
Noteworthy up here on Wall Street, a great many Obama supporters -- especially hedge-fund types who voted for “change” -- are becoming disillusioned with the performances of Obama and Treasury man Geithner. There is a growing sense of buyer’s remorse. Well then, do conservatives dare say: We told you so?
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http://kudlowsmoneypolitics.blogspot.com/
An Interview with Canadian Prime Minister Stephen Harper
What follows below is the transcript of my interview with Canadian Prime Minister Stephen Harper on last night's show. Mr. Harper is a trained economist and quite an impressive statesman. Our northern neighbors are lucky to have him at the helm. We covered a wide range of key topics including the ailing banking system, risks of protectionism, oil sands and autos. As you'll see below, Mr. Harper offered some very wise observations and insight.
LARRY KUDLOW: All right. We are honored to welcome Canadian Prime Minister Stephen Harper to the program. Mr. Prime Minister, thank you very much.
PRIME MINISTER STEPHEN HARPER: It's nice to be here, Larry.
KUDLOW: Let me begin with an interesting subject here, banking. Everybody's talking about banking. The Canadian banks appear to be in much better shape than the American banks. They have fewer toxic assets. Their losses aren't nearly as bad. No one's talking about bankruptcy up there. I want to learn from our northern cousins. What can you tell us? Why are Canadian banks looking better than our banks?
HARPER: Well first of all I can tell you, it is true. We have, I think, the only banks in the western world where we’re not looking at bailouts or anything like that.
KUDLOW: No TARP money sir, if I’m not mistaken? No TARP money?
HARPER: We haven’t got any TARP money. We’ve gone in and done some market transactions with our banks to improve liquidity. But I think the reasons are really complex, Larry. You know, first of all, our banks are private. We don’t have a Fannie Mae or Freddie Mac equivalent mucking around in the system.
KUDLOW: Is that a lesson right there Prime Minister?
HARPER: Well, I think my observation is those are institutions with a difficult private/public mix. And sometimes private/ public mixes have benefits and sometimes they have the worst of both worlds. We don’t have anything like that. We do have though, a strong system of regulation, and activist regulators, who go and meet with the sector. But they’re macro, prudential kind of regulations. They don’t try and micromanage banks’ decisions. We try and establish good oversight and transparency.
KUDLOW: Do you have leverage and borrowing ratios that might have been enforced? Because that’s clearly one of the breakdowns here in the states?
HARPER: Well, we do have leverage ratios. What’s ironic is that our own banks had not actually achieved those ratios. They were actually working under them. Part of what we…
KUDLOW: They were under leveraged?
HARPER: They were under leveraged.
KUDLOW: Wait, wait. Canadian banks were under leveraged?
HARPER: Under what they could have been.
KUDLOW: I didn’t know there was such a thing on this entire planet earth.
HARPER: Well I think part of what we have done is through the system of regulation we’ve had, we’ve encouraged a fairly cautious culture in the banks. For example, our banks, when they sign mortgages, largely hold those mortgages rather than trading them. So they have a lot more interest in the underlying quality of those mortgages. And we avoided the sub-prime kind of problem.
KUDLOW: Did I hear you at your final news conference with President Obama last week -- you turned down, or your government or the regulators turned down a merger from one of the large Canadian banks. Is “too big to fail” solved in part by not letting them get so big? Is that a model that needs to be more regulated?
HARPER: Well I think the truth is we already have a highly concentrated sector. We have only six major banks that have most of the market. We have only three major insurance firms. And the banks also generally control the major brokerages. So obviously, to go any farther in terms of concentration without opening up the Canadian market itself would be a highly controversial decision.
KUDLOW: I want to ask you another economic question. You’re in a recession, but really, it just began. Your unemployment rate is a little bit less than the United States. Your stock market has been hit bad, as hard as our stock market, so it’s been very poor. However, from a little bit of research, the top federal personal tax rate in Canada, if I have this right, is 29 percent. Ours is 35. Mr. Obama says he’s going to push it up to 40, back pre-Bush. Is that true, 29 percent?
HARPER: Well in fairness it’s 29 percent, but there is a provincial tax put on top of that.
KUDLOW: Well we have that too.
HARPER: I think our combined income tax rate is still higher than yours.
KUDLOW: Really? How high are the provincial?
HARPER: At the highest, they’re about half, my recollection is about half of what the federal would be. On top of that they kick in at a much lower level of income. Ours kick in at about $130,000. Obviously, looking into the future, when we have a bit more fiscal room, that is something we would like to tackle. We’re bringing the corporate rate down. Our corporate tax rates will be the lowest in the G7 in the few years.
KUDLOW: Nineteen percent, is that correct? Nineteen percent?
HARPER: I think it’s down to 18 and a half, or 18.
KUDLOW: Wow. We’re at 35 percent.
HARPER: It’ll be at 15 percent in 2012. So we’ll have the lowest in the G7.
KUDLOW: Looking ahead to try to get through this banking mess, and try to get out of this most difficult recession, given the fact that Canadian banks have had a good performance, and given the fact that your tax rates—what advice would you give the United States from your perch?
HARPER: You know Larry, I’ve been asked that several times today, and unfortunately a lot of my advice would be don’t get into this mess in the first place. These are not easy things to deal with. You know, obviously we’ve got a drop in activity like you’ve got here. That’s why we’ve got a stimulus package. We don’t have a banking mess. We don’t have a mortgage mess. The truth of the matter is the president’s administration is going to look at a lot of polices, I know a lot of polices you don’t like, because a lot of them do have very serious long-run dangers. But the fact of the matter is they’ve got to do some things now that stop the continuing drop in economic activity. And the short term is going to drive a lot of decisions, for better or worse.
KUDLOW: Well if Canada is lowering its tax burdens, wouldn’t that be a reasonable example to your friends in the south?
HARPER: Well let me be clear though. When we lowered our tax burdens—and we did this in our first stimulus package over a year ago—we did that knowing we could lower our tax burdens while keeping our structural budget surplus in the long term. We could afford those tax cuts without going into deficit, immediately or in the long term. We’ve now done a second stimulus that is spending. It is short term. We’ll come out of it and we’ll go back into surplus. But we believe strongly in Canada, there’s a strong consensus, that we should keep our budget in a surplus position structurally in the long term. So we will only cut taxes if we are sure that is affordable.
KUDLOW: All right. And these tax rates, particularly the business tax rates, that’s law?
HARPER: That’s law.
KUDLOW: 19 percent or 18 percent, that’s done?
HARPER: Those are all legislated and they’ll come in.
KUDLOW: All right, let me move on quickly. Energy and climate change. The Canadian oil sands. We’ve had all the major CEOs on this program several times. Canada is our biggest importer, our biggest source. Now, problem. The Obama administration—Carol Browner—his top energy person who was up at the conference you just completed, they are against the Canadian oil sands because of the carbon emissions issue. Some states like California may actually try to stop the importation of energy and oil from the Canadian sands. What can you tell us? How is this going to be resolved?
HARPER: Well first of all, let me be clear about the importation of oil sands oil. Regardless of what any legislature does, the United States will be importing this oil. Because there is absolutely no doubt if you look at the supply and demand pattern into the future, the United States is going to need Canadian oil. It is the one secure, growing, market-based source of energy that the United States has. So there will be no choice but to import oil sands. We…
KUDLOW: Well you say that. But that’s an economic decision. But what about the political, legislative route? Did you talk to President Obama about that? His whole campaign, and as I said, he’s got Carol Browner running this from the White House; he’s got people all over his administration totally hostile to the oil sands because of the carbon problem.
HARPER: Well, and look, we believe there is also, there is a carbon problem there, Larry. And we’re prepared to work to reduce the carbon footprint of the oil sands. But as President Obama himself said, when he talked about the oil sands, he also talked about coal-fired electricity in the United States. Carbon emissions from coal-fired electricity in the United States are 40X the emission of the oil sands. So we’ll take care of, we’ll work on that problem, just as we expect the United States to be working on the problem of coal-fired electricity.
KUDLOW: But you don’t think the flow of your exports of the oil sands will be stopped? You don’t think that flow will be stopped because of the environmental, climate change considerations?
HARPER: I think that policy—any policy like that—is completely unrealistic. If you look at American needs for energy and where Americans can get supply at a reasonable price, it’s completely unrealistic. But it doesn’t mean that we will shirk our environmental responsibilities. We are making significant investments, carbon capture and storage, and other things, that your government is also doing. And we will do what we can to reduce the carbon footprint. But there should be no illusion that economic reality will hit those environmental polices pretty hard when one goes to implement them.
KUDLOW: One can only hope on that point. As I understand it, your latest fiscal package actually lowered import barriers in a number of places which you believe helps Canada and helps the rest of the world. Now the Unites States stimulus package raises import barriers with a “Buy America” provision for iron and steel and other infrastructure materials. Did you talk to President Obama? How’s this going to be resolved? You’re going one way, they’re going another.
HARPER: Look, we certainly raised our concerns. And as you know that provision was modified in the Senate to insure that they would conform with all existing trade obligations. There are trade provisions that allow you to have preferences in government procurement. But we think it’s very important, if we’re going to kickstart this global economy, that administrations around the world avoid turning stimulus packages into protectionism. Because if you try and stimulate a national economy at the expense of the global economy, we’re going to make the whole situation worse around the world. I think–my conversations with the president—I am quite convinced he understands that, he understands how serious it is to avoid a protectionist drift in this present economic climate.
KUDLOW: All right, last one Prime Minister. You have up in Canada if I’m not mistaken about a fifth of the General Motors/UAW workforce. You have given them some money as we have. How much money are you going to be prepared to give? They’re going to come back for much more in the next tranche, I guess at the end of March. How much money will you and the taxpayers of Canada be prepared to give?
HARPER: Well Larry we haven’t decided that. We’re doing due diligence on these guys. They’ve submitted our plans. We’re going to watch what’s being done in the United States. I mean, we’re under no illusion about why we’re doing this. The United States is engaged in a politically-directed restructuring of the industry. We came to the conclusion, whether one is for it or against it, that we have to put our skin in the game…
KUDLOW: And if I may, politically-directed, as opposed to let’s say, bankruptcy directed.
HARPER: Right, right. Absolutely. We came to the conclusion that if we don’t put our 20 percent skin in the game, we’re going to end up with an industry that’s restructured out of Canada entirely. We know it’s going to be a smaller industry in the future. There are some very difficult decisions that are going to have to be made. I hope both of our governments are willing to impose those decisions on all of the participants, on all of the players. Because that’s the only way we’re going to make sure…
KUDLOW: You’re kind of stuck, you’re kind of stuck. If we throw money at them you’re going to have to throw more money at them. Is that what you’re saying?
HARPER: I think if we’re not in the game the industry will be restructured out of Canada. And it’s frankly too important an industry to Canada. It’s probably close to 10 percent of our GDP that depends on that industry. A huge percentage in the province of Ontario, our industrial heartland. But we as governments, both Canadian and American governments, we have to make the industry, all of the players in the industry, make the difficult decisions necessary to make those sustainable companies.
KUDLOW: All right. Prime Minster, thank you very much.
HARPER: Thank you Larry.
KUDLOW: I really appreciate it. You’re terrific to come on.
HARPER: I appreciate it.
KUDLOW: All right, Canadian Prime Minister Stephen Harper.
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Canada is less socialist than us. I weep for my country.
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By SCOTT WALKER
Milwaukee
Recently, a firestorm ignited in Wisconsin when I, as Milwaukee County executive, refused to submit a wish list to Gov. Jim Doyle for items in the federal "stimulus" package.
Gov. Doyle -- like other politicians -- had lined up at the federal trough begging for billions in "free money" to cover budget deficits and to fuel new spending. He and others simply couldn't understand and were outraged that I didn't join them, and that I didn't relent even after the president signed the stimulus bill into law.
My explanation is simple. First, this money isn't free. Second, under Gov. Doyle our state has borrowed vast sums of money and avoided making tough budget decisions while expanding government programs. In three biannual budgets since he took office in 2003, new state bonding exceeded new tax revenue collections by $2.1 billion. During good times, the governor had been borrowing money to underwrite expansions of health care, education and environmental programs. If he is bailed out now, the federal stimulus funds will only enable the governor and others to go on spending and even taking on new obligations that will lead to larger deficits down the road. Third, if we grow government rather than private-sector jobs, we will not help the economy. Strong leadership, honest budgeting and tax cuts would do a lot more.
This burst housing bubble that led to the recession was created when millions of people were allowed (or encouraged) to spend borrowed money on homes they couldn't afford and were later forced into foreclosure.
Apparently Washington politicians learned nothing from this process. They rushed to spend $787 billion of borrowed money on new government programs in the name of economic stimulus. But even this loan of taxpayer money -- essentially the largest mortgage in history -- will come due. When it does, our children and grandchildren will pay for this imprudence.
As popular as the federal "stimulus" package is with Washington politicians, it is more popular among state and local politicians who view federal money as a cure for their fiscal woes.
Wisconsin is afflicted with fiscal woes. In every budget he has signed, Gov. Doyle postponed difficult decisions using accounting gimmicks and excessive bonding to pay for ongoing operational costs. The most egregious example is the damage done to the transportation fund over the past six years, which uses state gas taxes and vehicle registration fees to fund road projects. The governor has raided the segregated fund for a total of $1.2 billion to cover ongoing operational costs for government programs. He's partially replaced the raided funds with $865.5 million in bonds.
As a result of borrowing against tomorrow to live for today, the governor left Wisconsin's budget vulnerable. So in the fall of 2008 when recession caused a sharp decline in tax revenue, the state was forced into the red.
Wisconsin now faces an unprecedented $5.75 billion budget deficit, fourth-largest in the nation. Many municipalities also face deficits. My county, however, finished fiscal year 2007 with a $7.9 million surplus and will break even for fiscal year 2008 when the books are closed next month. Why? Because we made tough budget decisions demanded by the taxpayers.
State and local officials who failed to do so are looking to the federal government for a bailout. But what happens when the stimulus money is gone? Is the federal government committed to funding the projects it will now underwrite forever? I'm not willing to bet on it.
The stimulus is a classic bait-and-switch. Once the highways are built and social-service case loads have increased, Wisconsin will be left with the bill to maintain the new roads and services. This will force Wisconsin to raise new taxes. Gov. Doyle and legislative Democrats are already discussing higher taxes on hospitals, retailers, employers and even Internet downloads to feed their spending addiction.
The stimulus is also a bait-and-switch on employment. While the stimulus package might create a few construction jobs, the federal money will run out and those workers will lose their jobs. Even worse, most of the money is actually spent on new government programs and on bailing out failed state and local governments.
For the vast majority of residents of my state, the stimulus funds will not help them pay the mortgage or replenish their depleted retirement savings as they worry about being laid off.
True economic stimulus creates sustainable private-sector jobs. The fastest, most effective way to create them is to reduce taxes and implement regulatory and fiscal policies that encourage job growth and economic investment. History has shown repeatedly from John F. Kennedy to Ronald Reagan that as taxes are cut, consumers spend more and investors put more money in the economy. This, in turn, creates jobs, and grows the economy.
Too many politicians confuse more government spending with economic recovery. I believe that's the wrong approach, and I will not submit a wish list for new government spending. Excessive spending will only lead to higher taxes, and that will drive jobs away when we need them the most.
We need to use these challenging times as an opportunity to streamline government and reduce the tax burden on working families. In 2002, during my first campaign for county executive, I promised to spend taxpayer money as if it were my own. If government -- at all levels -- were to do just that, we could reduce taxes and stimulate the economy. That would put people back to work again. And that is something on my wish list.
Mr. Walker, a Republican, is Milwaukee County executive.
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I really feel a sense of profound disappointment coming up here. We are having a great financial problem around the world. And finance doesn't work without some sense of trust and confidence and people meaning what they say. You take their oral word and their written word as a sign that their intentions will be carried out.
The letter of invitation I had to this affair indicated that there would be about 40 people here, people with whom I could have an intimate conversation. So I feel a bit betrayed this evening. Forty has swelled to I don't know how many, and I don't know how intimate our conversation can be. But I will, at the very least, be informal.
There is a certain interest in what's going on in the financial world. And I will disappoint you by saying I don't know all the answers. But I know something about the problem. Let me just sketch it out a little bit and suggest where we may be going. There is a lot of talk about how we get out of this, but I think it's worth remembering, or analyzing, how this all started.
This is not an ordinary recession. I have never, in my lifetime, seen a financial problem of this sort. It has the makings of something much more serious than an ordinary recession where you go down for a while and then you bounce up and it's partly a monetary - but a self-correcting - phenomenon. The ordinary recession does not bring into question the stability and the solidity of the whole financial system. Why is it that this is so much more profound a crisis? I'm not saying it's going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either.
This phenomenon can be traced back at least five or six years. We had, at that time, a major underlying imbalance in the world economy. The American proclivity to consume was in full force. Our consumption rate was about 5% higher, relative to our GNP or what our production normally is. Our spending - consumption, investment, government -- was running about 5% or more above our production, even though we were more or less at full employment.
You had the opposite in China and Asia, generally, where the Chinese were consuming maybe 40% of their GNP - we consumed 70% of our GNP. They had a lot of surplus dollars because they had a lot of exports. Their exports were feeding our consumption and they were financing it very nicely with very cheap money. That was a very convenient but unsustainable situation. The money was so easy, funds were so easily available that there was, in effect, a kind of incentive to finding ways to spend it.
When we finished with the ordinary ways of spending it - with the help of our new profession of financial engineering - we developed ways of making weaker and weaker mortgages. The biggest investment in the economy was residential housing. And we developed a technique of manufacturing class D mortgages but putting them in packages which the financial engineers said were class A.
So there was an enormous incentive to take advantage of this bit of arbitrage - cheap money, poor mortgages but saleable mortgages. A lot of people made money through this process. I won't go over all the details, but you had then a normal business cycle on top of it. It was a period of enthusiasm. Everybody was feeling exuberant. They wanted to invest and spend.
You had a bubble first in the stock market and then in the housing market. You had a big increase in housing prices in the United States, held up by these new mortgages. It was true in other countries as well, but particularly in the United States. It was all fine for a while, but of course, eventually, the house prices levelled off and began going down. At some point people began getting nervous and the whole process stopped because they realized these mortgages were no good.
You might ask how it went on as long as it did. The grading agencies didn't do their job and the banks didn't do their job and the accountants went haywire. I have my own take on this. There were two things that were particularly contributory and very simple. Compensation practices had gotten totally out of hand and spurred financial people to aim for a lot of short-term money without worrying about the eventual consequences. And then there was this obscure financial engineering that none of them understood, but all their mathematical experts were telling them to trust. These two things carried us over the brink.
One of the saddest days of my life was when my grandson - and he's a particularly brilliant grandson - went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?
A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."
There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have "once every hundred years" events happening every year or two, which tells me something is the matter with the analysis.
So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken. I'm not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go.
So I'll jump over the short-term process, which is how we get out of the mess, and consider what we should be aiming for when we get out of the mess. That, in turn, might help instruct the kind of action we should be taking in the interim to get out of it.
In the United States, in the UK, as well - and potentially elsewhere - things are partly being held together by totally extraordinary actions by a central bank. In the United States, it's the Federal Reserve, in London, the Bank of England. They are providing direct credit to markets in massive volume, in a way that contradicts all the traditions and laws that have governed central banking behaviour for a hundred years.
So what are we aiming for? I mention this because I recently chaired a report on this. It was part of the so-called Group of 30, which has got some attention. It's a long and rather turgid report but let me simplify what the conclusion is, which I will state more boldly than the report itself does.
In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort. Financial systems always fluctuate and go up and down and have crises, but let's not have a big crisis that undermines the whole economy. And if that's the kind of financial system we want and should have, it's going to be different from the financial system that has developed in the last 20 years.
What do I mean by different? I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions - or at least that's the way the market is going - whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system.
This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I'm not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great.
What has happened recently just underscores that. And I think we're at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we've had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won't get into that.
But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.
These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them - it's the service part of the financial system.
And then we have the other part, which I'll call the capital market system, which by and large isn't directly dealing with customers. They're dealing with each other. They're trading. They're about hedge funds and equity funds. And they have a function in providing fluid markets and innovating and providing some flexibility, and I don't think they need to be so highly regulated. They're not at the core of the system, unless they get really big. If they get really big then you have to regulate them, too. But I don't think we need to have close regulation of every peewee hedge fund in the world.
So you have this bifurcated - in a sense - financial system that implies a lot about regulation and national governments. If you're going to have an open system, you have got to get much more cooperation and coordination from different countries. I think that's possible, given what we're going through. You've got to do something about the infrastructure of the system and you have to worry about the credit rating agencies.
These banks were relying on credit rating agencies while putting these big packages of securities together and selling them. They had practically - they would never admit this - given up credit departments in their own institutions that were sophisticated and well-developed. That was a cost centre - why do we need it, they thought. Obviously that hasn't worked out very well.
We have to look at the accounting system. We have to look at the system for dealing with derivatives and how they're settled. So there are a lot of systemic issues. The main point I'm making is that we want to emerge from this with a more stable system. It will be less exciting for many people, but it will not warrant - I don't think the present system does, either -- $50 million dollar paydays in that central part of the system. Or even $25 or $100 million dollar paydays. If somebody can go out and gamble and make that money, okay. But don't gamble with the public's money. And that's an important distinction.
It's interesting that what I'm arguing for looks more like the Canadian system than the American system. When we delivered this report in a press conference, people said, "Oh you mean, banks won't be able to have hedge funds? What are you talking about?" That same day, Citigroup announced, "We want to get rid of all that stuff. We now realize it was a mistake. We want to go back to our roots and be a real commercial bank." I don't know whether they'll do that or not. But the fact that one of the leading proponents of the other system basically said, "We give up. It's not the right system," is interesting.
So let me just leave it at that. We've got more than 40 people here but they're permitted to ask questions, is that the deal?
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Pitchfork Time
by Patrick J. Buchanan
03/03/2009
In his campaign and inaugural address, Barack Obama cast himself as a moderate man seeking common ground with conservatives.
Yet, his budget calls for the radical restructuring of the U.S. economy, a sweeping redistribution of power and wealth to government and Democratic constituencies. It is a declaration of war on the Right.
The real Obama has stood up, and lived up to his ranking as the most left-wing member of the United States Senate.
Barack has no mandate for this. He was even behind McCain when the decisive event that gave him the presidency occurred -- the September collapse of Lehman Brothers and the market crash.
Republicans are under no obligation to render bipartisan support to this statist coup d'etat. For what is going down is a leftist power grab that is anathema to their principles and philosophy.
Where the U.S. government usually consumes 21 percent of gross domestic product, this Obama budget spends 28 percent in 2009 and runs a deficit of $1.75 trillion, or 12.7 percent of GDP. That is four times the largest deficit of George W. Bush and twice as large a share of the economy as any deficit run since World War II.
Add that 28 percent of GDP spent by the U.S. government to the 12 percent spent by states, counties and cities, and government will consume 40 percent of the economy in 2009.
We are not "headed down the road to socialism." We are there.
Since the budget was released, word has come that the U.S. economy did not shrink by 3.8 percent in the fourth quarter, but 6.2 percent. All the assumptions in Obama's budget about growth in 2009 and 2010 need to be revised downward, and the deficits revised upward.
Look for the deficit for 2009 to cross $2 trillion.
Who abroad is going to lend us the trillions to finance our deficits without demanding higher interest rates on the U.S. bonds they are being asked to hold? And if we must revert to the printing press to create the money, what happens to the dollar?
As Americans save only a pittance and have lost -- in the value of homes, stocks, bonds and other assets -- $15 trillion to $20 trillion since 2007, how can the people provide the feds with the needed money?
In his speech to Congress, Obama promised new investments in energy, education and health care. Every kid is going to get a college degree. We're going to find a cure for cancer.
Who is going to pay for all this?
The top 2 percent, the filthy rich who got all those Bush tax breaks, say Democrats. But the top 5 percent of income earners already pay 60 percent of U.S. income taxes, while the bottom 40 percent pays nothing.
Those paying a federal tax rate of 35 percent will see it rise to near 40 percent and will lose a fifth of the value of their deductions for taxes, mortgage interest and charitable contributions.
Yet, two-thirds of small businesses are taxed at the same rate as individuals. Consider what this means to the owner of a restaurant and bar in Los Angeles open from noon to midnight, where a husband and wife each put in 80 hours a week.
At year's end, the couple finds they have actually made a profit of $500,000 that they can take home in salary.
What is the Obama-Schwarzenegger tax take on that salary?
Their U.S. tax rate will have hit 39.6 percent.
Their California income tax will have hit 9.55 percent.
Medicare payroll taxes on the proprietor as both employer and salaried employee will be $14,500. Social Security payroll taxes for the proprietor as both employer and employee will be $13,243.
In short, U.S. and state income and payroll taxes will consume half of all the pair earned for some 8,000 hours of work.
From that ravaged salary they must pay a state sales tax of 8.25 percent, gas taxes for the 50-mile commute, and tens of thousands in property taxes on both their restaurant and home. And, after being pilloried by politicians for having feasted in the Bush era, they are now told the tax deduction they get for contributing to the church is to be cut 20 percent, while millions of Obama voters, who paid no U.S. income tax at all, will be getting a tax cut -- i.e., a fat little check -- in April.
Any wonder native-born Californians are fleeing the Golden Land?
Markets are not infallible. But the stock market has long been a "lead indicator" of where the economy will be six months from now. What are the markets, the collective decisions of millions of investors, saying?
Having fallen every month since Obama's election, with January and February the worst two months in history, they are telling us the stimulus package will not work, that Tim Geithner is clueless about how to save the banks, that the Obama budget portends disaster for the republic.
The president says he is gearing up for a fight on his budget.
Good. Let's give him one.
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The Bridge to Your Wallet
Posted by Andrew J. Coulson
The airwaves and Intertubes are filled with images of this bridge in Missouri – the first transportation project in the nation to be funded through the stimulus bill signed by president Obama last month. In their coverage of this project, the media uniformly point to the jobs it has created for local workers, and neglect to reflect on its economic costs.
As Doug Bandow pointed out in his earlier post, even Congress’s own Budget Office expects the stimulus to shrink our economy in the long term. And the CBO’s analysis is arguably too rosy, neglecting the crucial psychological effect of Washington’s unprecedented spending spree on American consumers.
An NBC/WSJ public opinion poll found in January that “60 percent say they’re concerned that the government will spend too much money in trying to stimulate the economy, ultimately increasing the size of the debt.” That’s up from 57 percent who were already terrified by Bailout Mania back in November of 2008. What do people do when they’re scared about the state of the economy? They. Stop. Spending.
Supporters of bailouts and “stimuli” imagine that they can overcome consumers’ tight-fistedness in the short term, but they fail to realize that each new lavish increase in federal spending makes taxpayers more nervous about their ability to repay the ballooning federal debt and about the future of the U.S. economy. So while the Bridge to Your Wallet may have created a handful of local construction jobs in Missouri, it is almost certainly costing many others around the nation.
Cautious taxpayers look at that bridge project, at the mind-boggling accumulation of federal bailouts and stimuli and the biggest federal budget in history, and they cancel major purchases and family vacations. They eat at home instead of supporting their local restaurants. They do exactly the opposite of what the president and Congress are expecting.
If the media insist on doing more stories about the Bridge to Your Wallet, they should look at the polling and spending data showing how Washington’s spending spree is scaring the public into spending less — defeating the very purpose of the stimulus. They should interview restaurant and hotel owners and ask them just how economically stimulated they feel at the moment.
http://www.cato-at-liberty.org/2009/03/04/the-bridge-to-your-wallet/
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Fed Refuses to Release Bank Data, Insists on Secrecy (Update1)
By Mark Pittman
March 5 (Bloomberg) -- The Federal Reserve Board of Governors receives daily reports on loans to banks and securities firms, the institution said in response to a Freedom of Information Act lawsuit filed by Bloomberg News.
The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.
The bank provides “select members and staff of the Board of Governors with daily and weekly reports” on Primary Dealer Credit Facility borrowing, said Susan E. McLaughlin, a senior vice president in the markets group of the Federal Reserve Bank of New York in a deposition. The documents “include the names of the primary dealers that have borrowed from the PDCF, individual loan amounts, composition of securities pledged and rates for specific loans.”
The Board of Governors contends that it’s separate from its member banks, including the Federal Reserve Bank of New York which runs the lending programs. Most documents relevant to the Bloomberg suit are at the Federal Reserve Bank of New York, which isn’t subject to FOIA law, according to the Fed. The Board of Governors has 231 pages of documents, which it is denying access to under an exemption under trade secrets.
“I would assume that information would be shared by the Fed and the New York Fed,” said U.S. Representative Scott Garrett, a New Jersey Republican. “At some point, the demand for transparency is paramount to any demand that they have for secrecy.”
‘Financial Crisis’
Bloomberg sued Nov. 7 under the U.S. Freedom of Information Act, requesting details about the terms of 11 Fed lending programs.
The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”
The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.
Total Fed lending exceeded $2 trillion for the first time Nov. 6 after rising by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA. Fed lending as of Feb. 25 was $1.92 billion.
Commercial, Consumer Loans
On Feb. 23, the Fed disclosed a breakdown by broad categories for $1.81 trillion of collateral pledged by banks and bond dealers as of Dec. 17 after Congress demanded more transparency from the central bank.
The largest portions of collateral being held by the Fed at that time were $456 billion in commercial loans, $203 billion in consumer loans and $159 billion in residential mortgages, according to the central bank’s Web site. It didn’t identify any loans or provide their credit ratings and said it will update the figures about every two months.
Government loans, spending or guarantees to rescue the country’s financial system total more than $11.7 trillion since the international credit crisis began in August 2007, according to data compiled by Bloomberg. In return, banks left collateral with the central bank that effectively acts as a credit line that lenders can draw on without posting additional assets.
Bank Opposition
Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.
On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It sued Nov. 7.
In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”
Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.
The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.
Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, the Fed argued in its response.
“You could make everything a trade secret,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net .
Last Updated: March 5, 2009 09:58 EST
http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aG0_2ZIA96TI
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http://www.forbes.com/2009/03/04/global-recession-insolvent-opinions-columnists-roubini-economy_print.html
The U.S. Financial System Is Effectively Insolvent
Nouriel Roubini 03.05.09, 12:01 AM ET
For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:
First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.
Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.
With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.
Fiscal policy in the U.S. and China also has its limits. Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)
Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).
With massive excess capacity in the industrial/manufacturing sector and thousands of firms shutting down, why would private and state-owned firms invest more, even if interest rates are lower and credit is cheaper? Forcing state-owned banks and firms to, respectively, lend and spend/invest more will only increase the size of nonperforming loans and the amount of excess capacity. And with most economic activity and fiscal stimulus being capital- rather than labor-intensive, the drag on job creation will continue.
So without a recovery in the U.S. and global economy, there cannot be a sustainable recovery of Chinese growth. And with the U.S, recovery requiring lower consumption, higher private savings and lower trade deficits, a U.S. recovery requires China's and other surplus countries' (Japan, Germany, etc.) growth to depend more on domestic demand and less on net exports. But domestic-demand growth is anemic in surplus countries for cyclical and structural reasons. So a recovery of the global economy cannot occur without a rapid and orderly adjustment of global current account imbalances.
Meanwhile, the adjustment of U.S. consumption and savings is continuing. The January personal spending numbers were up for one month (a temporary fluke driven by transient factors), and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth).
In the years when stock markets and home values were going up, the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.
But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%), the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth, personal savings is not 5%, as the official NIA definition suggests, but rather sharply negative.
In other terms, given the massive destruction of household wealth/net worth since 2006-07, the NIA measure of savings will have to increase much more sharply than has currently occurred to restore households' severely damaged balance sheets. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.
In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).
Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.
Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers' market rally will fizzle out later in the year, like the previous five ones in the last 12 months.
In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).
Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
But even in this case, the distinction is only between partial nationalization and full nationalization: With 36% (and soon to be larger) ownership of Citi, the U.S. government is already the largest shareholder there. So what is the non-sense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.
Ditto for AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
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March 05, 2009, 3:15 p.m.
Fiscal Double Dipping
Democrats have embarked on an irresponsible spending bonanza.
By Veronique de Rugy & Alex Bright
President Barack Obama promises to cut the federal deficit in half by 2013. He also promises that appropriations bills will be free of earmarks during his presidency. These claims are belied by the omnibus spending bill that Democrats are trying to rush through Congress. The bill is larded with pork and would significantly increase fiscal year 2009 spending, and by funding agencies that just received a major boost from the stimulus bill.
The omnibus package is made of nine appropriations bills left over from last year. In September 2008, Pres. George W. Bush signed into law the only three appropriations bill — totaling $600 billion in spending — completed at the time: Defense, Homeland Security, and Veteran Affairs. Congress faces a tight time frame for getting the omnibus to Pres. Obama’s desk, since the agencies covered by the measure are being funded at last year’s levels through March 6.
The omnibus would provide $410 billion in discretionary spending. That’s $31 billion (or 8 percent) more than the amount contained in the FY2008 versions of these nine appropriations bills, and it’s $19 billion more than Pres. Bush requested for FY2009. Agriculture is scheduled to get $20 billion in spending — $2 billion more than Bush’s request — after getting $26 billion from the stimulus. In fact, according to Sen. Tom Coburn (R., Okla.), if the omnibus bill goes through, most federal agencies would get a 50 percent to 80 percent funding boost between 2009 and 2010, if you include the stimulus funds.
(http://www2.nationalreview.com/dest/2009/03/05/5762ca62cf119c83c7a07c83106479f3.jpg)
Hundreds of groups — including the Association of Community Organizations for Reform Now (ACORN) and the National Education Association (NEA) — that have already received billions of tax dollars from the stimulus plan will get another serving from the omnibus spending bill. Also, thanks to the $1 billion in stimulus funding and another $3.9 billion in the omnibus, the Census Bureau’s budget for 2009 will nearly triple over last year. The National Endowment for the Arts will receive a 57 percent funding increase over FY2008 thanks to $50 million in the stimulus and another $138 million in the omnibus. And Amtrak will see its funding double in FY2009 after receiving $850 million from the stimulus and another $940 million from the omnibus.
How can President Obama justify this fiscal double dipping? Didn’t he campaign on a promise to reduce earmarks? Taxpayers for Common Sense (TCS), a nonpartisan watchdog organization that tracks pork, found 8,570 earmarks worth $7.7 billion in the proposed omnibus bill. Adding those to the $6.6 billion in earmarks passed last fall, TSC calculates a total of $14.3 billion in pork appropriated for FY2009 — a mere $500 million less than the year before.
Some of the earmarks include $713,625 for woody biomass at SUNY College of Environmental Science and Forestry; $951,500 for “Sustainable Las Vegas”; $24,000 for the “A+ for Abstinence” program; $300,000 for the Montana World Trade Center; $950,000 for the Myrtle Beach International Trade and Convention Center; $200,000 for the Oil Region Alliance; $190,000 for the Buffalo Bill Historical Center in Cody, Wyo., for digitizing and editing the Cody collection; and $143,000 for the Las Vegas Natural History Museum, to expand natural-history education programs.
Interestingly, according to a Congressional Quarterly story published on February 26, “President Obama, who took a no-earmark pledge on the campaign trail, is listed as one of dozens of cosponsors of a $7.7 million set-aside in the fiscal 2009 omnibus spending bill passed by the House on Wednesday.” The earmark is for vocational training at two schools run by American Indian groups in New Mexico and North Dakota. Shortly after the news broke, Senate Appropriations Committee spokesman Rob Blumenthal said that Obama’s name would be removed from future versions of the congressional report identifying earmarks and their sponsors.
Obviously, U.S. lawmakers’ love for pork was not altered by the economic crisis. An amendment introduced by Sen. John McCain to get rid of earmarks was easily defeated, and Sen. Coburn was told that he couldn’t introduce additional amendments. Democrats even told the president not to bother asking them to cut earmarks out the bill because they wouldn’t.
We are in the midst of a serious crisis, and yet Congress and the president have embarked on an irresponsible spending bonanza. The only question is, How much are they willing to put on our children’s tab?
— Veronique de Rugy is an economist at the Mercatus Center at George Mason University, where Alex Bright is a program associate.
National Review Online - http://article.nationalreview.com/?q=NWUxYWFjMjU5Zjg5YTkwOTVmMTY2Mjg2MTk0Mjk1MzQ=
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http://online.wsj.com/article/SB123629969453946717.html#
Obama's Radicalism Is Killing the Dow
A financial crisis is the worst time to change the foundations of American capitalism.
By MICHAEL J. BOSKIN
It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.
Martin Kozlowski
The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.
Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.
To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.
The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).
Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.
Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.
Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.
The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.
The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.
A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.
The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.
Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.
New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.
From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.
Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.
On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
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http://hotair.com/archives/2009/03/06/why-the-aussies-could-have-predicted-geithners-incompetence/
Why the Aussies could have predicted Geithner’s incompetence
posted at 5:12 pm on March 6, 2009 by Ed Morrissey
Remember when the Obama administration and its allies in Congress urged the confirmation of Tim Geithner despite his tax problems? They claimed that Geithner was “uniquely qualified” to lead the nation out of an economic collapse, and that no other candidate could possibly replace Geithner. Former Australian prime minister Paul Keating must have thought the Democrats and American media had discovered a completely different Tim Geithner than the one he knew:
If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner’s performance since.
In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”
In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
In fact, Geithner bungled the job so badly that Asian nations still refuse to “stick their head in the IMF noose,” as Keating puts it. Despite 7% compound growth over several years afterwards, Indonesia still couldn’t get itself out of the hole Geithner dug for them. Soeharto lost power, and countries like China paid attention. Instead of working more cooperatively, China built up big reserves instead, creating a debt imbalance that helped make the current financial crisis much worse than it might have been.
Geithner’s performance since his confirmation hasn’t surprised Keating at all. The dithering on bank issues has left the US with few realistic options outside of nationalization on some scale. The vacillation and fumbled rollouts of economic policy have left the markets with no confidence at all in his leadership, leading to a flight from capital investment clearly shown in the stock market performance of the last few weeks. Keating understands that lack of confidence from his own experiences with Geithner, but the US has just begun to figure out Geithner’s incompetence.
That sound you hear from down under? Laughter at the gullibility of Congress and the media in buying the argument that a man who couldn’t figure out his own taxes had the only qualifications for handling American economic policy. Our mainstream media never reported on this botch-up until it was far too late to do anything about it.
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March 6, 2009
Banana Republic, U.S.A
By Thomas E. Woods, Jr.
Barack Obama is already making the Clinton and Bush years seem like the good old days.
Close to a trillion dollars are being tossed around in a "stimulus" package that no one in his right mind-and I do not here include the mainstream of the economics profession, which has disgraced itself in this crisis-expects to bring about recovery. Economist Robert Wenzel rightly describes the stimulus as "just the insiders raiding the till while there is still money in it." Trillions of dollars are likewise being thrown at financial institutions that (if we actually believe in the free market) richly deserve to go bankrupt. Nationalization of the banks is being openly discussed-an outcome our rulers assure us they would undertake only as a last resort, deploring every minute of it, and only for our own good.
We are learning what it is like to live in an Orwell novel. Our television screens are filled with people offering choices between idiotic and suicidal option A and idiotic and suicidal option B. We are being told that we must at least partially nationalize our banks, prop up zombie companies, lower interest rates to zero, and pass stimulus packages in order to escape the fate of Japan-which, um, partially nationalized its banks, propped up zombie companies, lowered interest rates to zero, and passed eight stimulus packages. We have a president who tells us we cannot rely on the free market to get us out of this mess because the free market is what got us here, as if the Federal Reserve and its bubble-inducing monetary policy never existed.
F. A. Hayek won the Nobel Prize in 1974 for showing how central bank manipulation of interest rates gives rise to the kind of boom-bust cycle we are experiencing now, and that such phenomena are not caused by the unhampered market. If by some miracle you manage to hear this point of view on television, it will be sandwiched between hours and hours of Keynesian droning.
Of course, the rationale we're being given for the insanity is that these are crisis times, and the usual rules go out the window. That's what Paul Krugman means when he speaks of "depression economics"-a special set of economic principles come into play in times like this that differ radically from those we would abide by under normal conditions. And so we see once again why Keynesian economics swept the board so successfully: it tells the regime just what it wants to hear. It provides intellectual cover for the expansion of government power and the seizure of private property that state officials want to engage in anyway.
"Never allow a crisis to go to waste," said chief of staff and former Freddie Mac board member Rahm Emmanuel. He needn't worry. The Keynesian economists who suddenly dominate public life in America, years after everyone else assumed Keynes and his fallacies were long dead and buried, will weave every apologia under the sun for whatever activity Emmanuel and the president he serves choose to undertake. The all-purpose pretext is ready at hand: why, we've got to do something about this terrible crisis.
Indeed we should do something-but, as usual, it's exactly the opposite of what the federal government intends to do. We should cut the government's budget as drastically as possible, thereby releasing resources for use by the productive sector. (That worked pretty well in stopping the terrible depression of 1920-21.) We should stop the Fed from interfering in the recovery process. We should let the private economy sort out which activities undertaken during the artificial Greenspan boom are genuine wealth-generating activities and which are wealth-destroying bubble activities. The latter should be promptly liquidated so their resources can be better employed by the former.
Meanwhile, we still have some conservatives, frozen in the 1980s, calling for reductions in marginal income tax rates, among other feckless suggestions. Tax reductions are desirable, to be sure, but the crisis we are facing is a systemic one that is not going to be fixed by marginal changes here and there. We need to start talking big changes. We need to open up questions the regime has long since considered closed. We need to talk about the monetary system, the Fed, entitlements, and much else.
In other words, if the Left can advocate $1 trillion-plus annual deficits as far as the eye can see, why can't supporters of the free market be equally bold in the opposite direction?
Conservatives' rediscovery of government frugality has been a refreshing thing to behold. The important thing now is for conservative intellectuals to be sure they know sound economics. For instance, the problem with the stimulus package isn't the "pork," however evil, stupid, and counterproductive it surely is. The problem is the Keynesian nonsense on which the very idea of "fiscal stimulus" is based. The problem is the mistaken view that "spending" is what the economy needs now, and that all our efforts must be expended on ways to revive consumer spending and borrowing.
The president has unveiled a program to help troubled homeowners make their mortgage payments and stay in their homes. He is going to encounter the same problem Charles Murray identified in the mid-1980s in his book Losing Ground: American Social Policy 1950-1980. There Murray famously argued that poverty persisted in the United States not in spite of anti-poverty programs, but because of them. Before evaluating the empirical evidence, though, Murray first explained why, from a theoretical point of view, we should in fact expect this perhaps counterintuitive result.
Murray challenged his readers to devise a social program that would not cause net harm. He gave the example of a government program aimed at discouraging smoking. I can't reproduce his whole argument here, which is quite lengthy, but his point is that the reward the government offers for people who quit has to be substantial enough to persuade them to go to the trouble of quitting, but not so substantial as to encourage nonsmokers to start smoking. Just as Murray says, this task turns out to be borderline impossible. It is especially difficult when the program in question makes it more desirable to be out of work. Given man's inclination to acquire wealth with the least possible exertion, such programs threaten to drag additional people into a cycle of dependency that mankind's inclination to sloth will only reinforce over time.
For similar reasons, every attempt to solve the problems caused by a housing bubble that the Fed should not have blown up in the first place, such as the proposed measures for mortgage relief, will exacerbate the problems, thereby leading to still more government intervention, in the very pattern Ludwig von Mises identified in his famous essay "Middle-of-the-Road Policy Leads to Socialism." That is the fallacy in the usual statement that "it would cost only $X billion to give every American who needs it" this or that benefit. Once people realize the government is giving out a benefit for free, more and more people will place themselves in the condition that entitles them to the benefit, thereby making the program ever more expensive.
The best outcome I can see is that under Obama the United States will experience the kind of economic stagnation that is now routine in Western Europe, with high unemployment and sluggish (if any) growth, and people standing around pretending not to know what could be causing it. A smaller and smaller core of productive firms and individuals will be expected to support a larger and larger demand for bailouts and other corporate and individual welfare. Who is John Galt, indeed.
The worst outcome, which we cannot dismiss out of hand, is a hyperinflationary destruction of the currency or, barring that, the reduction of America to banana-republic conditions.
Regardless of which of these outcomes actually occurs, the Obama administration will have moved the country farther away from a market economy than it has ever been in peacetime (barring perhaps the early years of the New Deal and its outright cartelization of industry), accelerating trends already at work under the Bush administration. If you want to succeed in the so-called private sector, you had better have some friends in Washington, because that's where credit and capital will be allocated from.
And if you want to hold on to your wealth, assume the dollar is going to collapse. The euro is under terrific strain right now, and so the dollar may continue its artificial rally in the near term, but in light of the accelerating demands of the predatory sector (that is, the government) on the shrinking productive sector, the dollar's bust has to come. The printing press will be the regime's only way out. If this crisis doesn't do it, the looming entitlement disaster will finish off the dollar. How else are $70 trillion in entitlement liabilities going to be paid for? Floating a few more bonds?
Things could get very bad indeed. If we are to have any chance of beating back these unprecedented incursions of the state, supporters of the free market need to know their position cold. I wrote my just-released book Meltdown for this reason: to educate Americans about the causes of the crisis, to be sure, but also to give supporters of the free market the ammunition they need to make their case effectively.
Even that may prove not to be enough. We may have to be consoled with the knowledge that at least we fought with all our strength. And fight we must, as Ludwig von Mises urged: "No one can find a safe way out for himself if society is sweeping toward destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interest of everyone hangs on the result."
Thomas E. Woods, Jr. is senior fellow in American history at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: The Politically Incorrect Guide to American History and the just-released Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.
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First time I've encountered this site. It cites Paul Krugman approvingly, who I loathe, and has a somewhat LaRouchie feel, but I'll poke around it some more. An interesting piece:
Confusion, Tunneling, And Looting
with 80 comments
Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.
Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
This is the prospect now faced by the United States.
Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertized. And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.” The people involved are convinced - and hold this almost as an unshakeable ideology - that this is the only way to bring private capital into banks.
This attempt to protect shareholders and insiders in large banks is misguided. Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven’t these boards resigned?), but the government’s policy is creating toxic financial institutions that no one wants to touch either with equity investments or - increasingly - further credit.
Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO? If that wasn’t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company?
Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week’s Citigroup deal, preferred shareholders - whose claims had debt-like characteristics - were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%.
Who can explain exactly how AIG has lost so much money? Drip-drip injections of government money are not a proper clean-up; there has been no complete recognition of losses and, almost six months later, that company still cannot move on. Time horizons presumably remain short or are getting shorter for all involved. This points to a bleak future more generally.
What do rapidly widening credit default spreads for nonbank financial entities (such as GE Capital and many insurance companies) signify? Is it something about expected behavior by the insiders or by government, or by some combination of both?
Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.
The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.
The road to economic hell is paved with good intentions and bad banks.
http://baselinescenario.com/2009/03/05/confusion-tunneling-and-looting/
http://baselinescenario.com/
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"Who can explain exactly how AIG has lost so much money?"
I gather that "mark to market" played the overwheliming role in its most recent losses.
The larger point about the opportunities for vast corruption is valid though IMHO.
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Oh yeah, all kinds of looting is going on with our "bailout" money.
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http://michellemalkin.com/2009/03/05/the-steve-urkel-ization-of-the-economy/
Now I know who he reminds me of....
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Obamafusion
Posted By Victor Davis Hanson On March 6, 2009 @ 12:02 am In Uncategorized | 58 Comments
Why is Wall Street Worried?—Let us count the ways.
1) The proverbial Wall Street capitalists believe that, with new federal income tax rates, the removal of FICA ceilings, increases in capital gains rates, decreases in deductions, and simultaneous tax raises, not only will Obama remove incentives for innovation and productivity, but that he does not seem to care about—or perhaps appreciate—he consequences?
2) On the spending side, investors see too many subsidies and entitlements that may Europeanize the populace and erode incentives, while creating so much debt that in the next decade, should interest rates rise, the federal budget will be consumed with servicing borrowing and entitlement obligations. A redistributive economy in which government ensures an equality of result is Wall Street’s worst nightmare. Debt can only be paid back by floating more foreign debt, issuing more US bonds at home, raising taxes, or printing money—all bad options in the mind of the investor.
3) Too many are beginning to think Obama is, well, a naïf—and hence dangerous. He chest-thumps speeches Geithner cannot deliver. He says we are near the Great Depression—but then, after the stimulus package passes, suddenly hypes future growth rates to suggest that we will be out a recession, soon after all? Add in all the talk of high-tax, Al-Gorist cap-in-trade, wind and solar, socialized medicine in the midst of a financial crisis, and at best Obama comes across as confused and herky-jerky, and at worse, clueless on the economy—as if a Chicago organizer is organizing a multi-trillion-dollar economy. Talking about ‘gyrations’ and confusion about profits and earnings, and offering ad hoc advice about investing do not restore authority.
`4) Given the amount of debt the US is incurring (and the decades needed to pay it off), given the loose talk about the ‘rich’, and given the rumors about nationalization, investors are unsure whether the United States will remain a safe haven for investment, or even offer a climate for profit-making, since it would either be taxed to the point of seizure, or its beneficiaries would be culturally and socially demonized. Ultimately perhaps some will accept that as the price of doing business in a socialist US, but for now it creates doubt. This is not a defense of Wall Street (a year ago Richard Fuld and Robert Rubin were our Zeuses on Olympus who strutted like gods), simply a warning that we are going from excess to stasis, and the cure will be as bad as or worse than the disease.
5) Uncertainty. Who is now our Commerce Secretary? Which cowards is the Attorney General talking about? What did Geithner mean about pernicious oil and gas companies? What is with this Solis, and card check? How hard is it to ensure a Richardson or Daschle is clean? In other words, market watchers see after five weeks chaos, and think there is no sure and steady paradigm in which they can make careful business decisions and anticipate with some surety future risk.
So the perfect storm forms, and millions of individuals come to millions of identical conclusions: “Cut your losses with these guys, and get your cash out before it gets worse” rather than “Wow, what bargains! I gotta get in before the window of profit opportunity closes.”
But is there an alternative?
Do Republicans offer an antithesis? Can they explain the Bush deficits and take responsibility for them, as well as the Republican congressional creepiness from 2002-06 (Craig, Stevens, Cunningham, Foley, etc)? And most importantly, will they offer counterproposals—a stimulus much smaller, mixtures of loan guarantees, tax cuts, and (some) public works alone, coupled with spending caps as soon as GDP growth returns? Can they articulate how the market corrected, say, in 1980-3, without our government going socialist? Can we get a plan not merely to balance the budget, but to pay off the debt? If not, legitimate criticisms of Obama fall on deaf ears without some positive alternative.
Obamania
The rants of Sec. Geithner about oil and gas companies and global warming were quite unusual. Does he grasp that the transition to his solar and wind nirvana requires some rather tough hombres working tonight on rigs in the Gulf, and some brave engineers driving a Jeep in a Libya or out in the Kuwaiti desert looking for more oil, or some poor fellow freezing out in the Arctic Circle so that Mr. Geithner can be driven in his government limo to the hearings? Solar panels do not power the President’s chopper—yet. And Hillary flew to the Middle East on fossil fuel engines not via clipper ship.
Meanwhile, note that the campaign flip-flop positions of supporting off-shore drilling, nuclear, shale oil, and coal, are now insidiously back to the original positions of ‘no—maybe’.
The Utopian Ranters
Energy Secretary Chu ranted that we warmed up the planet so Californians must the pay the price by seeing their farms dry up and blow away. Attorney General finger pointed and labeled us “cowards.” So why the attack on oil companies by Geithner—and why these lectures about our supposed racism and environmental crimes? What deep psychological need does it fulfill for a Holder, our first African-American AG, to blast us as cowardly racists, or why does an elite like Geithner think fossil fuels are not the linchpin that our economy still for a bit hinges upon? They all need to go back to work, ensure the debt is paid down, and quiet down the Harvard Yard sermons.
The Worst of Both Worlds
There is much talk about Obama merely returning to the tax rates of the Clinton administration. But that is misleading for two unfortunate reasons: (1) Clinton did not tamper with FICA ceilings and other deductions in addition to the income tax hikes; (2) he had spending limits imposed by the post 1994-Congress, so at least his income tax increases led to a balanced budget. But Obama is not only raising taxes far higher in aggregate than did Clinton with the present trillion-some spending hikes, but ensuring that we will still end up with astronomical deficits. So we get the tax hikes of Clinton—but without the balanced budgets; and we get far higher deficits than under Bush—but sans the tax cuts.
Fear of Government–Part Two.
Last week I wrote of my encounters with municipal garbage trucks spewing garbage, and city bus drivers doing rolling stops into the cross walk, one hand with cigarette, one hand with cell phone—as a reflection of the old Roman worry “Who will police the police?”
In a world of government employees there is no real redress of grievances, but real difficulty of accountability (what government employee fines the government-employed bus driver for violating state law concerning driving while on a cell phone?). My latest example was Thursday afternoon.
As I drove out of the parking lot of the San Jose parking lot, of the six exit pay stations, only one was open. But at the window, a city tractor and a city pick-up were parked and idled blocking the exit. The drivers were both out and talking to the parking attendant about their “lost” ticket. After watching them all nonchalantly talk—joined by the other parking attendant with his booth closed on “break”—I got out and asked the four ‘what’s up’?
You know what followed—abuse, yelling, ‘how dare you question us!’, etc. A number of backed-up drivers like me now got out and were yelling back, and finally the city employees moved through and unblocked the exit while the idle attendant ran back to open a second station to handle the irate idling cars. Total elapsed time? 24 minutes of waiting. Imagine four employees blocking the only way out the San Jose parking lot, while cars line up, their drivers watching the four josh around and apparently laugh at the fee-paying customers.
I had nightmares that this is what the new 40% government GDP USA will look like by 2012—$20 trillion now in aggregate debt to ensure a nation of city-employees lounging around the toll booth, while cars line up and drivers cool their heels. No success, no failure, no stress, no calm—just endless existence.
Article printed from Works and Days: http://pajamasmedia.com/victordavishanson
URL to article: http://pajamasmedia.com/victordavishanson/obamafusion/
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There has been a lack of clarity about what got us into this mess and what should have been the way out now.
Gilder is at his best on economics IMO, not stock picking...
GEORGE GILDER, Featured in "The
Claremont Review": In the current financial and political circus, with
Fabian fantasists and climate cranks in control of economic policy, the
mainstream media join Ivy League sages in condemning Adam Smith’s
invisible hand. Free market ideology has blinded conservatives, say many
sophisticates, to a crime wave on Wall Street, as Adam Smith gives way to
Bernie Madoff as the epitome of capitalism.
For perspective on what is going on, however, we should contemplate the
view of Richard Armey, the crusty cowboy who long served as Republican
majority leader and economic guru in the House, who pointed out to me more
years ago than I want to recall, that economics has more hands and feet,
visible and invisible, than the media imagines. Confounding the market’s
invisible hand during the past decade’s financial follies were the
government’s very visible handouts. These outlays massively and
conspicuously supported popular causes and constituents: low income
mortgage seekers, affirmative action litigators, failed farmers, US
automakers, ethanol junkies, sugar beet shysters, hustlers of solar power
and windmills, socialist educators, climate cranks, and other altruistic
but addled government dependents, plus all the interventionist CRAP
(Community Reinvestment Act programs) that mandated the suspension of
credit rules for politically favored home buyers. With much of this murky
activity guaranteed by the government, it prompted orgies of overreach,
with the “assets” of Fanny Mae and Freddy Mac rising from a few hundred
million to five trillion in a decade or so. Democrats fervently celebrated
all these visible handouts and wish to expand them hugely.
Meanwhile (in perhaps Armey’s best trope), the invisible foot of
government went to work. This millipedal regulatory force covertly kicks
at the underpinnings of private economy activity by capriciously
debauching the dollar; imposing onerously progressive tax rates on
successful economic ventures but making investors eat the losses;
fostering anti-business law suits and class action rackets; restricting
access to energy resources; snarling international trade; and enacting
ever more intricate mazes of contradictory laws and regulations with ever
more acute moral hazard, which assures that the results of the
intervention will be the opposite of its goals. The effect of these
relatively inconspicuous activities is to unleash the visible foot of the
market—all those bankruptcies and foreclosures—and increase demand for the
visible hand of government largesse.
In general, to rectify the situation, the invisible foot of government
must be removed—regulations retrenched, tax rates reduced, tariffs
eliminated, the value of the dollar restored. But instead conservatives
focus most of their energies attacking Leviathan at its strongest and most
popular point: the visible handouts of government spending—earmarks,
subsidies, and such—which matter relatively little if the invisible
assaults are suppressed. Since the visible handouts cannot be reduced in a
recession, the only spending cuts that actually happen as a result of the
Republican complaints are in defense.
A few decades ago, supply side economists, such as Arthur Laffer and
Robert Mundell and inspired journalists such as Jude Wanniski and Steve
Forbes pointed out the politically feasible remedy. Lower tax rates and
retrenched regulations result in more revenues for the government and less
need for visible handouts. Because this footloose outcome allows the
expansion of government and the defense of the country while the private
sector grows even more rapidly, it was extremely popular for a few years.
Its truth, demonstrated globally (look it up), is incontrovertible. Supply
side policies enable the otherwise impossible combination of guns and
butter: large defense efforts with low tax rates and rapid economic
growth. Countries with low or declining tax rates can increase their
government spending three times faster than countries with high or rising
tax rates, because the low tax countries grow six times faster than the
high taxers.
Why then is this truth controverted today by all reputable economists?
Even the disreputable supply siders seem to concede to the Democrats that
it is possible to increase revenues by increasing tax rates from current
levels or to sustain social security and medicare without reducing the
payroll tax. The reason is that all economists have been tied to the
procrustean bed of existing national models which exclude all the
factors—economic growth, tax shelters, entrepreneurial innovations,
transnational and interstate investment flows and demographic
migrations—that register the supply side effects.
Meanwhile, the profession upholds the phantasmagorical models of demand
side economics. Because these models find no confirmation in reality—as
Jean Baptiste Say proved centuries ago, demand is always and only a side
effect of real supply—established economic theories are extremely
difficult to learn and remember. You get Nobel prizes for minor and
obvious insights in economic geography. Thus the exponents of the standard
model are deeply threatened by any reality-based economics.
These experts are now completely in control of Washington, attempting to
spend their way to political dominance, while taking well over half the
voters off the federal tax rolls and giving actual taxpayers a greater
incentive to hide and shuffle existing wealth than to earn or create new
wealth. These measure will retard recovery from the recession and reduce
revenues. But globalization means that entrepreneurial creativity—in which
the United States is increasing it lead—can survive by adopting foreign
locales and resources. Countries such as Israel (a global center of
innovation) and Ireland (a low tax haven), China (a manufacturing dervish)
and India (ascendant in software), are taking the lead and will help
capitalism survive the Lilliputians currently trying to ruin it in the
United States. What will matter, after all, is not whether President Obama
approves of markets but whether markets approve of President Obama, who
may think he has protected his future by buying off the middle class with
tax rebates but will soon discover that his future will be decided by
global markets for currencies and stocks.
To any socialist revival, the invisible hand will still deliver the final
finger.
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Obama Just Doesn’t Get It
Posted By Jennifer Rubin On March 8, 2009 @ 12:03 am In . Feature 01, . Positioning, Politics | 24 Comments
George W. Bush, his critics said, was isolated and unaware of how badly things were going in Iraq. He was caught up in a messianic vision to bring democracy to the Middle East. Meanwhile, he stubbornly clung to grandiose domestic policy proposals (e.g., social security reform and immigration reform) when the timing was simply not right. Some of that has been disproved by subsequent events (e.g., we did bring democracy to Iraq) or revelations about his own intimate involvement in reworking a failing Iraq strategy. But the image remained of an isolated and out-of-touch president.
As queasy as it might make us feel, we might consider that we have gone from the frying pan into the fire. Obama does not perceive things are substantially worse or that his “strategy” is failing. He also seems to have the timing terribly off as he discusses an onslaught of taxes and regulation while the economy is staggering. And to make matters worse we have no General Petraeus to help guide us back from the brink of ruin. We have instead Tim Geithner.
In a [1] brilliant posting, small business owner Jim Prevor makes clear that the president is frightfully oblivious to the real world impact of the stock market crash on the lives of ordinary Americans (and hence on our prospects for recovery). Prevor explains:
Every stock market investor quickly learns that the math of markets is forbidding. After all, if stock prices go down by 50 percent, they have to rally by 100 percent to get one back to even.
Yet this doesn’t begin to explain the problem. In political polling, all’s well that ends well. But this is most decidedly not true in the stock market.
If a family needs $25,000 to pay tuition and it sells stocks to raise the money, that money is not available to benefit from any future upswing in market values. So even if Obama orchestrates a miraculous rebound, countless millions of people will have been permanently hurt.
And for individuals and businesses who tried to use prudent margin, Obama seems oblivious to people sitting at their desks desperately trying to navigate not only margin calls but announcements that their brokerage firm has decided the maintenance requirement on certain stocks has been raised and, suddenly, people have to sell anything of quality because they need to raise cash. They get stuck with illiquid portfolios and the selling pressure on anything of quality is immense.
These people and businesses are wiped out, whatever the long term effect of the President’s policies.
And yet the president flicks away the real world news, while his supporters point to poll numbers. That’s right– we have 8.1% unemployment and a stock market crash; they take refuge in a popularity poll more than three and half years before the president would again face the voters. (To its credit the Bush team never boasted about polls numbers or showed much concern when their fortunes changed.) And in their spare time they devise a juvenille plot to attack a radio talk show host.
Rather than ruminating on the worsening economy, Obama is cheered by polls and fixated on redesigning America. The cratering economy doesn’t give him pause. Instead it encourages him to speed up before the voters catch up with him.
And he seems intent on running “victory laps” over the stimulus bill passed weeks ago. Surely [2] campaign-style events touting his handiwork don’t do much to improve the economic outlook going forward. And his cheesy [3] recovery logo only reinforces the sense that he is obsessed with garnering credit, keeping his poll numbers high and reinforcing awareness of government’s growing presence in citizens’ lives. None of this has much to do with improving the climate for job development, economic growth and private sector confidence.
Defenders of the president dismiss the notion that Obama’s policies and rhetoric are in any way responsible for our current plight. It happened on Bush’s watch! Of course it did. But they misstate their opponents’ criticism — another straw man in a growing army of them. The question is not whether Obama caused the recession, but whether he is making it worse. Even the [4] AP spots the fallacy of the Obama administration’s defense: “Although the administration likes to say it ‘inherited’ the recession and trillion-dollar deficits, the economic wreckage has worsened on Obama’s still-young watch.” And it is simply folly to deny that the devastation of wealth in the stock market has made things worse and further unnerved Americans. The stock market crash is the greatest anti-stimulus development of his presidency. Obviously, consumers and homeowners feel even less financially secure than they did when the Dow was 3000 points higher.
[5] Donald Luskin writes:
What will our world look like when President Obama “reforms” health care by nationalizing it given that it represents about one sixth of U.S. economic activity (and the part that’s still working)? What will happen to the cost and availability of electricity when he puts in place a “cap-and-trade” tax on carbon emissions? What will happen to Wall Street when taxes are raised on hedge fund and private-equity managers? What will happen to all of us when all our taxes go up and our deductions go down?
I have a pretty decent idea that none of that will lead to anything good at least not economically. You may disagree. But can’t we at least agree that President Obama is stirring the pot by ramming all these things through now, at a time when he ought to be calming things down so we can all catch our breath and the economy can get back on its feet?
Perhaps if the Treasury Department was fully staffed or if Paul Volker was not apparently banished to an undisclosed location, the president might have a better grip on why his anti-business, anti-wealth-creating policies and rhetoric have sent the markets skidding. Maybe if the national press were less invested in his New Deal II vision, he would confront daily criticisms and aggressive questioning about his schemes. And if he spent more time talking to agitated wealth creators, investors, retirees and middle class parents and less time at photo-ops and campaign-style rallies with handpicked fans, he might internalize what it means to lose half or more of your retirement or college fund.
But on he strides, into the Brave New World of a government-directed economy. (Incidentally, if Tim Geithner is not the best advertisement for limited government I don’t know what is.) And the scariest part of the first six weeks of this administration? The realization that, contrary to his defensive remark in his joint address to Congress, he really doesn’t “get it.”
Article printed from Pajamas Media: http://pajamasmedia.com
URL to article: http://pajamasmedia.com/blog/obama-just-doesnt-get-it/
URLs in this post:
[1] brilliant posting: http://www.weeklystandard.com/weblogs/TWSFP/2009/03/when_it_comes_to_real_life_exp.asp
[2] campaign-style events: http://www.commentarymagazine.com/blogs/index.php/rubin/57672
[3] recovery logo: http://blogs.wsj.com/economics/2009/03/04/stimulus-logo-branding-the-us-recovery/
[4] AP: http://news.yahoo.com/s/ap/20090307/ap_on_an/the_obama_economy_analysis_1
[5] Donald Luskin: http://www.smartmoney.com/Investing/Economy/Even-Worse-Than-the-Great-Depression
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Amazing how quiet the Obots are these days. The kool-aid must be getting bitter.
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Amazing how quiet the Obots are these days. The kool-aid must be getting bitter.
:lol: the only "change" we got was the guy signing the stimulus checks.
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Lloyds Cedes Control to Government, Insures Assets
March 7 (Bloomberg) -- Lloyds Banking Group Plc, Britain's biggest mortgage lender, will cede control to Prime Minister Gordon Brown's government in return for state guarantees covering 260 billion pounds ($367 billion) of risky assets.
The government's stake will rise to as much as 75 percent, making Lloyds the fourth U.K. bank to slip into state control since the run on Northern Rock Plc in September 2007. Brown is using that leverage to force banks to increase lending to homeowners and businesses and spur an economy that is facing its worst recession since World War II.
"In order to get British banks lending again the government needed to take them over," said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London, who has a "sell" rating on Lloyds stock. "It is likely to be at least three of four years before the banks return to the private sector."
Lloyds will pay more for asset protection than Royal Bank of Scotland Plc, the first lender to enter the program, because of the deteriorating quality of loans acquired when it bought HBOS Plc in a government-brokered deal. London-based Lloyds will pay 15.6 billion pounds, or 5.2 percent of the insured assets, in the form of non-voting shares, the bank said in a statement. RBS last month paid 2 percent.
About 83 percent of the assets Lloyds is insuring came from HBOS, the bank said.
The HBOS loan book "is more toxic than anyone ever dreamed," said Alan Beaney, who helps manage $2 billion, including Lloyds stock, at Principal Investment Management in Sevenoaks, England. "As a Lloyds shareholder you are very annoyed because you had a bank that did not need the government very much and now you have inherited a rubbish bank."
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUuK.B52o350&refer=home
Washington plans for big bank failure
NEW YORK (Fortune) -- The government is bracing for a big bank failure.
A bill introduced in Congress would give the FDIC, the agency that stands behind Americans' bank deposits, temporary authority to borrow as much as $500 billion from the government to shore up the deposit insurance fund.
The bill -- the Depositor Protection Act of 2009, backed by Senate Banking Committee Chairman Chris Dodd, D-Conn. and Sen. Mike Crapo, R-Idaho -- wouldn't change the status of individual bank accounts, which through the end of this year are insured up to $250,000.
http://money.cnn.com/2009/03/06/news/dodd.fdic.fortune/index.htm?cnn=yes
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China sees recovery; rich countries sink deeper
ZHOU XIN AND SIMON RABINOVITCH
Reuters
March 6, 2009 at 6:27 AM EST
BEIJING — China served glum markets a dose of optimism on Friday, saying its economy was recovering and promising more swift action to absorb the shock of the global financial crisis and deepening recession in rich nations.
Top Chinese officials said substantial fiscal and monetary stimulus was breathing life back into the world's third-biggest economy hit by crumbling exports, suggesting Beijing saw no need to boost the existing investment plan of nearly $600-billion (U.S.).
“The economic figures are stabilizing and recovering, which demonstrates that the policies have begun to show an impact,” central bank governor Zhou Xiaochuan told a news conference during the National People's Congress.
China's optimism was not expected to be shared by the world's largest economy later on Friday, with forecasters expecting grim numbers when the key U.S. February payrolls report is released.
China sees economic recovery
Related Articles
The Globe and Mail
Mr. Zhou said China had learned the lesson from other countries that a sluggish response to the crisis delayed the restoration of confidence.
“We must err on the side of being quick and decisive.”
Mr. Zhou was speaking a day after Premier Wen Jiabao said China would ramp up deficit spending this year to hit its target of 8 per cent growth, even though he failed to announce an increase to the two-year stimulus plan that financial markets had hoped for.
Beijing's quiet confidence stands in contrast with increasingly gloomy predictions for the United States, the euro zone, Japan, Britain and other industrial nations, all mired in the most severe downturns in decades.
A top International Monetary Fund official said the world's developed economies were suffering the deepest slump since World War Two and warned the downturn could last into next year.
“The emerging consensus is that it looks as if the downturn in the advanced economies will run through this year and into next year,” IMF first deputy managing director John Lipsky told the Daily Mail newspaper in an interview published on Friday.
Jeffrey Lacker, president of the Richmond Federal Reserve and a voting member of the Federal Open Market Committee, sought to dispel the gloom, saying the U.S. economy may join China and start recovering before the end of this year.
Mr. Lacker told CNBC television that the plunge in discretionary spending may have run its course and could “give people some confidence that we've almost seen the worst of it”.
But an onslaught of grim economic data and corporate reports was deepening market pessimism about the U.S. biggest economy.
On Thursday, auditors for General Motors, once the world's top carmaker, voiced doubts whether it could survive without declaring bankruptcy, pushing its shares down more than 15 per cent and Wall Street stocks to 12-year lows.
Asian stocks also fell, unsettled by GM's troubles and lingering fears of more turmoil in the financial sector. Tokyo's Nikkei average closed down 3.5 per cent at a four-month low.
“I'm worried about America and the place where we can place our hopes now is China,” said Yoku Ihara, manager at Retela Crea Securities.
Hopes that China may boost its stimulus plan sparked a brief rally in global stocks earlier this week.
But the latest assurances from Beijing and suggestions that they still had plenty of ammunition to support the economy failed to cheer up investors ahead of the U.S. February payrolls report, the key gauge of the U.S. economy's health.
Economists in a Reuters poll forecast that job losses likely jumped to 648,000 last month, driving the unemployment rate to a 25-year high of 7.9 per cent.
The report comes a day after the European Central Bank and the Bank of England slashed interest rates to record lows to arrest a deepening slide in the European economy.
The BoE also pledged £75-billion ($106-billion) of newly created money to buy government bonds and pump funds into the struggling economy, embarking on an scheme known as quantitative easing.
Unprecedented in Britain, it was tried by Japan with limited success at the beginning of the decade.
In Japan, where the central bank has already driven interest rates close to zero, media reported that the authorities were considering tripling to $30-billion a scheme offering low-interest loans and cash injections to firms in trouble.
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http://online.wsj.com/article/SB123630304198047321.html
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Chinese political advisors propose making yuan an int'l currency
www.chinaview.cn 2009-03-07 20:18:22 Print
NPC, CPPCC Annual Sessions 2009
Special Report: Global Financial Crisis
BEIJING, March 7 (Xinhua) -- China should speed up reforming its financial system to make the yuan an international currency, said political advisors Saturday.
"A significant inspiration to draw from the global financial crisis is that we must play an active role in the reconstruction of the international financial order," said Peter Kwong Ching Woo, chairman of the Hong Kong-based Wharf (Holdings) Limited.
The key to financial reform is to make the yuan an international currency, said Woo in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body.
That means using the Chinese currency to settle international trade payments, allowing the yuan freely convertible on the capital account and making it an international reserve currency, he said.
China's yuan, or Renminbi, can be freely convertible on the current account but not on the capital account, preventing it from being a reserve currency or a choice in international trade settlement.
China has announced trial programs to settle trade in the yuan, a move analysts say will facilitate foreign trade as Chinese exporters might face losses if they continue to be paid in the U.S. dollar. The dollar's exchange rate has become more volatile since the global financial crisis.
Economists say the move will increase the acceptance of the currency in Asia, which will help it become an international currency in the long run.
The status of the yuan as an international currency will benefit China by giving it a bigger say in world financial issues and reducing the reliance of its huge foreign reserves on the U.S. dollar, some analysts say.
Other analysts argue a fully convertible yuan will hurt China as it would allow massive capital outflow during a financial crisis.
Meanwhile, Chinese authorities remain cautious.
It's possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there's no need to push for that, Yi Gang, vice central bank governor, told Xinhua earlier this month.
That process should be conducive to all sides, he said.
Xu Shanda, former vice director of the State Administration of Taxation and a CPPCC National Committee member, urged for faster paces in making the yuan an international currency as a way of increasing national wealth.
He said the United States and the European Union have obtained hefty royalties from the international use of their currencies while China has become the biggest source of that income.
A royalty, or seignior age, results from the difference between the cost of printing currency and the face value of the money.
"China's loss due to royalty payment has far exceeded the benefit of not making the yuan an international currency," he said in a speech to the annual session of the CPPCC National Committee, without elaborating. China's State Council, or Cabinet, said last December it would allow the yuan to be used for settlement between the country's two economic powerhouses -- Guangdong Province and the Yangtze River Delta -- and the special administrative regions of Hong Kong and Macao. Meanwhile, exporters in Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.
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Mark to Market is one valuable tool to analyze the value of an asset. The rigid accounting of nothing but mark to market on all loans ignores the reality that most families will stay in their home and make the payments un der most circumstances.
We have a long tradition of incompetent regulation. That is not an argument for no regulation nor is it an argument to increase the size or budget of the failed regulators. To me it is an argument to define the role of the federal government down to a manageable, constitutional size and hold regulators to efficiency and performance standards in line with their responsibilities.
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- Works and Days - http://pajamasmedia.com/victordavishanson -
Oh, the Debts We Will See!
Posted By Victor Davis Hanson On March 8, 2009 @ 11:12 pm In Uncategorized | 40 Comments
Going broke without style…
$3.6 trillion budget. $1.7 trillion annual deficit. $800 billion plus borrowing stimulus. $600 billion plus in outlays for new nationalized health care, and then another $600 billion again for cap-and-trade.
These numbers are so fantastic, so absolutely crazed, that the thought of ever paying them off boggles the mathematical senses. (I have surreal nightmares that as we haggle with the Chinese for another $500 billion dollar note to fund cap-and-trade, or another DMV-like national health care center, the USS Carl Vinson radios that it is broke and has no credit to buy supplies off Dubai, or its F-18s sit in rows on its deck, gathering brine for want of parts to take off).
“They” will pay
How many of those diabolical rich making $250,000 and above are there left to gouge to pay for this all? It simply doesn’t compute. One is left with the only possibility that we slash defense, or we will inflate our way out, since no foreign debtor will want to supply those staggering sums of cash.
Athens in the fourth century B.C. chose to mint “redheads”, silver coins with bronze cores that were quickly exposed once the patina around the coins’ imprinted busts wore off. Rome did the same thing, and by the fourth century AD simply flooded its provinces with money of little real value. Germany paid off its war debts to France in the 1920s, with deliberately inflated German marks. I lived in Greece during the oil-embargo hyperinflation of 1973, and remember buying individual eggs with three or four inked-in price figures crossed out, as the store-keeper kept upping the price each day. (And I remember farming in the early 1980s when full-strength Roundup herbicide seemed to go from $60 to $70 to $100 a gallon in a single year).
What, me worried?
I don’t think any one knows what is quite going on. I recently gave a lecture, and a Wall Street grandee afterwards approached the dais, asking me for advice (me, who could not even turn a profit growing raisins, and was a lousy peddler of family fruit for years at Farmers’ Markets), saying in effect something like the following: “Mr. Hanson—Consider: Real estate bad—not going to put money there when I’m not sure where the bottom is. Stocks worse—had I got out at New Year’s, I’d have thousands more than I do now. Cash pathetic—the interest doesn’t even cover what’s lost to inflation. So what’s left—the dole?”
I had no advice, of course, other than some vague warning that we are in a war against capital, sort of similar to what Sallust and Cicero claim that Catiline and his band of dissolute and broke aristocrats were planning, with his calls for cancellation of debts and redistribution of property.
Here are the possible exegeses.
(a) Clueless. Obama, the community organizer from Chicago with a mere two years plus in the Senate, is clueless. He has never run a business, never served as an executive, never done anything in matters of commerce other than speak and write and authorize spending bills as part of his government job. The result is that he listens to the last person he speaks with—and with dozens of advisors with dozens more agendas, we are seeing a herky-jerky, now this, now that, everything but the kitchen sink, sort of governance. This version of the President is a nice guy who wants to please everyone and will please no one.
(b) Not so clueless. Or Obama has a pretty certain, calculated European objective of high taxes, big-spending programs, utopian foreign policy initiatives, and a therapeutic sense of ensuring we are all going to be equal by result. In that sense, the recession was a godsend, since he has a brief window of about six months of fright and uncertainty to ram through programs that will last a lifetime, and whose expense will ensure a vast redistribution of income. His closest advisors are life-long government technocrats who are inured to spending others’ money and can use tax-free public appurtenances (salaries, perks, benefits, travel, etc.) to emulate the grand lifestyles of those they detest in corporations and on Wall Street. So we will get a new technocrati overseer class to replace the now disgraced masters of the universe on Wall Street. This manifestation of Obama is a hustler of the first order, and almost everything he says from FISA and earmarks to raising the ethical bar on appointments and limits on spending is, well, made up as he goes along, with the assurance that the media is still ga-ga.
(c) A Mean streak. Or there is not so much chaos or European utopianism at work as a sort of primeval dislike of capitalists and those who have access to money—an angry President Obama whose furor now and again peeks through (remember the clingers’ speech, the accidental middle finger scratches, and the Robespierre rhetoric). Never mind the hypocrisy involved, or the mega-fortunes at play in the rise of Obama’s candidacy. Instead concentrate on the effects, both direct and insidious, of his initiatives on capital of the near-do-well. This is a quadruple whammy:
1) Aggregate tax rates are going to approach 70% in some states, effectively destroying the idea that anyone from the lower classes can ever achieve wealth in a single lifetime, and pass some of it on to his children (increases in estate taxes will be next).
2) The pulverizing of the Dow (cf. Obama’s flippant talk of gyrations and advice to invest now at rock bottom prices, as if those who were wiped out have disposable cash to buy more stocks) means that the aggregate wealth in 401(k)s and stocks for millions—along with equity in homes— of the upper middle classes has effectively vanished. In some cases, the lawyer or contractor who a year ago had $400K put away in retirement funds and $300K in home equity has effectively lost half, if not more, of his hard-won wealth. And when one computes the additional taxes on future income he will pay, it will be almost impossible in his remaining lifetime to make it back.
3) The promises of free health and free education for everyone most surely will come with salary considerations and mean-testing (we are seeing that already with ideas floating about charitable contributions). In other words, the more you of the upper middle class will pay for new expansive entitlements, the more likely you will not be eligible to use the full extent of them.
4) The power of anti-“rich” rhetoric is already beginning to demonize the wealthy as those who have somehow done something wrong in paying the full ticket for their children’s’ educations, or their own health care, or their full mortgage payments. Of all the things that worry me about Obama, the most troublesome is his conflation of the super wealthy—who are so rich that even Obama cannot touch them and who often are his most fervent supporters—with the entrepreneurs, the scramblers of the small business class who make between, say, $250,000 and $600,000.
These already pay over 50% in various taxes, are eligible for almost no government support, do not have access to insider government breaks and special legislation, pay their own way—and create both jobs and new innovations critical to the performance of the U.S. economy. Yet between Wall Street and DC they have been targeted for extinction.
Target Limbaugh
Recently David Frum contrasted what he thought was the ungainly (both physically and morally) image of Rush Limbaugh with that of the suave Barack Obama to underscore how the Republicans must change and assume new leadership. I replied to that charge in a recent corner posting on nationalreview.com, and thought it was rather incoherent in that Limbaugh never claimed to be a national political leader and middle-way conservatives were simply following White House talking points.
Rumors also circulated that Rahm Emanuel, with Clinton emeriti, like Paul Begala and James Carville, are coordinating attacks on the talk show host from the White House. Now the New York Daily News prints a derivative hit piece by a senior correspondent David Saltonstall (note the melodramatic reference to Limbaugh’s four-part name) that has quips like:
“Rush Hudson Limbaugh 3rd, 58, is a thrice-divorced, formerly drug-addicted college dropout who casts himself as a working class hero, yet drives his $450,000 Mercedes-Benz Maybach 57S home to a 24,000-square-foot [1] Florida mansion every night (one of five houses on the property).”
Questions, however, arise. Do we really wish to go after the personal lives of entertainers and commentators, who are not in public office, as is true of say, a Bill Clinton, Larry Craig, or Ted Kennedy? Won’t this also open up a can-of-worms—such as ‘If Limbaugh abused prescription drugs, what about the President of the United States who admitted to using illicit drugs like marijuana and cocaine (“blow”)?’ Or “Is Limbaugh more honest for being rich and fiscally conservative or a John Kerry for being even richer and liberal”? Or “Is it worse for Limbaugh to use his own money to fly in his own jet, or for a Nancy Pelosi to use ours to fly in ours (and whose is the bigger anyway?).
Working-class hero?
I don’t recall Limbaugh ever saying he was a “working class hero” and worry more about how Connecticut Senator Chris Dodd got his various houses than I do the five homes of private citizen Rush Limbaugh. I think this invective all started because Limbaugh gave a speech to some conservatives and reiterated that he wished Obama’s socialist program initiatives to fail—from that point on, he morphed into the supposed lead target of the Obama hit team, that is rapidly becoming Nixonian in its attack on “enemies” like Hannity or Limbaugh. Wanting the Congress to say no on the President’s proposals for socialized medicine, in preference for refining the present system, is not the same as declaring America’s war in Iraq as lost (or hoping it so).
My take? If the multilateral White House insults the visiting British Prime Minister by a less than formal reception ceremony, and sends him packing with a gift box of CDs, and then pleads in its defense it is frazzled and overworked, what is it then doing spending hours to focus on and demonize a talk show host?
Bottom Line
I’ve come rapidly to the point where I simply do not believe (cf. the claim that all those companies every thirty minutes are going broke due to the lack of federal health care) that what our President says is at all accurate. And worse have come to think that he knows it is not, and, worse still, knows that the media largely know too but will do their part as disciples must. In short, we are soon to see an end to things as they once were for the last quarter-century.
Article printed from Works and Days: http://pajamasmedia.com/victordavishanson
URL to article: http://pajamasmedia.com/victordavishanson/oh-what-a-debt/
URLs in this post:
[1] Florida: http://www.nydailynews.com/topics/Florida
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Addressing a strain of political economics that considers imports and trade deficits to be symptoms of economic weakness or failure, it is interesting to note that in this bad economy our trade deficit is 'improving', down to its lowest level since our last bad economy. (We also had a trade 'surplus' during the great depression.) http://www.ftportfolios.com/Commentary/EconomicResearch/2009/3/13/the_trade_deficit_in_goods_and_services_fell_to_$36.0_billion_in_january
I'll try to explain my view better... commerce is good (except for warheads to tyrants etc.), each transaction involves productive behavior between consenting adults and EACH transaction is a win-win situation for BOTH parties or they wouldn't make the deal. So each import is good and each export is good. More is better. To make a judgment about how they are going you should ADD them together for the trade figure instead of subtracting one from the other. You don't see growing imports in a contracting domestic economy or growing exports in a contracting global economy. In this bad economy, both imports and exports are way down. That is a more meaningful observation than comparing one with the other IMO.
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I am trying to find out what our biggest exports are; autos? gas? oil? technology?
The biggest exporter is Germany:
http://en.wikipedia.org/wiki/List_of_countries_by_exports
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"The biggest exporter is Germany"
Impressive statistic for Germany but not a fair comparison with the US economy IMO for the following reason: When Germany ships to any other country in European Union it is counted as an export, when someone in Florida, Texas, California, New York, Massachusetts or 45 other states ships across state lines it does not.
"I am trying to find out what our biggest exports are; autos? gas? oil? technology?"
Here are some trade stats to sift through, imports: http://www.intracen.org/tradstat/sitc3-3d/ir842.htm, exports: http://www.intracen.org/tradstat/sitc3-3d/er842.htm, Other countries: http://www.intracen.org/tradstat/sitc3-3d/indexri.htm.
What you see there might surprise you.
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Thanks for the feedback that my link did not light up correctly. I use this bookmark for the economic posts of Brian Wesbury: http://www.ftportfolios.com/Common/Rss/CommentaryFeed.aspx All of the posts marked commentary or analysis are well worth the read IMO.
For the latest trade deficit link, scroll down to: "The trade deficit in goods and services fell to $36.0 billion". I'll try to hot-link again:
http://www.ftportfolios.com/Commentary/EconomicResearch/2009/3/13/the_trade_deficit_in_goods_and_services_fell_to_$36.0_billion_in_january
My point was that if imports declined by 23% and exports declined by 16%, both are bad news even though the 'trade deficit' is now smaller.
(Wesbury should have been Bush's Fed chair pick instead of failed Fed insider Ben Bernancke.)
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Wesbury is first rate. Always someone whose thoughts I consider carefully.
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Doug,
Thanks for the links. Very interesting. I wonder where drugs would be on the list of imports from Mexico if records were kept.
Natural gas seems to be the biggest US export if I read the table correctly.
I don't know how the oil market works. One wonders how we export so much oil rather than use it all here? It must not be that simple.
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I'm not sure it's time to join the pitchfork and torch bearing throng. . . .
Terence Corcoran: AIG bonuses should be paid
Posted: March 16, 2009, 7:47 PM by NP Editor
Terence Corcoran, Barack Obama, compensation, AIGObama is punishing AIG for systemic failure created by government
By Terence Corcoran
To use a current cliché, frequently deployed to humiliate bankers and CEOs: He doesn’t get it. Barack Obama, that is. He just doesn’t get it, and nor do millions of others who are following the U.S. President on his long destructive march against bankers and corporate executives for their alleged “recklessness and greed.”
Those were the words Mr. Obama used yesterday when he instructed his treasury secretary, Timothy Geithner, to “pursue every legal avenue” to block the payment of $165-million in bonuses to employees of AIG Financial Products. News of the payments sparked a demagogic explosion in Congress and the U.S. media, and the President seized the momentum and then got out in front of it. He loves a parade.
There’s no need to repeat here the distorted content and hysterical tone of the AIG explosion. What is worth repeating, however, are some of the facts behind the AIG bonus payments. Much has been made of AIG CEO Edward Liddy’s letter to Mr. Geithner, explaining the reasons for the bonuses. For people who like facts with their hysteria, and can calm down enough to read it, the Liddy letter appears elsewhere on this page.
Mr. Liddy had no involvement with establishing the original bonus plan, designed to “retain” AIG Financial Product specialists through 2008 and 2009. But he says he has “grave concerns about the long-term consequences of the actions we are taking” to reduce the contractual payments to AIG employees. He warns of AIG’s inability to retain the best talent. AIG, he says, will simply not be able to attract employees if they come to believe “that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”
Now their compensation is about to undergo adjustment down to zero by the U.S. President. They say you can’t fight city hall. Then what can you do with the mighty U.S. government, which is going to throw the full legal force of the state against you? Even if the AIG employees are legally and rightly entitled to their bonus payments — which they almost certainly are — they are about to get steamrolled by a populist president riding an anti-corporate wave.
Of course, if you believe that AIG and its Financial Products group —through greed, recklessness and malfeasance — were the cause of AIG’s failure and the adjacent global financial meltdown, then you have no problem with rolling back the bonuses.
But the attack on executive compensation, Wall Street bonuses and bankers is largely without merit, a trumped up attack on the private sector — on markets and capitalism — to overshadow the real causes of the global financial crisis. In recent weeks, reports from U.S. Fed Chairman Ben Bernanke, the International Monetary Fund and former Fed Chairman Alan Greenspan added to the already mountainous body of evidence that massive government failure created a monetary- and policy-driven house of cards.
Writing in The Wall Street Journal last week, Mr. Greenspan all but conceded that the Fed missed the signals and implications from the flood of foreign-owned dollars cascading into the U.S. market — dollars that his monetary policies had created. But he said his 1% interest rate regime through 2003 and 2004 was not to blame.
Then Mr. Bernanke, current Fed chairman, in a speech last Tuesday, said we were experiencing the worst financial crisis since the 1930s, but, “Its fundamental causes remain in dispute.” While corporate behaviour may have played a role, Mr. Bernanke ran through a list of government-based causes for the global crisis. Mr. Bernanke cited global savings imbalances, the buildup of U.S. dollar currency reserves in China and elsewhere and the build-up of oil dollars among petroleum exporting countries.
The build-up of systemic risk — the rising odds that the entire system might crash — took place beyond the ability or even the responsibility of any one private bank or insurance company. No bankers or AIG executives are responsible for systemic risk.
The leading government-created disaster behind the financial crisis is U.S. housing policy and the multi-trillion dollar securitized mortgage market created by the U.S.-government backed mortgage agencies known as Fannie Mae and Freddie Mac. In comments in 2007, Mr. Bernanke reported that the two agencies, with $5.2-trillion in mortgage obligations, posed a systemic risk. Such risk, he said, occurs when “disruptions occurring in one firm or financial market may spread to other parts of the financial system, with possibly serious implications for the performance of the broader economy.”
When Fannie Mae and Freddie Mack failed, because of the mortgage bubble they helped create, the systemic meltdown spread around the globe. The private sector, bankers and insurance companies, were the victims of a failed global financial regulatory regime.
That conclusion is essentially the one delivered by International Monetary Fund officials in early March. In a brief report, “Initial Lessons of the Crisis,” the IMF reviews the regulatory disaster. It tries to put the blame on “market failure” and financial institutions for failing to recognize the looming systemic problems. But it is the regulators — who are really charged with detecting and preventing systemic risks — who failed to see the train coming down the track.
Botched regulations, distorting accounting rules, misguided monetary policy, over-stimulative government policy — the list of state policy failure behind the crisis is long and much more significant than any of the individual deals done by AIG Financial Products. They sold products that made sense under the monetary and regulatory regimes established by governments all over the world. Market players do that. Bankers are not responsible for systemic risk.
But now, apparently, bankers and financial market actors are supposed to personally pay for the government-created systemic risk and collapse. In its report, the IMF suggested that in future, financial market compensation packages should be designed so that individuals are only paid the money after the passage of time. “An early priority should be to delink bonuses from annual results and short-term indicators.” Instead, bonuses would be paid as “deferred disbursements and allowing for some claw back as risks are realized.”
Private market players, in other words, are to bear the burden of regulatory failure. They would only receive their compensation after they find out whether governments and regulators have done their jobs and protected against systemic risk. In AIG’s case, Mr. Obama is punishing AIG staff for massive, global government failure.
http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/03/16/terence-corcoran-aig-bonuses-should-be-paid.aspx
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Second Post
March 17, 2009, 5:23 p.m.
The AIG Outrage
The government shouldn’t run anything, because it cannot run anything.
By Larry Kudlow
This whole AIG fiasco — where the entire political class is suddenly screaming over bonuses paid to derivative traders in AIG’s financial-products division — is just a complete farce. What it really shows is how the government has completely bungled the AIG takeover. Blame the Bush administration and the Obama administration. It also shows, once again, why the government shouldn’t run anything, because it cannot run anything.
AIG should have been placed in bankruptcy last fall under some sort of government sponsorship. While in bankruptcy, all the salary contracts (and every other AIG contract) would have been nullified and voided. At the same time, there would have been an orderly liquidation and sale of AIG’s assets and separate divisions.
But as things stand now, there still is no clear roadmap for the dissolution of AIG. There are ideas, but nothing is set in concrete.
And as for the $165 million or so in AIG bonus payments, the Obama administration — including the president, Treasury man Tim Geithner, and economic adviser Larry Summers — knew all about them many months ago. They were undoubtedly informed of this during the White House transition.
So there’s no big surprise. Nobody should be shocked. But President Obama is doing his best play-acting ever. He knows full well that the nationwide outcry against federal bailouts and takeovers is only going to get worse on his watch. His poll numbers are already falling, and this AIG episode is going to pull them down more.
Incidentally, has anybody asked Team Obama why it is more than willing to break mortgage contracts with a bankruptcy-judge cram-down, but won’t cram-down compensation agreements for AIG, despite the fact that the U.S. government owns the company? Kind of odd, don’t you think?
The Wall Street Journal editors get it right when they ask: Who’s in charge and what’s the game plan? The whole AIG story is an outrage.
What’s more, AIG is acting as a conduit for taxpayer money that is being sent to dozens of derivative counterparties, including foreign banks and American banks like Goldman Sachs. If we’re going to bail out all these other firms, why not bail them out in full taxpayer view? Why is the money being laundered furtively through AIG? And where exactly is the end game for AIG? How are the taxpayers going to be repaid?
And what is Treasury man Geithner’s role in all this? He appears to be the biggest bungler in what has become a massive bungling. My CNBC friend and colleague Charlie Gasparino thinks Geithner can’t survive this. I am inclined to agree.
Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.
Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.
Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.
Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.
In a column last week I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out — just as they did back in the 1990s.
We don’t need more TARP. We don’t need to take over more big banks. And we don’t need to have the government run things it simply isn’t capable of running.
— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic$.
National Review Online - http://article.nationalreview.com/?q=YjA0ODRlOWIyMjU5ZjUxMTBkMTEwYjhkNjQ4OGYwNGU=
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CCP:" I wonder where drugs would be on the list of imports from Mexico if records were kept."
- Good point. Also it is said that if China paid full price royalties for the software, music and movies that it takes, that would entirely close the trade gap.
"One wonders how we export so much oil rather than use it all here? It must not be that simple."
- I don't know the mechanics either - shipping lanes or refined versus crude etc. We have a large geography. Reuters: "The biggest share of U.S. oil products exported went to Mexico, Canada, Chile, Singapore and Brazil",
http://uk.reuters.com/article/oilRpt/idUKN0325640920080703?pageNumber=2&virtualBrandChannel=0
Looks to me like refined product gets shipped out the west coast (no doubt that some of it originated in Canada, hence both import and export). I looks like the US east coast is a large importer, remember the Katrina refinery shutdowns in New Orleans (south coast?). I know Iran for example has no refining so they export oil but have to import all their gasoline. When Venezuela was threatening to cut off oil to the U.S, one analyst wrote that they would then have tankers going both directions through the Panama canal. It is a global market. Wouldn't it be easier to just switch the shipping labels.
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Welfare Reform R.I.P.
By INVESTOR'S BUSINESS DAILY | Posted Tuesday, March 17, 2009 4:20 PM PT
Big Government: Even many liberals thought the 1996 reform ended the welfare debate forever. That Congress' stimulus unravels that landmark law proves again the mindlessness of its unprecedented spending spree.
Read More: Budget & Tax Policy
The Monica Lewinsky scandal didn't spur prominent Clinton administration staffers to resign on principle. It was President Clinton's embrace of the Republican Congress' welfare reform in 1996 that motivated a longtime Clinton friend like HHS assistant secretary Peter Edelman, a former Bobby Kennedy aide and husband to Children's Defense Fund founder Marian Wright Edelman, to depart. Edelman's fellow HHS officials Mary Jo Bane and Wendell Primus also turned in their walking papers.
At issue was the idea of insisting that millions of people make a transition from the dole to the work force. States were given much more power in running their federally-funded welfare programs, deadlines were imposed on individuals getting back to work, and a lifetime time limit of five years was set for family benefits.
Defenders of the status quo warned that more than a million additional children would be condemned to poverty. But what really happened was a 65% drop in welfare caseloads, millions liberated from the government teat and returned to supporting themselves, and a model gratefully followed by other countries.
Welfare reform proved the conservative Republicans right about the destructive wastefulness of government "helping" the have-nots by trapping them in a cycle of dependency. But it also proved that liberal Democrats, led by Bill Clinton, were capable of abandoning blind faith in the powers of government. Clinton was re-elected in great part thanks to his signing of welfare reform that year; the Republican architects of the law maintained a House majority for a decade afterward.
But today's Washington seems little impressed by the achievement of reducing the welfare rolls from over 5 million to below 2 million in the course of a decade. Congress' big-spending "recovery" package reverts the federal-states welfare funding arrangement to the old Aid to Families with Dependent Children (AFDC) system — in some respects making it worse than those bad old days.
"For the first time since 1996, the federal government would begin paying states bonuses to increase their welfare caseloads," noted Heritage Foundation scholars Robert Rector and Katherine Bradley in an analysis released last month.
"Indeed, the new welfare system created by the stimulus bills is actually worse than the old AFDC program because it rewards the states more heavily to increase their caseloads," they added. Under Congress' new scheme, "the federal government will pay 80% of cost for each new family that a state enrolls in welfare; this matching rate is far higher than it was under AFDC."
Rector and Bradley found that in the first year welfare spending will see its highest rise in history, an increase of more than 20% to exceed $600 billion. The overall cost over the next decade is estimated to reach $1.34 trillion.
In response to the argument that the magnitude of the current financial crisis and economic downturn mandates this welfare reversal, the Heritage analysts point out the existence of a quickly accessible $2 billion contingency fund for the states under welfare reform. Congress could easily have expanded that fund; instead, it chose to repeal reform.
Slate.com blogger Mickey Kaus is a liberal who is proud that Clinton and other Democrats embraced one of the most successful domestic reforms of recent decades. Last month, he reminded his readers that big labor interests view the workfare requirements of welfare reform as a threat to their members' inflated salary levels.
Kaus added, however, that the biggest-spending, Edelmanesque liberals "don't really need to be pressured into relaxing work requirements. They've never liked work requirements, including 'workfare,' and are always looking for an excuse to say 'It's OK to come back on the dole.' "
On top of the return to welfare can be added the Obama administration's tax policies set to take a majority of Americans off the income-tax rolls — giving them no interest in lowering income-tax rates.
It all signals that this country may be taking a giant step toward a high-unemployment, low-growth European-style economy.
http://www.ibdeditorials.com/IBDArticles.aspx?id=322184018399528
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Dodd: Administration pushed for language protecting bonuses
Story Highlights
NEW: Sen. Dodd tells CNN he put bonus provision in bill, despite earlier denials
Sen. Chuck Grassley: Congress only has leverage if firm uses taxpayers' money
AIG under fire for doling out big bonuses after taking bailout money
Rep. Barney Frank says execs shouldn't get bonuses if they are "incompetent"
(CNN) -- Senate Banking committee Chairman Christopher Dodd told CNN Wednesday that he was responsible for language added to the federal stimulus bill to make sure that already-existing contracts for bonuses at companies receiving federal bailout money were honored.
Dodd acknowledged his role in the change after a Treasury Department official told CNN the administration pushed for the language.
Both Dodd and the official, who asked not to be named, said it was because administration officials were afraid the government would face numerous lawsuits without the new language.
Dodd, a Democrat, told CNN's Dana Bash and Wolf Blitzer that Obama administration officials pushed for the language to an amendment designed to limit bonuses and "golden parachutes" at those companies.
"The administration had expressed reservations," Dodd said. "They asked for modifications. The alternative was losing the amendment entirely."
On Tuesday, Dodd denied to CNN that he had anything to do with adding the language, which has been used by officials at bailed-out insurance giant AIG to justify paying millions of dollars in bonuses to executives after receiving federal money.
He said Wednesday that the "grandfather clause" language "seemed like innocent modifications" at the time. Watch Dodd's interview with CNN's Dana Bash »
"I agreed reluctantly," Dodd said. "I was changing the amendment because others were insistent."
Dodd said he did not speak to high-ranking administration officials and the change came after his staff spoke with staffers from Treasury.
The White House did not immediately respond to CNN's request for comment.
Later, in a town hall meeting in Costa Mesa, California, Obama addressed the AIG controversy, saying, "I'll take responsibilty. I'm the president.
"We didn't draft these contracts. But it is appropriate when you're in charge to make sure stuff doesn't happen like this," he said. "So we're going to do everything we can to fix it."
On Capitol Hill on Wednesday, AIG chief executive Edward Liddy called the roughly $165 million in bonuses "distasteful" but necessary because of legal obligations and competition.
"We have to continue managing our business as a business -- taking account of the cold realities of competition for customers, for revenues and for employees," Liddy told a House Financial Services subcommittee. "Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful."
Pennsylvania Rep. Paul Kanjorski, the hearing's chairman, responded to Liddy's statement by arguing that AIG should have refused to pay all the bonuses -- regardless of its contractual obligations with the bonus recipients.
"Let them sue us," said Kanjorski, a Democrat.
Liddy, who joined AIG after the bailout, said some employees have returned their bonus money.
Senators and representatives have vowed to get the bonus money back, but questions have arisen about why Congress didn't act to prevent the bonuses in the first place.
"Well, the only lever we have in this is the fact that these corporations have come to the Congress of the United States and want a taxpayers' bailout," Sen. Chuck Grassley, R-Iowa, said Wednesday on CNN's "American Morning."
"If it weren't for that, we would not have any leverage on how any individual corporation is being run, and we don't pretend to have any leverage on any corporation today in the United States that's not seeking federal help," said Grassley, the top Republican on the Senate Finance Committee. Related: Grassley defends 'suicide' comment
AIG, an ailing insurance giant, has received more than $170 billion in federal assistance. Taxpayers now own nearly 80 percent of the company.
In a letter to Congress on Tuesday, New York Attorney General Andrew Cuomo confirmed that AIG paid 73 employees bonuses of $1 million-plus each this year after it received federal bailout money.
AIG will have to return the $165 million it paid in executive bonuses to the Treasury Department, Treasury Secretary Timothy Geithner said Tuesday.
Grassley and Sen. Max Baucus, D-Montana, on Tuesday introduced a plan that would impose a hefty tax on retention bonuses paid to executives of companies that received federal bailout money or in which the United States has an equity interest. Watch Grassley describe how the tax would work »
Other lawmakers, such as Rep. Charlie Rangel, D-New York, said it would be unfair to use the tax code as punishment, but Grassley said it's not a question of being fair.
"It's unfair what they did to the taxpayers by paying bonuses when they don't have the money to pay bonuses," he said. iReport.com: Sound off on AIG
AIG Chairman and CEO Edward Liddy has defended the bonuses, saying the company needed them to retain top talent and because of contractual rights. He has pledged to reduce 2009 bonus payments, which AIG refers to as "retention payments," by at least 30 percent.
Libby is testifying Wednesday on Capitol Hill. He's likely to face tough questions from lawmakers despite not being at the helm of AIG when the financial fiasco happened. He took over about six months ago. Who's insured by AIG? »
Rep. Barney Frank, D-Massachusetts, said Wednesday that Congress can't just pass a law to abrogate any past contracts because that move would not hold up in court. Instead, he argued the executives don't deserve bonuses under the contract. Watch what Frank says about the bonuses »
"We own this company in effect, and we're not asking that these bonuses be rescinded because we have lent money to the company. I believe we are saying as the owners of the company, we do not think ... we should have paid bonuses to people who made mistakes who were incompetent," said Frank, chairman of the House Financial Services Committee. See facts, attitudes and analysis on the recession »
CNN's Ed Hornick Kristi Keck contributed to this report.
All AboutAmerican International Group Inc. • U.S. Senate
Find this article at:
http://www.cnn.com/2009/POLITICS/03/18/aig.bonuses.congress/index.html#cnnSTCText
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Now Dodd blaming BO. We all know that is the end of Dodd. In few days watch for him tol come out apologizing or correcting what he just said as though it was "taken out of context" after the BO thugs and MSM go after him (and maybe his family). BO ain't going down for him that's for sure.
I bet this whole thing doesn't hurt BO a bit. He is what the crats used to whine about Reagan - the "teflon" Prez.
****Dodd Blames Obama Administration for Bonus Amendment (Update2)
By Ryan J. Donmoyer
March 19 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said the Obama administration asked him to insert a provision in last month’s $787 billion economic- stimulus legislation that had the effect of authorizing American International Group Inc.’s bonuses.
Dodd, a Connecticut Democrat, said yesterday he agreed to modify restrictions on executive pay at companies receiving taxpayer assistance to exempt bonuses already agreed upon in contracts. He said he did so without realizing the change would benefit AIG, whose recent $165 million payment to employees has sparked a public furor.
Dodd said he had wanted to limit executive compensation at companies that got money from the government’s financial-rescue fund. AIG has received $173 billion in bailout money. His provision was changed as the stimulus legislation was negotiated between the House and Senate.
“I did not want to make any changes to my original Senate-passed amendment” to the stimulus bill, “but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG,” Dodd said in a statement released last night. “Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week.” He didn’t name the administration officials who made the request.
No Insistence
An administration official said last night that representatives of President Barack Obama didn’t insist on the change, though they did contend that the language in Dodd’s amendment could be legally challenged because it would apply retroactively to bonus agreements. The official spoke on the condition of anonymity.
That provision in the stimulus bill may undercut complaints by congressional Democrats about the AIG bonuses because most of them voted for the legislation. No Republicans in the House and only three in the Senate supported the stimulus measure
“Taxpayers deserve better than this from their government, and this is just the latest reason why legislation must be transparent for all Americans to see before it is recklessly signed into law,” said Eric Cantor, the No. 2 Republican in the House.
The new law, approved by Congress Feb. 13 and signed into law by Obama the next week, effectively authorized bonus arrangements at companies receiving taxpayer bailouts as long as they were in place before Feb. 11. The AIG bonuses qualified under that provision.
Obama and many lawmakers who voted for the legislation, such as Senator Charles Schumer, a New York Democrat, and Senate Finance Committee Chairman Max Baucus, a Montana Democrat, are demanding AIG employees surrender their bonuses.
Schumer Letter
Schumer yesterday sent a letter to AIG Chief Executive Officer Edward Liddy warning him to return bonuses or face confiscatory taxes on them. The letter was signed by Senate Majority leader Harry Reid, a Nevada Democrat, and seven other senators.
Brian Fallon, a spokesman for Schumer, said the senator “supported a provision on the Senate floor that would have prevented these types of bonuses, but he was not on the conference committee that negotiated the final language.”
A House vote is planned for today on a bill to impose a 90 percent tax on executive bonuses paid by AIG and other companies getting more than $5 billion in federal bailout funds.
“I expect it to pass in overwhelmingly bipartisan fashion,” House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters yesterday in Washington.
Republican Attacks
Republicans seized on the provision in the stimulus bill to paint Democrats as hypocrites.
“The fact is that the bill the president signed, which protected the AIG bonuses and others, was written behind closed doors by Democratic leaders of the House and Senate,” Iowa Senator Charles Grassley said in a statement.
AIG donated a total of $854,905 to political campaigns in 2008, according to the Center for Responsive Politics, a Washington-based research group. AIG employees as a group represent Dodd’s fourth-biggest donor during his career, the group’s research shows. The company’s political action committee, employees and immediate family members have given Dodd more than $280,000, the group said.
Dodd said the provision was written to give the Treasury Department enough discretion to reclaim bonuses as necessary.
“Fortunately, we wrote this amendment in a way that allows the Treasury Department to go back and review these bonus contracts and seek to recover the money for taxpayers,” he said.
Treasury Secretary Timothy Geithner told lawmakers in a letter this week that department lawyers believe it would be “legally difficult” to prevent AIG from paying bonuses.
Other Democrats who voted for the stimulus bill have ramped up criticism of AIG’s bonuses, including Massachusetts Representative Barney Frank, the chairman of the House Financial Services Committee, who told reporters, “I think the time has come to exercise our ownership rights.”
To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net****
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And so the spiral into economic fascism continues, , , ,
BTW, how much is the $180+billion we given to AIG? Well, if I have my numbers right, total take on Capital Gains is somewhere around $225B. Imagine what would have happened to the market if we had simply abolished the cap gains tax!
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IMF poised to print billions of dollars in 'global quantitative easing'
The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.
http://www.telegraph.co.uk/finance/financetopics/recession/4986287/IMF-poised-to-print-billions-of-dollars-in-global-quantitative-easing.html
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WSJ:
In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.
It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.
Corbis
William McChesney Martin Jr.
It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.
The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.
The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.
The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania.
The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit.
The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners.
Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later.
Please add your comments to the Opinion Journal forum.
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http://www.ft.com/cms/s/0/4ff2f77e-1584-11de-b9a9-0000779fd2ac.html
Banker fury over tax ‘witch-hunt’
By FT reporters
Published: March 20 2009 19:39 | Last updated: March 20 2009 23:32
Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions.
Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the “anti-American” measures smacked of “a McCarthy witch-hunt” that would send the country “back to the stone age”.
There were fears that the backlash triggered by AIG’s payment of $165m in bonuses to executives responsible for losses that forced a $170bn taxpayer-funded rescue would have devastating consequences for the largest banks.
“Finance is one of America’s great industries, and they’re destroying it,” said one banker at a firm that has accepted public money. “This happened out of haste and anger over AIG, but we’re not like AIG.”
Pandit memo to Citi employees on bonus clawbacks
Lockhart letter to Frank on Fannie/Freddie bonuses
The banker added: “It’s like a McCarthy witch-hunt?.?.?.?This is the most profoundly anti- American thing I’ve ever seen.”
Vikram Pandit, Citigroup’s chief executive, told employees in a memo that some anger about executive compensation was “warranted”. But he hit out against the idea of a special tax. “The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees,” he wrote.
Some policymakers expressed concern that banks may try to break out of the government’s embrace by paying back public capital even if the price is a more severe credit squeeze.
They also fear that financial institutions may decide not to take part in public-private partnerships to finance credit markets and acquire toxic assets.
The outcry followed Thursday’s approval by the House of Representatives of a bill that would impose 90 per cent tax on bonuses to employees whose gross income exceeded $250,000 at bailed-out firms.
Next week the Senate will also consider a hefty tax on bail-out bonuses amid calls for an investigation into who was responsible for allowing the pay-outs. Some senators are calling for a committee hearing on a bill that would impose a 70 per cent tax at bailed-out institutions, half paid by employees and half by companies, arguing that a delay would help cool political anger.
“There are three big industries where the US has global leadership: financial services, media and technology. Introducing this 90 per cent tax is like taking one of those industries out the back and shooting it,” said a top Wall Street executive.
In Frankfurt one employee at a US investment bank said the new tax measures would “send [the US] back to the stone age”.
“Commodity traders are already moving to companies like BP where they can make as much money as they used to,” said another banker at a US firm.
Reporting by Lina Saigol in London, Julie MacIntosh and Saskia Scholtes in New York, Tom Braithwaite in Washington and James Wilson in Frankfurt
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http://europac.net/#
March 20, 2009
The Mother of All Bells
There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets. Investors who ignore the clanging do so at their own peril. The bell’s reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine. While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.
This week the Federal Reserve finally made clear what should have been obvious for some time – the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.
In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the Fed’s printing presses. Few can doubt that they will persist with these operations until the economy returns to its former health. Whether or not this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.
Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.
Now that the Fed has recklessly shown its hand, the mad dash to get out of Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.
Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt then it expects as it becomes the only buyer in a seller’s market.
Just last week, Chinese premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.
There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasurers. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.
With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
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A tragically plausible hypothesis. Safe us buying/reading the book. What does it say?
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http://www.financialsense.com/transcriptions/2007/0310.html
An interview with the author from 2 years ago. Too long to paste here.
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http://www.youtube.com:80/watch?v=2I0QN-FYkpw&eurl=http%3A%2F%2Fwww%2Enews%2Ecom%2Eau%2Fperthnow%2Fstory%2F0%2C21598%2C24705811%2D5014325%2C00%2Ehtml&feature=player_embedded
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Gov. Sanford gets it right too on a different facet of the clusterfcuk.
By MARK SANFORD
Columbia, S.C.
America's states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we've found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.
A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.
President Barack Obama recently signed a "stimulus" bill that will spend about $2 billion through "programmatic means" in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.
Here's the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn't spend money we don't have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.
If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.
If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.
When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.
Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.
One of Mr. Obama's central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed "an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."
This idea connected with millions of voters, myself included. I've always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina's presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.
Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.
Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don't believe a problem created by too much debt will be solved by piling on more debt. This doesn't strike me as an unreasonable or extremist position.
Nevertheless, the White House declined my request for a waiver yesterday afternoon. That's unfortunate. But in coming months we'll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we'd all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.
Mr. Sanford, a Republican, is the governor of South Carolina.
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Schiff hit the nail on the head regarding real estate bubble and gives an excellent explanation of why attention to the supply side of the economy comes first and demand follows. I disagree with him on the importance of some other points. You must certainly give credit to someone who wrote a book about collapse in such a timely manner but also be aware that books and warnings like these were available throughout the last 25 year expansion. The key is in the details of the analysis.
Schiff (from GM's interview link): "I saw this guy from Freddie Mac (and you know no one talks about this – it’s amazing this isn’t a front page story) – just recently last week(March 2007), they announced they were going to tighten their standards with respect to subprime mortgages that they buy. Going forward (it’s starting in a few months), they are not going to buy mortgages where there is a strong likelihood that the person can’t make the payment and it’s going to end in default. Now, that’s an amazing statement because it means up until that point they were buying those mortgages.
I like this quote, Schiff: "The problem is modern day (demand side) economists measure an economy just based on these GDP numbers, and if it is all consumption based on borrowing they don’t differentiate that. They don’t take a look at where the consumption is coming from, and they’ve confused the cart with the horse. The horse is savings and production; the cart is the consumption. You don’t drive an economy by consuming – the consumer is not the engine, the consumer is the caboose – but we’re acting like we’ve got this great economy simply because we consume, and the whole world owes because we’re doing it like we’re doing everybody a favor. It’s just nonsense."
OTOH, putting the focus on 'profiting' from the coming collapse instead of anticipating it, avoiding it, or surviving it reminds me a bit or Gilder picking stocks instead of just explaining trends. 'Profiting' sells better than just expanding your knowledge. My question would be how much better off are you to hold gold with $500 taken out of a strong economy and then own $1000 worth that you can convert back to a worthless currency for a collapsed economy. Seems to me you are screwed either way.
I don't agree that impending inflation was the trigger or the force that brought this down nor the trade deficit nor do I agree that it was the US bringing down the world; most measures indicate the downward force hit elsewhere first and hardest.
I still look for the best explanation of the collapse. The US economy is an amazing, dynamic machine that can withstand an amazing number of shocks and bad policies up to a point, but you can't forever keep chopping its roots and arms and legs off and still see it grow. A number of negative factors kept accumulating. The biggest 3 I see were real estate, energy and anti-growth tax and spend policies.
Like Schiff says in his book, "bubbles burst, don't they". Real estate values haven't made any sense for a long time. Zero equity with 100% borrowing, full deductability, teaser front end payments that expire with wildly exaggerated purchase prices led to a collapse accelerated by mark to market rules that combine good loans in with the defaulted ones.
Energy demand grew with the global economy. Supply here and elsewhere was curtailed. Prices rose until the weakest links in demand chain broke, crippling the economies.
Pelosi and the gang came with their promise of punishing all capitalist activity while opinion polls showed that they were here to stay and would be soon joined by an administration to her left, eager to crush capitalism. Eventually the rational and awake investors ran for cover while the rest of us watched our values implode.
The way out isn't complicated IMO: a) pro-growth fiscal policies (lower, simpler, flatter tax rates coupled with spending within our near-term means), b) commit to allow the private sector to produce as much energy as we expect to consume (at the forecasted 4% economic growth level), and c) real estate lending practices based on a meaningful down payment and a reasonable likelihood of paying back the loans.
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The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to "partner" with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn't keep falling lest taxpayers lose big on their new loan guarantees.
APOther than that, General, how was the siege of Moscow?
Markets nonetheless roared their approval yesterday, though also for the increase in existing home sales and for the Obama Administration's (belated) pushback against Congress's rage against bankers and private contracts. In simplest terms, Treasury is using loan guarantees and $100 billion in remaining TARP money to create a more liquid market for dodgy financial assets. These include those infamous mortgage securities, as well as various loans that may be nonperforming. The idea is to create new buyers for those assets, perhaps leading to higher prices than now exist in a illiquid market, and thus help banks gradually clean up their balance sheets.
This isn't the worst idea the federal government has ever had, and if it works it will help banks take their losses and burn down debt. A Resolution Trust Corp. would have been a simpler and more politically transparent way to do this, especially six months or a year ago. But this Administration and the entire bailout have already lost too much standing with the public to pull that off now. So in essence this is an attempt at a slow-motion bank workout without a fight over a new resolution agency or having to ask Congress for more money.
On the other hand, none of this will be easy to execute. Start with the problem of attracting private investors, who will have to accept Uncle Sam as a 50-50 business partner. Mr. Geithner says investors won't be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside -- especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.
Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying "I do solemnly swear . . ." Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.
Then there is the question of whether the banks will sell enough of those assets to make a difference. Mr. Geithner's bet is that the banks will judge that they are better off disposing of their bad assets, even if it means taking losses. With a cleaner balance sheet, they would then have an easier time raising more private capital and repaying their TARP money to Treasury more quickly. The stronger banks may well find this attractive, since they'd emerge faster from asset purgatory and get a competitive jump on the laggards.
The harder call is the weaker banks, such as Citigroup, which fear that taking big losses will weaken them further. Citigroup CEO Vikram Pandit has publicly said that he'd be violating his fiduciary duty to shareholders to take such losses when he thinks the market value of its assets is artificially low. Citi and Bank of America already have federal guarantees against tens of billions in future losses, so they have even less incentive than most to sell and write them down. Much will depend on how much Treasury can raise asset prices with this new liquidity play. Some banks -- some of them big -- will undoubtedly fail anyway.
Of course the largest risk, as always, is to the taxpayers. Don't be fooled because Treasury isn't going to Capitol Hill for more cash. The Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.
In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses. Better hope the recovery really is, as the White House says, just around the corner.
Whatever the Geithner plan's pitfalls, we sincerely hope this works. The feds have so thoroughly botched the TARP execution and various bailouts that Treasury has few options left. No accounting change can make bank losses vanish, or inspire investors and short sellers to value bank assets at more than their market price. Yes, banks need to earn their way out of trouble, and many are doing that, but they also need to burn losses. Might as well get on with it.
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I disagree quite a bit with this piece, but post it anyway. It is glibly plausible-- how do we respond?
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By ROBERT B. REICH
Twenty-eight years ago, Ronald Reagan used the severe economic downturn of 1980-82 to implement an economic philosophy that not only gave force and meaning to a wide range of initiatives but also offered a way back to sustained economic growth. Is there a similarly powerful animating idea behind Obamanomics?
Chad CroweI believe there is -- and it's not a return to big government.
The expansive and expensive forays of the Treasury and the Federal Reserve Board into Wall Street notwithstanding, President Barack Obama's 10-year budget (whose projections may prove wildly optimistic if the economy fails to rebound by early next year) presents a remarkably conservative picture. In 10 years, taxes are expected to fall to around 19% of GDP, a lower level than the late 1990s. Spending is expected to drop to around 22.5% of GDP, about where it was under Ronald Reagan -- including nondefense discretionary spending at about 3.6% of GDP, its lowest since data on this were first collected in 1962.
The real distinction between Obamanomics and Reaganomics involves government's role in achieving growth and broad-based prosperity. The animating idea of Reaganomics was that the economy grows best from the top down. Lower taxes on the wealthy prompts them to work harder and invest more. When they do so, everyone benefits. Neither Reagan nor the apostles of supply-side economics explicitly promised that such benefits would "trickle down" to everyone else but this was broadly understood to be the justification.
Reaganomics surely marked the beginning of one of the longest bull markets in American history and generated enormous gains at the top. But its benefits were not widely shared. After the Reagan tax cuts, growth in the median wage slowed, adjusted for inflation. After George W. Bush's tax cuts in 2001 and 2003, the median wage dropped. Meanwhile, an increasing share of total income went to the top 1% of income earners. In 1980, before Reagan took office, the highest-paid 1% took home 9% of total national income. By 2007, before the economy melted down, the richest 1% was taking home 22%.
Obamanomics, by contrast, holds that an economy grows best from the bottom up. The president proposes to increase taxes on the highest 2% of income earners starting in 2011. Those tax increases will fund more Pell grants allowing lower-income children to attend college, better pay for teachers that show they're worth it, broader access to health care, improved infrastructure, and more basic research. These and related expenditures are designed to help Americans become more productive. You might think of it as "trickle up" economics.
The key is public investment. Reaganomics did not view any public spending as an investment in the future except when it came to spending on the military. Hence, since 1980, federal spending on education, job training, infrastructure and basic research and development (apart from defense-related R&D) have all shrunk as a proportion of GDP. And apart from a modest expansion of health insurance available to poor children, there has been no significant attempt to make health insurance broadly affordable to Americans.
Obamanomics is premised on the central importance of public investments in the productivity of Americans. The logic is straightforward. Capital no longer remains within the borders of a nation where it is saved. It moves to wherever around the globe it can get the best return. Some of it flows as highly liquid investments that slosh across borders at the slightest provocation, as we're witnessing in the current financial crisis. But much takes the form of direct investments in new plants and equipment, telecommunications systems, laboratories, offices and -- most important of all -- jobs. Such capital goes to nations that can deliver high returns either because labor is cheap and taxes and regulations low or because labor is highly productive: well educated, healthy and supported by modern infrastructure.
In this way, every nation faces an implicit choice of whether its strategic advantage will lie in low costs or high productivity. For the better part of the last three decades America's job strategy has tended toward the former. But this inevitably exerts downward pressure on the real wages of a larger and larger portion of our population.
Only those Americans whose parents can afford to give them a high-quality private education and health care, and who can situate themselves in locations with excellent infrastructures of telecommunication, transportation, public health and safety, have been able to link up with global capital on more positive terms. But not even they are entirely secure economically, because they face growing shortages of talented people they can rely on within easy reach, and can't entirely avoid the disadvantages of a deteriorating public infrastructure, such as ever more congested roads and airports.
Obamanomics recognizes that the only resource uniquely rooted in a national economy is its people -- their skills, insights, capacities to collaborate, and the transportation and communication systems that link them together. Public investment is the key to attracting long-term private investment so that a nation's people can prosper.
Bill Clinton understood this but failed to do much about America's deteriorating public investments because he came to office during an economic expansion, when the major worry was excessive government spending leading to inflation. Mr. Obama comes to office during the biggest downturn since the Great Depression, and his plan represents the largest commitment to public investment in 30 years.
Regulation, done correctly, is also a form of public investment because it enables consumers and investors to be confident about what they're receiving, and ensures that the side-effects of trades don't harm the public. Reaganomics assumed that deregulated markets always function better. They do in many respects. But when they don't, all hell can break loose, retarding economic growth.
Energy markets were deregulated and we wound up with Enron. Food and drug safety has been neglected, resulting in contaminated products that have endangered consumers and threatened whole industries. Financial markets were deregulated and we now have a global meltdown. Obamanomics, by contrast, views appropriate regulation as an essential precondition for sustainable growth.
Under Reaganomics, government was the problem. It can still be a problem. But a central tenet of Obamanomics is that there are even bigger problems out there which cannot be solved without government. By building the economy from the bottom up, enhancing public investment, and instituting reasonable regulation, Obamanomics marks a reversal of the economic philosophy that has dominated America since 1981.
Mr. Reich is professor of public policy at the University of California at Berkeley and a former U.S. Secretary of Labor under President Bill Clinton.
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Big Banks' Recent Profitability Due to AIG Scam?
Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turn keeps on duping U.S. taxpayers into believing everything is good.
I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:
AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).
Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).
Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.
Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.
I was mostly involved in the corporate synthetic CDO side.
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever."
As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.
I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.
For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money-losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.
In simple terms think of it as an auto dealer who knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).
What this all means is that the statements by major banks, i.e. JP Morgan Chase (JPM), Citi (C), and BofA (BAC), regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.
For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.
And the conspiracy thickens.
Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers
The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.
Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:
Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.
"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."
And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).
So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.
This wholesale manipulation of markets, investors and taxpayers, has gone on long enough.
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Is this really such a bad thing? I kind of like the idea of having a standard based on a basket of currencies. As a Canadian it will not effect my country to move to a new standard other then offer more stability.
Russia backs return to Gold Standard to solve financial crisis
Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.
Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5072484/Russia-backs-return-to-Gold-Standard-to-solve-financial-crisis.html
Russia, China cooperate on new currency proposals:
Russia and China are coordinating proposals on a new global currency that could replace the US dollar as a reserve currency to prevent a repeat of the global economic crisis, the Kremlin said on Monday.
"We have received proposals from our colleagues in China, detailed proposals," President Dmitry Medvedev's top economic adviser Arkady Dvorkovich said. "Our positions are very similar.
"We have similar positions on the development of the international financial architecture," he told reporters.
http://www.breitbart.com/article.php?id=CNG.7e6cab4fec704a0fdd135ecdac00673b.9c1&show_article=1
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Its a long read but gives the best explaination of whats going on...........
My Manhattan Project
I have been called the devil by strangers and "the Facilitator" by friends. It's not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It's been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.
I wrote the software that turned mortgages into bonds.
Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we're in. I don't completely disagree. But in my view, and of course I'm inescapably biased, there's nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don't resume writing mortgages to people who can't afford them. Here's one thing that's definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.
http://nymag.com/news/business/55687/
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Crafty: "I disagree quite a bit with this piece (Robert Reich compares obamanomics to Reagan's success)...how do we respond?"
- It took me a few days to find the time, but I will answer him point by point. Reich's arguments are the same as Hillary's, same as Obama's, same as our Democrat Senators and probably the same as your local Democrats. It is worth taking the time to go through this slowly and learn their points whether you want to join them or refute them.
Reich uses a mixture of scattered truths, straw man arguments, deceptive statistics and then draws conclusions from them that don't logically follow. Take a look.
For some reason, liberals like to start a serious piece with a false first sentence:
"By ROBERT B. REICH
Twenty-eight years ago, Ronald Reagan used the severe economic downturn of 1980-82 to implement an economic philosophy that not only gave force and meaning to a wide range of initiatives but also offered a way back to sustained economic growth. Is there a similarly powerful animating idea behind Obamanomics?"
- Reagan did not 'use' the economic downturn of 80-82 to implement his philosophy. The downturn was caused by congress approving but delaying and phasing in the tax cuts while the Fed did not correspondingly delay the tightening of money. The monetary and fiscal changes were intended to be simultaneous, not to squeeze the life out of the economy with tight money before stimulating new activity with across the board rate cuts. As far as timing was concerned, Reagan was ready to go in 1976; he was not dependent on a recession that was largely avoidable.
Reich: "it's [Obamanomics] not a return to big government ...President Barack Obama's 10-year budget ...presents a remarkably conservative picture. In 10 years, taxes are expected to fall to around 19% of GDP, a lower level than the late 1990s. Spending is expected to drop to around 22.5% of GDP, about where it was under Ronald Reagan..."
- Yes it is a return to big government. Big government programs are scheduled to increase and accelerate forever if they can find a way to do it. He downplays the growth in government by stating it only as a percentage of a false GDP projection. GDP will grow more like a damaged speedboat pulling a larger and larger anchor - national health, federalized K-12, free college, national pre-K, mandatory universal civil service, limiting and taxing energy use, removing the ability to pass on a business, etc. etc. These things don't accelerate growth.
Reich with the standard Democrat focus group tested, straw man argument:
"The real distinction between Obamanomics and Reaganomics involves government's role in achieving growth and broad-based prosperity. The animating idea of Reaganomics was that the economy grows best from the top down. Lower taxes on the wealthy prompts them to work harder and invest more. When they do so, everyone benefits. Neither Reagan nor the apostles of supply-side economics explicitly promised that such benefits would "trickle down" to everyone else but this was broadly understood to be the justification."
- Only an opponent of supply side incentives says the strategy is "trickle down". For one thing, there is no up-down to the economy; it is a complex, ever-changing jigsaw puzzle of interconnected parts. Rate cuts unleash energy and creativity across the board. The owner of an airline or bank or boat builder does not benefit from a tax cut unless someone else flies, makes a deposit or buys a boat. You don't raise taxes on the rich, you raise taxes on the economy, hurting all its participants.
Reich follows with deceptive statistics to find fault in a remarkable 26 year economic expansion:
"Reaganomics surely marked the beginning of one of the longest bull markets in American history and generated enormous gains at the top. But its benefits were not widely shared. After the Reagan tax cuts, growth in the median wage slowed, adjusted for inflation. After George W. Bush's tax cuts in 2001 and 2003, the median wage dropped.
- When you add 20 million jobs, even if every earner increases their earnings, statistically 'the median wage falls. How can that be? A university doesn't hire many more Deans and Department Heads when it grows. More likely it adds teaching assistants and research assistants. The company doesn't hire more CEOs but it might hire more entry level people in every department. Conversely, if we laid off all our lowest seniority, lowest skill, entry level workers - chopped off the lowest rung of the ladder (as Reich's minimum wage proposals are designed to do) - the median wage increases with every job lost. That is a very deceptive statistic. A better measure is total receipts to the Treasury. That is the financial interest that the feds have in the private sector anyway.
Reich continues with deceptive statistics, all the negative ones they could find:
"Meanwhile, an increasing share of total income went to the top 1% of income earners. In 1980, before Reagan took office, the highest-paid 1% took home 9% of total national income. By 2007, before the economy melted down, the richest 1% was taking home 22%."
Like median statistics, top 1% stats are bait and switch also. You are not measuring the same people. Yesterday's rich could all hold and increase their wealth while the new rich achieve even more as they invent, innovate, produce and sell into a much larger and richer and more globalized economy. Comparing the best in the world 27 years apart is interesting but not telling. Disparity is a contrary indicator: it increases in times of rapid growth because the rich are more invested. And disparity fell during the collapse. Is that what we want more of or less of?
Another false characterization and invalid conclusion, Reich continues:
"Obamanomics, by contrast, holds that an economy grows best from the bottom up. The president proposes to increase taxes on the highest 2% of income earners starting in 2011. Those tax increases will fund more Pell grants allowing lower-income children to attend college, better pay for teachers that show they're worth it, broader access to health care, improved infrastructure, and more basic research. These and related expenditures are designed to help Americans become more productive. You might think of it as "trickle up" economics."
- First, he is not lessening the power of the top, he is transferring it over to smarter and nicer people at the government. Second, taking from the 2% doesn't pay for what they said it would pay for - witness the $600-700 billion rosy scenario out-year deficit projections. When Hillary was frontrunner (same message) she was going to repeal George Bush's tax cuts for the wealthiest Americans (a sleight of hand because the cuts were across the board with the percentage cut getting larger as you go down the income spectrum) and she was going to 'use the money' to pay for health care, and then use it for education, and then use it again to buy down the deficit, depending on who she was talking to. The dirty little secret is that there is actually more money collected from the rich at the lower rates.
Deception continued: "The key is public investment. Reaganomics did not view any public spending as an investment in the future except when it came to spending on the military. Hence, since 1980, federal spending on education, job training, infrastructure and basic research and development (apart from defense-related R&D) have all shrunk as a proportion of GDP..."
Again he minimizes the social benefit of defeating the Soviet Union and minimizes the increases in social spending by only citing it as a percentage of rapidly moving target, GDP growth under Reagan. Why doesn't he cite social spending as a percentage of a fixed number like 1980 GDP. Then the chart would show phenomenal growth, if that's what we even want, more grow in out-of-control social spending.
To summarize his view, we can have policies that are exactly the opposite of pro-growth policies, experience all of the growth anyway, and somehow in fairy tale fashion the gains will be beautifully distributed across the interest groups and electoral base of the Democrat party.
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Dang Doug, nice job!
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April 04, 2009, 7:00 a.m.
Feel Like Getting Nasty?
The G20 wants international regulation that will export their mistakes to the entire planet.
By Mark Steyn
During the Obama administration’s foray to London this last week, officials provided a special telephone number to journalists interested in discussing foreign-policy issues in an “on-the-record briefing call with Secretary of State Hillary Clinton and National Security Advisor Jim Jones.”
Unfortunately, as part of the curious run of bad luck currently afflicting our new Secretary of State, upon dialing the number the gentlemen of the press were greeted by a honey-voiced seductress, presumably not Secretary Clinton, offering them “phone sex” and seeking their credit-card number if they “feel like getting nasty.”
No, it’s not a White House April Fool’s gag. This was April 2nd.
Alas, what with the collapse of the newspaper industry and major metro dailies filing for bankruptcy every 20 minutes, sticking phone sex on your expense tab isn’t as easy as it once was. So many of these big-shot correspondents were forced to hang up, call the White House Press Office, get given the correct number, and listen to Hillary droning on about the NATO summit for half an hour. The deputy press secretary, Bill Burton, insisted that the White House handing out sex-line numbers was no big deal and only Fox News would make a fuss about “a corrected phone number.”
I’m not sure why the White House needed to correct it. It’s the perfect radio ad for the administration. Call 1-900-OBAMA and Timothy Geithner will demand your credit-card number and ask whether you feel like getting nasty, because he certainly does. He’ll be wearing a steel-tipped basque, and the squeals in the background will be an AIG executive or the former CEO of General Motors hanging upside down in the Treasury Department basement while he feels the firm lash of government “regulation” from Barney Frank and Mistress Pelosi.
Well, we all hate “the rich,” don’t we? Last week, David Paterson, the governor of New York, said that if he’d known his latest tax increase would persuade Rush Limbaugh to sell his Manhattan apartment and leave the city, he’d have raised taxes earlier. Ha-ha. Very funny. In New York City, as Mayor Bloomberg has pointed out, the wealthiest 1 percent contribute 50 percent of municipal revenue. How tiny a number of people does Governor Paterson have to drive out before it causes significant shortfalls in the public coffers?
On the other hand, the rich can only be driven out if they’ve got somewhere to be driven to. At the ludicrous G20 summit in London last week, the official communiqué crowed over a “clampdown” on tax havens — those British colonies in the Caribbean and a few other offshore pinpricks in the map. “The era of banking secrecy is over,” the G20 proclaimed.
Does anyone seriously think a Swiss bank account or a post office box in the Turks and Caicos are responsible for the global meltdown?
No, but the world’s governments have decided to focus on irrelevant scapegoats. In the current crisis, Japan, Germany, and Italy (plus Russia) are in net population decline that’s only going to accelerate in the years ahead. So, unlike the U.S., they can’t run up the national debt and stick it to their kids and grandkids, because they don’t have any kids and grandkids to stick it to. If New York is running out of rich people, Germany is running out of people, period. The Chinese and other buyers of Western debt know that. If you’re an investor and you’re not tracking GDP versus median age in the world’s major economies, you’re going to lose a lot of money.
If government has a role in this crisis, it ought to be to reverse the combination of unaffordable social programs and deathbed demographics that make a restoration of real GDP growth all but impossible in many European nations. But that would involve telling the citizenry unpleasant truths, and Continental politicians who wish to remain electorally viable aren’t willing to do that. President Sarkozy, the Times of London reported, “said that the summit provided a once-in-a-lifetime opportunity to give capitalism a conscience.” What he means by “a conscience” is a global regulatory regime that ensures there’s nowhere to move to. If you’re France, which has a sluggish, uncompetitive, protectionist, high-unemployment business environment whose best and brightest abandon the country in ever-greater droves, it obviously makes sense to force the entire planet to submit to the same growth-killing measures that have done wonders for your own economy. But it’s not good news for the rest of the world. The building blocks for a global regulatory regime and even a global central bank with an embryo global currency (the IMF and the enhanced role of “Special Drawing Rights”) are an ominous development.
Let it be said that in recent years in America, the United Kingdom, and certain other countries the “financial sector” grew too big. In The Atlantic, Simon Johnson points out that, between 1973 and 1985, it was responsible for about 16 percent of U.S. corporate profits. By this decade, it was up to 41 percent. That’s higher than healthy, but it wouldn’t have gotten anywhere near that high if government didn’t annex so much of your wealth — through everything from income tax to small-business regulation — that it’s become increasingly difficult to improve your lot by working hard, making stuff, and selling it. Instead, in order to fund a more comfortable retirement and much else, large numbers of people became “investors” — albeit not as the term is traditionally understood: Instead, you work for some company and they put some money on your behalf in some sort of account that somebody on the 12th floor pools together with all the others and gives to somebody else in New York to disperse among various corporations hither and yon. You’ve no idea what you’re “investing” in, but it keeps going up, so why do you care? That’s not like a 19th-century chappie saying he’s starting a rubber plantation in Malaya and, with the faster shipping routes out of Singapore, it may be worth your while owning 25 percent of it. Or a guy in 1929 barking “Buy this!” and “Sell that!” at his broker every morning. Instead, an exaggerated return on mediocre assets became accepted as a permanent feature of life.
It’s not, and it can never be. Especially given the long-term structural defects in many Western nations. A serious G20 summit would have seen France commit to the liberalization of its economy; Germany to serious natalist incentives; Britain to a reduction of the near-Soviet size of state spending in Scotland and Northern Ireland; and the United States to allowing its citizens to keep more of their hard-earned money and thus reduce both the dependency on ludicrous asset inflation as the only route to socio-economic improvement, and the risk of a Euro-style decline in birthrate caused by the unaffordability of kids.
Instead, the great powers are erecting a global regulatory regime to export their worst mistakes to the entire planet.
As they say on the State Department phone-sex line, it’s going to get nasty.
— Mark Steyn, a National Review columnist, is author of America Alone. © 2009 Mark Steyn
National Review Online - http://article.nationalreview.com/?q=YTNlZjcxOGZmMjA0YjU2OTE5ZjJmN2FkNmYyYzI3MjQ=
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Finally, what of the claim not to raise taxes on anyone earning less than $250,000 a year? Even ignoring his large energy taxes, Mr. Obama must reconcile his arithmetic. Every dollar of debt he runs up means that future taxes must be $1 higher in present-value terms. Mr. Obama is going to leave a discounted present-value legacy of $6.5 trillion of additional future taxes, unless he dramatically cuts spending. (With interest the future tax hikes would be much larger later on.) Call it a stealth tax increase or ticking tax time-bomb.
What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In ten years, interest would bring the total to well over $200,000, if paid all at once. If paid annually over the succeeding ten years, the tax hike per year would average almost $26,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.
We can get a rough idea of who is likely to pay them by distributing this $6.5 trillion of future taxes according to the most recent distribution of income-tax burdens. We know the top 1% or 5% of income-taxpayers pay vastly disproportionate shares of taxes, and much larger shares than their shares of income. But it also turns out that Mr. Obama's massive additional debt implies a tax hike, if paid today, of well over $100,000 for people with incomes of $150,000, far below Mr. Obama's tax-hike cut-off of $250,000 (over $130,000 in ten years and over $16,000 a year if paid annually over the following ten years). In other words, a middle-aged two-career couple in New York or California could get a future tax bill as big as their mortgage.
While Mr. Obama's higher tax rates are economically harmful, some of his tax policies deserve wide support, e.g., permanently indexing the alternative minimum tax. Ditto some of the spending increases, including the extension of unemployment benefits, given the severe recession.
Neither a large deficit in a recession nor a small increase from the current modest level in the debt to GDP ratio is worrisome. And at a 50% debt-to-GDP ratio, with nominal GDP growing 4% (the CBO out-year forecast), deficits of 2% of GDP would not be increasing the debt burden relative to income.
But what is not just worrisome but dangerous are the growing trillion dollar deficits in the latter years of the Obama budget. These deficits are so large for a prosperous nation in peacetime -- three times safe levels -- that they would cause the debt burden to soar toward banana republic levels. That's a recipe for a permanent drag on growth and serious pressure on the Federal Reserve to inflate, not the new era of rising prosperity that Mr. Obama and his advisers foresee.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
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From Bubble to Depression?
By STEVEN GJERSTAD and VERNON L. SMITH
Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed.
We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer.
But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets -- momentum trading, liquidity, price-tier movements, and high-margin purchases -- combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy.
In just the past 40 years there were two other housing bubbles, with peaks in 1979 and 1989, but the largest one in U.S. history started in 1997, probably sparked by rising household income that began in 1992 combined with the elimination in 1997 of taxes on residential capital gains up to $500,000. Rising values in an asset market draw investor attention; the early stages of the housing bubble had this usual, self-reinforcing feature.
The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.
But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.
The price decline started in 2006. Then policies designed to promote the American dream instead produced a nightmare. Trillions of dollars of mortgages, written to buyers with slender equity, started a wave of delinquencies and defaults. Borrowers' losses were limited to their small down payments; hence, the lion's share of the losses was transmitted into the financial system and it collapsed.
During the 1976-79 and 1986-89 housing price bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, "leaning against the wind," helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the fed-funds rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than in any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.
Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!
By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.
How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.
With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.
With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.
The unraveling of the bubble is in many ways the most fascinating part of the story, and the most painful reality we are now experiencing. The median price of existing homes had fallen from $230,000 in July to $217,300 in November 2006. By the beginning of 2007, in 17 of the 20 cities in the Case-Shiller index, prices were falling. Serious price declines had not yet begun, but the warning signs were there for alert observers.
Kate Kelly, writing in this newspaper (Dec. 14, 2007), tells the story of how Goldman Sachs avoided the fate of many of the other investment banks that packaged mortgages into securities. Goldman loaded up on the Markit ABX index of credit default swaps between early December 2006 and late February 2007, as their price dropped from 97.70 on Dec. 4 to under 64 by Feb. 27. But the market was not yet in free-fall: The insurance on AAA-rated parts of the mortgage-backed securities (MBS) remained inexpensive. By mid-summer 2007, concern spread to the AAA-rated tranches of MBS.
At the end of February 2007, the cost of $10 million of insurance on the AAA-rated portion of a mortgage-backed security was still only $68,000 plus a $9,000 annual premium. Housing-market conditions deteriorated further in the first half of 2007. Case-Shiller tiered price sequences in Los Angeles, San Francisco, San Diego and Miami all show serious declines by the summer of 2007. Prices in the low-price tier in San Francisco were down almost 13% from their peak by July 2007; in San Diego they were off 10% by July 2007. Startling developments began to unfold that month. Between July 9 and Aug. 3, 2007, the cost of insuring AAA MBS tranches went from $50,000 upfront plus a $9,000 annual premium for $10 million of insurance to over $900,000 upfront (plus the annual premium).
Once the cost of insuring new mortgage-backed securities skyrocketed, mortgage financing from MBS rapidly declined. Subprime originations plummeted from $160 billion in the third quarter of 2006 to $28 billion in the third quarter of 2007. Mortgage-backed security issuance fell comparably, from $483 billion in all of 2006 to only $30.7 billion in the third quarter of 2007. Other measures of new loan originations were falling at the same time. The liquidity that generated the housing market bubble was evaporating.
Trouble quickly spread from the cost of insuring mortgage-backed securities to problems with credit markets generally, as the spread between short-term U.S. Treasury debt and the LIBOR rate increased to 2.40% from 0.44% between Aug. 8 and Aug. 20, 2007. Since U.S. Treasury debt is generally considered secure, but a bank's loans to another bank carry some risk of default, the spread between these rates serves as an indicator of perceived risk in financial markets.
In one city after another, prices of homes in the low-price tier appreciated the most and then fell the most; prices in the high-priced tier appreciated least and fell the least. The price index graphs for Los Angeles, San Francisco, San Diego and Miami show that in all of these cities, prices in the low-price tier have fallen between 50% and 57%. Moreover, housing prices have continually declined in every market in the Case-Shiller index. According to First American CoreLogic, 10.5 million households had negative or near negative equity in December 2008. When housing prices turned down, many borrowers with low income and few assets other than their slender home equity faced foreclosure. The remaining losses had to be absorbed by the financial system. Consequently, the financial system has suffered a blow unlike anything since the Great Depression, and the source is the weak financial position of the people holding declining assets.
Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a measure of financial system performance, the Keefe, Bruyette, & Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007. The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.
How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?
In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.
In an important paper in 1983, Ben Bernanke argued that during the Depression, severe damage to the financial system impeded its ability to perform its economic role of lending to households for durable goods consumption and to firms for production and trade. We are seeing this process playing out now as loan funds for automobile purchases have withered. Auto sales fell 41% between February 2008 and February 2009. Retail and labor markets too are now part of the collateral damage from the housing debacle. Housing peaked in early 2006. Losses from the mortgage market began to infect the financial system in 2006; asset prices in that sector began to decline at the end of 2006. Meanwhile, equities and the broader economy were performing well, but as the financial sector deteriorated, its problems blindsided the rest of the economy.
The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.
The Great Depression has been attributed to excessive speculation on Wall Street, especially between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers' loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash. But the banking system did not show serious strains until the fall of 1930.
Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands. Had the mounting difficulties of the banks and the final collapse of the banking system in the "Bank Holiday" in March 1933 been caused by contraction of the money supply, as Milton Friedman and Anna Schwartz argued, then the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis.
The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn.
What we've offered in our discussion of this crisis is the back story to Mr. Bernanke's analysis of the Depression. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.
http://online.wsj.com/article/SB123897612802791281.html
Mr. Gjerstad is a visiting research associate at Chapman University. Mr. Smith is a professor of economics at Chapman University and the 2002 Nobel Laureate in Economics.
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http://www.voxeu.org/index.php?q=node/3421
Sobering graphs.
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I debated whether to put this article here or in the power of the word but imo it flt better here. However if religious stuff annoys you don't read it.
This article is also preaching to the choir but I thought it would be enjoyed.
Ethics @ Work: Festival of freedom - not prosperity
Apr. 10, 2009
ASHER MEIR , THE JERUSALEM POST
Free markets are part of our freedom. The current economic crisis is causing a few people to have second thoughts about the free-market system. People blame the free market for the crisis; some point to the fact that Nazi Germany was one of the first countries in Europe to restore employment and industrial production when it moved to an authoritarian regime.
The criticism is almost totally unfounded. We can see that citizens in orderly market economies (that excludes Russia) even during a crisis are better off economically than those in command economies during boom times.
The problem characteristic of a free-market downturn is a glut: too much of everything and everything is too cheap. That's not the kind of problem they had in Soviet Russia or Communist China. Germany restored its industry, but the average German didn't benefit from the expansion at all, since it all went to military production.
But more fundamentally, the criticism misses an important point. The value of a free market economy is not solely or even primarily in the prosperity it has been proven to provide. As we approach the Holiday of Freedom, we should take account of the inherent importance of the freedom it provides.
This aspect of a free-market economy has been emphasized by many commentators, not necessarily libertarians. Economist and Nobel-prize recipient Amartya Sen writes in his 1999 book, Development as Freedom, "As Adam Smith noted, freedom of exchange and transaction is itself part and parcel of the basic liberties people have reason to value... The freedom to exchange words, or goods, or gifts does not need defensive justification in terms of their favorable but distant effects; they are part of the way human beings in society live and interact with each other."
And as Britain leaned leftward in the 1940s, economist Friedrich Hayek wrote the work The Road to Serfdom warning "Who can seriously doubt that the power which a millionaire, who may be my employer, has over me is very much less than that which the smallest bureaucrat possesses who wields the coercive power of the state and on whose discretion it depends how I am allowed to live and work?"
There is good reason to believe that people think this way. One example found in economics books is the blacks in the American South. There is convincing evidence that the material standard of living of the blacks was higher under slavery than after emancipation, and this is hardly surprising. The white masters had good reason to look after the physical condition of their slaves, just as farmers today take good care of their tractors. But I haven't heard that any emancipated blacks longed for the good old days of slavery.
In fact, we have evidence from our own history as well. There is plenty of evidence from the Torah that the children of Israel enjoyed a higher material standard of living in Egypt than they did in the desert. In Egypt they lived in houses, in the desert only tents. In the desert they repeatedly refer to the varied diet they enjoyed in Egypt, where they "sat on the meat pot and ate bread to satisfaction," not to mention the fish and the vegetables. By contrast, they refer to the manna as "insubstantial food." Even so, we never find that they contemplated returning to subjection in Egypt in order to restore their standard of living, only at times when they thought they were in mortal danger.
Even if you consider this bit of amateur Scriptural commentary rather speculative, it is certainly significant that we celebrate Pessah as "the festival of freedom," and not "the festival of prosperity."
Clearly, economic freedom is not the only or even necessarily the most important freedom, and that it needs to be limited in various ways in order to have an orderly and prosperous society. It is also true that in a democracy laws themselves are to some extent an expression of our national freedom. However, any time we consider limiting economic liberty in order to achieve some other worthy social aim, we must take into account not only any possible economic loss but also the loss of this important liberty per se.
This article can also be read at http://www.jpost.com /servlet/Satellite?cid=1238562950157&pagename=JPArticle%2FShowFull
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Credit Crunch Will Lead to Oil Shock: Consultant
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The global financial crisis and collapse in the oil market have stalled vital investment in oil exploration and production and are likely soon to lead to a sharp spike in prices, an energy consultant and financier says.
Matt Simmons, founder of Houston-based investment bank Simmons & Co, argues the underlying rate of decline of the world's ageing oilfields is as much as 20 percent a year and only high levels of investment can reduce that to single digits.
With credit tight and oil prices almost $100 a barrel below their highs last year, oil companies are unable to sustain previous levels of spending and the result is falling production, he said in an interview on Thursday.
"We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away -- it will be much sooner," Simmons told Reuters in London.
"These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike," he said.
Oil prices hit record highs of almost $150 per barrel last July but have tumbled since then as the global economic downturn has cut energy consumption by consumers and companies alike.
Prices have rallied from lows below $35 a barrel in December to above $50 but remain well below what many oil companies and producing countries say they need to invest in new production.
Simmons is a proponent of the "peak oil" theory, and has argued for years that world oil output is in irreversible decline because oil industry infrastructure is getting too old.
He says the cost of rebuilding the oil industry is colossal: "The industry's asset base is beyond its original design life."
Twilight in the Desert
Simmons' 2005 best-seller "Twilight in the Desert, The Coming Saudi Oil Shock and the World Economy," argued oil output from the Middle East's biggest supplier was reaching an apex and would soon decline, ending forever the era of cheap oil.
Saudi Arabian oil company Aramco and many other analysts strongly disagreed with that thesis, saying Simmons exaggerated the rate of decline of older oilfields.
Cambridge Energy Research Associates last year put the rate of decline of the world's oilfields at just 4-5 percent a year.
But Simmons' concerns over the impact of the credit crisis and the dramatic fall in oil prices are shared by many other, more conservative bodies, including the International Energy Agency (IEA), which advises 28 industrialized nations.
IEA Deputy Executive Director Richard Jones warned the oil market this week that so far as much as 2 million barrels per day (bpd) of new upstream capacity due to come on stream had been deferred for now due to lack of funds and low oil prices.
The IEA is also worried recent cuts in oil production by the Organization of the Petroleum Exporting Countries in an attempt to bolster prices have left oil inventories dangerously low, leaving little room for maneuver when oil demand recovers.
Simmons says many OPEC oil producers will find it difficult to bring output back to previous levels once prices recover.
"When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was."
Slideshow: Which Oil Nations Make Money?
Because of this and natural declines in output, oil use may not need to rise much before production fails to meet demand.
"Unless oil demand falls by 10 or 15 percent per annum, which it is not going to do, then we don't need to wait for oil demand to come back before we have a supply crunch," he said.
"Within a few months, we are going to realize our visible inventories are really tight -- squeaky tight -- and what would really be inconvenient is to see a recovery in the economy."
Copyright 2009 Reuters. Click for restrictions.
http://www.cnbc.com/id/29891917
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America is Being LootedTuesday, April 14, 2009, 9:20 am, by cmartenson
As cynical as I am, I just can’t keep up.
That sentence is a paraphrase of a quote by Lily Tomlin that reads, “No matter how cynical you become, it's never enough to keep up.”
I have long been a cynic of the bailouts and, unfortunately, I cannot detect even the slightest sliver of daylight between the prior and current administrations. The reason, I fear, is captured by this quote from Simon Johnson, the former Chief Economist at the IMF and current professor at MIT’s Sloan School of Management:
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
The unfortunate conclusion here is that our system and processes are fully “captured” by a tangled web of interests that serve themselves over everything else. Your future, my future, and our future is being systematically ruined by a self-interested group of insiders that can no longer distinguish between their good and the common good.
Here’s the latest string of outrages from this week.
First it is vitally important that not just the absence of conflict of interest be present when big money is involved in policy decisions, but also the appearance of conflict. Our system of money is based on confidence (after all it is a Ponzi scheme) and therefore it is vital that our checks and balances assure that the public good is not abused by a few at the expense of the many.
In order for the average person to pull hard on the yoke of life, straining to earn their daily wage, that wage has to be worth something. What is money “worth” if some of us have to work to exhaustion to obtain it while a very small minority can literally conjure trillions out of thin air and distribute it amongst themselves?
Money is a social contract, especially fiat money, and abusing the trust inherent to making that money system work is the gravest of all possible errors. I am not exaggerating here.
This week I found out that even as Lawrence Summers, in his role as President of Harvard University, was excoriating professor Cornell West for shirking is professorial duties by making a spoken-word audio CD, he was himself moonlighting for a hedge fund and various Wall Street banks earning millions. Here’s Frank Rich in the NYT:
Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs.
Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration.
This goes well beyond “the appearance of” a conflict of interest. If Summers were a judge he’d have to recuse himself from the case. Nearly $8 million in a few years from Wall Street is a conflict of interest. A massive one.
However, if smoking guns are more your thing, then this next bit of information from the same article will be to your liking:
Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts.
Think of the judgment of a person long in the public eye who has apparently learned nothing from their past scrapes with public perception who attempts to install a past patron in a plumb post involving public money being distributed to private, already wealthy recipients.
Think of the character of a person who can rationalize the act of publicly excoriating a professor for doing something that they are secretly doing themselves, but on a much grander scale.
That person is Lawrence Summers, the man chosen by the Obama team to coordinate the bailout efforts.
Rahm Emanuel, the current white house chief of staff, comes similarly burdened:
…the banking industry recently paid Rahm Emanuel $16 million for about two years of work. That investment was recently paid back when, as President Obama's chief of staff, Emanuel led the January campaign to release another $350 billion in bank bailout funds.
But it goes deeper than that. Rahm Emanuel also took what I consider to be a lot of money serving on the board of Freddie Mac, a company that is certain to cost the taxpayers hundreds of billions of dollars.
Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.
One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.
Before Timothy Geithner (“Turbo Tax Timmy” as he’s called in some circles) was appointed to the Treasury position, his career and connections were explored in depth in an excellent article in Portfolio.com by Gary Weiss:
After the Bear deal, the Fed wound up with $30 billion in collateral, mostly in the form of subprime-mortgage securities. Even Paul Volcker, the former Fed chairman who served on the search committee that picked Geithner and who still holds him in high regard, has expressed queasiness about the way the deal was structured. In a speech to the Economic Club of New York, Volcker said the Fed took actions that “extend to the very edge of its lawful and implied powers, transcending certain long-embedded central-banking principles and practices.” Volcker later leavened this harsh assessment a bit, telling me that the Fed’s intervention “was a proper action, but it was extraordinary—something that’s never been done before, in terms of calling upon that emergency power. It tells you how seriously they took it.”
Still, misgivings about the deal are hard to ignore, no matter how catastrophic the consequences of not intervening might have been. It doesn’t help that the deal is teeming with connections that are sure to raise questions. Dimon is one of the three class-A directors of the board of the New York Fed, and its head is Stephen Friedman, a former Goldman Sachs chairman, who still sits on the investment bank’s board. The New York Fed’s board also includes Richard Fuld of Lehman Brothers, a firm that is another oft-rumored potential candidate for a bailout. Fuld is a class-B director, meaning that he is elected by member banks, astoundingly, to represent the public. (Friedman is also supposed to be looking out for you: He was “appointed by the board of governors to represent the public.”) Thus Geithner reports to a board that is composed of people who are not only under his purview but would also benefit from any potential bailouts. The structure of the New York Fed’s board bears more than a passing resemblance to that of the New York Stock Exchange in the bad old days, when member firms, regulated by the N.Y.S.E., were heavily represented on its board.
Even more intriguing is Geithner’s informal brain trust, loaded with Wall Street luminaries. Since coming to the Fed in November 2003—recruited by then-New York Fed chairman Pete Peterson, co-founder of the Blackstone Group—Geithner has learned the ways of the financial industry at the feet of some of its biggest legends. He was almost immediately taken under the wing of Gerald Corrigan, a gregarious former New York Fed chief who is now a managing director of Goldman Sachs. Corrigan describes his relationship with Geithner as close, and it has flourished since Geithner’s first days at the Fed. Another frequent adviser—“you don’t want those things to get too formal,” Corrigan notes—is also a preeminent banker, Merrill Lynch C.E.O. John Thain, a Goldman alumnus and former head of the N.Y.S.E. Over the years, Thain has often talked to Geithner—“sometimes I talk to him multiple times a day,”
Given this extensive set of interconnections, you might think that he’d be careful to project the right image when stepping into the Treasury role but instead he saw fit to place a Goldman Sachs insider in the position as his top aide last January (before anybody was paying too much attention to all this insider self-dealing):
WASHINGTON — Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist as a top aide Tuesday, the same day he announced rules aimed at reducing the role of lobbyists in agency decisions.
Mark Patterson will serve as Geithner's chief of staff at Treasury, which oversees the government's $700 billion financial bailout program. Goldman Sachs received $10 billion of that money.
Just a few months later in March, when questioned about the appearance of conflict of interest, Geithner bristled at the suggestion:
"I am just asking the questions," Waters said, "because the talk is...that this small group of decision makers at the center of it is Goldman Sachs and that's what's causing a lot of the distrust, because people are thinking or believing that Goldman Sachs, because of the connections, have had a lot to do with the decisions that are being made."
Geithner took umbrage.
"I think it's deeply unfair to the people who are part of these decisions to suggest that they were making judgments that in their view were not in the best interest of the American people," Geithner said.
Apparently Mr. Geithner found it completely confusing why anybody would see anything at all wrong with a regular revolving door between positions of extreme financial power over public money and the firms set to benefit from public money.
To me, that is a sure sign that someone is too deeply embedded, too deeply conflicted, too detached from reality to even know where to draw the line. Timothy apparently cannot distinguish between the “best interest of the American people” and Goldman Sachs raking in billions of undeserved public dollars. To him, those are one and the same thing and that's a major reason why I have grave doubts that the bailouts will succeed.
Now let’s cross into the surreal. One of the more grossly mismanaged companies on the face of the planet, the one that will cost taxpayers close to a trillion dollars when all is said and done, is Fannie Mae, the Government Sponsored Enterprise, or GSE. Last night (Monday, April 14th, 2009) this came across my newswire:
7:30 [FNM] Fannie Mae Chief Executive Herb Allison to run TARP: WSJ
So who is it, do you suppose, that picked the CEO of Fannie Mae to run TARP? Could it be Summers and Geithner and Emanuel?
You bet. That’s the vetting team.
As far as I am concerned the CEO of Fannie Mae should be defending himself in court, not running a massive wealth redistribution program.
Meanwhile, Goldman Sachs reported strong earnings yesterday much of them based on the fact that Goldman Sachs received full payout from side bets it had made with AIG on which it should not have been paid a single dime. Goldman Sachs is a business run by grown-ups and knew that making bets on the unregulated OTC derivatives market did not come with any public guarantee. Nonetheless, Goldman was immediately bailed out, in full, on these side-bets by the Treasury Department.
The funny thing is, Goldman Sachs actually did the prudent thing and hedged their side bets with AIG (presumably by shorting AIG stock…that way, if AIG failed to pay off their side bets the stock price of AIG would slide thereby covering some of the losses for Goldman Sachs). So they were already "made whole" on these losses by their hedging activity.
So you might wonder how is it that a company that is not in danger of failing and has strong earnings and has prudently covered (or hedged) its bets comes to receive tens of billions of dollars of public money anyway? How can this be? More importantly, what does this tell us about the prospects for the bailout?
Here’s where we simply need to return to the opening quote:
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
My cynicism stems from the fact that as I string together the dots comprising this entire bailout fiasco I can come to only one conclusion; our “public policy” is not being conducted in the interests of the people, by the people, and for the people.
Public policy appears to be in the grip of a very powerful and self-interested cabal that seemingly has no concern for the future or the health of this country and does not even see the need to be cautious enough to mask its efforts.
The fact that the bailout trajectory did not waver in the slightest while passing from the Bush to the Obama administrations indicates that the bailout is not a function of who’s in political power, it is a function of something else, of some other power.
I fear that Simon Johnson has nailed it; “[the] recovery will fail unless we break the financial oligarchy that is blocking essential reform.”
By continuing on our current path, using the same people who created the mess to clean up the mess, we are wasting time, we are wasting money and we are wasting opportunity. Worse, we are risking the very sort of public backlash that has been thankfully missing from our cultural landscape for a long, long time.
Now, if you’ll excuse me, I have to go jogging to see if I can catch up with my cynicism.
http://www.chrismartenson.com/blog/america-being-looted/16444
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The U.S. and Europe were widely expected to clash at the G-20 summit in London last month over how to address the global financial crisis. Voila, in just two days the problem was solved with a joint promise to increase International Monetary Fund resources by $750 billion to a total of $1 trillion.
AFP/Getty ImagesThe U.S. portion of this new commitment is more than $140 billion. Yet Congress has debated neither the amount nor the proposed use of the funds. Instead, President Obama and his fellow leaders simply waved their hands, like a Star Trek captain, and said make it so.
Recall that the IMF was founded in 1944 when the world monetary system operated on a gold standard. The fund's job was to act as a lender of last resort when countries encountered balance-of-payments shortfalls. When the world went to a fiat-currency system, the fund's original role became obsolete. It is possible to argue that a modified version of the lender-of-last-resort remains important for the global financial system. But over the past 30 years the fund has increasingly strayed from that limited mission to become a vehicle for transferring wealth to poor-country governments. The London agreement further advances these foreign aid ambitions with no oversight from Congress.
Exhibit A is a $250 billion increase in "special drawing rights," or SDRs -- one third of the new resources. SDRs are homemade credit allocations printed by the fund and handed out to all members. They are redeemable for subsidized loans from hard-currency fund countries. Prior to last week, there were about $32 billion in SDRs. The fund's board had lobbied for 12 years to double that number. But because the loans cost taxpayers more than $300 million a year and because there are no minimum governance standards that must be met by borrowers, Congress refused to approve the expansion.
Now Mr. Obama has overruled Congress and blessed an SDR increase -- not twice the existing number, but eight times. As Juergen Stark, a member of the European Central Bank Executive Board, told the German daily Handelsblatt, "It was never examined whether there indeed is a global need for additional liquidity," adding that "one used to take a lot of time to check something like this." He also called it "helicopter money for the globe." If Mr. Stark keeps this up, his G-20 dining privileges will be revoked.
As to the other $500 billion, here is the G-20 communique: "We have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow [NAB], increased by up to $500 billion, and to consider market borrowing if necessary."
Keep your eye on that "expanded and more flexible" lingo. Fund rules state clearly that money under NAB can only be used "to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system." In other words, to draw on the NAB the IMF has to argue convincingly that there is systemic risk. Moreover, there is a clear view that the money should be repaid as the crisis passes.
But now the NAB will be "expanded and more flexible." This implies an intention to alter the restrictive nature of NAB lending so that the London commitments can be used at the discretion of the fund, without approval of the contributors. A fund spokesman told us that the idea of increasing flexibility is that "the NAB money becomes part of the general resources of the fund and if the managing director decides that the fund needs to step in somewhere, it can."
That would be nirvana to IMF employees who have been running low on money to lend but love to roam the world signing up new "clients." Borrowers would like it too, since they take the general resources of the fund at rock-bottom rates with no implied obligation ever to retire the loan.
You may wonder why the IMF simply doesn't ask for a quota increase to expand its resources. Probably because that requires 85% of member votes and can take years. By using the NAB, Treasury can simply attach the request to any spending bill, and that is apparently what we can expect. A U.S. Treasury official told us last week that "the current U.S. share of the NAB is about 20%, so consistent with that, our share of a NAB increase of $500 billion could be up to $100 billion."
The upshot for U.S. taxpayers is that neither the $40 billion-plus in new SDRs nor the $100 billion for the NAB will get much democratic scrutiny. Yet they amount to a massive expansion in U.S. foreign aid. We can see why the G-20 applauded. But this is the opposite of the "transparency" this Administration has promised, and someone on Capitol Hill should blow the whistle.
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A 'Copper Standard' for the world's currency system?
http://www.telegraph.co.uk/finance/comme...
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
By Ambrose Evans-Pritchard
Last Updated: 12:33PM BST 16 Apr 2009
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
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A very interesting piece Huss, worthy of reflection. Nice find.
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Very profound. Unrestricted warfare, financial mode.
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A 'Copper Standard' for the world's currency system? (H/T Cat233)
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html
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Think of it this way: China started out with about $1 trillion in cash, most of which was held in dollars. Then it looked at the yield on that cash (almost zero) and then they thought about all the money the Fed was printing, and all the commodities they would be buying in the future, and they figured they had too much exposure to dollars and not enough to commodities. Then they realized that if they tried to sell $1 trillion of dollar cash they could depress the dollar's value and thus undermine their entire holdings of dollar-denominated instruments. So they decided to move some money from dollar cash to copper. That is the equivalent of the world suddenly waking up and finding that its demand for dollar cash had declined, and its demand for exposure to commodities had increased. A relative price shift happens, and most of it shows up in an increased price for copper.
The world cannot get rid of all the dollar cash that exists out there, but any attempt to reduce dollar cash exposure must necessarily result in an increased price for the new object of affection. Money doesn't actually flow from one market to another, but changing desires to hold the money balances that exist do result in changes in relative prices.
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The orginial post has several charts.
http://blogs.cfr.org/setser/2009/04/13/chinas-reserves-are-still-growing-but-at-a-slower-pace-than-before/
China’s reserves are still growing, but at a slower pace than before
Posted on Monday, April 13th, 2009
By bsetser
If China’s euros, pounds, yen and other non-dollar reserves were managed as a separate portfolio, China’s non-dollar portfolio would be bigger than the total reserves of all countries other than Japan. It would also, in my view, be bigger than the portfolio of the world’s largest sovereign fund. That is just one sign of how large China’s reserves really are.
Roughly a third ($650 billion) of China’s $1954 billion in reported foreign exchange reserves at the end of March aren’t invested in dollar-denominated assets. That means, among other things, that a 5% move in the dollar one way or another can have a big impact on reported dollar value of China’s euros, yen, pound and other currencies. China’s headline reserves fell in January. But the euro also fell in January. After adjusting for changes in the dollar value of China’s non-dollar portfolio, I find that China’s reserve actually increased a bit in January. Indeed, after adjusting for changes in the valuation of China’s existing euros, pounds and yen, I estimate that China’s reserves increased by $40-45b in the first quarter — far more than the $8 billion headline increase.
That though hinges on an assumption that China’s various hidden reserves — the PBoC’s other foreign assets, the CIC’s foreign portfolio, the state banks’ foreign portfolio - didn’t move around too much.*
The foreign assets that are not counted as part of China’s reserves are also quite large by now; they too would, if aggregated, rank among the world’s largest sovereign portfolios. They are roughly equal in size to the funds managed by the world’s largest existing sovereign funds. That is another indication of the enormous size of China’s foreign portfolio.
Clearly, the pace of growth in China’s reserves clearly has slowed. Quite dramatically. Reserve growth — counting all of China’s hidden reserves — has gone from nearly $200 billion a quarter (if not a bit more) to less than $50 billion a quarter. Indeed, reserve growth over the last several months, after adjusting for valuation changes, has been smaller than China’s trade surplus.
As Michael Pettis notes, that implies ongoing speculative — or “hot” — outflows.
But there is some evidence that the pace of the “hot” outflows has started to slow. Indeed, the evidence showing a turn here — assuming the data on the state banks’ doesn’t have any surprises — is better than the evidence showing a turnaround in trade flows.*** The non-deliverable forward market is no longer pricing in a depreciation of China’s currency, and in the past, changes in the NDF market have corresponded reasonable well with hot money flows.
I consequently wouldn’t be totally surprised if the pace of China’s reserve growth started to pick up again over the next couple of quarters. The fall in reserve growth over the past two quarters has corresponded to rise in capital outflows — not with a sustained fall in China’s trade surplus.
But even if reserve growth picks up a bit, China’s government will likely buy fewer US assets than it did in 2008. Some of those assets though were in a sense bought with “borrowed” money — the hot inflow. This adjustment though isn’t a bad thing; we all should want China to buy more of the world’s goods and fewer of the world’s bonds.
For now, though, the available data indicates that China is still buying US assets: in January, China’s US holdings rose by about $20 billion (almost all deposits and short-term Treasuries).**** Keith Bradsher’s lede focused on the headline change in China’s reserves in January and February — the fall in reserves wasn’t adjusted for valuation changes, and thus overstates the actual change in China’s dollar holdings. Yves Smith consequently is a bit more worried than I am. China’s purchases have slowed, but — if the TIC data is accurate — they haven’t stopped.
One last point: As Bradsher notes, China’s trade surplus can help to finance the United States (now reduced) trade deficit even if it doesn’t flow directly into China’s central bank. The hot money leaving China has to go somewhere, and no doubt a large fraction currently flows into US dollar-denominated assets. A decent chunk of the outflows seems to be showing up in Hong Kong’s reserves for example, and the HKMA likely holds a dollar-heavily portfolio.
Sustained hot money outflows pose more problems for China than for the US. They imply a lack of domestic confidence in China’s economic prospects. The risk to the US would come if China’s government decided to suddenly stop buying US assets — or sell its existing assets — at a point in time when private Chinese investors didn’t want to hold US dollars or US assets.
* The main issue here is what happened to the state banks’ dollar reserve requirement; those dollars seem to be held on deposit at the PBoC, where they are counted as part of the PBoC’s balance sheet as “other foreign assets.”
** I am also assuming that China doesn’t mark its bond or equity portfolio to market, and thus changes in the market value of China’s existing investments have no material impact on China’s reported reserves.
*** A fall in the reserve requirement and the PBoC’s other foreign assets reduces reserve growth, and thus would increase estimated hot money outflows. Adding in FDI outflows (Chinese mining companies expanding abroad) and the Rosneft loan, if it wasn’t financed out of the state banks existing pool of foreign exchange, by contrast, would tend to reduce estimated hot money outflows.
**** The fall off in China’s recorded dollar purchases has actually lagged the fall in China’s reserves. This likely reflects a shift in China’s portfolio toward safe dollar assets, but it is striking that China’s recorded US portfolio has increased by more than its reserves recently. That though is a topic for another post.
This entry was posted on Monday, April 13th, 2009 at 9:21 am and is filed under China, Exchange Rate, Sovereign Wealth Funds, central bank reserves. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
22 Responses to “China’s reserves are still growing, but at a slower pace than before”
1. April 13th, 2009 at 9:58 am charlie responds:
I think China’s reserve growth is directly correlated to how much it has to grow to maintain their USD, I mean basket, peg.
The reason their reserve growth has slowed is with a smaller trade surplus, they don’t have to acquire as many USD to maintain their currency peg.
2. April 13th, 2009 at 10:15 am anon1 responds:
http://www.bob-mcteer-blog.com/will-china-buy-our-treasuries/
3. April 13th, 2009 at 10:36 am Twofish responds:
bsetser: Sustained hot money outflows pose more problems for China than for the US. They imply a lack of domestic confidence in China’s economic prospects.
No. That’s not what is happening.
If you look closely at what has caused hot money outflows, they have been mostly cases of “pull” versus “push.” What has happened is that Western banks and investors have ended up with huge losses and have been cashing in their China investments and not extending anymore credit.
I haven’t seen a single investor that thinks that China’s investment environment is worse than that of the United States, and the reason that people are withdrawing money is that they fear that the US is going to have big problems in which case they want as much cash as they can get.
Also my sense is that very little of the money that is going out is “domestic”. Lot’s of Western money went into China over the last few years, and it’s that money that is now flowing out.
The other thing is that people going into pawn shops and carrying suitcases of cash makes a nice image, but you just are not going to move $100 billion in suitcases and pawn shops.
All that money is flowing through investment banks in Hong Kong, and I think that one of the ironies of this is that Western banks are going to be hit harder by new Chinese NPL’s than Chinese banks.
4. April 13th, 2009 at 2:03 pm bsetser responds:
Actually, most of the inflows seem to have come from the overseas Chinese community and HK residents, given China’s controls. And most of the outflows todate seem to reflect the reversal of early bets on RMB appreciation rather than a loss of confidence in China. Ergo, they are the mirror image of big inflows in late 07/ early 08. But if the outflows are sustained, that would be something different —
Note as well that I do not expect the outflows to be sustained, ergo i expect more reserve growth going forward than in q4 08 and q1 09.
5. April 13th, 2009 at 2:34 pm Namke von Federlein responds:
@ Twofish - I think that you are one of the few people in the entire world that has earned the right to use the word ‘no’ to start a sentence. However, this gives me an obvious question - losing face is crime number one in China? I love question marks? Get the right question - you have 90% of the answer? Prevent a war, start a peace?
@brad - Perhaps the outflows are just a USD carry-forward unwind? I would appreciate a blog post about the USD issued debt - and whether the carry-forward is unwinding or the Treasury situation is simply creating a bubble catastrophe of epic proportions. If I was running China or a Chinese corporation - I would not issue a single contract or bond in USD. Not one penny. But, hey, I’m a bit eccentric?
@Twofish - Serendipity. Brad does what he can (like all of us - in the limits of his self-policing conceptual framework) but the link from my blog to brad’s blog is called ‘Twofish comments Council’. To be funny : China is not a blob? I still remember the first time I saw an ethic map of China in color. The Art of Peace = My Own Land?
@Brad - the name I was looking for in an old blog post about a letter to the World Bank was Simon Johnson - when he started blogging at the IMF it was wonderful. Mr. Johnson’s strong opinions and fairness got him kicked out? I will ‘pull a Simon’ here and ask - as politely as I can - are you getting intellectually inbred? In my opinion - peace is how statistics offer a perspective on the integrity of an investment climate and the people who report on it?
May all beneficial wishes come true in beneficial ways!
A famous Namke expression : Patience is a virtue until it becomes some sort of weird psychological disease?
May we soon all look back on this credit crisis as nothing more than a way to encourage our children to invest with wisdom!
6. April 13th, 2009 at 5:05 pm DJC. responds:
Brad: And most of the outflows to date seem to reflect the reversal of early bets on RMB appreciation rather than a loss of confidence in China.
DJC: Western Banks are massively divesting of Chinese assets. From Reuters,
” Bank of America (BAC.N) has sold part of its stake in China Construction Bank (0939.HK), while UBS (UBSN.VX) and Royal Bank of Scotland (RBS.L) each sold their entire holdings in Bank of China (3988.HK)(601988.SS). ”
http://uk.reuters.com/article/hongkongMktRpt/idUKHKG25847920090401
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The Baby Boomers
According to Wikipedia, "Influential authors William Strauss and Neil Howe label American Baby Boomers [as people born between the years] 1943 and 1960." This means that in 1980, the youngest boomer was 20, the oldest was 37 and the average was 28.5 (see table below).
Why is this important? Because the boomers are the largest single demographics cohort in history, and they have exerted many well-characterized influences on politics and social structure. I won't go into any of that here, but will instead focus on what I view as the underappreciated economic and financial impacts of the boomer crowd.
The relevant detail here is that a person's income begins at a level of zero, and (on average) rises steadily to a point before declining throughout old age back towards zero. Where is the peak of earnings?
Again from Wikipedia, "Two decades ago, the peak earning years were between 35 and 44. Now they occur ten years later. Twenty years ago, those in their peak earning years took home about twice as much as workers between the ages of 20 and 24. Now they earn more than three times as much."
So peak earnings lie between the ages of 35 to 55 over the period we are discussing (1978 onwards).
This means that in 1980, when stocks and bonds and housing all began their journey into the wild blue yonder, the oldest of the baby boomers were just entering their peak earning years. What might we predict to be the collective impact of a gigantic demographics bolus moving through its peak earning years?
Well, accumulating savings and investing in such things as stocks, bonds, and houses are both highly correlated with earning power. Extrapolating across an entire generational demographic bulge, we might readily defend the idea that rising asset prices were at least partially, if not largely, driven by the rising earning power of the boomers.
Now let's take another look at the 30-year stock chart with the boomers' peak earning years (loosely defined as the time when the middle range of the boomer demographic was between 35 and 50 years old) marked upon it:
Again, this might be a matter of correlation, not causation, but if the rise in stock prices witnessed over the late 1980s, 1990s and early 2000 timeframe was in large part due to a demographic bulge, then we could readily predict that stocks and bonds (and houses and everything else) will not be a sure-fire path to wealth in the future like they were in the past.
However, what goes up must come down. Those who save for retirement must also spend in retirement. So I invite you to consider the idea that our common experience with paper assets might be explained as a demographic dividend, as much as by the inflationary policies of the Federal Reserve or the fact that ample oil reserves were available to supply the economic expansion.
If this thesis holds, then here's what we might predict:
Tailwind of boomer investment turns into headwind of disinvestment
As mentioned in the Crash Course (in Chapter 14 - Assets and Demographics), there seems to be a slight problem in the model where one generation sells off its assets to the generation behind them. When there are more sellers than buyers, prices fall, and when there are more buyers than sellers, prices rise. So I must ask the question, "What will happen when the boomers seek to unload their assets to fund their retirements?" It seems entirely likely that we could see more sellers than buyers for a while. I am anticipating that this will create a sustained headwind that will grind down asset prices until a more proportional relationship to production is struck.
The great illusion created by the demographically-driven rise in asset prices was the notion that one could park excess money in some form of paper or housing asset and "get wealthy" over time. For a while, it seemed so simple. Buy the right index fund and sit back and wait. Just buy a house and wait. Just pick the right stock and wait. That's all it took to ‘get rich.' Right?
But if you stop and think about it, this is really not possible, at least not in aggregate and certainly not over the long haul. It is a cheap, temporary illusion. Real wealth is created by people producing things. Once a company has sold stock through a primary offering, no new capital is "invested" in the company, by virtue of the fact that people are bidding up its stock in the secondary market. So all secondary stock-market purchases are really just bets on the prospects of the company to earn future money, not actual capital investment.
The impact of the failure to save
Real wealth comes from actual production. Somebody, somewhere, has to turn sand into a silicon wafer, and somebody else has to turn that into a semiconductor chip, which somebody else has to turn into a computer. That's creating value. Along the way, it is vital that the property, plant, and equipment of these manufacturers be refurbished and replaced as necessary. Unless we want to fund these investments from a steadily rising mountain of debt that will someday collapse on itself, the borrowings must come from savings.
When I look around, I see nation that has failed both to save and to properly maintain its core capital stock. The bridges in my town are all "D"-rated or lower, many towns still subsist on dial-up Internet access, and practically every public building is due for a retrofit. These are local anecdotes, so take them with a grain of salt, but that's what I see.
On a larger scale, it is certain that consuming more than one produces and failing to save (two sides of the same coin) are a sure path to the poorhouse. Since the late 1970s or early 1980s, the US has been living well beyond its means, consuming more than it produces. We call this "the trade deficit," which is simply the measure of what we export against what we import. Specifically, imports are subtracted from exports, and a negative number means, "You're consuming more than you produce!"
This next chart of the trade deficit is a bit old (it comes from a seminar I gave in 2007), and I certainly should update it, but it would tell the very same story: The US is on an aggressive path to the poorhouse. To fund all that excess consumption, the US made the strategy-poor decision to borrow the difference from foreigners, a decision which will either destroy the dollar at some point in the future or cede a form of economic veto power to our future competitors.
Along with this foreign borrowing came the migration of our actual sources of wealth generation (production) to offshore locations, which, when you think about it, was a necessary condition, because we were not saving enough to fund the required investments here at home anyway.
The bottom line of this story is that debt represents a claim on the future, and future cash flows cannot forever be borrowed. Eventually they must reflect actual production. That is, future wealth generation must be of sufficient size to support future debt servicing costs.
Because the US made the extremely odd conjoined decision to both fund its excess consumption with foreign borrowing and send a large proportion of its wealth generation offshore, a future consisting of a vastly diminished standard of living is about as much of a sure thing as one can find.
Frankly, I do not see any possible way for the debt promises (see the Debt-to-GDP chart) to be kept. I see a future of paper asset destruction that will bring future promises and future production back in line. I don't know all the wrinkles and details, but I am thinking that the next ten years will see the US's debt obligations shrink back to something less than 200% of GDP. Along with that, the portion of our GDP that was false, because it was inflated by excess deficit spending, will be shrinking. I think that $25 to $30 trillion of (current value) debt destruction lies along that path.
The stimulus package, as large as it is, is merely a down payment.
This means that you might need to completely rethink your views on "investing" and how assets behave, along with how you will secure and protect your wealth.
The notion that everyone can "become wealthy" through entirely passive investments in stocks and bonds is a deep-seated cultural belief that is constantly reinforced by a self-interested financial services industry. But we each might benefit by asking ourselves, "Does this makes sense?" And, if it does not, we must then ask, "What might the implications be?" Whatever answers might develop in your mind, I invite you to trust yourself and to research the matter further if you are not entirely comfortable with them.
What next?
My purpose in writing about the true source of material wealth and the impact of baby boomers on stocks, bonds, and housing prices is to prompt you to seriously consider the possibility that the economic activity of the last few decades is misleading.
It is this disconnect between "how things were" and "how things actually work" that led me to make serious changes to my life. It formed the basis for my deeply held belief that the next twenty years are going to be completely unlike the last twenty years.
If you are like me, your beliefs about "how things work" were shaped during an anomalous period which will not soon be replicated in our lifetimes - if ever. It comprised a unique combination of demographics, geopolitical circumstances, a politicized Federal Reserve, supportive energy supplies, and corporatized media better suited to reinforcing consumer beliefs than delivering essential context.
In my estimation, this marks the beginning of a great leveling of expectations between what we promised ourselves and what reality can deliver. We are in the opening stages of a grand play with many acts and even more plot twists.
I intend this piece to give you one more tool in your toolbox that you could use in your discussions with your financial advisor, spouse, friends, or with whomever you regularly discuss our future financial prospects.
The final act in this play, I suspect, will be the destruction of the dollar, along with many other fiat currencies, as stores of wealth. You still have time to begin maneuvering your wealth out of fiat (paper) currencies and into tangible expressions of wealth, but in my experience, most people won't, until and unless their beliefs are in alignment with the necessary actions. For most people, most especially me, sawing at the rope that anchors our beliefs in the past is a slow process, with progress being measured by the breaking of each individual strand.
http://www.chrismartenson.com/blog/great-babu-boomer-asset-bubble/16648
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I certianly agree that the Boomers have and will affect the economy. However our economy is increasing global and there are more young people in the world than old. One of the problems with Economics and all of the other Social Science is that the data is weaker than the Hard Science (physics etc) and it is hard to separate all the different factors out. Models are very simplified forms or reality etc. I don' t think you can predict the future of the Economy with certainly with one data point
I also think one of greatest causes of increased wealth in the US is increased productivity of US workers. (To be fair this is sort of one data point) Increased productivity is usually causes by better technology and I think recent technological advances are just at the beginning stages.
Larry Summers has a nice three minute summary of the history of American productivity from the Big Think.
http://bigthink.com/ideas/lawrence-summerss-history-of-american-productivity
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Look at the birth rates of the nations that can possibly supply us with educated motivated workers. Most are below sustaining levels. The only places still exporting works are islamic third world rat holes. After doing alot fo travelling over the last two years i think i have seen enough to say, we do not need anymore sudanese cab drivers or pakistanni baggage screeners.
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"I also think one of greatest causes of increased wealth in the US is increased productivity of US workers. ... Increased productivity is usually causes [caused?] by better technology and I think recent technological advances are just at the beginning stages."
Yes, but technology growth comes from friendly policies toward the gains from capital investment. Productivity growth in simple terms comes from power tools. When the carpenter goes from a hand saw and hammer to a power saw, nailing gun and laser level, productivity increases. You might get shovelers to shovel a little faster with a bonus program but not on a magnitude like you will if they put them at the controls of a diesel powered Bobcat. I had the opportunity to sell microprocessor emulation tools to supercomputer companies, logic analyzers to avionics firms and optical time domain reflectometers to under-the-ocean fiber optic cable operators. Productivity growth is all about capital investment. In the Lawrence Summers video he seems to confirm that with his observation that the highest growth in productivity started in the mid-nineties. That is precisely when Clinton accepted the Gingrich rate cuts in capital gains taxation. You don't increase the productivity or value of labor or the pay for labor by promising to punish the gains from capital investments. The first phase of canceling the gains of the Bush tax cuts began Jan. 1 2008 when the Pelosi congress ended favorable rules on depreciation of capital equipment, along with their promise of serious increases in investment tax rates to follow. Maybe Summers has had some success persuading President Obama of the ill-advised wisdom of punishing returns from investment to help labor but a great deal of damage has already been done - just by promising that future rates will be higher.
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This point about the market's beliefs about FUTURE rates is key.
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Just when you think the political class may have learned something in months of trying to fix the banking system, the ghost of Hank Paulson returns to haunt the Treasury. The latest Beltway blunder -- and it would be a big one -- is the Obama Administration's weekend news leak that it may insist on converting its preferred shares in some of the nation's largest banks into common equity.
The stock market promptly tumbled by more than 3.5% yesterday, with J.P. Morgan falling 10% and financial stocks as a group off 9%, as measured by the NYSE Financials index. Note to White House: Sneaky nationalizations aren't any more popular with investors than the straightforward kind.
The occasion for this latest nationalization trial balloon is the looming result of the Treasury's bank strip-tease -- a.k.a. "stress tests." Treasury is worried, with cause, that some of the largest banks lack the capital to ride out future credit losses. Yet Secretary Timothy Geithner and the White House have concluded that they can't risk asking Congress for more bailout cash.
Voila, they propose a preferred-for-common swap, which can conjure up an extra $100 billion in bank tangible common equity, a core measure of bank capital. Not that this really adds any new capital; it merely shifts the deck chairs on bank balance sheets. Why Treasury thinks anyone would find this reassuring is a mystery. The opposite is the more likely result, since it signals that Treasury no longer believes it can tap more public capital to support the financial system if the losses keep building.
Worse, wholesale equity conversion would mean the government owns a larger share of more banks and is more entangled than ever in their operations. Giving Barney Frank more voting power is more likely to induce panic than restore confidence. Simply look at the reluctance of some banks -- notably J.P. Morgan Chase -- to participate in Mr. Geithner's private-public toxic asset sale plan. The plan is rigged so taxpayers assume nearly all the downside risk, but the banks still don't want to play lest Congress they become even more subject to political whim.
A backdoor nationalization also creates more uncertainty, not less, by offering the specter of an even lengthier period of federal control over the banking system. And it creates the fear of even more intrusive government influence over bank lending and the allocation of capital. These fears have only been enhanced by the refusal of Treasury to let more banks repay their Troubled Asset Relief Program (TARP) money.
As it stands, banks and their owners at least know how much they owe Uncle Sam, and those preferred shares represent a distinct and separate tier of bank capital. Once the government is mixed in with the rest of the equity holders, the value of its investments -- and the cost to the banks of buying out the Treasury -- will fluctuate by the day.
Congress is also still trying to advance a mortgage-cramdown bill that would hammer the value of already distressed mortgage-backed securities, and now the Administration is talking up legislation to curb credit-card fees and interest. Both of these bills would damage bank profits, but large government ownership stakes would leave the banks helpless to oppose them. (See Citigroup, 36% owned by the feds and now a pro-cramdown lobbyist.)
We've come to this pass in part because the Obama Administration is afraid to ask Congress for the money for a meaningful bank recapitalization. And it may need that money now in part because Mr. Paulson's Treasury insisted on buying preferred stock in all the big banks instead of looking at each case on its merits. That decision last fall squandered TARP money on banks that probably didn't need it and left the Administration short of funds for banks that really do.
The sounder strategy -- and the one we've recommended for two years -- is to address systemic financial problems the old-fashioned way: bank by bank, through the Federal Deposit Insurance Corp. and a resolution agency with the capacity to hold troubled assets and work them off over time. If the stress tests reveal that some of our largest institutions are insolvent or nearly so, it's then time to seize the bank, sell off assets and recapitalize the remainder. (Meanwhile, the healthier institutions would get a vote of confidence and could attract new private capital.)
Bondholders would take a haircut and shareholders may well be wiped out. But converting preferred shares to equity does nothing to help bondholders in the long run anyway. And putting the taxpayer first in line for any losses alongside equity holders offers shareholders little other than an immediate dilution of their ownership stake. Treasury's equity conversion proposal increases the political risks for banks while imposing no discipline on shareholders, bondholders or management at failed or failing institutions.
The proposal would also be one more example of how Treasury isn't keeping its word. When he forced banks to accept public capital whether they needed it or not, Mr. Paulson said the deal was temporary and the terms wouldn't be onerous. To renege on those promises now will only make a bank recovery longer and more difficult.
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The internet certainly has the ability (it may not) to raise education levels are over the world. Educated woman have on average lower birth rates but that is a father off problem. There are currently educated motivated people from over the world who would like to immigrate to US and could replace boomers in the work force. My company is currently off-shoring technical jobs to Latin America. I am not saying it is certain the our economy will improve but there is much more evidence for hope than despair.
There are obvious security problems with Pakistani immigrants and this article underestimate the risks but I thought some of these statics were interesting. It is from 2005.
http://www.opinionjournal.com/editorial/feature.html?id=110007151
THE MELTING POT
Stars, Stripes, Crescent
A reassuring portrait of America's Muslims.
by BRET STEPHENS AND JOSEPH RAGO
Wednesday, August 24, 2005 12:01 A.M. EDT
"Ever since it became clear that three of the four jihadis who bombed London on July 7 were born and bred in England, the British have been taking a hard look at their Muslim neighbors: Do they share the same values? How do they fare economically? Whom do they cheer when England plays Pakistan at cricket? And how many more would-be bombers are among them?
As it happens, Her Majesty's government was well clued on these questions before the bombers struck: A 2004 Home Office study showed, for example, that British Muslims are three times likelier to be unemployed than the wider population, that their rates of civic participation are low, and that as many as 26% do not feel loyal to Britain. By contrast, the U.S. Census Bureau is forbidden by law from keeping figures on religious identification (although it collects voluminous information on race and ethnicity), so there are no authoritative data on the size and nature of America's Muslim population. Yet if the U.S. is ever attacked by American jihadis, we will no doubt ask the same questions about our Muslim community that Britons are now asking about theirs.
Here is what we know.
First, let's dispose of the common misconception that Arab-Americans and Muslim Americans are one and the same. In fact, most Arab-Americans aren't Muslim, and most Muslim Americans aren't Arab. According to the 2000 census, there are 1.2 million Americans of Arab descent, of whom only 24% (according to a survey by the Arab American Institute) are Muslim. As for the rest, they are mainly Catholic, Eastern Orthodox or Protestant. They are also highly successful, with an above-average median household income of $52,000 and an astonishing intermarriage rate of over 75%, suggesting they are well on their way toward blending into the great American melting pot.
Information on American Muslims is sketchier. Thanks to a 2004 Zogby International survey, we know that a plurality of Muslim Americans--about one-third--are of South Asian descent; 26% are Arab and another 20% are American blacks. But until 2001 we had no idea how many Muslims lived in America, and even now the figure remains a matter of intense controversy. All major Muslim advocacy groups put the number at above six million, which, as Daniel Pipes of the Middle East Forum observes, has the convenience of being higher than the American Jewish population. Yet all independent surveys put the real figure at no more than three million, while the most credible study to date, by Tom Smith of the University of Chicago's National Opinion Research Center, estimates total Muslim population at 1,886,000. "[It] is hard to accept that Muslims are greater than one percent of the population," he writes.
Whatever the real figure, what's reasonably clear is that Muslim Americans, like Arab-Americans, have fared well in the U.S. The Zogby survey found that 59% of American Muslims have at least an undergraduate education, making them the most highly educated group in America. Muslim Americans are also the richest Muslim community in the world, with four in five earning more than $25,000 a year and one in three more than $75,000. They tend to be employed in professional fields, and most own stock, either personally or through 401(k) or pension plans. In terms of civic participation, 82% are registered to vote, half of them as Democrats. Interestingly, however, the survey found that 65% of Muslim Americans favor lowering the income tax.
In these respects, Muslim Americans differ from Muslim communities in Britain and Continental Europe, which tend to be poor and socially marginalized. Four other features set American Muslims apart.
First, unlike in Europe the overwhelming majority of Muslims arrived here legally, and many of those who didn't were deported after Sept. 11, 2001. Currently, according to Ali Al-Ahmed of the Washington-based Saudi Institute, there are probably no more than a few thousand Muslim illegal immigrants in the U.S.
Second, 21% of Muslim Americans intermarry, according to the 2001 Religious Identification Survey of the City University of New York--close to the national rate of 22% of Americans who marry outside their religion. And because 64% of Muslim Americans are foreign born, there is reason to expect that figure to grow among second and third generations.
Third, according to Ishan Bagby, a professor at the University of Kentucky who recently made a study of mosque attendance in Detroit, the average mosque-goer is 34 years old, married with children, has at least a bachelor's degree, and earns about $74,000 a year. If this is representative of Muslim Americans as a whole, it suggests that the religiously committed among them hardly fit the profile of the alienated, angry young Muslim men so common today in Europe.
Finally, Muslim Americans benefit from leaders who, despite some notable exceptions, are generally more responsible than Muslim leaders in Britain and Europe. Just compare the forthright condemnations of terrorism by the Los Angeles-based Muslim Public Affairs Council to the cunningly ambiguous utterances of France's Tariq Ramadan, to say nothing of the openly jihadist positions of some of Britain's most notorious imams.
So does the U.S. have a "Muslim problem"? If the data above are accurate, they strongly suggest we do not; on the contrary, America's Muslims tend to be role models both as Americans and as Muslims. But that does not mean there aren't any problems. One comes in the form of U.S. mosques funded by Saudi Arabia, which can serve as a conduit for the kingdom's extreme Wahhabist brand of Islam. Mr. Al-Ahmed calls these mosques "an incubator for suicide bombings and terrorism." Another is that, while most American Muslims have successfully integrated into American life, there remain culturally isolated and impoverished enclaves of Muslim immigrants. It was in just such an enclave in Jersey City, N.J., that the disciples of Sheikh Omar Abdel Rahman planned the 1993 World Trade Center bombings. Similarly, in Lodi, Calif., where two Pakistani men have been charged with attending terrorist training camps, some 80% of the Pakistani community does not speak adequate English.
Hanging over all this is the question of the long-term trajectory of the American Muslim population. In Britain, as in Germany and France, a striking feature of the Islamist movement is that it has taken root among second-generation Muslims, whose disenchantment with their Western lives is matched by the romanticist appeals of ethnic authenticity and religious purity. America's mostly foreign-born Muslims are perhaps less susceptible to this. But that's no guarantee their children won't be seduced. Then, too, neither a first-rate Western education nor economic affluence offers any inoculation against extremism: Just look at the careers of 9/11 ringleader Mohamed Atta, educated at the Technical University of Hamburg, or Daniel Pearl killer Ahmed Omar Saeed Sheikh, who did undergraduate work at the London School of Economics.
It takes no more than a few men (or women) to carry out a terrorist atrocity, and there can be no guarantee the U.S. is immune from homegrown Islamist terror. But if it can be said that "it takes a village" to make a terrorist, the U.S. enjoys a measure of safety that our European allies do not. It is a blessing we will continue to enjoy as long as we remain an upwardly mobile, assimilating--and watchful--society."
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Capital investments are certainly important and I would not like to see it shrink but there is a lot of future growth that does not require a lot of capital investments.Our world is increasing digitized which usually means lower capital costs.
The are way less capital intensive options than fiber optic cable and there is a lot of work being done currently that is not based on fiber optic cables
Creating Aps for smart phones is being called the next gold rush. It requires very little capital investment. Google and Facebook did not start with large amount of capital investments. Cloud Computing ( Computer technology becoming a Utility ) is reducing costs for starting new businesses.
You do not need to build a sim if you could rent one from Amazon.
http://www.nicholasgcarr.com/bigswitch/interview.shtml
"An interview with Nicholas Carr, author of The Big Switch: Rewiring the World, from Edison to Google.
You write that the computer is escaping its box. How so?
Computers used to be self-contained devices. If you wanted to do something with your PC, you had to buy a piece of software and install it on your hard drive. That began to change when the World Wide Web arrived in the 1990s. Suddenly, if you had a network connection and a browser, you could tap into millions of web pages that were stored not on your PC but on other people’s computers. The PC began to turn inside out—what was important wasn’t what was inside its case but what was outside it.
But that was just the start. Today, a far more radical change is under way, thanks to the proliferation of very fast broadband connections. Rather than just using the Internet to visit web pages, you can use it to run very sophisticated software - the kind of software that you used to have to run on your own drive. Computing is breaking out of its old beige box and moving onto the Internet.
The World Wide Web, you say, is turning into the World Wide Computer.
Right. Now that they’ve been connected with fiber optic cables, all the machines hooked up to the Net are merging together into one giant, incredibly powerful computer - the World Wide Computer. Our own personal PCs, not to mention our cell phones and gaming consoles, are turning into terminals hooked up to that big shared computer. They get most of their power and usefulness from all the software and information that’s floating around out on the Net.
In The Big Switch, I draw a parallel to what happened with the invention of electric utilities a hundred years ago. Before the electric utility, people had to generate their own power to run their machines - with waterwheels or steam engines or just their own muscles. But as soon as the wires for the electric grid were strung, they no longer had to worry about producing their own power. Power was delivered to their home or their office over the network, and all they had to do was plug an appliance into the socket in the wall. That’s what’s happening to computing today. It’s turning into a service supplied over a network. It’s becoming a utility.
What does the rise of utility computing mean for businesses, which have been the biggest buyers of computers and software?
You know, for most of us, the shift in the nature of computing has been almost invisible. As long as you have a web browser and a fast Internet connection, you don’t really care where your software is running. YouTube, MySpace, Facebook, Wikipedia, Google Search, Yahoo Mail, Flickr - none of those programs is running on your PC’s hard drive. They’re all utility services that you share with thousands of other people. And that’s fine, because none of us really cares where our software is coming from—we just want stuff that works.
For companies, particularly big ones, it’s a completely different story. They’ve spent millions or even billions of dollars building private data centers, filling them up with complicated computer systems, and hiring squads of IT professionals to keep everything running. Ever since businesses began installing computers a half a century ago, they’ve assumed that they had to buy and maintain all their own hardware and software. Now, suddenly, that assumption is being overturned, and businesses have to begin rethinking all their past decisions and investments. Do they really need all those expensive systems? Do they even need their IT departments? It’s as big a change as companies faced in the early Eighties when personal computers displaced mainframes – maybe even bigger.
That’s going to shake up the technology industry, isn’t it?
The entire computing industry is going to be turned on its ear. There are a whole lot of big tech companies - Microsoft, IBM, Oracle, Hewlett-Packard, Dell, and many others - that have made fortunes selling the same pieces of hardware and the same software programs to thousands of different customers. As computing turns into a utility and systems begin to be shared, a lot of those sales are going to dry up. Instead of buying new computers, companies will just subscribe to various software services served up online for a low monthly fee. Most of today’s computer giants see this transformation coming, and they’re scrambling to remodel themselves to compete in the new world. Some will adapt successfully. But some are going to fail. And new utility companies - companies like Google and Salesforce.com and even Amazon—are already moving in to take their place.
Microsoft presents a particularly interesting case because it’s been the paragon of the old, PC-centered mode of computing. One of the chapters in my book is called “Goodbye, Mr. Gates.” Gates has announced that he’ll retire from Microsoft in the summer of 2008, and you really couldn’t ask for a better symbol of the change taking place in the industry. The world that Gates and the other PC pioneers created is being dismantled, bit by bit and byte by byte. Ten years from now, it will be a very different industry.
But this isn’t just a business story.
Not at all. The implications of the transformation of computing go far beyond business or even technology. When electricity turned into a utility, it pushed the price of power down dramatically, and that set off a chain reaction that fundamentally changed not only business but media, culture, education, and, in the end, all of society. The expansion of the middle class, the spread of secondary education, the rise of mass media and culture, the flood of consumer products—none of those things would have happened without the cheap current pumped out by big utilities.
I think utility computing is going to send equally big shock waves across society. In fact, we can already see the early effects all around us – in the shift of control over media from institutions to individuals, in people’s growing sense of affiliation with “virtual communities” rather than physical ones, in debates over the security of personal information and the value of privacy, in the export of the jobs of knowledge workers, and in the growing concentration of wealth in a small slice of the population. All these trends either spring from or are propelled by the rise of Internet-based computing. As information utilities grow in size and sophistication, the changes to business and society - and to ourselves - will only get broader and more intense.
Give us an example.
I’ll give you two examples, both of which I discuss in the book. First is the distribution of wealth. Usually when a major new technology comes along, it leads to the loss of certain types of jobs, but it ends up creating a whole lot of new kinds of jobs. We saw that with electricity, which brought a boom in both unskilled factory jobs and skilled white-collar jobs. Computerization is taking a very different course. It’s allowing companies to replace all sorts of workers, skilled and unskilled, with software, but it isn’t creating big new classes of well-paying jobs in the place of the ones it destroys. That’s one of the main reasons that we’ve been seeing the steady erosion of middle-class prosperity over the last two decades. This effect will be magnified by the arrival of the World Wide Computer, which is both displacing additional categories of jobs and allowing other jobs to be transferred overseas where they can be performed more cheaply. If the electric utility helped create the vast middle class, t he computing utility may help destroy it.
Second is mass culture. As the power and the reach of the Internet expands, it’s turning into our universal medium - the way we get information and news and entertainment. And because we can “personalize” this medium to an extent that wasn’t possible with, say, newspapers or radio or TV, we’re getting the power to wrap ourselves in our own custom-designed culture, our own tailor-made media cocoon. Now, some argue that this trend is all to the good, that it will give us more choices, more ability to get precisely what we desire. And there’s certainly some truth to that view. But there are other, darker sides to this phenomenon. For all the flaws of the mass media, it helped give diverse people a common sense of identity; it served as a glue for society. That glue is being dissolved, and a lot of the mainstays of our culture, such as the kind of hard journalism that was traditionally done by newspapers, are facing severe economic threats. As I argue in the book, we may end up losing more than we gain.
Even the rules of national security and defense are changing, you argue.
I think most of us have been blissfully unaware of just how vulnerable the Internet is. Just recently, Estonia got hit by a huge, well-coordinated attack over the Internet - what’s called a distributed denial-of-service attack. Many of the country’s governmental and commercial computers ended up paralyzed, and its entire economy was threatened. No one’s quite sure who instigated the attack, but it revealed some of the truly scary risks inherent in today’s Internet. The Net is rapidly turning into the major infrastructure for trade and commerce, and yet it’s an extraordinarily insecure infrastructure. All around the world, national militaries as well as guerrilla forces are creating plans to “fight the Net,” as the U.S. Department of Defense phrased it in a recent report. I sketch out some of the scenarios for what might be called Cold War 2.0 in The Big Switch, and they’re not pretty. The Net has the capacity to bring people together, but it also has the capacity to divide us in ways we haven’t seen before.
You end the book, though, by looking into the more personal implications of the World Wide Computer—how it may alter our identities and even our minds.
Technology changes us. It doesn’t just change what we do. It changes who we are. The modern self, you could argue, came into being about 500 years ago, when the invention of the printing press led to a great flood of inexpensive books and journals and newspapers. It’s hard to overstate the importance of the printed page in shaping who we are, both as individuals and as a society. I think the Internet, as our new universal medium, will have a similarly momentous effect. It will change us. Clicking rapidly between snippets of information, as we do when we’re online, is a radically different way of developing an understanding of the world than we’ve ever experienced in the past. What does it mean for our memory, for our reasoning, for our sense of self? We don’t know yet. But I don’t think the early signs are particularly encouraging. "
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Related threads:
http://dogbrothers.com/phpBB2/index.php?topic=1167.0
http://dogbrothers.com/phpBB2/index.php?topic=1586.0
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"The are way less capital intensive options than fiber optic cable and there is a lot of work being done currently that is not based on fiber optic cables"
Your post came through over fiber cables (and that required a huge capital investment). All google searches and facebook postings run over fiber optic cable as well. I'm not sure what you refer to.
"Capital investments are certainly important and I would not like to see it shrink..." Yet we elected people committed to punishing investment returns and demonizing capitalists - the rich aren't paying their share, aren't doing their patriotic duty, we can tax just the 2% - not us and get free health care, etc.
"...but there is a lot of future growth that does not require a lot of capital investments. Our world is increasing digitized which usually means lower capital costs. Creating Aps for smart phones is being called the next gold rush. It requires very little capital investment."
I think many apps written free by users will likely end up as freeware/shareware, not economic growth. Software engineering is extremely capital intensive. I would put time available of software engineers ahead of copper as the truly scarce resource of this economy. Iphone apps are of no value without the enormous sunken investment of the 3G networks and enormous capital investment still required for the so-called 4G.
"Google and Facebook did not start with large amount of capital investments. Cloud Computing ( Computer technology becoming a Utility ) is reducing costs for starting new businesses."
Maybe you refer to Google as an idea or as a search patent, but google as a money making enterprise requires hundreds of thousands of servers using enormous amounts of electricity. In spite of their 'going green' campaign, the energy they consume is mostly from fossil fuels.
Cloud computing like using salesforce.com is extremely expensive IMO. It is like lease versus purchase of your information systems. Startups still need the capital to pay these services and all their other expenses until their own revenues begin to cover. Punishing capital lessens the likelihood of more success stories like the ones you cite.
The political argument is not for or against new innovations, it is IMO about central planning and control versus a more free economy.
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[Jim Lindgren, April 22, 2009 at 1:18am] Trackbacks
High Unemployment States Have High Income Taxes or High Unionization or Both. As the nation considers increasing marginal tax rates and facilitating greater union membership, I thought it might make sense to look at the states with the highest and lowest unemployment rates to see if there might be any relevant patterns.
The six states with the highest unemployment rates are:
12.6% Michigan
12.1% Oregon
11.4% South Carolina
11.2% California
10.8% North Carolina
10.5% Rhode Island
The six states with the lowest unemployment rates are:
5.2% Iowa
5.2% Utah
4.9% South Dakota
4.6% Nebraska
4.5% Wyoming
4.2% North Dakota
In the six states with the highest unemployment rates, the average top state income tax bracket is 8.05%. All but Michigan have marginal tax rates of at least 7% (and Michigan has a very high unionization rate).
On the other hand, the average top tax bracket for the six states with the lowest unemployment is only 4.4%, with 4 of the 6 states having a top marginal rate of 5.54% or less.
Further, union representation averages 14.1% in the six high unemployment states, with a median of 17.4%. All but the Carolinas are among the most unionized states in the nation (and the Carolinas have relatively high marginal income tax rates of 7% and 7.75%).
Putting this together, 3 of the 6 states with the highest unemployment (California, Oregon, and Rhode Island) have both high marginal income tax rates and high union representation. Michigan has high unionization but moderate marginal income tax rates, and the Carolinas have high marginal income taxes, but low unionization rates.
Among the 6 states with the lowest jobless rates, 4 have low unionization rates and no state income tax or modest marginal rates and a fifth (Nebraska) has average income tax rates and low unionization. The exception is Iowa, which has average unionization rates (13%) and high marginal income taxes (8.98%).
I would put less emphasis on my analysis of the LOW unemployment states because they are all in the upper Great Plains. But the HIGH unemployment states are otherwise quite diverse (from the West Coast to New England to the upper Midwest to the Carolinas). What they share are high marginal income taxes or high unionization or both.
As with so many of the reforms contemplated in the budget passed a few weeks ago, we can't know that they will be counter-productive, but the stated goals and the means to achieve those goals do seem to point in opposite directions.
http://volokh.com/archives/archive_2009_04_19-2009_04_25.shtml#1240377524
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See what your congresscritter is asking for:
http://www.washingtonwatch.com/blog/2009/04/12/catalogue-of-fy-2010-earmarks/
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A high-five is due the Special Inspector General for the government's Troubled Asset Relief Program. In his quarterly report to Congress last week, Neil Barofsky promotes a reform to help prevent the next credit disaster.
Mr. Barofsky criticizes the New York Fed's Term Asset-Backed Securities Loan Facility (TALF) for relying on the major credit-rating agencies to determine if securities are safe enough for taxpayers. Under the TALF, the New York Fed provides nonrecourse loans to private firms to buy AAA-rated pools of mortgages and other assets. But can you trust that triple-A rating?
Mr. Barofsky notes that credit ratings on residential mortgage-backed securities (RMBS) "have proven to be unreliable and largely irrelevant to the actual value and performance of the security. Arguably, the wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis." Hear, hear.
Could this message finally penetrate the crania of senior U.S. officials? Mr. Barofsky reports that his office "has been informed by the Federal Reserve that it is considering, but has not yet adopted" a plan to replace credit ratings with actual examinations of the underlying loan portfolios. He further reports that Treasury says that "conducting due diligence with respect to the underlying collateral" will be part of its plan for investing in mortgage-backed securities. Imagine that: Trying to find out what they are buying before committing your money.
So many bad ideas are coming from Washington these days that a rare good one needs more exposure and support. Pour it on, Mr. Barofsky. Taxpayers need a champion, and the financial system needs an alternative to the credit-rating oligopoly.
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My complaint and my point which I didn't actually make was--
I tend to get annoyed by articles about how the world is ending, the sky is falling and it will never get better. I dislike economic advice that says keep all you money in cash or better gold, buy lots of guns,ammo and learn how to farm. Learning how to farm etc is not necessarily bad but it is not great economic advice. Huss's article on demographics didn't actually say any of that but it shared some common themes. Maybe the buy gold people are right -- we will see but they do not have a crystal ball and the sad little data we do have is not all bleak.
I was actually not discussing the difference between central planning and market choice. It is not black and white anyway.
Unless you think market choice should pay for the military, police,fire, road system. etc.
Taxes obviously have a negative economic effect but the interesting question is what is worth the negative economic effect and what isn't.
Obviously you can be in very different ball parks about the correct size of our government but no one here anyway wants anarchism or communism.
This a philosophical discussion not scientific one because the data is so weak. Correlation is not causation etc
Philosophically, Do we want to be more like " Old Fashion America" or more like Europe?
I happen to like America philosophically better in many things but Canada and the UK are not Nigeria or Russia.
I will continue more of the tech arguments in the tech threads.
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http://www.cafehayek.com/hayek/2007/10/fooling-ourselv.html
Fooling ourselves
Russell Roberts
"At the University of Chicago, where I went to graduate school, a quote from Lord Kelvin, was carved in stone at the Social Sciences Research Building: When you cannot measure...your knowledge is meager and unsatisfactory. We graduate students took in this credo like mother’s milk. I came out of Chicago with a tremendous confidence in the power of economics and the ability to quantify that power.
But over the years, I have become increasingly skeptical of the power of statistical techniques to measure causation in complex systems. Edward Leamer’s indictment of modern econometrics, “Let’s take the ‘con’ out of econometrics” is the best known critique of our habits as empirical economists but it has not been taken to heart by the profession.
My thoughts on this issue came to a head with my recent podcast with Ian Ayres on his new book SuperCrunchers. The book is about the power of statistics to improve decision-making. And of course, facts and numbers are crucial for making wise decisions. And there are many examples where statistical analysis helps us in our private and political lives to overcome irrational prejudice or bad ideas.
But in the course of preparing for the interview, I realized in a way I hadn’t before, that how we feel about the reliability of statistical results lines up incredibly neatly with our political and ideological biases. One example I use in the podcast is the debate over whether allowing citizens to carry concealed handguns deters crime. John Lott and others say yes and trot out the analysis that proves they're right. Their opponents trot out a different analysis and prove the advocates for concealed carry are wrong.
Now I happen to believe that concealed handguns do deter crime and allowing concealed handguns is a good thing. And you can claim that the evidence that shows I'm right is "good" statistical analysis. The other side disagrees. They claim it's "bad" statistical analysis. Who's right? I have no idea. But what's clear to me is that my belief in the virtues of allowing concealed hand guns has little to do with the empirical evidence. And I would argue that the opponents are really in the same boat. They just don't like guns and they've dressed up their prejudices in fancy statistical analysis.
I came to this realization because Ayres thinks LoJack deters car theft. LoJack is a hidden device you put in your car that lets the police trace your car. Ayres and Steve Levitt found that LoJack has an incredible deterrent effect on car theft. But they think John Lott's work on concealed hand guns is irrevocably flawed. But LoJack is the same thing as a concealed handgun. Ayres and Levitt should like Lott's work and Lott should like Ayres and Levitt. But Lott doesn't like Ayres and Levitt and the feeling is mutual.
It's obvious why neither respects the other. It's not the quality of the empirical evidence. It's just bias. Ayres and Levitt don't like guns and Lott doesn't like the idea that insurance companies (and criminals) could ignore the impact of LoJack if it's really so big. Ayres and Levitt see LoJack as an example of market failure and Lott thinks market failure in this case requires too much ignorance.
The nature of the analysis is such that neither side can convince the other that "their" analysis is reliable. That's not always true. As I suggest in the podcast, Milton Friedman was able to convince the skeptics that inflation is everywhere and always a monetary phenomenon. Friedman won the debate. But how many other studies can you think of where someone staked out a controversial position and convinced the skeptics based on empirical analysis? I think it can be done, but it's rare. And in today's world, most of the interesting empirical claims are being made in cases where the data are too incomplete and the issue is so complex that we can't move to a consensus. The empirical work doesn't improve our understanding of what's going on. It masks what's going on. It gives a patina of science when in effect the numbers aren't really informing the debate.
In the case of crime, to isolate the effect of LoJack or concealed hand guns, you have to control for any other causes of crime and control for the simultaneity problem that causation could be running the other way. I'm not sure that can be done. My other favorite example of this is WalMart. There are economists out there who claim that WalMart lowers wages when it comes to a town, even a big town, such as Los Angeles. I don't find this argument believable. But the proponents of such arguments claim to just be using the numbers to tell them what's going on rather than relying on their prejudices as I am. But the numbers can't be crunched sufficiently well to come to a conclusion on WalMart. To do that, you have to control for a bunch of factors that can't be controlled for in real-world data situations.
And that's why there are studies on the other side showing how great WalMart is for a town. But are we moving toward a consensus about the impact of WalMart? Do the analyses improve our understanding? I don't think so. And that's because of the way modern econometrics is done. Regression is cheap so we buy a lot of it. Leamer's point is that this is "faith-based" empirical work. You just keep running the regressions including or excluding this or that, trying this or that specification until you find the result that confirms your worldview before you started the work.
The pragmatists (Peirce and James) and Hayek understood the dangers of rationality and what is essentially fake science. I'll write more on this another time and maybe do a podcast just on this issue.
I've closed comments here. If you want to comment, please listen to the Ayres podcast at EconTalk and let's talk over there in the comments section to the Ayres podcast."
Here is the link to the Ayres podcast
http://www.econtalk.org/archives/2007/10/ayres_on_super.html
Here is a link to another podcast on the same subject.
http://www.econtalk.org/archives/2009/01/roberts_and_han.html
I am definitely not a libertarian and I don't agree with everything they say but I find the material from econtalk to be often excellent(ocassionallyl boring and dry) and very balanced.
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Rachel, I agree with everything you wrote in this post quoted below. We probably strike the balance in a different place. My comment of central planning vs. market choice was not aimed at you or intended to oversimplify, I just believe we already moved way too far in the wrong direction from my point of view and we want to correct by moving further, so I am referring to direction rather than destination. Sorry about when my posts drift from what started me going to addressing what others may have wrote or said elsewhere. My admitted anti-government bias is really against government doing things other than governing; setting up health plans and running the automakers would be examples.
I strongly favor roads, bridges, libraries, police, fire, snow plowing and national defense. Also level playing field laws like insider trading laws etc. and a far stricter interpretation of equal protection under the law.
Interestingly, many of the free market / supply side economists I read (cf. Brian Wesbury http://www.ftportfolios.com/Common/Rss/CommentaryFeed.aspx and Scott Grannis http://scottgrannis.blogspot.com/) are rather optimistic now even with policies they oppose, not sky is falling or buy gold. They were optimistic up to the fall while most doomsayers were predicting doom throughout the boom period so all we can do is read and sort out our own view. This is nice opportunity here to do that.
My complaint and my point which I didn't actually make was--
I tend to get annoyed by articles about how the world is ending, the sky is falling and it will never get better. I dislike economic advice that says keep all you money in cash or better gold, buy lots of guns,ammo and learn how to farm. Learning how to farm etc is not necessarily bad but it is not great economic advice. Huss's article on demographics didn't actually say any of that but it shared some common themes. Maybe the buy gold people are right -- we will see but they do not have a crystal ball and the sad little data we do have is not all bleak.
I was actually not discussing the difference between central planning and market choice. It is not black and white anyway.
Unless you think market choice should pay for the military, police,fire, road system. etc.
Taxes obviously have a negative economic effect but the interesting question is what is worth the negative economic effect and what isn't.
Obviously you can be in very different ball parks about the correct size of our government but no one here anyway wants anarchism or communism.
This a philosophical discussion not scientific one because the data is so weak. Correlation is not causation etc
Philosophically, Do we want to be more like " Old Fashion America" or more like Europe?
I happen to like America philosophically better in many things but Canada and the UK are not Nigeria or Russia.
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May 3rd I wrote that many of the free market economists like Brian Wesbury are optimistic now even with policies they oppose, and on May 4th Wesbury posted"
"Recession is Over; No More Shoes to Drop"
http://www.ftportfolios.com/Commentary/EconomicResearch/2009/5/4/recession_is_over;_no_more_shoes_to_drop
I'm not saying he's right, just that he's optimistic.
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Who is going to loan us the money for all the new, expansive O-mommy state? China is saying no mas.
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Doug et al:
Wesbury is one of the very best economists out there. His track record as a prognosticator is outstanding.
GM et al:
Is this the beginning of an extended cycle of rising interest rates?
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This is the beginning of the end of the world as we know it. No idea how long it will play out, but the fundamentals are fcuked. Anyone can spend their way into a hole that they can't get out of. This is what is happening now on a national scale.
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Indeed, an international scale because we are (not for much longer) the world's international currency so other countries print money to match our printing so as to maintain some sort of stability in exchange rates-- net result-- world wide inflation. My guess is that stagflation cometh. His Glibness may be Carter the Second.
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It's going to be much worse than anything we saw under Carter. Loose nukes, and rogue states run rampant while US power shrinks into nothing will leave a world future generations will curse us for. At least, those that survive.
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China has 'canceled US credit card': lawmaker
5 days ago
WASHINGTON (AFP) — China, wary of the troubled US economy, has already "canceled America's credit card" by cutting down purchases of debt, a US congressman said Thursday.
China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country.
But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.
Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had "very legitimate" concerns about its investments.
"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.
"I'm not sure too many people on Capitol Hill realize that this is now happening," he said.
The Republican lawmaker said that China was justified in concerns about returns from finance giants Fannie Mae and Freddie Mac, which were bailed out by the US government due to the financial crisis.
Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.
"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.
"We should track that, because up until last month they were the number one provider of currency to the United States and now they're gone."
With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States.
China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.
http://www.google.com/hostednews/afp/article/ALeqM5i4estRSYeFBIII9kezxnP4jgoGZQ
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http://www.smh.com.au/national/america-will-not-protect-us-warns-rudd-20090501-aq6c.html?page=-1
America will not protect us, warns Rudd
Jonathan Pearlman Defence Correspondent
May 2, 2009
THE Rudd Government has acknowledged that the supremacy of the US has begun to fade and Australia is preparing for an uncertain future in which it can no longer rely on the protection of its main ally.
In a fundamental shift in defence plans, the Government has explicitly declared that US primacy in the Asia-Pacific - the bedrock of the nation's security since World War II - may be ending. The change, caused by the rise of new great powers such as China, is set to produce growing regional tensions and a "sudden deterioration" in Australia's security.
A 20-year defence blueprint, to be released by the Prime Minister, Kevin Rudd, today, prepares for a multibillion-dollar build-up of naval and air forces to ensure that Australia can defend its northern and sea approaches.
It says a regional shake-up is under way but US supremacy will not be blunted before 2030 and assesses the chances of an attack on Australia in the short term as "very remote".
The white paper, Defending Australia In The Asia Pacific Century: Force 2030, is the first since 2000 and outlines a range of security threats, including instability caused by the financial crisis, cyber warfare, failed states in the Pacific, Islamist terrorism, weapons of mass destruction, and climate change.
It warns that Australia must ensure it can protect itself amid an emerging range of great powers in the region - particularly China, India and Russia - which could lead to a "miscalculation" with disturbing consequences for Australia.
"Australia has been a very secure country for many decades, in large measure because the wider Asia-Pacific region has enjoyed an unprecedented era of peace and stability underwritten by US strategic primacy," the paper says. "That order is being transformed as economic changes start to bring about changes in the distribution of strategic power. Risks resulting from escalating strategic competition could emerge quite unpredictably."
The Minister for Defence, Joel Fitzgibbon, said the world faced "the beginning of the end" of the unquestioned dominance of Australia's principal ally since the Cold War.
The paper criticises China for failing to explain its substantial military build-up in recent years, which appears to have exceeded the force needed for a war over Taiwan. China's military modernisation will be little affected by the global financial crisis and is set to limit the ability of the US to control the region, it says.
"The pace, scope and structure of China's military modernisation have the potential to give its neighbours cause for concern if not carefully explained, and if China does not reach out to others to build confidence regarding its military plans.
"As other powers rise, and the primacy of the US is increasingly tested, power relations will inevitably change. When this happens there will be the possibility of miscalculation … A potential contraction of US strategic presence in the Asia-Pacific region, with a requirement for allies and friends to do more in their own regions, would adversely affect Australian interests, regional stability and global security."
The paper affirms support for the US alliance and for US-led efforts to bolster global security but warns Australia will not put troops at risk "in distant theatres of war where we have no direct interests".
Instead, the Government has focused on defending the borders of Australia, primarily by building air and naval power to protect the northern sea-air gap, maritime approaches and offshore oil and gas reserves.
A range of large-scale purchases includes a doubling of the submarine fleet to 12, about 100 F-35 Joint Strike Fighters, eight frigates with submarine detection capability and - as planned - three air warfare destroyers. For the first time Australia will acquire an arsenal of sea-based long-range cruise missiles.
"The ability to deter or defeat armed attack on Australia will continue to be the primary force structure determinant … This means focusing predominantly on forces that can exert air superiority and sea control in our approaches."
The Government has kept its commitment to boost the Defence budget by 3 per cent each year until 2018, but plans to scale this back to 2.2 per cent until 2030.
It says an internal reform program will save $20 billion.
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Moved to China thread
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This is the beginning of the end of the world as we know it. No idea how long it will play out, but the fundamentals are fcuked. Anyone can spend their way into a hole that they can't get out of. This is what is happening now on a national scale.
Just like World War 2 ? I'm not saying the war necessary ended the Great Depression but where is your data?
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http://www.heritage.org/Research/Budget/bg2249.cfm
March 16, 2009
The Obama Budget: Spending, Taxes, and Doubling the National Debt
by Brian M. Riedl
Backgrounder #2249
During his presidential campaign, President Barack Obama promised the American people a "net spending cut."1 Instead, he signed a "stimulus" bill that spends $800 billion, and he has proposed a budget that would:
Increase spending by $1 trillion over the next decade;
Include an additional $250 billion placeholder for another financial bailout;
Likely lead to a 12 percent increase in discretion ary spending;
Permanently expand the federal government by nearly 3 percent of gross domestic product (GDP) over pre-recession levels;
Raise taxes on all Americans by $1.4 trillion over the next decade;
Raise taxes for 3.2 million taxpayers by an average of $300,000 over the next decade;
Call for a pay-as-you-go (PAYGO) law despite offering a budget that would violate it by $3.4 trillion;
Assume a rosy economic scenario that few econo mists anticipate;
Leave permanent deficits averaging $600 billion even after the economy recovers; and
Double the publicly held national debt to over $15 trillion ($12.5 trillion after inflation).2
Before the recession, federal spending totaled $24,000 per U.S. household. President Obama would hike it to $32,000 per household by 2019— an inflation-adjusted $8,000-per-household expan sion of government. Even the steep tax increases planned for all taxpayers would not finance all of this spending: The President's budget would add trillions of dollars in new debt.[1][2]
Yet, the President's budget may even understate future spending and deficits. It assumes that the temporary stimulus spending provisions will be allowed to expire and that the $634 billion down payment on universal health care will not be expanded. It proposes destructive income tax increases and a new cap-and-trade energy tax that could devastate the manufacturing sector. Yet, somehow, the budget assumes much faster eco nomic growth than forecast by the Congressional Budget Office (CBO) and the Blue Chip Consensus.
Overall, the President's budget represents a sharp break from the policies that created the most prosperous 25-year period in American economic history. Instead, it puts politicians in charge of an increasing portion of the economy. Congress should discard this tax-and-spend budget and start from scratch.
Doubling Down on President Bush's Economic Policies
President Obama has framed his budget as a break from the "failed policies" of the Bush Admin istration. Actually, his budget doubles down on President George W. Bush's borrow, spend, and bail out policies. For example:
President Bush expanded the federal budget by a historic $700 billion through 2008. President Obama would add another $1 trillion.[3]
President Bush began a string of expensive finan cial bailouts. President Obama is accelerating that course.[4]
President Bush created a Medicare drug entitle ment that will cost an estimated $800 billion in its first decade. President Obama has proposed a $634 billion down payment on a new govern ment health care fund.
President Bush increased federal education spending 58 percent faster than inflation. Presi dent Obama would double it.[5]
President Bush became the first President to spend 3 percent of GDP on federal antipoverty programs. President Obama has already in creased this spending by 20 percent.[6]
President Bush tilted the income tax burden more toward upper-income taxpayers. President Obama would continue that trend.[7]
President Bush ran budget deficits averaging $300 billion annually. After harshly criticizing Bush's budget deficits, President Obama proposed a budget that would run deficits averaging $600 billion even after the economy recovers and the troops return home from Iraq.
The President's tax policy is the only sharp break in economic policy. President Bush reduced taxes by approximately $2 trillion; President Obama has proposed raising taxes by $1.4 trillion. In doing so, President Obama has rejected the most successful Bush fiscal policy. In the 18 months following the 2003 tax rate cuts, economic growth rates doubled, the stock market surged 32 percent, and the econ omy created 1.8 million jobs, followed by 5.2 mil lion more jobs in the next 27 months.[8] Not until the housing bubble burst several years later did the economy finally lose steam. Pro-growth lawmakers should embrace tax relief policies that have proven successful, while rejecting the runaway spending that has been business as usual in Washington.
The Mythical "$2 Trillion in Savings"
During his recent address to a joint session of Congress, President Obama previewed his budget by asserting that the Administration has "already identified $2 trillion in savings over the next decade."[9] This is simply not true. His budget increases spending by $1 trillion over the next decade, which he attempts to offset by reclassifying as "savings" $1.4 trillion in tax increases and $1.5 trillion in reduced spending in Iraq. However, gov ernment savings have always referred to spending cuts that save taxpayer dollars, not tax increases that feed the government. Furthermore, the Iraq "sav ings" are measured against an implausible spending baseline that assumes a permanent $180 billion bud get for the global war on terrorism, without any troop withdrawals through 2019. This is the equiv alent of a family deciding to "save" $10,000 by first assuming an expensive vacation and then not taking it. Without these false savings, only the $1 trillion spending hike remains, and that does not account for the extra $250 billion proposed for another round of financial bailouts in the current fiscal year.
Despite the claimed savings, this budget undeni ably expands government. Before the recession, rev enues were 18 percent of GDP and spending was 20 percent. After the recession, President Obama would maintain revenues slightly above 19 percent of GDP and spending at over 22 percent.[10] Thus, new tax revenues would finance new spending, rather than deficit reduction. President Obama's structural bud get deficit would exceed President Bush's.
The President also calls for bringing back the PAYGO statute, which existed from 1991 through 2002. Under this law, if the sum of a given year's entitlement or tax legislation expanded the budget deficit, an automatic across-the-board cut ("seques tration") in entitlement spending would be trig gered at the end of the year. The President's PAYGO proposal lacks credibility because his own budget blueprint would violate PAYGO by $3.4 trillion over 10 years.[11]
This disconnect between PAYGO rhetoric and reality is nothing new: Congress violated the 1991– 2002 PAYGO law by more than $700 billion and then enacted legislation cancelling every single sequestration that would have enforced the law.[12] Although Congress created its own PAYGO rule in 2007, it has waived it several times at a cost of $600 billion. Conse quently, the President's PAYGO pro posal should be considered a hollow gimmick that will be bypassed any time it proves inconvenient.
Doubling the National Debt
President Obama's pledge to halve the budget deficit by 2013 is hardly ambitious. The budget deficit will quadruple in 2009 to $1.75 trillion, and cutting that level in half would still leave deficits twice as high as under President Bush. Furthermore, three expected developments—the end of the recession, withdrawal of troops from Iraq, and phaseout of temporary stimulus spending— would halve the budget deficit by 2013. The President's budget shows deficits averaging $600 billion even after the economy recovers and the troops return home from Iraq.[13] That is not good enough.
President Bush presided over a $2.5 trillion increase in the public debt through 2008. Setting aside 2009 (for which Presidents Bush and Obama share responsibility for an additional $2.6 trillion in public debt), President Obama's budget would add $4.9 trillion in public debt from the beginning of 2010 through 2016— nearly double the amount accumulated under Pres ident Bush over the same number of years. Overall, the public debt level would double over the next decade to $15.4 trillion ($12.5 trillion in inflation-adjusted dollars). (See Chart 1.) At 67 percent of GDP, this would constitute America's largest debt burden since immediately following World War II.[14]
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http://finance.yahoo.com/tech-ticker/article/56918/Big-Risk-Surging-Debt-Makes-U.S.-More-Dependent-on-China-Russia-Gulf-States?tickers=BAC,MER,LEH,AIG,C,XLF,%5EDJI
Big Risk: Surging Debt Makes U.S. More Dependent on China, Russia, Gulf States
Posted Sep 15, 2008 12:07pm EDT by Aaron Task in Investing, Recession, Banking
The demise of Lehman Brothers, Merrill Lynch, and Bear Stearns this year has investors contemplating the long-term outlook for other once-venerable institutions, including Dow members Citigroup, AIG and Bank of America.
But there's an even bigger financial institution with greater debt and an increasing level of bad loans on its books: The U.S. government.
Given the actions already taken, from the Housing Bill to the nationalization of Fannie Mae and Freddie Mac, the U.S. deficit could double to $800 billion in two years, says Nouriel Roubini, of NYU's Stern School and RGE Monitor. (Even worse, the official government deficit figures exclude the costs of the wars in Iraq and Afghanistan, as well as the unfunded liabilities of Social Security and Medicare.)
The big risk is that foreign holders of Treasuries will no longer accept low interest rates to help fund U.S. debt spending, says Roubini, noting countries like China, Russia and oil-producing nations in the Middle East have becoming increasingly important holders of Treasuries. Should they demand higher rates to hold U.S. debt or, worse, dump their holdings, it could have profound ramifications on the U.S. economy and the value of the dollar.
Roubini further notes the Federal Reserve has put its balance sheet -- and independence -- at risk via its intimate involvement in thus-far failed attempts to stem the crisis.
It's tempting to dismiss the notion of a "run" on the U.S. government as unthinkable and some bears have been warning for years, even decades, about such a worst-case scenario. But after the events of this weekend, much less the past six months, it's clear that (almost) anything is possible and no scenario too "outrageous" to seriously contemplate.
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**So, was Hillary right?**
http://www.chinapost.com.tw/print/149593.htm
Clinton says U.S. debt to China threatens security
Monday, March 31, 2008
By Jeff Mason, Reuters
INDIANAPOLIS, Ind. -- The Bush administration has jeopardized national security and the ability to intervene in world crises because of the huge U.S. debt held partly by China, Democratic presidential hopeful Hillary Clinton said on Saturday.
The New York senator, who argues she is better prepared to deal with economic and foreign policy problems than rival Illinois Sen. Barack Obama, told a rally in Indiana that the United States' US$9 trillion in gross national debt puts it at the mercy of other nations.
She said President George W. Bush's policies contributed to rising U.S. debt and also have hamstrung Washington's ability to lead.
"That is what George Bush's policies mean in real world terms -- that we have put our nation's security and our leadership of the world at risk because of this indebtedness," Clinton said.
Clinton made China the focus of her criticism, which she has repeated throughout Indiana, a state that has suffered from manufacturing job losses that many blame on unfair trade practices and companies outsourcing jobs to China.
Clinton hopes to win Indiana's Democratic nominating contest on May 6 in a bid to close the gap with Obama who leads in amassing delegates who determine the party's nominee.
In her campaign remarks, she lamented China's hold over the U.S. economy.
"We are so dependent upon decisions made in other countries' capitals," Clinton said, singling out China's potential power over U.S. foreign policy decisions because of its financial leverage.
Clinton cited a discussion she had with a retired general who raised a "nightmare scenario" in which China threatened Taiwan and the U.S. president wanted to send ships toward the island to ward off Beijing.
"He said, 'You know, suppose the Chinese decide that they're going to go after Taiwan the way we see them, you know, with Tibet,'" Clinton said, describing the general's remarks and referring to the recent unrest in Tibet.
"'We start to move the fleet, and the Chinese say, 'Fine. You do that, we will dump your dollars. We will flood the market. We will not buy any more of your debt.'"
China currently holds about US$490 billion in U.S. Treasury securities and has foreign exchanges reserves totaling more than US$1.5 trillion.
Clinton accused Beijing of manipulating its currency and of not holding its exporters to the same health and environmental standards that U.S. companies must meet.
The U.S. trade deficit with China soared last year to a record US$252 billion even as the U.S. trade gap with the rest of the world decreased.
Many U.S. lawmakers complain that China deliberately undervalues its currency to boost exports and limit imports and have pressed Bush to be more aggressive in addressing the issue.
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http://www.cbo.gov/ftpdocs/88xx/doc8877/12-13-LTBO.pdf
Looming disaster.
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http://www.examiner.com/examiner/x-6448-Norfolk-Military-Affairs-Examiner~y2009m4d18-Pentagon-budget-threatens-airpower-national-security-expert-warns
Pentagon budget threatens airpower, national security, expert warns
April 18, 5:50 PM
When Defense Secretary Robert Gates recently unveiled his new military spending plan, supporters hailed it as “revolutionary.” But others are suggesting that Mr. Gates’ proposal is not only shortsighted; it potentially jeopardizes American security.
With steep cuts in weapons systems—including missile defense—the Gates budget was described as a “break” with long-standing Pentagon procurement and contracting practices, which have produced revolutionary technology, but at a very steep price. Cost overruns and design changes have added billions to the cost of new weapons systems—including many targeted for deep cuts or elimination by Mr. Gates.
:
Programs on the chopping block include five deemed essential for the U.S. Air Force, and its ability to project airpower around the globe. Under the Gates plan, production of the service’s state-of-the-art F-22 fighter would be capped at 187 aircraft, well below what the Air Force requested.
Additionally, the new budget would eliminate funding for the service’s new rescue helicopter, and halt development of the next-generation bomber and the airborne laser, which targets ballistic missiles in their boost phase. Procurement of the C-17 transport would also end.
While the Gates budget also slashes weapons programs in the other services, one respected defense analyst believes it places an undue burden on the Air Force. Dr. Rebecca Grant, a senior fellow at the Washington-based Lexington Institute says the new defense plan “singles out” the USAF for deep cuts, by halting or eliminating key programs needed for joint war plans.
The result, she says, will be an Air Force that finds it more difficult to deal with advanced threats--and meet the needs of combatant commanders.
As an example of the budget’s adverse impact, Grant cited the decision to shut down the F-22 assembly line after producing just four additional Raptors. beyond those now on order. At one point, the Air Force hoped to buy over 700 F-22, but prior budget cuts forced dramatic reductions in that plan. Earlier this year, service leaders made a push for 60 additional Raptors, which would have raised the inventory to just over 240 aircraft. But Mr. Gates rejected that request.
Dr. Grant says halting F-22 procurement will have far-reaching consequences, in a variety of potential contingencies. She expressed doubt that the Air Force will be able to fully equip a Raptor squadron earmarked for the Hawaii Air National Guard, despite the aircraft’s prominent role in Pacific region war planning.
She also faulted the Defense Secretary for his plan to buy more Joint Strike Fighters instead of the F-22. “He accepted the analysis of his own staff over Air Force warfighters, Grant observed. “He said he wants the 75% solution that JSF provides, but JSF can’t do all the F-22 missions. It complements the F-22 but does not replace its speed and survivability.”
Dr. Grant believes that a smaller Raptor inventory will make it more difficult to deal with a variety of crises, ranging from the SA-20 air defense system in Iran, to “worst case” scenarios involving China, or a conflict along Russia’s borders.
She also suggested that the JSF faces a less-than-certain future, despite Gates’ endorsement. “He didn’t significantly accelerate the program,” Grant continued, “and there’s still the Quadrennial Defense Review (QDR) to come. He has given us no vision of future military forces.”
The Air Force’s long-range strike capabilities took an even greater hit under the Gates proposal, which ends development of a new bomber. Dr. Grant said that cancellation of the program would mean an even greater reliance on the B-2 stealth bomber, which entered operational service in the 1990s.
“If the U.S. had to go after a difficult, long distance target like a hostile missile launcher, only 4-5 B-2s would be available on any given day,” she predicted. Without a new bomber, Grant said that U.S. strategic forces face a “tough environment,” particularly after 2020, when the oldest B-2s will enter their fourth decade of service.
She also wondered if “Gates wants to leave airmen behind on the battlefield,” referring to his termination of the next-generation combat search-and-rescue helicopter, or CSAR-X. The defense secretary defended his decision in a recent appearance at the Air War College, claiming that the chopper’s mission requirements—rescuing personnel deep in enemy territory—“made no sense.”
While Gates plans to boost spending for certain systems, including UAVs, Dr. Grant warned that drones are no substitute for aircraft being cancelled, including the F-22 and the new bomber. “UAVs are great,” she said, “but they can’t survive in hostile airspace.” She also noted that one variant of the planned bomber would have been unmanned. Terminating the program “shuts down another key technology path,” Grant said.
As the defense chief makes the rounds of media appearances and war colleges to sell his proposal, there has been little criticism from the service chiefs and other senior, uniformed officers. Grant believes the lack of pushback is hardly a coincidence.
“He’s fired a service chief, two service secretaries and a combatant commander. Generals and admirals are afraid to speak in the climate created by Gates.” Dr. Grant also noted that Secretary Gates has required senior service officials to sign non-disclosure agreements, stifling dissent in the senior ranks.
The Gates plan faces stiffer opposition on Capitol Hill, where lawmakers are maneuvering to preserve programs targeted for elimination. “No way will the Senate go along with all of his recommendations,” predicted one Republican staffer.
But it’s still unclear which weapons systems—if any—will survive the process. Earlier this year, a bi-partisan group of Senators sent Mr. Gates a letter, asking him to continue F-22 production. But the defense secretary ignored their advice, and a plea from the Air Force Chief of Staff, General Norton Schwartz, and the service secretary, Michael Donley, for 60 additional aircraft.
An early showdown on the secretary’s proposal is expected on April 30th, when the Airland Subcommittee of the Senate Armed Services Committee holds a scheduled hearing on airpower. Supporters of the next-generation bomber are expected to raise that issue during the hearing, and the Senate aide says that continued development of that aircraft is a “high priority” for members of the subcommittee.
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Rachel,
Please explain how digging us deeper into unsustainable debt that leaves us vulnerable to economic warfare while gutting our military's technological edge leads to a happy ending.
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"Permanently expand the federal government by nearly 3 percent of gross domestic product (GDP) over pre-recession levels;"
Huge deal that this is, I believe it understates the number-- and we need to remember that health care is about 15% of GDP. Put the two together and we are looking at the feds being about 40% of GDP. :x
Our freedom, our economy, our currency (i.e. our savings) are being destroyed before our very eyes. :cry: :cry: :cry:
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"Huge deal that this is, I believe it understates the number-- and we need to remember that health care is about 15% of GDP. Put the two together and we are looking at the feds being about 40% of GDP."
And then add in 'Government Motors' and the impending takeover of the energy sector... Luckily you don't have a large state government also. :oops:
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"Clinton says U.S. debt to China threatens security - Monday, March 31, 2008"
GM: "**So, was Hillary right?**"
Of course she had it exactly upside down. The fact they are invested in the U.S. may be our only security after Obama-Pelosi unilaterally disarm us.
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Couple of months ago I posted: "the only check/balance on the American Left machine is 'Communist China'. If they stop buying our debt, we will have to cut spending by most of the $10 trillion (and eat the rest as inflation) even without the participation in the process of Republicans."
With the Specter jump and Al Franken likely, China's unwillingness to buy more debt has become the 41st senator. As with other debt ridden third world countries, they may require some restructuring and discipline before agreeing to a 'bailout'. Hopefully they will also impose their lower business tax rates on us as part of any agreement.
At this point I would rather see Obama inflate than borrow on that scale. Then maybe we can muster up the political will to spend less.
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Good point Doug.
Whodathunk that the PRC would end up being the voice of reason for us?
I gotta start drinking heavily.
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The Treasury released its bank "stress test" results late yesterday, and the good news is that the financial system has survived this very public undressing better than most analysts figured three months ago. We'd attribute the results much more to Adam Smith's continuing workout than to this public strip-tease, but we'll take relief wherever we can get it.
APStress-testing is what banks and their regulators are supposed to do as a matter of course, albeit more quietly. The current very loud and public effort was advertised to provide an extraordinary measure of transparency at a time when no one trusted bank books. Do markets trust them any better now? Judging by the run-up in bank stock prices from their oversold levels in January, they do. This is progress.
On the other hand, all we really have to go on is the word of the federal employees who looked at the banks and estimated their losses against certain economic assumptions. Did they go easier than they might have, and how much did they bend when the banks fought back? The Fed's overview yesterday claimed they ran a "deliberately stringent test" and pegged potential "adverse"-case losses at the 19 largest banks at $600 billion this year and next.
Yet markets are also full of reports that regulators showed more than a little forbearance, especially after it became clear that President Obama had no desire to go back to Congress to ask for more public money. With only $110 billion or so in Troubled Asset Relief Program (TARP) funds left uncommitted, it's probably no coincidence that Treasury now sees new net bank capital needs as a manageable $75 billion.
And maybe that optimism will prove correct. Most banks are earning healthy profits again, thanks to a low cost of funds and steep yield curve. They're also taking steps to burn bad debt and clean up their balance sheets. Some banks that got too big during the boom are looking to sell some of their operations in order to raise cash. This is how a financial system shapes itself up under the market pressure of recession, with or without stress tests.
Not that there still aren't plenty of financial risks out there. On the credit side, commercial real estate is ugly and both home mortgage and credit card losses are a long way from receding. While the economy seems to be bottoming out at last, unemployment will keep rising for several months, which will mean more bank losses.
But our biggest question concerns interest-rate risk. Thanks to the Federal Reserve's emergency easing, short-term rates are close to zero. That can't last forever, and the longer the Fed keeps rates this low the more likely it is that rates will have to climb higher down the road to prevent inflation. Remember how the Fed's 1% rate of 2003-2004 rose to 5.25% by 2006 and what that did to housing prices and the cost of bank funds? Yet the Fed didn't disclose the interest-rate projections for 2010 and beyond that it built into its stress test models.
On the interest-rate point, by the way, one omen was yesterday's terrible 30-year Treasury bond auction. Treasury sold $14 billion of the securities, but investors demanded yields in mid-auction that were higher than forecast and bond prices fell the most since February. The 30-year yield hit 4.3%. With trillions of dollars in budget deficits still in the pipeline -- even before health care -- Treasury may find the world keeps demanding higher yields to offset the fear of potential inflation. Fed Chairman Ben Bernanke didn't help on that score this week when he told Congress that it was too early to take liquidity out of the financial system because the economy was still too weak. By the time the economy is growing, it will be too late. Think 2004, again.
In the wake of the stress tests, the weaker banks will now have six months to raise private capital to fill the hole identified by Treasury. They'll be desperate to do so, because the alternative is that Treasury will force them to accept more public capital. This will include the conversion of Treasury's preferred stock, bought last year via the TARP, into common shares.
Under accounting rules, this gives the banks more "tangible common equity," the measure of capital favored by Treasury. Yet it provides not a penny more in actual capital to absorb losses. Meantime, the feds would suddenly own big chunks of those banks via common stock, the way they now are the largest shareholder in once-proud Citigroup. We've called this a back-door nationalization, and it means Congress looking over banker shoulders. The silver lining is that bank executives are now so appalled by this idea that they'll sell anything that moves to avoid such a fate.
As for the "stronger" banks, a major goal will be to flee as fast as possible from the TARP, also known as the Hotel Geithner. Banks can check in but it's a lot harder to check out. Treasury has set up major hurdles before a bank can escape, even if it wants to. Clearly banks at risk of failing can't be allowed to endanger the larger financial system, but banks that have adequate capital shouldn't be held hostage to the political worries of regulators.
The best that can be said about the stress tests is that they're over. Now the most urgent task is to get back to a financial system free of government guarantees, public capital and political control.
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So, here is my question. If the economy is on the way to recovery why does the FDIC need a new office with 500+ new employees in Georgia whose specific task will be "to manage receiverships and to liquidate assets from failed financial institutions" ? Keep in mind the office wont be up and running until sept which is still 5 months away and they will only be serving the south east. what do they know that we dont?
FDIC to Open a Temporary Satellite Office, Jacksonville Office will Assist with Bank Closings
The Federal Deposit Insurance Corporation (FDIC) today announced it will open a temporary satellite office in Jacksonville, Florida, to manage receiverships and to liquidate assets from failed financial institutions primarily located in the eastern states.
After conducting a competitive leasing acquisition process, the FDIC entered into a short-term agreement to lease space at 7777 Baymeadows Way in Jacksonville. The decision was based on mission needs and workload.
The new office will provide facilities for up to 500 nonpermanent staff and contractors. Staffing will be based on the workload needs of this office, based on the number of closings in the eastern states, the resulting number of receiverships, and the post-closing workload.
Throughout its history, the FDIC has used these offices to keep temporary asset resolution staff closer to the concentration of failed bank assets they oversee. As the work diminishes, the temporary satellite offices are closed.
The FDIC expects to gradually move into the space starting in mid-September 2009
http://www.fdic.gov/news/news/press/2009/pr09068.html
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What a great question, Huss wrote: "If the economy is on the way to recovery why does the FDIC need a new office with 500+ new employees in Georgia whose specific task will be "to manage receiverships and to liquidate assets from failed financial institutions" ? Keep in mind the office wont be up and running until sept which is still 5 months away and they will only be serving the south east. what do they know that we dont?"
I don't know the answer. My guess is that they build government buildings and hire hundreds because they can, probably stimulus and TARP money. If the recession bottomed, we are probably in for shaky and lethargic growth at best as the investor class is aware of an unprecedented amount of uncertainty going forward.
I posted that economist Brian Wesbury recently headlined a post 'the recession is over, no more shoes to drop' but we need a bunch of qualifiers on that. Headlines of scientists and economists are usually overblown. Click on the link, see the data, read the analysis and remember that the best forecasters don't really know the future. 'No more shoes to drop' he means we already know about the collapses of transportation, energy, housing, banking, insurance, release of terrorists, etc. etc. We are not exactly sitting on the grassy knoll looking at the shining city on the hill. Disposing of the so-called bad assets and trying to recover some value will be a major industry for some time to come. At least in the case of FDIC, most people might agree there was some proper role for government, more so than taking over the automakers, insurance companies or the healthcare sector anyway.
Here is my prediction. Recession I in this series is over and Recession II begins the day Obama and Pelosi ramp up their next attack on the private sector. They seem to be delaying tax hikes on the wealthy - I wonder why? Not because they know higher rates destroy economic growth I don't suppose. :-o But in June - next month - I wouldn't be surprised if the House of Representatives passes both a version of socialized health care and a version of CO2 cap, trade, tax and ban.
Those two freedom and enterprise killing bills along with the impending expiration of previous tax cuts should be enough to set off some kind public reaction as well as investor reaction. They will go a little slower in the senate. Red state Democrats will measure the uproar and the downturn and stake out their positions. In committee we will decide more about the future about this country than we decided with the constitution and the Revolutionary war combined. I hope I didn't understate the importance of stopping this train wreck.
In any case the next downturn is on Obama's watch and we will see how smoothly this smart man with a gift can transition our economy into communism or rescue his own career by flip flopping on his own key issues and pulling these proposals back off the table at least for a spell.
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I just dont see how they can call bottom just yet;
Fannie Mae to Tap $19 Billion in Treasury Capital
May 8 (Bloomberg) -- Fannie Mae, operating under a federal conservatorship, asked the U.S. Treasury for a $19 billion capital investment and raised the possibility that its long-term survival may be dependent on continued government funding.
Fannie Mae, which took $15.2 billion in aid on March 31, cited the “unprecedented” housing market slump and government- mandated programs that are creating “conflicts in strategic and day-to-day decision making,” according to company filings today with the Securities and Exchange Commission.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aR_Lf2hl0TJU
California could be broke by July, state official warns
Adding to the fiscal woes, the Obama administration is threatening to pull $6.8 billion in stimulus funds from California in a dispute over an earlier state budget cut. (note: the govt is threatening to pull bail out money if cali CUTS social programs)
http://www.latimes.com/news/local/la-me-california-budget-crisis8-2009may08,0,7342537.story
"Ruminations on the Latest Unemployment Figures from the Bureau of Lies and Statistics"
The unemployment figures just released by the Bureau of Labor Statistics are totally cosmetic: We lost a whole lot more than 531,000 unemployed.
First, the "seasonal adjustment", which is a black box that can tweek me into looking like Dumbo the flying elephant. They're knocking off ±65,000 workers for no clearly discernible reason.
Second, notice that the Census Bureau hired 60,000 people last month. Those workers (by definition) are temporary, and are a net cost to the economy, as they will not be adding marginal utility to any economic sector, the census being merely a social expenditure.
Those two items alone turn 530,000 new unemployed into 655,000.
http://www.nakedcapitalism.com/2009/05/guest-post-april-unemployment-figures.html
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http://formerspook.blogspot.com/2009/05/budget-cutting-101.html
WEDNESDAY, MAY 06, 2009
Budget-Cutting 101
How does the Obama Administration plan to save money? If you guessed "cutting defense," give yourself a gold star and move to the head of the budgetary class.
The Wall Street Journal reports that defense programs will absorb half of the $17 billion in planned cuts, which will be announced on Thursday. Some of the reductions have already been announced, including plans to halt production of the Air Force's F-22 stealth fighter.
The rest of the cuts will come from domestic programs, although it's unclear if the reductions will actually occur. As one administration official told the Journal, virtually all programs have a constituency, meaning that someone will fight the planned reductions.
Not that it really matters. The reductions are largely symbolic, as the WSJ explains:
Compared with the total $3.6 trillion spending plan for 2010, the proposed trims amount to one-half of 1%. Half the cuts would come from defense, especially Pentagon weapons programs already spelled out by Defense Secretary Robert Gates, such as trimming back the fleet of advanced F-22 fighter planes. The other half would come from programs that have strong support among progressive activists who cheered Mr. Obama's election. Programs targeted for elimination or consolidation include education and housing programs that Democratic aides said will have fierce advocates among traditionally Democratic constituencies.
Given that reality, it's not inconceivable that some of the domestic initiatives will be saved, forcing bean counters to look for more cuts in the defense budget. So the "50% share" for the Pentagon may well rise, as the administration looks for more ways to save money.
OMB Director Peter Orszag says the planned defense reductions include "all of those" outlined by Defense Secretary Bob Gates last month. Programs targeted for down-sizing (or elimination) include the C-17 transport, the airborne laser and the aforementioned F-22. Some analysts believe that the Air Force has been unfairly singled out for budget cuts, with ominous implications for the service and its airpower mission.
But those sorts of arguments don't get much traction. Just today, pollster Frank Luntz advised Republicans to avoid "principled arguments" in battling the White House on health care reform. Embrace the reform mantra, Luntz argued, and advocate efficiency and savings in the GOP plan.
If you can't get American voters to see the folly of socialized health care, then well-reasoned arguments supporting key defense programs stand absolutely no chance. Welcome to the ill-informed, indifferent U.S. electorate of the early 21st Century. The greatest of the "Great Unwashed." Just the kind of voters that Democrats love.
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That 17 billion does not even cover the extra 19 billion fanny mae is asking for.
http://formerspook.blogspot.com/2009/05/budget-cutting-101.html
WEDNESDAY, MAY 06, 2009
Budget-Cutting 101
How does the Obama Administration plan to save money? If you guessed "cutting defense," give yourself a gold star and move to the head of the budgetary class.
The Wall Street Journal reports that defense programs will absorb half of the $17 billion in planned cuts, which will be announced on Thursday. Some of the reductions have already been announced, including plans to halt production of the Air Force's F-22 stealth fighter.
The rest of the cuts will come from domestic programs, although it's unclear if the reductions will actually occur. As one administration official told the Journal, virtually all programs have a constituency, meaning that someone will fight the planned reductions.
Not that it really matters. The reductions are largely symbolic, as the WSJ explains:
Compared with the total $3.6 trillion spending plan for 2010, the proposed trims amount to one-half of 1%. Half the cuts would come from defense, especially Pentagon weapons programs already spelled out by Defense Secretary Robert Gates, such as trimming back the fleet of advanced F-22 fighter planes. The other half would come from programs that have strong support among progressive activists who cheered Mr. Obama's election. Programs targeted for elimination or consolidation include education and housing programs that Democratic aides said will have fierce advocates among traditionally Democratic constituencies.
Given that reality, it's not inconceivable that some of the domestic initiatives will be saved, forcing bean counters to look for more cuts in the defense budget. So the "50% share" for the Pentagon may well rise, as the administration looks for more ways to save money.
OMB Director Peter Orszag says the planned defense reductions include "all of those" outlined by Defense Secretary Bob Gates last month. Programs targeted for down-sizing (or elimination) include the C-17 transport, the airborne laser and the aforementioned F-22. Some analysts believe that the Air Force has been unfairly singled out for budget cuts, with ominous implications for the service and its airpower mission.
But those sorts of arguments don't get much traction. Just today, pollster Frank Luntz advised Republicans to avoid "principled arguments" in battling the White House on health care reform. Embrace the reform mantra, Luntz argued, and advocate efficiency and savings in the GOP plan.
If you can't get American voters to see the folly of socialized health care, then well-reasoned arguments supporting key defense programs stand absolutely no chance. Welcome to the ill-informed, indifferent U.S. electorate of the early 21st Century. The greatest of the "Great Unwashed." Just the kind of voters that Democrats love.
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Huss, I don't disagree with your point that this mess is not over. Would just add to points on econ stats: Unemployment tends to be a trailing indicator and that large job layoffs get widely publicized and hirings rarely do.
On another point, it is amazing that we have come to a point where 17 billion is chump change. If I could every man, woman and child to pay in a full dollar to support a fund, I would raise only $300 million. If I could get a full dollar from everyone who really makes any money, we are down to about $100 million. 17 Billion is 170 times that amount and still a drop in the bucket. The near term spending that needs to be cut is about $10 Trillion. To do any part of that we need to change our view government. Too bad the view of the founders is so out of date. :-(
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http://hotair.com/archives/2009/05/11/cbo-2009-deficit-50-greater-than-expected/
What could possibly go wrong???
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http://hotair.com/archives/2009/05/11/cbo-2009-deficit-50-greater-than-expected/
What could possibly go wrong???
correct me if im wrong, but the chart indicates the U.S will be over 10 trillion in the hole at the end of 10 years. A couple questions;
1- the current numbers are based on recovery starting this year which gives the govt increasing tax revenue. Most say recovery this year or even next year is unlikely. How do those numbers look if the slide continues.
2- Based on the "borrowing .50 of every dollar spent". who is going to lend the U.S 5 trillion additional dollar? considering the fed is buy u.s govt debt right now..............
3- what will happen to the U.S dollar if it is replaced as the reserve currency? what will this do to their buget projections. The IMF is already issuing reserve notes that are not linked to the U.S dollar.
I have a feeling the that chart is the best case senario and that any of the above will cause escalating layoffs and job loss which will result in further borrowing for social programs, which will result in the printing of money, which will result in inflation.
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The new new money
It's official: The government in Beijing has announced that the Yuan can now be used in international trade. Their mouthpiece for this occasion was the Industrial and Commercial Bank of China, a private entity, which made the announcement on their behalf. By the end of this year, it is expected that fully 50% of all transactions with Hong Kong will be denominated in the Yuan. In turn, Hong Kong re-exports 90% of its Chinese imports. Importer #1 is the European Union; importer #2 is the United States. Some of these countries may soon find themselves hard-pressed to earn enough Yuan to continue importing Chinese-made products.
This is only the next small step in Beijing's "policy of small steps." Already the Chinese government has ramped down its purchases of US Treasury paper, forcing the Federal Reserve to step in as the buyer of last resort. The IOU, with which the US has inundated the world, is now becoming the I-owe-me - which is not quite as impressive to those who are considering selling products to the US on credit. Instead of the funny paper, the Chinese government has started to buy up gold on the international market. The Yuan has long been in de facto use in Hong Kong, Sigapore, Kuala Lumpur, and other countries in the region, in preference to the US Dollar. In several countries it is already possible to have Yuan-denominated savings and checking accounts; in Hong Kong alone such accounts are set to exceed US$100 billion by the end of this year.
The United States and Europe have recently demonstrated their unwillingness to grant other countries a greater say in the IMF and the other organizations that govern international finance. Now Beijing can turn this combination of weakness and recalcitrance to its advantage, by quickly creating a wide coalition of countries that wish to isolate themselves from the financially untrustworthy regions of Europe and America. This is but one of many developments that those who are predicting economic recovery in the US sometime next year have chosen to ignore, but it may turn out to be one of the more important ones.
What do these major shifts in international finance portend for us mere private citizens? The implication is simple: if you think that you still have some money, let's hope that you don't mean that you have something or other denominated in the US Dollar. Or that you just wrote yourself an I-owe-me.
http://cluborlov.blogspot.com/2009/05/new-new-money.html
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http://tipstrategies.com/archive/geography-of-jobs/
Job loss time line
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http://online.wsj.com/article/SB124217336075913063.html#
Tax Increases Could Kill the Recovery
The cap-and trade levy would hit low-income earners especially hard.
By MARTIN FELDSTEIN
The barrage of tax increases proposed in President Barack Obama's budget could, if enacted by Congress, kill any chance of an early and sustained recovery.
Martin Kozlowski
Historians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.
The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.
Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.
The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.
But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.
Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.
CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.
But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.
The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.
The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.
Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.
The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.
The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America.
It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
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China's yuan 'set to usurp US dollar' as world's reserve currency
Professor Roubini, of New York University's Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the yuan's ascendance.
Known as "Dr Doom" for his negative stance, Prof Roubini argues that China is better placed than the US to provide a reserve currency for the 21st century because it has a large current account surplus, focused government and few of the economic worries the US faces.
In a column in the New York Times, Prof Roubini warns that with the proposal for a new international reserve currency via the International Monetary Fund, Beijing has already begun to take steps to usurp the greenback.
China will soon want to see the yuan included in the International Monetary Fund's special drawing rights "basket", he warns, as well as seeing it "used as a means of payment in bilateral trade."
Prof Roubini's warning followed the US government's latest economic data that showed producer prices in April experienced their biggest year-on-year drop since 1950, falling 3.7pc.
The number of Americans claiming unemployment benefit for the first time rose by 32,000 to 637,000 in the week to May 9. The increase meant the total number of people claiming benefits stood at to 6.56m, a record high for the 15th consecutive week in a row.
But neither the gloomy data, nor Prof Roubini's verdict on the greenback's future, held back the markets. The Dow Jones traded up 59.89 at 8344.78 in lunchtime trading.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5325805/Chinas-yuan-set-to-usurp-US-dollar-as-worlds-reserve-currency.html
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RealtyTrac: Record Foreclosure Activity in April
From RealtyTrac: Foreclosure Activity Remains at Record Levels in April
RealtyTrac ... today released its April 2009 U.S. Foreclosure Market Report(TM), which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 342,038 U.S. properties during the month, an increase of less than 1 percent from the previous month and an increase of 32 percent from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.
"Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level," said James J. Saccacio, chief executive officer of RealtyTrac. "Much of this activity is at the initial stages of foreclosure - the default and auction stages - while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."
emphasis added
http://www.calculatedriskblog.com/2009/05/realtytrac-record-foreclosure-activity.html
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Japanese opposition would avoid U.S. dollar bonds if elected
It is not just the Chinese making noises about the reliability of the United States as a debtor. Now, Japanese politicians are doing it too. In fact, the Democratic Party of Japan (which is not in power) have said they would not buy U.S. bonds if elected. An excerpt from a BBC story covering these comments reads as follows:
Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.
The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar.
Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.
But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.
“If it’s [in] yen, it’s going to be all right,” Mr Nakagawa said in an interview with the BBC World Service.
“We propose that we would buy [the US bonds], but it’s yen, not dollar.”
However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa’s party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party.
While the Democratic Party is unlikely to gain sway over the electorate in Japan, their comments do reflect a growing unease with the United States’ deficit spending. With dissatisfied noises coming from America’s two largest creditors, the Obama Administration’s policy options for continued reflation appear more limited. In essence, America can inflate and deficit spend at its own risk. Unfortunately, there are not very many other policy options available.
http://www.creditwritedowns.com/2009/05/japanese-opposition-would-avoid-us-dollar-bonds-if-elected.html
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Out of curiosity, how will Obama pay for his new social projects?
Government Receipts Down 34% Year over Year (Chart)
The U.S. reported the first budget deficit for April in 26 years, recording a shortfall in the month that usually sees a jump in individual tax payments before the Internal Revenue Service’s mid-month deadline.
“When the government can’t post a surplus in April, you know things are dire,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “It’s going to take a very long time until we see anything close to a balanced budget.”
Stripping out receipts ONLY, we see a whopping 34% decline from April 2008.
http://4.bp.blogspot.com/_8rpY5fQK-UQ/Sgowj1JEx1I/AAAAAAAAGuA/4EkvVCapNpI/s1600-h/receipt.png
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The next time someone trys to say Bush spent us into this mess, show them this chart.
http://1.bp.blogspot.com/_dZJ6SFB1ecE/SgnKZ_PeHYI/AAAAAAAABKM/FwuVV0PNQYk/s1600-h/Receipts+and+Outlays
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Im curious to see how obama is going to fund health care..............
Here’s what’s going on:
In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.
Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!
When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.
... What are the implications of this tanking tax revenue?
For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.
If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper. ...
Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.
That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.
alternatively, they can force the capital markets for corporate bonds and equities to vomit out the requisite funding with an end to the short squeeze and a return of the fear trade. but it seems altogether too reasonable to say that the treasury's funding demands in support of wealth transfers and balance sheet expansion are getting far ahead of the kind of cash flow funding that can be provided by household and corporate deleveraging and saving. the result has been rising rates on the long end that -- with apologies to caroline baum -- may or may not be indicative of a positive yield curve signal.
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Thanks Huss, here is a link: http://declineandfallofwesterncivilization.blogspot.com/
After the 2003 tax rate cuts we had incredible double digit growths in revenues that ended with the inauguration of the Pelosi-Obama congress promising to reverse the cuts especially on investors and employers.
Looks like we have fiscal year to date increases of 17% growth in spending not counting trillions in new future obligations along with a 24% decline in revenues! I guess the promise that the era of irresponsibility is over was just a bunch of BS.
"A budget is more than simply numbers on a page. It is a measure of how well we are living up to our obligations to ourselves and one another."
– President Barack Obama
"when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up." - But when we print it up we don't really have more money, we are just printing the word dollar on something that is really only a fifty cent piece. :-( I doubt if that is the policy that many of the supporters were supporting.
Maybe someone can help me here, but is there not a constitutional obligation of these officials to protect the value of our currency and honor our obligations??
If we were done borrowing, devaluing our currency would be a very clever trick to lower our debt. Unlike third world countries, we have borrowed at least until now in our own currency. Conversely, the day we have to borrow trillions in yuan or euros we return to third world status asking others for debt rescheduling and forgiveness. :-(
"Im curious to see how obama is going to fund health care" - Of course he is NOT going to fund it because tax rate increases we know are not how you grow revenues.
It was hard to find actual numbers. Not on a search of OMB, CBO or google... Try this: http://www.fms.treas.gov/mts/mts0409.pdf
(It would be nice if cut and paste from a pdf worked better)
Table 9. Summary of Receipts by Source, and Outlays by Function of the U.S. Government, April 2009 and Other Periods
[$ millions]
This Month, Fiscal Year to Date, Comparable Period Prior Fiscal Year
Net Receipts
Individual Income Taxes ... 136,668 566,369 747,558
Corporation Income Taxes... 14,545 70,781 171,142
Social Insurance and Retirement Receipts:
Employment and General Retirement............................................................................................ 90,985 508,833 507,153
Unemployment Insurance... 7,058 17,117 18,801
Other Retirement ... 323 2,401 2,415
Excise Taxes ... 5,642 34,343 37,130
Estate and Gift Taxes ... 3,976 16,082 18,121
Customs Duties ... 1,878 14,063 15,717
Miscellaneous Receipts ... 5,158 26,077 31,684
Total... 266,232 1,256,066 1,549,720
Net Outlays
National Defense ... 54,273 385,925 359,275
International Affairs... 4,341 21,699 16,171
General Science, Space, and Technology....................................................................................... 1,963 13,911 13,210
Energy ... -25 193 -29
Natural Resources and Environment ............................................................................................... 2,550 18,963 17,303
Agriculture ... 566 22,070 19,470
Commerce and Housing Credit... 3,520 202,359 755
Transportation ... 5,918 43,967 41,123
Community and Regional Development........................................................................................... 1,813 17,230 13,870
Education, Training, Employment and Social Services.................................................................... 7,940 53,538 52,538
Health ... 33,541 189,735 163,115
Medicare... 36,888 243,177 220,427
Income Security... 49,527 321,196 256,969
Social Security... 56,649 380,825 353,363
Veterans Benefits and Services... 8,024 54,214 48,608
Administration of Justice... 3,831 27,674 26,580
General Government ... 1,261 11,989 9,103
Net Interest... 19,223 114,047 145,301
Undistributed Offsetting Receipts ... -4,663 -64,352 -53,962
Total... 287,139 2,058,360 1,703,191
It all reminds me of a personal story from more than a dozen years ago. I was at a friend's home for a party. He is a conservative, his wife's politics I don't know, but they met at a liberal twin cities college and these were their friends. A gal talking was the daughter of the Minneapolis congressman, Kieth Ellison's predecessor (name withheld) who went on tho become state senator of south mpls and a failed Dem. candidate for Lt. Governor.
She explained in the sweetest most genuine way that the difference between Democrats and Republicans is that Democrats care mostly about others while Republicans care mostly about themselves. I waited for my chance to jump in and tried so hard not to say anything that would get me thrown out before the food was served. I replied that 'Republicans know how to load the wagon and Democrats know how to unload the wagon so we really need BOTH!' She looked stunned and said she never heard anything like that before.
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http://hotair.com/archives/2009/05/19/california-tax-revolt-what-next/
California tax revolt: What next?
POSTED AT 8:40 AM ON MAY 19, 2009 BY KARL
The Los Angeles Times claims that the campaign over six state budget propositions on today’s ballot in California ended with a whimper, and seeks to downplay the expected result by predicting a low turnout. But yesterday was more like the calm before the storm.
Tonight’s results will gauge what polls suggest is voter fury over the failure of the Republican governor and the Democratic-controlled Legislature to balance the state’s books.
As Californians struggle with joblessness, home foreclosures and sharp losses in the stock market, the state has raised taxes, cut spending and borrowed to fix a $42-billion shortfall — and still remains more than $15 billion shy of a balanced budget.
If voters reject Propositions 1C, 1D and 1E — the three chief money-raisers on Tuesday’s special election ballot — the shortfall will grow to $21 billion.
Gov. Arnold Schwarzenegger and his Democratic allies trotted out the usual human shields in this fight — kindergarteners, firefighters and policemen, nurses, etc. They outspent their opponents by seven-to-one. None of it worked. Although the opposing sides here did not always follow partisan lines (e.g., the SEIU opposes the initiatives), a recent Field Poll showed 72% of voters agreeing that rejecting the measures “would send a message to the governor and the state legislature that voters are tired of more government spending and higher taxes.”
In the face of expected defeat, Schwarzenegger has fled cross-country to Washington, DC, to listen to Pres. Obama talk about new federal tailpipe emissions. There is even more of a metaphor in the trip than the obvious punchline, as California’s future is likely to be found in DC. California Treasurer Bill Lockyer has already asked Treasury Secretary Timmy Geithner to backstop a wave of short-term borrowing California will need to undertake this summer. Indeed, the Busness Insider notes that the yield on California debt has already been shrinking:
We’d say that the market is probably also pricing in the possibility that Barney Frank will get his way and we’ll have a federal backstop of all muni debt soon enough. Even without a formal backstop, we think it’s unlikely that the Obama administration and a Democrat controlled Capitol Hill would let California default.
This is another way that we’ve broken the signalling function of the credit markets, which no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions.
This is more of the uncertainty that undermines economic recovery. But an administration running auto companies for the benefit of the UAW and its political viability in the Rust Belt undoubtedly considers the Golden State “too big to fail.” After all, the New York Daily News headline would write itself: “Obama to California: Drop Dead.”
However, bailouts are unpopular. Many Americans will chafe just as much at the prospect of paying to bail out California’s decades of inept govenment as they do at paying to bail out GM’s decades of inept management. Obama would bail out California to hold onto those electoral votes, but he will have to worry about how many he loses in the process.
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Bye-Bye Dollar? Brazil and China eye plan to axe dollar
(FT) Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.
The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.
Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.
An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.
“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”
Henrique Meirelles and Zhou Xiaochuan, governors of the two countries’ central banks, were expected to meet soon to discuss the matter, the official said.
Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.
In September, Brazil and Argentina signed an agreement under which importers and exporters in the two countries may make and receive payments in pesos and reals, although they may also continue to use the US dollar if they prefer.
An aide to Mr Lula da Silva on his visit to Beijing said the political will to enact a similar deal with China was clearly present. “Something that would have been unthinkable 10 years ago is a real possibility today,” he said. “Strong currencies like the real and the renminbi are perfectly capable of being used as trade currencies, as is the case between Brazil and Argentina.”
Economists have argued that while the SDR plan is unfeasible now, bilateral deals between Beijing and its trading partners could act as pieces in a jigsaw designed to promote wider international use of the renminbi. Any move to make the renminbi more acceptable for international trade, or to help establish it as a regional reserve currency in Asia, could enhance China’s political clout around the world. full article and much more: http://www.ft.com/cms/s/0/996b1af8-43ce-11de-a9be-00144feabdc0.html
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The national news media is being surprising silent about the fate Gov. Ahhnolds' ballot initiatives, though I hear they were resoundingly defeated. Any of you left coast types care to fill in the blanks?
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Arnold lost his initiative efforts a few years ago. This was a true shame. His effort to end gerrymandering would have been profoundly positive for the political process. Instead we continue the ossification of Sacramento, legislators have lockholds on their respective districts. He also lost his battle with the unions. So he became kittywhipped and started acting/voting/talking like his wife.
IIRC real spending has increased 40% during Arnold's term!!!
We vote for seriously stupid stuff (e.g. the super train between LA and SF) all the time, can't vote out the bums, and so now we have this.
To punish us for our temerity, the first thing the ruling class will do will be to cut schools, and release criminals. However, the high speed rail line, which makes no fcuking sense whatsoever but will cost billions of dollars, well, that will stay.
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Why Government Can't Run a Business
Politicians need headlines. Executives need profits.
By JOHN STEELE GORDON
The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.
In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.
When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.
Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.
These examples are not aberrations; they are typical of how governments run enterprises. There are a number of reasons why this is inherently so. Among them are:
1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.
And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?
2) Politicians need headlines. And this means they have a deep need to do something ("Sen. Snoot Moves on Widget Crisis!"), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn't produce favorable headlines and, indeed, often produces the opposite ("Sen. Snoot Fails to Move on Widget Crisis!").
3) Governments use other people's money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.
So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.
But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That's why public-service employees now often have much more generous benefits than their private-sector counterparts. And that's why the New York City public school system had an administrator-to-student ratio 10 times as high as the city's Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.
4) Government does not tolerate competition. The Obama administration is talking about creating a "public option" that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don't know of one.
5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.
When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called "postalization," a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.
Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.
6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.
But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.
7) Government is regulated by government. When "postalization" of the nation's phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that "all monopolies should be regulated. Government ownership would be an unregulated monopoly."
It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.
But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses."
Capitalism isn't perfect. Indeed, to paraphrase Winston Churchill's famous description of democracy, it's the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.
Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).
http://online.wsj.com/article/SB124277530070436823.html
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Brazil and China eye plan to axe dollar
Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.
The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.
Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.
An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.
“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”
Henrique Meirelles and Zhou Xiaochuan, governors of the two countries’ central banks, were expected to meet soon to discuss the matter, the official said.
Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Mr Zhou said the goal would be to create a reserve currency “that is disconnected from individual nations”.
http://www.ft.com/cms/s/0/996b1af8-43ce-11de-a9be-00144feabdc0.html?nclick_check=1
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Russia Sheds Dollars for Euros (Chart on page)
The euro's share in Russia's forex reserves, the world's third-largest, overtook that of the dollar last year as the country pressed on with a gradual diversification, the Central Bank's annual report showed.
The euro's share increased to 47.5 percent as of Jan. 1 from 42.4 percent a year ago, according to the report, which was submitted to the State Duma on Monday.
The dollar's share fell to 41.5 percent from 47 percent at the start of 2008 and 49 percent at the start of 2007.
As Brad points out:
It is often asserted that the dollar is the global reserve currency. It would be more accurate to say the dollar is the globe’s leading reserve currency.* The dollar is the dominant reserve currency in Northeast Asia. And the two big economies of Northeast Asia both happen to both hold far more reserves than either really needs. The dollar is also the reserve currency of the Gulf. And Latin America.**
But the dollar isn’t the dominant reserve currency along the periphery of the eurozone. Most European countries that aren’t part of the euro area now keep most of their reserves in euros. That makes sense. Most trade far more with Europe than the US – and some, especially in Eastern Europe, ultimately want to join the eurozone.
http://econompicdata.blogspot.com/2009/05/russia-sheds-dollars-for-euros.html
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Brazil Turns to China to Help Finance Oil Projects
SÃO PAULO -- Brazil's oil industry is turning to China for cash in the latest sign of how Beijing's clout is growing amid the global economic downturn.
Brazilian President Luiz Inácio Lula da Silva was set to arrive in Beijing Monday to meet with Chinese President Hu Jintao, who is expected to unleash billions of dollars of credit to help Brazil exploit its massive oil reserves. Brazil will return the favor by guaranteeing oil shipments to Chinese companies.
The nations are being thrust together by the global financial crisis. Brazil's state-controlled oil giant, Petroleo Brasileiro SA, wants to spend $174 billion over the next five years to elevate Brazil into the major leagues of oil-producing nations. With international capital markets on life support, China is among the few remaining sources of cash.
Petrobras, as the company is known, is turning to China at a time when China's appetite for raw materials has lifted economies across commodity-rich Latin America, blunting the impact of the global downturn. In March, China passed the U.S. as Brazil's biggest trade partner.
http://online.wsj.com/article/SB124259318084927919.html#mod=todays_us_page_one
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U.S. Dollar No Longer Russia Primary Reserve Currency...
This is a big deal. Today’s action with falling equities, falling bond prices, and a falling dollar (with sharply rising gold prices in dollar terms) pretty much boxes Bernanke and little Timmy Geithner in.
The American way of life is about to change whether we like it or not.
Notice that no shots were fired, no one sent up a balloon saying “Russia no longer uses the dollar as a reserve currency!” No, it happened slowly and subtly. (ht Comrade)
Russia Dumps the U.S. Dollar for Euro as Reserve Currency
The US dollar is not Russia’s basic reserve currency anymore. The euro-based share of reserve assets of Russia’s Central Bank increased to the level of 47.5 percent as of January 1, 2009 and exceeded the investments in dollar assets, which made up 41.5 percent, The Vedomosti newspaper wrote.
The dollar has thus lost the status of the basic reserve currency for the Russian Central Bank, the annual report, which the bank provided to the State Duma, said.
In accordance with the report, about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.
The dollar share had increased to 49 percent and remained so as of October 1. The euro share made up 40 percent. The rest of investments were based on the British pound, the Japanese yen and the Swiss frank.
The report also said that the reserve currency assets of the Russian Central Bank were cut by $56.6 billion. The losses mostly occurred at the end of the year, when the Central Bank was forced to conduct massive interventions to curb the run of traders who rushed to buy up foreign currencies. The currency assets of the Central Bank had grown to $537.6 billion by October 2008. Therefore, the index dropped by almost $133 billion within the recent three months.
The majority of Russian companies, banks and most of the Russian population started to purchase enormous amounts of foreign currencies at the end of 2008. The dollar gained 16 percent and the euro 13.5 percent over the fourth quarter. The demand on the US dollar was extremely high, and the Central Bank was forced to spend a big part of its dollar assets, experts say.
The change of the structure of the currency portfolio of the Bank of Russia has not affected the official peg of the dual currency basket, which includes $0.55 and 0.45 EUR.
The investments of the Bank of Russia in state securities of foreign issuers have been considerably increased, the report said. About a third of Russia’s international reserves are based on US Treasury bonds.
Russia became one of the largest creditors of the US administration last year, the US Department of the Treasury said. Russia increased its investments in the debt securities of the US Treasury from $32.7 billion as of December 2007 to $116.4 billion as of December 2008.
If that little development doesn’t bother you, then how about the possibility of the U.S. losing her AAA credit rating?:
Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone
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Couldn't agree more:
OBAMA’S CREDIT CARD REFORM IS A FRAUD
By Dick Morris And Eileen McGann 05.22.2009 The widely heralded credit card reform legislation making its way through Congress is a sellout to the credit card companies. Obama has proposed and Congress has passed a series of minor reforms that deal with the fringes of the problem - late billings, retroactive interest rate hikes, misapplication of payments and such - but fail to reform the most basic offense of the companies: their usury.
Congress explicitly rejected any limitation on the interest rate credit card companies can charge. It remains perfectly legal for them to charge rates that would make a loan shark blush.
In our book Fleeced, we explain how, until 1979, credit card interest was subject to usury limits of the various states. But the Supreme Court emasculated these limits by ruling that the state of the lender, not of the borrower, had the sole power to legislate interest rate limits. South Dakota swiftly jumped into the void the Court created, eliminating any usury limits. All the credit card companies moved there and took advantage of the regulatory vacuum to hike up their rates to unconscionable levels.
Competition can do nothing to force down rates since 90% of the credit cards are issued by a handful of companies. And states are paralyzed when it comes to regulating rates.
It is up to Congress to act. Yet the credit card companies’ massive campaign donations succeeded in buying off enough Democrats and virtually all the Republicans to kill any limits on interest rates. So companies can continue to charge basic rates of 18 percent and then up to 30 percent as punishment for minor offenses like being a few days late in making payments.
But Obama and his Democratic allies are loudly proclaiming their success in fighting for the consumer despite their failure to use their majorities to afford any real protection form usurious interest rates.
Congress should have legislated a ceiling on regular interest rates limiting them to five points above prime and on punitive rates requiring them to be no more than ten points above prime. But Obama and the Democrats (and, of course, the Republicans) caved into the special interests and left out any interest rate controls.
The high rates charged by credit card companies obviously do a great deal to impede consumer spending and drive families into bankruptcy. The average credit card balance for those who have such debt is over $13,000. A 30 percent interest rate means more than $300 per month in interest payments alone!
It is cruel to see Obama offering the illusion of hope for credit card victims while denying them real relief.
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Geithner Vows to Cut U.S. Deficit on Rating Concern (Update2)
By Robert Schmidt
May 22 (Bloomberg) -- Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.
“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.
The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.
Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”
The benchmark 10-year Treasury yield jumped 17 basis points to 3.36 percent yesterday and was unchanged as of 12:18 p.m. in London. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33 yesterday. The dollar tumbled 0.5 percent today to $1.3957 per euro after a 0.8 percent drop yesterday.
Gross’s Warning
Gross said in an interview yesterday on Bloomberg Television that while a U.S. sovereign rating cut is “certainly nothing that’s going to happen overnight,” markets are “beginning to anticipate the possibility.” Nobel Prize-winning economist Paul Krugman, speaking in Hong Kong today, nevertheless argues it’s “hard to believe” the U.S. would ever default.
Britain’s AAA rating was endangered when Standard & Poor’s yesterday lowered its outlook on the nation’s grade to “negative” from “stable,” citing a debt level approaching 100 percent of U.K. GDP.
It’s “critically important” to bring down the American deficit, Geithner said.
In its latest budget request, the administration said it expects the deficit to drop to 8.5 percent of GDP next year, then to 6 percent in 2011. Ultimately, it forecasts deficits that fluctuate between 2.7 percent and 3.4 percent between 2012 and 2019.
Early Stages
Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.
The Treasury chief said it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”
“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. While “these early signs of stability are very important” this is “still a very challenging period for businesses and families across the United States,” he said.
Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released yesterday. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.
As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.
Municipal Bonds
Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.
The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.
Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.
The municipal bond markets are “starting to find some new balance and equilibrium,” he said.
To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.
Last Updated: May 22, 2009 07:20 EDT
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http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html
Exploding debt threatens America
John Taylor
Published: May 26 2009 20:48 | Last updated: May 26 2009 20:48
Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up.
Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.
“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.
I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?
Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.
The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.
Why might Washington sleep through this wake-up call? You can already hear the excuses.
“We have an unprecedented financial crisis and we must run unprecedented deficits.” While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times. The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits.
“But we will cut the deficit in half.” CBO analysts project that the deficit will be the same in 2019 as the administration estimates for 2010, a zero per cent cut.
“We inherited this mess.” The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?
The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.
The good news is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one.
The writer, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of ‘Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis’
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http://hotair.com/archives/2009/05/27/irs-revenues-dropping-rapidly/
Giant sucking sound.
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Wealth and savings destroyed and federal revenues down 34% (?) but reassuring to know income disparity is lessening.
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Geithner to DeMint: Bailouts may never end, no exit plans...(Video)
In 1994, 10 percent of American pigs lived out their brief lives in vast factory farms. Only seven years later, in 2001, 72 percent did. The percentage is even higher today.
It's now known the virus that caused the swine flu outbreak in Mexico is a direct descendant of one that was first identified on an industrial-scale pig-raising facility in North Carolina in 1998.
Human beings were hardly prey to any severe epidemic diseases at all until they started domesticating animals around 10,000 years ago. Hunter-and-gatherer groups of a 100 or less were a poor target for diseases that killed their hosts fast, for they would quickly run out of potential hosts and die off themselves.
The giant corporations that drove most small hog-breeders out of business in the United States are now active all over the world. They are the ideal environment to maximize new mutations among diseases.
Just like entering a war with no exit plan, government "involvement" in private enterprise will prove to be just as disastrous, if not more so.
In fact, this is truly nation changing/ending material. What other downturn in our history has seen such wholesale buying and propping of “private” enterprise? None, and thus we are setting sail on a path that has not be traveled before, one that already has changed our nation. The effects of which will be permanent, thus no exit plan required (LOL).
What Geithner describes here is NOT just a rolling over of funds, but if payback is received and given to the “general fund” (i.e. SPENT), and they continue to dole out the “headroom” amount up to the $700 billion cap, then that makes the $700 billion TARP A POTENTIALLY INFINITE SUM. That’s no roll-over he’s describing there Senator, wake the heck up!
http://economicedge.blogspot.com/2009/05/geithner-to-demint-bailouts-may-never.html
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http://bloomberg.com/apps/news?pid=20601087&sid=aIeLg1djbBps&refer=home
U.S. Inflation to Approach Zimbabwe Level, Faber Says (Update2)
By Chen Shiyin and Bernard Lo
May 27 (Bloomberg) -- The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.
Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.
“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”
Action Economics is predicting inflation of minus 0.4 percent in the U.S. this year, with prices increasing by 1.8 percent and 2 percent in 2010 and 2011, respectively, Cohen said.
Near Zero
The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.
Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.
The global economy won’t return to the “prosperity” of 2006 and 2007 even as it rebounds from a recession, Faber said.
Equities in the U.S. won’t fall to new lows, helped by increased money supply, he said. Still, global stocks are “rather overbought” and are “not cheap,” Faber added.
Faber still favors Asian stocks relative to U.S. government bonds and said Japanese equities may outperform many other markets over a five-year period. “Of all the regions in the world, Asia is still the most attractive by far,” he said.
Gloom, Doom
Faber, the publisher of the Gloom, Boom & Doom report, said on April 7 stocks could fall as much as 10 percent before resuming gains. The Standard & Poor’s 500 Index has since climbed 9 percent.
Faber, who said he’s adding to his gold investments, advised buying the precious metal at the start of its eight-year rally, when it traded for less than $300 an ounce. The metal topped $1,000 last year and traded at $949.85 an ounce at 12:50 p.m. Hong Kong time. He also told investors to bail out of U.S. stocks a week before the so-called Black Monday crash in 1987, according to his Web site.
To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Bernard Lo in Hong Kong at blo2@bloombeg.net
Last Updated: May 27, 2009 00:54 EDT
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I would love to see a serious analysis of recent velocity number and a comparison of them to other periods , , ,
Anway, here's this:
The Week /The Incredibly Uneven Recovery
~~~~~~
Rich Karlgaard, Forbes.com Digital Rules (5/26/09): Prior to this
recession, the most notable feature of the late 20th/early 21st century
economy was its volatility. The silicon chip, the Internet and globalism
were accelerants to the renaissance of entrepreneurial capitalism that
began in the late 1970s. Around the world, the storyline was familiar. New
products, services, distribution paths and business models would appear
out of nowhere and cause damage to the old and slow.
The global consultant, McKinsey & Co., summarized this effect in a famous
2005 paper called "Extreme Competition" (published in McKinsey Quarterly).
"Extreme Competition" said top companies, across all industries, faced a
20% to 30% probability of falling out of leadership in a five-year period.
The chance of toppling from the top ranks had tripled in a generation.
Will this pace of disruption and churn continue during the recession and
recovery? I think so. It is tempting to see a recession as a yellow
caution flag that slows all cars in the field. But in fact, recessions
tend to shake out the old, slow and bloated that masked their decline in
flusher times. The 1973-74, 1980 and 1982 recessions dealt death blows to
the incoherent conglomerates created during the 1960s. The 1990-91
recession killed off the minicomputer industry and nearly did in IBM. The
recession of 2007-09 has shredded the Michigan auto industry. Big city
dailies are falling everywhere. Were they killed by the recession or
Craigslist? (By both.)
Recovery from this recession is likely to be weak. Rising oil prices
amidst increasing supply and falling demand is proof of U.S. dollar
weakness and portends stagflation. Real growth for the American economy
when recovery starts will be in the 1% to 2% range, instead of the usual
3%. It will be the 1970s again.
But remember: GDP growth is an aggregate number. Peel back this pedestrian
top line figure, and what you'll see is a jagged landscape of booms and
busts. Some companies, industries, cities, regions and skill sets were
never hurt much and will experience a robust recovery. Others will be
mired in permanent depression.
As one example, the New York Times columnist, Bob Herbert, points out the
disproportionate problems of uneducated young males: "The Center for Labor
Market Studies is at Northeastern University in Boston. A memo that I
received a few days ago from the center's director, Andrew Sum, notes that
'no immediate recovery of jobs' is anticipated, even if the recession
officially ends, as some have projected, by next fall
The memo said: 'Since unemployment cannot begin to fall until payroll
growth hits about 1%--and payroll growth will not hit 1% until [gross
domestic product] growth hits at least 2.5% to 3%--we may not see any
substantive payroll growth until late 2010 or 2011, and unemployment could
rise until that time.'
"We've already lost nearly 5.7 million jobs in this recession. Those
losses, the center says, 'have been overwhelmingly concentrated among male
workers, especially among men under 35.'"
As another example, today's Wall Street Journal has a fascinating tale of
two Michigan cities, Ann Arbor and Warren: "The divide between Ann Arbor,
with a population of 116,000, and Warren, population 126,000, is large and
widening. Ann Arbor's unemployment rate of 8.5% in March trailed the
nationwide rate of 9% and was well below Michigan's overall rate of 13.4%,
based on nonseasonally adjusted figures. By contrast, Warren's
unemployment rate of 17.3% is among the highest in the state. The average
family income in Ann Arbor was $106,599 in 2007, compared with $69,193
nationally and $60,813 in Warren.
"That economic gulf wasn't always there. In 1979, the average family in
Warren made $28,538 annually, not much below Ann Arbor's average of
$29,840. But in the past 30 years, the U.S. economy has undergone a
sweeping transformation that has benefited cities like Ann Arbor and hurt
manufacturing hubs like Warren.
"Warren is suffering from its reliance on the auto industry.
"As transportation and communication costs fell, and countries like Japan
and, now, China, increased their manufacturing capability, Michigan's
advantages have faded. Those same forces of globalization benefited
educated workers--an area where Michigan largely fell short.
The science fiction writer, William Gibson, likes to say: "The future is
already here--it is just unevenly distributed."
Likewise, the economic recovery has already started. But its distribution
will be highly uneven.
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American capitalism gone with a whimper
27.04.2009 Pravda.Ru
http://english.pravda.ru/opinion/col...n_capitalism-0
It must be said, that like the breaking of a great dam, the American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.
True, the situation has been well prepared on and off for the past century, especially the past twenty years. The initial testing grounds was conducted upon our Holy Russia and a bloody test it was. But we Russians would not just roll over and give up our freedoms and our souls, no matter how much money Wall Street poured into the fists of the Marxists.
Those lessons were taken and used to properly prepare the American populace for the surrender of their freedoms and souls, to the whims of their elites and betters.
First, the population was dumbed down through a politicized and substandard education system based on pop culture, rather then the classics. Americans know more about their favorite TV dramas then the drama in DC that directly affects their lives. They care more for their "right" to choke down a McDonalds burger or a BurgerKing burger than for their constitutional rights. Then they turn around and lecture us about our rights and about our "democracy". Pride blind the foolish.
Then their faith in God was destroyed, until their churches, all tens of thousands of different "branches and denominations" were for the most part little more then Sunday circuses and their televangelists and top protestant mega preachers were more then happy to sell out their souls and flocks to be on the "winning" side of one pseudo Marxist politician or another. Their flocks may complain, but when explained that they would be on the "winning" side, their flocks were ever so quick to reject Christ in hopes for earthly power. Even our Holy Orthodox churches are scandalously liberalized in America.
The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been a record setting, not just in America's short history but in the world. If this keeps up for more then another year, and there is no sign that it will not, America at best will resemble the Wiemar Republic and at worst Zimbabwe.
These past two weeks have been the most breath taking of all.
First came the announcement of a planned redesign of the American Byzantine tax system, by the very thieves who used it to bankroll their thefts, loses and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more then ordinary street thugs, in comparison. Yes, the Americans have beat our own thieves in the shear volumes. Should we congratulate them?
These men, of course, are not an elected panel but made up of appointees picked from the very financial oligarchs and their henchmen who are now gorging themselves on trillions of American dollars, in one bailout after another. They are also usurping the rights, duties and powers of the American congress (parliament). Again, congress has put up little more then a whimper to their masters.
Then came Barack Obama's command that GM's (General Motor) president step down from leadership of his company. That is correct, dear reader, in the land of "pure" free markets, the American president now has the power, the self given power, to fire CEOs and we can assume other employees of private companies, at will. Come hither, go dither, the centurion commands his minions.
So it should be no surprise, that the American president has followed this up with a "bold" move of declaring that he and another group of unelected, chosen stooges will now redesign the entire automotive industry and will even be the guarantee of automobile policies. I am sure that if given the chance, they would happily try and redesign it for the whole of the world, too. Prime Minister Putin, less then two months ago, warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster. Apparently, even though we suffered 70 years of this Western sponsored horror show, we know nothing, as foolish, drunken Russians, so let our "wise" Anglo-Saxon fools find out the folly of their own pride.
Again, the American public has taken this with barely a whimper...but a "freeman" whimper.
So, should it be any surprise to discover that the Democratically controlled Congress of America is working on passing a new regulation that would give the American Treasury department the power to set "fair" maximum salaries, evaluate performance and control how private companies give out pay raises and bonuses?
Senator Barney Franks, a social pervert basking in his homosexuality (of course, amongst the modern, enlightened American societal norm, as well as that of the general West, homosexuality is not only not a looked down upon life choice, but is often praised as a virtue) and his Marxist enlightenment, has led this effort. He stresses that this only affects companies that receive government monies, but it is retroactive and taken to a logical extreme, this would include any company or industry that has ever received a tax break or incentive.
The Russian owners of American companies and industries should look thoughtfully at this and the option of closing their facilities down and fleeing the land of the Red as fast as possible. In other words, divest while there is still value left.
The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker.
Stanislav Mishin
The article has been reprinted with the kind permission from the author and originally appears on his blog, Mat Rodina
© 1999-2009. «PRAVDA.Ru». When reproducing our materials in whole or in part, hyperlink to PRAVDA.Ru should be made. The opinions and views of the authors do not always coincide with the point of view of PRAVDA.Ru's editors.
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Nothing hurts worse than when Pravda actually tells the truth.
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Here is something from the Oakland Press. :x
By Jack Hoogendyk
Guest Opinion
Michigan, through its Department of Environmental Quality (DEQ) is one of only two states in the union that regulates wetlands with a state agency rather than through the U.S. Army Corps of Engineers.
This has been a problem, because the state guidelines are much more strict than the federal guidelines. Additionally, the DEQ has proven to be arbitrary and capricious in its decision making and has often caused long, unnecessary delays in approving permits.
While the concerns about over-regulation by a state agency are valid, they may be rendered moot by recent efforts in Congress.
U.S. Sen. Russ Feingold has introduced a bill with 23 sponsors including Senators Carl Levin and Debbie Stabenow.
Senate Bill S787 is titled, “To amend the Federal Water Pollution Control Act to clarify the jurisdiction of the United States over waters of the United States.”
Notice they start the description with the words “pollution control.” That makes it sound caring and good, doesn’t it?
The fact is, this legislation will put ALL surface waters in the United States of America under congressional jurisdiction.
The bill language has a couple of key phrases in it. The first changes the definition of what is under congressional jurisdiction. Ever since the Commerce Clause of the Constitution and several test cases in the Supreme Court, Congress has had jurisdiction over navigable waters. The meaning of that word has been argued, but according to precedent and legal definition, navigable includes anything you can get a canoe down, or anything that is connected by water to the same.
No matter, because under S787, the word navigable is stricken, which means now ALL surface water is under congressional jurisdiction.
Additionally, in case there were any question of state’s rights, the bill also states that this applies to interstate and intrastate waters. That means there is no state sovereignty over waters within that state’s boundaries.
And, if you have any doubt as to what the congressional definition of “waters” is, they spell that out, too. It includes, “all waters subject to the ebb and flow of the tide, the territorial seas, and all interstate and intrastate waters and their tributaries, including lakes, rivers, streams (including intermittent streams), mudflats, sandflats, wetlands, sloughs, prairie potholes, wet meadows, playa lakes, natural ponds, and all impoundments of the foregoing, to the fullest extent that these waters, or activities affecting these waters, are subject to the legislative power of Congress under the Constitution.”
The bottom line is this: Congress is taking over all the water.
If the Obama administration and Congress are anything like this state’s governor and her administration, you will see free trade and commerce come to a virtual standstill. Manufacturing, especially, will come to a screeching halt.
Water is an essential resource in the manufacture of virtually any consumable or durable good. Without ready access, manufacturers will be stifled in their attempts to create new products for market and the jobs that go with them.
Jack Hoogendyk is a former state legislator and executive director of CIVPRO, a nonprofit property rights organization based in Michigan
Now mind you Michigans DEQ water quality standards are much stricter than the EPA . So this isn't about pollution this is about controll over the states and manufacturing.Also this will then enable the feds to start draining the great lakes and pumping the water else where which every Michigander is opposed to except the sellout obamites levin and stabenow.
Boyo
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http://gatewaypundit.blogspot.com/2009/06/china-on-geithner-it-would-be-helpful.html
TEOTWAWKI
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Missing Milton: Who Will Speak For Free Markets?
By STEPHEN MOORE
With each passing week that the assault against global capitalism continues in Washington, I become more nostalgic for one missing voice: Milton Friedman's. No one could slice and dice the sophistry of government market interventions better than Milton, who died at the age of 94 in 2006. Imagine what the great economist would have to say about the U.S. Treasury owning and operating several car brands or managing the health-care industry. "Why not?" I can almost hear him ask cheerfully. "After all, they've done such a wonderful job delivering the mail."
I would rank Milton Friedman, next to Ronald Reagan, as the greatest apostle for freedom and free markets in the second half of the 20th century. I used to find great joy in visiting him and his wife and co-author, Rose, at their home in San Francisco. We'd have dinner at their favorite Chinese restaurant and chat about the latest silliness out of Washington.
I've been thinking a lot lately of one of my last conversations with Milton, who warned that "even though socialism is a discredited economic model and capitalism is raising living standards to new heights, the left intellectuals continue to push for bigger government everywhere I look." He predicted that people would be seduced by collectivist ideas again.
He was right. In the midst of this global depression, rotten ideas like trillion-dollar stimulus plans, nationalization of banks and confiscatory taxes on America's wealth producers are all the rage. Meanwhile, it is Milton Friedman and his principles of free trade, low tax rates and deregulation that are standing trial as the murderers of global prosperity.
When the University of Chicago wanted to create a $200 million Milton Friedman Institute last year, Sen. Bernie Sanders of Vermont, an avowed socialist and Chicago alum, fumed that "Friedman's ideology caused enormous damage to the American middle class and to working families here and around the world."
At academic conferences it has been open season on Friedman and his philosophy of limited government. Joseph Stiglitz, a Nobel Prize winner, says that Friedman's "Chicago School bears the blame for providing a seeming intellectual foundation" for the now presumably discredited "idea that markets are self-adjusting and the best role for government is to do nothing." University of Texas economist James Galbraith is even more dismissive: "The inability of Friedman's successors to say anything useful about what's happening in financial markets today means their influence is finished," he says. And pop author Naomi Klein says triumphantly: "What we are seeing with the crash on Wall Street . . . should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology." One left-wing group is even distributing posters in Washington and other cities that proclaim: "Milton Friedman: Proud Father of Global Misery."
The myth that the stock-market collapse was due to a failure of Friedman's principles could hardly be more easily refuted. No one was more critical of the Bush spending and debt binge than Friedman. The massive run up in money and easy credit that facilitated the housing and credit bubbles was precisely the foolishness that Friedman spent a lifetime warning against.
A few scholars are now properly celebrating the Friedman legacy. Andrei Shleifer, a Harvard economics professor, has just published a tribute to Friedman in the Journal of Economic Literature. He describes the period 1980-2005 as "The Age of Milton Friedman," an era that "witnessed remarkable progress of mankind. As the world embraced free market policies, living standards rose sharply while life expectancy, educational attainment, and democracy improved and absolute poverty declined."
So the Bernie Sanders crowd has things exactly backward: Milton's ideas on capitalism and freedom did more to liberate humankind from poverty than the New Deal, Great Society and Obama economic stimulus plans stacked on top of each other.
At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: "You don't understand. This is a jobs program." To which Milton replied: "Oh, I thought you were trying to build a canal. If it's jobs you want, then you should give these workers spoons, not shovels."
But in the energy industry today we are trading in shovels for spoons. The Obama administration wants to power our society by spending three or four times more money to generate electricity using solar and wind power than it would cost to use coal or natural gas. The president says that this initiative will create "green jobs."
Milton knew how to create real wealth-producing jobs. Once, when he visited India in the early 1960s, John Kenneth Galbraith, the U.S. ambassador, welcomed him by only half-joking, "I can think of no place where your free-market ideas can do less harm than in India." Talk about irony. India has adopted much of the Friedman free-market model and has moved nearly 200 million people out of destitution and despair.
I recently phoned Rose Friedman and asked her what she thought about the attacks on her husband. She was mostly dismayed at how far off-course our country has veered under President Obama. "Is this the death of Milton's ideas?" I hesitantly asked. "Oh no," she replied, "But it is the death of common sense."
Mr. Moore is senior economics writer for the Wall Street Journal editorial page .
http://online.wsj.com/article/SB124355131075164361.html
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http://hotair.com/archives/2009/06/02/video-michael-moore-pretty-darned-excited-about-owning-a-car-company/
Any Obama voter out there want to explain how this will work?
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I think this year has been the straw that broke the camels back for my familys manufacturing firm. We moved our office off shore and have sent over 1 million dollars worth of quotes to india, China and the Republic of Georgia this month alone. I almost felt guilt when i found out that the work we pulled will probably cause a smallish machine shop to go under.......... If it doesnt have to be made in Canada or the U.S it will go off shore. Im tierd of unions, taxes and people with an entitlement mentality. Going forward im going to take care of me and mine, let it burn.
After what Obama did to the bond holders of GM and Chrysler, hard working men in their 50's and 60's have litterally watched thier retirments be disolved and taken by the govt for themselves and the "worker".................. what the hell.
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Geopolitical Diary: The Significance of GM's Bankruptcy
June 2, 2009
U.S. auto giant General Motors filed for Chapter 11 bankruptcy on Monday, ending a period of U.S. dominance in automotive manufacturing that began when the first Ford Model T rolled off the assembly line in Detroit. In the United States and around the world, GM’s collapse is being viewed as yet another harbinger of doom — at least the third horseman of the apocalypse (right behind the collapse of Lehman Bros. and mounting government deficits) foretelling the end of U.S. hegemony — and as “proof” that American manufacturing capacity and industrial prowess is rotten to the core.
The collapse of GM is certainly not to be taken lightly, and its political, social and economic ramifications are serious. The U.S. “Rust Belt” has been rusting since essentially the late 1960s, and the collapse of what was once a manufacturing powerhouse certainly will erode it further. Some 21,000 employees (around 34 percent of GM’s total work force) are looking at layoffs. The 780,000-plus workers in the automotive parts industry are facing uncertainty, as their industry will be affected by the collapse. Then there are the serious effects that the end of GM will have for businesses that are not related to, but nevertheless dependent on, the automotive sector. According to estimates from the auto parts industry, 4.7 jobs — in everything from catering to regional banks — are created for every one job in the motor vehicle parts industry.
This is undoubtedly a social and economic concern. From a geopolitical perspective, however, it is far from upsetting the main foundations of U.S. hegemony.
First, American industrial prowess remains unrivaled in the world. In 2006, U.S. industrial production equaled $2.8 trillion — the largest in the world, more than double that of second-place power Japan, and more than the production of Japan and China combined. The collapse of GM, the symbol of American manufacturing might, will not put a dent in this industrial output.
In terms of value added from the United States’ entire industrial output, the automotive sector (counting both the suppliers and automotive manufacturers) accounted for only 5.54 percent. Motor vehicles alone accounted for just 2.49 percent, with the rest roughly representing auto-parts manufacturers’ shares. Computer and electronic products, by contrast, accounted for 7.64 percent, non-transport machinery (such as capital goods) accounted for 5.01 percent and aerospace accounted for 3.26 percent. In fact, if computers and electronics are combined with other “high-tech” manufacturing categories (such as communication equipment; aerospace; semiconductor and other electronic components; navigational, measuring, electromedical, and control instruments; and other electrical equipment), they account for more than 20 percent of total U.S. industrial output.
Nevertheless, automotive manufacturing does account for the majority of manufacturing jobs — 4.5 million of them nationwide. And according to the Center for Automotive Research, automotive manufacturing provides more jobs than any other sector in seven states (Indiana, Kentucky, Michigan, Missouri, Ohio, South Carolina and Tennessee). However, manufacturing as a whole has played a declining role in U.S. employment, despite a steady and regular rise of the industrial production index, which calculates real industrial output. The reason for this is the rise in labor-saving technological advances. For the U.S. industrial sector, this means that between 1979 and 2009, industrial output roughly doubled, but the labor force engaged in manufacturing dropped from 21 percent in 1979 to just over 9 percent in 2009. Basically, the U.S. industrial laborer has become four times more efficient than his or her counterpart in the 1980s.
The fact is that U.S. industrial output has been increasing along with the productivity of the American worker. The switch to more specialized and high-tech manufacturing jobs has facilitated that shift, and the collapse of the automotive manufacturing sector simply represents the culling of the least-efficient sector of American manufacturing. Highlighting that shift, GM was replaced in the Dow Jones Industrial Average — a key index for the U.S. industrial sector — by Cisco Systems, a manufacturer and designer of complex networking and communications technology.
The culling of jobs in the automotive sector will be extremely difficult. It will present a social, demographic and economic challenge that could define the next decade of American politics. However, from a geopolitical perspective, the United States is losing manufacturing capacity in a technology that has been mastered by almost every current, rising and future global player.
Whereas automotive manufacturing once signaled one’s “arrival” on the geopolitical scene — which in part explains a plethora of car manufacturers from Serbia to Colombia — it no longer represents a monumental technological achievement. Future economic competition will be based on the ability to master computer, communication, robotic, space travel, and nuclear technology (with potentially other, unforeseen technologies becoming part of the mix as well).
In other words, the United States is moving onto bigger challenges, fulfilling its role as a global hegemon, but incurring the political growing pains that go along with such a shift.
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http://www.chrismartenson.com/blog/may-employment-report-not-believable/20102
May Employment Report Not BelievableFriday, June 5, 2009, 8:51 am, by cmartenson
Well, I thought that I had seen some fantastic data manipulation in the past, but today's release of the May employment report by the BLS was a real keeper. It is one for the books (the forensic accounting books, specifically).
Here's the news:
NEW YORK (CNNMoney.com) -- Job losses slowed dramatically in May, according to the latest government reading on the battered labor market, even as the unemployment rate rose to a 26-year high.
Employers cut 345,000 jobs from their payrolls in the month, down from the revised 504,000-job decline in April.
What spectacular news! Stock futures vaulted, gold killed, the dollar rebounded - all in all a very favorable set of market outcomes that are certainly welcome in the marbled halls of DC and on Wall Street.
The problem is that this huge surprise to the upside is completely out of line with other sources of data and depends (once again) on an incredibly suspect boost from the Birth-Death Model. Let's start there.
In the chart below, you are looking at the number of jobs that the BLS has "modeled" to have been created. These are either added to or subtracted from the total that is reported and trumpeted across the financial-media spin machine.
I want you to note the blue arrows, which reveal that 43,000 construction jobs were somehow added in the month of May, along with 77,000 "leisure & hospitality" (hotels and parks and such) jobs and even 7,000 financial services jobs (I bet there are more than a few banking industry folks wondering where those might be!).
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I shared your post with economist Scott Grannis HUSS and here are his comments:
The establishment survey data is always subject to the whims of
seasonal adjustment and fudge factors (birth-death model). That's why
I always look at the household survey, which has no fudge factors.
Sometimes the two diverge. This time they are both telling the same
story: job losses are slowing down. Coupled with the unemployment
claims and all the green shoots out there, I think it is clear that
the recession has ended.
On Jun 5, 2009, at 9:46 AM, Marc Denny wrote:
http://www.chrismartenson.com:80/blog/may-employment-report-not-believable/20102
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http://www.philly.com/philly/business/Anyway_you_spin_it_the_job_market_is_still_bad.html
Anyway you spin it, the job market is still bad
We’ll learn today how many jobs were destroyed by employers in May.
But, to use the jargon of Wall Street, even if the number “beats estimates,” let’s not get too excited.
It’s probably recession/bailout fatigue, but I’ve run out of patience for the economic spin doctors from both extremes - the doom and gloomers as well as the sunny optimists.
Already this week, I’ve heard chief investment officers and economists calling for a “four- or five-handle” on the employment report. That’s financial news show-speak for a monthly loss of jobs of 400,000 to 500,000.
Such a report would be promising, the optimists say, because it shows the job market is getting “less bad.” After all, the worst month for job loss stands as January, when U.S. employers shed 741,000 workers.
But when the job market has turned from a comfy warm tub to a scalding cauldron of acid, wonky discussions about the temperature seem to miss the point:
It’s a lousy job market, and it’s going to stay bad for some time to come.
Yes, 500,000 is a smaller figure than 700,000. Forgive me if I save the champagne for the month when employers are creating jobs again.
Since the start of the recession in December 2007, the United States has lost 5.7 million jobs. Pick any survey of forecasters you want and none predicts job creation beginning before 2010. Think deep into 2010.
For the 132 million of us counted in non-farm payroll statistics, that’s worrisome. For the 13.7 million unemployed identified in the Bureau of Labor Statistics’ household survey, that’s downright depressing.
The economists at IHS Global Insight are among the more optimistic. They project a decline in payroll employment of 450,000 in May. “In normal circumstances a decline of 450,000 jobs would be seen as very bad news,” IHS said in a recent note.
Their point is these are not normal times, so coming after the loss of 539,000 jobs in April, 699,000 jobs in March and 681,000 in February, IHS views a four-handle as “clear improvement.”
What’s clear to me is that we have a lot of pain to endure before we harvest Federal Reserve Chairman Ben Bernanke’s “green shoots.”
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Europac.net
June 3, 2009
There Goes The Country
Yesterday, after a painfully long death spiral, General Motors finally filed for Chapter 11 bankruptcy protection. Oftentimes, bankruptcy portends rebirth. Unfortunately, the politically-inspired GM plan holds no such possibilities. Under the current deal, the restructuring of GM will cost taxpayers some $100 billion (after the hidden costs of interest and refinancing are included). Even then, it is highly unlikely that GM will ever be competitive or that its debts will ever be repaid. Far worse, the massive government bailout will delay rather than encourage broader economic recovery. And yet, U.S. stock markets rose on the GM announcement as if it were good news.
General Motors is but a microcosm of what most ails the U.S. economy. For decades, GM rested on its laurels. Its management yielded to innumerable, exorbitant trade union demands, passing the costs on to consumers in the form of lower quality products. The result was that higher quality foreign cars, eventually also produced domestically by American workers, severely eroded GM’s once dominant market position. The company’s autonomy was effectively extinguished by the growing debt needed to finance this downward spiral. Investors, believing that GM was “too big to fail,” continued to accept the company’s high-risk paper.
In short, GM was brought to its knees by the abuse of trade union power and management’s unwillingness to fight back.
Contrary to general belief, GM is not a huge employer. It directly employs only some 60,000 workers. This is less than one tenth of one percent of the number of Americans presently unemployed. However, its trade union pension fund is being given billions of dollars of citizens’ money and a major stake in the restructured company. Favoring GM workers over the millions of America’s unemployed is grossly inequitable. The reason, however, is found in the murky world of politics.
The United Auto Workers (UAW), GM’s primary union, was a major supporter of President Obama’s election campaign. Predictably, this Administration has moved aggressively to subsidize them. Obama has taken the position that GM workers are an ‘elite’ and entitled to privileges not afforded to other workers. If GM were any other company entering bankruptcy, many workers would have lost their jobs, pensions and health coverage. Not so under the protective blanket of Daddy Government.
In its fight for grotesque entitlements for this small, but heavily Democratic, subset of the workforce, the Administration has run roughshod over those who financed the American auto industry, even labeling some as “unpatriotic” for failing to surrender their contract rights as bondholders. The notion that these stakeholders should “cooperate” to reach an “equitable” solution ignores the free-market cooperation that led to the original, contractual agreements. If I agree to give you half of my steak in return for half of your mashed potatoes when I finish my entrée, and when I go to collect you have eaten 9/10 of your mashed potatoes, can you plead poverty? You ate the potatoes!
Aside from these considerations, the sheer logic of the deal is faulty. Has Obama ever heard of opportunity costs?
Having pursued a path to commercial failure for many decades, it is clear that GM’s management and workforce are moribund. However, the government has decided to pump massive amounts of citizens’ money into this flaccid firm, without the practical ability to change its operations. Remember, the unions put Mr. Obama in office, and this project is meant to reward them. Will he have the courage to do what a profit-seeking management couldn’t, by cutting the fat from this company? Obama now claims that a new “private sector” management team will be installed to make decisions independent of political control. This is farcical.
Economists believe that for each $1 billion spent on infrastructure projects, 35,000 wealth-generating jobs are created in the broader economy. The Administration is set on spending a minimum of $60 billion, and more likely $100 billion, to protect 60,000 workers at GM. Spent on much needed infrastructure, these same monies would create between 2.1 and 3.5 million real private sector jobs.
Furthermore, the money spent on GM represents a direct penalty against those foreign auto companies that manufacture domestically, who are fighting desperately for a piece of a decreasing market. American workers at these plants must surely feel unfairly discriminated against. Perhaps these competitors’ ownership is overseas; but, while GM was shipping its manufacturing to Canada and Mexico, these firms were expanding their operations right here in America.
The federal bailout of GM exemplifies the grossly negative impact that government intervention has on the economy. As this type of behavior becomes ever more accepted and popular (barring a major change in voter sentiment), the prospects for the U.S. dollar and American stock markets is grim. Yet, American investors are bullish on the bad news. They are reading corrupt bankruptcy proceedings and profligate spending as a sign of effective governance. This highlights how desperately most investors, indeed most Americans, are clinging to the red herrings of “hope” and “change.”
As goes GM, so goes the country.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s latest book "The Little Book of Bull Moves in Bear Markets".
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June 5, 2009
The Charm Offensive
This week, Team Obama took their dog and pony show on the road. Treasury Secretary Geithner went to China, Fed Chairman Bernanke to Capitol Hill, and the President himself began a Mideast tour in Saudi Arabia. This full-court press is not coincidental, and comes just as the federal government has begun unloading trillions of dollars in new Treasury obligations. The coordinated charm offensive is meant to assure the world-at-large that the United States can repay these obligations without destroying the dollar.
Given the renewed weakness in the dollar and the recent expressions of concern from China, our largest creditor, about the safety of its current holdings, this is no easy sell. Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more. The hope is that a dream team consisting of a charismatic politician, a skilled Wall Street banker with longstanding ties to China, and a respected Fed Chairman, can close the deal. However, no matter how slick the sales pitch, no amount of lipstick can dress up this pig.
The most obvious fear the trio must address is that oversized deficits will persist indefinitely. Reading from a carefully scripted rebuttal book, all three proclaim that as soon as the stimulus revives our economy, the government will take all necessary steps to reign in the deficits that result. Bernanke’s testimony showcases this rhetorical shift. The Fed Chairman claimed that catastrophe has been averted and that the recession is nearly over. As a result, he advised Congress to now focus on debt management. How he expects them to do that was left unexamined.
Setting aside the fact that the recession is far from over and that the stimulus will actually weaken the economy in the long run, Bernanke’s words were less a practical guide to Congress than a bromide for our foreign creditors. Meanwhile, Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government’s current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!
The laughter of Chinese students that greeted Secretary Geithner at Peking University shows how ridiculous this spiel sounds overseas. Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?
Of course, it’s not just major holders, like China and Saudi Arabia, that need to be convinced. Since the largest holders are already in so deep, they have the greatest short-term incentive to play ball. While throwing good money after bad is certainly a lousy investment strategy, it is politically expedient as it delays the need to officially acknowledge losses. The spin is designed to keep all the smaller, more nimble holders from dumping their Treasuries. The major holders can publicly pledge their commitment to Treasuries, while they privately planning their exit strategies, as long as they feel that the smaller holders won’t spook the market by front-running their trades.
However, once the psychology turns, there is no way to stop the rush for the exits. Remember how quickly the secondary market for subprime mortgages collapsed? One day, investors were lining up to buy; the next day, the stuff couldn’t be given away. Make no mistake about it, we are issuing subprime paper and no amount of political spin can alter that reality. Bogus credit ratings aside, I think the world already knows this and it’s just a matter of time before someone admits it.
In the meantime, by continuing to lend, our creditors merely supply us the shovels to dig ourselves into an even deeper economic hole. Their credit enables our government to grow when it needs to shrink, finances bailouts of companies that should be allowed to fail, and enables a nation that should be saving and producing to continue borrowing and spending. As a result, the more money the world loans us, the less capable we are of paying it back. I really wish the world would stop doing us favors, as neither party can afford the consequences.
For an timely example, just look at California. With an unmanageable $20 billion deficit, California recently asked Washington for a bailout. With none immediately forthcoming, California was forced to make real and needed budget cuts. The hard choices, which will benefit California in the long run, would not have been made if federal funds had been committed. We all should be so lucky.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".
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What does Schiff suggest to profit from the coming crash?
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No idea. I don't have enough money to worry about investing.
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Me neither :cry: I went for the big bucks in stickfighting , , , :lol:
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Huge sums of Treasury bonds seized on italian-swiss border
A short summary in english, i found the news in italian only.
On june, 4th the Italian police officials of the "Guardia di Finanza" and swiss authorities stopped two japanese businessmen arriving in Switzerland from the italian border at Chiasso; at the customs check the two declared nothing and were discovered having hidden in their luggage 249 FED Bonds ($500 millions each) and 10 "Kennedy" bonds ($1 billion each) for a total of $134 billion in value.
Investigations are underway, officials say.
the news can be found here (italian only):
Mercato Libero Blog (italian financial blog):
http://mercatoliberonews.blogspot.com/20...
Ticino Online (swiss newspaper):
http://www.tio.ch/aa_pagine_comuni/artic...
Guardia di finanza (official site):
http://www.gdf.it/GdF__Informa/Notizie_S...
Other references can be found on adnkronos.
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BRIC Countries Kick Sand in the Face of 98-pound-weakling US Dollar
Well, there they go again, as Ronald Reagan used to say. The Russians, that is, sniping at our powerful, globally-respected currency. Get a load of this commie carping --
June 5 (Bloomberg) -- Russian President Dmitry Medvedev questioned the U.S. dollar’s future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. The dollar “is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system,’’ Medvedev, who today hosts an international economic forum in St. Petersburg, said in an interview published by the Moscow-based Kommersant newspaper.
A new world currency may be on the agenda when Medvedev meets counterparts from Brazil, India and China on June 16 at a summit in the Ural Mountains city of Yekaterinburg, the Kremlin said this month. “This idea has potential, even though some of my G-20 colleagues aren’t actively discussing it at the moment,’’ Medvedev told Kommersant. “However, for example, in the opinion of our Chinese colleagues it is quite a possible step. The most important thing is not to walk away from discussions on this topic.’’
Turning the ruble into a reserve currency is still a possibility, especially if some of Russia’s partners start making payments for their oil and gas in rubles, Medvedev said. Russia might consider setting up ruble-yuan swap positions similar to the recent accord suggested between China and Brazil, he said.
http://www.bloomberg.com/apps/news?pid=n...
Here is a comment made on the article above that sums it up quite well
At 2.85 billion, the population of the BRIC countries is more than nine times higher than that of the U.S. Their combined GDP is slightly larger, too.
Currently, the English-speaking financial centers of New York and London have carved out a role for themselves as global cross-rate middlemen. If you want to exchange rubles for yuan, typically you must do back-to-back transactions -- rubles to dollars, then dollars to yuan. Forex dealers love the fat spreads and dual commissions.
If the BRIC countries decide to walk away from this exploitative, anachronistic scam, there won't be a damned thing that the Anglosphere can do about it.
More significant than the eroding economic leadership of the U.S. is its eroding intellectual leadership. Bretton Woods I, circa 1944, was an Anglo-American production. Bretton Woods II, circa 1971-1973, was an abortion caused by U.S. default on its promise to redeem overseas dollars for gold.
Now, virtually all innovative thinking on global monetary reform comes from the BRIC countries, while Anglo-Americans stand by sucking their thumbs, navel-gazing, and tweaking their high-speed presses. Does the unmerited privilege of seignorage make you poor and stupid? The evidence points that way, comrades.
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I suppose we can argue lower taxes, raise taxes, or... but I think most of us agree, the increased debt is frightening.
The day of reckoning will arrive; the question is only when.
Sorry, it's long, but it makes some salient points.
The next great crisis: America's debt
At this rate, your share of the load will be $155,000 in a decade. How chronic deficits are putting the country on a path to fiscal collapse.
(Fortune Magazine) -- Normally Paul Krugman, the liberal pundit and Nobel laureate in economics, and Paul Ryan, a conservative Republican congressman from Wisconsin, share little in common except their first names and a scorching passion for views they champion from opposite political poles. So when the two combatants agree on a fundamental threat to the U.S. economy, Americans should heed this alarm as the real thing. What's worrying both Krugman and Ryan is the rapid increase in the federal debt - not so much the stimulus-driven rise to mountainous levels in the next few years, but the huge structural deficits that, under all projections, keep building the burden far into the future to unsustainable, ruinous heights. "The long-term outlook remains worrying," warned Krugman in his New York Times column. Krugman strongly supports President Obama's spending plans but bemoans the shortfall in taxes to pay for them.
Ryan flays the administration for piling new spending on top of already enormous deficits. "This isn't a temporary stimulus but a ramp-up in debt followed by a greater explosion in spending and debt," he told Fortune, predicting a day when America's creditors will start viewing the U.S. Treasury as a risky bet. "The bond markets will come after us with a vengeance. We're playing with fire." Krugman favors far higher taxes, while Ryan wants to curb spending, but for now what's so big and so dangerous that it distresses such diverse types as Krugman and Ryan - and should scare all Americans - is the Great Debt Threat.
The bill is far too big for only the rich to pick up. There aren't enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn't telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren't part of the President's agenda. To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.
The growing debt will burden Americans not just with heavier taxes but also with higher interest rates and slower economic growth. On June 3, Fed chairman Ben Bernanke warned Congress that heavy borrowing is one of the factors driving up rates. The trend is just beginning, according to Allan Meltzer, the distinguished monetarist at Carnegie Mellon. "Rates can only stay low if foreign investors keep buying our debt," he warns. "I predict far higher rates over the next few years." The risk that the U.S. will follow Britain, which was warned recently that it could lose its triple-A bond rating, has risen from virtually nil to a real possibility, judging by the sevenfold jump in the cost of insuring Treasury debt in the past year. The big borrowing is already spooking the bond markets. This year rates on 10-year Treasuries have jumped from 2.2% to 3.7%. A further increase in rates would aggravate the situation, raising the interest costs on the debt and increasing its size even more.
As Krugman and Ryan point out, the problem isn't so much the big budget gaps for this year and next, though their scale is shocking. It's the policies that will allow the trend to become far worse in the future. After the stimulus spending winds down and the economy recovers, our spending will still far exceed our revenues. In 2009 the U.S. will post a deficit of $1.8 trillion, or 13.1% of GDP, according to the nonpartisan Congressional Budget Office, twice the post-World War II record of 6% in 1983 under Ronald Reagan. Now let's look forward to 2019, the final year for the budget projections for the administration and the CBO. Even in a scenario that assumes healthy economic growth, the CBO puts the 2019 deficit at $1.2 trillion, or 5.7% of GDP. "That wouldn't be a huge number for an economic downturn, but it's extremely high in a full-employment period," says William Gale, an economist at the centrist Brookings Institution. It gets worse from there. Around 2020 the cost of the big entitlements, Social Security and Medicare, soar as the peak wave of baby boomers retire.
It can't go on forever, and it won't. What will shock America into action is the prospect of fiscal collapse, which will grow more vivid each year. In 2008 federal borrowing accounted for 41% of GDP, about the postwar average. By 2019 the burden will double to 82% by the CBO's reckoning, reaching $17.3 trillion, nearly triple last year's level. By that point $1 of every six the U.S. spends will go to interest, compared with one in 12 last year. The U.S. trajectory points to the area that medieval maps labeled "Here Lie Dragons." After 2019 the debt rises with no ceiling in sight, according to all major forecasts, driven by the growth of interest and entitlements. The Government Accountability Office estimates that if current policies continue, interest will absorb 30% of all revenues by 2040 and entitlements will consume the rest, leaving nothing for defense, education, or veterans' benefits.
To understand why a massive tax increase, probably a VAT, is the mostly likely outcome, it's crucial to look at what's driving the long-term, widening gap between revenues and spending. Put simply, spending is following a steep upward curve, while revenues are basically fixed as a portion of GDP. Why? Because future spending is driven mostly by entitlements, which are programmed to rise far faster than national income, while revenues depend heavily on the personal income tax, which yields receipts that typically rise or fall with GDP. Under George W. Bush, the U.S. experienced a prelude to the crisis before us: Spending rose rapidly, while revenues remained reasonably flat. Bush created an expensive new entitlement, the Medicare drug benefit (cost this year: $63 billion), and let spending on domestic programs from education to veterans' benefits run wild. Over seven years the wars in Afghanistan and Iraq added a total of some $900 billion to the budget. All told, Bush raised spending from 18.5% to 21% of GDP, setting in motion a chronic budget gap by piling on new spending without paying for it.
Under Obama the Bush trend keeps going, but this time on steroids. It's important to see the Obama budget projections as two phases, the crisis period of astronomical spending in 2009 and 2010, and the normal phase, from 2011 to 2019. Most of his stimulus and other big programs are designed to give the economy a jolt in 2009 and 2010 and then largely disappear or be offset by tax increases - at least that's the plan. Then the surge in outlays comes from two forces that would wreak budget havoc for any President: the relentless rise in entitlements and the surge in debt interest.
Making the challenge far greater: Obama's budget is packed with a wish list of expensive new programs, led by a giant health-care-reform plan. He promises to pay for them mainly with higher taxes. But if extra revenues don't materialize - and most that he's proposed now look unlikely - will he abandon many of his cherished priorities or push them through without full funding, substantially deepening the debt crisis? The answer could determine how fast America reaches the hour of reckoning that could usher in a VAT.
Let's divide Obama's budget projections into the plausible, the impossible, and the questionable. First, the plausible: It's optimistic but highly possible that spending on Fannie Mae, Freddie Mac, and the Troubled Assets Relief Program (TARP) will fall from more than $500 billion this year to around $20 billion in 2010, and keep declining from there. It's also plausible that the costs of the wars in Afghanistan and Iraq will fall to around $50 billion a year.
Now the practically impossible: Obama is using a timeworn gimmick by pledging that nonmilitary discretionary spending, outlays that require annual approval, will rise just 2.1% a year from 2012 to 2019. It won't happen. Obama is raising spending in this category, which includes education, health research, and homeland security, a generous 9% in 2009 and 10% in 2010, excluding the stimulus outlays. "It's far more likely the category will match its historical growth rate of around 6.5% a year," says Brian Riedl, an economist with the conservative Heritage Foundation. The GAO says it will rise with GDP, at well over 5%.
Let's examine one of the questionables. Obama's prize initiative - and by far his biggest - is his health-care plan. In his 2010 budget request the President proposes a $635 billion "down payment" or "reserve fund" toward universal health coverage over ten years. As the administration acknowledges, the $635 billion doesn't come close to covering the full expense of the program. Leonard Burman, chief of the nonpartisan Tax Policy Center, estimates the total cost at $1.5 trillion. Obama plans to offset the down payment from two sources: from limiting deductions for high earners - still another hit to the over-$250,000 crowd - and from squeezing the balance from Medicare through curbing unnecessary hospital stays and ending a plan offering HMO services. Once again, Obama will most likely lose a big part of the revenue he counted on. The limitation on deductions is encountering what looks like fatal opposition in Congress. Obama and his budget director, Peter Orszag, swear that the health-care plan will not worsen the deficit. "We are committed to making sure that health-care reform is deficit neutral," Orszag told Fortune.
The administration's attachment to reform goes far beyond the campaign to provide universal care. Orszag adds, correctly, that unbridled health-care costs, chiefly for Medicare, "are the most important driver of our long-term entitlement problem." Obama is also counting on massive investment in infrastructure to reduce medical costs by spreading electronic record keeping, promoting prevention and wellness, and conducting research to determine the most effective therapies. It's impossible to predict how much money those initiatives would actually save. The administration isn't making a forecast.
Although a VAT seems inevitable, the administration isn't ready to get behind it. "While we are open to ideas to finance health-care reform in a deficit-neutral way," says Orszag, "the VAT is an idea popular with academics, but not one seriously considered by policymakers." The problem, however, is that the income tax simply won't do the job. Closing the budget deficit in 2019 by taxing only people earning more than $250,000 would require lifting their federal marginal tax rates to around 60%. The budget already calls for them to pay, on average, $30,000 more a year than in 2008, with the biggest hit falling on households with income above $500,000. Raising income taxes on all the Americans who pay them wouldn't work either. It would require a 55% increase per household, a political impossibility. The one other major new revenue raiser on the table is a tax on employer-provided health care, but that would merely help pay for a new program to cover the uninsured, rather than closing the deficit.
A VAT, on the other hand, would tax such a giant pool of purchases that a relatively low rate of 10% to 15% could generate the revenues needed to pay for Obama's agenda and balance the budget. The VAT, which would be imposed like a federal sales tax, is paid along the chain of production by wholesalers and retailers. The cost is passed to consumers in the form of higher prices. For the Democrats, the problem with the VAT is that it falls heavily on the middle class and low earners, who use a far higher portion of their incomes to buy things than the rich do. Some of the sting can be removed by exempting food and clothing from the VAT or sending rebates to lower-income households. But the middle class would be a big target in any event. "A lot more people will pay," says Gale. "We cannot get there from here without a VAT."
That brings us back to Krugman and Ryan. Wonder of wonders, they agree again - this time that a VAT is coming. Krugman likes the idea, though he says the middle class will pay more. "There's probably a value-added tax in our future," he writes. Ryan despises the VAT as the beginning of the end of the American empire. "The VAT is definitely the trajectory Obama is putting us on," he laments. Ryan believes that the big growth in government in Europe came from the easy money it provided. He makes a good point. It's not a destiny to be desired. And when the two Pauls agree, you can bet it's where things are headed.
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Opinion: Zero growth at Pentagon leaves $150B budget gap
Brookings Institution fellow Michael O'Hanlon says President Barack Obama has made his first serious mistake in the national security realm by failing to present an adequate five-year defense budget. O'Hanlon says a policy of zero growth in inflation-adjusted Pentagon spending will leave the U.S. about $150 billion short of its defense needs by the year 2014. While praising budget increases for international aid and State Department programs, O'Hanlon says it is "unwise politics and unwise strategy to put these key elements of foreign policy in direct competition with each other, as appears to be the case in the new budget." The Washington Post
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GE Aviation sees orders down 50 pct this year
KUALA LUMPUR (Reuters) - GE Aviation, a unit of General Electric Co (GE.N) and the world's largest maker of jet engines, expects orders this year to halve as airlines slow plane buying amid a slump in travel demand.
Jack Lutze, vice-president of sales for Europe and Africa, told Reuters on Tuesday some deferrals were likely for next year's deliveries but only a few cancellations, a sign that more airlines are likely to postpone plane buying in the downturn.
"Everybody is looking to push back 2010," Lutze told Reuters on the sidelines of the International Air Transport Association's (IATA) annual meeting in Kuala Lumpur.
"This industry lurches from boom to bust," he said. "We lag the industry on the way down and on the way up."
GE Aviation still has an order backlog worth years of production, Lutze said, after airlines went on an expansion drive earlier this decade with $500 billion worth of future plane orders placed by IATA airlines based on today's list prices, according to Reuters calculations.
But airlines have been hit in the past year's financial crisis by weak passenger and business travel demand, a slide in air cargo trade, trouble getting financing for new planes and by volatile oil prices.
Top plane maker Airbus told Reuters on Monday it would be a tough year for orders and next week's Paris Air Show would be nothing like last year.
GE Aviation, which makes engines for plane makers such as EADS (EAD.PA) unit Airbus and Boeing (BA.N), said in January it aimed to reduce its white-collar staff by more than 1,000 people this year, but did not plan to trim its manufacturing headcount.
The job cuts, off a base of 16,000 salaried employees, would come through attrition, retirement, buyout packages and some layoffs. Fellow engine maker Pratt & Whitney, a unit of United Technologies Corp (UTX.N), is also laying off 1,000 jobs.
Lutze said the focus for GE Aviation was to maintain existing orders, get customers needing engine servicing or parts to pay up, and win new orders.
"Cash is king for us too," said Paris-based Lutze.
The mood at the IATA meeting in the Malaysian capital was fairly grim with the association forecasting industry losses would be $9 billion this year, nearly double a forecast made just three months ago.
Many airline CEOs at the event told Reuters this was the toughest environment they had faced and some said they were considering deferring orders, though most have been careful to avoid mentioning cancellations.
(Editing by Ian Geoghegan)
http://www.reuters.com/article/businessNews/idUSTRE5581TO20090609
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Check out the new car from Detroit and Goverment Motors
[youtube]http://www.youtube.com/watch?v=rAqPMJFaEdY[/youtube]
Enjoy Boyo
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A friend writes:
"Iif prices go up while the population does not have (at least nominally correspondingly) increasing incomes, that's not inflation. That is a decline in the standard of living.
"When one lives in a poor country (been there, done that) everything seems expensive - and that has little to do with inflation.
"One of the side effects of defining inflation as a general increase in prices is that it becomes quite easy to mistake growing poverty for inflation. "Inflation" which in reality is a progressive decline in the standard of living is, in fact, deflationary - the economy slows, and people are willing to work for less."
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A friend writes:
"Iif prices go up while the population does not have (at least nominally correspondingly) increasing incomes, that's not inflation. That is a decline in the standard of living.
"When one lives in a poor country (been there, done that) everything seems expensive - and that has little to do with inflation.
"One of the side effects of defining inflation as a general increase in prices is that it becomes quite easy to mistake growing poverty for inflation. "Inflation" which in reality is a progressive decline in the standard of living is, in fact, deflationary - the economy slows, and people are willing to work for less."
Now add to the equation, prices are going up and the U.S dollar has been dumped so every import must be bought in Euro's.
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Joe Biden employing circular polysyllables to dodge, weave, and not say much of anything at all:
[youtube]http://www.youtube.com/watch?v=Og1JkGWY4ZQ&eurl=http%3A%2F%2Fstorminsmorningjava%2Eblogspot%2Ecom%2F2009%2F06%2Fnbcs%2Ddavid%2Dgregory%2Dchallenges%2Djoe%2Ehtml&feature=player_embedded[/youtube]
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Notice the U.S and the UK were not invited?
http://www.nytimes.com/2009/06/16/world/europe/16bric.html?_r=1&ref=global-home
MOSCOW — Leaders of some of the world’s most powerful economies are gathering on Tuesday to plot how they can exert more control over the global financial system as it takes its first wobbly steps toward recovery.
Yet not an American or Western European will be in the bunch.
The first summit meeting of the so-called BRIC group — Brazil, Russia, India and China — is intended to underscore the rising economic clout of these four major developing countries and their demand for a greater voice in the world. And Russia, the group’s host and ideological provocateur, is especially interested in using the summit to fire a shot across Washington’s bow.
All four countries have expressed varying degrees of discomfort with Washington’s financial stewardship, and are particularly concerned about the value of the dollar at a time of rapidly mounting indebtedness in the United States. At the same time, most economists say the BRIC countries can do little to change the current architecture of the global financial system, and that the outcome of this meeting will be largely symbolic.
The BRIC countries comprise about 15 percent of the world economy and, perhaps more important, have about 40 percent of global currency reserves. Brazil, India and China have also weathered the financial crisis better than the world as a whole.
While they are far from a monolithic group, they are generally united in their frustration with the dollar’s status as the world’s reserve currency, which enables Washington to run budget deficits without fears of facing the kind of budgetary day of reckoning that other countries risk.
The excess dollars fill up in foreign central banks, leaving those countries with a difficult choice: reinvesting the dollars in United States securities or holding them and facing an increase in the value of their own currencies, making their products less competitive in world markets.
While there have been periodic complaints about the dollar through the years, the criticisms from the BRIC countries have become more frequent and more acerbic lately, and have included calls for a supranational currency to replace the dollar.
In March, the prime minister of China, Wen Jiabao, expressed concerns about United States budget deficits, suggesting they might lead to inflation, a weaker dollar and rising yields on Treasuries, any one of which would hurt China’s $1 trillion investment in American government debt. Later that month, the head of the Chinese central bank called for a new international currency to replace the dollar.
For the Kremlin, undermining the dollar as the prevailing medium of exchange reflects a broader Russian belief that the United States exercises a dominance in global affairs that exceeds its diminishing power.
“What we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries, will not dominate,” Russia’s president, Dmitri A. Medvedev, said this month.
Senior officials in most of the BRIC governments — India, which does not depend as much on trade, is something of an exception — assert that while the United States has acted irresponsibly over the last 30 years by amassing too much debt, they will be the ones who suffer.
“The world economy should not remain entangled, so directly and unnecessarily, in the vicissitudes of a single great world power,” said Roberto Mangabeira Unger, Brazil’s minister for strategic affairs. “The developing countries should not have to see painfully accumulated hard-currency reserves fall under the shadow of major devaluations.”
China, Brazil and Russia have said recently that they will purchase notes from the International Monetary Fund to begin diversifying their reserves.
Still, the reality is that even many forceful critics of the dollar see no immediate alternative to it as the vehicle for international trade. No other markets in the world have the depth and liquidity of those in the United States, experts say.
And the four BRIC countries, while newly emboldened, have starkly different economies and relationships with the United States, complicating their attempts to unite. Each of the four also has a currency that either has been historically unstable or is not easily convertible.
“Between the BRIC countries, there is really little in common,” said Yevgeny G. Yasin, head of research at the Higher School of Economics in Moscow. “Each of them has its own destiny, its own special character, and it will be much more difficult for them to agree among themselves than separately with Western countries.”
China, whose economy dwarfs those of the other three, depends on the export of manufactured goods to the United States and Europe. Russia sells oil, natural gas and other natural resources abroad. Brazil focuses on agricultural exports, while India’s growth has been largely based on its domestic market.
The four countries do not necessarily do much business with one another. Only two percent of China’s trade last year was with Russia, though the countries are neighbors, according to official statistics.
At the same time, Brazil announced this year that China had surpassed the United States as its largest trading partner, and said last month that they would look for ways to finance their trade without the dollar.
The very notion of the BRIC nations was conceived in 2001 by an economist for Goldman Sachs, and only then embraced by the countries themselves. Their leaders have conducted informal discussions before, but the event on Tuesday in the central Russian city of Yekaterinburg will mark their first formal gathering, officials said.
Russia has sent somewhat mixed signals recently regarding how determined it is to confront the dollar. Last week, it announced that it would purchase bonds from the International Monetary Fund, but then the finance minister, Aleksei L. Kudrin, acknowledged that the world was not yet ready for another reserve currency.
Vladimir A. Mau, rector of the Academy of National Economy, a government advisory organization in Moscow, said Russia and the other BRIC countries had legitimate worries that the United States was piling up too much debt. But Mr. Mau said that at this point, he doubted that the Kremlin had any recourse.
Mr. Unger, the Brazilian minister, agreed, saying that the BRIC countries do not see replacing the dollar with “heavy-handed, bureaucratic machinery,” such as a global, European-style Central Bank.
In China, popular sympathies are with Russian and Brazilian demands for a robust challenge to American control, analysts said.
Yet there has been no consensus on what a new financial system should look like, and China’s dependence on exports and enormous holdings of dollar-denominated assets give it a vested interest in the status quo, leaving China’s leaders reluctant to pursue far-reaching changes.
While China’s official news media often give sizable attention to coming international gatherings, they have offered little coverage of the BRIC summit meeting.
Xu Xiaonian, an economist at the China Europe International Business School in Shanghai, said the silence reflected a desire not to raise hopes for the meeting. “What can they agree on? So little,” Mr. Xu said. “This meeting is more symbolic than of real effect.”
Vikas Bajaj contributed reporting from New Delhi, Alexei Barrionuevo from Rio de Janeiro, and Keith Bradsher from Hong Kong.
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Good source of economic charts and other data:
http://zimor.com/
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Obama Financial Reform Plan Misses the Mark
Posted by Mark A. Calabria
The Obama Administration is presenting a misguided, ill-informed remake of our financial regulatory system that will likely increase the frequency and severity of future financial crisis. While our financial system, particularly our mortgage finance system, is broken, the Obama plan ignores the real flaws in our current structure, instead focusing on convenient targets.
Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of the TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.
While the Administration plan recognizes the failure of the credit rating agencies, is appears to misunderstand the source of that failure: the rating agencies government created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the out-sourcing of their own due diligence to the rating agencies.
Instead of addressing our destructive federal policies at extending homeownership to households that cannot sustain it, the Obama plan calls for increased “consumer protections” in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower’s equity. However such recognition would also require admitting that the government’s own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.
The Administration’s inability to admit to the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.
http://www.cato-at-liberty.org/2009/06/16/obama-financial-reform-plan-misses-the-mark/
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The Fed Becomes a Dictator
"President Barack Obama is expected Wednesday to propose the most sweeping reorganization of financial-market supervision since the 1930s, a revamp that would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.
At the center of the plan, which administration officials are referring to as a "white paper," is a move to remake powers of the Federal Reserve to oversee the biggest financial players, give the government the power to unwind and break up systemically important companies -- much like the Federal Deposit Insurance Corp. does with failed banks ...
Lawmakers are expected to take issue with several of the plan's more thorny issues, including how to create a system that won't simply bail out large financial companies when they topple. Giving the Fed more clout -- in light of recent criticism from lawmakers, both Republican and Democratic, of its secrecy and accumulation of power -- will also be a controversial idea."
http://www.businessinsider.com/this-guys...
Question to ponder: Since there is really nothing Fed about the Fed other than it's head is appointed by the POTUS, do you feel like a private banking cartel should have the power to dismantle private companies much like the FDIC does with failed banks?
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Its an idea that a economic fascist would love.
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Its an idea that a economic fascist would love.
I fear for you guys. Things are changing so fast, there is no time to mount opposition to half of what is being passed. What the heck is going on with all the Czars? why does obama feel it nessesary to appoint people to power that are not accountable to anyone but obama?????
Your stock market is up today on the news that job losses were only 600K and that jobless claims are down by 145k........... because those 145k's benifits have expired. Its like a group of people going over a waterfall while cheering because the drop is only 200ft, 50ft less then expected.
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The case for the economy coming out of recession is very well made here by my friend supply side economist Scott Grannis:
http://www.scottgrannis.blogspot.com/
I recommend this blog for regular reading in the highest terms.
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Ok, I don't see how the economy will turn out alright after Obanomics drives us into unimaginable debt.
Meanwhile, we are getting ready to catch a BRIC to our collective heads. And Tthe remaining axis of evil nations are running wild.
So, how does this portend a recovery?
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Well, here's three bright people, including Scott Grannis offering their thoughts on this: See the transcript of their conversation at
http://seekingalpha.com/article/143495-live-discussion-the-dollar-inflation-and-protecting-your-portfolio
While you are there, surf around a bit and click on some of the pieces there.
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GM wrote: "I don't see how the economy will turn out alright after Obanomics drives us into unimaginable debt... remaining axis of evil nations are running wild...how does this portend a recovery?:
I think of it as Obama-recession-I and Obama-recession-II.
The first was caused by unaffordable global energy, the collapse of US housing market and the scares of the financial meltdown and panic to sell assets ahead of the impending anti-investment policies of the new government. Energy has come back down quickly as a reaction to collapsed global demand (poised to spike again and kill the next recovery). Housing - still a flood of foreclosures with collapsed values but the damage is done and the remaining stock to fail is finite. And there has been a delay for most of the impending economy-killers: tax rates are mostly unchanged, cap/trade doubtful, national healthcare - mostly scaled back (?).
I've read that the new spending has a 0.7 stimulation effect meaning some short term help but not worth the investment, the cost and the debt burden that follows. The catastrophe of the new debt is tomorrow's elephant in the room, but not preventing mild recovery now.
I agree with GM's point that anti-growth policies will kill off the new recovery, but that will be a new recession/stagnation certain to follow enactment of their agenda.
Same for inflation. As we gear up to start measuring the Obama-Misery-Index. the first dollar bills with the Geithner picture are already being fitted for lettering that could just as well say: 'One U.S. Fifty Cent Piece'.
Obama-Pelosi-Leftism can be slowed. Not just by decisive midterm elections, but as Bush proved, opinion and approval polls matter.
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Research: No evidence for 'too big to fail' policies
April 24th, 2009
Jean Helwege, associate professor of finance in Smeal College of Business at Penn State. Photo Credit: Penn State Department of Public Information
The U.S. economy would be better served by letting failing firms file for bankruptcy rather than by bailing them out under presumptive federal policies that deem them to be "too big to fail," according to new research from Penn State's Smeal College of Business.
Washington regulators have justified several recent interventions in the financial realm by warning that firms like Bear Stearns and AIG are too big to fail. Allowing these firms to go bankrupt, the argument goes, would result in fire sales and a domino effect, which pose systematic risks to the entire economy. But Jean Helwege, associate professor of finance, writes that there is little to no evidence to support these too-big-to-fail threats of counterparty risk and fire sales.
In "Financial Firm Bankruptcy and Systematic Risk," which Helwege will present April 18 at the FDIC's annual Derivatives Securities and Risk Management Conference in Arlington, Va., she finds that cascading failures are unlikely to occur because of diversification, and that U.S. bankruptcy law allows for plenty of time to avoid fire sales and dispose of assets slowly.
When justifying bailouts or other government actions in the finance sector, regulators warn of a domino effect: One bank's failure triggers another bank's failure, which triggers other failures, and so on. But, Helwege says, this result is, at best, unlikely in reality.
"While the idea of a domino effect of one firm failing and starting a cascade of addition failures seems eminently plausible," she writes, "the empirical evidence to date suggest that no such domino effect would take place were regulators to abandon TBTF policies." Helwege cites prior research that shows that second firms rarely fail because of a first firm's failure and "that there is never a third firm involved, let alone a fourth, fifth, sixth, seventh, eighth, ninth, or 10th."
"Cascades can only arise when firms' loans to other firms are very large as a fraction of their capital, a notion that is both at odds with bank regulations and good business practices regarding diversification," she writes.
Firms are more likely to be exposed to the same risk because they have made similar poor investment choices; such is the case with the current credit crisis and firms' common exposure to the subprime mortgage market. In this scenario, Helwege argues that "regulatory aid to one firm is of little use to the entire economy. Such assistance might bolster confidence, but clearly increasing confidence among all such firms is more productive than merely attempting to boost confidence in one particularly weak firm."
Helwege writes that the best policy oftentimes is to allow a portion of firms to fail without any assistance. Regulators warn that failures like this will result in fire sales, so they often force failing firms into mergers like the Federal Reserve-assisted takeover of Bear Stearns by JPMorgan Chase. However, Helwege points out that bankruptcy law allows plenty of time for less desirable assets to be sold off slowly so that their true worth can be discerned. In fact, mergers like Bear and JPMorgan, which took place over the course of a weekend, actually allow less time for assets to be properly valued.
"Mergers like the Bear/JP deal are examples of fire sales, not paths to avoiding them," Helwege writes.
She concludes that the best way to maintain stable, liquid, and orderly markets — the ultimate goal of financial regulators — is to allow individual firms to file for bankruptcy and slowly sell off their distressed assets while allowing Congress to find ways to provide more general assistance to the overall economy.
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Thank you Freki for a great post. Bankruptcy is only bad news if you didn't already know that the firm had failed financially.
Those who make the argument that an airline, automaker, brokerage or insurance company is too big to fail are the same ones IMO who do not understand or favor market capitalism in the first place. President Obama to my knowledge has not read a book about free market capitalism that does not oppose it. Same I'm sure can be said about Pelosi, Reid, Durban, Barney Frank, Ted Kennedy and the rest of the current power structure.
Failure is the lifeblood of capitalism and new growth. It puts a market check, price check and reality check on ideas, strategies and organizations. Out of failure comes re-priced assets and human talent free to start new and better enterprises. The sooner failed enterprises fail, the sooner that better, more efficient and more innovative ones can emerge.
Too big to fail is a perfect description for the old Soviet economy. There was no dynamic movement of resources and capital to its most efficient use. By refusing to recognize failure of the large, bureaucratic, inefficient, non-competitive enterprises, they blocked the emergence of newer and better ones. Eventually the whole house of cards came crashing down. Every day under this regime we look more and more like them.
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Paul Krugman of Princeton / NY Times is the icon of current liberal economics. His criticism that the stimulus is too small gives the print and spend crowd much needed cover. Don't be fooled by his Nobel peace prize - terrorist Yasser Arafat and appeaser Jimmy Carter each have one too!
Krugman is arguing that the plan to borrow / print 10 trillion or so in the current forecast is not inflationary, because ... well, we need the money. Economist Alan Reynolds takes him to task in Forbes this week on his history and logic.
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Krugman's Liquidity Claptrap
Alan Reynolds, 06.19.09, 12:00 AM EDT
The laureate gets his history wrong.
In his June 15 column, "Stay the Course," Paul Krugman suggests it is simply foolish to worry that the government could possibly borrow too much, or that the Federal Reserve might buy ("monetize") too much of that debt.
In a closely related blog, claiming Art Laffer is "way off base" about future inflation, Krugman insisted "for the 1.6 trillionth time, we are in a liquidity trap." That makes 1.6 trillion times he's been wrong about that.
His column says, "A rising monetary base isn't inflationary when you're in a liquidity trap. America's monetary base doubled between 1929 and 1939; prices fell 19%. Japan's monetary base rose 85% between 1997 and 2003; deflation continued apace."
A 100% increase in the U.S. monetary over 10 years (1929-1939) amounts to just 7% a year. That is scarcely comparable to the 113% increase over the past 12 months. Besides, the 1930s do not support his "liquidity trap" argument once we examine what happened when.
To say U.S. prices fell 19% from 1929 to 1939, for example, means they fell much more than 19% from 1929 to 1933 before rising from 1934 to 1937 when the monetary base was growing.
With the exception of a brief Fed easing in the spring of 1932, the U.S. monetary base was generally falling or flat from January 1929 to early 1934. From March 1934 to July 1937, by contrast, the rate of growth of the monetary base jumped above 16% on a year-to-year basis. If we had been in a "liquidity trap" that would have had no effect. Yet real gross domestic product grew by 9.5% a year from 1934 to 1937, and consumer prices by 2.6% a year. Since the facts contradict his liquidity trap thesis, Krugman pretends the rebound after 1933 was "helped along by New Deal policies."
On the contrary, Christina Romer's research clearly demonstrates that strong rebound of 1934-37 was "helped along" by a 42% increase in the money supply. She found, "monetary developments were very important and fiscal policy was of little consequence ... Even in 1942, the year that the economy returned to its trend path, the effects of fiscal policy were small."
In his blog, Krugman argues that "a Friedman-style focus on a broad monetary aggregate gives the false impression that Fed policy wasn't very expansionary. But it was; the problem was that since banks weren't lending out their reserves and people were keeping cash in mattresses, the Fed couldn't expand M2."
In any bank crises, the public wants to hold more currency rather than bank deposits, and banks also want excess reserves as insurance against bank runs. Japan's central never adequately accommodated that demand for bank reserves and currency before 2001 (if then) nor did the Fed in 1929-33. But that does not mean (as the liquidity trap implies) that monetary policy was impotent and merely "pushing on a string."
Once monetary policy stopped pulling and started pushing after 1933, both real output and prices went up. Krugman then turns to Japan from 1997 to 2003 as his second bad analogy with current Fed policy. Although Japan's "lost decade" began in 1992, Krugman starts with 1997. Why? Because Japan's monetary base grew very slowly before then. The Bank of Japan did not try even a mild dose of "quantitative easing" until March 19, 2001, and it may have helped. Economic growth was 2.7% in both 2004 and 1996, so Krugman talks only about 1997 to 2003.
Krugman's other reason for starting with 1997 is to argue that Japan's economy slipped into recession that year because the budget deficit shrunk too much. He says, "Japan experienced a partial recovery, with the economy growing almost 3% in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession." This Keynesian focus on deficits is untenable: Japan's budget deficit reached 10.7% of GDP by 1998--up from 4% in 1996.
What really happened is a classic example of "intertemporal shifting" to avoid a tax hike. In 1996, Japanese consumers knew the consumption tax (VAT) was scheduled to rise from 3% to 5% in April 1997. So they rushed to stock up on big-ticket items in 2006 before the tax increase. That tax-induced shopping spree artificially boosted GDP in 1996 at the expense of 1997-1999.
Even if Krugman's two historical examples of an alleged liquidity trap were not so obviously flawed, he also never managed to tie them in any way to recent events. His only (flawed) evidence of a liquidity trap in the 1930s was that "the Fed couldn't expand M2."
Yet Krugman's claim about the Fed's inability to increase M2 during liquidity traps proves for the 1.6 trillionth time that we are NOT in a liquidity trap! M2 increased by 14.8% from August to February, thus lifting M2's year-to-year increase to 9% in May from 5.3% last August.
If Paul Krugman hopes to base his sanguine inflationary forecasts and go-go policy advice on historical analogies, he needs to (1) get the history right, and (2) show how that history is comparable to recent experience. On both counts, he failed. Again.
Alan Reynolds is a senior fellow with the Cato Institute.
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Washington Metro’s Problem: Too Much Money
Posted by Randal O'Toole
The terrible Washington Metrorail crash that killed nine people has led to calls for more money for transit. Yet the real problem with Washington Metro, as with almost every other transit agency in this country, is that it has too much money — it just spends the money in the wrong places.
“More money” seems to be the solution to every transit issue. Is ridership down? Then transit agencies need more money to attract more riders. Is ridership up? Then agencies need more money because fares only cover a quarter of the costs.
Yet the truth is that urban transit is the most expensive form of transportation in the United States. Where the average auto user spends about 24 cents per passenger mile, transit costs more than 80 cents per passenger mile, three-fourths of which is subsidized by general taxpayers. Subsidies to auto driving average less than a penny per passenger mile. Where autos carry 85 percent of American passenger travel, transit carries about 1 percent.
When Congress began diverting highway user fees to transit in 1982, it gave transit agencies incentives to invest in high-cost transportation systems such as subways and light rail when lower-cost systems such as buses would often work just as well. Once they build the high-cost systems, the transit agencies never plan for the costs of reconstructing them, which is needed about every 30 years. The Washington Metro system, which was built as a “demonstration project” in the 1970s, is just a little ahead of the curve.
Now over 30 years old, Washington’s subways are beginning to break down. Before the recent accident, some of the symptoms were broken rails, smoke in the tunnels, and elevator and escalator outages.
Now we learn that the National Transportation Safety Board told Metro in 2006 to replace the cars that crashed on Monday because they were in danger of “telescoping,” which is what killed so many people in Monday’s accident. Also, the brakes were overdue for maintenance. Metro responded that it planned to eventually replace the obsolete cars, but didn’t have the money for it.
But it does have money to build an expensive new rail line to Tysons Corner and, eventually, Dulles Airport. Planners had originally recommended running bus-rapid transit along this route, but that wasn’t expensive enough so Metro decided to go with rails instead — at ten times the cost of the bus line.
The simple problem is that we have forgotten about the need to weigh revenues and costs. Instead, transit has become a favorite form of pork barrel and, for the slightly more idealistic, a method of social engineering, meaning a part of the Obama administration’s campaign to “coerce people out of their cars.”
That’s one more government program we can do without.
http://www.cato-at-liberty.org/2009/06/24/washington-metros-problem-too-much-money/
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On June 15th California implemented another foreclosure moratorium. The California Foreclosure Prevention Act (CFPA) was signed into law by Governor Schwarzenegger which adds another 90 days to the foreclosure process. If you recall, a similar law was put into place in 2008 and turned out to be an utter failure. So what do we do? We virtually create another replica plan for a second go around. The plan will fail on so many levels and we will discuss the reasons why in this article. California has taken a major beating since it was part of the housing bubble mania and is now at the forefront of the bubble bursting.
The problem with dealing with the current foreclosure issue in California is how the issue is being framed. Take this perspective for example:
“(SF Chronicle) The goal is to compel banks to do systematic loan modifications across California to reduce our foreclosure rate, which is the highest in the nation,” said Assemblyman Ted Lieu, D-Torrance, who wrote the bill. “Until we slow that down, the California economy cannot recover.”
I appreciate the perspective but dropping the foreclosure rate in the short-term to pad statistics is flawed for many reasons. The way the plan is devised, it will create an army of lifelong renters with onerous mortgage terms. This is helping no one except servicers to get a nice kick back for modifying the loan and padding foreclosure data in the short term. Take a look at how the last moratorium turned out in California:
http://www.mybudget360.com/california-foreclosure-prevention-act-creating-an-army-of-lifetime-renters-in-california/
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The Debt Tsunami
The CBO's latest warning on the long-term deficit is scarier than ever.
Sunday, June 28, 2009
THE CONGRESSIONAL Budget Office has a tough job: to provide America's lawmakers with a reality check on their tax and spending plans. Not surprisingly, the CBO's projections are not always received cheerfully. Both President Obama and leading congressional Democrats were less than thrilled when the CBO estimated that the costs of universal health coverage would be much higher than advertised. To be sure, projecting the cost of legislation involves making assumptions and constructing models that may or may not prove accurate 10 years down the road. Nonetheless, the CBO, with its tradition of scholarly independence, is the best available arbiter, and Congress must heed its numbers -- like them or not.
Now comes the CBO with yet more news of the sort that neither Capitol Hill nor the White House is likely to welcome: its freshly released report on the federal government's long-term financial situation. To put it bluntly, the fiscal policy of the United States is unsustainable. Debt is growing faster than gross domestic product. Under the CBO's most realistic scenario, the publicly held debt of the U.S. government will reach 82 percent of GDP by 2019 -- roughly double what it was in 2008. By 2026, spiraling interest payments would push the debt above its all-time peak (set just after World War II) of 113 percent of GDP. It would reach 200 percent of GDP in 2038.
This huge mass of debt, which would stifle economic growth and reduce the American standard of living, can be avoided only through spending cuts, tax increases or some combination of the two. And the longer government waits to get its financial house in order, the more it will cost to do so, the CBO says.
The CBO's new long-term forecast is considerably more pessimistic than the one it issued 18 months ago, mostly because of the recession, which has driven the budget deficit above 12 percent of GDP. But the report makes clear that the recent economic downturn did not cause the government's predicament and that the situation will not necessarily improve once the economy does. The principal cause of long-term fiscal distress is the aging of the U.S. population, coupled with rising health-care costs -- which, together, will drive spending on Medicare, Medicaid and Social Security to new heights. Unchecked, federal spending on Medicare and Medicaid combined will grow from almost 5 percent of GDP today to almost 10 percent by 2035 -- and to more than 17 percent of GDP by 2080.
Like his predecessors, Mr. Obama is aware of this issue. Like them, he has promised a plan to deal with it. And like them, he has not come up with anything credible yet. It's time for that to change.
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/27/AR2009062701979.html
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This fits in several catagories but since its main thrust is economic I will post it here:
Green Stimulus Money Costs More Jobs Than It Creates, Study Shows
Monday, April 13, 2009
By Josiah Ryan, Staff Writer
President Barack Obama exits Air Force One. (AP Photo) (CNSNews.com) - Every “green job” created with government money in Spain over the last eight years came at the cost of 2.2 regular jobs, and only one in 10 of the newly created green jobs became a permanent job, says a new study released this month. The study draws parallels with the green jobs programs of the Obama administration.
President Obama, in fact, has used Spain’s green initiative as a blueprint for how the United States should use federal funds to stimulate the economy. Obama's economic stimulus package,which Congress passed in February, allocates billions of dollars to the green jobs industry.
But the author of the study, Dr. Gabriel Calzada, an economics professor at Juan Carlos University in Madrid, said the United States should expect results similar to those in Spain:
"Spain’s experience (cited by President Obama as a model) reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created,” wrote Calzada in his report: Study of the Effects on Employment of Public Aid to Renewable Energy Sources.
Obama repeatedly has said that the United States should look to Spain as an example of a country that has successfully applied federal money to green initiatives in order to stimulate its economy.
“Think of what’s happening in countries like Spain, Germany and Japan, where they’re making real investments in renewable energy,” said Obama while lobbying Congress, in January to pass the American Recovery and Reinvestment Act. “They’re surging ahead of us, poised to take the lead in these new industries.”
“Their governments have harnessed their people’s hard work and ingenuity with bold investments — investments that are paying off in good, high-wage jobs — jobs they won’t lose to other countries,” said Obama. “There is no reason we can’t do the same thing right here in America. … In the process, we’ll put nearly half a million people to work building wind turbines and solar panels; constructing fuel-efficient cars and buildings; and developing the new energy technologies that will lead to new jobs, more savings, and a cleaner, safer planet in the bargain.”
Included in the stimulus package, for example, was $4.5 billion to convert government buildings into high-performance green buildings.
According to the Calzada’s study, Spain is a strong example of the government spending money on green ideas to stimulate its economy.
“No other country has given such broad support to the construction and production of electricity through renewable sources,” says the report. “The arguments for Spain’s and Europe’s ‘green jobs’ schemes are the same arguments now made in the U.S., principally that massive public support would produce large numbers of green jobs.”
But in the study’s introduction Calzada argues that the renewable jobs program hindered, rather than helped, Spain’s attempts to emerge from its recession.
“The study’s results show how such ‘green jobs’ policy clearly hinders Spain’s way out of the current economic crisis, even while U.S. politicians insist that rushing into such a scheme will ease their own emergence from the turmoil,” says Calzada. “This study marks the very first time a critical analysis of the actual performance and impact has been made."
Pat Michaels, professor of environmental sciences at the University of Virginia and senior fellow in environmental studies at the Cato Institute, a free market group, told CNSNews.com that the study’s conclusions do not surprise him. He added that the United States should expect similar results with the stimulus money it spends on green initiatives.
“There is no reason to think things will be any different here,” Michaels said. “In the short run you have to ask who is doing the hiring, and in the long run how efficient is it to have people serving technology such as windmills. We are creating inefficiencies.”
Michaels also said he was not surprised by the study’s finding that only one out of 10 jobs were permanent.
“That doesn’t surprise me,” said Michaels. “When we see how imperfect wind energy is and how expensive it is to maintain -- I think many of those jobs will become impermanent here in the U.S. as well.”
Inquiries for comment to the Natural Resources Defense Council and the Center for American Progress were not answered before this story went to press.
Hello green jobs good by real jobs.
Boyo
PS In order to keep the GM plant in lake orion Mi. open congressman Gary Peters (Dem) sold his vote and supported cap and trade .In doing so he saved 1200 jobs in Oakland county Mi. but long term it is estimated that he burned about 4,000 jobs in Oakland county . If or should I say WHEN cap and trade is enacted.Nice vision for the future there congressman peters.
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Global Warming Bubble (Bubble #6 from a fantastic exposé by Matt Taibbi, Rolling Stone)
It's early June in Washington, D.C. Barack Ohama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs - its employees paid some $981,000 to his campaign - sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place arc Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm's co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits - a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a ground breaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade.
The new carbon-credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.
Here's how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimated that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.
The feature of this plan that has special appeal to speculators is that the "cap" on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually for comparison's sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm shifting legislation, (2) make sure that they're the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank's environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation.
Paulson's report argued that "voluntary action alone cannot solve the climate-change problem." Few years later, the bank's carbon chief, Ken Newcombe, insisted that cap-and-trade alone won't be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, "We're not making those investments to lose money."
The bank owns a 10 percent stake in carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner AI Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Hanis. Their business? Investing in carbon offsets, There's also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech...the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?
"Oh, it'll dwarf it," says a former staffer on the House energy committee.
Well, you might say, who cares? If cap-and-trade succeeds, won't we all be saved from the catastrophe of global warming? Maybe but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap and trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it's even collected.
"If it's going to be a tax, I would prefer that Washington set the tax and collect it," says Michael Masters, the hedge fund director who spoke out against oil-futures speculation. "But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want, It's just asinine."
Cap-and-trade is going to happen. Or, if it doesn't, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees - while the actual victims in this mess, ordinary taxpayers, are the ones paying tor it.
It's not always easy to accept the reality of what we now routinely allow these people to get away with; there's a kind of collective denial that kicks in when a country goes through what America has gone though lately, when a people lose as much prestige and status as we have in the past few years. You can't really register the fact that you're no longer a citizen of a thriving first-world democracy, that you're no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things Bat are no longer there.
But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state, running on gangster economics, and even prices can't be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can't stop it, but we should at least know where it's all going.
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Fading of the Dollar's Dominance
As a result, the IMF is now set to "print" $300 billion worth of SDRs -- 10 times more than currently exist -- for distribution to nations around the globe. They will effectively be held as reserve deposits by each nation's central bank.
Some, like Bergsten, have argued the SDRs' role should be taken a step further, allowing them to serve as a de facto global reserve currency. Bergsten has advocated, for instance, the idea of nations such as China "trading in" their dollars for SDRs, allowing for an orderly transition away from the greenback without causing a sharp fluctuation in the dollar's market value.
"Like it or not, the dollar is going to lose some of its global status," Bergsten said. "So maybe it's time we just accepted that and figured out the best and most orderly way to make that happen."
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June 29, 2009
Entitlements Darken Long-Term Outlook for Federal Budget
by Nicola Moore
WebMemo #2510
For years, the Congressional Budget Office (CBO), Government Accountability Office, Social Security and Medicare Trustees, and think tanks from across the political spectrum have been warning Congress that the budget is on an unsustainable course, and for years Congress has ignored them. CBO recently issued a new warning in their updated "Long-Term Budget Outlook" that is déjà vu all over again.
Under either of two scenarios CBO examined, spending will explode, resulting in unprecedented levels of debt and deficits that would cause substantial harm to the economy. But this year, Congress does not need to read any further than the summary of the report to figure out what to do. As CBO states:
Almost all of the projected growth in federal spending other than interest payments on the debt comes from growth in spending on the three largest entitlement programs--Medicare, Medicaid, and Social Security.[1]
Solving America's deficit problem is an impossible task unless entitlement programs are reformed. The current recession, which has put a finer point on the problem of trillion-dollar deficits, should elevate the need for reform to a level not even Congress can continue to ignore.
Outlook Does Not Look Good
CBO's analysis consists of two sets of projections whose chief difference is that one, the "Extended-Baseline Scenario," assumes no changes to current tax policy while the other, the "Alternative Fiscal Scenario," would extend the 2001 and 2003 tax cuts and patch the AMT. The former yields higher revenues, resulting in lower deficits and a rosier outlook than the latter. For simplicity and to illustrate that even the best-case scenario is a miserable option, this paper will quote numbers from the Extended-Baseline Scenario only.
The most frightening findings in this report are the deficit and debt projections. In this year and next year, the yearly budget shortfall, or deficit, will be the largest post-war deficits on record--exceeding 11 percent of the economy or gross domestic product (GDP)--and by 2080 it will reach 17.8 percent of GDP.
The national debt, which is the sum of all past deficits, will escalate even faster. Since 1962, debt has averaged 36 percent of GDP, but it will reach 60 percent, nearly double the average, by next year and will exceed 100 percent of the economy by 2042. Put another way, in about 30 years, for every $1 each American citizen and business earns or produces, the government will be an equivalent $1 in debt. By 2083, debt figures will surpass an astounding 306 percent of GDP.
The report also finds high overall growth in the government as a share of the economy and of taxpayers' wallets that provides an additional area of concern. While total government spending has hovered around 20 percent of the economy since the 1960s, it has jumped by a quarter to 25 percent in 2009 alone and will exceed 32 percent by 2083. Taxes, which have averaged at 18.3 percent of GDP, will reach unprecedented levels of 26 percent by 2083. Never in American history have spending and tax levels been that high.
But Why Should This Year Be Any Different?
Much of the shock of these statistics is old news. The specific numbers from report to report by CBO and even other agencies have changed slightly year to year as data is updated and assumptions are modified, but the message about the budget's unsustainable course has stayed the same. However, two factors should cause this year's "Long-Term Budget Outlook" to resonate more strongly and catalyze congressional action.
First, the current recession has proven how important it is to get and keep America's economy on track. America is in a period of high unemployment, negative economic growth, and trillion-dollar deficits. More trillion-dollar deficits will not get or keep America's economy on a sustainable path, nor will they be tolerated by the public, but that is precisely where the U.S. economy is headed.
While debt levels at 300 percent of GDP would produce unimaginable economic pain, the situation would be even worse than CBO predicts. As debt levels increase, interest rates, too, must increase in order to encourage more citizens or foreign governments to buy up debt. However, CBO does not attempt to model interest rate increases. Had CBO accounted for this, long-term deficit and debt numbers would be far higher because rising interest rates would drive net interest costs up further, driving deficits and debt up even higher, driving interest rates up further, and so on in a vicious cycle. As CBO states on page eight of the report: "If debt actually increased as projected under either scenario, interest rates would be higher than otherwise and economic growth would be slower."[2]
Second, the Obama Administration and Democratic congressional leadership are poised to make the budget situation far worse with proposals for new expensive federal programs, such as national health care. While many policy goals may seem important in isolation, they must still be paid for in the broader context of the entire budget. Americans cannot afford to let Congress quietly sweep this report under the rug; Congress must confront America's budget situation openly and honestly before passing policies that would make this bad situation worse.
Congress Has One Option: Entitlement Reform
As CBO explains, the cause of the bleak outlook is clear: "Debt soars (under either baseline) because of unrelenting growth in federal spending on health care programs and a rise in Social Security spending as a share of GDP, combined with a much smaller increase in tax revenues."[3] Indeed, over the projection period these retirement entitlements, which are already the largest pieces of the budget, will more than double in size.
Unlike other spending, which will actually decrease substantially over the projection period if stimulus spending is phased out, entitlement spending is part of mandatory spending and grows on autopilot. The automatic growth leads to exploding costs due to rising health care costs and the fact that the 77 million retiring baby boomers outnumber the workers who will support them by a 2-to-1 ratio. Cutting an earmark here or raising a soda tax there will be absolutely insufficient to overcome these pressures, which is why CBO correctly admits that entitlement reform is the only option.
Too Bad to Ignore
Now that Americans are all too familiar with the problems associated with economic slowdowns and trillion-dollar deficits, Congress ought to take the warnings issued in the CBO's "Long-Term Budget Outlook" seriously. Adding new entitlements, such as national health care, or ignoring the need to reform existing ones while claiming to care about fiscal responsibility will be disingenuous at best and economically debilitating at worst.
Nicola Moore is Assistant Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
[1]Congressional Budget Office, "The Long-Term Budget Outlook," June 2009, p. xi, at http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf (June 26, 2009).
[2]Ibid., p. 8.
[3]Ibid., p. 16.
http://www.heritage.org/Research/Budget/wm2510.cfm
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http://www.foxnews.com/politics/2009/06/24/mr-popular-rep-paul-wins-supporters-fed-sunshine/
Mr. Popular? Ron Paul Wins Supporters to Fed Sunshine Bill
Rep. Ron Paul so far has won 245 co-sponsors to a bill that would require a full-fledged audit of the Federal Reserve by the end of 2010.
By Judson Berger
FOXNews.com
Tuesday, June 30, 2009
Rep. Ron Paul, shown here speaking to the American Conservative Union last February, is winning supporters to a new bill. (Reuters Photo)
All of a sudden, Congress is paying close attention to Ron Paul.
The feisty congressman from Texas, whose insurgent "Ron Paul Revolution" presidential campaign rankled Republican leaders last year, now has the GOP House leadership on his side -- backing a measure that generated paltry support when he first introduced it 26 years ago.
Paul, as of Tuesday, has won 245 co-sponsors to a bill that would require a full-fledged audit of the Federal Reserve by the end of 2010.
Paul attracted just 18 co-sponsors when he authored a similar bill, which died, in 1983. While the impact Fed policies have on inflation is once again a concern, fears about loose monetary policy and excessive federal spending appear even more widespread in 2009.
"In the past, I never got much support, but I think it's the financial crisis obviously that's drawing so much attention to it, and people want to know more about the Federal Reserve," Paul told FOXNews.com.
With the Federal Reserve holding interest rates at rock-bottom levels, pumping trillions into the economy and now poised to have new powers to oversee the financial system under President Obama's proposed regulatory overhaul, Paul said lawmakers want transparency.
"If they give them a lot more power and there's no more transparency, that'll be a disaster," he said.
The bill would call for the comptroller general in the Government Accountability Office to audit the Fed and report those findings to Congress. The GAO's ability to conduct such audits now is severely restricted.
A slew of top Republicans are backing the bill, as are many Democrats.
"Ron Paul has the right idea on this," said Sen. Jim DeMint, R-S.C., who supports similar legislation in the Senate. "I'm just hoping we can get a clear audit. ... We need to know what they're up to."
House Republican Leader John Boehner, who signed on as a co-sponsor this month, wrote in a recent blog post that the "lack of transparency and accountability" regarding federal dollars committed by the Fed and Treasury Department raise "serious concerns" and make an audit critical.
"The Federal Reserve Transparency Act would remove all of these restrictions, and allow GAO to get real answers from the Federal Reserve to protect American taxpayers," Boehner wrote.
Unfortunately for Paul, the bill appears to be idling in the House Financial Services Committee, which is chaired by Barney Frank, D-Mass. The bill has been sitting there, gathering co-sponsors, since Paul introduced it in late February.
"You've kind of got to rely on the Democratic leadership (to move the bill along)," a Boehner aide said. "I haven't heard a lot of support from Chairman Frank."
Calls to Frank's office were not returned.
Paul acknowledged that his bill hasn't advanced but said Frank has "promised" him he will deal with his bill and is willing to give it a hearing. Paul said it's easily got the "momentum" to pass the full House.
A representative with the Federal Reserve could not be reached for comment.
Obama, though, voiced confidence in Fed Chairman Ben Bernanke last Tuesday and defended the Fed's overall ability to regulate effectively as well as his proposal to give the body more power.
"If you look at what we've proposed, we are not so much expanding the Fed's power as we are focusing what the Fed needs to do to prevent the kinds of crises that are happening again," Obama said. "We want that power to be available so that taxpayers aren't on the hook."
Sen. Bernie Sanders, I-Vt., introduced a bill similar to Paul's in the Senate in March, which so far has attracted just three co-sponsors -- DeMint and Republican Sens. David Vitter of Louisiana and Mike Crapo of Idaho.
But DeMint told FOX News last week that the measure would have a good chance of passing the Senate if supporters can push Paul's to a vote, which he said would be successful, in the House.
"I think if we can get that much attention on this bill, I don't believe senators could vote against it, if people knew what they were voting for because everyone is suspicious of the Federal Reserve," DeMint said.
Paul's underlying goal is to abolish the Federal Reserve, which he finds contemptible.
"I blame almost everything on the Fed because they create the bubbles, they create the credit," Paul said.
But the move to require an audit, which Paul described as "neutral," puts him a bit more in the congressional mainstream.
That's a change of pace. The long-time congressman's GOP primary bid was decidedly outside the mainstream. His campaign drew enthusiastic support last year, and though it wasn't enough to pose an electoral threat to the top candidates, he even staged his own September counter-convention in Minneapolis -- down the road from the official Republican National Convention in St. Paul. His "Rally for the Republic" drew more than 10,000 supporters and was complete with a rock band and a slew of faux-delegates wielding signs for their states.
Paul frequently plays the role of party and congressional outsider. Most recently, he was the lone "no" vote on last Friday's resolution to condemn the Iranian government's crackdown on protesters.
He cited constitutional concerns in that vote, as he has in his criticism of the Fed and a slew of other issues.
"The whole process is unconstitutional. There is no legal authority to operate such a monetary system," Paul said in February, in a statement calling for Washington to "end the Fed." He introduced the Federal Reserve Transparency Act the following day.
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I like Walmart, and regularly am given grief for supporting what I see as the unvarnished success of capitalism. But as this piece makes clear, they are able to embrace gross inconsistency when it serves them:
Why Wal-Mart Supports an Employer Mandate
Posted by Michael F. Cannon
A couple of years ago, I shared a cab to the airport with a Wal-Mart lobbyist, who told me that Wal-Mart supports an “employer mandate.” An employer mandate is a legal requirement that employers provide a government-defined package of health benefits to their workers. Only Hawaii and Massachusetts have enacted such a law.
I couldn’t believe what I was hearing. Wal-Mart is a capitalist success story. At the time of our conversation, this lobbyist was helping Wal-Mart fight off employer-mandate legislation in dozens of states. Those measures were specifically designed to hurt Wal-Mart, and were underwritten by the unions and union shops that were losing jobs and business to Wal-Mart.
But it all became clear when the lobbyist explained the reason for Wal-Mart’s position: “Target’s health-benefits costs are lower.”
I have no idea what Target’s or Wal-Mart’s health-benefits costs are. Let’s say that Target spends $5,000 per worker on health benefits and Wal-Mart spends $10,000. An employer mandate that requires both retail giants to spend $9,000 per worker would have no effect on Wal-Mart. But it would cripple one of Wal-Mart’s chief competitors.
So yesterday’s news that Wal-Mart is publicly endorsing a “sensible and equitable” employer mandate — i.e., a mandate that hurts Target but not Wal-Mart — didn’t come as a surprise to me. It merely confirmed what I learned in a cab on the way to the airport: Wal-Mart has gone native. That great symbol of the benefits of free-market competition now joins its erstwhile enemies among the legions of rent-seeking weasels who would rather run to government for protection than earn their keep by making people’s lives better.
In 2007, Wal-Mart officially joined the Church of Universal Coverage when it entered one of those countless strange-bedfellows coalitions with the Service Employees International Union. At the time, I criticized Wal-Mart for “self-congratulatory puffery” and “jump[ing] on the big-government bandwagon.” I also criticized then-CEO Lee Scott for spouting economic nonsense. (I later learned that Scott was not amused.)
This is so much worse than that.
http://www.cato-at-liberty.org/2009/07/01/wal-mart-supports-employer-mandate/
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A Garden of Piggish Delights
Waxman-Markey is part power-grab, part enviro-fantasy. Here are 50 reasons to stop it.
By Stephen Spruiell & Kevin Williamson
The stimulus bill was the legislative equivalent of the famous cantina scene from Star Wars, an eye-popping collection of the freakish and exotic, gathered for dubious purposes. The Waxman-Markey cap-and-trade bill, known as ACES (the American Clean Energy and Security Act), is more like the third panel in Hieronymus Bosch’s Garden of Earthly Delights — a hellscape that disturbs the sleep of anybody who contemplates it carefully.
Two main things to understand about Waxman-Markey: First, it will not reduce greenhouse-gas emissions, at least not at any point in the near future. The inclusion of carbon offsets, which can be manufactured out of thin air and political imagination, will eliminate most of the demands that the legislation puts on industry, though in doing so it will manage to drive up the prices consumers pay for every product that requires energy for its manufacture — which is to say, for everything. Second, it represents a worse abuse of the public trust and purse than the stimulus and the bailouts put together. Waxman-Markey creates a permanent new regime in which environmental romanticism and corporate welfare are mixed together to form political poison. From comic bureaucratic power grabs (check out the section of the bill on candelabras) to the creation of new welfare programs for Democratic constituencies to, above all, massive giveaways for every financial, industrial, and political lobby imaginable, this bill would permanently deform American politics and economic life.
The House of Representatives, famously, did not read this bill before passing it, which is testament to either Nancy Pelosi’s managerial incompetency or her political wile, or possibly both. If you take the time to read the legislation, you’ll discover four major themes: special-interest giveaways, regulatory mandates unrelated to climate change, fanciful technological programs worthy of The Jetsons, and assorted left-wing wish fulfillment. We cannot cover every swirl and brushstroke of this masterpiece of misgovernance, but here’s a breakdown of its 50 most outrageous features.
SPECIAL-INTEREST SOPS
1. The big doozy: Eighty-five percent of the carbon permits will not be sold at auction — they will be given away to utility companies, petroleum interests, refineries, and a coterie of politically connected businesses. If you’re wondering why Big Business supports cap-and-trade, that’s why. Free money for business, but higher energy prices for you.
2. The sale of carbon permits will enrich the Wall Street investment bankers whose money put Obama in the White House. Top of the list: Goldman Sachs, which is invested in carbon-offset development and carbon permissions. CNN reports:upping emissions of nitrous oxide — a much more powerful greenhouse gas. The practice also makes weed control more difficult, meaning that it supports the market for herbicides such as Monsanto’s RoundUp. Guess who’s spending millions lobbying for no-till?
Less than two weeks after the investment bank announced it would be laying off 10 percent of its staff, ***Goldman Sachs confirmed that it has taken a minority stake in Utah-based carbon offset project developer Blue Source LLC. . . . “Interest in the pre-compliance carbon market in the U.S. is growing rapidly,” said Leslie Biddle, Head of Commodity Sales at Goldman, “and we are excited to be able to offer our clients immediate access to a diverse selection of emission reductions to manage their carbon risk.”
3. With its rich menu of corporate subsidies and special set-asides for politically connected industries, Waxman-Markey has inspired a new corporate interest group, USCAP, the United States Climate Action Partnership — the group largely responsible for the fact that carbon permits are being given away like candy at Christmas rather than auctioned. And who is lined up to receive a piece of the massive wealth transfer that Waxman-Markey will mandate? Canada Free Press lists:
Alcoa, American International Group (AIG) which withdrew after accepting government bailout money, Boston Scientific Corporation, BP America Inc., Caterpillar Inc., Chrysler LLC (which continues to lobby with taxpayer dollars), ConocoPhillips, Deere & Company, The Dow Chemical Company, Duke Energy, DuPont, Environmental Defense, Exelon Corporation, Ford Motor Company, FPL Group, Inc., General Electric, General Motors Corp. (now owned by the Obama administration), Johnson & Johnson, Marsh, Inc., National Wildlife Federation, Natural Resources Defense Council, The Nature Conservancy, NRG Energy, Inc., Pepsico, Pew Center on Global Climate Change, PG&E Corporation, PNM Resources, Rio Tinto, Shell, Siemens Corporation, World Resources Institute, Xerox Corporation.
One major group of recipients of the free money being given to industry in the form of carbon permits are the electric utilities, represented in Washington by the Edison Electric Institute. Along with the coal and steel businesses, the utilities are positioned to receive a huge portion of the carbon permits — some of which will be disguised as measures for consumers — and have become one of the nation’s highest-spending lobbies, working to ensure that their interests are served by cap-and-trade.
4. To the extent that the allowances actually generate government revenue, that money is going to be used for fraud-inviting projects of dubious environmental or economic value. Example: Some allowance money will be used to “build capacity to reduce deforestation in developing countries experiencing deforestation, including preparing developing countries to participate in international markets for international offset credits for reduced emissions from deforestation.” What are the chances of that being abused?
5. In addition to the permits, the bill also allows for the creation of “offsets” — the medieval-style indulgences of the carbon-footprint world. In fact, nearly all of Waxman-Markey’s carbon-reduction targets can be met with offsets alone through 2050, meaning decades before any actual reduction of greenhouse gases is required. That means huge new expenses for small businesses and consumers in return for basically zero environmental improvement. And how does one earn an offset to sell? Get a farm and cash in through such methods as, and we quote, “improved manure management,” “reduced tillage/no-tillage,” or “afforestation of marginal farmlands.” Translation: Plant some trees around the house and claim some extra credits on the land the government may already be paying you not to farm. And do a better job of handling your B.S. — but you’ll never do as good a job on that one as the authors of Waxman-Markey.
6. Because the cap-and-trade regime will disadvantage domestic refineries vis-à-vis foreign competitors, such as India’s powerhouse Reliance Industries, Waxman-Markey is attempting to buy them off with free permits — 2 percent of the national total will go to domestic refineries, at no cost.
7. Agribusiness is exempted from cap-and-trade controls, but the farm lobby will be given permits to sell and to profit from anyway. All carrot, no stick — precisely what this powerful industry lobby is accustomed to receiving from Washington.
8. Waxman-Markey strips the EPA of its oversight role when it comes to managing the offsets associated with American farms. At the behest of Cargill and other big players in the farm lobby, oversight will be entrusted to the USDA — basically a wholly owned subsidiary of the agriculture cartel, one of America’s most rapacious special-interest groups, which already is stuffed with subsidies and sops.
9. Waxman-Markey directs the EPA to ignore the real environmental impact of ethanol and other biofuels. The gigantic subsidies lavished on the farm lobby through the ethanol program encourage farmers to clear forest land to plant corn — a net environmental loss that the use of ethanol does nothing to offset. An earlier version of the legislation that would have accounted for land-use changes was altered at the farm lobby’s demand. Now, the EPA will be forbidden to rain the same pain on the ethanol gang that it’s going to rain on the rest of the economy — a minimum of five years’ (ahem) “study” is required before a ruling on whether ethanol should be treated the same as any other fuel, and the EPA, USDA, and Congress all must agree to act before Big Corn reaps what Waxman-Markey sows.
10. Rural electrical cooperatives are demanding that the offsets be awarded in proportion to historic emissions, and they probably will prevail. This means that high-polluting generators, such as the coal-fired plants typical of electric co-ops’ members, will be rewarded because they pollute more, while cleaner producers, such as those using nuclear and hydroelectric power, will be penalized.
11. The farm lobby will be rewarded for practices that do little or nothing to reduce greenhouse gases. One such practice is “no till” planting, in which farmers forgo plowing and plant seeds directly into the soil. Two peer-reviewed scientific papers suggest that no-till either does nothing to decrease carbon dioxide or actually increases the level of greenhouse-gas emissions by upping emissions of nitrous oxide — a much more powerful greenhouse gas. Now it’s not clear that no-till will reduce greenhouse gases, but the practice does make weed-control more difficult, meaning that it supports the market for herbicides such as Monsanto’s RoundUp. Guess who’s spending millions lobbying for no-till?
12. Waxman-Markey provides an excuse for trade protectionism. The bill will give the Obama administration broad new powers to enact tariffs on imports from jurisdictions that have not had the poor sense to enact similar legislation, meaning that it invites both politically driven trade protectionism and retaliatory measures from abroad in the service of an empty green dream. As the New York Times puts it:
A House committee working on sweeping energy legislation seems determined to make sure that the United States will tax China and other carbon polluters, potentially disrupting an already-sensitive climate change debate in Congress. The Ways and Means Committee’s proposed bill language would virtually require that the president impose an import tariff on any country that fails to clamp down on greenhouse gas emissions. Directed primarily at China, the United States’ biggest manufacturing competitor, the provisions aim to protect cement, steel and other energy-intensive industries that expect to face higher costs under a federal emissions cap
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13. Waxman-Markey channels billions of dollars into subsidies for “international clean technology deployment for emerging markets.” David H. McCormick of the Treasury Department recently gave a speech on the establishment of an $8 billion fund for that purpose; those who showed up to gets the specs on this new gravy train included Sequoia Capital, the United Steelworkers Union, the Clinton Climate Initiative, Ernst & Young, Duke Energy, SunPower, Honeywell, Shell, ConocoPhillips, Credit Suisse, Chrysalix Energy Venture Capital, and Goldman Sachs. If you’re wondering who’s going to make real money off of Waxman-Markey, this list would be a pretty good place to start.
14. Naturally, Big Labor gets its piece of the pie, too. Projects receiving grants and financing under Waxman-Markey provisions will be required to implement Davis-Bacon union-wage rules, making it hard for non-union firms to compete — and ensuring that these “investments” pay out inflated union wages. And it’s not just the big research-and-development contracts, since Waxman-Markey forces union-wage rules all the way down to the plumbing-repair and light-bulb-changing level.
NON-CAP MANDATES
15. The renewable electricity standard is the big one here. This would require utilities to supply 20 percent of their power from renewable energy sources (or “increased efficiency”) by 2020. The Senate was unable to pass a smaller mandate in 2007, because favored sources of renewable energy (wind power, for instance) just don’t work in certain regions of the country, and regional blocs can wield a great deal of power in the Senate. These blocs may be less powerful this time around, because the Democrats within them will be under a great deal of pressure to pass this bill. The renewable standard would force utilities to rely increasingly on expensive sources of energy like wind and solar — expensive because they are capital-intensive and must be located far away from urban areas, necessitating long transmission lines. You can thank Congress for adding yet another charge to your monthly utility bill.
16. The bill would create a system of renewable electricity credits similar to the carbon offsets mentioned above — utilities that cannot meet the standard could purchase credits from other utilities. One way or another, however, the cost is getting passed along to you.
17. The renewable standard excludes sources of power like nuclear and coal gasification, and perhaps that’s to be understood. Even though these sources are cleaner than traditional coal-burning plants, they violate a number of green taboos. What’s less understandable is the way “qualified hydropower” is narrowly defined to exclude hydropower from Canada. Again, the thing to remember is that Congress is less concerned with greening the environment and more concerned with greening the pockets of parochial interests.
18. The legislation calls for the establishment of a Carbon Storage Research Corporation (CSRC) to steer $1 billion annually into the development of carbon-capture technologiesy. The CSRC would be funded via assessments on utility companies. Hear that? It’s the sound of another charge being added to your bill. Evidence suggests that subsidizing research into carbon-capture technology is either futile (in the case of traditional coal-powered plants) or unnecessary (the technology for sequestering emissions from gasification plants already exists).
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19. The promotion of carbon capture will require a host of new regulations — the bill calls on the EPA to create a permitting process for geologic sequestration (burying captured carbon emissions in the ground), regulations to keep the buried carbon from escaping into the air, and regulations to keep it from escaping into the water supply. All we need now are carbon guards to throw the carbon in solitary confinement if it gets too rowdy in the prison yard.
20. The bill imposes performance standards on new coal-fired power plants to encourage the adoption of carbon-capture technology. Ratepayers would pay more for electricity because of the efficiency losses associated with carbon capture.
21. The bill regulates every light fixture under the sun. Actually, the sun might be the only light source that isn’t regulated specifically in this legislation. There are rules governing fluorescent lamps, incandescent lamps, intermediate base lamps, candelabra base lamps, outdoor luminaires, portable light fixtures — you get the idea. The government actually started down this road by regulating light bulbs in the 2005 energy bill. This bill merely tightens the regulations, which means the unintended consequences produced by the 2005 bill — more expensive light bulbs that burn out quicker — will probably get worse.
22. The bill extends its reach to cover appliances as well. Clothes washers and dishwashers, portable electric spas, showerheads, faucets, televisions — all these and more are covered specifically in the bill. You thought we were kidding when we said this bill represents the federal government’s attempt to expand its regulatory reach to cover everything. We weren’t.
23. Appliances will be required to come with “carbon output” labels, and retailers will get bonus payments for marketing those that are certified “best-in-class.” The bill sets up a payment schedule to reward the manufacturers of these “best-in-class” products: $75 for each dishwasher, $250 for each clothes washer, and so on. So go out and splurge on that new super-energy-efficient refrigerator — under this bill, you already made a $200 down payment.
24. The bill requires the EPA to establish environmental standards for residences, meaning a federally dictated one-size-fits-all policy for greening every home in America. When you’re retrofitting your home according to EPA guidelines, it will come as little comfort to know that the government is reimbursing you for your troubles, especially if you’re doing the work around April 15.
25. The bill would affect commercial properties, too. In fact, all buildings would be governed by a “national energy efficiency building code” that would require 50 percent reductions in energy use in all buildings by 2018, followed by 5 percent reductions in energy use every three years after that through 2030. No one disputes that these changes will be costly, but Waxman-Markey supporters argue that they will pay for themselves through lower energy bills. This argument holds up only if we assume that energy prices will stay flat or fall over time. But the aforementioned carbon caps instituted elsewhere in this legislation make that prospect highly unlikely. Businesses and homeowners will pay twice — once to retrofit their roosts and again when the energy bill arrives.
26. The bill instructs the EPA to regulate greenhouse-gas emissions from mobile sources such as cars, trucks, buses, dirt bikes, snowmobiles, boats, planes, and trains.
27. It instructs the EPA to cap and reduce greenhouse-gas emissions from non-mobile sources as well. These two items would be bigger news if the Supreme Court hadn’t already cleared the way for the EPA to regulate greenhouse-gas emissions. President Obama will probably move forward on this front even if Congress fails to pass the cap-and-trade bill. He has already announced a strict national fuel-efficiency standard for cars, and the implications for other sources of greenhouse-gas emissions are not good.
28. The bill calls on the EPA to establish a federal greenhouse-gas registry. Businesses would be required to collect and submit data on their emissions to the EPA, creating yet another compliance cost for them to pass on to their customers.
29. The bill undermines federalism by prohibiting states from creating their own cap-and-trade programs. Nearly half of all U.S. states have already taken some sort of action to cap greenhouse-gas emissions by forming regional compacts and implementing their own emission standards. Understandably, these states support a federal cap so that they are not at an economic disadvantage to states that do not cap emissions. If these states want to hamstring their own economies in the pursuit of green goals, that should be their business. States that don’t see any reason to do so should not be forced to share in their folly.
GREEN DREAMS
30. Utility companies are directed to start laying the groundwork for a glorious future in which everyone drives a plug-in car. The legislation directs them to start planning for the deployment of electrical charging stations along roadways, in parking garages, and at gas stations, as well as “such other elements as the State determines necessary to support plug-in electric drive vehicles.” (States are directed to consider whether the costs of planning or the implementation of these plans merit reimbursement. Either way, you wind up with the bill.
31. The secretary of energy is required to establish a large-scale vehicle electrification program and to provide “such sums as may be necessary” for the manufacture of plug-in electric-drive vehicles, including another $25 billion for “advanced technology vehicle” loans. As if Detroit hadn’t gotten its hands on enough taxpayer money.
32. The bill directs the secretary of energy to promulgate regulations requiring that each automaker’s fleet be comprised of a minimum percentage of vehicles that run on ethanol or biodiesel.
33. It includes loan guarantees for the construction of ethanol pipelines. Nearly every energy bill in the last five years has included loan guarantees for the construction of ethanol pipelines. Apparently, would-be builders of this vital infrastructure are still having problems getting financing.
34. Congress passed (and Obama signed) a “cash for clunkers” program as part of the war appropriations bill this month. Under the program, you get a rebate for trading in a used car for one that gets slightly higher mileage. The Waxman-Markey bill takes this concept and applies it to appliances, electric motors — basically anything that can be traded in for a more energy-efficient version. These types of programs generally fail cost-benefit analyses spectacularly because more energy goes into the production of the new appliances than would have been used if the old ones had just run their course.
35. The bill includes $15 billion in grants and loans to encourage the manufacture of wind turbines, solar energy, biofuel production, and other sources of renewable energy that have benefited from decades of such largesse already. Another $15 billion is not going to make these energy sources cost-competitive. Only carbon rationing can achieve that. One suspects the Democrats know this; that’s why they are pushing a carbon-rationing bill. The $15 billion is just another sop to the green-energy lobby to help grease the skids.
36. The bill establishes within the EPA a SmartWay Transport Program, which would provide grants and loans to freight carriers that meet environmental goals.
37. The bill requires the secretary of energy to establish a program to make monetary awards to utilities that find innovative ways of using thermal energy, as if utilities needed an extra incentive to discover a new, cheap energy source.
38. It includes another $1.5 billion for the Hollings Manufacturing Partnership Program. This program pops up repeatedly in discussions of programs that both liberals and conservatives think should be eliminated. It is corporate welfare, pure and simple.
39. It includes $65 million for research into high-efficiency gas turbines, another gift to the corporate world with little environmental benefit.
40. It includes $7.5 million to establish a National Bioenergy Partnership to promote biofuels. Economic barriers to the commercial viability of biofuel as an energy source have proven to be so insurmountable that even with all of the federal mandates and subsidies already thrown their way, the ethanol companies lined up with everyone else for a federal bailout when the financial crisis hit. The last thing consumers need is another full-time, federally subsidized lobbying arm for that industry.
VARIOUS LEFT-WING WISH FULFILLMENT
41. One of Obama’s most reliable constituencies, college administrators, will be given billions of dollars to play with through the creation of eight “Clean Energy Innovation Centers,” university-based consortia charged with a mission to “leverage the expertise and resources of the university and private research communities, industry, venture capital, national laboratories, and other participants in energy innovation to support cross-disciplinary research and development in areas not being served by the private sector in order to develop and transfer innovative clean energy technologies into the marketplace.” Meaning that the famous business acumen of the federal government will be applied to the energy industry.
42. Another Obama constituency, the community-organizing gang — i.e., ACORN — will be eligible to receive billions in funding as the bill “authorizes the Secretary [of Energy] to make grants to community development organizations to provide financing to businesses and projects that improve energy efficiency.” Think federally subsidized consultants paid $55 an hour to tell businesses to turn down their AC in the summer.
43. Waxman-Markey also enables Obama to indulge his persistent desire to use the tax code to transfer wealth from people who pay taxes to people who don’t — i.e., from likely Republican voters to likely Obama voters. The bill “amends the Internal Revenue Code to allow certain low income taxpayers a refundable energy tax credit to compensate such taxpayers for reductions in their purchasing power, as identified and calculated by the Environmental Protection Agency (EPA), resulting from regulation of GHGs (greenhouse gases).”
44. Not only will Waxman-Markey slip more redistribution into the tax code, it will establish a new monthly welfare check. It will create an “Energy Refund Program” that will “give low-income households a monthly cash energy refund equal to the estimated loss in purchasing power resulting from this Act.”
45. Another new class of government dependents will be created by Waxman-Markey: Americans put out of work by Waxman-Markey. The bill establishes a program to distribute “climate change adjustment assistance to adversely affected workers.”
46. Waxman-Markey will create yet another raft of government dependents, but of a different sort — bureaucrats. The bill creates: a new United States Global Change Research Program, a National Climate Change Adaptation Program, a National Climate Service, Natural Resources Climate Change Adaptation Strategy office at the White House, and an International Climate Change Adaptation Program at the State Department.
47. And since everybody else is getting a check, Bambi gets one, too, in the form of money for “domestic wildlife and natural resource adaptation.”
48. States also get in on the action. The legislation allows each state to set up a State Energy and Environment Development (SEED) account into which the federal government can deposit emission allowances. States can then sell these allowances and use the proceeds to support clean-energy programs. They must set aside a certain amount of the money to fund federal mandates, but they are given broad discretion to use the rest by making loans, grants, and other forms of support available to favored constituencies. It’s federalism, of a sort — the wrong sort.
49. And, of course, everything includes a health-care component, even cap-and-trade. Waxman-Markey requires the Department of Health and Human Services to develop a “strategic action plan to assist health professionals in preparing for and responding to the impacts of climate change.”
50. Waxman-Markey dumps money into questionable “partnerships” and grants to study “emerging careers” in “renewable energy, energy efficiency, and climate change mitigation.” The first career to emerge, of course, will be managing grants to study emerging careers.
That’s our Top 50. We could go on. And on.
When Nancy Pelosi was advising congressmen to back this beast, she said they should not worry about the words of the bill they had not read, but think about four others: “jobs, jobs, jobs, jobs.” The legislation offers Pelosi perverse vindication: Waxman-Markey will create a lot of jobs for Wall Street sharps, Big Business rent-seekers, ACORN hucksters, utility-company lobbyists, grant-writers at left-wing organizations, college administrators, light-bulb-policing bureaucrats, and an army of parasitic hangers-on. It’s up to the Senate to stop it.
— Stephen Spruiell is a staff reporter for National Review Online. Kevin Williamson is a deputy managing editor of National Review.
National Review Online - http://article.nationalreview.com/?q=YTc1MmVhMGYxY2UzNzAwMTJlODBjZjg2NDJjNmM2MWE=
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U.S. Job Report Suggests that Green Shoots are Mostly Yellow Weeds
Nouriel Roubini | Jul 2, 2009
The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.
It’s clear that even if the recession were to be over anytime soon – and it’s not going to be over before the end of the year – job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over.
The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we’re looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours, and average hourly wages – and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone.
The details also suggest that other aspects of the labor markets are worsening. If you include discouraged workers and partially-employed workers, the unemployment rate is already above 16 percent. If you consider also that temporary jobs are falling now quite sharply, labor market conditions are becoming worse. And the average duration of unemployment now is at an all-time high. So people not only are losing jobs, but they’re finding it harder to find new jobs. So every element of the labor market is worsening.
The unemployment rate rose only marginally from 9.4 percent to 9.5 percent, but that’s because so many people are discouraged that they exited the labor force voluntarily, and therefore are not counted in the official unemployment rate.
The other element of the report that must be considered is that, for the summer, the Bureau of Labor Statistics (BLS) is still adding between 150,000 and 200,000 jobs based on the birth/death model. We know the distortions of the birth/death model – that in a recession jobs created within firms are much smaller than those created by firms that are dying. So that’s distorting downward the number of job losses. Based on the initial claims for unemployment benefits, it’s more likely that the job losses are closer to 600,000 per month rather than the figures officially reported.
These job losses are going to have a significant effect on consumer confidence and consumption in the months ahead. We’ve also seen extreme weakness in consumption. There was a boost in retail sales and real personal consumption-spending in January and February, sparked by sales following the holiday season, but the numbers from April, May, and now June are extremely weak in real terms. In April and May you saw a significant increase in real personal income only because of tax rebates and unemployment benefits. In April, there was a sharp fall in real personal spending, and in May the increase was only marginal in real terms.
This suggests that the most of the tax rebates are being saved rather than consumed. The same thing happened last year. Last year, with a $100 billion tax rebate, only thirty cents on the dollar were spent while seventy cents on the dollar were saved. Last year, people expected the tax rebate to stimulate consumption through September. Instead, there was an increase in April, May, and June, with the increase fizzling out by July.
This year it’s even worse. We have another $100 billion in tax rebates in the pipeline. But the numbers suggest that in April, real consumption fell. And in May it was practically flat. So this year households are even more worried than they were last year about jobs, income, credit cards and mortgages. Most likely only around 20 cents on the dollar – rather than 30 cents last year – of that increase of income is going to be spent. In any case, that increase in income is just temporary and is going to fizzle out by the summer. So you can expect a significant further reduction in consumption in the fall after the effects of the tax rebates fade.
The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.
In the stress tests, the average unemployment rate next year was assumed to be 10.3 percent in the most adverse scenario. We’ll be already at 10.3 percent by the fall or the winter of this year, and certainly well above that and close to 11% at some point next year.
So these very weak conditions in the labor market suggest problems for the U.S. consumer, but also significant increasing problems for the banking system as these sharp increases in job losses lead to further delinquencies on loans and securities and lower than expected recovery rates.
The latest figures – published this week - on mortgage delinquencies and foreclosures suggest a spike not only in subprime and near-prime delinquencies, but now also on prime mortgages. So the problems of the economy are significantly affecting the banking system. Even if for a couple of other quarters banks are going to use the new Financial Accounting Standards Board (FASB) rules and under-provisioning for loan losses to report better-than-expected results, by Q4, with unemployment rates above 10 percent, that short-term accounting fudging will have a significant impact on reported earnings. And this will show the underlying weakness in the economy. So banks may fudge it for a couple of other quarters, but eventually the effects of very sharp unemployment rates and still sharply falling home prices are going to drag down earnings and have a sharp effect on losses and capital needs of the banks and of the entire financial system.
Essentially, the results today suggested that there are not as many green shoots. These green shoots, as we’ve argued, are mostly yellow weeds that may even turn into brown manure if a double dip W-shaped recession occurs in 2010-2011. And it’s not just the employment situation. Real consumption and retail sales remain weak. Industrial production remains weak. The housing market, in terms of price adjustment, remains weak, even if the quantities - demand and supply - may be closer to bottoming out. Indeed, the inventory of unsold new homes is so large that you could stop producing new homes for almost a year to get rid of that inventory. Moreover, about 50% of existing home sales are distressed sales (short sales and foreclosed homes).
The labor market conditions may have a significant effect on how long it takes for the housing market to bottom out. It’s already estimated that by the end of this year, there will be about 8.4 million people who have a mortgage who have lost jobs, and therefore have essentially little income. Therefore, the number of people who will have difficulties servicing their mortgages is going to rise very sharply.
Home prices have already fallen from their peak by about 27 percent. Based on our analysis, they are going to fall by at least another 40 percent, and more likely 45 percent, before they bottom out. They are still falling at an annualized rate of over 18 percent. That fall of at least 40-45% percent of home prices from their peak is going to imply that about half of all households that have a mortgage – about 25 million of the 51 million that have mortgages – are going to be underwater with negative equity in their homes, and therefore will have a significant incentive to just walk away from their homes.
The job market report is essentially the tip of the iceberg. It’s a significant signal of the weaknesses in the economy. It affects consumer confidence. It affects labor income. It affects consumption. It affects the willingness of firms to start increasing production. It has significant consequences of the housing market. And it has significant consequences, of course, on the banking system.
Overall, it’s an extremely weak report and suggests that weakness in the labor markets is going to continue, and that the recession is more likely to continue through the end of the year and the beginning of next year. It also suggests that recovery will be anemic, subpar, below trend. We are still estimating that U.S. growth next year is going to be 1 percent above the 2009 level, well below a potential growth rate of 3 percent. This is because there is little deleveraging of households, corporate firms and financial institutions while there is a massive re-leveraging of the public sector with sharply rising deficits and debts as many of the private losses have been socialized.
There are also signs that there may be forces leading to a double-dip recession, sometime toward the second half of next year or towards 2011. If oil prices rise too much, too fast, too soon, that’s going to have a negative effect on trade and real disposable income in oil-importing countries (US, Europe, Japan, China, etc.). Also concerns about unsustainable budget deficits are high and are going to remain high, with growth anemic and unemployment rising. These deficits are already pushing long-term interest rates higher as investors worry about medium- to long-term stability. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, you are going to have a sharp increase in expected inflation - after three years of deflationary pressures - that’s going to push interest rates even higher.
For the time being, of course, there are massive deflationary pressures in the economy: the slack in the goods markets, with demand falling relative to supply-and-excess capacity. The rising slack in labor markets, which are controlling wages and labor costs and pushing them down, implies that deflationary pressures are going to be dominant this year and next year.
But eventually, large budget deficits and their monetization are going to lead – towards the end of next year and in 2011 – to an increase in expected inflation that may lead to a further increase in ten-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011. So the outlook for the US and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse- than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.
http://www.rgemonitor.com/
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Nouriel "Dr. Doom" Roubini is right, but I think things will be even worse than what he predicts. Then again, I expected the Dow to be in the 6000 range by now.
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I just saw this and was not sure if I should put it here or political rants but since it is about car dealerships and gm I opted for here
http://www.youtube.com/watch?v=cjwEBrAWMu4
Well worth the 5 mins it takes
Rep. Michele Bachmann (R-Minn.) speaking on the House floor: "Now we've moved into the realm of gangster government."
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Freki, Thanks for the video of Michele Bachmann calling out this government for what it is. I wish it was just overblown rhetoric of a far right conservative but every word of it unfortunately is true. - Doug
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Oil, Gas Market Speculation May Face Restrictions by U.S. CFTC
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By Tina Seeley
July 7 (Bloomberg) -- U.S. regulators say they may clamp down on oil and gas price speculators by limiting the holdings of energy futures traders, including index and exchange-traded funds.
The Commodity Futures Trading Commission will hold hearings to explore the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets, Chairman Gary Gensler said today in a statement. The agency didn’t say when the hearings would start or who would be asked to testify.
Senator Bernie Sanders, a Vermont independent, and Representative Bart Stupak, a Michigan Democrat, have called for action to avoid a repeat of last year’s run-up in crude oil prices to a record $147.21 a barrel, which they blame on speculators. Oil has climbed 44 percent this year in New York Mercantile Exchange trading, even amid a drop in demand and high levels of fuel in storage.
“Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products,” Gensler said in the statement. “This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.”
Billionaire investor George Soros told a Senate hearing in June 2008 that the oil price increase that year was caused partly by index funds that buy only oil contracts. Index funds and exchange-traded funds, which mimic an index, can hold oil contracts in excess of available supply.
Emergency Authority
Sanders has introduced legislation that would force the CFTC to invoke emergency authority to stop oil speculation. The agency is seeking input on whether it should impose aggregate position limits, Gensler said.
Gensler said in a letter to lawmakers earlier this year that speculators contributed to an asset bubble in commodities in 2008. His statement broke from former CFTC Acting Chairman Walter Lukken, who testified to Congress on Sept. 11 that there wasn’t “strong evidence” index traders were driving up prices.
Gensler wouldn’t say in an interview last week if he thought the same thing was happening this year.
“The CFTC currently sets and ensures adherence to position limits with respect to certain agriculture products,” Gensler said in the statement. “For energy commodities, futures exchanges set position limits and accountability levels to protect against manipulation and congestion. The exchanges are not required to set and enforce position limits to prevent the burdens of excessive speculation.”
‘Bona Fide Hedging’
The chairman said the CFTC is reviewing exemptions from position limits for “bona fide hedging,” after seeking public comment on whether the exemption should continue to apply to traders who are in the market for financial reasons, rather than those that actually use the commodity.
Gensler also said the agency was going to improve its weekly commitment of traders’ reports by separating swaps dealers from hedge funds. The agency will continue to collect and report data from swaps dealers and index investors, extending a “special call” from last year, Gensler said.
“Enhancing the quality of information in these weekly reports will better inform market participants and the public about the positions of the various types of traders,” he said.
To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net.
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http://www.youtube.com/watch?v=P5yxFtTwDcc&feature=channel
So libs, is 173 MPH ok because Obama is sooooooo dreamy?
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True unemployment rate already at 20%
Posted Jul 06 2009, 01:16 PM by Anthony Mirhaydari Rating: Filed under: Target, Office Depot, Macy's, economy, Anthony Mirhaydari
Really, how hard is it to find a job? Was June's horrid numbers, in which 467,000 people lost their jobs compared to 345,000 in May, a one-time fluke? Or does it mean that all those Wall Street economists who believe the economic recovery is starting are dead wrong?
Not to scare you, but the situation is actually worse than it seems. Over the years, the government has changed the way it counts the unemployed. An example of this is the criticized Birth-Death Model which was added in 2000. The model is designed to account for the birth and death of businesses and the resultant lag in survey data. Unfortunately, the model doesn't work that well during economic contractions (like we have now) and consistently overstates the number of jobs being created each month.
John Williams of Shadow Government Statistics specializes in removing these questionable tweaks to the government's statistical data to better align current numbers with the methodology used to gather historical data. After reviewing the data, Williams believes that "the June jobs loss likely exceeded 700,000." David Rosenberg of Gluskin Sheff notes that the fall in the number of hours worked in June (to a record low of 33 per week) is equivalent to a loss of more than 800,000 jobs.
There are similar issues with the way the unemployment rate is measured. The headline rate only jumped from 9.4% to 9.5% because of a drop in the number of people in the workforce. The more inclusive "U-6" measure of unemployment, which includes discouraged workers, jumped from 16.4% to 16.5%. But even this doesn't adequately capture the situation on the ground: Back in the Clinton Administration, the definition of discouraged worker was changed to only include those that had given up looking for work because there were no jobs to be had within the last year.
By adding these folks back in, William's SGS-Alternate Unemployment Measure rose to a jaw-dropping 20.6%. Separately, the Center for Labor Market Studies in Boston puts U.S. unemployment at 18.2%. Any way you cut the numbers, the situation is very bad. According to David Rosenberg, one-in-three among the unemployed have been looking for a job for more than six months and still can't find one.
This brings us to another issue: expiring unemployment benefits. Continuing unemployment claims fell 53,000 to 6.7 million last week, but Deutsche Bank's chief U.S. economist Joseph LaVorgna wonders how much of this decline is due people exhausting their standard 26-week benefit. He says: "We are concerned about what will happen when a significant share of out-of-work individuals' benefits completely expire, because this could lead consumer spending to re-weaken, hence jeopardizing a fragile recovery."
Unless the economy starts getting traction here in the third quarter, we could face a situation where people find that they have no job and no unemployment benefits. For these people, 2009 will feel an awful lot like 1932. As a result, spending cuts will be deep and dramatic.
My positions
The ongoing job losses will continue to weigh on the retail sector -- which was one of the best performing groups coming out of the March low. I've added short positions in Target (TGT), Macy's (M), and Office Depot (ODP) to my portfolio. Besides penny-pinching consumers, retailers face a federal minimum wage increase as well as a tough back-to-school and holiday shopping season.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
http://blogs.moneycentral.msn.com/topstocks/archive/2009/07/06/true-unemployment-rate-already-at-20.aspx
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http://dyn.politico.com/printstory.cfm?uuid=5736B6C8-18FE-70B2-A8A8C069D3E78A15
Economist declares 'train wreck'
By: Victoria McGrane
July 8, 2009 04:50 AM EST
If you thought last week’s job numbers were bad, take a look at the latest from Morgan Stanley’s chief economist, Richard Berner.
In a research note that’s been making the rounds of economics blogs this week, Berner declares that “America’s long-awaited fiscal train wreck is now under way.”
By “train wreck,” he means out-of-control federal budget deficits that he’s sure will finally drag the economy under — as if we weren’t already feeling badly enough about its shaky state.
“Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6 percent of [the gross domestic product] through 2019, contributing to a jump in debt held by the public to as high as 82 percent of GDP by then — a doubling over the next decade,” Berner writes on Morgan Stanley’s online Global Economic Forum.
“Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth,” he adds. “And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service.”
“Not only will those factors steadily lower our standard of living,” Berner concludes, “but they will imperil economic and financial stability.”
Wall Street POLITICO is a weekly column looking at issues that drive business.
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http://www.bloomberg.com/apps/news?pid=20601087&sid=aTP9nCROB6PU
Commercial Real Estate Is a ‘Time Bomb,’ Maloney Says (Update2)
By Dawn Kopecki
July 9 (Bloomberg) -- The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.
About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.
The response by banks to this “growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. “The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”
There were 5,315 commercial properties in default, foreclosure or bankruptcy at the end of June, more than twice the number at the end of last year, with hotels and retail among the most “problematic,’ Real Capital Analytics Inc. said in a report yesterday. Losses on commercial mortgage-backed securities, or CMBS, will total 9 percent to 12 percent of the market, or as much as $90 billion, said Richard Parkus, a research analyst for Deutsche Bank Securities in New York.
Bottom Not Near
The bottom is several years away, and it will be at least 2012 before there is “palpable improvement” in the commercial real estate market, Parkus told lawmakers at the hearing. “It’s hard to imagine fundamentals improving in an environment where we are beginning to see massive increases in defaults.”
The largest concentration of distressed properties is in New York City, Helsel said. Las Vegas, Los Angeles, Detroit, Phoenix, Chicago, Dallas and Boston also have high distress rates, he said.
A tightening in issuance of CMBS, which used to account for about 30 percent of financing, has exacerbated problems, Jon D. Greenlee, the Federal Reserve’s associate director for banking supervision and regulation, said in prepared testimony today. A disproportionately high number of small and medium-sized banks have “sizable exposure” to commercial real estate loans, and delinquency rates at around 7 percent in the first quarter are almost double from a year ago, he said.
“Market participants anticipate these rates will climb higher by the end of this year, driven not only by negative fundamentals but also borrowers’ difficulty in rolling-over maturing debt,” Greenlee said. “In addition, the decline in CMBS has generated significant stresses on the balance sheets of institutions that must mark these securities to market.”
Fed Programs
The Federal Reserve has expanded its Term Asset-Backed Securities Loan Facility, or TALF, to new and existing commercial mortgage backed securities to jump start the market. Maloney said the Public Private Investment Program, or PPIP, may also help with the problem as officials release more details of its potential use.
Maloney said the TALF program expires at the end of this year, which may short cut its effectiveness “just as it begins to ramp up.” She also said that uncertainty about the future of the PPIP has kept many investors “on the sidelines, so there’s some urgency to the Treasury providing additional clarity about the program.”
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.
Last Updated: July 9, 2009 12:14 EDT
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Gore: U.S. Climate Bill Will Help Bring About 'Global Governance'
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Former Vice President Al Gore declared that the Congressional climate bill will help bring about “global governance.”
“I bring you good news from the U.S., “Gore said on July 7, 2009 in Oxford at the Smith School World Forum on Enterprise and the Environment, sponsored by UK Times.
“Just two weeks ago, the House of Representatives passed the Waxman-Markey climate bill,” Gore said, noting it was “very much a step in the right direction.” President Obama has pushed for the passage of the bill in the Senate and attended a G8 summit this week where he agreed to attempt to keep the Earth's temperatures from rising more than 2 degrees C.
Gore touted the Congressional climate bill, claiming it “will dramatically increase the prospects for success” in combating what he sees as the “crisis” of man-made global warming.
“But it is the awareness itself that will drive the change and one of the ways it will drive the change is through global governance and global agreements.” (Editor's Note: Gore makes the “global governance” comment at the 1min. 10 sec. mark in this UK Times video.)
Gore's call for “global governance” echoes former French President Jacques Chirac's call in 2000.
On November 20, 2000, then French President Chirac said during a speech at The Hague that the UN's Kyoto Protocol represented "the first component of an authentic global governance."
“For the first time, humanity is instituting a genuine instrument of global governance,” Chirac explained. “From the very earliest age, we should make environmental awareness a major theme of education and a major theme of political debate, until respect for the environment comes to be as fundamental as safeguarding our rights and freedoms. By acting together, by building this unprecedented instrument, the first component of an authentic global governance, we are working for dialogue and peace,” Chirac added.
Former EU Environment Minister Margot Wallstrom said, "Kyoto is about the economy, about leveling the playing field for big businesses worldwide." Canadian Prime Minster Stephen Harper once dismissed UN's Kyoto Protocol as a “socialist scheme.”
'Global Carbon Tax' Urged at UN Meeting
In addition, calls for a global carbon tax have been urged at recent UN global warming conferences. In December 2007, the UN climate conference in Bali, urged the adoption of a global carbon tax that would represent “a global burden sharing system, fair, with solidarity, and legally binding to all nations.”
“Finally someone will pay for these [climate related] costs,” Othmar Schwank, a global tax advocate, said at the 2007 UN conference after a panel titled “A Global CO2 Tax.”
Schwank noted that wealthy nations like the U.S. would bear the biggest burden based on the “polluters pay principle.” The U.S. and other wealthy nations need to “contribute significantly more to this global fund,” Schwank explained. He also added, “It is very essential to tax coal.”
The 2007 UN conference was presented with a report from the Swiss Federal Office for the Environment titled “Global Solidarity in Financing Adaptation.” The report stated there was an “urgent need” for a global tax in order for “damages [from climate change] to be kept from growing to truly catastrophic levels, especially in vulnerable countries of the developing world.”
The tens of billions of dollars per year generated by a global tax would “flow into a global Multilateral Adaptation Fund” to help nations cope with global warming, according to the report.
Schwank said a global carbon dioxide tax is an idea long overdue that is urgently needed to establish “a funding scheme which generates the resources required to address the dimension of challenge with regard to climate change costs.”
'Redistribution of wealth'
The environmental group Friends of the Earth advocated the transfer of money from rich to poor nations during the 2007 UN climate conference.
"A climate change response must have at its heart a redistribution of wealth and resources,” said Emma Brindal, a climate justice campaigner coordinator for Friends of the Earth.
[Editor's Note: Many critics have often charged that proposed climate tax and regulatory “solutions” were more important to the promoters of man-made climate fears than the accuracy of their science. Former Colorado Senator Tim Wirth reportedly said, "We've got to ride the global warming issue. Even if the theory of global warming is wrong, we will be doing the right thing — in terms of economic policy and environmental policy."]
http://www.climatedepot.com/a/1893/G...bal-Governance
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$23.7 Trillion to Fix Financial System?
In New Report, Neil Barofsky Says It's Possible Government Could Spend $23.7 Trillion to Fix Financial System
By MATTHEW JAFFE
July 20, 2009—
Sitting down?
"The total potential federal government support could reach up to $23.7 trillion," says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government's efforts to fix the financial system.
Yes, $23.7 trillion.
"The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn't even imaginable," said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. "If you spent a million dollars a day going back to the birth of Christ, that wouldn't even come close to just $1 trillion -- $23.7 trillion is a staggering figure."
Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.
At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.
Barofsky's estimate means that if each federal agency spends the maximum potential amount involved in these 50 different initiatives -- if the Federal Reserve ends up spending $6.8 trillion on its programs. If the Treasury Department spends $4.4 trillion, if the Federal Deposit Insurance Corporation spends $2.3 trillion, and so on -- then the numbers add up to a total of $23.7 trillion.
That figure, Barofsky notes, is designed to "suggest the scale and scope of these efforts and not to provide a firm financial statement." It is not a figure that has been evaluated to give an estimate of likely net costs to the American taxpayer. "The actual potential for losses," he says, "is likely to be lower."
But in his new quarterly report to Congress that will be released Tuesday, the watchdog warns that hundreds of billions of taxpayer dollars could be lost if the government does not make certain changes to these programs. The Treasury Department, he cautions, needs to increase the transparency of the $700 billion TARP program, which he says has grown to an unprecedented scope and scale.
"Although Treasury has taken some steps toward improving transparency in TARP programs, it has repeatedly failed to adopt recommendations that SIGTARP believes are essential to providing basic transparency and fulfill Treasury's stated commitment to implement TARP with the highest degree of accountability and transparency possible," Barofsky says in the report.
Barofsky said his office currently has 35 ongoing civil or criminal investigations.
Treasury Should Require TARP Recipients to Report on Use of Funds, Says Barofsky
Barofsky notes that there are currently four specific recommendations that the Treasury Department has not adopted. The department, he believes, should require all TARP recipients to report on their use of funds. The department should also report on the values of its TARP portfolio so taxpayers know about the value of their investments; disclose the identity of any TALF borrowers; and disclose tradings, holdings and valuations of assets of the public-private investment funds that will be buying toxic assets from banks.
This public-private investment program is a key source of concern for the watchdog. In the program, a handful of selected funds will purchase toxic assets -- like mortgage-backed securities -- from banks in an effort to cleanse their balance sheets and help them increase lending.
In his last quarterly report in April, Barofsky cautioned that many aspects of the toxic asset program left it vulnerable to fraud, waste and abuse, such as conflicts of interest for fund managers, collusion with fund managers, money laundering and misuse with the Fed's lending program, known as the TALF.
Since then, Treasury has incorporated many of the watchdog's recommendations, so now "the program has a significantly improved compliance and fraud-prevention regime than that initially proposed," Barofsky says. However, he warns that "there remain some significant areas in which Treasury's plan for PPIP falls short."
One such area is the lack of an informational barrier -- or a wall -- between fund managers making investment decisions on behalf of the program and employees of the fund management company who manage funds that are not part of the program. A fund manager, Barofsky warns, "could generate massive profits in its non-PPIF funds as a result of an unfair advantage."
Treasury has declined to put such a wall in place.
"Failure to impose a wall will leave Treasury vulnerable to an accusation that has already been leveled against it -- that Treasury is using TARP to pick winners and losers and that, by granting certain firms PPIF manager status, it is benefiting a chosen few at the expense of the dozens of firms that were rejected, of the market as a whole, and of the American taxpayer," Barofsky says. "The reputational risk is not one that can be readily measured in dollars and cents, but is rather a risk that could put in jeopardy the fragile trust the American people have in TARP and, by extension, their Government."
Barofsky to Testify Tuesday on Report's Findings
Barofsky also wants the department to increase the disclosure of trading activities and holdings of the program's investment funds."
"Such transparency not only dissuades misconduct and promotes sound management but also promotes a better understanding of PPIP and thus enhances the credibility of PPIP and TARP more broadly," he says. "Even more importantly, the most significant investors in each PPIF, the American taxpayers, have a right to know the status of their investments. The lack of transparency as to what use TARP funds were put by recipients in other TARP programs, in SIGTARP's view, has damaged the credibility of TARP and therefore may have threatened its viability. Treasury should not repeat that apparent error with PPIP."
However, the department, Barofsky says, plans to disclose "no more than the bare minimum required by statute."
With nearly $24 trillion potentially flying out of federal coffers, the watchdog wants the government to do a lot more than just "the bare minimum."
When Barofsky testifies before the House Oversight and Government Reform Committee on Tuesday, Congress is expected to sound off on the watchdog's findings.
In a separate report released Monday, Barofsky said he obtained responses from banks on what they did with TARP funds, something that the Treasury Department has refused to do. Many of the banks, he said, used some funds to make investments, buy other banks and pay off debts.
"This administration promised an 'unprecedented level' of accountability and oversight, but as this report reveals, they are falling far short of that promise," Issa said. "In fact, the Treasury Department is actively obstructing transparency. The American people deserve to know how their tax dollars are being spent -- especially considering they are the ones who are footing the bill."
http://abcnews.go.com/Business/Politics/story?id=8127005&page=1
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I don't even know how we'd ever recover from that. That is the ultimate game changer with that level of debt.
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Deficit Deceit
By INVESTOR'S BUSINESS DAILY | Posted Monday, July 20, 2009 4:20 PM PT
Fiscal Policy: What do you do when you have bad news that could affect what you're doing? Why, delay it, of course. Which is exactly what the White House is doing right now with the midsession budget estimate.
Each year, a revised budget estimate is put out in July. The idea is to catch up with fiscal changes that have been made since the last budget forecast six months earlier.
This year, of course, there have been massive — not too strong a word — changes in the spending outlook. That's not just our opinion. It's based on preliminary data from the Congressional Budget Office, budget analysts and think tanks of all ideological stripes.
But instead of issuing the July outlook as planned, the White House has postponed it until mid-August. Why? President Obama has made clear he wants major health care reform and, if possible, a global warming bill from Congress before it recesses in August.
But as the costly details of these bills become known, average Americans are coming to realize they'll be on the hook for trillions of dollars of new spending that will do little to improve either health care or the amount of CO2 in the air.
With the popularity of the White House and Democrats in Congress plummeting, generic congressional preference polls now show Republicans leading Democrats. So for the latter, it's now or never. They're afraid voters will reject these expensive programs. And they're right.
What's shocking isn't that the White House would put off the July budget estimate until August — so no one can see how bad our deficits really are — but that it's being done so openly. Recall that President Obama vowed when he took office that "transparency will be the touchstone of my administration."
Unfortunately, the decision to put off the mid-summer budget update until August negates that. It is, frankly, deceptive and deeply dishonest. It's hiding bad news about worsening deficits and growing unemployment to get a big spending agenda through Congress.
Recall that earlier deficit estimates put the red ink through 2019 at $9.3 trillion — or nearly $1 trillion a year. But this year alone the deficit will be $1.8 trillion, and if brisk growth doesn't resume soon, future deficits will be far greater than estimated.
As it is, even with the administration's highly bullish GDP growth estimates of more than 4% for 2011, 2012 and 2013, the deficit never drops below $600 billion in the next decade.
So, how bad could it get? Take just one program as an example.
According to congressional testimony scheduled for Tuesday from Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP), we have a monster on our hands.
TARP, begun as a "modest" $700 billion program to buy up bad mortgages, has morphed into a Hydra-headed 12 programs wrapped up in one, with $3 trillion in government commitments.
But here's the bombshell: According to Barofsky's prepared comments, which IBD obtained Monday, total efforts to "stabilize and support the financial system" since 2007 could eventually "reach up to $23.7 trillion." Such numbers are, in a word, stunning.
Add to this the $1 trillion-plus planned for health care reform over the next 10 years and the $1 trillion to $3 trillion cost for cap-and-trade, and you can see the deficits will be enormous, pervasive and permanent — requiring unparalleled tax hikes.
Eventually, the total take by government at all levels will be well over 50% of GDP — enough to sink the U.S. economy into a state of semi-permanent stagnation, a socialist stupor.
Good governance begins with honesty. Unfortunately, the Democrats' plans to expand the scope and reach of government to nearly every part of Americans' lives have been marked by fiscal deception and budget chicanery. The American people deserve better.
http://www.ibdeditorials.com/IBDArticles.aspx?id=332981912528221#
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http://www.usdebtclock.org/
I know, let's spend more on a gov't healthcare boondoggle!
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His numbers don't quite add up:
[youtube]http://www.youtube.com/watch?v=i4NfocHluh8&eurl=http%3A%2F%2Fwww%2Ecato%2Dat%2Dliberty%2Eorg%2F2009%2F07%2F21%2Fpresident%2Dobamas%2Ddishonest%2Ddemagoguery%2F&feature=player_embedded[/youtube]
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http://directorblue.blogspot.com/2009/07/we-are-now-in-early-stages-of.html
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http://www.ft.com/cms/s/0/3a1e9d86-76eb-11de-b23c-00144feabdc0.html?ftcamp=rss&nclick_check=1
US banks warn on commercial property
By Francesco Guerrera and Greg Farrell in New York
Published: July 22 2009 19:21 | Last updated: July 22 2009 19:21
Two of America’s biggest banks, Morgan Stanley and Wells Fargo, on Wednesday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans.
The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors’ fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market.
The failing health of the $6,700bn commercial property market, which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.
Colm Kelleher, Morgan Stanley’s chief financial officer, said he did not see the light “at the end of the commercial real estate tunnel yet”, after the bank reported a $700m writedown on its $17bn commercial property portfolio in the second quarter. “Peak to trough, you have already had a pretty nasty correction in the market but it is still not looking very good at the moment,” he said after Morgan Stanley reported its third straight quarterly loss.
Wells Fargo saw non-performing loans in commercial real estate jump 69 per cent, from $4.5bn to $7.6bn in the second quarter as the economic downturn caused developers and office owners to fall behind in their mortgage payments.
Shares in the San Francisco-based bank were down more than 3 per cent at $24.55 in the early afternoon in New York as the increase in commercial non-performing loans undermined news of its best-ever quarterly profit. Morgan Stanley shares dipped before moving higher.
Ben Bernanke, chairman of the Federal Reserve, was repeatedly questioned by lawmakers on commercial real estate while testifying to Congress on Wednesday.
Mr Bernanke warned that a continued deterioration in commercial property, where prices have fallen by about 35 per cent since the market’s peak and defaults have been rising sharply, would present a “difficult” challenge for the economy.
He added that one of the main problems was that the market for securities backed by commercial mortgages had “completely shut down”.
The widespread weakness in commercial real estate is a crucial issue for US banks, especially regional lenders that ramped up their exposure to local developers in the easy credit boom that preceded the crisis.
“The commercial real estate market is soft, and most of the big banks are seeing the same kind of thing,” said Howard Atkins, chief financial officer of Wells Fargo.
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"Mr Bernanke warned that a continued deterioration in commercial property, where prices have fallen by about 35 per cent since the market’s peak and defaults have been rising sharply, would present a “difficult” challenge for the economy."
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Make sure I have this right - We announce a new commitment to punish production, employment, investment, commerce and profits and the result is double digit unemployment and collapsed demand for the rental or purchase of business space. That makes sense and I think people here get it, but I wonder if the typical voter/constituent of Barbara Boxer or Amy Klobuchar or Chuck Schumer understands what Bernancke is trying to tell them - You don't have to be an owner of Commercial real estate to be hurt by a collapse in that market. Just like you didn't have to be a buyer of yachts to be hurt by a tax on the purchasing of yachts. You don't have to be an employer to be hurt by another costly and unnecessary mandate on employers. If you are middle or lower class worker, you or your loved ones (not wealthy) will be hurt by another tax on the wealthy. As participants in the economy, we share the economy with the other participants. It is not an us vs. them ("Make the rich pay their fair share") economy. It is all inter-related and intertwined. I didn't see the movie, but when the front end of the Titanic goes under it doesn't mean more desserts will be available for those in the middle and the back. (This should have been a rant.) What we are seeing is an avoidable, man-made disaster of self-inflicted wounds IMHO.
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Does this seem stupid or what? Federal money to help people buy cars, and of course stimulate Governement Motors.
Hopefully the majority of non Dem diehard Americans are waking up to how we are being screwed over by the radicals in government.
The joke is on us:
Friday, July 24, 2009
$1 billion 'Cash for clunkers' program to kick off Monday
David Shepardson / Detroit News Washington Bureau
Washington -- The National Highway Traffic Safety Administration will release a final regulation today, clearing the way for the launch of the $1 billion federal "Cash for Clunkers" program.
The program gives buyers of new, more fuel-efficient vehicles up to $4,500 in government rebates to turn in cars and trucks up to 25 years old that in most instances get less than a combined highway/city fuel efficiency of 18 miles per gallon.
NHTSA's final rule will explain the process for registering dealers, the manner in which dealers will be reimbursed for eligible transactions, the requirements and procedures for disposing of trade-in vehicles, and the means for enforcing the program's requirements. NHTSA is working to guard against fraud, but also to ensure prompt payment.
Advertisement
Transportation Secretary Ray LaHood will kick off the program on Monday with an event at the department's headquarters that will include fuel-efficient vehicles from major manufacturers and some members of Congress.
Charles Territo, a spokesman for the Alliance of Automobile Manufacturers, the trade group representing General Motors Co., Ford Motor Co., Chrysler Group LLC, Toyota Motor Corp. and six other automakers, said the program should help customers with the purchase of about 250,000 vehicles. But once the money runs out, there is no guarantee that Congress will approve more funds.
Similar programs -- though typically less restrictive -- in other countries have dramatically boosted auto sales.
Chrysler Group LLC has offered to match the $4,500 government rebate with its own $4,500 rebate on new vehicles. Chrysler's rebate also applies to people buying new cars who don't qualify for the government rebate.
The federal program ends Nov. 1 even if consumers haven't exhausted the rebates. The vouchers apply only to new vehicles that cost $45,000 or less, and consumers must have owned the driveable clunkers for the past year.
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http://www.rasmussenreports.com/public_content/politics/obama_administration/daily_presidential_tracking_poll
Rude awakening, in progress
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http://hotair.com/archives/2009/07/28/obamanomics-101-the-bad-news-isthe-good-news-isnt-really-that-good/
Obamanomics 101: The Bad News Is, the Good News Isn’t Really That Good
posted at 8:47 am on July 28, 2009 by The Other McCain
The Boss today calls attention to a New York Times feature about unemployment:
It’s bad enough that the unemployment rate has doubled in only a year and a half and one out of six construction workers is out of work. What truly troubles President Obama’s economic advisers is that, even adjusting for the recession, the contraction in employment seems way too high. . . .
The Federal Reserve now expects unemployment to surpass 10 percent . . . The economy has shed 6.5 million jobs . . . Economists fear that even when the economy turns around, the job market will be stagnant.
Even while the media keeps pushing “recovery” talk, the further ahead you look, the scarier it gets:
The global economy may fall back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth, said Nouriel Roubini, the New York University economist who predicted the credit crisis. A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote . . .
Did anybody notice that the FDIC took over six banks Friday, bringing the year-to-date total to 64 bank failures? And there’s more trouble on the horizon for the banking industry:
Regional banks can no longer ignore the elephant in the room — their exposure to the commercial real estate bust . . . analysts expect credit problems over the next year to center on commercial real estate — mortgages on office and apartment buildings and shopping malls, as well as construction, development and industrial loans. U.S. banks hold some $1.8 trillion worth of commercial loans, according to Federal Reserve data . . . With financing markets locked up and the economy still mired in recession — unemployment is at a 26-year high while capacity utilization, a key measure of industrial production, recently hit a record low — observers fear a wave of loans will go bad in coming quarters . . .
People who read headline saying the worst is over need to read the fine print in those stories. If the headline says “June New Home Sales Up,” for example, be sure to pay attention to the bad news about the good news:
However, sales are still 28% below the levels of a year ago, when new homes sold in June at an annualized rate of 530,000. Four years ago, during the height of the housing boom, the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month. . . .
Look at what analysts told the Wall Street Journal:
“[T]he dismal state of the U.S. labor market will continue to cast a long shadow over the prospects for a meaningful recovery in the sector in the near term . . .”
“[T]he report showed a sharp 6% sequential decline in June suggesting that much of the sales activity was concentrated at the lower end of the market . . .”
“The news sounds better than it looks . . . despite the jump in sales in June, new home sales remain at very low levels, and the not seasonally adjusted data show a total of 36,000 homes sold nationwide in June, the lowest sales total for June since 1982.”
Hey, how good can the economy be, if Tim Geithner can’t sell his house? The two-week stock-market surge — which saw the Dow Jones Industrial Average zoom up about 800 points before the rally ended Friday — was fueled in large measure by a constant media drumbeat of “recovery is near” messages. Allen Abelson of Barron’s is getting tired of the happy-talk:
The melancholy fact is that our ink, online and TV colleagues can be too easily snookered by Washington, Wall Street and Corporate America, all of whom are desperately peddling recovery rather than reality.
One of the things that make it hard for people to figure out which way the economy is heading is that analysts shy away from outright predictions:
Like being a weatherman who never gets around to saying firmly, “It’s gonna rain tomorrow,” you’re always 100% accurate.
Me? I boldly say, “Bring your umbrella.” As I first explained in December at The American Spectator, the most important thing to understand about Obamanomics is It Won’t Work. The neo-Keynesian deficit-spending “stimulus” approach, which began with Henry Paulson and the Bush administration, is the exact opposite of what the economy needs, because The Fundamentals Still Suck.
Obamanomics flunks in terms of the basics. There is nothing in economic history to support the belief that the agenda currently being pursued in Washington will lead to real recovery. Jimmy Carter-style “stagflation” is a much more likely result.
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New Geographer
Green Jobs Can't Save The Economy
Joel Kotkin, 08.04.09, 12:01 AM ET
Nothing is perhaps more pathetic than the exertions of economic developers and politicians grasping at straws, particularly during hard times. Over the past decade, we have turned from one panacea to another, from the onset of the information age to the creative class to the boom in biotech, nanotech and now the "green economy."
This latest economic fad is supported by an enormous industry comprising nonprofits, investment banks, venture capitalists and their cheerleaders in the media. Their song: that "green" jobs will rescue our still weak economy while saving the planet. Ironically, what they all fail to recognize is that the thing that would spur green jobs most is economic growth.
All told, green jobs constitute barely 700,000 positions across the country--less than 0.5% of total employment. That's about how many jobs the economy lost in January this year. Indeed a recent study by Sam Sherraden at the center-left New America Foundation finds that, for the most part, green jobs constitute a negligible factor in employment--and will continue to do so for the foreseeable future. Policymakers, he warns, should avoid "overpromising about the jobs and investment we can expect from government spending to support the green economy."
This is true even in California, where green-job hype has become something of a fetish among self-styled "progressives." One recent study found that the state was creating some 10,000 green jobs annually before recession. To put this into context, the total state economy has lost over 700,000 jobs over the past year (more than 200,000 in Los Angeles County alone). Any net growth in green jobs has barely made a dent in any economic category; only education and health services have shown job gains over this period.
More worrisome, in terms of national competitiveness, the green sector seems to be going in the wrong direction. The U.S.'s overall "green" trade balance has moved from a $14.4 billion surplus in 1997 to a nearly $9 billion deficit last year. As the country has pushed green energy, ostensibly to free itself from foreign energy, it has become ever more dependent on countries such as China, Japan and Germany for critical technology. Some of this is directly attributable to the often massive subsidies these countries offer to green-tech companies. But as New America's Sherraden puts it, this "does not augur well for the future of the green trade balance."
Nor are we making it any easier for American workers to gain from green-related manufacturing. Some of America's "greenest" regions are inhospitable for placing environmentally oriented manufacturing facilities. For example, high taxes and regulatory climate have succeeded in intimidating solar cell makers from coming to green-friendly California; a manufacturer from China told the Milken Institute's Ross DeVol that the state's "green" laws precluded making green products there.
Attempts to put windmills in Nantucket, Mass., the Catskills and Jones Beach in New York and other scenic areas have also been blocked by environmentalist groups. Transmission lines, necessary to take "renewable" energy from distant locales to energy-hungry cities, often face similar hurdles. Solar farms in the Mojave desert might help meet renewable energy quotas but, as wildlife groups have noted, may not be so good for local fauna.
And then there is the impact of green policies on the overall economy. Green power is expensive and depends on massive subsidization, with government support levels at roughly 20 times or more per megawatt hour than relatively clean and abundant natural gas. Lavishing breaks for Wall Street investors and favored green companies also may be harmful to the rest of the economy. A recent study on renewable energy subsidies on the Spanish economy found that for every "green" job created more than two were lost in the non-subsidized economy.
So how do we build a green economy that is sustainable without massive subsidies? First, governments need to learn how to say no to some environmentalists. Green jobs and renewable energy can not be fully developed without affecting somebody's backyard. Windmills will have to be built in some scenic places; transmission lines may mar somebody's "view-shed."
Arguably, the thing that would spur green jobs and domestic industries most would be economic growth. Environmentalists long have been cool to growth, since they link it to carbon production and other noxious human infestations. As an official at the Natural Resources Defense Council put it, the recession has "a moment of breathing room." Disaster may be still looming, but bad times add a few more moments to our carbon clock.
Long term, though, I would argue hard times may prove harmful for the environmental cause. Even with subsidies, many renewable energy projects are now on hold or being canceled across the country. Slackening energy demand, brought on by a weak economy, has undermined the case for new sources of energy generation; what looked attractive with oil prices at $140 a barrel and headed higher looks at $70 or less.
Similarly, hard-pressed homeowners and businesses don't constitute the best market for new, often expensive "green" products. A growing economy, which would drive up energy prices, could spur a more sustainable interest in alternative energy from firms that now only do so for public relations concerns. At the same time, cash-rich consumers could more afford to install energy-saving home insulation or rooftop solar panels. A strong economy would also spur sales of new energy-efficient appliances and cars.
This process would go more quickly if government relied less on mandates, which tend to scare serious investors, and turned toward incentives. With the right tax advantages, energy efficiency could become a positive imperative for companies.
There's also an unappreciated political calculus at work. A persistently weak economy undermines support for the green agenda. For the first time in 25 years, according to a Gallup poll, more people place higher priority on economic growth than on the environment.
Furthermore, more people now feel claims about global warming are "exaggerated." Early this year, Pew reported that global warming ranked last among the top 20 priorities of Americans.
Ultimately, environmentalists need to realize that the road to a green economy does not lie in promoting hysteria, guilt and self-abnegation while ignoring prohibitive costs and grim economic realities. Green enthusiasts should focus on promoting a growing economy capable of generating both the demand and the ability to pay for more planet-friendly products. After all, the economy needs green jobs less than green jobs need a thriving economy.
Joel Kotkin is a presidential fellow in urban futures at Chapman University. He is executive editor of newgeography.com and writes the weekly New Geographer column for Forbes. He is working on a study on upward mobility in global cities for the London-based Legatum Institute. His next book, The Next Hundred Million: America in 2050, will be published by Penguin early next year.
http://www.forbes.com/2009/08/03/green-jobs-economic-growth-opinions-columnists-joel-kotkin_print.html
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http://europac.net/externalframeset.asp?from=home&id=16962&type=schiff
August 7, 2009
“Experts” Never Learn
There is an inexplicable, but somehow widely held, belief that stock market movements are predictive of economic conditions. As such, the current rally in U.S. stock prices has caused many people to conclude that the recession is nearing an end. The widespread optimism is not confined to Wall Street, as even Barack Obama has pointed to the bubbly markets to vindicate his economic policies. However, reality is clearly at odds with these optimistic assumptions.
In the first place, stock markets have been taken by surprise throughout history. In the current cycle, neither the market nor its cheerleaders saw this recession coming, so why should anyone believe that these fonts of wisdom have suddenly become clairvoyant?
According to official government statistics, the current recession began in December of 2007. Two months earlier, in October of that year, the Dow Jones Industrial Average and S&P 500 both hit all-time record highs. Exactly what foresight did this run-up provide? Obviously markets were completely blind-sided by the biggest recession since the Great Depression. In fact, the main reason why the markets sold off so violently in 2008, after the severity of the recession became impossible to ignore, was that it had so completely misread the economy in the preceding years.
Furthermore, throughout most of 2008, even as the economy was contracting, academic economists and stock market strategists were still confident that a recession would be avoided. If they could not even forecast a recession that had already started, how can they possibly predict when it will end? In contrast, on a Fox News appearance on December 31, 2007, I endured the gibes of optimistic co-panelists when I clearly proclaimed that a recession was underway.
Rising U.S. stock prices – particularly following a 50% decline – mean nothing regarding the health of the U.S. economy or the prospects for a recovery. In fact, relative to the meteoric rise of foreign stock markets over the past six months, U.S. stocks are standing still. If anything, it is the strength in overseas markets that is dragging U.S. stocks along for the ride.
In late 2008 and early 2009, the “experts” proclaimed that a strengthening U.S. dollar and the relative outperformance of U.S. stocks during the worldwide market sell-off meant that the U.S. would lead the global recovery. At the time, they argued that since we were the first economy to go into recession, we would be the first to come out. They claimed that as bad as things were domestically, they were even worse internationally, and that the bold and “stimulative” actions of our policymakers would lead to a far better outcome here than the much more “timid” responses pursued by other leading industrial economies.
At the time, I dismissed these claims as nonsensical. The data are once again proving my case. The brief period of relative outperformance by U.S. stocks in late 2008 has come to an end, and, after rising for most of last year, the dollar has resumed its long-term descent. If the U.S. economy really were improving, the dollar would be strengthening – not weakening. The economic data would also show greater improvement at home than abroad. Instead, foreign stocks have resumed the meteoric rise that has characterized their past decade. The rebound in global stocks reflects the global economic train decoupling from the American caboose, which the “experts” said was impossible.
Though the worst of the global financial crisis may have passed, the real impact of the much more fundamental U.S. economic crisis has yet to be fully felt. For America, genuine recovery will not begin until current government policies are mitigated. Most urgently, we need a Fed chairman willing to administer the tough love that our economy so badly needs. That fact that Ben Bernanke remains so popular both on Wall Street and Capital Hill is indicative of just how badly he has handled his job.
Contrast Bernanke’s popularity to the contempt that many had for Fed Chairman Paul Volcker in the early days of Ronald Reagan’s first term. There were numerous bills and congressional resolutions demanding his impeachment, and even conservative congressman Jack Kemp called for Volcker to resign. Had it not been for the unconditional support of a very popular president, efforts to oust Volcker likely would have succeeded. Though he was widely vilified initially, he eventually won near unanimous praise for his courageous economic stewardship, which eventually broke the back of inflation, restored confidence in the dollar, and set the stage for a vibrant recovery. Conversely, Bernanke’s reputation will be shattered as history reveals the full extent of his incompetence and cowardice.
As congress and the president consider the best policies to right our economic ship, it is my hope that they will pursue a strategy first developed by Seinfeld character George Costanza. After wisely recognizing that every instinct he had up unto that point had ended in failure, George decided that to be successful, he had to do the exact opposite of whatever his instincts told him. I suggest our policymakers give this approach a try.
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August 08, 2009
Predator
By Randy Fardal
In a series of articles published from 1902-1904, Ida Tarbell attacked Standard Oil, the leading US supplier of kerosene lamp fuel. The centerpiece of Ms. Tarbell's criticism was that the company had engaged in predatory pricing by continually lowering its prices. Her readers must have asked themselves, "How is that a bad thing? Am I supposed to be outraged that the amount I pay for lamp oil has fallen?"
Although company cofounder John Rockefeller had retired from actively managing Standard Oil in 1896, Ms. Tarbell vilified him in her articles, even criticizing his elderly appearance. Populist US president Theodore Roosevelt joined Ms. Tarbell's witch-hunt. Eventually, she stoked enough public hate and envy toward Rockefeller that the courts broke the company into 34 parts.
Economists point out that Ms. Tarbell's predatory pricing theory is unsustainable in a free market. For instance, auto company execs know that a predatory competitor can't offer money losing rebates forever, so they either match the predator's rebates to preserve their market shares or temporarily cut back production and wait out the storm.
To benefit from the ploy, a predator eventually would have to raise prices enough to recover all losses during the price-cutting period. But competitors then would reenter the market and regain their lost share -- or gain an even greater share if the former predator raises prices too much. By then, a predator also might be weaker financially than competitors that conserved cash while waiting for the storm to pass.
Standard Oil did not raise its prices. At the time Ms. Tarbell's exposé appeared, Standard Oil's customers were paying less than a third as much for kerosene compared to what they had paid two decades earlier.
How could Standard Oil seemingly violate the laws of economics and sell its products below cost for decades? And even more puzzling, if Standard Oil had been selling its products at a loss, how did Mr. Rockefeller become so wealthy? The answer, of course, is that Ms. Tarbell's charges were false. In reality, the company was a free market Olympic athlete, using innovation and good business practices to boost efficiency and reduce production costs.
Consumers only benefited from Standard Oil's actions, so who actually was harmed? --Just its less talented competitors.
Society probably would have been better off back then if someone had written an exposé on Ida Tarbell. Her father, Frank Tarbell, had gone bankrupt because his business was not as efficient as Standard Oil's. Her father wasn't a victim; he just got beaten by a better competitor. Ms. Tarbell must have hoped to use government to get revenge, even if it harmed the consumers she claimed to be protecting.
Ms. Tarbell also neglected to disclose a serious conflict of interest: her brother William was treasurer of Pure Oil Company, a Standard Oil competitor. Had Ms. Tarbell written her scathing articles today and attacked wind turbine giant, General Electric, the Left might have called her "a dishonest lobbyist with secret familial ties to greedy oil industry executives".
Taxpayer-Funded Predators
Although economists now scoff at claims of predatory pricing in a free market, it does exist in government-controlled markets. Education is a good example. Government uses predatory pricing to secure a near-monopoly of K-12 schools. Public education costs have tripled over the past 30 years, yet the students still pay nothing for it.
Annual federal, state, and local spending now total over $10K per pupil, and far more in areas such as Washington, D.C., where it was $28,900 last year. Private schools' costs are a small fraction of that and their products are better, but they are forced to compete in a market where the dominant rival offers its product at no charge.
The federal government's Fannie Mae and Freddie Mac employed predatory pricing to gain market share in the residential home mortgage business. They used taxpayer funds to cover their losses on risky loans while grabbing share from their free-market competitors. Their predatory pricing would have been suicidal if they were competing as private enterprises.
Federal and state governments use taxpayer-funded subsidies, grants, accelerated depreciation, and ratepayer subsidies to enable economically unviable wind energy businesses to compete with highly efficient electricity producers. The proposed cap-and-trade legislation would pile even more taxes and higher rates on the efficient competitors. Mr. Obama indicated that he wants to use those predatory pricing actions, along with costly regulations and taxes targeted at the coal industry to put it out of business. What would Ida Tarbell say about that?
The government now owns a portion of the automobile industry. Private shareholders demand a profit on their investments, but Mr. Obama didn't invest his own private money. Instead, he invested the public's money -- or more precisely, he invested wealth borrowed from future generations of taxpayers. As de facto CEO, he has more incentive to maximize votes than profits, so why wouldn't he use predatory pricing and subsidies to sell the best vote-getting cars below cost? Future taxpayers will cover his losses, and they can't vote him out of office.
And how better to get campaign funds than subsidizing the production of a politically correct sports car for rich Leftist donors? Mr. Obama has given Tesla Motors $465M -- almost a million dollars for every car they've delivered. Decades from now, taxpayers will have to work two jobs to finance the luxury sports car that some wealthy Hollywood actor got in 2009.
Only Government Can Win at Monopoly
At its peak, Standard Oil's domestic revenue accounted for less than one percent of America's GDP. There were well over a hundred direct competitors in the market, and many competing electric and gas lighting companies. If Standard Oil had been playing the board game Monopoly, it would have owned a house on Baltic Avenue.
Now, a century later, Mr. Obama is eying the multi-trillion dollar healthcare industry. He wants to expand beyond Medicare, Medicaid, and SCHIP to control the entire market. If he were playing Monopoly, it would be the equivalent of having hotels on five of the 28 properties -- from Pacific Avenue to Boardwalk. And he won't buy those hotels with his own money; he asked Congress to take them for him.
Government healthcare insurance will cost society about twice as much as private insurance but will sell for less than market rates, driving private insurers out of business. Once again, Mr. Obama can get away with predatory pricing because future taxpayers -- the ones that don't yet vote -- will be forced to cover his losses. It is fiscal child abuse.
Let's survey the game board:
Using taxpayer-funded subsidies to implement predatory pricing, government already controls virtually all of the nation's K-12 schools, and many universities
Big Media and Big Labor are Mr. Obama's puppets
Taxpayer-funded bailouts gave Mr. Obama stakes in the auto, banking, and insurance industries
Seemingly endless taxpayer-funded loan guarantees for Fannie Mae and Freddie Mac let Mr. Obama control the home mortgage industry
Taxpayer-funded subsidies and tax breaks let Mr. Obama rig the electricity market in favor of politically correct Leftist power companies, while proposed regulations and taxes will hobble their politically incorrect competitors
Government already controls a large portion of the pension industry through Social Security and has considered seizing control of private 401-K accounts
And now Mr. Obama wants to monopolize the healthcare industry
Public school children are taught that Mr. Rockefeller was an evil businessman and that he used predatory pricing to drive his competitors out of business. But he actually was the consumer's best friend and the courts did not charge Standard Oil with predatory pricing. Only governments can be successful predators.
Free enterprise is win-win, but like most board games, Leftism is win-lose. Mr. Obama apparently thinks the American economy is just a 15 trillion-dollar Monopoly game and he intends to do whatever it takes to win it.
Most of Ms. Tarbell's allegations about Mr. Rockefeller were false, but if she were alive today and made similar charges against Mr. Obama, they would be accurate. The vilified Mr. Rockefeller controlled less than one percent of America's economy, but the deified Mr. Obama wants to seize control of more than one-sixth of the economy -- healthcare -- in a single additional conquest. Perhaps the Justice Department should charge Mr. Obama with anti-trust crimes.
Page Printed from: http://www.americanthinker.com/2009/08/predator.html at August 08, 2009 - 03:49:50 PM EDT
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Interesting piece, followed by a friend's comments:
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The Stock Market and Monetary Disorder:
I’ll restate my thesis as concisely as I can (not my strong suit): The deeply maladjusted U.S. “Bubble” economy requires $2.5 Trillion or so of net new Credit creation to stem systemic (Credit and economic Bubbles) implosion. Only “government” (Treasury, agency debt, and GSE MBS) debt can, today, fill the gigantic void created with the bursting of the Wall Street/mortgage finance Bubble. The private sector Credit system is severely impaired, and there is as well the reality that the market largely lost trust (loss of “moneyness”) in Wall Street obligations (private-label MBS, CDOs, ABS, auction-rate securities, etc.). The $2.0 Trillion of U.S. “government” Credit creation coupled with the Trillion-plus expansion of Federal Reserve Credit over the past year has stabilized U.S. financial and economic systems.
The synchronized global expansion of government deficits, state obligations, and central bank Credit amounts to an historic government finance Bubble. Markets have thus far embraced the surge of debt issuance. This U.S. and global reflation will have decidedly different characteristics when contrasted to previous Fed and Wall Street-induced reflations.
First off all, the most robust inflationary biases are today domiciled in China, Asia and the emerging markets generally. The debased dollar has provided China and the “developing” world Credit systems unprecedented capacity to inflate (expand Credit/financial claims without fear of spurring a run on their currencies). Asian and emerging markets are outperforming, exacerbating speculative inflows. Things that the “developing” world need (energy/commodities) and want (gold, silver, sugar, etc.) should demonstrate increasingly strong inflationary pressures. Their overflow of dollars provides them, for now, the power to buy whatever they desire.
Here at home, the post-Wall Street Bubble financial landscape ensures the old days of the Fed slashing rates and almost instantaneously stoking mortgage Credit, home price inflation and consumption have run their course. Accordingly, the unfolding reflation will be of a different variety than those of the past – and, importantly, largely bypass U.S. housing. This sets the stage for a lackluster recovery in consumption and economic revival generally. Household sector headwinds will likely be exacerbated by higher-than-expected inflation (especially in energy and globally-traded commodities), higher taxes and rising interest rates.
There is a confluence of factors that expose the market to an upside surprised in yields. The bond market has been overly sanguine, emboldened by the prospect of the Bernanke Fed maintaining ultra-loose monetary policy indefinitely. Bond bulls have been further comforted by the deep structural issues overhanging both the U.S. financial system and economy. However, massive government Credit creation has, for now, put systemic issues on hold. Especially in Asia, unfettered Credit expansion creates the backdrop for a surprisingly speedy economic upsurge. The weak dollar plays a major reflationary role globally, while also raising the prospect for inflationary pressures here at home. Massive issuance, global economic resurgence, heightened inflation and a weak currency are offering increasingly tough competition to the bullish “forever loose policy” view.
Meanwhile, fixed income must gaze at the feverish equities market with disbelief – and rising trepidation. The bond market discerns incessant economic impairment, a historic debt overhang, 9.4% unemployment, and begrudging recovery. An intoxicated stock market ganders something altogether different, with the Morgan Stanley Retail Index up 61% y-t-d, the Morgan Stanley High Tech Index up 47%, the Morgan Stanley Cyclical Index up 52%, and the Broker/Dealers up 45%. The bond market has been content to laugh off the silly equities game. The chuckles may have ended today.
My secular bearish thesis rests upon a major assumption: The U.S. economy is sustained by $2.5 Trillion (or so) of new Credit. Only this amount will stem a downward spiral of asset prices, Credit, incomes, corporate cash flows and government finances. On the other hand, if forthcoming, the $2.5 Trillion of additional – chiefly government-directed and non-productive - Credit will foment problematic Monetary Disorder. In simplest terms, another bout of Credit inflation leads further down the path of unhinged market prices, destabilizing speculation, and unwieldy flows of finance.
The stock market has become illustrative of what we might experience in the way of Monetary Disorder. Speculation has returned with a vengeance, galloping blindly ahead of fledgling little greenish shoots. Those of the bullish persuasion contend that the marketplace is, as it should, simply discounting a rosy future. I would counter that problematic market dynamics have taken over, with prices increasingly disconnected from reality. In short, the market is in the midst of one major short squeeze.
There are myriad risks associated with the government’s unprecedented market interventions. Likely not well appreciated, policymaker actions have forced the destabilizing unwind of huge positions created to hedge against systemic risk (as well as to profit from bearish bets). This reversal of various bear positions has created enormous buying power, especially in the securities of companies (and sectors) most exposed to the Credit downturn. The reversal of bets in the Credit default swap (and bond) market has certainly played a role. Surging junk bond and stock prices have fed one another, as the highly leveraged and vulnerable companies provide phenomenal market returns. The markets are today throwing "money" at the weak and leveraged.
The resulting outperformance of fundamentally weak companies spurred short covering more generally, creating a dynamic whereby heavily shorted stocks became about the best performing sector in the equities market. This dynamic put significant pressure on so-called market neutral strategies that have proliferated over the past few years. The strategy of attempting to own the good companies and short bad ones is faltering, likely causing a flow out of these strategies - and a self-reinforcing unwind of positions. The “bad” stock soar and the “good” ones languish.
There’s nothing like a short squeeze panic to get the markets’ speculative juices flowing. Many will say all’s just fine and dandy – let the fun and games continue! My retort is that the stock market is indicative of the current dysfunctional financial backdrop. At the end of the day, the financial system must be capable of effectively allocating finance and real resources throughout the economy. I would argue that this is not possible for a system that congenitally misprices risk and distorts financial asset prices. Today’s stock market will inherently finance mainly speculative Bubbles and fragility. And the core systemic problem, the maladjusted "Bubble economy," well, the financial backdrop only worsens the situation.
I have great confidence that government finance Bubble dynamics ensure ongoing distortions in the markets’ pricing of risk and, as well, a continued misallocation of resources (financial and real). And it is increasingly clear that the stock market is embroiled in this problematic dynamic. But that is a dilemma for another day, as surging stocks fan optimism and risk embracement – not to mention forcing many into the stock market with both nostrils plugged. And speculative equities and Credit markets will spur increased economic output in the short-run.
Everything has been extraordinary; the boom, the bust, policymaker interventions, and now the bear market rally. I wish I could see some mechanism in the works that will help kick our system’s addiction to easy Credit and commence the inevitable process of economic adjustment and restructuring. Instead, I see confirmation everywhere that policy and market dynamics are working in concert to sustain the existing financial and economic structure. I have huge doubts it will work and no doubt about the risks of failure.
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The point is that massive injections of liquidity around the world have created conditions which distort the pricing mechanisms to such an extent that we can expect resource allocations to be increasingly screwed up. With artificially lowered interest rates maintained by almost all central banks, people everywhere are becoming leveraged speculators. If you can borrow money at 1 or 2% and invest it for higher returns, the amount you make is limited only by the amount of leverage you are willing to accept. With governments accepting all losses by banks and investment banks, very few constraints remain -- if any at all. Worse than that: if the central banks stop the flood of liquidity, most of these leveraged bets will quickly be revealed as uneconomic malinvestments and the world will be plunged back into crisis. Noland expects that the US government will have to continue running a $2 + trillion dollar deficit indefinitely to hold back the forces of sanity -- and prevent another crisis from breaking out. I would add that the amount of credit unleashed will actually have to grow at an accelerating rate to keep the economy from breaking, again. As Noland said "I have huge doubts it will work and no doubt about the risks of failure."
Needless to say, the government cannot continue to run a $2+ trillion dollar deficit forever without significant consequences. As I have argued in my recent blog posts, the specific nature of the next crisis will depend on decisions not yet made -- so, IMO, nobody can know what form it will take. But it will happen. Don't believe our moronic Fed Chairman -- the one who was telling us everything was great right up until he panicked and said the world would come to an end if he didn't spend a few trillion dollars to bailout his banking cronies. I think even John Maynard Keynes himself would be aghast to see the practices his "theories" have unleashed.
Tom
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Instead of allowing failures to fail and distortions to correct, we insist on artificially building more on a house of cards. TARP was all about injecting money to override market forces and stop natural corrections. The 'stimulus' money is all about everything other than encouraging private investment decisions. This gang actually put a freeze on foreclosures at the start of this administration. It's very reminiscent of President Nixon's Price Wage Freeze to stop inflation. (Inflation doubled after Nixon's freeze was lifted.)
There is an amazing lack of analysis about what happens next after we inject all that is available plus some trillions and pile on additional burdens and attacks against enterprise and private sector investment. I think the author is hinting that it won't just be inflation we see after we undermine our currency, our balance sheet and abandon our economic foundations.
Ironically, George Bush actually grew government revenues and sustainable government expenditures far faster than these government-loving statists.
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http://hotair.com/archives/2009/08/10/cap-and-trade-will-kill-jobs-economy/
Economic killshot.
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We are witnessing a historical moment. The greatest robbery in the history of the world. Here is a video showing what the government is doing about it. :cry:
This is the site I saw the vid first.
http://dailybail.com/home/there-are-no-words-to-describe-the-following-part-ii.html
Here is that vid
[youtube]http://www.youtube.com/watch?v=cJqM2tFOxLQ[/youtube]
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I recall the uproar when Reagan / Tip O'Neill deficits approached and exceeded $200Bil.
I recall the uproar over Bush deficits... decreasing as the economy grew, but in the low hundreds of billions.
So far not noticing much criticism from the media or left about the new Obama deficit... $181 Billion... in the MONTH of July!
http://thehill.com/leading-the-news/deficit-grew-by-181-billion-in-july-2009-08-09.html
Do deficits matter?
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With due respect for the lack of liberal viewpoint represented on this board, I post the following drivel about right wingers unconcerned about income inequality. If anyone can find a valid point in this piece, please point it out; I will to try to refute it.
Opposing income "inequality" (is income supposed to be equal regardless of training, effort and ability) is the centerpiece of liberal economic thought, as pointed out by this author. In that case, liberals should be THRILLED with the recent collapse of investment values and asset prices as that serves to 'mind the gap' better than any economic expansion in history.
Meanwhile I am headed over to the PGA where income inequality is truly celebrated. A few golfers will split up about $9 million for 4 days work not counting the real money in sponsorships. The worst of the best will make zero, half will get sent home early and all other golfers in the world will be restricted to the gallery or the television audience. Should Tiger Woods and Gerald Ford make the same for playing golf?
Seriously, the idea of equal outcomes should scare you: "So why not take some of that income away", he writes. I say, what incentive would there ever be to do well or do better if there is only one number available on your career pay scale? Should the high school drop out hanging out on the street and the medical resident working 80 hours a week to enter his/her profession make EXACTLY the same, now or later?? Only in a non-existent, Soviet Socialist Utopia. Not in a real world, efficient economy! - Doug
http://www.tnr.com/politics/story.html?id=ab981331-13e8-40d3-89b7-26406e29af5a
The New Republic
Mind the Gap by Jonathan Chait
What the right wing really thinks about inequality.
Wednesday, August 12, 2009
Should we care about economic inequality? That question is the subtext for most debates in American politics. It just remains below the surface because the party that thinks we shouldn't care about inequality--I'll give you one guess--has an endless string of obfuscations ("death tax," "small business," "tollgate to the middle class") to avoid admitting that it doesn't care about inequality.
There are, however, some real reasons not to care about income inequality, and right-wingers who don't have to run for public office are happy to admit it. A new paper by the Cato Institute's Will Wilkinson, which compiles all the reasons why we shouldn't worry our pretty little heads about inequality, has drawn a lot of attention. It's a usefully honest and relatively persuasive iteration of the belief system that undergirds right-wing thought.
Alas, it still isn't very persuasive. Wilkinson begins by pointing out that, while the gap between how much the rich and the non-rich earn has exploded, the gap between how much the rich and the non-rich consume has remained fairly stable. And that's true. But Wilkinson misunderstands the implications of this fact. "Suppose you made a million dollars last year and put all but $50,000 of it in a shoebox," he writes. (He must have enormous feet.) "Now imagine you lose the box. What good did the $950,000 do you?"
Wilkinson's point--money only has value if you eventually spend it--may be true. Yet most rich people don't put their money in shoeboxes. They invest it so they, their children, or young trophy wives can one day spend even more of it. And, indeed, the gap in wealth (how much money you have) has grown even faster than the gap in income. Meanwhile, the middle class has tried to keep pace with the rich by spending beyond its means, sending average household debt skyrocketing. Tell me why this should make us feel better about inequality?
Wilkinson's most interesting argument holds that material inequality between the rich and the non-rich lags behind the wealth and income gaps. For one thing, he argues that the luxury goods rich people own offer only marginal improvement over the cheap stuff that poor people own. For instance, he compares the luxurious Sub-Zero PRO 48 refrigerator to a standard IKEA fridge. Despite the vast difference in cost ($11,000 vs. $350), he writes, "The lived difference ... is rather smaller than that between having fresh meat and milk and having none." He also notes that rich people have used some of their increased income merely bidding up the price of positional goods, like fancy real estate or elite college tuition, forcing them to buy the same stuff at higher prices. Wilkinson thinks this goes to show that there's "an often narrowing range of experience" between being rich and being poor, so inequality isn't that big a deal.
In fact, Wilkinson is inadvertently bolstering the strongest liberal argument against inequality: it's inefficient. In case you're unfamiliar with this argument--as Wilkinson seems to be; he doesn't rebut or even mention it anywhere in his paper--it runs like this: Taking money from the rich and giving it to the poor helps the latter more than it hurts the former (at least until you create serious work-incentive effects, a point which most liberals think we're not close to). Wilkinson is saying the rich are getting little (in the case of luxury goods like refrigerators) or zero (in the case of real estate and higher tuition) actual benefit from their rising incomes. So why not take some of that income away and use it to buy extremely useful but currently unaffordable things for the non-rich, like, oh, basic medical care?
Watch Chait and Wilkinson face off over the inefficiency of inequality (and check out the rest of the debate here)
One liberal complaint about inequality holds that it increases the political influence of the rich, thereby locking in even more inequality. Wilkinson scoffs at this prospect, pointing to rich voters' support for Barack Obama over John McCain. Oddly, Wilkinson confines his analysis to campaigning and pays no attention to governing. While it's true that many rich people used their money to help bring about Democratic control of Washington, every day brings a new example of the rich using their money to ensure that Democrats pose the least possible harm to their interests. Democrats in Congress have abandoned Obama's sensible call to limit deductions for the top bracket, backed away from an upper-income surtax to pay for health care despite favorable polls, shot down bank nationalization, and on and on.
The deeper problem with Wilkinson's argument is that it assumes the natural correctness of all market-based outcomes. This is a premise you either take on faith or don't, and which undergirds most of his argument. Wilkinson assumes that inequalities arising from the market are inherently fair. Therefore, he asserts that just about the only unjust forms of economic inequality are those that spring from non-market circumstances: "t's not enough to identify a mechanism of rising inequality. An additional argument is required to show that there is some kind of injustice involved."
If such injustices persist, he further argues, it's usually because the American people like it that way. Wilkinson recognizes that some liberals blame "wealthy elites," not public opinion, for the persistence of injustice. But he dismisses this complaint as a "'false consciousness'" argument by liberals "frustrated to find that [their] convictions are in the minority." So we should stop whining. Yet, later on in the same paper, Wilkinson blames the state of education on teachers' unions, and hawkish foreign policy on "special interests that stand to benefit from war." Wait, what about that false-consciousness business? Apparently, it's fair to complain about special interests when they subvert the libertarian agenda but not otherwise.
Wilkinson concludes by asserting that people should only care about their absolute well-being, not their relative well-being. But comparisons are among the best measures we have to gauge our material well-being. Ten years ago, I felt perfectly happy with my low-definition television, because high-definition hadn't come out. Today, that same television gives me slightly less enjoyment because I realize that I'm missing out on a better picture.
"How are a poor, inner-city kid's life chances affected," asks Wilkinson, "by the fact that some Web entrepreneur makes billions of dollars as opposed to just millions?" They're not. But if the Web entrepreneur has to pay a slightly higher tax rate so the inner-city kid can afford to attend a decent college, or so the kid's parents can see a dentist, how are the entrepreneur's life chances affected?
Jonathan Chait is a senior editor of The New Republic.
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Reminds me of the old Soviet Union joke:
An American and Russian were talking about how communism works.
"Let me get this straight," said the American, "under your system if you had two cars you'd give me one."
"Yes," replied the Russian.
"And if you had $50,000 you'd give me $25,000?"
"Yes," the Russian reiterated.
"And if you had two shirts, you'd give me one?" posited the American.
"No." replied the Russian.
"Why not?" the American asked. "You'd give me a car, 25 grand, but not a shirt? Why no shirt?"
"Because I have two shirts," the Russian explained.
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BBG, love your joke!
I need a better title - we always have record deficits, but these are something else.
Can't say that I stand corrected (on the deficit hitting 181 Billion for the month of July) but the Obama administration offers this explanation: August 1 fell on a Saturday this year requiring many government benefit checks to be sent out earlier and counted as spending in July. http://finance.yahoo.com/news/Federal-deficit-higher-in-apf-3876319127.html?x=0&.v=5
Of course these transfer payment checks, taking from Peter to pay Paul or not collecting from Peter but still paying Paul, have NOTHING to do with 'governing'.
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http://hotair.com/archives/2009/08/13/jobless-claims-jump-retail-sales-fall/
Jobless claims jump, retail sales fall
posted at 12:45 pm on August 13, 2009 by Ed Morrissey
If Barack Obama hoped that improving economic indicators would rescue his health-care plan, he will have to wait for at least another week to make that case. The Bureau of Labor Statistics reports that initial jobless claims increased last week to 558,000, up 4,000 from the previous week and 13,000 more than analysts predicted. The continuing massive job losses show that the economy still has a long way to go to reach the corner-turning point (via Instapundit and HA reader Desmond L):
The Labor Department says new claims increased to a seasonally adjusted 558,000, from 554,000 the previous week. Analysts expected new claims to drop to 545,000, according to Thomson Reuters.
The number of people remaining on the benefit rolls fell to 6.2 million from 6.34 million the previous week. Analysts had expected a slight decline.
The four-week average of initial claims, which smooths out fluctuations, rose by 8,500 to 565,000, after falling for six straight weeks.
The decline on the rolls results from the expiration of benefits, however, and not a new hiring impulse in the marketplace. With business shedding over a half-million jobs every week and now starting to rise again, the prospect for new jobs in any significant number looks bleak for the near term.
The retail numbers for July underscores that pessimism:
Retail sales outside of autos turned in a disappointing performance in July, underscoring concerns about the timing and durability of a recovery from the worst recession since World War II.
The Commerce Department said Thursday that retail sales fell 0.1 percent last month. Economists had expected a gain of 0.7 percent.
While autos, helped by the start of the Cash for Clunkers program, showed a 2.4 percent jump — the biggest in six months — there was widespread weakness elsewhere. Gasoline stations, department stores, electronics outlets and furniture stores all reported declines.
The Fed tried talking about a recovery yesterday, and the Obama administration has been salivating at the prospect of getting some good economic news. Instead, we seem to be stuck in a rut. While Germany and France have both shown GDP growth in Q2, the US economy declined an additional 1% in the same period. Unemployment began to slow a little earlier in the summer, but appears to be regaining its downward momentum again.
Why? The radical policies of the Obama administration has capital sidelined for the most part. Investors who saw the White House’s bullying tactics with GM and Chrysler bondholders have little incentive to jump into American markets. Those who see the coming takeovers of the health-care and energy-production sectors have no reason to invest in either. And with energy prices about to explode through the imposition of cap-and-trade, who would want to sink their money into start-ups and expansions now?
As long as Democrats insist on shoving radical, business-hostile legislation through Congress, expect this fibrillating stagnation in the American economy.
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http://www.ft.com/cms/s/0/2559e768-88f0-11de-b50f-00144feabdc0.html
A rally with troubling aspects.
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Worst. Hires Rate. Ever.
Welcome to the “Help Not Wanted” economy.
By Jerry Bowyer
(http://www2.nationalreview.com/images/chart_bowyer_081409.jpg)
It’s not enough for most people to know what the unemployment rate is and whether it’s going up or down. It’s not enough for investors and entrepreneurs living during some of the strangest times in American financial history. And it’s not enough for citizens trying to decide whether the policy proposals now in Washington are worthy of their support. If you fall into any of these categories, you need to know more about the labor market than the headline numbers. In particular, you need to know the JOLT.
Last week we learned that non-farm payrolls dropped by “only” 247,000 and that the unemployment rate decreased a tick from 9.5 percent to 9.4 percent — important statistics both. This week, however, a lesser-known but no-less-vital jobs indicator arrived: the Job Openings and Labor Turnover Survey (or JOLT, to its friends). This survey breaks down the ins and outs, literally, of our dynamic employment system. It tells us how fast we’re hiring, firing, quitting, and offering gainful employment. Critically, it tells us the hires rate.
The Bureau of Labor Statistics defines the hires rate as the “number of hires during the month divided by the number of employees who worked during or received pay for the pay period that includes the 12th of the month.” And the latest hires rate — the worst in the history of this measure — confirms what BuzzCharts has been reporting for months (see “Obama’s Magical Misery Tour” and “The Jobless Recovery”): Entrepreneurs and business managers are frozen. They’ve stopped posting want ads and they’ve stopped adding staff. When I look at the chart above, I see a giant sign hanging in the window of America. It reads: “Help Not Wanted.”
Economic minds on the political left might reflexively counter that the blame should fall on the greedy businesspeople who are not hiring. But even if we concede that business owners are greedy (which we do not), was there ever a point, across the hundreds of months during which the hiring rate has been reported, when they weren’t greedy? Weren’t they greedy when they went on a hiring spree following passage of the Bush-Cheney (or is it the other way around?) tax cuts of 2003? Did Obama make them greedy?
No, but Obama has made them scared. Everywhere I go I hear the same story. Business owners know the little details that academics and pundits don’t, and they know what not to do. They know, for example, that payroll taxes are not only scheduled to rise, but already have risen. And they know all too well that government-mandated unemployment compensation is funded by employers through an unemployment-compensation payroll tax. As a result, they know not to hire.
As a business owner, your unemployment-compensation level rises as you are forced to cut your workforce. And when job-market conditions are strained, as they are now, each new employee you hire becomes a potentially larger cost center than he used to be for each hour worked. If you let him go, you will end up paying him anyway every time you cut a check to your remaining employees. My friend Art Laffer calls this a “wedge” between employee and employer. It’s a job killer and a wealth killer.
BuzzCharts offers its sincerest prayers and condolences to the roughly 15 million Americans — including one in four teenagers and one in three African-American teenagers — who want work but can’t find it. We’ve been there too.
But if the job statistics don’t miraculously recover, you’ll need to proceed as follows: Next year, get out there and elect for yourself, and the rest of us, a new Congress. One that understands the way the world really works.
Two years after that, vote in a new president.
— Jerry Bowyer is an economist, CNBC contributor, and author of the upcoming Free Market Capitalist’s Survival Guide.
National Review Online - http://article.nationalreview.com/?q=N2Y0ZGUyYWVmZWU0ZWJlMGNjYTA0MTNlMWQ1NjA0ODg=
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Divine Debt Trumps All
The U.S. is broke and its ability to borrow ever more trillions of dollars is ending.
By Victor Davis Hanson
In Greek mythology, even Olympian gods and heroes were subject to a higher divine power known loosely as “fate” — an allotted moira, or destiny, that could not be changed even by thunderbolt-throwing Zeus.
In modern America, debt — whether national, state, or trade — now plays the same overarching role as the ancient Greek notion of fate. And the president, Congress, and the states for all their various agendas are impotent since they must first pay back trillions that have long ago been borrowed and spent.
Politicians in their hubris who believe they can ignore debt or wish it away are sorely disappointed — as we see now with the plummeting approval ratings of both the administration and Congress.
Take the issue of health-care reform proposals, in which the issue of debt looms large. We are told that more people will be insured, costs will go down, and care will not be rationed. But this rhetoric cannot disguise the reality of taking on even more debt.
To cover more Americans, a broke federal government will have to either borrow more or curtail the level of coverage that the currently insured enjoy. Numbers do not lie, and our government must explain either how a radical expansion in medical care will cut back on existing choice and service or where the additional revenue will come from.
The spiraling budget deficit also now trumps all discussion of tax policy. We are told the government will not raise taxes on 95 percent of Americans. Yet aside from billions for corporate bailouts, new entitlements will go largely to this group and will increase the annual budget shortfall to nearly $2 trillion.
The wealthiest 5 percent of Americans, who currently pay over 40 percent of the aggregate income tax, simply are not numerous enough to provide the necessary additional revenue — despite having taxes raised to 40 percent of their income, along with proposed Social Security payroll tax increases and health-care surcharge hikes.
Most likely, the administration soon will have to impose a value-added tax that will fall on everyone, or make Americans who now pay no federal income taxes start paying them. We may casually talk of all sorts of new programs and “stimulus,” but the vast trillion-dollar collective national debt and rising annual deficits will insidiously hamstring almost everything we plan to do.
Debt also will overshadow energy policy and, for now, trump green politics and politicians. Administration officials lecture grandly about wind and solar power to come. But both are still expensive and now constitute less than 5 percent of our energy production. Instead, our electrical power and transportation fuel overwhelmingly come from more pedestrian oil, natural gas, coal, and hydro and nuclear power.
Due to the recession, the United States has been given a rare reprieve, as decreased global consumption has led to increased supplies abroad and a radical — though temporary — fall in energy prices. We have a brief window of salvation in which to start developing additional energy inside the United States — whether nuclear, untapped coal, offshore oil, new natural-gas fields, shale oil, or tar sands — that could ensure that the country does not go broke when energy prices rise again, and we slowly transition to new renewable sources of power.
Yet the current policy seems to be that the United States can arrogantly ignore the cost of imported energy. We continue to dream of inadequate, expensive solar and wind power, while not expanding traditional domestic sources of energy — even as we borrow to consume imported oil and natural gas.
President Obama has put forth an ambitious agenda of radical health-care reform, cap-and-trade legislation, new energy proposals, and expanded entitlements. But no matter how brilliantly the president describes his progressive agenda, it can’t escape our fiscal fate: The country is broke and its ability to borrow ever more trillions of dollars is coming to an end.
Asian and European creditors are becoming wary of lending so much at such low interest to such an encumbered debtor. And why shouldn’t they be?
In short, Americans will have to either raise massive taxes, postpone new spending programs, or cut existing expenditures — and most likely all three at once.
Ultimately, even we Americans must bow before debt, whose unchangeable laws trump even our Olympian president and Congress.
— Victor Davis Hanson is a senior fellow at the Hoover Institution and a recipient of the 2007 National Humanities Medal.
National Review Online - http://article.nationalreview.com/?q=ZTE1ODBjNzhhNTEzYjlmNjIwZGNjZWU5MmQ1NmNkZWQ=
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Leading economic indicators (LEI) rose for the fourth consecutive month in July, with help from an improving employment and productivity picture. Still, data indicated weakness for housing and the consumer.
“The indicators suggest that the recession is bottoming out, and that economic activity will likely begin recovering soon. The Coincident Economic Index was flat in July – the first time it did not register a decline since October 2008. The Leading Economic Index, which has increased for four consecutive months, suggests that the CEI will turn positive soon.”
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http://online.wsj.com/article/SB10001424052970203863204574347000967657192.html
Big Government, Big Recession
There's no evidence for the theory that state spending has shortened this or any other slowdown.
By ALAN REYNOLDS (WSJ)
‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”
This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a "second Great Depression" were it not for the Obama stimulus plan.
Even those who think government borrowing is a free lunch can't possibly believe the government has already done enough "stimulus spending" to explain the difference between depression and recovery.
CNNMoney recently calculated that the stimulus plan has spent just $120 billion—less than 1% of GDP—mostly on temporary tax cuts ($53 billion) and additional Medicaid, food stamps and unemployment benefits. Less than $1 billion has been spent on highway and energy projects. Commitments for the future are much larger, but households and firms can't spend commitments.
Proponents of Big Government can't say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it's more important that the federal government merely continued spending and didn't "slash" spending as in the early 1930s. But the federal government didn't slash spending in the early '30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.
President Obama clearly believes Big Government is the antidote to this and perhaps all recessions. At his first news conference in February, the president said, "The federal government is the only entity left with the resources to jolt our economy back to life." Yet that raises a key question: If the U.S. economy could not recover without a big "jolt" of deficit spending, then how did the economy recover from recessions in the distant past, when the federal government was very small?
A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.
The relative brevity of recessions before the New Deal is particularly surprising since the U.S. economy was then dominated by farming and manufacturing—industries far more prone to nasty cyclical surprises than today's service-based economy.
In the late 19th and early 20th centuries, nobody thought the government could or should do anything except stand aside and let the mistakes of business and banking be fixed by those who made them. There were no Keynesian plans to borrow and spend our way out of recessions. And bankers had no Federal Reserve to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent.
It's clear that U.S. history does not support the theory that Big Government means shorter and milder recessions. In reality, recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed. What's more, recessions ended more quickly before the New Deal's push for Big Government than they have in the past three decades. The economy's natural recuperative powers before the 1930s proved superior to recent tinkering by Big Government economists, politicians and central bankers.
The recent experience of other countries provides another way to test the Big Government theory of economic recovery. If it is true that Big Government prevents or cures recessions, then countries where government accounts for the largest share of GDP should have suffered much smaller losses of GDP over the past year than countries where the private sector is dominant.
The chart nearby lists 13 major economies by the size of government spending relative to GDP using OECD figures for 2007 (the U.S. is well above 40% by 2009). Europe's big spenders are at the top, the U.S. and Japan are in the middle, and fiscally frugal countries like China and India are at the bottom.
The last column shows the change in real GDP over the most recent four quarters—ending in the second quarter for the U.S., U.K., Germany, Japan, France, Italy, Sweden and China, but the first for the rest. Four of the five deepest contractions happened in countries with the biggest governments—Sweden, Italy, Germany and the U.K. Japan's government spending in 2007 was about like ours, but Japan's tax rates are far more punitive and the economy has suffered endless "fiscal stimulus" packages. China's central government spent 22% of GDP, but 30%-plus with local government included.
To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries.
On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.
In short, bigger government appears to produce only bigger and longer recessions.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
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http://www.examiner.com/blog/printexaminerarticles.cfm?section=examiners&blogtype=examiners§ion=examiners&mode=alias&blogid=3704&blogURL=Columbia-Conservative-Examiner&byYear=2009&byMonth=8&byDay=21&byAlias=UpdateTeetering-on-the-edge-of-economic-collapse
Update--Teetering on the edge of economic collapse
August 21, 1:13 PM · Anthony G. Martin - Columbia Conservative Examiner
From Karl Denninger at the Market Ticker:
*U.S. TREASURY TO AUCTION $27 BILLION IN 52-WEEK BILLS
*U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES
As we reported last week in this stunning revelation by some of the nation's top economists, contrary to the mantra of the Obama Administration that the financial stability of the U.S. is growing more secure and that his stimulus program 'is working,' the Federal Reserve and the U.S. Treasury Department have been engaging in covert practices that indicate our economy is in deep trouble, teetering on the edge of collapse.
By monetizing part of the nation's debt by printing more money to cover it and then quickly selling off the bonds at auction, the Fed hopes it can avoid the hyper-inflation that normally ensues with our current economic policies. But it does so at a huge price. Even more debt is added to the already mind-boggling multi-trillion-dollar national debt that threatens to unravel the entire U.S. economy.
The quote provided above concerning the Treasury's continued practice of auctioning off various notes and bills is an ominous signal that the economy is still very sick and is actually getting sicker.
As Karl Denninger states in the Market Ticker article cited above:
I count $207 billion, coming two weeks after a $250 billion dollar week.
Let's annualize - that would be about $5 trillion a year in annualized issuance. My-oh-my how long can this continue?
Who knows. What I do know is that this is absolutely unsustainable, it is approaching 40% of GDP annually, and yet this is what is required to keep all the balls and plates in the air as a direct consequence of our government's decision to sponsor and permit massive financial system fraud to continue.
The world's tolerance for this will eventually end and before it does our government had better have changed their tune and cleaned up the mess, because if that has not taken place first the economic consequences will be catastrophic.
This amounts to sheer insanity. The Federal Government is playing a game of Russian Roulette with the American economy, and the only question is which pull of the trigger will result in a deadly shot to the nation's core, resulting in a shut-down of banks, financial investment firms, insurance giants, and mortgage corporations.
A concrete example of just how precarious the economy really is lies in General Electric's renewed financial woes. GE benefited handsomely from the Obama bailout plan, receiving multi-billions of taxpayer dollars for which it reciprocated by overtly supporting Obama's 'green initiative' and promoting his agenda on its television networks--NBC, MSNBC, and CNBC.
Even after gobbling up our tax dollars, GE is still in trouble and is rumored to be looking for another handout from Obama and company, courtesy of the taxpayers.
This is not to mention that one of the largest banks in the South, Colonial Bank of Alabama, was seized by the FDIC last week and is thus the largest single bank failure so far this year.
And look out for auto repossessions to go through the roof when all of those that Obama and the Dems enabled to buy a car through the 'cash for clunkers' program suddenly discover in a few months they cannot afford that new vehicle.
We can also look for the jobless rate to spike significantly in August.
Take evasive action, secure your finances, and batten down the hatches. We are nowhere near the end of this mess, and the worst may be yet to come.
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http://news.bbc.co.uk/2/hi/business/8207174.stm
China reduces holdings in US debt
China wants to establish a new global currency regime
China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.
China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC's Chris Hogg.
Japan and the UK - second and third largest holders of US debt - increased their holdings over the same period.
China's holding of US debt is about 7% higher than at the turn of the year.
Inflation fear
In recent months the US government's budget deficit has widened thanks in part to the Obama administration's costly stimulus plan.
Our correspondent in Shanghai says that China is worried about this, and fears the stimulus efforts will fuel inflation in the US, reducing the value of the dollar.
This would then erode the value of the debt China holds in the US currency.
In June, China cut its holdings of US securities by about $25bn, a fall of 3.1%.
'Dollar alternative'
The sales were made as the US treasury secretary was visiting Beijing to try to reassure the Chinese that their investment in his country's government debt is safe.
In 2008, the Chinese increased their holdings in US debt by 52% over 12 months.
"China has said it would like to establish an alternative to the US dollar as the world's favoured currency for foreign exchange reserves," said our correspondent.
"So far there is no evidence that there is a suitable alternative. But these figures suggest they are exploring ways to diversify their investments where they can."
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Obama to raise 10-year deficit to $9 trillion
Fri Aug 21, 2009 5:54pm EDT
By Jeff Mason
WASHINGTON (Reuters) - The Obama administration will raise its 10-year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report next week, a senior administration official told Reuters on Friday.
The higher deficit figure, based on updated economic data, brings the White House budget office into line with outside estimates and gives further fuel to President Barack Obama's opponents, who say his spending plans are too expensive in light of budget shortfalls.
The White House took heat for sticking with its $7.108 trillion forecast earlier this year after the Congressional Budget Office forecast that deficits between 2010 and 2019 would total $9.1 trillion.
"The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year," said the administration official, who is familiar with the budget mid-session review that is slated to be released next week.
"Our budget projections are now in line with the spring and summer projections that the Congressional Budget Office put out."
The White House budget office will also lower its deficit forecast for this fiscal year, which ends September 30, to $1.58 trillion from $1.84 trillion next week after removing $250 billion set aside for bank bailouts.
Record-breaking deficits have raised concerns about America's ability to finance its debt and whether the United States can maintain its top-tier AAA credit rating.
Politically, the deficit has been an albatross for Obama, a Democrat who is pushing forward with plans to overhaul the U.S. healthcare industry -- an initiative that could cost up to $1 trillion over 10 years -- and other promises, including reforming education and how the country handles energy.
DEFICIT WORRIES
Republicans have pounced on Obama for planning to spend too much when deficits are so high, and the issue is likely to loom large in next year's Congressional elections.
Obama, who has promised to halve the deficit by the end of his four-year term and likes to remind constituents he inherited a $1.3 trillion deficit from former President George W. Bush, says bringing down healthcare costs is critical to long-term deficit reduction.
Treasury markets have been worried all year about the mounting deficit. The United States relies on large foreign buyers such as China and Japan to cheaply finance its debt, and they may demand higher interest rates if they begin to doubt that the government can control its deficits.
"It's one of those underlying pieces of news that is liable to haunt the bond market at some point in the future," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco, referring to the revised 10-year deficit projection.
Many economists think it is unlikely the government can curtail spending, which means taxes would have to go up to cover the rising costs of providing retirement and healthcare benefits to aging Americans.
Higher taxes, which could slow economic growth, are also a major concern of voters on both sides of the political divide. Obama has promised not to raise taxes on Americans making less than $250,000 a year.
(Additional reporting by Butron Frierson in New York; editing by Chris Wilson)
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Scary data, Obama's own estimates are $9.1 trillion starting 2010 (up $2 trillion today while leaving for Martha's Vineyard) plus this year's new debt...and that is without healthcare?? Who can comprehend new debt into the tens of trillions much less find someone in a position to lend it.
The Fed is printing the paper money first and selling bonds second. If one of us financed major debt with float, we would be guilty of a federal felony of check kiting. With Madoff, they called the same thing a Ponzi scheme.
We can follow the Mexican example where the nuevo peso in place of a thousand old pesos; as they did, we will need a new dollar $ign to signify the new, devalued American currency. :-(
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If people are seeing "green shoots" it's more likely putrefaction rather than growth.
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http://www.reason.com/blog/show/135631.html
You Will Have Ben Bernanke to Kick Around
Tim Cavanaugh | August 25, 2009, 6:26am
Federal Reserve Chairman Ben Bernanke is expected to get reappointed at 9 o'clock this morning. In honoring the man who in 2006 was still talking about solid fundamentals and a soft landing in the real estate market, and who predicted growth in the second half of 2007, President Obama will express gratitude on behalf of all the peoples of Planet Earth, with special praise for Bernanke's leadership "through one of the worst financial crises that this nation and this world have ever faced."
Got it? Not just this nation but this world. Self-dramatization buffs take note: This recession dwarfs not only the Panic of 1837 and the Great Depression, but the South Sea Bubble, Egypt's seven-year famine in the Book of Genesis, and whatever killed the Mayans. We're all heroes, just for being here, dammit!
The great missed opportunity is not economic (given that Larry Summers was in serious contention as a Bernanke replacement, the move may in fact be a blessing), but political. In the wake of the health care debacle, Americans are feeling the kind of misgivings not felt since Britney Spears woke up to Jason Alexander. Obama has demonstrated his fondness for announcing grand schemes in a golden cloud of "understand one things" and "let there be no doubts," but he has provided no evidence that he has an interest in the nuts-and-bolts job of keeping his customers satisfied. This is the moment for the president to give up the illusion of vision and start creating the illusion of results.
My advice: After the vacation that should have been in Hawaii, come back and fire Treasury Secretary Tim Geithner. Then announce that Bernanke will not be reappointed. Then announce that you've called together an international team of ninja economists and financial titans -- I mean stellar people, blue ribbon right down to their white shoes -- to craft a better, smarter Stimulus II (actually Stimulus IV or V, but who's counting?). Then spend the fall doing photo-opps with small business owners and chambers of commerce around the country, vowing to get this economy moving again -- for real American working families and such.
Nobody will be fooled, any more than anybody outside the Beltway is fooled by the "signs of life" and "green shoots" flapdoodle the Administration and its stooges keep ladling out. But they'll appreciate the gesture. And with luck we may see just one more big money dump rather than the methodical destruction of the federal budget.
Most people recognize that the economy is out of the president's control. They just don't like seeing Washington and Wall Street use this supposed disaster as an excuse to loot and pillage. This is a bigger political problem than Obama seems to understand.
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Worse and Worser
By Randall Hoven
The Congressional Budget Office came out with an update to its predictions of the federal budget this week. For some reason, the CBO did not title its report "Hell In A Hand Basket."
It is difficult to put all these predictions into easily understandable apples-to-apples comparisons. But I will try. One thing that messes up the understanding is that the White House or Treasury comes out with predictions as well the CBO, and usually at about the same time, so that there are always multiple estimates of about the same things.
Here is my tip for getting a grip on such predictions: ignore all predictions coming from the Obama administration. To keep things simple and within an order of magnitude of the truth, stick with CBO estimates. Not that the CBO is perfect, but (a) it is more accurate than anything coming from Obama, and (b) its predictions are apples-to-apples comparable to each other.
In March, the CBO came out with a report that included predictions for two different scenarios: a "baseline" scenario and an "Obama budget" scenario. It also updated that report in June. In August, the CBO updated only one of those predictions, its "baseline" one. (Format note: the embedded links here are directly to pdf versions of the CBO reports. In the first two reports, look for Table 1-1. In the August report, look for Table 1.)
The CBO's "baseline" is an estimate of what will happen if Congress does nothing new and just lets existing law continue. If tax breaks expire, Congress lets them expire, etc. The CBO also assumes discretionary spending will go up merely at the pace of inflation. The "baseline" is not quite what Bush left for Obama, since it includes legislation passed already, such as the $787 B stimulus and the $410 FY 2009 reconciliation budget, both passed in 2009 under Obama.
The CBO's "Obama" estimate is based on Obama's proposals being adopted, rather than continuing with the current law. Obama's proposals are documented in his budget, originally submitted February 26 and updated May 7. This budget is not yet law; it is what Congress is considering right now. Also, this budget includes neither Obamacare nor Cap & Trade.
In order to compare all these predictions, each full of numbers and assumptions, I provide only the predictions of the cumulative deficit over 2010-2019.
"Baseline" from March report: $4.441 trillion.
"Obama budget" from March report: $9.270 trillion.
"Baseline" from June report: $4.441 trillion.
"Obama budget" from June report: $9.139 trillion.
"Baseline" from August report: $7.137 trillion.
Note a few things. First, Obama's budget would more than double the long-term deficit, from $4.4 T to about $9.2 T, when estimated apples-to-apples. Secondly, the baseline estimate has gone up $2.7 T, or 61% just between June and August. Third, we do not have such an updated estimate for Obama's budget.
If CBO would re-do its estimate for Obama's budget like it did for the baseline case, we could expect the 2010-2019 cumulative deficit to be $12 T to $15 T if Obama gets his way -- before Obamacare or Cap & Trade or anything else new.
Let's be clear here. If Congress from here out does nothing but maintain the dreaded status quo, we are on an unsustainable budget path. A path of structural deficits never going below $500 B or 3% of GDP in any year from now on. A path that leaves us with a public debt of about 67% of GDP from 2011 on, or a level not seen since Truman was paying off World War II.
That's the good news. The bad news is if Obama gets his way. If he does, essentially double everything: annual deficits more like $1 trillion or 6% of GDP every year. Debt held by the public will reach at least 80% of GDP, if not 90% or more.
You need to note something else about all this. We are talking 2010 and beyond. Obama expects our current recession to end this year. Most economists expect the same thing. Years from 2010 on are expected to be post-recession years. To be explicit, that means that even Keynesians would say fiscal stimuli are not needed in those years.
Yet we spend like crazy, non-stop, that entire time! This is not about fixing the current recession.
Critics (e.g., the Washington Post) always like to remind us of Cheney's quote, "Reagan proved deficits don't matter." I don't think Cheney meant just any deficits, but deficits of limited size and duration. Size and endurance matter.
In Reagan's eight years, 1981-88, the deficit averaged 4.2% of GDP, with the worst year being 6.0%. Under George W. Bush, 2001-2008, the deficit averaged 2.0% of GDP, with the worst year being 3.6%.
Now let's look at CBO's forecast of Obama's deficits for 2009-2016. The average deficit will be 6.3% of GDP, with a worst case of 13% and a best case of 3.9%. And these are the rosy predictions, the June predictions -- before being updated in August as the baseline scenario was.
Do you get the size and endurance differences? Obama's average will be worse than Reagan's worst single year. Obama's best will be worse than Bush's worst single year. Obama's average will, in fact, be worse than any year since 1930 except for World War II. That means unprecedented in peacetime.
What's more, the numbers under Obama never get better. The picture doesn't clear up with the end of this recession. The deficit will be 5.6% of GDP, and the public debt 82% of GDP (unprecedented in peacetime), in 2019. But again, those are the rosy numbers.
Obama's budget is now being considered by Nancy Pelosi's House and Harry Reid's Senate. Do you think the tweaks they make to Obama's budget will increase or decrease the deficit? Obama's budget did not include health care reform. The health care bill currently being considered (H.R. 3200) was estimated to add $1 trillion to the 2010-2019 cumulative deficit, per the CBO.
Things were bad in 2008. What Obama did early ($787 B stimulus, $410 B reconciliation, $350 B TARP part II) made them worse. What he put in his February budget would make them even worse. What he proposed after that budget (health care reform with a public option, cap and trade emissions legislation) would make them yet worse again.
Every single proposal from this President makes the budget outlook worse. Much worse. Unprecedented in peacetime worse. Third World basket case, debtor-nation, worse. Can we get anything from this man that is not a 1,000 page piece of legislation that costs $1 trillion and needs a new czar?
Let's grant, for the sake of argument, that Obama was handed a terrible situation. He was made captain of a ship that was leaking and close to sinking. But instead of patching the leaks, he is taking an ax to everything. He says we can't live with the status quo.
Can we please not save this country by destroying it?
Randall Hoven can be contacted at randall.hoven@gmail.com or via his web site, kulak.worldbreak.com.
Correction: The text above has been corrected. The average deficit of the Reagan years was 4.2%, not 2.4% as first stated.
Page Printed from: http://www.americanthinker.com/2009/08/worse_and_worser.html at August 28, 2009 - 10:34:05 AM EDT
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I don't know if Krugman formally advises the administration or is just their chief apologist in the media. Forget about Cheney allegedly saying Reagan proved deficits don't matter, this Nobel prize winner thinks 10 trillion is good but more would be better.
At the heart of the differences in philosophy is the belief in government intervention, a never-ending so-called Keynesian stimulus of demand, versus a supply side view that if government reduced its role of crowding out the private sector in terms of taxing, spending and regulating, the economy would flourish faster, freer and stronger, without all the man-made 'business cycles'.
Could have run this in 'Humor/WTF' but I swear to God this is his column...
http://www.nytimes.com/2009/08/28/opinion/28krugman.html?hp
Till Debt Does Its Part
By PAUL KRUGMAN
Published: August 27, 2009
So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.
The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.
The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?
Let’s start with the effects of this year’s deficit.
There are two main reasons for the surge in red ink. First, the recession has led both to a sharp drop in tax receipts and to increased spending on unemployment insurance and other safety-net programs. Second, there have been large outlays on financial rescues. These are counted as part of the deficit, although the government is acquiring assets in the process and will eventually get at least part of its money back.
What this tells us is that right now it’s good to run a deficit. Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.
As I said, deficits saved the world.
In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.
But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.
Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.
Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.
The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P. That’s not good, but it’s within a range that has historically proved manageable for advanced countries, even those with relatively weak governments. In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis.
So is there anything to worry about? Yes, but the dangers are political, not economic.
As I’ve said, those 10-year projections aren’t as bad as you may have heard. Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.
That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.
But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to “pull the plug on grandma.”
So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid. - Paul Krugman, NY Times
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The $10 trillion estimate is low UNLESS there is a change of government. What is the cost of the new, permanent debt when interest rates hit 15% or 20% and GDP growth is at 0.00? - Doug
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Australian Broadcasting Corporation
TV PROGRAM TRANSCRIPT
LOCATION: http://www.abc.net.au/lateline/content/2004/s1064193.htm
Broadcast: 11/03/2004
Krugman calls on Bush to reign in the red
Reporter:
TONY JONES: Well, the US is not just labouring under a record trade deficit, there are warnings tonight that its budget deficit could precipitate a Latin American style financial crisis.
Influential economist Paul Krugman says the US will face a severe downturn before the end of the decade unless the $500 billion fiscal debt is rectified.
In his latest book, The Great Unravelling, the Princeton University economist is calling on President Bush to abandon his program of trillion dollar tax cuts, otherwise, he claims, there may not be enough funds to pay for the waves of baby boomers who will soon retire.
I spoke to Paul Krugman a short time ago.
TONY JONES: Paul Krugman, history proved your predictions right over the Asian financial crisis.
You're now warning essentially that the engine of the world economy, the United States itself, is heading for a South American style financial crisis.
What's the evidence for that?
PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there.
It's comparable to the worst we've ever seen in this country.
It's biggest than Argentina in 2001.
Which is not cyclical, there's only a little bit that's because the economy is depressed.
Mostly it's because, fundamentally, the Government isn't taking in enough money to pay for the programs and we have no strategy of dealing with it.
So, if you take a look, the only thing that sustains the US right now is the fact that people say, "Well America's a mature, advanced country and mature, advanced countries always, you know, get their financial house in order," but there's not a hint that that's on the political horizon, so I think we're looking for a collapse of confidence some time in the not-too-distant future.
TONY JONES: When you say the not-too-distant future, what does that mean?
We know there may be a crisis in paying, for example, in social security...
PROFESSOR PAUL KRUGMAN: What I envision is that at some point, we have about 10 years now until the baby boomers hit the United States.
The US even more than other advanced countries has a welfare state that's primarily a welfare state for retirees.
We have the huge bulge in the population that starts to collect benefits and earn the next decade.
If there isn't a clear path towards fiscal sanity well before that, then I think the financial markets are going to say, "Well, gee, where is this going?"
I think, where in that 10 years the crunch comes, I don't know.
I think there's a real possibility that next year or one or two years from now, when they see that actually the same irresponsible tax cuts as the solution to everything continue, we might have a crisis that soon but more likely towards the end of the decade.
TONY JONES: Let me ask you this - just in the short-term, given today's policy settings and the ones that are going to prevail, we assume, through the election period, what's likely to happen to interest rates?
PROFESSOR PAUL KRUGMAN: Right now, long-term interest rates, short-term interest rates, I think, are going to stay where there are, which is not far above zero, right through the election and probably beyond because that's directly under the control of the Federal Reserve.
The economy is weak for the time being.
Job creation is essentially non-existent.
Long-term interest rates which should reflect all these things are actually quite low right now and it's an interesting thing when you try to talk to people in the bond market, why, you ask, doesn't the deficit worry you?
Don't you wonder that there's going to be a financing crunch?
And they say: "Well, we believe that next year Bush or whoever is in the White House is going to get responsible."
And you ask them: "What evidence do you have for that?"
And they say: "Well, I don't know but it's always happened before."
So right now again, the bond market is reflecting the credit built up in previous responsible governments.
TONY JONES: Actually the bond market's quite interesting because for the present moment there seems to be a huge influence on the US economy from the Asian central banks.
Is that risky?
PROFESSOR PAUL KRUGMAN: Well sure.
Although, I'm not sure that it's particularly riskier than a lot of other things. But yeah, we have this, I didn't say this, but we've got twin deficits.
We've got a huge budget deficit and an equally large current account deficit.
And if you ask, "How are we financing the current account deficit?", well that's a story.
A few years ago it was foreigners investing in the United States.
It was Daimler buying Chrysler, it was people investing in the strength of the US economy.
These days it's Asian central banks buying up US Government debt because they're trying to keep their currencies weak against the dollar and this can't go on forever.
TONY JONES: Your detractors - and there are quite a few of them on the Republican side of the equation - they're accusing you of scare mongering?
PROFESSOR PAUL KRUGMAN: The first thing to say is to look at what some of those same people were saying in the middle of the Clinton years when the deficit was substantially smaller as a proportion of GDP and they were carrying on about what a bad thing it was.
The other thing is the comparison.
The only time post war that the United States has had anything like these deficits is the middle Reagan years and that was with unemployment close to 10 per cent.
A lot of that was a cyclical thing which would go away when the economy recovered.
Also the baby boomers were 20 years younger than they are today.
If you look at the actual fiscal situation, it's much, much worse than it was even at its worst during the Reagan years. One way to say this is we have social security which is a retirement program which viewed on its own is running a surplus.
If you take that out of the budget then we're running at a deficit of more than 6 per cent of GDP and that is unprecedented.
TONY JONES: One of your fiercest critics, Donald Luskin, seems to fear you because of your very credibility and your plausibility.
As he puts it, you're the most "dangerous liberal commentator in the United States".
He says he once admired you but now he actually runs a website called the Krugman Truth Squad?
PROFESSOR PAUL KRUGMAN: Yeah.
Well, look this is good.
Something I used - let them hate as long as they fear.
I think the point is, let me quote Harry Truman: "I give them the truth and they think it's hell."
I don't think I've been saying anything that isn't quite straight forward.
It's just arithmetic but it's been stuff that a lot of, very few journalists have been willing or able to say.
TONY JONES: It's a bit more than arithmetic though, isn't it?
Would you agree with the proposition that you're slowly transforming yourself, in a way, from a pure economist into also something of a political activist?
PROFESSOR PAUL KRUGMAN: Well, yeah, I mean, it's not what I intended. But I came in writing as a journalist, writing occasional columns in the 90s, mostly about economical fears with a political tinge.
I came to the New York Times intending to do pretty much the same thing.
But then it became clear very early on that the President of the United States was irresponsible and dishonest on matters economic and it turned out that what I learned there was true of other kind of policies as well.
So, I was forced, if you like, just by the arithmetic of understanding how the budget works into a much broader critique of this really kind of scary thing that's happening to my country.
TONY JONES: Let's look a little bit at that broader critique that you outline in The Great Unravelling, your new book.
You claim that President Bush is part of the radical right and that America has become a revolutionary power.
How did you come to those conclusions?
PROFESSOR PAUL KRUGMAN: If you look at the policies and in a variety of areas, they're not within the range of normal partisan divides.
That is, Republicans always want lower taxes and Democrats a bigger state.
There are always disagreements about how strong environmental policies should be, but we're really way outside that now.
We're talking about repeated tax cuts in the face of enormous deficits and in the face of war.
Never done that before.
We're talking about a shift towards unilateralist foreign policy.
We've just gone to war without significant allies other than the UK to destroy weapons that didn't exist.
This is something that's kind of unique.
We're seeing a radical breakdown of the separation of church and state in a lot of policy issues.
This is something that's really outside normal politics and then if you just look at the political history, where do these people come from - you discover that there is a network of think tanks, organisations, funding sources, radical activists - which really, it's more than just an ordinary swing of the political pendulum.
If you like, the vast right-wing conspiracy isn't a theory, it's quite clearly visible to anyone who takes a little care to do his home work.
TONY JONES: One of those think tanks, of course, is the Heritage Foundation which was set up in a way to boost a series of ideological positions on the economy, on the social front and is now, you say, virtually running, to some degree, a lot of economic policy and one of the things they say, for example, is that social security and Medicare are violations of basic principals?
PROFESSOR PAUL KRUGMAN: That's right.
Heritage is central.
Heritage is in the middle of everything.
Almost every - if you like, the WAPs, the policy types such as they are, as opposed to the politicos - but the WAPs in this administration are almost all connected with Heritage or American Enterprise Institute but one or both of those.
And Heritage very clearly in its letters to fund raisers reminds them that our goal is to get rid of these programs, that we need to get rid of the legacy of the new deal on the great society and that means social security and Medicare.
TONY JONES: Now here's another quote from your book: "A revolutionary power does not accept the legitimacy of the state."
PROFESSOR PAUL KRUGMAN: There's a very hardline view.
There was actually a kind of revealing moment recently - Bush gave an interview, was more or less dragooned into an interview on Meet The Press and the interviewer said: "Well, what if you lose the election?"
And he said: "I'm not going to lose the election."
And the interviewer said: "But what if you do lose?"
He said: "I'm not going lose the election."
The possibility that they just would not regard it as a legitimate thing if someone else were to take power.
Quite a few people as part of the Republican movement have said that God chose Bush to be President.
I don't know whether they would accept the idea that mere mortal men should choose for him not to be President for another four years.
TONY JONES: You also link the personal fortunes of George Bush and Dick Cheney to what you called the epidemic of corporate malfeasance.
Are you suggesting that, in a way, their business ethics somehow leaked out into the rest of the corporate world or that they're just representative of it?
PROFESSOR PAUL KRUGMAN: Oh no, they're representative of it.
Let's be clear.
Most of the explosion of corporate malfeasance really took place during the 90s.
It took place with Clinton in the White House, which is not to say that he caused it.
In fact, you could say a lot of it happened despite some mild efforts on the part of Clinton to stop it.
But the point is that you ask when Bush says, "I want to reform corporations," is he credible?
Well, you have to look back and say, "Gee his own personal fortune arose, in large part, through deals that look an awful like Enron."
TONY JONES: Nor do you spare Alan Greenspan, the chairman of the Fed Reserve.
I always thought under the Clinton years or during the Clinton years he was the steady hand on the tiller.
You seem to refer to him these days as a partisan hack?
PROFESSOR PAUL KRUGMAN: Well, here's a special case.
I mean, the governor of the central bank has a terribly important job, enormous responsibility and power.
He's not an elected official.
This is an agreement that we've all reached - that this is a good thing to do because monetary policy is too easily politicised.
Best to have it in a technocrat.
In his role as a technocrat Greenspan has done a good job, not as stellar a job as his admirers will tell you but he's done a very good job.
There's an obligation that goes with this which is to stand above and outside the political fray.
Greenspan did that during the 90s.
But no sooner was Bush in office than Greenspan threw his weight behind tax cuts.
He actually went to Congress and argued that we need tax cuts because otherwise we're going to run excessively large budget surpluses and pay down our debt too quickly.
Which he shouldn't have done in the first place.
This was violating the role.
Then, of course, when it turned out to be completely wrong.
Instead we've plunged from surpluses into huge deficits, he has now said, "Well, I don't think we should rescind the tax cut, instead we need to talk about cutting social security benefits."
That's injecting himself into politics in a very partisan fashion.
TONY JONES: You essentially claiming the Fed is no longer independent?
PROFESSOR PAUL KRUGMAN: Well Mr Greenspan is acting as a partisan figure.
He is acting as somebody who is doing whatever he can to support the agenda of this right-wing movement that is now running a large part of the Government.
I think that the star at the Fed is as good as ever.
My belief is that if you were to promote one of the other governors to chairman of the Fed we would be back to business as we've had it before.
I don't think everybody has been corrupted but I do think that Mr Greenspan has gone very far - basically has abused in his position, in a way, that's no longer recoverable.
TONY JONES: We will have to leave it there.
Paul Krugman, we thank you very much for taking the time to come and join us tonight.
PROFESSOR PAUL KRUGMAN: Well, thank you.
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GM, Who could have imagined this intellectual giant was criticizing deficits just as we grew out from under economic disaster that followed the stock crash of 2000 and the attacks of 9/11/01. As said about the Clintons, they lie with such ease!
Bush deficits were all about spending, not tax cuts. An economist should know that Bush did not 'cut taxes', he cut tax rates and revenues surges beyond all projections.
2003 1,782,532,000,000 Federal revenues as Krugman sounded his alarm
2004 1,880,279,000,000 5.6% increase in revenues, in spite of lower rates
2005 2,153,859,000,000 14.6% increase - The surge goes to double digits!
2006 2,407,254,000,000 11.5% increase - Double digit revenue increases continue as tax cuts remain firmly in place.
Jan. 2007 Pelosi-Reid-Obama take over majorities in congress, promise to end tax cuts. Economic growth ends after setting a 52 month consecutive job growth record and surpassing federal revenue forecasts by hundreds of billions of dollars.
Same for the 1980's, rates slashes - revenues doubled.
1980: $517 Billion
1990 $1.032 Trillion
Same for the 1990's. Slow growth until the (Clinton)-Gingrich capital gains rate cuts of 1995. Revenues surged, budget balanced.
Professor Krugman, the problem is the SPENDING, stupid.
ps. I meant to include this link with my numbers, straight from Obama's office. These charts are hard to find through google.
http://www.gpoaccess.gov/usbudget/fy09/pdf/hist.pdf
Page 26 out of 342
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John Adams said this? We may as well pack it in and go home:
"Remember," said John Adams, "democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy yet that did not commit suicide."
Fatal Flaw of Democracies
by Patrick J. Buchanan
08/25/2009
"We just can't afford it!"
Not long ago, every America child heard that, at one time or another, in the home in which he or she was raised.
"We just can't afford it!" It may have been a new car, or two weeks at the beach, or the new flat-panel TV screen.
Every family knew there were times you had to do without. Every father and mother has had to disappoint their kids with those words. Why is it that what parents do many times a year politicians seem incapable of doing: saying no.
How many times in the last decade have the political leaders of either party stood up and declared, "No, we cannot afford this."
Consider. Friday, the White House conceded that the deficits over the next 10 years will total $2 trillion more than they had reported just months ago. Instead of $7.1 trillion, we will run $9 trillion in deficits.
Meanwhile, the White House demands a new entitlement -- health care coverage for 47 million uninsured who can't afford it or refuse to buy it -- that will cost at least $1 trillion over 10 years. Can we afford this -- now?
"We can't afford not to," comes the retort. This is "a core ethical and moral obligation," says Barack Obama.
But is it not a core ethical and moral obligation not to debauch the currency in which most of the hard-earned wealth of the American people is invested? Yet, as Warren Buffett writes in The New York Times, collapse of the dollar and the end of its days as the world's reserve currency is what we are risking.
Government expenditures are running at 185 percent of revenue, which is like the lone family breadwinner earning $50,000 a year, while the family spends $92,500 a year. With families that do that, it is not too long before the credit cards are cut off, the mortgage is called in and the family Chevy is repossessed.
According to those same White House figures, this year's deficit will be closer to $1.6 trillion than the $1.8 trillion previously projected. Now, there are only three basic ways to finance that deficit.
The first is by borrowing the savings of one's own citizens, thus consuming the seed corn of the private economy. The second is by borrowing from abroad. The third is by having the Fed, "through a roundabout process," writes Buffett, "printing money."
Assume the Treasury borrows most of the savings of the American people this year, say, $500 billion. Then Uncle Sam is able to persuade Beijing to buy another $500 billion in Treasury bonds. The Fed must still run the printing presses to create another $600 billion.
How long before our Chinese, Japanese and OPEC creditors conclude that the Americans are depreciating their currency, and dump their U.S. Treasury bonds, or demand a higher rate of interest to cover the risks of their dollar-denominated assets sinking in value?
Can anyone believe the dollar can even retain its present diminished purchasing power if we run $9 trillion in deficits over 10 years? How long before producers conclude the same and start to demand more dollars for their goods -- and inflation takes off?
As Buffett argues, even when the U.S. economy returns to full employment, the new tax revenue it would throw off cannot close a deficit of that size. One must either slash spending or raise taxes to balance a budget where the feds are spending a fourth of gross domestic product.
But how do we cut spending when the five largest items in the budget -- Social Security, Medicare, Medicaid, interest on the debt and national defense -- are untouchables and growing faster then the 3 percent to 4 percent a year a full-employment economy can manage?
Are we going to cut veterans benefits, spending on our crumbling infrastructure or education, when Obama is promising every kid a college degree? Are we going to cut funds for Afghanistan and Iraq, and risk losing both wars? Are we going to cut foreign aid after Hillary Clinton has been touring Africa telling one and all America is here to stay?
How about cutting funds for food stamps and the Earned Income Tax Credit? Good luck. How about PBS and the National Endowment for the Arts? Just try it.
Does either party have any plan to cut federal spending from today's near 28 percent of GDP to the more traditional 21 percent?
George W. Bush didn't even try, and Obama is making that Great Society Republican president look like Ron Paul.
When a democracy reaches a point where the politicians cannot say no to the people, and both parties are competing for votes by promising even more spending or even lower taxes, or both, the experiment is about over.
"Remember," said John Adams, "democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy yet that did not commit suicide."
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Mr. Buchanan is a nationally syndicated columnist and author of Churchill, Hitler, and "The Unnecessary War": How Britain Lost Its Empire and the West Lost the World, "The Death of the West,", "The Great Betrayal," "A Republic, Not an Empire" and "Where the Right Went Wrong."
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Reader Comments: (248)
And in 1787, when old Benjamin Frankliln cam doddering out of the Constitutional Convention, someone asked him, "What kind of government did you give us?" and old Ben replied, -- "A Republic -- IF YOU CAN HOLD IT."
Old Ben seemed to believe that the triumph of Democracy was NOT inevitable, but that it depended on the caliber of its citizenry to uphold it.
And according to his colleague John Adams, the necessary caliber of its citizenry needs to be sober, wise, and virtuous.
America is indeed "tolerant." But is it wise and virtuous?
And if America's citizenry does not measure up to the calber of citizenship that is equired to sustain democracy, can democracy be sustained?
Benjamin Franklin doubted it. So too do I.
It's a shame, in a way, because the ULTIMATE blame for thse problems is WE THE PEOPLE. It is WE THE PEOPLE who demand more services than we can afford. It is WE THE PEOPLE who picked Obama Osama and his ilk - and who likewise picked both of the George Herbert Hoover Bushes who did nothing to rein in spending.
Special interests have learned that the power is in the Federal Government, and they will crucify a politician that tries to cut down their government largess. The same with voters.
Voters don't want to tighten their belts. Don't cut my farm subsidies, don't cut my welfare, don't cut my federal contract, don't cut my medicare.
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So This Is Hope 'n' Change?
In May, when the federal deficit was projected to be $7 trillion over the next decade, President Barack Obama was asked, "At what point do we run out of money?" His reply was actually rather candid: "Well, we are out of money now," he said. Last Friday, the administration adjusted its deficit projection -- upwards, of course. The White House now says the number will reach $9 trillion, including $1.6 trillion this year and $1.5 trillion next year. So much for The One's promise to end the years of "borrow and spend" budgeting.
The Congressional Budget Office simultaneously projected a deficit of $7 trillion over the next decade, a lower number because the CBO considers only current law, not White House proposals. The Wall Street Journal reports that "these deficit estimates are driven entirely by more domestic spending and already assume huge new tax increases. CBO predicts that debt held by the public as a share of GDP, which was 40.8% in 2008, will rise to 67.8% in 2019 -- and then keep climbing after that. CBO says this is 'unsustainable,' but even this forecast may be optimistic."
Among the problems with the White House estimate is that it depends, in part, on raising $640 billion through the cap-and-tax bill as well as another $200 billion in international business taxes. Both bills face opposition in the Senate, even from some Democrats. And these new taxes aren't guaranteed to produce more federal revenue. Instead, we can count on cap-and-tax to depress the economy, resulting in less revenue. The White House already expects unemployment to hit 10 percent this year.
The CBO estimate, meanwhile, is based on the ridiculous premise that Congress will hold spending to the rate of inflation. The Journal remarks, "CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth." The CBO also assumes that all of the Bush tax cuts will expire, even those for lower and middle class families.
Finally, the president's crown jewel, ObamaCare, projected to cost at least $1 trillion over the next 10 years, is entirely omitted from the deficit estimate because Obama pledges that it won't add to the deficit. Next, he'll be trying to sell us some oceanfront property in Arizona.
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Well that certainly does sound like we are headed for a collapse.
It doesn't even seem as though number One would mind.
He doesn't believe in our system as it was anyway.
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Also worth noting is that borrowing constitutes 40% of spending this year!!! :-o :-o :-o
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n Uncomfortable Choice
by John Mauldin
August 28, 2009
In this issue:
An Uncomfortable Choice
What Were We Thinking?
Frugality is the New Normal
And Then We Face the Real Problem
The Teenagers Are in Control
Choose Wisely
Argentina, Brazil, Uruguay, New Orleans, Detroit, and More
We have arrived at this particular economic moment in time by the choices we have made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week's letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip recession? Read on.
An Important Announcement
But first, I want to make a very important announcement. There are not many times in a career when you can say that something new has been created in the financial services industry and that you have been a part of it. But now I can say that and, I must admit, with a little pride in helping to bring a new creation into the world.
For years, Steve Blumenthal and I have shared a passion for bringing Absolute Return Strategies to all investors, not just the wealthy and institutional investors.
I want to introduce you to a new mutual fund, one that is different than the typical long-only equity mutual fund. My friends and partners at CMG have created a mutual fund that is comprised of 9 different trading strategies, a "fund of trading strategies," so to speak; and it's one that I believe will be strategically suitable for the economic environment that I think we face. And, as a mutual fund, it is open to all investors.
You can learn more about it by reading a report I have prepared, entitled "How to Deal with Volatility in Extraordinary Markets - Introducing the CMG Absolute Return Strategies Fund." Simply click here.
If you are an investment advisor or broker, you especially should read about this new fund and contact CMG directly for more information and reports. Full disclosure: as a consultant to the Advisor to the fund, my investment advisory firm does participate in the fees. And be sure and read all the disclosures and risk factors in the document.
And now, let's look at the choices we face.
An Uncomfortable Choice
As our family grew, we limited the choices our seven kids could make; but as they grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, "What were you thinking?" and get a mute reply or a mumbled "I don't know."
Yet how else do you teach them that bad choices have bad consequences? You can lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.
I have watched good kids from good families make bad choices, and kids with no seeming chance make good choices. But one thing I have observed. Very few teenagers make the hard choice without some outside encouragement or help in understanding the known consequences, from some source. They nearly always opt for the choice that involves the most fun and/or the least immediate pain, and then learn later that they now have to make yet another choice as a consequence of the original one. And thus they grow up. So quickly.
But it's not just teenagers. I am completely capable of making very bad choices as I approach the end of my sixth decade of human experiences and observations. In fact, I have made some rather distressing choices over time. Even in areas where I think I have some expertise I can make appallingly bad choices. Or maybe particularly in those areas, because I have delusions of actually knowing something. In my experience, it takes an expert with a powerful computer to truly foul things up.
Of course, sometimes I get it right. Even I learn, with enough pain. And sometimes I just get lucky. (Although, as my less-than-sainted Dad repeatedly intoned, "The harder I work the luckier I get.")
Each morning is a new day, but it is a new day impacted by all the choices of the previous days and years. Tiffani and I have literally interviewed in depth well over a hundred millionaires, and talked anecdotally with hundreds over the years. I am struck by how their lives, and those of their families, come down to a few choices. Sometimes good choices and sometimes lucky choices. Often, difficult ones. But very few were the easy choice.
What Were We Thinking?
As a culture, the current mix of generations, especially in the US, has made some choices. Choices which, in hindsight, leave the adult in us asking, "What were we thinking?"
In a way, we were like teenagers. We made the easy choice, not thinking of the consequences. We never absorbed the lessons of the Depression from our grandparents. We quickly forgot the sobering malaise of the '70s as the bull market of the '80s and '90s gave us the illusion of wealth and an easy future. Even the crash of Black Friday seemed a mere bump on the path to success, passing so quickly. And as interest rates came down and money became easier, our propensity to acquire things took over.
And then something really bad happened. Our homes started to rise in value and we learned through new methods of financial engineering that we could borrow against what seemed like their ever-rising value, to finance consumption today.
We became Blimpie from the Popeye cartoons of our youth: "I will gladly repay you Tuesday for a hamburger today."
Not for us the lay-away programs of our parents, patiently paying something each week or month until the desired object could be taken home. Come to think of it, I am not sure if my kids (15 through 32) have ever even heard of a lay-away program, not with credit cards so easy to obtain. Next family brunch, I will explain this quaint concept. (Interestingly, I heard about a revival of the concept on CNBC radio, coming back from dropping Trey off at school this morning. Everything old is new again.)
As a banking system, we made choices. We created all sorts of readily available credit, and packaged it in convenient, irresistible AAA-rated securities and sold them to a gullible world. We created liar loans, no-money-down loans, and no-documentation loans and expected them to act the same way that mortgages had in the past. What were the rating agencies thinking? Where were the adults supervising the sand box?
(Oh, wait a minute. DThat's the same group of regulators who now want more power and money.)
It is not as if all this was done in some back alley by seedy-looking characters. This was done on TV and in books and advertisements. I remember the first time I saw an ad telling me to call this number to borrow up to 125% of the value of my home, and wondering how this could be a good idea.
Turns out it can be a great idea for the salesmen, if they can package those loans into securities and sell them to foreigners, with everyone making large commissions on the way. The choice was to make a lot of money with no downside consequences to yourself. What teenager could say no?
Greenspan keeping rates low aided and abetted that process. Starting two wars and pushing through a massive health-care package, along with no spending control from the Republican Party, ran up the fiscal deficits.
Allowing credit default swaps to trade without an exchange or regulations. A culture that viscerally believed that the McMansions they were buying were an investment and not really debt. Yes, we were adolescents at the party to end all parties.
Not to mention an investment industry that tells their clients that stocks earn 8% a year real returns (the report I mentioned at the beginning goes into detail about this). Even as stocks have gone nowhere for ten years, we largely believe (or at least hope) that the latest trend is just the beginning of the next bull market.
It was not that there were no warnings. There were many, including from your humble analyst, who wrote about the coming train wreck that we are now trying to clean up. But those warnings were ignored.
Actually, ignored is a nice way to put it. Derision. Scorn. Laughter. And worse, dismissal as a non-serious perpetual perma-bear. My corner of the investment-writing world takes a very thick skin.
The good times had lasted so long, how could the trend not be correct? It is human nature to believe the current trend, especially a favorable one that helps us, will continue forever.
And just like a teenager who doesn't think about the consequences of the current fun, we paid no attention. We hadn't experienced the hard lessons of our elders, who learned them in the depths of the Depression. This time it was different. We were smarter and wouldn't make those mistakes. Didn't we have the research of Bernanke and others, telling us what to avoid?
In millions of different ways, we all partied on. It wasn't exclusively a liberal or a conservative, a rich or apoor, a male or a female addiction. We all borrowed and spent. We did it as individuals, and we did it as cities and states and countries.
We ran up unfunded pension deficits at many local and state funds, to the tune of several trillion dollars and rising. We have a massive, tens of trillions of dollars, bill coming due for Social Security and Medicare, starting in the next 5-7 years, that makes the current crisis pale in comparison. We now seemingly want to add to this by passing even more spending programs that will only make the hole deeper.
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Frugality is the New Normal
I could go on and on, but I think you get the point. The time for good choices was a decade ago. It would have been more difficult at the time, so that is not what we did. And now we wake up and are faced with a set of choices, none of them good.
Reality is staring back in the mirror at the American consumer, and especially the Boomer generation. The psyche of the American consumer has been permanently seared. We are watching savings beginning to rise and consumer spending patterns change for the first time in generations. Even as the authorities try to prod consumers back into old habits, they are not responding. Borrowing and credit are actually falling. Banks, for whatever reason, now want borrowers to actually be able to pay them back. Go figure.
Frugality is the new normal. We are resetting the underpinnings of a consumer-driven society to a new level. It will require a major overhaul of our economy. The normal drivers of growth - consumer spending, business investment, and exports - are all weak, and it is only because of massive government spending that the second quarter was not as bad as the two previous quarters and that the coming quarter will be positive.
But what then? How long can we continue with 10%-plus GDP deficits? We have an economy that is in a Statistical Recovery, fueled by government largesse. In the real world, we are watching unemployment rise, and it is likely to do so through the middle of next year. Deflation is in the air. Capacity utilization is near all-time lows. Housing numbers are only bouncing because of the government program of large tax credits for first-time home buyers and lower home prices. It will be years before construction is significant.
We will be faced with a choice this fall and early next year. If you take away the government spending, the potential for falling back into a recession is quite high, given the underlying weakness in the economy. A few hundred billion for increased and extended unemployment benefits will not be enough to stem the tide. There will be a groundswell for yet another stimulus package. Another 10% of GDP deficit is quite likely for next year.
As I (and Woody Brock) have made very clear in these e-letters, deficits that are higher than nominal GDP cannot continue without dire consequences. Good friend Richard Russell writes today:
"The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let's say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof."
That would be at least 30% of the national budget. How would your household do, paying that much as interest? How can you operate when interest payments are 30% or more of the budget? Do you borrow to pay the interest? And the Obama administration openly admits to deficits of over a trillion a year for the next ten years, under very rosy growth assumptions. Anyone outside of Washington and rosy-eyed economists think we will grow 4% next year? I am not seeing many hands go up.
And Then We Face the Real Problem
If we do not maintain high deficits, it is likely we fall back into recession. Yet if we do not control spending, we risk running up a debt that becomes very difficult to finance by conventional means. Monetizing the debt can only work for a few trillion here or there. At some point, the bond market will simply fall apart. And it could happen quickly. Think back to how fast things fell apart in the summer of 2007. When perception of the potential for inflation changes, it changes things fast.
The problem is that we are now in a very deflationary world. Deleveraging, too much capacity, high and rising unemployment, falling real incomes, and more are all the classic pieces of the formula for deflation.
Let's look at what my friend Nouriel Roubini recently wrote. I think he hit the nail on the head:
"A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.
"Yet the alternative - the early withdrawal of the stimulus drug that governments have been dispensing so freely - is even more serious. The present administration believes that deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment - a time when unemployment is rising, and private demand is still contracting - could be catastrophic, turning recovery into renewed recession."
There are no good choices. Nouriel, optimist that he is (note sarcasm), suggests that there is a possibility that the government can manage expectations by showing a clear path to fiscal responsibility that can be believed. And thus the bond markets do not force rates higher, thereby thwarting recovery.
And technically he is right. If there were adults supervising the party, it might be possible. But there are not. The teenagers are in control. Instead of fiscal discipline, we are hearing increased demands for more spending. Please note that the very rosy future-deficit assumptions assume the end of the Bush tax cuts at the close of 2010. But raising taxes back to the level of 2000 does not make the projected future budget deficits go away.
I mean, seriously, does anyone think Pelosi or Reid are going to lead us to fiscal constraint? Obama talks a good game, but he has not offered a serious deficit-reduction proposal, other than further tax increases. And by serious, I mean we need cuts on the order of several hundred billion dollars. The Republicans lost their way and their power (deservedly, in my opinion). Just as at the high school prom, the very few adults are being ignored.
It is the proverbial rock and the hard place. Cut the stimulus too soon and we slide back into a deeper recession. Let the budget spin out of control for a few years and we will see inflation return, with higher rates and a recession. Raise taxes by 1.5-2% of GDP in 2010 and we are shoved back into recession.
There are no good choices. If we do the right thing and cut the deficit, it means very hard choices. Can we keep our commitments to two wars and our massive defense budget? Medicare and Social Security reform are not painless. Education? Research? The "stimulus"? But cutting the deficit by hundreds of billions while raising taxes by even more than is already in the works, is not the formula for sustainable recovery.
Have we grown up? Are there adults in the room? Sadly, I don't think there are enough. We are still a nation of teenagers. We will do whatever we can to avoid the pain today. We will kick the can down the road, hoping for a miracle. Will we grow up? Yes, but the lessons learned will be hard.
There are no statistical signs of an impending recession. We are not going to get an inverted yield curve this time, which made it relatively easy for me to predict recessions in 2000 and 2006. We are in a deflationary, deleveraging world. A far different world than in the past.
I see little room for us to avoid a double-dip recession. It would take the skill and speed of former Cowboys running back Tony Dorsett hitting a very small hole in the line to break us into the open. I see no running back in our national leadership with such ability. As I have outlined above, recession could be triggered again in any number of very different economic environments. It all depends on the choices we make. But the choices lead to the same consequences, at least in my opinion.
As I wrote in August 2000 and August 2006, I write again in August 2009: there is a recession in our future. I was early both of those times and I am early now, maybe two years early, though I doubt it. And as I pointed out both of those last times, the stock market drops an average of over 40% during a recession. When I was on Kudlow in October of 2006, I was given a hard time about my recession call and prediction of a bear market. I think it was John Rutherford who dismissed my bearish vision. And he was right for the next three quarters, as the market proceeded to rise another 20%. I looked foolish to many, but I maintained my views.
You have choices. You can buy and hold (buy and hope?) or you can develop a strategic alternative. The next bear market, as I wrote in 2003 and in Bull's Eye Investing, will likely be the bottom. (It takes at least three of them to really take us to the bottom.) But the next one will change perceptions for a long time. Valuations will drop. Savings will rise even more. And a generation will grow up. The adults will return. Chastened. Scarred. Shaken. But we will Muddle Through. That is what we do. Even my teenagers.
Choose wisely.
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The Maudlin piece is interesting. He introduces the idea of a double-dip recession which makes sense if we are having a bit of a turnaround while we inject trillions of pretend money. Eventually that faucet slows or dries and the pre-existing problems are still all there.
He points to deflation risk now but that will pass if/when we economically survive this. Then we instantly have huge inflationary pressures.
He spelled out the bad choices we face and then the piece ended kind of suddenly before he told us the right answer. Hopefully there is a sequel.
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http://hotair.com/archives/2009/09/04/unemployment-jumps-to-97/
So, how soon until we hit 10% (officially)?
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September 04, 2009, 4:06 p.m.
Some Data for Mr. Biden
Big-stimulus America has lagged the global recovery. How might the vice president explain that?
By Jerry Bowyer
(http://www2.nationalreview.com/images/chart_bowyer_090409NEW.jpg)
‘Facts are stubborn things,” wrote John Adams; I’m tempted to add: “But not as stubborn as Joe Biden.”
The vice president recently told the Brookings Institution that he has no doubt that the Obama administration’s stimulus plan has been a success. In fact, it’s been so successful that it has moved us from the precipice of a second Great Depression to the safer ground on which we now discuss recovery.
A big problem with this line of “reasoning” is that as of the second quarter of 2009 — the most recent period for which GDP data are available — we were still in recession. Meanwhile, much of the rest of the developed world had resumed positive economic growth.
Across the financial crisis, stimulus spending by the U.S. easily exceeded that of any other developed nation, both in absolute terms and as a percentage of GDP. It seems the Obama administration — in conjunction with the Gordon Brown regime in the U.K. — failed to persuade many of our European friends to increase their planned stimulus spending as part of a proposed “global New Deal.”
(http://www2.nationalreview.com/images/chart_bowyer_090409B.jpg)
The U.S. will spend a full 2 percent of GDP on stimulus programs this year, while France will stimulate by only 0.7 percent of its GDP. Germany and Japan have both been robust stimulus spenders, yet each has spent considerably less than the United States. The result? While there is no one-to-one correlation between stimulus spending and GDP performance — since so many other factors are tied to economic growth — it is certainly notable that France, Japan, and Germany entered an economic spring during the second quarter of 2009 while the U.S. (along with the U.K.) remained stuck in an economic winter.
This analysis is constrained by complexity. For instance, the U.K.’s stimulus plan is in the same ballpark as Germany’s — it’s smaller if you only count this year, and slightly larger if you count last year as well. The U.S. and the U.K., however, have been much more aggressive in their central-planning initiatives than their developed-market cousins, with the U.S. embracing the nationalization of private-sector industries and various forms of income redistribution. The shift toward Keynesianism in the U.S. has been sizeable, and so far it’s been a bust.
So Joe Biden can boast all he wants. But facts are stubborn. And the fact of the matter is that the U.S. continued contracting while lesser Keynesians of the crisis resumed expansion.
— Jerry Bowyer is an economist, CNBC contributor, and author of the upcoming Free Market Capitalist’s Survival Guide.
National Review Online - http://article.nationalreview.com/?q=ZTcyNzNlNmFkMjFkMDgwMGFjYWYyZmYzYzUwNmZmZmQ=
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Barack Obama accused of making 'Depression' mistakes
Barack Obama is committing the same mistakes made by policymakers during the Great Depression, according to a new study endorsed by Nobel laureate James Buchanan.
By Edmund Conway( U.K. Telegraph)
Published: 9:55PM BST 06 Sep 2009
History repeating itself? President Obama has been accused by some economists of making the same mistakes policymakers in the US made in the Great Depression, which followed the Wall Street crash of 1929, pictured Photo: AP
His policies even have the potential to consign the US to a similar fate as Argentina, which suffered a painful and humiliating slide from first to Third World status last century, the paper says.
There are "troubling similarities" between the US President's actions since taking office and those which in the 1930s sent the US and much of the world spiralling into the worst economic collapse in recorded history, says the new pamphlet, published by the Institute of Economic Affairs.
In particular, the authors, economists Charles Rowley of George Mason University and Nathanael Smith of the Locke Institute, claim that the White House's plans to pour hundreds of billions of dollars of cash into the economy will undermine it in the long run. They say that by employing deficit spending and increased state intervention President Obama will ultimately hamper the long-term growth potential of the US economy and may risk delaying full economic recovery by several years.
The study represents a challenge to the widely held view that Keynesian fiscal policies helped the US recover from the Depression which started in the early 1930s. The authors say: "[Franklin D Roosevelt's] interventionist policies and draconian tax increases delayed full economic recovery by several years by exacerbating a climate of pessimistic expectations that drove down private capital formation and household consumption to unprecedented lows."
Although the authors support the Federal Reserve's moves to slash interest rates to just above zero and embark on quantitative easing, pumping cash directly into the system, they warn that greater intervention could set the US back further. Rowley says: "It is also not impossible that the US will experience the kind of economic collapse from first to Third World status experienced by Argentina under the national-socialist governance of Juan Peron."
The paper, which recommends that the US return to a more laissez-faire economic system rather than intervening further in activity, has been endorsed by Nobel laureate James Buchanan, who said: "We have learned some things from comparable experiences of the 1930s' Great Depression, perhaps enough to reduce the severity of the current contraction. But we have made no progress toward putting limits on political leaders, who act out their natural proclivities without any basic understanding of what makes capitalism work."
Boyo
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Nice post Boyo. Interesting that besides doing everything the opposite of Reagan he is emulating the policies that worsened and lengthened the great depression.
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On a different note I picked up a pearl of wisdom from Professor Walter Williams last week. He was explaining inflation which he defines as increasing (inflating) the money supply. What we think of as inflation - increases in prices - are a symptom of inflation, but it is the increase in money supply that is the inflation.
I would clarify that it is the increase in money supply relative to the quantity of good and services in the economy, but at a time of zero growth - all monetary increases are inflationary.
Translated I think that means that it will only take ordinary levels of new growth in the economy for this current inflation to show its ugly head in the form of spiraling prices increases, and it will also be possible to return to stagflation, where inflation roars up without the accompanying economic growth. :-(
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Swiss topple U.S. as most competitive economy: WEF
By Sven Egenter
Tue Sep 8, 3:10 am ET
GENEVA (Reuters) – Switzerland knocked the United States off the position as the world's most competitive economy as the crash of the U.S. banking system left it more exposed to some long-standing weaknesses, a report said on Tuesday.
The World Economic Forum's global competitiveness report 2009/2010 showed economies with a large focus on financial services such as the U.S., Britain or Iceland were the losers of the crisis.
The U.S. as the world's largest economy lost last year's strong lead, slipping to number two for the first time since the introduction of the index in its current form in 2004.
"We have been expecting for some time that it may lose its top-position. There are a number of imbalances that have been building up," said Jennifer Blanke, Head of the WEF's Global Competitiveness Network.
"There are problems on the financial market that we were not aware of before. These countries (like the U.S. and Britain) are getting penalized now," she said.
Trust in Swiss banks also declined. But in the assessment of banks' soundness, the Alpine country still ranked 44th. U.S. banks fell to 108 -- right behind Tanzania -- and British banks to 126 in the ranking, now topped by Canada's banks.
The WEF bases its assessment on a range of factors, key for any country to prosper. The index includes economic data such as growth but also health data or the number of internet users.
The study also factors in a survey among business leaders, assessing for example the government's efficiency or the flexibility of the labor market.
The WEF applauded Switzerland for its capacity to innovate, sophisticated business culture, effective public services, excellent infrastructure and well-functioning goods markets.
The Swiss economy dipped into recession last year, too and had to bail out its largest bank UBS. But its economy is holding up better than many peers and most banks are relatively unscathed by the crisis, which drove U.S. banks into bankruptcy.
The WEF said the U.S. economy was still extremely productive but a number of escalating weaknesses were taking its toll.
Concerns were growing about the government's ability to maintain distance to the private sector and doubts rose about the quality of firms' auditing and reporting standards, it said.
BRAZIL LEAPS
Leading emerging markets Brazil, India and China improved their competitiveness despite the crisis, the report showed.
But Russia saw one of the steepest declines among the 133 countries assessed, falling back 12 places to 63, as worries about government efficiency and judicial independence rose, the WEF said.
After years of rapid improvement, which took it to place 29, China now had to tackle shortcomings in areas such as financial markets, technological readiness and education as it could no longer rely on cheap labor alone to generate growth.
India, ranked 49th, was in turn well positioned in complex fields such as innovation but had still to catch up on basics such as health or infrastructure, the WEF said.
Brazil leapt by 8 ranks to 56th, as measures to improve fiscal sustainability and to liberalize and open the economy showed effects, the report said.
Among the top-ten, Singapore moved up to third from fifth, swapping positions with Denmark, which fell behind fellow-Nordic country Sweden. Finland as 6th and Germany as 7th stayed put while Japan and Canada overtook the Netherlands.
The WEF study named African countries Zimbabwe and Burundi as the world's least competitive economies.
In the case of Zimbabwe, the WEF noted the complete absence of property rights, corruption, basic government inefficiency as well as macroeconomic instability as fundamental flaws.
For the full report click on: www.weforum.org/gcr
(Reporting by Sven Egenter; Editing by Andy Bruce)
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http://hotair.com/archives/2009/09/15/is-obama-the-next-herbert-hoover/
Is Obama the next Herbert Hoover?
posted at 10:55 am on September 15, 2009 by Ed Morrissey
The last President to initiate a trade war during a recession wound up creating the biggest economic catastrophe in American history. Yet the current President appears to have ignored the lesson of Herbert Hoover and the Smoot-Hawley Act in slapping tariffs on China and its tire exports while the economy struggles to come back to life after a deep recession. The Wall Street Journal wonders where Barack Obama is leading the US, or whether Obama wants to lead at all:
The smell of trade war is suddenly in the air. Mr. Obama slapped a 35% tariff on Chinese tires Friday night, and China responded on the weekend by threatening to retaliate against U.S. chickens and auto parts. That followed French President Nicolas Sarkozy’s demand on Thursday that Europe impose a carbon tariff on imports from countries that don’t follow its cap-and-trade diktats. “We need to impose a carbon tax at [Europe's] border. I will lead that battle,” he said.
Mr. Sarkozy was following U.S. Energy Secretary Steven Chu, who has endorsed a carbon tax on imports, and the U.S. House of Representatives, which passed a carbon tariff as part of its cap-and-tax bill. This in turn followed the “Buy American” provisions of the stimulus, which has incensed much of Canada; Congress’s bill to ban Mexican trucks from U.S. roads in direct violation of Nafta, prompting Mexico to retaliate against U.S. farm and kitchen goods; and the must-make-cars-in-America provisions of the auto bailouts. Meanwhile, U.S. trade pacts with Colombia, Panama and South Korea languish in Congress.
Through all of this Mr. Obama has either said nothing or objected so feebly that Congress has assumed he doesn’t mean it. Despite his pro-forma demurrals, Mr. Obama’s actions and nonactions are telling the world that the U.S. is abandoning the global leadership on trade that Presidents of both parties have worked to maintain since the 1930s. His advisers whisper that their man is merely playing a little tactical domestic politics, but he is playing with fire, as the last 80 years of trade history should tell him.
Not only does this ignore the history of trade wars and recessions, which the Journal outlines, but it also ignores Obama’s own big-spending policies. Obama wants to spend trillions of dollars in deficits over the next ten years, especially on his overhaul of the health-care and energy industries in the US. That will take a lot of happy bondholders buying US debt, and for the last several years, that means China. What happens when China stops buying — or worse yet, starts selling what Treasuries they already hold?
If an American administration wanted to confront China on trade, it should have prepared itself by eliminating the need to sell debt. That administration would have pared down spending dramatically, lowered corporate taxes to allow for better competition in the global marketplace for American companies, and encouraged domestic investment by lowering capital-gains taxes. The Obama administration has done the exact opposite instead, leaving the US completely unprepared for a trade war against China, especially over tires, which impacts a mere 7,000 jobs in the US.
Bill Clinton, for all his faults, understood the power and the necessity of open trade. George Bush learned that lesson after a fumble on steel tariffs in 2001. No other president since Hoover has made the mistake of thinking that a trade war would help bolster the economy here in the US or abroad. Picking a fight with the US’s largest debtholder as we prepare to issue more debt in the next few years than we have over the course of the past 230 seems like a foolish, ignorant strategy — the worst of both worlds, with the worst possible outcomes.
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Buchanan doesn't surprise me. He has always as far as I know been a protectionist but Obama does.
This has to be a nod to unions. Otherwise, isn't a tire tariff otherwise completely counter the Obama's talk of working with the world in partnership?
09/15/2009
Down at the Chinese outlet store in Albany known as Wal-Mart, Chinese tires have so successfully undercut U.S.-made tires that the Cooper Tire factory in that south Georgia town had to shut down.
Twenty-one hundred Georgians lost their jobs.
The tale of Cooper Tire and what it portends is told in last week's Washington Post by Peter Whoriskey.
How could tires made on the other side of the world, then shipped to Albany, be sold for less than tires made in Albany?
Here's how.
At Cooper Tire, the wages were $18 to $21 per hour. In China, they are a fraction of that. The Albany factory is subject to U.S. health-and-safety, wage-and-hour and civil rights laws from which Chinese plants are exempt. Environmental standards had to be met at Cooper Tire or the plant would have been closed. Chinese factories are notorious polluters.
China won the competition because the 14th Amendment's "equal protection of the laws" does not apply to the People's Republic. While free trade laws grant China free and equal access to the U.S. market, China can pay workers wages and force them to work hours that would violate U.S. law, and China can operate plants whose health, safety and environmental standards would have their U.S. competitors shut down as public nuisances.
Beijing also manipulates its currency to keep export prices low and grants a rebate on its value-added tax on exports to the U.S.A., while imposing a value-added tax on goods coming from the U.S.A.
Thus did China, from 2004 to 2008, triple her share of the U.S. tire market from 5 percent to 17 percent and take down Cooper Tire of Albany.
But not to worry. Cooper Tire has seen the light and is now opening and acquiring plants in China, and sending Albany workers over to train the Chinese who took their jobs.
Welcome to 21st century America, where globalism has replaced patriotism as the civil religion of our corporate elites. As Thomas Jefferson reminded us, "Merchants have no country."
What has this meant to the republic that was once the most self-sufficient and independent in all of history?
Since 2001, when George Bush took the oath, the United States has run $3.8 trillion in trade deficits in manufactured goods, more than twice the $1.68 trillion in trade deficits we ran for imported oil and gas.
Our trade deficit with China in manufactured goods alone, $1.58 trillion over those eight years, roughly equals the entire U.S. trade deficit for oil and gas.
U.S. politicians never cease to wail of the need for "energy independence." But why is our dependence on the oil of Saudi Arabia, the Gulf, Nigeria, Canada, Mexico and Venezuela a greater concern than our dependence on a non-democratic rival great power for computers and vital components of our weapons systems and high-tech industries?
As Executive Director Auggie Tantillo of the American Manufacturing Trade Action Committee compellingly argues:
"Running a trade deficit for natural resources that the United States lacks is something that cannot be helped, but running a massive deficit in manmade products that America easily could produce itself is a choice -- a poor choice that is bankrupting the country and responsible for the loss of millions of jobs."
How many millions of jobs?
In the George W. Bush years, we lost 5.3 million manufacturing jobs, one-fourth to one-third of all we had in 2001.
And our dependence on China is growing.
Where Beijing was responsible for 60 percent of the U.S. trade deficit in manufactured goods in 2008, in the first six months of 2009, China accounted for 79 percent of our trade deficit in manufactured goods.
How can we end this dependency and begin building factories and creating jobs here, rather than deepening our dependency on a China that seeks to take our place in the sun? The same way Alexander Hamilton did, when we Americans produced almost nothing and were even more dependent on Great Britain than we are on China today.
Let us do unto our trading partners as they have done unto us.
As they rebate value-added taxes on exports to us, and impose a value-added tax on our exports to them, let us reciprocate. Impose a border tax equal to a VAT on all their goods entering the United States, and use the hundreds of billions to cut corporate taxes on all manufacturing done here in the United States.
Where they have tilted the playing field against us, let us tilt it back again. Transnational companies are as amoral as sharks. What is needed is simply to cut their profits from moving factories and jobs abroad and increase their profits for bringing them back to the U.S.A.
It's not rocket science. Hamilton, James Madison and Abraham Lincoln all did it. Obama's tariffs on Chinese tires are a good start.
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http://planetgore.nationalreview.com/post/?q=ZDYwYjIwMDMwMjFmY2YzMWVjOTdlYTI4OGI0YjhiNjA=
Friday, September 18, 2009
September Auto Sales Go Clunk [Henry Payne]
When Congress gave away $3 billion for buyers to trade in their “clunkers” and buy new cars in August, lawmakers thrilled as buyers swamped showrooms to take advantage of the big discounts. “Cash for clunkers has captured the public’s attention . . . (it) has the possibility to truly jumpstart our economy,” said Rep. Candice Miller (R., Mich.). Other, more sober analysts, warned that the clunkers program was only stealing from future sales.
September sales are in, and sobriety can take a bow.
Edmunds.com reports that “September’s light-vehicle sales rate will fall to 8.8 million units . . . the lowest rate in nearly 28 years, tying the worst demand on record. After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once — in December 1981 — with records stretching back to January 1976.”
“Many people regard February as the darkest month of the recession, but even then (sales were) higher, at 9.1 million units,” adds Edmunds.com statistician Zhenwei Zhou.
But sobriety comes hard for Washington. Now NHTSA says that, despite burdening manufacturers with $60 billion in new costs, its new 35.5 mpg fuel mandate will stimulate the economy by boosting auto sales by 65,480 vehicles through 2016 because Washington “expects stronger consumer demand for fuel-efficient models.” Sure.
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From the Boston Globe about an economist who predicted the latest crash. His prescription is Obama like.
Big government supporting unions and jobs to the lower socioeconomic classes even if supported by big government.
Sounds simply like New Deal stuff.
What is interesting is that we already have millions upon millions of lower wage jobs (ala Minsky) available for the unemployed.
If we simply throw out the illegals who work for low wages our unemployed would have ample opportunity to make some money at least till the economy picks up.
Instead we give it all away. What dopes:
http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails/?page=5
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The dead end kids
By RICHARD WILNER
Last Updated: 4:45 AM, September 27, 2009
Posted: 1:34 AM, September 27, 2009
The unemployment rate for young Americans has exploded to 52.2 percent -- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.
And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost.
"It's an extremely dire situation in the short run," said Heidi Shierholz, an economist with the Washington-based Economic Policy Institute. "This group won't do as well as their parents unless the jobs situation changes."
Al Angrisani, the former assistant Labor Department secretary under President Reagan, doesn't see a turnaround in the jobs picture for entry-level workers and places the blame squarely on the Obama administration and the construction of its stimulus bill.
"There is no assistance provided for the development of job growth through small businesses, which create 70 percent of the jobs in the country," Angrisani said in an interview last week. "All those [unemployed young people] should be getting hired by small businesses."
There are six million small businesses in the country, those that employ less than 100 people, and a jobs stimulus bill should include tax credits to give incentives to those businesses to hire people, the former Labor official said.
"If each of the businesses hired just one person, we would go a long way in growing ourselves back to where we were before the recession," Angrisani noted.
During previous recessions, in the early '80s, early '90s and after Sept. 11, 2001, unemployment among 16-to-24 year olds never went above 50 percent. Except after 9/11, jobs growth followed within two years.
A much slower recovery is forecast today. Shierholz believes it could take four or five years to ramp up jobs again.
A study from the National Longitudinal Survey of Youth, a government database, said the damage to a new career by a recession can last 15 years. And if young Americans are not working and becoming productive members of society, they are less likely to make major purchases -- from cars to homes -- thus putting the US economy further behind the eight ball.
Angrisani said he believes that Obama's economic team, led by Larry Summers, has a blind spot for small business because no senior member of the team -- dominated by academics and veterans of big business -- has ever started and grown a business.
"The Reagan administration had people who knew of small business," he said.
"They should carve out $100 billion right now and create something like $5,000 to $6,000 job credits that would drive the hiring of young, idled workers by small business."
Angrisani said the stimulus money going to extending unemployment benefits is like a narcotic that is keeping the unemployed content -- but doing little to get them jobs.
Labor Dept. statistics also show that the number of chronically unemployed -- those without a job for 27 weeks or more -- has also hit a post-WWII high.
http://www.nypost.com/p/news/business/the_dead_end_kids_AnwaWNOGqsXMuIlGONNX1K
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Agreed that the situation is terrible and agreed that the O-boids are devoid of business experience and awareness, but doesn't this piece fall into the trap of a government directed economy?
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Yep. Though there is the implicit argument that government should get out of the micromanagement biz via schemes like minimum wage, it does then propose government fixes. Think the most important statement in the piece, however, is that small business is the engine that creates entry level employment, yet is the economic segment most impacted by minimum wage requirements. Throw in health care mandates, higher taxes, and so on, and that engine will be sputtering for quite some time.
Of course, that might be what the O-bots want: send all the kids into gov. sponsored jobs programs or into education paid for with government loans. . . .
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Exclusive report by Robert Fisk
The demise of the dollar
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
By Robert Fisk
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
Tuesday, 6 October 2009
Rex
Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars.
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
Related articles
•Sean O'Grady: China will overtake America, the only question is when
•Leading article: The end of the dollar spells the rise of a new order
The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."
This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.
The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.
Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.
China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.
Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.
Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.
The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."
Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.
The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.
"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."
Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.
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http://blogs.ft.com/economistsforum/2009/10/a-second-great-depression-is-still-possible/
Very possible. Almost certain, in my book.
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http://www.bloomberg.com/apps/news?pid=20601087&sid=a7mHS_OElufk
Slow-motion-trainwreck.
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First regarding Bloomberg on the Obama dollar, normally a weak dollar boosts exports i.e. self correcting, but combine that with the decimation of industry, what is there to sell anymore and the dollar was already low.
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The Financial Times piece: a good chance the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression.
I agree with GM, absolutely possible and almost certain. But also totally PREVENTABLE.
All of our policy levers are currently headed in the wrong direction. Pro-growth economics has been replaced with assumed growth economics that makes it okay to keep adding burdens and inefficiencies to the productive economy until it collapses on its own weight.
"The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fuelled by indebtedness and asset price inflation, and it is done."
- There was a little more to it IMO but he has his time line correct. 30 years ago we were in the Jimmy Carter era of stagnation and stagflation. Carter's answer was to do everything possible to make it worse while correcting none of the underlying weakness.
Today, if the problem was debt, our answer is debt on steroids??
Decline is a choice. (See http://www.weeklystandard.com/Content/Public/Articles/000/000/017/056lfnpr.asp)
Pro-growth policies are a different choice. True pro-growth policies such as those of JFK, Reagan, and even Clinton after the Gingrich takeover, are rather simple and always available.
Investors don't even know what their tax rate will be on returns from productive investments made now. Taking a widespread, wait and see approach chops off new job growth before it can get started. The left machine certainly promised huge hikes on all the larger players. Complicating that is that fact that their word is worthless, their policy aprovals are negative and the context they operate in has changed. Even though they haven't really raised taxes yet, the uncertainty causes all the economic damage we would expect if they had.
Employers don't even know what the burden of hiring an employee today will be. With space and time not allowing a full laundry list of all the known burdens and coming burdens (cf. employee leave, layoff notification laws, health care burdens...). Hillary said it best and Obama and Pelosi are definitely to her left; it goes something like this: You can't afford all the ideas I have for the economy.
Consumers, citizens, taxpayers and voters, whatever we like to call ourselves, we don't even know if we will have $2000 added to our energy bill, $4000 added to our health care bill, and who knows what added to our tax bill, not even counting state and local taxes. Property taxes, energy taxes, health care costs and more are not costs that go down when you lose your job or close your company. Then what?
What else did they do to really dig deep for the first great depression? Smoot Hawley. So what did Obama do as the hole keeps expanding: "Obama slaps tariff on Chinese tires - MarketWatch Sep 11, 2009 ... The Obama administration will slap a special tariff on Chinese-macde tires." Also canceled out of a free trade agreement in Latin America. Does that mentality from the world's largest economy cause others to open the doors a little more to free enterprise and free trade? I think not!
Repeating, decline is a choice. We are choosing it. Maybe you and I didn't vote for Pelosi or Obama, but we also are not successfully putting out clear, pro-growth alternatives and arguments up for consideration.
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We keep hearing how non partisan the CBO is. But is it? The present director was appointed 01/22/2009 for four years.
He is from Princeton and Harvard (where else?) did work with a Reagan guy years ago but recently worked at the liberal think tank the Brookings Institute.
To me it is not clear he is a partisan inasmuch as a political opportunist. He donated 1000 to Obama's campaign. He seems to hail from the left and worked under the Clinton regime. Yet some of his moves towards Obama may be more to garner favor for a job than that he is a true believer.
The conclusion from the CBO that the Baucus bill will reduce the deficit by some 80 million certainly sounds suspect to me.
To think that Pelosi and the rest are not pressuring him would seem naive.
In any case:
*****WhoRunsGov.com, a Wash Post Co > Profiles > Douglas W. Elmendorf
Douglas W.
Current Position: Director of the Congressional Budget Office (since January 2009)
Credit: Jahi Chikwendiu/TWP
Table of Contents
1. Why He Matters
2. At a Glance
3. Path to Power
4. The Issues
4.1. The Bailout
4.2. Health Care
5. The Network
6. Campaign Contributions
7. Footnotes
8. Tags
9. Links
10. Key Associates
11. News
Why He Matters
Elmendorf may be the most important financial analyst in America. He’s not one of the highest paid, but his client list is the U.S. Congress as he evaluates the nation’s budget in trying economic times. He will be a key player in determining how Congress responds to President Barack Obama’s proposed $3.6 trillion budget for fiscal year 2010.
Succeeding new Office of Management and Budget Director Peter Orszag, Elmendorf joined the Congressional Budget Office (CBO) as the struggling economy commanded much of Congress’ time. Like Orszag, he comes from the liberal think-tank the Brookings Institution, and was the former director of the Hamilton Project, which focuses on economic policy at Brookings.
Elmendorf continued what Orszag began as CBO head, including contributing to the CBO “Director’s Blog” and evaluating health-care reform’s impact on the national budget. Speaker of the House Nancy Pelosi (D-Calif.) and the President Pro Tempore of the Senate Robert C. Byrd (D-WestVa.) selected Elmendorf after getting recommendations from the House and Senate Budget Committees. The House and Senate switch who takes charge in selecting a new CBO director; Pelosi took the lead in selecting Elmendorf.“Pelosi and Spratt Statement on New Director of the Congressional Budget Office” Press Release, Dec. 30, 2008(1)“Pelosi and Spratt Statement on New Director of the Congressional Budget Office” Press Release, Dec. 30, 2008
In March 2009, the CBO released a revised budget outlook, which increased its forecast of the 2008 deficit from $1.2 trillion to $1.8 trillion. It also valued the 10-year deficit at $9.3 trillion — $2.3 trillion more than what the White House projected in February 2009.Pulizzi, Henry J., "OMB's Orszag:CBO Figures Reflect Worsening Econ, Fiscal Outlook," Dow Jones News Service, March 20, 2009(2)Pulizzi, Henry J., "OMB's Orszag:CBO Figures Reflect Worsening Econ, Fiscal Outlook," Dow Jones News Service, March 20, 2009
Elmendorf is also a key voice in the health-care debate as his office in July 2009 released a report estimating the cost of the health-care plan crafted by Sens. Edward M. Kennedy (D-Mass.) and Christopher J. Dodd (D-Conn.) at a daunting $1 trillion. A Preliminary Analysis of the HELP Committee’s Health Insurance Coverage Provisions," Congressional Budget Office, July 2, 2009(3)A Preliminary Analysis of the HELP Committee’s Health Insurance Coverage Provisions," Congressional Budget Office, July 2, 2009
At a Glance
Current Position: Director of the Congressional Budget Office (since January 2009)
Career History: Director of the Hamilton Project at the Brookings Institution (2008 to 2009); Senior fellow at the Brookings (2007 to 2009); Chief of the macro-economic analysis team at the Federal Reserve Board (2002 to 2007)
Birthday: N/A
Hometown: Poughkeepsie, N.Y.
Alma Mater: Princeton University, A.B. (economics), 1983; Harvard University, M.A. (economics), 1985; Harvard, PhD (economics), 1989
Spouse: N/A
Religion: N/A
DC Office: N/A
State/District Office: N/A
Email N/A
Web site
Path to Power
Hailing from upstate New York, Elmendorf spent his early career as an academic and educator. He went to Princeton University as an undergraduate, studying economics, and then headed to Harvard University to obtain his master’s and Ph.D in the same subject. After graduating in 1989, he stayed at Harvard for five years, working closely with economics professor Martin Feldstein, the director of the Council of Economic Advisers (CEA) under President Reagan.Douglas Elmendorf’s resume(4)Douglas Elmendorf’s resume
In 1993, Elmendorf moved to public life, working for the CBO office for the first time. He spent a year as an associate analyst before joining full-time in 1994 as a principal analyst where Elmendorf focused on health- care issues and the economic effects of budget deficits. Working under CBO Director Robert D. Reischauer, Elmendorf worked on a team that concluded President Bill Clinton's health reform package would cost much more than originally thought. This analysis helped cripple Clinton's attempt to reform health care.Montgomery, Lori, "What Would a Health Overhaul Cost? All Eyes on the CBO," The Washington Post, June 11, 2009(5)Montgomery, Lori, "What Would a Health Overhaul Cost? All Eyes on the CBO," The Washington Post, June 11, 2009
Elmendorf only stayed a year at the CBO as a principal analyst before heading to the Federal Reserve Board as an economist while Alan Greenspan headed it. In 1998, his travels through the financial departments of the federal government continued, as Elmedorf moved to the CEA, working as a senior economist under Director Janet Yellen.Douglas Elmendorf’s resume(4)Douglas Elmendorf’s resume
After staying at the CEA for a year, Elmendorf then joined the Treasury Department as deputy assistant secretary for economic policy, working under Clinton Treasury Secretary Lawrence Summers. When George W. Bush took office, Elmendorf moved back to the Fed as a senior economist and in 2002, he got a promotion to chief of the macro-economic analysis team, leading a group of 30 economists and researchers as they forecasted inflation rates and labor markets.
In 2007, Elmendorf began working for the liberal think-tank Brookings Institution, co-editing the yearly publication “Brookings Papers on Economic Activity.”Douglas Elmendorf’s resume(4)Douglas Elmendorf’s resume In 2008, Jason Furman, the director of the Brookings’ group known as the Hamilton Project left to join the Obama campaign. Elmendorf replaced him as director of the Hamilton Project, a forum for economic policy discussion that was created by Clinton Treasury Secretary Robert Rubin — an advocate of free trade and a small deficit.
The Issues
Joining the CBO in late December 2008, Elmendorf is responsible for providing estimates of the cost of legislation on the federal budget. Elmendorf already has a full plate: Within the first month of President Obama’s administration, Congress passed a $787 billion stimulus package and weeks later, the House approved a $410 billion ‘omnibus’ bill, which allocated funds for the federal government through September 2009.Faler, Brian, "House Approves $410 Billion ‘Omnibus’ Spending Bill," Bloomberg News, Feb. 25, 2009(6)Faler, Brian, "House Approves $410 Billion ‘Omnibus’ Spending Bill," Bloomberg News, Feb. 25, 2009 The CBO was tasked with evaluating the long-term effects of these mammoth measures, while explaining their impact on the budget to lawmakers on the Hill.
The Bailout
Although the CBO is a non-partisan position, Elmendorf worked two years at Brookings. While there, he spent much of his time opining on the mortgage collapse, and the appropriate response by the government. While he only called for the nationalization of banks as a last resort, Elmendorf did support a bailout of struggling financial institutions.
In a paper titled “The Great Credit Squeeze,” Elmendorf along with co-authors Martin Neil Baily and Robert E. Litan, laid out important steps in an attempt to stabilize the financial system quickly, and to assure nothing similar repeats itself. The paper recommended helping banks and mortgage finance companies like Fannie Mae and Freddie Mac, but also suggested ways to aid struggling homeowners facing foreclosure. Some of the short-term stabilization options the authors proposed included equity investment by the government, “outright nationalization” of Fannie and Freddie and allowing judges the power to reduce mortgage payments.Baily, Martin Neal; Elmendorf, Douglas and Litan, Robert E., “The Great Credit Squeeze,” The Brookings Institution, May 21, 2008(7)Baily, Martin Neal; Elmendorf, Douglas and Litan, Robert E., “The Great Credit Squeeze,” The Brookings Institution, May 21, 2008
The three authors also outlined long-term recommendations for changes to the financial system to make it more stable. The three long-term changes they suggested were:
Make financial instruments, like derivatives and certain mortgages, more transparent.
Prevent financial institutions from leveraging themselves to the degree many did prior to the 2008 collapse of the credit markets.
Increased government supervision of financial institutions.Baily, Martin Neal; Elmendorf, Douglas and Litan, Robert E., “The Great Credit Squeeze,” The Brookings Institution, May 21, 2008(7)Baily, Martin Neal; Elmendorf, Douglas and Litan, Robert E., “The Great Credit Squeeze,” The Brookings Institution, May 21, 2008
Health Care
In July 2009, CBO estimated the cost of Senate Health, Education and Labor Committee health-care reform bill - otherwise known as the Kennedy-Dodd bill - would cost more than $1 trillion over ten years, but it did not include the tax on the wealthy when analyzing the bill."A Preliminary Analysis of the HELP Committee’s Health Insurance Coverage Provisions," Congressional Budget Office, July 2, 2009(8)"A Preliminary Analysis of the HELP Committee’s Health Insurance Coverage Provisions," Congressional Budget Office, July 2, 2009
Then, on July 16, 2009, Elmendorf testified in front of the Senate Budget Committee. He came out strongly against the proposed bills being drafted by Democrats in both the House and the Senate. Elmendorf said the proposals did not offer "the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a signficant amount."
"On the contrary," said Elmendorf, "the legislation significantly expands the federal responsibility for health care costs."Montgomery, Lori, "CBO Chief Criticizes Democrats' Health Reform Measures," The Washington Post, July 16, 2009(9)Montgomery, Lori, "CBO Chief Criticizes Democrats' Health Reform Measures," The Washington Post, July 16, 2009
When asked whether or not he felt that there had been a "successful effort" to reign in the long-term costs of health care, Elmendorf answered "No."Montgomery, Lori, "CBO Chief Criticizes Democrats' Health Reform Measures," The Washington Post, July 16, 2009(9)Montgomery, Lori, "CBO Chief Criticizes Democrats' Health Reform Measures," The Washington Post, July 16, 2009
In October 2009, there was only one version of the health care bill still in committee. The Senate Finance Committee had a plan that proposed nonprofit cooperatives in place of the more controversial, public insurance option. Despite much debate on how much the bill would cost, the CBO scored it favorably. The agency's preliminary analysis showed that the committee's bill would cost $829 billion over ten years, while decreasing the deficit by $81 billion. The proposal would insure 29 million people who are currently uninsured.Letter by CBO Director Douglas W. Elmendorf to Senator Max Baucus regarding the Senate Finance Committee Health Care Bill, Oct. 7, 2009(10)Letter by CBO Director Douglas W. Elmendorf to Senator Max Baucus regarding the Senate Finance Committee Health Care Bill, Oct. 7, 2009
The Network
Elmendorf has spent years working in government, and has had an opportunity to work closely with a variety of senior officials in the Obama administration. In the waning years of the Clinton administration, Elmendorf worked under Clinton Treasury Secretary Lawrence Summers — Summers now heads Obama’s National Economic Council (NEC).
In 2002, Elmendorf moved to the Fed, working under Alan Greenspan.
While at Harvard, Elmendorf worked closely with Martin Feldstein, former chair of the Council of Economic Advisers under President Reagan. In 2007, Elmendorf moved to the Brookings Institution. Obama Deputy Director of the NEC Jason Furman also worked at Brookings when Elmendorf started.
Elmendorf has followed in Office of Management and Budget Director Peter Orszag’s career footsteps twice now. Elmendorf took over as director of the Hamilton Project a few years after Orszag stepped down in order to join the CBO as its director. Now, Elmendorf has replaced Orszag as CBO head.
Campaign Contributions
Elmendorf donated $1,000 to President Barack Obama’s campaign in June 2008.Center for Responsive Politics
(11)Center for Responsive Politics
SideBar
SideBar Footnotes
1.“Pelosi and Spratt Statement on New Director of the Congressional Budget Office” Press Release, Dec. 30, 2008
2.Pulizzi, Henry J., "OMB's Orszag:CBO Figures Reflect Worsening Econ, Fiscal Outlook," Dow Jones News Service, March 20, 2009
3.A Preliminary Analysis of the HELP Committee’s Health Insurance Coverage Provisions," Congressional Budget Office, July 2, 2009
4.Douglas Elmendorf’s resume
5.Montgomery, Lori, "What Would a Health Overhaul Cost? All Eyes on the CBO," The Washington Post, June 11, 2009
6.Faler, Brian, "House Approves $410 Billion ‘Omnibus’ Spending Bill," Bloomberg News, Feb. 25, 2009
7.Baily, Martin Neal; Elmendorf, Douglas and Litan, Robert E., “The Great Credit Squeeze,” The Brookings Institution, May 21, 2008
8."A Preliminary Analysis of the HELP Committee’s Health Insurance Coverage Provisions," Congressional Budget Office, July 2, 2009
9.Montgomery, Lori, "CBO Chief Criticizes Democrats' Health Reform Measures," The Washington Post, July 16, 2009
10.Letter by CBO Director Douglas W. Elmendorf to Senator Max Baucus regarding the Senate Finance Committee Health Care Bill, Oct. 7, 2009
11.Center for Responsive Politics
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When McCain challenged BO about the radicals around him, BO cited Volcker and Warren Buffett as the people to whom he listened on economics. We're shocked, absolutely shocked, to discover that this may have been a misdirection!
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Volcker Fails to Sell a Bank Strategy
Published: October 20, 2009
Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis.
“The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”
Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.
He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.
“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”
Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.
More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.
For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.
Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.
The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.
Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.
“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.
The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.
Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.
On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.
Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.
“People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”
He may not be alone in his proposal, but he is nearly so. Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia. An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system.
Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz, a Nobel laureate in economics at Columbia and a former official in the Clinton administration. “We would have a cleaner, safer banking system,” Mr. Stiglitz said, adding that while he endorses Mr. Volcker’s proposal, the former Fed chairman is nevertheless embarked on a quixotic journey.
Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.
Taking issue implicitly with the Volcker proposal to split commercial and investment banking, he has said: “No form of economic organization can fully contain bouts of destructive speculative euphoria.”
For his part, Mr. Volcker is careful to explain that he supports 80 percent of the administration’s detailed plan for financial regulation, including much higher capital requirements and “guidelines” on pay. Wall Street compensation, he said in a recent television interview, “has gotten grotesquely large.”
Before the credit crisis, the big institutions earned most of their profits from proprietary trading, and those profits led to giant bonuses. Mr. Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices.
His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him.
He operates from his own offices in New York, communicating with administration officials and other members of the advisory board mainly by telephone. (He does not use e-mail, although his support staff does.) He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.
So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.
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second post
Rising Debt a Threat to Japanese Economy
By HIROKO TABUCHI
NYT
Published: October 20, 2009
TOKYO — How much debt can an industrialized country carry before the nation’s economy and its currency bow, then break?
A construction site near the Yamba dam project in Naganohara, Japan. Stimulus spending on dams and roads have helped inflate Japan's gross public debt to twice the $5 trillion economy.
The question looms large in the United States, as a surging budget deficit pushes government debt to nearly 98 percent of the gross domestic product. But it looms even larger in Japan.
Here, years of stimulus spending on expensive dams and roads have inflated the country’s gross public debt to twice the size of its $5 trillion economy — by far the highest debt-to-G.D.P. ratio in recent memory.
Just paying the interest on its debt consumed a fifth of Japan’s budget for 2008, compared with debt payments that compose about a tenth of the United States budget.
Yet, the finance minister, Hirohisa Fujii, suggested Tuesday that the government would sell 50 trillion yen, about $550 billion, in new bonds — or more.
“There’s no mistaking the budget deficit stems from the past year’s global recession. Now is the time to be bold and issue more deficit bonds,” Mr. Fujii told reporters at the National Press Club in Tokyo. “Those who may call this pork-barrel spending — that’s a total lie.”
For jittery investors, Japan’s rising sea of debt is the stuff of nightmares: the possibility of an eventual sovereign debt crisis, where the country would be unable to pay some holders of its bonds, or a destabilizing collapse in the value of the yen.
In the immediate term, Mr. Fujii’s remarks prompted concerns of a supply glut in bond markets, sending prices on 10-year Japanese government bonds down 0.087 yen, to 99.56 yen, and yields to their highest point in six weeks.
The Obama administration insists that it understands the risks posed by deficits and ever-increasing debt. Its critics are doubtful. But as Washington runs up a trillion-dollar deficit this year, with trillions in debt for years to come, it need look no farther than Tokyo to see how overspending can ravage an economy.
Tokyo’s new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.
“Public sector finances are spinning out of control — fast,” said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. “We believe a fiscal crisis is imminent.”
One of the lessons of Japan’s experience is that a government saddled with debt can quickly run out of room to maneuver.
“Japan will keep on selling more bonds this year and next, but that won’t work in three to five years,” said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. “If you ask me what Japan can resort to after that, my answer would be ‘not very much.’ ”
How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.
The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.
The spending initially fueled Japan’s rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.
The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.
“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.
Still, officials insist that Japan is better off than the United States by some measures.
One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America’s debt is held overseas by countries such as China and Japan.
Moreover, half of Japan’s government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.
All of this makes a sudden sell-off of government bonds unlikely, officials argue.
“The government is just borrowing from one pocket and putting it in the other,” said Toyoo Gyohten, a former top finance ministry official and a special currency adviser to Mr. Fujii. “Although the numbers appear very fearsome, we have some leeway.”
Many analysts agree that during a recession, Japan, like the United States, should worry less about trying to cut debt. But they say Tokyo should at least concentrate on making sure that spending does not get out of hand.
“The government needs to stabilize the debt, first and foremost. Only then can it start setting other targets,” said Randall Jones, chief economist for Japan and Korea at the Organization for Economic Cooperation and Development.
A credible plan to pare down spending is important “to maintain public confidence in Japan’s fiscal sustainability,” said the O.E.C.D.’s economic survey of Japan for 2009.
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Rising Debt a Threat to Japanese Economy
Published: October 20, 2009
(Page 2 of 2)
In the long run, even Japan’s sizable assets could fall and eventually turn negative. Japan’s rapidly aging population means retirees are starting to dip into their nest eggs — just as government spending increases to cover their rising medical bills and pension payments.
The fall in public and private savings could eventually reverse Japan’s current account surplus, possibly driving up interest rates as the public and private sectors compete for funds. Higher interest rates would increase the cost of servicing the debt, and raise Japan’s risk of default.
In a worst case, Japan’s currency could suffer as more investors switch away from Japan to other assets. And if Japan were to print more money and set off inflation to reduce its debt burden, the supply of yen would shoot up, lowering the currency’s value further.
In recent months, the yen’s surge on major markets as the dollar weakened has sent a false sense of security. The currency recently touched a seven-month high of about 89 yen to the dollar before easing slightly, as near-zero interest rates in the United States prompted investors to take their money elsewhere. Many strategists expect the yen to strengthen further, at least in the short term.
“In 10 or 20 years, Japan’s current-account surplus will fall into deficit, and that will lead to a weaker yen,” said Mr. Morita at Barclays Capital. “But if investors become pessimistic about Japan before that, the yen will weaken earlier than that.”
For all the recent talk of a shift away from the dollar as the reserve currency of choice, it is the yen that is becoming increasingly irrelevant, analysts say. The yen made up 3.08 percent of foreign currency reserves in mid-2009, down from 3.29 percent the same time last year and down from 6.4 percent in 1999. In mid-2009, the dollar still accounted for almost 63 percent of global foreign reserves.
“The yen is set to enter a long decline” in both stature and value as investors lose confidence in Japan, said Hideo Kumano, chief economist at the Dai-Ichi Life Research Institute in Tokyo.
Considering the state of Japan’s finances and economy, Mr. Kumano said, the yen’s recent strength against the dollar “isn’t an affirmation of Japan — it’s the yen’s last hurrah.”
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First my comment on the previous post here. The Yen in one currency mentioned for the replacement of the dollar. Japan is/was the world's no.2 economy yet countries hold a whopping 3% of their foreign reserves in Yen. I will criticize Europe later but point out for now that the only threat to our own currency is economic mis-management from within.
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Saw this on a bumper sticker today next to some save the earth stickers:
“Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all.” - John Maynard Keynes
Substitute the word liberty for the word capitalism in the quote for that is what they are really saying. They can't curtail your free ability to buy, sell, work, save, invest or retain a fair portion of the fruits of your labor without curtailing your liberties.
The nastiest of men for the nastiest of motives is their way of describing hard working Americans who are trying to bring prosperity and economic security to their families. Keynes is dead but he is still the chief economic adviser to the current administration. At room temperature he still believes that a large deficit is the ONLY way that our flawed free market can rescued.
There isn't a capitalist in today's world who can take away 40% of your family's income. Big government can. A bit unusual but my total taxes paid for 2008 were 4 times larger than my take home income. To say that taxes are greater than food, clothing and shelter combined would be pure sugar coating for the magnitude of this taking.
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State of the Stimulus
By Veronique de Rugy
Tuesday, November 10, 2009
Filed under: Economic Policy, Boardroom, Government & Politics, Numbers
One reason unemployment continues to rise may be that stimulus funds did not target high-unemployment states.
On Friday, the Labor Department announced that the national unemployment rate rose by 0.4 percentage points to 10.2 percent. This increase is larger than expected for October and represents the highest unemployment level in 26 years. However, this is probably not the end of the unemployment rate’s upward trend. One reason may be that the stimulus funds did not target high unemployment states.
Using numbers from the administration’s website Recovery.gov and September 2009 labor force data from the Bureau of Labor Statistics, the chart below plots the number of jobs created for each 100,000 people in every state’s labor force and the corresponding unemployment rate in that state.
(http://american.com/graphics/2009/Chart_11-9-09.gif)
The solid green line estimates what the number of jobs created or saved should look like if the administration were allocating relatively more money to the states with higher unemployment rates and if that money, in turn, created more jobs.
However, the data show that this is not the case. The chart shows that many higher-unemployment states (the states on the right) saw similar numbers of jobs created as lower-unemployment states (the states on the left), or even worse, saw relatively fewer jobs created.
Michigan is a good case in point. The state has a 15.3 percent unemployment rate, the highest in the country. So far, the Obama administration claims to have created or saved some 466 jobs per 100,000 members of the labor force in Michigan. That’s roughly the same number of jobs created by states with lower unemployment, such as New Jersey. And there were fewer jobs saved or created in Michigan than in California, Washington, or Montana—all states with relatively lower unemployment.
Now let’s look at North Dakota. With a 4.2 percent unemployment rate, there were roughly 356 jobs saved or created—more jobs than many states with much higher unemployment.
This suggests that there is no real correlation between unemployment rates in the states and the number of jobs “created or saved” with stimulus money.
This lack of correlation could be explained in several ways. First, perhaps the causes of Michigan’s high unemployment rate cannot be countered just by spending money. In other words, structural factors (such as tax rates, regulations, or labor laws) in the state could mean that more money is needed to create a job in Michigan than it takes to create a job in, say, Montana (if so the best way to create jobs in that state would be to address these underlying factors of unemployment).
Another reason could be that stimulus funds are being allocated without any connection to the level of unemployment within states. If government spending could in fact create jobs, then the problem of unemployment could have been mitigated by distributing funds to states based on their relative unemployment levels.
Finally, the money could be properly allocated but states are wasting it, hence not creating enough jobs.
The reality is likely at the crossroad of these three explanations. First, the data show that much of the money has been allocated randomly among states without regard for the level of unemployment in those states.
Second, much of the money has been spent to close budget gaps in the states, which often means keeping union-protected school teachers in their jobs and paying for public-sector jobs rather than creating jobs in the private sector. For instance, according to Recovery.gov data, so far a little over 13,000 contracts went to independent contractors and over 116,000 grants went to public agencies. Also, reports have shown that the stimulus funds have been used to pay for employees whose jobs were never in danger (see California for instance).
Finally, the data on Recovery.gov reveals that many private-sector jobs were created at very high cost to taxpayers. For instance, $437,675,000 was awarded to CH2M WG IDAHO, LLC, in Washington to create 496 jobs. That’s $882,409 per job. That’s not as bad as the $257,613,800 awarded to the Brookhaven Science Associates, LLC, in New York to create 25 jobs. That’s over $10.3 million per job.
It’s worth noting that due to over-reporting issues, the White House’s claim of 640,329 jobs created or saved is likely inaccurate. USA Today noted that “the federal government sent Bob Bray $26,174 in stimulus aid to fix a fence and replace the roofs on public apartments in Blooming Grove, Texas, a town of fewer than 900 people outside Dallas. He hired five roofers and an inspector to do the job. But the number of jobs he reported to the government looked very different—450 jobs.”
Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.
http://american.com/archive/2009/november/state-of-the-stimulus/article_print
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http://www.politico.com/news/stories/1109/29330.html
If true, this will shake the world.
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A possibility I have been raising for some time. Would you also please post it on the China thread?
As far as its relevance for this thread here i.e. what would happen to Chinese purchases of US debt, I cannot reason out whether the bursting of the Chinese bubble would mean that our debt was their only option or whether they would cease buying altogether.
BBG: Forgive me, but IMHO that was one hideous article (said, of course, with Love). The stimulus hasn't worked not because of good or bad targeting but because its demand side economics (Keynesianism) which as I see it, doesn't work by definition. If I am not mistaken, total take of US cap gains tax is $200+ billion. Imagine the effect of lifting the cap gains tax altogether!
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Crafty, don't post it 'cause I agree w/ it, or 'cause I'm even statistician enough to understand the graph. I post it 'cause it struck me as a nice piece of evidence that the stimulus does squat: one would think stimulus spending in one place would impact job growth there, but as I read the graph there is not a lot of correlation between government spending and job creation. Not a surprise to a supply sider, but it should be a nail in the Keynesian coffin.
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My initial reaction as I read the report was similar to Crafty's but not as harsh. I couldn't think of reply lines other than sarcasm... Stimulus was poorly targeted, didn't solve the problem - no kidding...
Though it looks like a deck chair debate on a Titanic going under, I think it IS VERY important for serious studies like this one to look at the results of this nonsense and get the failed results out there for the electorate to see.
If the trillions were not targeted at the problem areas in the country, and they were not randomly dropped from an airplane - actually be a better Keynesian attempt than this one - then the funds were disbursed based on other cynical means, political influence of the members in power and even worse, the cronyism of the unelected staffers serving the public from their extremist organizations, spreading our not-earned-yet money on the family and friends plan.
Just like Glen Beck's program to study the Czars and a trillion times more important is for investigators to follow the money trail of these people that would trivialize the term drunken sailors.
Most closed auto dealerships had Republican ownership. I don't know what that means or why you rebuild an industry a federal mandate to close sales and service locations, but that is a heads-up that EVERYTHING they do and every dollar they printed, borrowed and wasted needs to be scrutinized.
The corruption and cronyism might be the sword that brings this group down, but as Crafty states, the way forward is not Keynesian economic flooding and tampering, it needs to be a comprehensive system of responsible, pro-growth measures - so far not even on the table for discussion.
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$13 trillion of American wealth has been destroyed since San Francisco liberal congresswoman Nancy Pelosi was chosen by America to be Speaker, Minneapolis congressman Keith Ellison put his hand on the Koran to serve with her, all the committee chairmanships turned over to the likes of Barney Frank and Charlie Rangel, and young Obama moved from the minority to the majority to the White House in a successful takeover of the other branches of government.
$13 Trillion destroyed and now the U6 measure of unemployment approaches 17% and rising.
That's the good news; think where we would be without trillions in phony Keynesian stimuli and the resulting millions of jobs created or saved. :-o :-( :?
So ... from all we have learned ... what is our political - economic policy going forward?
a) Let the 'Bush' tax cuts expire for a massive tax increase on 'the rich', the only ones capable of hiring anyone.
b) Pass a 2000 page multi-trillion dollar government expansion and control program to handcuff all Americans but especially to place more burdens and mandates on businesses, in particular those who hire and employ people.
c) Remove the cap on 'FICA' income making the tax rate on 'wealthy' go way over 50%, before state, local, double taxation, and other new taxes such as energy, and reducing social security from a supplemental insurance program to just another failed general welfare program.
d) Add $3000 per family for a new energy tax - from all that extra money you have lying around - and really go after companies that still actually do anything or produce anything in America.
e) Raise the Death Tax from zero to 55%, leaving basically no reason whatsoever for anyone who knows how to build wealth and employ anyone to continue to do so.
f) Raise capital gains tax rates, just as our largest economic competitor is lowering tax rates.
g) Increase Government Spending at dollar and percentage levels never heard of before.
h) Instead of a 'Fair Tax' to replace the income tax, the talk now is for a federal VAT/sales tax ON TOP OF raised levels of income taxation. Why? because they already know that the tax rate increases on the rich are just punitive and dramatic in nature and don't actually bring in more revenue, like rate decreases did. So first you must punish the rich - who most easily can rearrange their affairs, then you still have to raise revenues.
i) Inflate the currency. Continue to flood the market with dollars at unprecedented levels while the economy stagnates or contracts. That is inflation, by definition. Price increases and wealth destruction follow. We already know that but continue to do it.
j) Generational theft. For all talk and action about tax increases, no one even pretends they will be enough to close the gap on unfunded liabilities. Unlike our predecessors leaving things better than ever before, the result of the above economic destruction policies, uncontrolled spending, high rates of taxation and regulation/strangulation, debt, devalued dollars and unfunded liabilities, is to leave the bills behind for our children and our children's chilren.
How is that for hope and change? - Doug
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Possibly by design Barack Obama is the biggest enslaver of part of our society since 1865.
We the taxpayers are enslaved to government who confiscate wealth to bribe their way to power.
Ironically so many in the lower classes think of themselves slaves to those of the higher classes.
Obama is turning this around and making the earners and creators of wealth the slave to those who have their hands out for entitlements.
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Nov 11, 2009
THE BEAR'S LAIR
Which big country will default first?
By Martin Hutchinson
Of the world's six largest economies, three have budget and public debt positions that if allowed to fester will push those nations into bankruptcy (the seventh largest, Italy, also has a budget and debt position that is highly vulnerable, but its problems appear chronic rather than acute).
Given the proclivities of modern politicians for delaying pain and avoiding problems, it is likely that festering is just what those positions will do. So which major country, the United States, Japan or Britain, will default first on its foreign debt?
The other three of the six top economies, Germany, China and France, appear to have fewer problems but are not out of the woods entirely. Germany has substantial public debt because of the costs involved in integrating the former East Germany, but those costs are now mostly past and the current government is highly disciplined - thus Germany is now the most stable major economy. France is less disciplined; its debt level is similar to that of Germany but its budget deficit is much higher, at around 8% of gross domestic product (GDP) in 2009, according to The Economist forecasting panel. However, its problems pale in comparison to those of the deficit-ridden trio. China has huge amounts of hidden debt in its banking system, which could well collapse, but its direct public debt is small, as is its budget deficit, so it is unlikely to enter formal default.
The worst budget balance of the three deficit countries is in Britain, where the forecast budget deficit for calendar 2009 is a staggering 14.5% of GDP. Furthermore, the Bank of England has been slightly more irresponsible in its financing mechanisms than even the Federal Reserve, leaving interest rates above zero but funding fully one third of public spending through direct money creation. Governor Mervyn King has a reputation in the world's chancelleries as a conservative man of economic understanding. He doesn't really deserve it, having been one of the 364 lunatic economists who signed a round-robin to Margaret Thatcher in 1981 denouncing her economic policies just as they were on the point of magnificently working, pulling Britain back from what seemed inevitable catastrophic decline.
King's quiet manner may be more reassuring to skeptics than the arrogance of "Helicopter Ben" Bernanke, the US Federal Reservechairman, but the reality of his policies is little sounder and the economic situation facing him is distinctly worse.
Britain has two additional problems not shared by the United States and Japan. First, its economy is in distinctly worse shape. Growth was negative in the third quarter of 2009, unlike the modest positive growth in the US and the sharp uptick in Japan. Moreover, whereas US house prices are now at a reasonable level, in terms of incomes (albeit still perhaps 10% above their eventual bottom), Britain's house prices are still grossly inflated, possibly in London even double their appropriate level in terms of income.
The financial services business in Britain is a larger part of the overall economy than in the US and the absurd exemption from tax for foreigners has brought a huge disparity between the few foreigners at the top of the City of London and the unfortunate locals toiling for mere mortal rewards. A recent story that the housing market for London homes priced above 5 million British pounds (US$8.3 million) was being reflated by Goldman Sachs bonuses indicates the problem, and suggests that the further deflation needed in UK housing will have a major and unpleasant economic effect.
A second British problem not shared by the US is its excessive reliance on financial services. As detailed in previous columns, this sector has roughly doubled in the last 30 years as a share of both British and US GDP. In addition, the sector's vulnerability to a restoration of a properly tight monetary policy has been enormously increased through its addiction to trading revenue. The US has many other ways of making a living if its financial services sector shrinks, and New York is only a modest part of the overall economy. Britain is horribly over-dependent on financial services, and the painful if salutary effects of London costs being pushed down to national levels by a lengthy recession are less likely to be counterbalanced by exuberant growth elsewhere.
The other question to be answered for all three countries is that of political will. If, as is certainly the case in Britain, deficits at the current levels will lead to default (albeit not for some years since the country's public debt is still quite low), then to avoid default tough decisions must be taken. Britain is in poor shape in this respect. Its prime minister, Gordon Brown, is largely responsible for the underlying budget problem, having overspent when Chancellor of the Exchequer, or finance minister, during the boom years, largely on added bureaucracy rather than on anything productive or value-creating. However, the opposition Conservatives, likely to take power next spring, are led by a center-leftist with a background in public relations and no discernable backbone or principles.
Britain has a history of such leaders, which it has managed to survive - the ineffable Harold Macmillan, in particular, who wanted to abolish the stock exchange and contemplated nationalizing the banks when they raised interest rates, was a man of outlook and temperament very similar to David Cameron's. Macmillan was notoriously prone to soft options that postponed economic problems, firing his entire Treasury team in pursuit of soft options in 1958 and leaving behind an appalling legacy of inflationary bubble on his retirement in 1963. If Cameron is truly like Macmillan, his government's response to economic and financial disaster will be one of wriggle rather than confrontation.
With neither party providing solutions to an economic crisis, the British public is likely to discover that, unlike in the crisis of 1976, no solutions will be found. Default (doubtless disguised as with Argentina as "renegotiation") would in that case inevitably follow.
The United States is in somewhat better shape than Britain. Its deficit is somewhat lower, at 11.9% of GDP in calendar 2009, although its debt level is higher if you include the direct debt of mortgage guarantors Fannie Mae and Freddie Mac, as you should. It also has lower overall levels of public spending, although spending is rising rapidly. Furthermore, it has a much more diverse economy and a healthier real estate market, so that further likely downturns in California and Manhattan real estateand the financial services sector can be easily overcome.
US pundits like to whine about the impending deficits in social security and healthcare, but the former is easily overcome by adjusting the retirement age while the latter could be greatly mitigated by simple cost-containment measures, such as limiting trial lawyer depredations, making the state pay for the "emergency room" mandate to treat the indigent and allowing interstate competition for health insurance. All those changes would be politically difficult, but they are clearly visible and involve no damaging cuts in vital services, unlike the changes that would probably be necessary in Britain.
The other US advantage is political: it has an alternative to overspending. Last Tuesday's election results were a useful shot across the bows of the overspending consensus that had developed in both the George W Bush and Barack Obama administrations (as well as among the barons of Congress) since 2007. Whereas voter concern about spiraling deficits and public spending has no satisfactory outlet in Britain, it can now express itself clearly in the US, producing either a sharp change of policy by the current administration and Congress or a change of administration in 2012. Since the likelihood of a reversal of policy towards sound budgetary management is greater in the US than in Britain, the probability of eventual default is less.
Japan has already had its change of government, throwing out the faction of the Liberal Democrat Party (LDP) that regarded politics as the art of creating pointless infrastructure. Unfortunately, the Japanese electorate, faced in August with a no-good-choices problem similar to that of US voters last year and British voters next spring, replaced a long-serving overspending government with another committed to a different set of spending priorities rather than to ending the spending itself. The Democratic Party of Japan (DPJ) has cut back sharply on the infrastructure "stimulus" but is showing signs of replacing it with social spending. It is also committed to economically dozy policies such as reversing postal privatization, organized with such great political effort by prime minister Junichiro Koizumi in 2005.
Japan does however have a couple of advantages that may enable it to avoid default. First, its public debt carries very low interest rates, mostly below 2% per annum, and is owned almost entirely by its own citizens. What's more, state-owned entities such as the now un-privatized Postal Bank lend vast amounts of money to the government, acting as conduits to the less efficient bits of the public sector in the same way as do China's state-owned banks. This is appallingly bad for the efficiency of the economy and for living standards, but it postpones default and makes it less likely.
Second, it's not inevitable that the LDP's wasteful infrastructure spending will simply be replaced by wasteful social spending. Finance Minister Hirohisa Fujii is reputed to be a budgetary hard-liner. Further, at least part of the DPJ's spending will take the form of handouts to families with children. That may increase domestic consumption compared with exports and thereby better balance the Japanese economy, increasing its growth potential marginally. Nevertheless, since Japan's public debt is currently around 200% of GDP, Japan is much closer to the default precipice than either the US or Britain. Thus, while the better structure of Japan's economy and its debt make Japan's probability of default lower than Britain's, it's likely that if both countries defaulted, Japan would do so first.
We have not experienced a debt default by a major economy since the 1930s. That three such defaults are currently conceivable indicates both the severity of the current downturn and the wrong-headedness of the policies taken to address it. If it happens, a major sovereign debt default of this kind will cause the seizure of global capital markets, prolonging downturn for a decade or more.
We'd all better hope the urge for fiscal responsibility hits London, Washington and Tokyo pretty damn soon.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005).
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Dollar Crisis
Posted by Gerald P. O'Driscoll
Over the weekend, Liu Mingkang, a senior Chinese official, blasted the economic policies of the Obama Administration. He identified low interest rates in the U.S. as the cause of “massive speculation” that was inflating asset bubbles around the world. The U.S. dollar is being used in what is known as a carry trade and is borrowed cheaply to finance the purchase of real estate in Asian cities like Hong Kong and Singapore. The easy money policies of the Fed are also fueling a boom in commodity prices.
The ordinary American, if not the political class, recognizes that neither the Fed’s monetary actions nor the trillions in spending have helped them. Unemployment is in double digits. Former senior Bush economic adviser Larry Lindsey is reported to have estimated that Americans’ net worth has dropped $13 trillion since the beginning of the recession in December 2007. Americans suffer while speculators profit.
We are on the cusp of a dollar crisis. President Jimmy Carter faced a similar crisis in his presidency. Carter ousted his own choice for Chairman of the Fed and appointed Paul Volcker to that position. Volcker recognized that the dollar crisis needed to be ended and instituted painful but necessary sound money policies. President Reagan re-appointed Volcker and together they restored American prosperity. Volcker advises President Obama and can explain to the president why he must act now.
http://www.cato-at-liberty.org/2009/11/16/dollar-crisis/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Cato-at-liberty+%28Cato+at+Liberty%29
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Actually Volcker has said that he was used for his credibility and that none of the BO people listen to him. Complete agreement on the risk and severity of a dollar crisis.
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Crafty has touched on this subject several times. Well worth the read.
CORPORATIONS VERSUS THE MARKET; OR, WHIP CONFLATION NOW
by RODERICK LONG
LEAD ESSAY
November 10th, 2008
Defenders of the free market are often accused of being apologists for big business and shills for the corporate elite. Is this a fair charge?
No and yes. Emphatically no—because corporate power and the free market are actually antithetical; genuine competition is big business’s worst nightmare. But also, in all too many cases, yes —because although liberty and plutocracy cannot coexist, simultaneous advocacy of both is all too possible.
First, the no. Corporations tend to fear competition, because competition exerts downward pressure on prices and upward pressure on salaries; moreover, success on the market comes with no guarantee of permanency, depending as it does on outdoing other firms at correctly figuring out how best to satisfy forever-changing consumer preferences, and that kind of vulnerability to loss is no picnic. It is no surprise, then, that throughout U.S. history corporations have been overwhelmingly hostile to the free market. Indeed, most of the existing regulatory apparatus—including those regulations widely misperceived as restraints on corporate power—were vigorously supported, lobbied for, and in some cases even drafted by the corporate elite.[1]
Corporate power depends crucially on government intervention in the marketplace.[2] This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts,[3] and other forms of corporate welfare; protectionist tariffs; explicit grants of monopoly privilege; and the seizing of private property for corporate use via eminent domain (as in Kelo v. New London). But these direct forms of pro-business intervention are supplemented by a swarm of indirect forms whose impact is arguably greater still.
As I have written elsewhere:
One especially useful service that the state can render the corporate elite is cartel enforcement. Price-fixing agreements are unstable on a free market, since while all parties to the agreement have a collective interest in seeing the agreement generally hold, each has an individual interest in breaking the agreement by underselling the other parties in order to win away their customers; and even if the cartel manages to maintain discipline over its own membership, the oligopolistic prices tend to attract new competitors into the market. Hence the advantage to business of state-enforced cartelisation. Often this is done directly, but there are indirect ways too, such as imposing uniform quality standards that relieve firms from having to compete in quality. (And when the quality standards are high, lower-quality but cheaper competitors are priced out of the market.)
The ability of colossal firms to exploit economies of scale is also limited in a free market, since beyond a certain point the benefits of size (e.g., reduced transaction costs) get outweighed by diseconomies of scale (e.g., calculational chaos stemming from absence of price feedback)—unless the state enables them to socialise these costs by immunising them from competition – e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.[4]
Nor does the list end there. Tax breaks to favored corporations represent yet another non-obvious form of government intervention. There is of course nothing anti-market about tax breaks per se; quite the contrary. But when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.
Intellectual property laws also function to bolster the power of big business. Even those who accept the intellectual property as a legitimate form of private property[5] can agree that the ever-expanding temporal horizon of copyright protection, along with disproportionately steep fines for violations (measures for which publishers, recording firms, software companies, and film studios have lobbied so effectively), are excessive from an incentival point of view, stand in tension with the express intent of the Constitution’s patents-and-copyrights clause, and have more to do with maximizing corporate profits than with securing a fair return to the original creators.
Government favoritism also underwrites environmental irresponsibility on the part of big business. Polluters often enjoy protection against lawsuits, for example, despite the pollution’s status as a violation of private property rights.[6] When timber companies engage in logging on public lands, the access roads are generally tax-funded, thus reducing the cost of logging below its market rate; moreover, since the loggers do not own the forests they have little incentive to log sustainably.[7]
In addition, inflationary monetary policies on the part of central banks also tend to benefit those businesses that receive the inflated money first in the form of loans and investments, when they are still facing the old, lower prices, while those to whom the new money trickles down later, only after they have already begun facing higher prices, systematically lose out.
And of course corporations have been frequent beneficiaries of U.S. military interventions abroad, from the United Fruit Company in 1950s Guatemala to Halliburton in Iraq today.
Vast corporate empires like Wal-Mart are often either hailed or condemned (depending on the speaker’s perspective) as products of the free market. But not only is Wal-Mart a direct beneficiary of (usually local) government intervention in the form of such measures as eminent domain and tax breaks, but it also reaps less obvious benefits from policies of wider application. The funding of public highways through tax revenues, for example, constitutes a de facto transportation subsidy, allowing Wal-Mart and similar chains to socialize the costs of shipping and so enabling them to compete more successfully against local businesses; the low prices we enjoy at Wal-Mart in our capacity as consumers are thus made possible in part by our having already indirectly subsidized Wal-Mart’s operating costs in our capacity as taxpayers.
Wal-Mart also keeps its costs low by paying low salaries; but what makes those low salaries possible is the absence of more lucrative alternatives for its employees—and that fact in turn owes much to government intervention. The existence of regulations, fees, licensure requirements, et cetera does not affect all market participants equally; it’s much easier for wealthy, well-established companies to jump through these hoops than it is for new firms just starting up. Hence such regulations both decrease the number of employers bidding for employees’ services (thus keeping salaries low) and make it harder for the less affluent to start enterprises of their own.[8] Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf.[9]
I don’t mean to suggest that Wal-Mart and similar firms owe their success solely to governmental privilege; genuine entrepreneurial talent has doubtless been involved as well. But given the enormous governmental contribution to that success, it’s doubtful that in the absence of government intervention such firms would be in anything like the position they are today.
In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles. Small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.
So where does this idea come from that advocates of free-market libertarianism must be carrying water for big business interests? Whence the pervasive conflation of corporatist plutocracy with libertarian laissez-faire? Who is responsible for promoting this confusion?
There are three different groups that must shoulder their share of the blame. (Note: in speaking of “blame” I am not necessarily saying that the “culprits” have deliberately promulgated what they knew to be a confusion; in most cases the failing is rather one of negligence, of inadequate attention to inconsistencies in their worldview. And as we’ll see, these three groups have systematically reinforced one another’s confusions.)
Culprit #1: the left. Across the spectrum from the squishiest mainstream liberal to the bomb-throwingest radical leftist, there is widespread (though not, it should be noted, universal)[10] agreement that laissez-faire and corporate plutocracy are virtually synonymous. David Korten, for example, describes advocates of unrestricted markets, private property, and individual rights as “corporate libertarians” who champion a “globalized free market that leaves resource allocation decisions in the hands of giant corporations”[11]—as though these giant corporations were creatures of the free market rather than of the state—while Noam Chomsky, though savvy enough to recognize that the corporate elite are terrified of genuine free markets, yet in the same breath will turn around and say that we must at all costs avoid free markets lest we unduly empower the corporate elite.[12]
Culprit #2: the right. If libertarians’ left-wing opponents have conflated free markets with pro-business intervention, libertarians’ right-wing opponents have done all they can to foster precisely this confusion; for there is a widespread (though again not universal) tendency for conservatives to cloak corporatist policies in free-market rhetoric. This is how conservative politicians in their presumptuous Adam Smith neckties have managed to get themselves perceived—perhaps have even managed to perceive themselves—as proponents of tax cuts, spending cuts, and unhampered competition despite endlessly raising taxes, raising spending, and promoting “government-business partnerships.”
Consider the conservative virtue-term “privatization,” which has two distinct, indeed opposed, meanings. On the one hand, it can mean returning some service or industry from the monopolistic government sector to the competitive private sector—getting government out of it; this would be the libertarian meaning. On the other hand, it can mean “contracting out,” i.e., granting to some private firm a monopoly privilege in the provision some service previously provided by government directly. There is nothing free-market about privatization in this latter sense, since the monopoly power is merely transferred from one set of hands to another; this is corporatism, or pro-business intervention, not laissez-faire. (To be sure, there may be competition in the bidding for such monopoly contracts, but competition to establish a legal monopoly is no more genuine market competition than voting—one last time—to establish a dictator is genuine democracy.)
Of these two meanings, the corporatist meaning may actually be older, dating back to fascist economic policies in Nazi Germany;[13] but it was the libertarian meaning that was primarily intended when the term (coined independently, as the reverse of “nationalization”) first achieved widespread usage in recent decades. Yet conservatives have largely co-opted the term, turning it once again toward the corporatist sense.
Similar concerns apply to that other conservative virtue-term, “deregulation.” From a libertarian standpoint, deregulating should mean the removal of governmental directives and interventions from the sphere of voluntary exchange. But when a private entity is granted special governmental privileges, “deregulating” it amounts instead to an increase, not a decrease, in governmental intrusion into the economy. To take an example not exactly at random, if assurances of a tax-funded bailout lead banks to make riskier loans than they otherwise would, then the banks are being made freer to take risks with the money of unconsenting taxpayers. When conservatives advocate this kind of deregulation they are wrapping redistribution and privilege in the language of economic freedom. When conservatives market their plutocratic schemes as free-market policies, can we really blame liberals and leftists for conflating the two? (Well, okay, yes we can. Still, it is a mitigating factor.)
Culprit #3: libertarians themselves. Alas, libertarians are not innocent here—which is why the answer to my opening question (as to whether it’s fair to charge libertarians with being apologists for big business) was no and yes rather than a simple no. If libertarians are accused of carrying water for corporate interests, that may be at least in part because, well, they so often sound like that’s just what they’re doing (though here, as above, there are plenty of honorable exceptions to this tendency). Consider libertarian icon Ayn Rand’s description of big business as a “persecuted minority,”[14] or the way libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people.[15] Or again, note the alacrity with which so many libertarians rush to defend Wal-Mart and the like as heroic exemplars of the free market. Among such libertarians, criticisms of corporate power are routinely dismissed as anti-market ideology. (Of course such dismissiveness gets reinforced by the fact that many critics of corporate power are in the grip of anti-market ideology.) Thus when left-wing analysts complain about “corporate libertarians” they are not merely confused; they’re responding to a genuine tendency even if they’ve to some extent misunderstood it.
Kevin Carson has coined the term “vulgar libertarianism” for the tendency to treat the case for the free market as though it justified various unlovely features of actually existing corporatist society.[16] (I find it preferable to talk of vulgar libertarianism rather than of vulgar libertarians, because very few libertarians are consistently vulgar; vulgar libertarianism is a tendency that can show up to varying degrees in thinkers who have many strong anti-corporatist tendencies also.) Likewise, “vulgar liberalism” is Carson’s term for the corresponding tendency to treat the undesirability of those features of actually existing corporatist society as though they constituted an objection to the free market.[17] Both tendencies conflate free markets with corporatism, but draw opposite morals; as Murray Rothbard notes, “Both left and right have been persistently misled by the notion that intervention by the government is ipso facto leftish and antibusiness.”[18] And if many leftists tend to see dubious corporate advocacy in libertarian pronouncements even when it’s not there, so likewise many libertarians tend not to see dubious corporate advocacy in libertarian pronouncements even when it is there.
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There is an obvious tendency for vulgar libertarianism and vulgar liberalism to reinforce each other, as each takes at face value the conflation of plutocracy with free markets assumed by the other. This conflation in turn tends to bolster the power of the political establishment by rendering genuine libertarianism invisible: Those who are attracted to free markets are lured into supporting plutocracy, thus helping to prop up statism’s right or corporatist wing; those who are repelled by plutocracy are lured into opposing free markets, thus helping to prop up statism’s left or social-democratic wing. But as these two wings have more in common than not, the political establishment wins either way.[19] The perception that libertarians are shills for big business thus has two bad effects: First, it tends to make it harder to attract converts to libertarianism, and so hinders its success; second, those converts its does attract may end up reinforcing corporate power through their advocacy of a muddled version of the doctrine.
In the nineteenth century, it was far more common than it is today for libertarians to see themselves as opponents of big business.[20] The long 20th-century alliance of libertarians with conservatives against the common enemy of state-socialism probably had much to do with reorienting libertarian thought toward the right; and the brief rapprochement between libertarians and the left during the 1960s foundered when the New Left imploded.[21] As a result, libertarians have been ill-placed to combat left-wing and right-wing conflation of markets with privilege, because they have not been entirely free of the conflation themselves.
Happily, the left/libertarian coalition is now beginning to re-emerge;[22] and with it is emerging a new emphasis on the distinction between free markets and prevailing corporatism. In addition, many libertarians are beginning to rethink the way they present their views, and in particular their use of terminology. Take, for example, the word “capitalism,” which libertarians during the past century have tended to apply to the system they favor. As I’ve argued elsewhere, this term is somewhat problematic; some use it to mean free markets, others to mean corporate privilege, and still others (perhaps the majority) to mean some confused amalgamation of the two:
By “capitalism” most people mean neither the free market simpliciter nor the prevailing neomercantilist system simpliciter. Rather, what most people mean by “capitalism” is this free-market system that currently prevails in the western world. In short, the term “capitalism” as generally used conceals an assumption that the prevailing system is a free market. And since the prevailing system is in fact one of government favoritism toward business, the ordinary use of the term carries with it the assumption that the free market is government favoritism toward business.[23]
Hence clinging to the term “capitalism” may be one of the factors reinforcing the conflation of libertarianism with corporatist advocacy.[24] In any case, if libertarianism advocacy is not to be misperceived—or worse yet, correctly perceived! —as pro-corporate apologetics, the antithetical relationship between free markets and corporate power must be continually highlighted.
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Roderick Long is Associate Professor of Philosophy at Auburn University.
Notes
1 For documentation and analysis see Weinstein, James, The Corporate Ideal in the Liberal State, 1900-1918 (New York: Farrar Straus & Giroux, 1976); Kolko, Gabriel, The Triumph of Conservativm: A Reinterpretation of American History, 1900-1916 (Glencoe: The Free Press, 1963); Kolko, Gabriel, Railroads and Regulation, 1877-1916 (Princeton: Princeton University Press, 1965); Weaver, Paul, The Suicidal Corporation: How Big Business Fails America (New York: Touchtose, 1988); and Shaffer, Butler D., In Restraint of Trade: The Business Campaign Against Competition, 1918-1938 (Lewisburg PA: Bucknell University Press, 1997). For briefer accounts see Childs, Roy A., “Big Business and the Rise of American Statism,” Reason, February 1971, pp. 12-18, and March 1971, pp. 9-12 (online: http://praxeology.net/RC-BRS.htm), and Stromberg, Joseph R., “The Political Economy of Liberal Corporatism,” Individualist (May 1972), pp. 2-11 (online: http://tmh.floonet.net/articles/strombrg.html).
2 This is especially true if, as some libertarians argue, the corporate form itself (involving legal personality and limited liability) is inconsistent with free-market principles. (For this position see Van Dun, Frank, “Is the Corporation a Free-Market Institution?,” Freeman 53 no. 3 (March 2003), pp. 29-33 (online: http://www.fee.org/pdf/the-freeman/feat7.pdf); for the other side see Barry, Norman, “The Theory of the Corporation,” Freeman 53 no. 3 (March 2003), pp. 22-26 (online: http://www.fee.org/pdf/the-freeman/feat5.pdf ).) For the purposes of the present discussion, however, let us assume the legitimacy of the corporation.
3 Long, Roderick T., “Regulation: The Cause, Not the Cure, of the Financial Crisis” (online: http://www.theartofthepossible.net/2008/10/09/regulation-the-cause-not-the-cure-of-the-financial-crisis)
4 Long, Roderick T., “Those Who Control the Past Control the Future,” 18 September 2008 (online: http://www.theartofthepossible.net/2008/09/18/those-who-control-the-past-control-the-future); cf. Long, Roderick T., “History of an Idea; or, How an Argument Against the Workability of Authoritarian Socialism Became an Argument Against the Workability of Authoritarian Capitalism,” 2 October 2008 (online: http://www.theartofthepossible.net/2008/10/02/history-of-an-idea), and Carson, Kevin A., “Economic Calculation in the Corporate Commonwealth,” Freeman 57 no. 1 (June 2007), pp. 13-18 (online: http://tinyurl.com/6cm3wo). For a more detailed case see Carson, Kevin A., Studies in Mutualist Political Economy, Booksurge (2007; online: http://mutualist.org/id47.html), and Carson, Kevin A., Organization Theory: An Individualist Anarchist Perspective, forthcoming (online: http://mutualist.blogspot.com/2005/12/studies-in-anarchist-theory-of.html).
5 Another disputed issue among libertarians; see, e.g., Cato Unbound’s June 2008 symposium on “The Future of Copyright” (online: http://www.cato-unbound.org/archives/june-2008-the-future-of-copyright).
6 Rothbard, Murray N., “Law, Property Rights, and Air Pollution,” Cato Journal 2 no. 1 (Spring 1982), pp. 55-99 (online: http://www.cato.org/pubs/journal/cj2n1/cj2n1-2.pdf).
7 Ruwart, Mary J., Healing Our World In an Age of Aggression (Kalamazoo: SunStar, 2003
pp. 117-119.
8 On this latter point see Johnson, Charles, “Scratching By: How Government Creates Poverty as We Know It,” Freeman 57 no 10 (December 2007), pp. 12-17 (online: http://www.fee.org/pdf/the-freeman/0712Johnson.pdf).
9 For some of the ways in which purportedly pro-labor legislation turns out to be anti-labor I practice, see Johnson, Charles, “Free the Unions (and All Political Prisoners),” 1 May 2004 (online: http://radgeek.com/gt/2004/05/01/free_the).
10 Especially given that many anti-corporate libertarians identify themselves as part of the left, e.g., the Alliance of the Libertarian Left (online: http://all-left.net).
11 Korten, David C., When Corporations Rule the World, 2nd ed. (San Francisco: Berrett-Koehler, 2001), p. 77.
12 Long, Roderick T., “Chomsky’s Augustinian Anarchism” (online: http://www.theartofthepossible.net/2008/09/04/chomskys-augustinian-anarchism)
13 Germà Bel, “Retrospectives: The Coining of ‘Privatization’ and Germany’s National Socialist Party,” Journal of Economic Perspectives 20 no. 3 (Summer 2006), pp. 187-194. Bel’s article unfortunately shows little sensitivity to the distinction between libertarian and corporatist senses of “privatization.”
14 Rand, Ayn, “America’s Persecuted Minority: Big Business,” Capitalism: The Unknown Ideal (New York: Signet, 1967), pp. 44-62. In fairness to Rand, she was not entirely blind to the phenomenon of corporatism; in her article “The Roots of War” (Capitalism, pp. 35-44), for example, she condemns “men with political pull” who seek “special advantages by government action in their own countries” and “special markets by government action abroad,” and so “acquire fortunes by government favor. . . which they could not have acquired on a free market.” Moreover, while readers often come away from her novel Atlas Shrugged (New York: Penguin, 1999) with the vague memory that the heroine, Dagny Taggart, was fighting against evil bureaucrats who wanted to impose unfair regulations on her railroad company, in fact Taggart’s struggle is against evil bureaucrats (in league with her power-hungry brother/employer) who want to give her company special favors and privileges at its competitors’ expense. For an analysis of what Rand got right and wrong about corporatism, see Long, Roderick T., “Toward a Libertarian Theory of Class,” pp. 321-25, in Social Philosophy & Policy 15 no. 1 (1998), pp. 303-349 (online: http://praxeology.net/libclass-theory-part-1.pdf and http://praxeology.net/libclass-theory-part-2.pdf).
15 See Long, “Roderick T., “Poison As Food, Poison As Antidote,” 28 August 2008 (online: http://www.theartofthepossible.net/2008/08/28/poison-as-food-poison-as-antidote).
16 Carson, Kevin A., “Vulgar Libertarianism Watch, Part 1,” 11 January 2005 (online: http://mutualist.blogspot.com/2005/01/vulgar-libertarianism-watch-part-1.html).
17 Carson, Kevin A., “Vulgar Liberalism Watch (Yeah, You Read It Right)” 21 December 2005 (online: http://mutualist.blogspot.com/2005/12/vulgar-liberalism-watch-yeah-you-read.html).
18 Rothbard, Murray N., Left and Right: The Prospects for Liberty (Cato Institute, 1979; online: http://www.lewrockwell.com/rothbard/rothbard33.html)
19 The relationship between big business and big government is like the relation between church and state in the Middle Ages; it’s not an entirely harmonious cooperation, since each would like to be the dominant partner (and whether the result looks more like socialism or more like fascism depends on which side is in the ascendant at the moment), but the two sides share an interest in subordinating society to the partnership. See Long, “Poison As Food,” op. cit.
20 See Long, Roderick T., “They Saw it Coming: The 19th-Century Libertarian Critique of Fascism” (2005; online: http://lewrockwell.com/long/long15.html)
21 John Payne, “Rothbard’s Time on the Left,” Journal of Libertarian Studies 19 no1 (Winter 2005), pp. 7-24 (online: http://mises.org/journals/jls/19_1/19_1_2.pdf).
22 See, for example, the group blogs LeftLibertarian.org and TheArtOfThePossible.net.
23 Long, Roderick T., “Rothbard’s ‘Left and Right’: Forty Years Later” (2006; online: http://mises.org/story/2099)
24 William Gillis has likewise suggested abandoning “free market” in favor of “freed market”:
“You’d be surprised how much of a difference a change of tense can make. ‘Free market’ makes it sound like such a thing already exists and thus passively perpetuates the Red myth that Corporatism and wanton accumulation of Kapital are the natural consequences of free association and competition between individuals. . . . But ‘freed’ has an element of distance. . . . It moves us out of the present tense and into the theoretical realm of ‘after the revolution,’ where like the Reds we can still use present day examples to back theory, but we’re not tied into implicitly defending every horror in today’s market.” Gillis, William, “The Freed Market,” 31 July 2007 (online: http://williamgillis.blogspot.com/2007/07/freed-market-one-of-tactics-ive-taken.html).
http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/
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Well, here's a fine example of POTH at work:
New Consensus Sees Stimulus Package as Worthy Step Recommend
by JACKIE CALMES and MICHAEL COOPER
Published: November 20, 2009
WASHINGTON — Now that unemployment has topped 10 percent, some liberal-leaning economists see confirmation of their warnings that the $787 billion stimulus package President Obama signed into law last February was way too small. The economy needs a second big infusion, they say.
No, some conservative-leaning economists counter, we were right: The package has been wasteful, ineffectual and even harmful to the extent that it adds to the nation’s debt and crowds out private-sector borrowing.
These long-running arguments have flared now that the White House and Congressional leaders are talking about a new “jobs bill.” But with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working.
The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama’s promise to “save or create” about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers.
“It was worth doing — it’s made a difference,” said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass.
Mr. Gault added: “I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’ I’m afraid the answer is, yes, we did badly but we would have done even worse without the stimulus.”
In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the “jobless recovery” under way as wary employers hold off on new hiring.
But there are criticisms, mainly that the Obama team relied last winter on overly optimistic economic assumptions and oversold the job-creating benefits of the stimulus package.
Optimistic assumptions in turn contributed to producing a package that if anything is too small, analysts say. “The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded,” said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.
While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy.
“There should have been more direct federal spending that would have added to aggregate demand,” he said. “Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending.”
Even the $787 billion price tag overstates the plan’s stimulus value given changes made in Congress, economists say. Nearly a tenth of the package, $70 billion, comes from a provision adjusting the alternative minimum tax so it does not hit middle-income taxpayers this year. That routine fix, which would do nothing to stimulate the economy, was added in part to seek Republican votes. But to keep the package’s overall cost down, provisions that would stimulate the economy — like aid to revenue-starved states and infrastructure projects — got less as a result.
Among Democrats in the White House and Congress, “there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument,” said Mark Zandi, chief economist of Moody’s Economy.com and an occasional adviser to lawmakers.
Even so, “the stimulus is doing what it was supposed to do — it is contributing to ending the recession,” he added, citing the economy’s third-quarter expansion by a 3.5 percent seasonally adjusted annual rate. “In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus.”
Politically, however, the president is saddled with his original claim that, with the stimulus, the jobless rate would peak at 8.1 percent — a miscalculation that Republicans constantly recall. While the administration has said its economic assumptions were in line with private forecasts, most of which also underestimated the recession’s punch, it was more optimistic than most.
“That was a mistake,” said Jeffrey A. Frankel, a Harvard University economist and former Clinton administration official who is a member of the National Bureau of Economic Research panel that judges when recessions start and end. “I thought so at the time.”
Christina D. Romer, chairwoman of Mr. Obama’s Council of Economic Advisers, said attention to that too-rosy projection “prevents people from focusing on the positive impact of the fiscal stimulus. So of course I find that frustrating.”
Much federal infrastructure money has gone not to new job-creating projects but to finance existing plans, which otherwise would be unaffordable to states.
So the stimulus has not “supercharged” transportation construction as was hoped, said Charles Gallagher, an asphalt company owner, speaking for the American Road and Transportation Builders Association, but it has nonetheless been “a welcome Band-Aid” to offset state cuts.
“Many contractors across the nation have been able to sustain, if not add to, their work force,” he said.
That sort of impact is what makes federal aid to state governments rank high in economists’ reckoning of the stimulus value of various proposals. Every dollar of additional infrastructure spending means $1.57 in economic activity, according to Moody’s, and general aid to states carries a $1.41 “bang” for each federal buck.
Even more effective are increases for food stamps ($1.74) and unemployment checks ($1.61), because recipients quickly spend their benefits on goods and services.
By contrast, most temporary tax cuts cost more than the stimulus they provide, according to research by Moody’s. That is true of two tax breaks in the stimulus law that Congress, pressed by industry lobbyists, recently extended and sweetened — a tax credit for homebuyers (90 cents of stimulus for each dollar of tax subsidy) and extra deductions for businesses’ net operating losses (21 cents).
Economists said Republicans’ recent proposals to rescind unspent money would be a mistake.
James Glassman, a senior economist at JPMorgan Chase & Company, said: “If we could be absolutely convinced that the growth we’re getting is for reasons beyond the help the government is giving, then that would make sense. But the fact is we can’t be certain of that.”
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http://www.nytimes.com/2009/11/23/business/23rates.html?pagewanted=print
November 23, 2009
Payback TimeWave of Debt Payments Facing U.S. Government By EDMUND L. ANDREWS
WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.
But that happy situation, aided by ultralow interest rates, may not last much longer.
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
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http://www.cnbc.com/id/34040009
The 'Real' Jobless Rate: 17.5% Of Workers Are Unemployed
Published: Thursday, 19 Nov 2009
CNBC.com
As experts debate the potential speed of the US recovery, one figure looms large but is often overlooked: nearly 1 in 5 Americans is either out of work or under-employed.
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"The 'Real' Jobless Rate: 17.5% Of Workers Are Unemployed"
For young blacks that number is 35%. Hope and change...
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http://thehill.com//homenews/house/69295-dems-push-wall-street-150b-stock-tax
More from the Cloward-Piven playbook.
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Intriguing article:
Are Dollar Bears Too Bullish?
By RANDALL W. FORSYTH |
It would be so simple to follow the playbook of the inflationary 1970s. Today's deflationary threat is more dangerous, however.
GOLD SET ANOTHER RECORD MONDAY while the Dow Jones Industrial Average gained 1% to a 13-month high, supposedly based on the cheery thought that the U.S. dollar would inevitably collapse to zero.
Investors faced a barrage of bearish articles about America's fiscal plight, from the front page of the New York Times warning about "Wave of Debt Payments Facing U.S. Government" to the Economist's cover story, "Dealing with America's Fiscal Hole" to the Financial Times posing the question, "Is Sovereign Debt the New Subprime?"
No wonder they wanted to flee the dollar. As Dennis Gartman observed in his Monday morning missive: "It is almost as if one can hear capital saying aloud, 'Let me outta here; get me some gold; or get me some euros, at least get me some blue-chip stocks. Get me anything, but get me out.'"
With the U.S. Dollar Index falling another 0.7%, to 75.10, gold continued its seemingly unstoppable advance to another peak. The active December futures contract on the Comex settled up $17.90, at $1,164.70 an ounce after trading at almost $1,175.
And as if to underscore the public's interest in the latest gold rush, the five most-read stories on Marketwatch.com were all about gold. (Marketwatch is owned by News Corp., which also is the publisher of Barrons.com.)
There's no disputing that America's budget mess poses a long-term threat to the dollar, more so than the Federal Reserve's low-interest-rate policies. That was pointed out here just last week ("A Foolish View of America's Debt, Nov. 18.)
So far, however, there seems no shortage of buyers for the U.S. government's debt, including Monday's record auction of $44 billion of two-year notes, which will be followed $42 billion of five-year notes Wednesday and $32 billion of seven-year notes.
That would contradict the notion of an imminent rerun of That 'Seventies Show, featuring soaring interest rates and inflation. That is, after all, what sent gold to its then-record of $850 in January 1980, the final year of that benighted decade. (And by the way, notwithstanding all the recently published assessments of this decade, it doesn't end until Dec. 31, 2010.)
Would that we could have that rerun? We'd all have the playbook on how to deal with those travails. Don't buy any Pintos, avoid polyester and burn disco records. Just buy gold, dump bonds, borrow and borrow and buy the biggest house you can afford. Maybe the last one didn't turn out so well.
Indeed, Albert Edwards, Societe Generale's global strategist, sees the risks running quite the opposite of the consensus, which has a global recovery on track with a steadily falling dollar. Instead, he looks for a double-dip back into recession leading to a surging greenback, with a collapse of "the China economic bubble" resulting in a double whammy for commodity prices.
Writing in his latest Global Strategy Letter, Edwards points to signs of doubts about the U.S. economic recovery, from the labor market remaining "very sick" with the uptick in unemployment rate over 10% plus the Conference Board's consumer finding showing jobs getting still harder to get. Meanwhile, the ECRI Leading Indicator, which trumpeted recovery earlier in the year, has fallen for five straight weeks.
But what's way out of the consensus is the call for China's massive trade surplus to turn to deficit by Societe Generale's Asian economist, Glenn Maguire, who Edwards writes has been "very right on China this year."
"This is a mega-call and will have major implications for the global financial markets," Edwards declares. China no longer will be accumulating currency reserves at nearly the same pace, leaving less to recycle into U.S. Treasuries. The reduced capital inflow would also slow China's domestic monetary growth and real output, which track each other. Meanwhile, capital outflows from Japan, another source of global liquidity, could be hampered were there a sharp rise in its government bond yields.
A synchronized end to the Chinese and U.S. economic recoveries could play out in increased protectionist pressures, including competitive devaluations, Edwards continues. That could lead to a spike in the dollar as speculative carry trades are unwound, as happened to the yen in 2008. A rise in the dollar would pull up the renminbi, which "may be all too much for a beleaguered Chinese economy."
Then, Edwards says, the U.S. goal of delinking of the RMB from the dollar would be accomplished -- with China devaluing rather than revaluing its currency higher.
Edwards adds, "I am reassured that my views are not totally bananas when two of the deepest thinkers are also concerned about a Chinese economic crash."
Those include Edward Chancellor, who has written extensively about bubbles, including "The Devil Take the Hindmost: A History of Financial Speculation," and recently observed the Chinese economy shows symptoms of weakness similar to those after the Greenspan Fed reflated following the bursting of the tech bubble. Meanwhile, Jim Chanos, the famed short seller of Kynikos Associates, thinks he spies manipulated data about China's economy. Chanos, it should be remembered, sniffed out the phony accounting at Enron.
Indeed, there were hints the bubble in China was about to burst, or at least deflated, in the 3.5% plunge in the Shanghai Composite Tuesday. That came after on rumors that China's banks were ordered to raise more capital. Charles Dumas of Lombard Street Research writes in a note to clients this wasn't just a matter of an increased supply of shares, but a move almost certainly on orders of the government for banks to bolster their balance sheets following their lending spree earlier this year. Tightening of monetary policy is likely to follow as the boom produced by massive fiscal stimulus -- equal to 25% of gross domestic product--is generating inflation pressures.
The sort of deflationary crisis, resulting in competitive devaluations, protectionism and contracting world trade, recalls what happened in the 1930s, Edwards concludes. Despite politicians' solemn vows not repeat those blunders, "all I see are more and more protectionist measures being implemented, belying the soothing rhetoric."
The 1930s were indeed very different from the 1970s. In the latter decade, you could just buy gold (though that was more difficult before today's exchange-traded funds) and let your cash earn double-digit yields. The falling dollar battered stocks and especially bonds back then.
Now, cash yields absolute zero but stocks benefit from every drop in the dollar while global investors continue to buy Treasuries, seemingly undeterred by the greenback's steady slide.
But recall a year ago; the dollar soared like the yen with the unwinding of carry trades (which involve the borrowing in those low-yielding currencies) as stocks and other risk assets fell sharply.
Such a rerun seems to be the one potential risk that seems ignored as gold gets bid giddily higher -- a significantly more painful deflationary squeeze than the inflationary surge they see.
At the minimum, China's likely moves to cool its boom could portend outcomes quite different from the what the consensus expects. As Lombard Street's Dumas concludes, "With China's recovery as the leading force in the world recovery, this would mark the end of the stock market, and general risk asset, rebound from last winter's lows."
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Friday Feature /Only Supply Side Can Fix $1.4 Trillion Deficit
~~~~~~~~~~~~
RICH KARLGAARD, "Digital Rules" on Forbes.com (11/30/09): school of
economic public policy known as "supply side" is out of favor, but it is
not as dead as it looks. The theory works. The production of goods and
services does indeed create its own demand. Otherwise, low productivity
countries would be wealthy. Jamaica would be as rich as Singapore. As Josh
Lerner points out here: "In 1965 the two nations were equal in wealth.
Four decades later, their standing was dramatically different. What
accounts for the difference?"
Lerner answers his own question:
Soon after independence, Singapore aggressively invested in infrastructure
such as its port, subsidized its system of education, maintained an open
and corruption-free economy, and established sovereign wealth funds that
made a wide variety of investments. It has also benefited from a strategic
position on the key sea lanes heading to and from East Asia. Jamaica,
meanwhile, spent many years mired in political instability, particularly
the disastrous administration of Michael Manley during the 1970s. Dramatic
shifts from a market economy to a socialist orientation and back again,
with the attendant inflation, economic instability, crippling public debt,
and violence, made the development and implementation of a consistent
long-run economic policy difficult.
But in explaining Singapore's economic growth, it is hard not to give
considerable credit to its policies toward entrepreneurship. The
government has experimented with a wide variety of efforts to develop an
entrepreneurial sector:
In other words, Singapore invested in supply. It built infrastructure with
government funds. It kept taxes low, regulations light, trade open and
laws simple but rigorously enforced so as to encourage private investment.
President Obama is a thorough-going demand-sider. The $787 billion
stimulus package, tax "cuts" for people who aren't paying taxes, Cash for
Clunkers--could it be any clearer? Demand side has a fatal flaw. It takes
the production of goods and services for granted. Demand side takes you to
Jamaica, not Singapore.
The critics of supply side argue that it, too, has a fatal flaw: deficits.
Does it? Sure, when government spends more than it takes in.
Supply side, in fact, is the only way out of the deficit nightmare....
Read On:
http://blogs.forbes.com/digitalrules/2009/11/only-supply-side-can-fix-1-4-trillion-deficit/
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December 6, 2009
Carbon credits bring Lakshmi Mittal £1bn bonanza
Jonathan Leake and Bojan Pancevski
LAKSHMI MITTAL, Britain’s richest man, stands to benefit from a £1 billion windfall from a European scheme to curb global warming. His company ArcelorMittal, the steel business where he is chairman and chief executive, will make the gain on “carbon credits” given to it under the European emissions trading scheme (ETS).
The scheme grants companies permits to emit CO2 up to a specified “cap”. Beyond this they must buy extra permits. An investigation has revealed that ArcelorMittal has been given far more carbon permits than it needs. It has the largest allocation of any organisation in Europe.
The investigation has also shown that ArcelorMittal and Eurofer, which represents European steel makers at European level, have lobbied intensively in Brussels. This has included threatening to move plants out of Europe at a cost of 90,000 jobs, and asking European commissioners to meet Mittal.
ArcelorMittal is now free to sell its surplus permits on the market or to hoard them for future use. The latter would allow it to avoid cutting greenhouse gas emissions for years, effectively undermining the point of the scheme.
Either way, the company will have gained assets worth around £1 billion by 2012. The eventual value could be much greater. Each carbon permit is currently worth about £12.70 but the European Union has said it wants to drive this price above £30.
The disclosure comes on the eve of the Copenhagen climate conference, whose main aim is to extend schemes such as the ETS into a global system for trading carbon.
Details emerged from an analysis of the community independent transaction log, the EU system for logging the carbon permits issued to factories and power stations covered by the scheme in Europe.
Anna Pearson, an expert on the ETS who carried out the analysis, said: “Between 2008 and 2012 ArcelorMittal stands to gain assets worth £1 billion at today’s prices for scant effort. For them, the ETS has been turned into a system for generating free subsidies.”
ArcelorMittal, which is based in Luxembourg and has more than 80 steel plants around Europe, has confirmed Pearson’s figures. The ETS covers 10,000 industrial installations, responsible for 40% of the EU’s greenhouse gas emissions.
“Following intense lobbying and claims that the scheme would harm business, the cap on emissions was set too high and too many permits were issued,” said Pearson, who performed her analysis for Sandbag, which campaigns to improve carbon trading.
ArcelorMittal was given the right to emit 90m tonnes of CO2 each year from its plants in the EU from 2008 to 2012. However, the company emitted just 68m tonnes last year. That was partly due to the recession, but Pearson believes its allocation of 90m was already too generous. This year ArcelorMittal’s emissions are predicted to plummet to 43m tonnes.
A spokesman for the company said: “The extra surplus arose when actual steel production fell way below forecasts because of the unexpected global economic crisis. As the world returns to growth, we expect to use them up.”
However, Pearson estimates that by 2012 the company will have accumulated surplus permits for 80m tonnes of CO2 — equivalent to the pollution generated annually by the whole of Denmark.
Details of ArcelorMittal’s lobbying emerged from freedom of information requests made by Corporate Observatory Europe to the European commission. They include two letters from Mittal himself, in December 2006 and April 2007, requesting meetings with Günter Verheugen, the commissioner for enterprise and industry, and Stavros Dimas, the environment commissioner.
In another, in January 2008, ArcelorMittal threatened to relocate if made to pay for carbon certificates.
The business is 43% owned by Mittal, who tops The Sunday Times Rich List with a fortune of £10.8 billion. He lives in a Kensington mansion bought for £70m in 2003.
The revelations support the criticisms of carbon trading by Professor Jim Hansen, director of Nasa’s Goddard Institute for Space Studies, who supports the alternative idea of a direct tax on carbon. He said: “The corporates see emissions trading as a huge opportunity to boost profits.”
Pearson said she had written to Mittal on behalf of Sandbag asking if ArcelorMittal would “retire” the carbon permits — meaning they could not be used by anyone else.
“If the company were to rip these up it would be a great act of philanthropy and set an excellent example,” she said.
An ArcelorMittal spokesman said: “ArcelorMittal’s surplus carbon credits are an asset which will only grow in importance,” he said.
http://business.timesonline.co.uk/tol/business/industry_sectors/industrials/article6945991.ece
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"politicians are acting either in ignorance of specialist knowledge or by manipulating and misusing it in the conviction that central planners can organize and control human behavior better than individuals can through markets and voluntary action"
Stealing a thought from Michael Barone's column at the DC Examiner, 4 examples:
"Writing in Policy Review, economists Paul Gregory and Kate Zhou compare the success of market reforms in China and their failure in Russia. They point out that reform in China was bottom-up: Peasants started producing food for private sale and, as markets thrived, Communist leader Deng Xiaoping winked at their rule-breaking and changed the rules. The economy mostly thrived.
In contrast, reform in Russia was top-down: Mikhail Gorbachev changed the rules, but that allowed apparatchiks to gobble up state industries and created new monopolies, over which Vladimir Putin's government re-established control. The economy mostly stagnated.
The Democrats' health care and cap-and-trade bills are classic top-down legislation. Many inside players have bought into the changes and are preparing to game the new systems. Far from banishing lobbyists from Washington, Barack Obama has provided them with enormous amounts of new business.
An alternative approach was taken in George W. Bush's major domestic legislation. Tax cuts, the education accountability bill and the Medicare prescription drug benefit law opened up areas where markets and incentives could operate. Costs came in lower and revenues higher than projected. An economy stalled by recession proved capable of creating new jobs without direction from central planners."
http://www.realclearpolitics.com/articles/2009/12/10/the_problem_with_expanding_government_power.html
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Romer, who heads the White House Council of Economic Advisers, said: "no one is talking about raising taxes during a recession..."
She didn't say why not. I wish she would spell that out. Maybe she would say that raising tax rates reduces the incentives to take on economic risk, to hire, to invest, to make capital purchases, to make larger consumer purchases, etc, etc, etc. Everybody knows that (?).
We've been through this here before, but a very important economic point is that the promise of raising tax rates has the EXACT SAME AFFECT on stifling new investment. Or perhaps worse as investors sit out the uncertainty rather than respond to a new, worse set of rules.
Pelosi to the speakership, Obama into the senate majority in 2006 and obviously Obama to the White House... this group came to power on the promise of significantly raising key tax rates on Americans who hire and invest. They still hold the promise of doing that as soon as they see a little bit of life in the economy.
That promise, even yet largely unfulfilled, more than anything else IMO, killed off this economy.
Where I part with Keynes and these current demand siders is that I would not ever do in good economic times what everyone knows would be harmful in bad economic times.
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Bill Whittle on the fight of our lives.
"The Kudzu Curse: A Fight for Free Enterprise"
http://www.pjtv.com/v/2834
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The Yield Curve Is Signaling Bigger Growth
By Lawrence Kudlow (Archive) · Thursday, December 24, 2009
What's a yield curve, and why is it so important?
Well, the curve itself measures Treasury interest rates, by maturity, from 91-day T-bills all the way out to 30-year bonds. It's the difference between the long rates and the short rates that tells a key story about the future of the economy.
When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good. When the curve is upside down, or inverted, with short rates above long rates, it tells us that something is amiss -- such as a credit crunch and a recession.
The inverted curve is abnormal; the positive curve is normal. We have returned to normalcy, and then some. Right now, the difference between long and short Treasury rates is as wide as any time in history. With the Fed pumping in all that money and anchoring the short rate at zero, investors are now charging the Treasury a higher interest rate for buying its bonds. That's as it should be. The time preference of money simply means that the investor will hold Treasury bonds for a longer period of time, but he or she is going to charge a higher rate. That is a normal risk profile.
The yield curve may be the best single forecasting predictor there is. When it was inverted or flat for most of 2006, 2007 and the early part of 2008, it correctly predicted big trouble ahead. Right now, it is forecasting a much stronger economy in 2010 than most people think possible.
So there could be a mini boom next year, with real gross domestic product growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down, perhaps moving into the 8 percent zone from today's 10 percent.
The normalization of the Treasury curve is corroborated by the rising stock market and a normalization of credit spreads in the bond market. I note that as the curve has widened in recent weeks, gold prices have corrected lower and the dollar has increased somewhat. So the edge may be coming off the inflation threat.
If market investors expect the economy to grow, inflation at the margin will be that much lower as better growth absorbs at least some of the money-supply excess created by the Fed. My hunch is that inflation will range 2 percent to 3 percent next year.
It also could be that the health care bill about to pass in the Senate is less onerous from a growth standpoint -- and certainly less onerous than the House bill. For example, the Senate bill does not contain a 5.4 percent personal-tax-rate surcharge, which also would apply to capital gains. So if the Senate bill becomes the final bill, it will be less punitive on growth.
That could explain the fall in gold and the rise in the dollar. We'll still be stuck with a tax hike from the expiration of the Bush tax cuts, but at least we won't have a tax hike on top of that. That's the optimistic view, at any rate.
But really, pessimists have missed the big rise in corporate profits, the resiliency of our mostly free-market capitalist economy and the monetarist experiment from the easy-money Fed. The optimal policy mix on the supply-side is low tax rates and King Dollar. We don't have that. So as good as 2010 may be, with investors moving to beat the tax man, it could be a false prosperity at the expense of 2011.
But let's cross that bridge when we get there. Right now, rising stocks and a wide and positive yield curve are spelling strong economic growth in the new year.
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Even though it is POTH, a point of major importance is finally noticed-- that low interest rates destroy savers. Because it is POTH, "capitalism" is blamed, but the true name is "liberal fascism". The destruction of savings due to government meddling (which includes programs which "protect" people from the natural responsibility to save for emergencies, old age, etc.) is one of the most profound underlying vehicles for the destruction of the American free market and one of the most profound enabling tactics for the implementation of liberal fascism. Now that govt. deficits look ready to kick it in with interest rates, POTH finally notices that savers are hurt.
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At Tiny Rates, Saving Money Costs Investors Recommend
By STEPHANIE STROM
Published: December 25, 2009
Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.
Joe Parks, a retired accountant in Houston who sits on the volunteer advisory board of Better Investing, said that with low interest rates and fees, retirees and the elderly could take anywhere from a half to three-quarters of a percent cut in their incomes. Joe Parks, a retired accountant, said retirees and the elderly would take up to a three-quarters of a percent cut in income. The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.
“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)
“They’re advertising it in the papers as if they’re actually proud of that,” said Steven Weisman, a title insurance consultant in New York. “It’s a joke.”
The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent.
The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd.
Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.
Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.
“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”
Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”
Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.
Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.
He began investing some of the money in blue chip stocks with a dividend yield of at least 3 percent and even managed to find an oil-and-gas limited partnership that offered 8 percent.
Mr. Parks said, however, that he would not pursue that strategy as more of his C.D.’s matured. “What worked in the first quarter of this year isn’t as relevant, because the market has come up so much,” he said.
No one is advising a venture into higher-risk investments. Katie Nixon, chief investment officer for the northeast region at Northern Trust, said that, in general, “no one should be taking risks with their pillow money.”
“What people are paying for is safety and security,” she said, “and that’s probably just right.”
People who rely on income from such investments for support, however, are being forced to consider new options.
Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates. Reverse mortgages have a checkered reputation, but Ms. Lurie said her bank was going out of its way to explain the product to her.
“These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.
Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on Social Security or Medicare payments. The loans are repaid after death.
“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”
Eve Wilmore, 93, has watched returns on her C.D.’s drop to between 1 percent and 2 percent from about 5 percent a year or so ago. Yet the Social Security Administration recently raised her Medicare Part B premium based on those higher rates she had been earning. “I’m being hit from both sides,” Mrs. Wilmore said. “There’s some way I can apply for a reconsideration, and I’m going to fight it. I have to.”
She said she was reluctant to redeploy her money into higher-risk investments. “I don’t know what my medical bills will be from here on in, and so I want to keep the money where I can get to it easily if I need it,” she said.
Peter Gomori, who taught a course on money and investing for Dorot, a nonprofit that offers services for the elderly, did not advise his students on investment strategies but said that if he had, he would probably have told them to sit tight.
“I know interest rates are very low for Treasury securities and bank products, but that isn’t going to be forever,” he said.
But investment professionals doubt rates will rise any time soon — or to any level close to those before the crash.
“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”
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The Bankruptcy of the United States
By Porter Stansberry
From the November 23, 2009, S&A Digest
It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem.
Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.
When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities.
The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."
The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.
So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.
According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.
Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.
So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.
So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.
One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.
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The Porter Stansberry piece is very interesting. I don't take the US bankruptcy worry very seriously because we already are in a sense. Question IMO is just how much more damage.
Clinton saved billions with a very high risk by financing with short term debt. The risk really at what cost will be the replacement debt.
The U.S. Treasury does not risk not being able to find buyers for bonds. We currently use the Bernie Madoff technique on steroids. We just print (monetize) as they come due and sell replacement bonds as we see fit. If they sell - they sell. If not - then it stays monetized. Like issuing more stock instead of borrowing. The current owners shares just get a few trillion more diluted. We can't default in our own currency under our own rules. It is all play money in a sense from the point of view of the policy makers.
For the zillionth time, I ask the question, what right does a congress today have to obligate a congress of tomorrow? It violates the principle of consent of the governed. Tomorrow's voter is boxed in without choices. What if in the future they want a lower tax, lower spending society or different programs from the flawed ones of today? The establishment of these long term entrenched programs takes choices away from future voters and that is WRONG IMHO.
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Ran across the piece below at the American Thinker over the holidays. I have warned others that if/when the economy comes back we will see inflation and high interests rates because we have already 'inflated' the currency with 'printed money' and price increases are a result or symptom of the already inflated currency.
One flaw and one omission to that line of reasoning. The omission is in the if/when the economy roars back. Under today's policies, why would it? The reported 3rd qtr growth was adjusted down and looks to be government sector only. If you hire, earn or save, you are screwed.
The flaw in inflationary thinking is that while we are 'printing' or injecting a couple trillion a year in the U.S. we have also destroyed 50 trillion of wealth wordwide. For every bank loan dismantled and asset de-leveraged, there is a shrinking of money besides the loss in value.
Look at the Fed. Looks like everything they are doing is inflationary with 0% interest etc. Maybe with all the info they have they think the strongest need is still fighting off deflation. At roughly zero interest, they don't have room to go any further.
We had this discussion before I believe and it is important to understand that deflation is not the opposite of inflation. It is just another ailment like strep vs. viral infection or heart attack vs. stroke. They are both the opposite a vibrant, healthy economy with a stable currency and positive public policies guiding it like reasonable incentives to produce, save, invest, hire, etc.
BTW, I don't know anything about the credibility of this author.
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http://www.americanthinker.com/2009/12/the_defaltion_threat.html
December 22, 2009
The Deflation Threat
By Paul Berkowitz
Contrary to what you are hearing in the media, the worst economic news may still lie ahead: A deflationary depression is descending upon us.
Breakneck federal printing of debt and dollars, gold and stocks rising, the dollar falling -- surely these trends presage inflation, or even hyperinflation. So goes the narrative across the media. But a contrarian and increasingly likely view is that deflation, not inflation, awaits.* What is deflation? How will it develop? How will it affect us?
Most of us have known only inflation, in which prices rise over time. In deflation, prices fall. The last time this happened in the U.S. was during the Great Depression. Japan has been living it these last fifteen years.
A falling price trend is at first a benefit to consumers. But then it leads to a spiral of economic decline: a depression. Deflation occurs when money for whatever reason becomes scarce, and therefore more valuable. Lower prices are the effect. Producers starve for profits, which leads to layoffs, loan defaults, and bankruptcies. Borrowers find they have to repay with more expensive dollars, so they pay off their debts. Low debt throttles growth and slows purchases. Expensive dollars make exports less competitive. Unsold inventories waste away on the shelf, crumble in value, and must be sold at deep discounts. Prices fall further, and so on, in a vicious circle.
Normal downturns are triggered by cyclic imbalances in which supply temporarily exceeds demand. Growth pauses while inventory excesses are liquidated. This time, however, things are different. The triggering event was an asset valuation bubble -- high stock and real estate prices -- boosted excessively in a buying mania fueled by cheap credit during the last fifteen years. Lots of borrowing creates financial leverage, which pumps up profits during good times and wipes them out during bad. Consumer credit swelled with the aid of cheap mortgages and home equity lines. Businesses borrowed cheap short-term money and invested long-term, expecting to roll the loans over as profits expanded. Most significantly, bankers ran high ratios of what they lent out versus what they took in. All of this borrowing was encouraged by the Federal Reserve Board and Congress to foster social goals like full employment and high levels of homeownership.
But the system eventually became unstable. The real estate that served as collateral for trillions of dollars of debt on the banks' (and the bank-like Fannie and Freddie) balance sheets became priced too high, and for the first time in seventy years, prices began a serious decline. Many highly leveraged borrowers had their equity wiped out, so they threatened to default. An increased sense of risk rippled through these debt pools, erasing much of their value and rendering them unsalable, or "toxic." Soon, a "run," or loss of general confidence, pervaded the U.S. and European economies. Though it has come to be called the housing bubble recession, a better name is the great credit bubble depression.
Deflation stems from a shortage of money. Isn't the Fed creating trillions of new dollars that they lend to banks and to the Treasury for disbursement in "stimulus" programs? Yes, but even as the Fed has recently created $2 trillion in new assets, many times, more money has been and will continue to be taken out of the world's economy through the process of de-leveraging -- that is, the paying off or writing off of a portion of the hundreds of trillions in credit floated around the world. Despite talk of TARP success and nascent recovery, those toxic assets are still on the books, some with the banks and some with the Fed itself. Eventually, much of this money will become worthless. As fast as the Fed is printing new money, money is being destroyed as debt is taken off the table. In the end, the Fed will lose as the quicksand of depression sucks more and more money into its muck.
Ironically, the 60% stock market rally of 2009, which in itself is anti-deflationary, is no source of comfort. Though it's hard to prove why stocks move, the recent rally is most likely due to a "carry trade," in which banks borrow cheaply from the Fed and invest in high-return risk markets like stock, gold, or even foreign currencies. The Fed is encouraging this with low rates precisely because this asset re-inflation makes the dollar less valuable. They are fighting the inevitable deflation.
But they are also creating a new asset bubble just like the one that imploded last year. They have lowered short-term interest to zero. As prices correct downward and the dollar rises as deleveraging continues, the Fed can take rates no lower. The last remedy available is for the Fed to buy government and corporate debt in the open market, literally printing money at will -- adrenaline for a burst, perhaps, but not sustainable. Other government measures like deficit spending and expansion of primarily public sector jobs in the "Stimulus" program are simply wasteful, destroying more dollars in the present and creating public debt to burden the future. These effects are deflationary. Obama's plans for new taxes and regulations, which extinguish dollars, are also deflationary.
What about the oft-cited signs of recovery like upticks in GDP, consumer sentiment, and retail sales? Well, even in a trending economy -- and ours is trending down -- it is normal to see short blips, zigs, and zags against the trend. The numbers are also somewhat cooked for political effect. You'll know that the grip of deflation is tightening if you continue to see more of the following: discounts, price reductions, joblessness, real estate vacancies, bank failures, business failures, public finance failures, pension defaults, loan defaults, shrinking debt and credit, higher savings ratios, and frugal spending.
Obama's economists, Larry Summers and Ben Bernanke, are smart enough to understand and see the lurking deflation, even if they publicly brag that the worst is over. They might even quietly suspect that their current policy mix will not stop deflation. So what have they told the boss? If they are speaking honestly, then Obama must already know how much pain is coming our way. Or are these generals cowering before their stern commander, who will shoot a messenger bringing unwelcome news? The mood must be pretty tense.
*While the forecast is deflation for the next few years, inflation is still a long-term threat. Economic trends swing to and fro. A mild deflation could be followed by a mild inflation. Unfortunately, we may see a very deep deflation change into a hyperinflation as panicky anti-deflationary policies overshoot their mark.
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That 1937 Feeling Recommend
by PAUL KRUGMAN
Published: January 3, 2010
Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.
But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.
This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.
As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.
And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.
Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.
Which brings us to the still grim fundamentals of the economic situation.
During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.
What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.
Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.
So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.
The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.
Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.
Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.
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Deregulation Now
Richard A. Epstein, 01.05.10, 12:01 AM ET
As we enter a new decade, the political mood of the country can be captured in one word: glum. In particular, there is widespread recognition at the state level that conditions have reached near crisis proportions. In states like California, Illinois and New York, large deficits and service cutbacks loom everywhere, as traditional tax bases can no longer support the ambitious entitlement programs that rest precariously upon them. Tax revenues are down 10% across all states, even as taxes are raised in half of them.
The consequences are serious. Just look at the implosion in higher education now taking place at the University of California. State revenues have gone dry and budgets are slashed, yet student and labor protests make it difficult to raise tuition and fees needed to maintain a strong institutional base. More and more students cannot complete their education in four years, as unpaid furloughs will drive the best professors, administrators and students elsewhere.
Tragically, this lesson often goes unheeded. Too many faculty and students link arms with union organizers in the naïve hope of extracting blood from a stone. A bankrupt state cannot increase allocations to the university. But affluent citizens pack their bags to move to low-tax jurisdictions. And those who stay do more tax-free work at home or participate more heavily in the underground economy.
At this point, it won't work to reaffirm the deadly triumvirate that drives this misery: tax the rich, greater local control over real estate development and special privileges for organized labor. What's needed is to break from the past with some unimaginative, but necessary, New Year's resolutions in the areas of taxation, real estate and labor.
On taxation, don't play the mug's game of imposing ever higher marginal tax rates on ever lower amounts of income. Play it smart for the long haul. Low-income tax rates (and no estate taxes) will attract into states and communities energetic individuals who would otherwise choose to live and work elsewhere. Treasure their efforts to grow the overall pie. Don't resent their great wealth, but remember the benefits their successes generate for their employees, customers and suppliers. Repudiate the politics of envy for the social destruction it creates. Don't fret about the states and communities left behind. Let them adopt the same sound policies to keep people at home. The outcome won't be a zero-sum game. Enterprise is infectious. Open markets are the rising tide that raises all ships. High taxation is the tsunami that sinks them.
On real estate, change the culture so that getting permits for yourself and blocking them for everyone else is no longer the preeminent developer's skill. The government can still prevent buildings from falling down and fund infrastructure through general taxation. But don't let entrenched landowners and businesses raise NIMBY politics to a fine art. Today our dysfunctional land-use processes too often build thousands of dollars and years of delay into the price of every square foot of new construction. The instructive requirements on aesthetics and handicap access should be junked, along with the crazy-quilt system of real estate exactions that asks new developments to fund improvements whose benefit largely belongs to incumbent landowners. And for heaven's sake, learn the lesson of Kelo and stop using the state's power of condemnation for the benefit or private developers.
On labor, state and local governments have to junk the progressive mindset in both the public and the private sector. State and local governments should never, repeat never, be forced to negotiate with local unions. The huge pensions garnered by prison guards in California or transportation workers in New York present the intolerable spectacle of requiring ordinary citizens to pay huge subsidies to union workers far richer than themselves. On the private side, don't force developers to hire union workers on construction sites or to block the construction of new facilities that hire nonunion labor. If unions are really efficient--and they aren't--let them compete like everyone else.
On other labor fronts, we should kill off minimum wage laws that reduce opportunities for youthful employees and overtime legislation that distorts labor markets. And yes, take on the sacred cow by repealing the antidiscrimination laws on race and sex, and especially age.
None of this activity costs the public a dime. All of it will increase tax revenues and reduce administrative expenses. The best test of a good policy is whether it is sustainable over the long haul. We know now that the progressive regime flunks this key test. At this point, all good libertarians can only take cold comfort that they have fought these destructive policies tooth and nail. In today's overheated environment, our New Year's resolution can be summed up in two words: deregulation now.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, The University of Chicago; the Peter and Kirsten Bedford Senior Fellow, the Hoover Institution; and a visiting professor at New York University Law School. He writes a weekly column for Forbes.com.
http://www.forbes.com/2010/01/04/deregulation-new-year-resolutions-opinions-columnists-richard-a-epstein.html
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U.S. Job Losses in December Dim Hopes for Quick Upswing
By PETER S. GOODMAN
Published: January 8, 2010
The nation lost 85,000 jobs from the economy in December, the Labor Department reported Friday, as hopes for a vigorous recovery ran headlong into the prospect that paychecks could remain painfully scarce into next year.
“We’re still losing jobs,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It’s nothing like we had in the free fall of last winter, but we’re not about to turn around. We’re still looking at a really weak economy.”
The disappointing snapshot of the job market intensified pressure on the Obama administration to show results for the $787 billion spending bill it championed last year to stimulate the economy.
At a news conference, Mr. Obama acknowledged the December data as a setback, while outlining plans to deliver $2.3 billion in tax credits to spur manufacturing jobs in clean energy.
“We have to continue to explore every avenue to accelerate the return to hiring,” the president told reporters.
Most economists assume the unemployment rate — which held steady at 10 percent in December — will worsen in coming months. The nation would then confront the highest jobless rate in a generation on the eve of November elections that will determine the balance of power in Congress.
Mark Zandi, chief economist at Moody’s Economy.com, forecasts that the unemployment rate will reach 10.8 percent by October. The so-called underemployment rate — which counts people who have given up looking for work and those who are working part time for lack of full-time positions — now sits at 17.3 percent.
Mr. Zandi argues that the economy requires an additional $125 billion jolt of stimulus spending on construction projects and aid to state and local governments — a proposal that confronts enormous political challenges.
Republicans assert the first dose of stimulus spending has been squandered on dubious projects. The Obama administration, increasingly concerned by the size of federal deficits, is loath to spend more.
Mr. Zandi argues that a failure to spend now to spur growth could leave the United States in a bigger hole.
“If we don’t do it and we slide back into recession,” he said, “that’s going to exacerbate the deficit even more.”
The December jobs report included one encouraging milestone: Data for November was revised to show the economy gained 4,000 jobs that month, compared with initial reports showing a net loss of 11,000 jobs. That was the first monthly improvement since the recession began two years ago.
But the December data failed to repeat the trend, disappointing economists, who had generally expected a decline of 10,000 jobs. The report showed continued slowing in the pace of job losses, but it also underscored that companies were reluctant to hire.
For a fifth consecutive month, temporary help services expanded, adding 47,000 positions in December. That buttressed the notion that companies required more labor, even as they held off hiring full-time workers.
“We’re going in the right direction,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm. “If we just have a little bit of patience, we’ll start to see monthly increases of 200,000 to 300,000 jobs within six months.”
But millions of people still grappling with the bite of the worst downturn since the Great Depression have exhausted their patience — along with their savings and confidence.
In Charlotte, N.C., Kumar G. Navile, 33, says he has applied for 500 jobs in the year since he lost his position as an engineer.
“You get up every day and say today will be different, but it is mentally challenging,” Mr. Navile said. “I performed well in school. I got a job the day I graduated. It’s been a struggle.”
For those out of work, the market is bleaker than ever. The average duration of unemployment reached 29 weeks in December, the longest since the government began tracking such data in 1948.
“There is almost no hiring going on outside the temporary help sector,” said Andrew Stettner, deputy director of the National Employment Law Project.
Despite the parsing of data and contrasting economic forecasts, no complexity cloaked the basic facts of the report: job openings remain scarce.
“Most people, they’re not looking at the data,” Mr. Baker said. “They’re just asking, ‘Can I get a job?’ And that’s not getting any easier.”
The government’s monthly jobs report, while always important, now stands as the crucial indicator of economic health.
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For years, households spent in excess of incomes by borrowing against the value of homes, leaning on credit cards and tapping stock portfolios. But home prices have plummeted, stock holdings have diminished and nervous banks have sliced credit even for healthy borrowers, leaving the paycheck as the primary source of household finance.
Economists are divided over the nation’s economic prospects. Some argue that recent expansion on the factory floor presages broader economic improvement that will soon deliver job growth.
Not yet. Manufacturing lost 27,000 jobs in December. Construction jobs declined by 53,000. Government shed 21,000 jobs. Despite a surprisingly strong holiday shopping season, retailing lost 10,000 jobs.
Health care remained a bright spot, expanding by 22,000 jobs.
Skeptics argue that the factory expansion merely reflects a rebuilding of inventories after businesses slashed stocks during the panic. Expansion has been aided by stimulus spending and tax credits for homebuyers.
Once these factors fade in coming months, skeptics argue, the economy will confront stubborn challenges — cash-tight households curtailing spending, banks reluctant to lend and businesses unwilling to hire.
Those with the gloomiest outlooks envision a “double dip” recession, in which the economy resumes contracting. Others fear years of stagnation, like Japan’s Lost Decade in the 1990s.
One point of agreement among economists is that the nation cannot recover without millions of new jobs. The economy needs about 100,000 new jobs a month just to keep pace with people entering the work force. When workers gain wages, they spend them at other businesses, creating jobs for other workers — a virtuous cycle, in the parlance of economists.
Recent months have produced tentative signs that such a cycle might be unfolding, even as economists debate its sustainability. The December jobs report added to the ambiguity.
On the one hand, job losses undermined hopes for a quick turnaround. Yet the losses were a far cry from the roughly 700,000 monthly job losses seen a year ago.
“Standing still feels good when you’ve been used to falling backwards,” said Stuart G. Hoffman, chief economist at the PNC Financial Services Group. “But we want to move forward.”
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About a year ago I tried to answer the deception of Robert Reich regarding income distribution. I was pleased to see that Dr. Sowell reads this forum and took the time to expand on this in his latest book. :-)
Read Thomas Sowell new book: Intellectuals and Society (and all of his books).
Investors Business Daily is running a series on it at:
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=517564
Dr. Sowell is a Professor at Stanford, grew up in Harlem. During his 20s, when he was a self-described Marxist, he graduated magna cum laude from Harvard with a B.A. in economics. He also has a master's in economics from Columbia and a Ph.D. in economics from the University of Chicago.
Read just this one section and see the lies exposed of people like Paul Krugman, Reich and the politicians like Pelosi and Obama who base their shallow, class warfare politics on the lies of the liberal economists with their simple sleight of hand.
Simply put, the lowest income workers become richer and leave the lower quintiles. New workers enter the work force, some previously had no income, some came from far away to double their income though still low by our standards and they make up the new lowest quintile. Middle income earners become wealthier and enter the higher quintiles. The highest income earners and business owners retire, sell, die, scale back, whatever and the new high earners make even more than the rich of old used to make. Then some liberal economist perform a phony quintile analysis to conclude that no one has improved their economic standing over an extended period of time. All the liberal blogs and politicians pick up on it and take down our economy based on false information and analysis.
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How Data On Income Distribution Are Misunderstood And Misapplied
Most intellectuals outside the field of economics show remarkably little interest in learning even the basic fundamentals of economics. Yet they do not hesitate to make sweeping pronouncements about the economy in general, businesses in particular, and the many issues revolving around what is called "income distribution."
Famed novelist John Steinbeck, for example, commented on the many American fortunes which have been donated to philanthropic causes by saying:
One has only to remember some of the wolfish financiers who spent two thirds of their lives clawing a fortune out of the guts of society and the latter third pushing it back.
Despite the verbal virtuosity involved in creating a vivid vision of profits as having been clawed out of the guts of society, neither Steinbeck nor most other intellectuals have bothered to demonstrate how society has been made poorer by the activities of Carnegie, Ford or Rockefeller, for example — all three of whom (and many others) made fortunes by reducing the prices of their products below the prices of competing products.
Lower prices made these products affordable to more people, simultaneously increasing those people's standard of living and creating fortunes for sellers who greatly expanded the numbers of their customers. In short, this was a process in which wealth was created, not a process by which some could get rich only by making others poorer.
Nevertheless, negative images of market processes have been evoked with such phrases as "robber barons" and "economic royalists" — without answering such obvious questions as "Just who did the robber barons rob when they lowered their prices?" or "How is earning money, often starting from modest circumstances (or even poverty-stricken circumstances in the case of J.C. Penney and F.W. Woolworth) the same as simply inheriting wealth and power like royalty?"
The issue here is not the adequacy or inadequacy of intellectuals' answers to such questions because, in most cases, such questions are not even asked, much less answered. The vision, in effect, serves as a substitute for both facts and questions.
This is not to suggest that nobody in business ever did anything wrong. Saints have been no more common in corporate suites than in government offices or on ivy-covered campuses. However, the question here is not one of individual culpability for particular misdeeds.
The question raised by critics of business and its defenders alike has been about the merits or demerits of alternative institutional processes for serving the economic interests of society at large.
Implicit in many criticisms of market processes by intellectuals is the assumption that these are zero-sum processes, in which what is gained by some is lost by others. Seldom is this assumption spelled out but, without it, much of what is spelled out would have no basis.
Perhaps the biggest economic issue, or the one addressed most often, is that of what is called "income distribution," though the phrase itself is misleading, and the conclusions about income reached by most of the intelligentsia are still more misleading.
Variations in income can be viewed empirically, on the one hand, or in terms of moral judgments, on the other. Most of the contemporary intelligentsia do both. But, in order to assess the validity of the conclusions they reach, it is advisable to assess the empirical issues and the moral issues separately, rather than attempt to go back and forth between the two, with any expectation of rational coherence.
Given the vast amounts of statistical data on income available from the Census Bureau, the Internal Revenue Service and innumerable research institutes and projects, one might imagine that the bare facts about variations in income would be fairly well known by informed people, even though they might have differing opinions as to the desirability of those particular variations.
In reality, however, the most fundamental facts are in dispute, and variations in what are claimed to be facts seem to be at least as great as variations in incomes. Both the magnitude of income variations and the trends in these variations over time are seen in radically different terms by those with different visions as regards the current reality, even aside from what different people may regard as desirable for the future.
Perhaps the most fertile source of misunderstandings about incomes has been the widespread practice of confusing statistical categories with flesh-and-blood human beings.
Many statements have been made in the media and in academia, claiming that the rich are gaining not only larger incomes but a growing share of all incomes, widening the income gap between people at the top and those at the bottom. Almost invariably these statements are based on confusing what has been happening over time in statistical categories with what has been happening over time with actual flesh-and-blood people.
A New York Times editorial, for example, declared that "the gap between rich and poor has widened in America." Similar conclusions appeared in a 2007 Newsweek article that referred to this era as "a time when the gap is growing between the rich and the poor — and the super-rich and the merely rich," a theme common in such other well-known media outlets as the Washington Post and innumerable television programs.
"The rich have seen far greater income gains than have the poor," according to Washington Post columnist Eugene Robinson. A writer in the Los Angeles Times likewise declared, "the gap between rich and poor is growing."
According to Professor Andrew Hacker in his book "Money": "While all segments of the population enjoyed an increase in income, the top fifth did 24 times better than the bottom fifth. And measured by their shares of the aggregate, not just the bottom fifth but the three above it all ended up losing ground."
Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories — and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one category to another over time.
In terms of statistical categories, it is indeed true that both the amount of income and the proportion of all income received by those in the top 20% bracket have risen over the years, widening the gap between the top and bottom quintiles.
But Internal Revenue Service data following specific individuals over time show that, in terms of people, the incomes of those particular taxpayers who were in the bottom 20% in income in 1996 rose 91% by 2005, while the incomes of those particular taxpayers who were in the top 20% in 1996 rose by only 10% by 2005 — and those in the top 5% and top 1% actually declined.
While it might seem as if both these radically different sets of statistics cannot be true at the same time, what makes them mutually compatible is that flesh-and-blood human beings move from one statistical category to another over time.
When those taxpayers who were initially in the lowest income bracket had their incomes nearly double in a decade, that moved many of them up and out of the bottom quintile — and when those in the top 1% had their incomes cut by about one-fourth, that may well have dropped them out of the top 1%.
Internal Revenue Service data can follow particular individuals over time from their tax returns, which have individual Social Security numbers as identification, while data from the Census Bureau and most other sources follow what happens to statistical categories over time, even though it is not the same individuals in the same categories over the years.
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http://reason.com/archives/2010/01/12/class-war
Reason Magazine
Class War
How public servants became our masters
Steven Greenhut from the February 2010 issue
In April 2008, The Orange County Register published a bombshell of an investigation about a license plate program for California government workers and their families. Drivers of nearly 1 million cars and light trucks—out of a total 22 million vehicles registered statewide—were protected by a “shield” in the state records system between their license plate numbers and their home addresses. There were, the newspaper found, great practical benefits to this secrecy.
“Vehicles with protected license plates can run through dozens of intersections controlled by red light cameras with impunity,” the Register’s Jennifer Muir reported. “Parking citations issued to vehicles with protected plates are often dismissed because the process necessary to pierce the shield is too cumbersome. Some patrol officers let drivers with protected plates off with a warning because the plates signal that drivers are ‘one of their own’ or related to someone who is.”
The plate program started in 1978 with the seemingly unobjectionable purpose of protecting the personal addresses of officials who deal directly with criminals. Police argued that the bad guys could call the Department of Motor Vehicles (DMV), get addresses for officers, and use the information to harm them or their family members. There was no rash of such incidents, only the possibility that they could take place.
So police and their families were granted confidentiality. Then the program expanded from one set of government workers to another. Eventually parole officers, retired parking enforcers, DMV desk clerks, county supervisors, social workers, and other categories of employees from 1,800 state agencies were given the special protections too. Meanwhile, the original intent of the shield had become obsolete: The DMV long ago abandoned the practice of giving out personal information about any driver. What was left was not a protection but a perk.
Yes, rank has its privileges, and it’s clear that government workers have a rank above the rest of us. Ordinarily, if one out of every 22 California drivers had a license to drive any way he chose, there would be demands for more police power to protect Californians from the potential carnage. But until the newspaper series, law enforcement officials and legislators had remained mum. The reason, of course, is that the scofflaws are law enforcement officials and legislators.
Here is how brazen they’ve become: A few days after the newspaper investigation caused a buzz in Sacramento, lawmakers voted to expand the driver record protections to even more government employees. An Assembly committee, on a bipartisan 13-to-0 vote, agreed to extend the program to veterinarians, firefighters, and code officers. “I don’t want to say no to the firefighters and veterinarians that are doing these things that need to be protected,” Assemblyman Mike Duvall (R-Yorba Linda) explained.
Exempting themselves from traffic laws in the name of a threat that no longer exists is bad enough, but what government workers do to the rest of us on a daily basis makes ticket dodging look like child’s play. Often under veils of illegal secrecy, public-sector unions and their political allies are systematically looting the public treasury with gold-plated pensions, jeopardizing the finances of state and local governments around the country, removing themselves from legal accountability, and doing it all in the name of humble working men and women just looking for their fair share. Government employees have turned themselves into a coddled class that lives better than its private-sector counterpart, and with more impunity. The public’s servants have become our masters.
Good Enough for Government Work
There was a time when government work offered lower salaries than comparable jobs in the private sector but more security and somewhat better benefits. These days, government workers fare better than private-sector workers in almost every area—pay, benefits, time off, and job security. And not just in California.
According to a 2007 analysis of data from the U.S. Bureau of Labor Statistics by the Asbury Park Press, “the average federal worker made $59,864 in 2005, compared with the average salary of $40,505 in the private sector.” Across comparable jobs, the federal government paid higher salaries than the private sector three times out of four, the paper found. As Heritage Foundation legal analyst James Sherk explained to the Press, “The government doesn’t have to worry about going bankrupt, and there isn’t much competition.”
In February 2008, before the recession made the disparity much worse, The New York Times reported that “George W. Bush is in line to be the first president since World War II to preside over an economy in which federal government employment rose more rapidly than employment in the private sector.” The Obama administration has extended the hiring binge, with executive branch employment (excluding the Postal Service and the Defense Department) slated to grow by 2 percent in 2010—and more than 15 percent if you count temporary Census workers.
The average federal salary (including benefits) is set to grow from $72,800 in 2008 to $75,419 in 2010, CBS reported. But the real action isn’t in what government employees are being paid today; it’s in what they’re being promised for tomorrow. Public pensions have swollen to unrecognizable proportions during the last decade. In June 2005, BusinessWeek reported that “more than 14 million public servants and 6 million retirees are owed $2.37 trillion by more than 2,000 different states, cities and agencies,” numbers that have risen since then. State and local pension payouts, the magazine found, had increased 50 percent in just five years.
These huge pension increases have eaten away at public finances, most spectacularly in California, where a bipartisan bill that passed virtually without debate unleashed the odious “3 percent at 50” retirement plan in 1999. Under this plan, at age 50 many categories of public employees are eligible for 3 percent of their final year’s pay multiplied by the number of years they’ve worked. So if a police officer starts working at age 20, he can retire at 50 with 90 percent of his final salary until he dies, and then his spouse receives that money for the rest of her life. Even during the economic crisis, “3 percent at 50” and the forces behind it have only become more entrenched.
In the midst of California’s 2008–09 fiscal meltdown, with the impact of deluxe public pensions making daily headlines, the city of Fullerton nevertheless sought to retroactively increase the defined-benefit retirement plan for its city employees by a jaw-dropping 25 percent. What’s more, the Fullerton City Council negotiated the increase in closed session, outside public view. Under California’s open meetings law, known as the Brown Act, even legitimate closed-session items such as contract negotiations are supposed to be advertised so that the public has a clear idea of what’s being discussed. But the Fullerton agenda for that night only vaguely referred to labor negotiations.
Four of the five council members—two Republicans and two Democrats—seemed to support the deal. But Republican Shawn Nelson, a principled advocate for limited government, didn’t appreciate the way the council was obscuring not only the legitimately secret details of the negotiations but the basic subject matter. He called me at the Register (where I worked at the time) and, without revealing details of the closed session, shared his concerns about the way the public had not been alerted. After I wrote about the secret, fiscally reckless deal, the recriminations came down in a hurry: on Shawn Nelson.
Not surprisingly, the liberal council members were furious that the public had been informed about what was going on. But some conservative Republicans, including a prominent state senator, Dick Ackerman of Irvine, were angry as well, because Nelson’s willingness to talk embarrassed a Republican councilman whom the GOP was backing for re-election. When I later bumped into Ackerman at the Republican National Convention in St. Paul, he laid into me about Nelson’s supposed violation of the Brown Act. Some officials and bloggers actually called for Nelson to be prosecuted. Local union mouthpieces and fellow council members portrayed the whistleblower as a common criminal, even though he was merely acting in the spirit of the open meetings law and showing the kind of fiscal responsibility you would hope to see in public officials.
In its embarrassment, the city council voted against the deal at the last minute, but only after council members publicly chastised Nelson, accused me of libel, and vowed to come back for more when the timing was right. One Republican councilman couldn’t figure out what the fuss was all about, given that the council enhances public employee pay and pensions all the time.
Pension Tsunami
Although Americans may have a vague sense that the nation has run up a great deal of debt, the public employee benefit problem is not well known. Yet the wave of benefit promises is poised to wash away state and local government budgets and large portions of the incomes of most Americans. Most of these benefits are vested, meaning that they have the standing of a legal contract. They cannot be reduced. And the government employees’ allies, such as California’s legislative Democrats, are cleverly blocking some of the more obvious exit strategies.
For instance, when the city of Vallejo went bankrupt after coughing up 75 percent of its budget to police and firefighters, the state Assembly introduced legislation that would allow cities to go bankrupt only if they get approval from a commission. Such a commission would of course be dominated by union-friendly members. The result: Cities would be stuck making good on contracts they cannot afford to fulfill.
When the economy was booming, these structural problems could be hidden. But not now. As debt loads become unsustainable, you can expect cuts in services, tax increases, pension-obligation bonds, or some combination of the three.
In California unfunded pension and health care liabilities for state workers top $100 billion, and the annual pension contribution has shot up from $320 million to $7.3 billion in less than a decade. In New York state, local governments may have to triple their annual pension contributions during the next six years, from $2.6 billion to $8 billion, according to the state comptroller.
That money will come from taxpayers. The average private-sector worker, who enjoys a lower salary and far lower retirement benefits than New York or California government workers, will have to work longer, retire later, and pay more so that his public-employee neighbors can enjoy the lifestyle to which they have become accustomed. The taxpayers will also have to deal with worsening public services, since there will be less money to pay for things that might actually benefit the public.
In July 2009, Orange County, California, Sheriff Sandra Hutchens proposed more than $20 million in budget cuts to close the gap caused by falling tax revenue. Her department slashed 40 percent of its command staff, cut a total of about 30 positions, and made changes that affected about 200 positions through reassignments, demotions, new overtime rules, and other maneuvers. “These are services that we believe are quite important to maintaining public safety, that we’re just not going to be able to continue,” department spokesman John MacDonald told the Los Angeles Times.
The sheriff failed to identify another reason for the tight budget: In 2001 the Orange County Board of Supervisors had passed a retroactive pension increase for sheriff’s deputies. That policy nearly doubled pension costs from 2000 to 2009, when pension contributions totaled nearly $95 million—20 percent of the sheriff’s budget. So the sheriff decries an economic downturn that is costing her department about $20 million, but she doesn’t mention that a previous pension increase is costing her department more than double that amount. It’s safe to say that had the pension increase not passed, the department would have money to keep officers on the streets and to avoid the cuts the sheriff claims are threatening public safety.
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Chief’s Disease
One would think that a “3 percent at 50” retirement would be a good enough deal for most people. Most workers in the private sector would probably jump at such an opportunity. But many public safety officials aren’t satisfied with a system that allows them to retire with 90 percent or more of their final year’s pay at young ages. They feel compelled to game the system in ways that stretch or break the law.
A large percentage of public safety officials —more than two-thirds of management-level officials at the California Highway Patrol, for instance—come down with something widely known as “Chief’s Disease” about a year before their scheduled retirement. “High-ranking [CHP] officers, nearing the end of their careers, routinely pursued disability claims that awarded them workers’ comp settlements,” John Hill and Dorothy Korber of the Sacramento Bee reported in 2004. “That, in turn, led in many cases to disability retirements. As they collected their disability pensions, some of these former CHP chiefs embarked on rigorous second careers—one as assistant sheriff of Yolo County, for example, another as the security director for San Francisco International Airport.”
When Mike Clesceri was mayor of Fullerton (a part-time position filled by a city council member), he also worked as an investigator for the Orange County District Attorney’s Office. As his retirement approached, Clesceri claimed to have an extreme case of acid reflux, which would help him net a tax-free pension of $58,000 a year, plus cost-of-living increases. Even while retired with that alleged disability, Clesceri pursued a local police chief’s job, retained his mayorship, and ran a tough re-election campaign. He even had the time to have his brother-in-law, an attorney, send threatening letters to members of the community who commented on the absurdity of his disability pension. As Clesceri explained in a newspaper column, the disability only applied to his job at the D.A.’s office.
The exposure of this abuse ultimately galvanized the public to boot Clesceri off the Fullerton City Council. The problem is most of these situations never get aired publicly.
Other state employees go to great lengths to find the highest-paying job they can in their final year, thereby locking in their permanent retirement benefit based on a salary they made only once. Bee reporters Hill and Korber told the story of Sharon McGraw, a Sacramento-area accounting manager for the state who moved from her suburban home to a tiny apartment in the San Francisco Bay area so she could temporarily take a high-paying job that would increase her pension benefit by $18,000 a year.
Then there’s the bizarre story of Armando Ruiz, a part-time trustee for the Coast Community College District in Southern California. Ruiz also worked full time as an administrator with the South Orange County Community College District. Ruiz wanted to run for re-election as a trustee and use the “incumbent” label on his ballot, but he also wanted to take advantage of a strange California law that dramatically increases an employee’s pension payout if he retires from two jobs on the same day.
“Ruiz ‘retired,’ effective Oct. 31, as a part-time trustee of the Coast district and as a full-time counselor at Irvine Valley College,” Register columnist Frank Mickadeit reported in 2008. “Even though the trustee gig pays just a $9,800 annual stipend, he was able to calculate his state pension as if he had been paid $106K a year for that ‘job’ plus the $106K a year he got for his real job at Irvine. So, based on a $212K salary he never really made, his pension will work out to about $108K a year for life. Otherwise, the pension would have been $59K—$54K for the real job; $5K for the trustee job. Even though Ruiz was officially retired from the Coast district board, he was still listed on Tuesday’s ballot as an incumbent. A cynical person might say that by waiting to ‘retire,’ just days before the election Ruiz knew it would be too late to change the ballots. And incumbents rarely lose such elections.”
The only good news from that scam: After Ruiz’s maneuver was exposed, the state legislature repealed the incomprehensible pension-spiking rule. But the pending pension crisis, with its thousands of abuses undetected by outside scrutiny, continues to loom over our heads.
The Public Sector Menace
In the summer of 2009, various Democratic candidates for California attorney general came before the Police Officers Research Association of California, a union lobbying organization, to ask for its support. According to one attendee (who asked to remain anonymous, given the obvious repercussions for his career), the organization had two basic questions for Assemblymen Ted Lieu (D-Torrance), Alberto Torrico (D-Newark), and Pedro Nava (D–Santa Barbara), each a candidate in the 2010 attorney general race. The first: Did they support the death penalty for cop killers? The second: Would each candidate, as attorney general, make sure the official summary of a state pension reform proposal would be slanted to destroy its chances of passing?
In California crafting ballot language is one of the most important jobs of the state’s attorney general. The police union officials reminded the candidates that 90 percent of voters read nothing more than the ballot title and summary, and they emphasized the importance of putting the kibosh to the measure. My source was appalled, not just by the directness of the question but by the eagerness with which the candidates, especially Torrico, answered it. They all promised they would help kill the measure.
Public-sector unions have a growing influence in state and federal governments, and in the overall labor movement, but they are a relatively recent phenomenon. Civil service unionization in the federal government wasn’t allowed until President John F. Kennedy issued an executive order legalizing it in 1962. In California it didn’t become legal until 1968. Yet now California may be spearheading the re-unionization of the country.
In a 2003 study of union membership rates, the sociologists Ruth Milkman and Daisy Rooks explained that “California stands out as an exception to the general pattern of the past decade. Against all odds, union density has inched upward in the nation’s most populous state, from 16.1 percent of all wage and salary workers in 1998 to 17.8 percent in 2002.”
The study was produced by the University of California Institute for Labor and Employment, itself a testament to union power in the Golden State. Critics call the institute Union University, arguing that the state is funding a left-wing advocacy and research organization that advances union causes. As the Los Angeles Times explained in a 2004 article about the controversy, “For years these programs received the majority of their funding from the budgets of the universities where they are housed. Then in the 2000–01 budget, former Gov. Gray Davis approved $6 million to create the institute encompassing the two centers and charged with carrying out ‘research, education and service involving the world of work, and the public and private policies that govern it.’ ”
In the 2003 study, Milkman and Rooks found that union growth in California’s public sector has far outpaced such growth in other states, for an obvious reason: “Organized labor has more political influence in California than in most other states.” In more-recent studies, the Institute for Labor and Employment found that for the first time in five decades, U.S. unionization rates actually increased in 2008. The reason: increases in California, mainly in the government sector.
At all levels, state and local government employment grew by 13 percent across the United States from 1994 to 2004. The number of judicial and legal employees increased by 28 percent. The number of public safety workers increased by 21 percent. The number of teachers increased by 22 percent.
Michael Hodges’ invaluable Grandfather Economic Report uses the Bureau of Labor Statistics to chart the growth in state and local government employees since 1946. Their number has increased from 3.3 million then to 19.8 million today—a 492 percent increase as the country’s population increased by 115 percent. Since 1999 the number of state and local government employees has increased by 13 percent, compared to a 9 percent increase in the population.
The United States had 2.3 state and local government employees per 100 citizens in 1946 and has 6.5 state and local government employees per 100 citizens now. In 1947, Hodges writes, 78 percent of the national income went to the private sector, 16 percent to the federal sector, and 6 percent to the state and local government sector. Now 54 percent of the economy is private, 28 percent goes to the feds, and 18 percent goes to state and local governments. The trend lines are ominous.
Bigger government means more government employees. Those employees then become a permanent lobby for continual government growth. The nation may have reached critical mass; the number of government employees at every level may have gotten so high that it is politically impossible to roll back the bureaucracy, rein in the costs, and restore lost freedoms.
People who are supposed to serve the public have become a privileged elite that exploits political power for financial gain and special perks. Because of its political power, this interest group has rigged the game so there are few meaningful checks on its demands. Government employees now receive far higher pay, benefits, and pensions than the vast majority of Americans working in the private sector. Even when they are incompetent or abusive, they can be fired only after a long process and only for the most grievous offenses.
It’s a two-tier system in which the rulers are making steady gains at the expense of the ruled. The predictable results: Higher taxes, eroded public services, unsustainable levels of debt, and massive roadblocks to reforming even the poorest performing agencies and school systems. If this system is left to grow unchecked, we will end up with a pale imitation of the free society envisioned by the Founders.
Steven Greenhut (stevengreenhut@gmail.com), the director of the Pacific Research Institute's Journalism Center, was a columnist for The Orange County Register for 11 years.
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"Public-sector unions have a growing influence in state and federal governments, and in the overall labor movement, but they are a relatively recent phenomenon"
I am glad someone else has posted this topic which I have noted before on this board.
I've asked a few times before why it makes sense that people who work for the government can turn around and unionize and tell elected officials how much they should make and benefits they should get.
Instead of serving us we are serving them.
I also posted about a patient of mine who retired last year from the NJ TPK "Authority" and then shows up in my office recently with a disability form. I asked in honest amazement what he was talking about. He was not disabled and indeed had been working till he voluntarily retired just before. His answer was that a friend told him he could get more money this way than from retirement.
I asked was he claiming disability for his seizure disorder and he said yes. I noted he hadn't had a seizure for many years and it never prevented him from working before.
I came right and told him flatly no I will not sign the form and this is why this country goes broke, this is why everyone hires illegals, or sends jobs overseas. He agreed with me.
The concept that retirement is an entitlement the same as free speech, legal rights has got to go.
Double dipping is rampant.
Everyone knows that civil servant retirees who retire in their 50s go and get second jobs. Some of these second jobs the proverbial double and triple dipping is rampant.
My Federal employee relatives love to speak of being able to retire soon.
Of course on the backs of those of us who work in the private sector.
Yet they are happily for health care for all, and all the rest of the liberal crap. As always as long as they don't suffer for it.
If I hear them speak one more time about "green" this or that.....
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http://reason.com/archives/2010/01/14/lets-take-the-crony-out-of-cro
Reason Magazine
Let's Take the "Crony" Out of "Crony Capitalism"
It's time to choose the free market
John Stossel | January 14, 2010
When Judge Richard Posner, the prolific conservative intellectual, released his book A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression last year, you might have thought the final verdict was in: Capitalism caused the economic downturn and high unemployment.
That this verdict was pronounced by someone like Posner, who is associated with the University of Chicago and the free-market law and economics movement, gave moral support to all the politicians who were intent on exploiting the recession (as they exploit all crises) to increase government control of the economy.
But what exactly is this "capitalism" that is blamed?
The word "capitalism" is used in two contradictory ways. Sometimes it's used to mean the free market, or laissez faire. Other times it's used to mean today's government-guided economy. Logically, "capitalism" can't be both things. Either markets are free or government controls them. We can't have it both ways.
The truth is that we don't have a free market—government regulation and management are pervasive—so it's misleading to say that "capitalism" caused today's problems. The free market is innocent.
But it's fair to say that crony capitalism created the economic mess.
Crony capitalism, by the way, will be the subject of my TV show this week on the Fox Business Network (Thursday at 8 p.m. Eastern; Friday at 10).
What is crony capitalism? It's the economic system in which the marketplace is substantially shaped by a cozy relationship among government, big business, and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in the free market, including import restrictions, bailouts, subsidies, and loan guarantees.
Crony capitalism is as old as the republic itself. Congress' first act in 1789—on July 4, no less!—was a tariff on foreign goods to protect influential domestic business interests.
We don't have to look far to see how crony-dominated American capitalism is today. The politically connected tire and steel industries get government relief from a "surge" of imports from China. (Who cares if American consumers want to pay less for Chinese steel and tires?) Crony capitalism, better know as government bailouts, saved General Motors and Chrysler from extinction, with Barack Obama cronies the United Auto Workers getting preferential treatment over other creditors and generous stock holdings (especially outrageous considering that the union helped bankrupt the companies in the first place with fat pensions and wasteful work rules). Banks and insurance companies (like AIG) are bailed out because they are deemed too big to fail. Favored farmers get crop subsidies.
If free-market capitalism is a private profit-and-loss system, crony capitalism is a private-profit and public-loss system. Companies keep their profits when they succeed but use government to stick the taxpayer with the losses when they fail. Nice work if you can get it.
The role that regulation plays in crony capitalism is unappreciated. Critics of business assume that regulation is how government tames corporations. But historically, regulation has been how one set of businesses (usually bigger, well-connected ones) gains advantages over others. Timothy Carney's book about this, The Big Ripoff: How Big Business and Big Government Steal Your Money, explains why Phillip Morris joined the "war on tobacco," General Motors pushed for clean-air legislation, and Archer Daniels Midland likes ethanol subsidies.
As economist Bruce Yandle writes, "(I)ndustry support of regulation is not rare at all; indeed, it is the norm."
If you wonder why, ask yourself: Which are more likely to be hampered by vigorous regulatory standards: entrenched corporations with their overstaffed legal and accounting departments or small startups trying to get off the ground? Regulation can kill competition—and incumbents like it that way.
When will Michael Moore figure this out? His last movie attacked what he calls capitalism, but his own work shows that it's not the free market that causes the ills he abhors. Had he called the movie Crony Capitalism: A Love Story, he would have been on firmer ground.
It's time we acknowledged the difference between the free market, which is based on freedom and competition, and crony capitalism, which is based on privilege. Adam Smith knew the difference—and chose the free-market.
What's taking us so long?
John Stossel is host of Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. To find out more about John Stossel, visit his site at johnstossel.com.
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I prefer the terms "liberal fascism", "corporate fascism", or "progressivism".
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http://reason.com/blog/2010/01/26/cbo-gently-reminds-america-of
Reason Magazine
CBO Gently Reminds America of Coming Budgepocalypse
Peter Suderman | January 26, 2010
"Daunting." "Unsustainable." These are the sort of adjectives the Congressional Budget Office—about as calm and reserved an office as exists in Washington—uses when it reports on the country's fiscal future. Given the agency's penchant for cautious understatement, you might translate the gist of its big-deal budget reports something like this: "Budget-wise, we're probably screwed."
But at least we'll have lengthy CBO reports to burn for warmth (and roast marshmallows over!) after the budgepocalypse. Today, the CBO released yet another detail-packed mega-report on the country's budgetary outlook, covering the period from 2010-2020. And as the cowboys say in cartoon Westerns, it ain't purdy. "Under current law," the report reads, "the federal fiscal outlook beyond this year is daunting."
Key findings include:
Projected average yearly deficits of about $600 billion for each of the next 10 years. That's around $6 trillion total, $1.35 trillion of which we'll see just this year.
Significantly higher debt, fueled by those high deficits. By the end of 2020, public debt is expected to equal 67 percent of GDP—up from 53 percent in 2009.
As a result, the report says, "interest payments on the debt are poised to skyrocket." According to CBO projections, annual spending on interest payments will triple.
Complicating the picture is that CBO's projections, as a rule, have to assume that current law will stay in effect, and unchanged, for the duration of the projection period. That means that, for example, the projections include revenue generated from tax cuts that supposedly expire but are widely expected to be renewed. The report also assumes that appropriations spending will rise in line with inflation rather than with GDP. The result, as the report states explicitly, is that "baseline projections understate the budget deficits that would arise under many observers' understanding of current policy." Or, to put it another way, if everything goes the way everyone expects everything to go, things will actually be even worse than we're predicting.
Combine this with the office's summer 2009 report on the long term budget outlook, in which CBO director Douglas Elmendorf called the country's long-term budgetary path "unsustainable," and you get a fairly unsettling picture of a country hurtling towards, if not actual disaster, then some serious fiscal pain. As the summer report noted, the options for righting the course are limited: raise taxes or cut spending, and soon. I know which one I think is more likely, given the current state of affairs, but neither's exactly an easy sell. And knowing how willing politicians typically are to do either, I'd say that's a daunting outlook, indeed.
Official summary of today's report here. Read my long feature on the CBO's history here.
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Who here thinks this is Cloward-Piven, and who thinks it's just incompetence?
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Most far leftists I meet come in two flavors. Some think the government is so freaking omnipotent that, gosh darn it, all they have to do write sensitive enough policies and write enough checks to fix all the problems that ail us. Let's call them the Useful Idiots. The second type are True Believers who want the evil United States to implode and so seek to impose every irresponsible burden they can in the hope of hastening that implosion. I think both types are represented in BHO's coterie.
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Where do you think Barry Hussein Omptysuita falls between those two groups?
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Think he quacks like the former and waddles like the latter.
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We need a president ready to go Texas chainsaw on the budget, hell with the bureaucrats and trim things back down. DHS needs to be parted back out-it obviously isn't working in its current state so the "coordinators" are obviously a waste of money. Trim BATFE the continually seem to be an instrument used to violate the 2nd amendment, and seem to have an institutionalized contempt for the citizenry. Americorps seems to be another one of those programs that has done little, they did not show up for Katrina like they should have given their "young pool of labor" mandate that was publicized a few years back. What can be trimmed from these Infrastructure renewal and Bailout programs that are giving out money, but not using any due diligence for getting good value?
I think there are several older programs that could be cut too, but I would consider those measures kind of draconian given how many americans are dependant on them. I think that a lot of the cuts could be made on the Citizen vs. Non-Citizen divide tho'
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Abolish the Dept of Education and leave education to the States.
Abolish the Dept of Agriculture
Abolish the NEA (Nat. Endowment of the Arts)
Gradually raise the age for Soc. Security. When the age of 65 was set the average lifespan was 68. Now its somewhere around 80.
Super important: Abolish the Orwellian fiction/fraud called "baseline budgeting" and require govt to use the same accounting principles as everyone else. Under BB reductions in the rate of increase are called "cuts" even though more money than the year before is being spent. Until we do this, I fear we will always lose the current game of Three Card Monte.
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Only Bonafide Citizens can get welfare benefits, and then only for long enough to regain their footing. This living in FEMA trailer crap is just that, and a real american would not remain on welfare any longer than he had to. (I think a real free person would rather starve to death than to take a hand out, but one must make allowances.)
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Laffer: Obama's 'Train Wreck' Ahead
by Donald Lambro (more by this author)
Posted 01/27/2010 ET
Arthur Laffer, creator of the Laffer Curve that showed how low tax rates boost economic growth, is warning anyone who will listen that the economy is headed for a “train wreck” in 2011 that will make the current recession look tame by comparison.
The famed economist, whose supply-side, tax-cutting policies enacted by President Reagan in 1981 put the economy on a record-breaking, 25-year economic trajectory of growth and prosperity, is telling Americans not to be lulled by sporadic signs of growth this year, because the economy is headed for a sharper decline next year when tax rates are expected to jump sharply, sending the economy into a new tailspin.
“It will make the decline in U.S. output from 2010 to 2011 worse than the decline in output in 2008 and 2009 which will catastrophic,” Laffer said in an interview with HUMAN EVENTS.
In a wide-ranging discussion about where the economy is headed, and the fiscal, tax and monetary reasons why, Laffer gives a bleak forecast of where President Obama and his administration are taking the country in the next three years -- which he predicts will end with Obama’s defeat in 2012.
“Obama is a fine, very impressive person. He really is. Unfortunately, everything that he is doing in economics is exactly wrong. He is a crappy president,” Laffer said.
“Whenever a country is in the throes of spending too much and raising taxes, it’s a fiscal catastrophe in the making and this is what is happening now,” he said.
The economy in the short-term this year “will continue to improve, growing by more than 4 percent. By the end of 2010 the unemployment rate could fall to as low as 7 percent and the Obama administration will be busting with pride and conceit,” Laffer told his clients in his latest economic outlook for the year ahead.
But don’t be fooled into thinking the economy is actually coming out of one of the worst recessions of the post-war era, because this year will be a false recovery, he adds. The downturn will begin again when “2011 will enter center stage, followed quickly by an economic catastrophe. All the factors that will make 2010 (and have already made the last half of 2009) look so good will reverse direction, and 2011 will be a train wreck,” he said in his forecast.
The big reason, among several, is Obama’s plan to allow the Bush tax cuts to expire at the end of this year, and other tax increases the Obama administration intends to enact this year and next, and how businesses will respond to these tax changes.
“In anticipation of known tax increases the economy will shift income and output from 2011 -- the higher tax year -- into 2010 -- the lower tax year. As a result of this income shift, 2010 will look a lot better than it should, and 2011 will be a train wreck,” he predicts.
“GDP growth in 2010 will be some 3 to 4 percent higher than it otherwise should be, thus green shoots,” he said. “The transfer of income from 2011 into 2010 will not only make 2010 [economic growth] higher than it otherwise would be, it will also make 2011 [economic growth] 3 and 4 percent lower than it otherwise should be because people have shifted income out of 2011 into 2010.”
“The effect of the shift in income on GDP growth in 2010, however, is going to be fairly substantial, but when the U.S. economy comes to 2011, the train’s going to come off the tracks.”
But the tax picture also will grow darker this year as the country heads into the midterm elections, Laffer said. “In 2010 the U.S. will have a payroll tax rate increase, an estate tax increase and income tax increases. There’s also a tax increase coming in 2010 on carried interest. This rate will rise from its current level of 15 percent to 35 percent, and then it will rise again in 2011.”
Many economists are predicting modest growth rates this year, but high unemployment, too, which the Federal Reserve Board’s economists are projecting will be in the mid-to-high 9 percent range into the fourth quarter. Others say it could go higher. The national unemployment rate is at 10 percent, but if you count workers who have given up looking for work and those who are in temp jobs, the real jobless rate is over 17 percent. Last week, the Labor Department said that 43 states saw their unemployment rates rise in December, especially in key Democratic strongholds such as Ohio, Michigan, Pennsylvania and California.
“We are presently in a dangerously risky economic environment, more risky than any in memory and that includes the 1970s,” said Stanford economist John Cogan, a former Reagan administration fiscal adviser.
“The primary sources of that risk come from uncertainty about U.S. government economic policy. In the area of taxation, personal income taxes, especially those on savings and capital formation, are set to rise substantially in a year,” Cogan told me. “How high tax rates will rise and what activities will be hit hardest creates a sizeable risk this year for investors and businesses.”
Cogan is especially worried about the damage that will come from the administration’s “unprecedented peacetime deficits. Because we are in uncharted territory, there is considerable uncertainty about how bad the consequences of the run-up in debt will be. But we do know that they won’t be good.”
The mountain of debt that Obama is piling up is breathtaking and Laffer says it will put unprecedented burdens on the economy that will only get worse under his proposed tax and spending policies. Federal, state and local government spending has climbed to 38 percent of GDP, with the federal government’s spending binge accounting for 27 percent of GDP, he said.
Earlier this month, Laffer presented his economic forecasts to several dozen conservative House members at a private policy briefing retreat held in Charlottesville, Va., sponsored by the Heritage Foundation. Laffer’s presentation was said to be the high point of the retreat.
The reason: Laffer doesn’t mince words and placed economic growth options in front of the lawmakers in blunt and dramatic terms that few if any economists have the courage to tackle.
For example, he remains convinced that Congress should never have spent the bailout money it has dished out so far, which he puts “at about $3 trillion. “We should have done nothing. I was pretty much alone in that position near the end of 2008,” he told me.
“If you total what the government takes in the income tax, corporate tax, Social Security taxes, capital gains taxes, all of that adds up to $2.2 trillion in tax receipts and they spent $3.5 trillion,” he said.
Instead of the massive bailouts, stimulus and other giveaway programs, Laffer says, “I would have had a federal tax holiday. No taxes of any sort for a year and nine months which comes out to $3.5 trillion.
“Can you imagine what would have happened to the economy. We’d have an unemployment rate of three percent and the economy would be growing like mad and we’d be way out of this problem,” he said.
After one year in office, Obama’s $800 billion spending stimulus plan has provided little if any stimulus to the economy and produce few if any permanent new jobs. The administration promised that the unemployment rate would be down to about 7 percent by now, but in fact the jobless number has climbed higher as Obama’s job approval numbers have fallen sharply and an increasing number of Democratic lawmakers are in trouble or have decided not to seek re-election.
Obama’s answer is another spending “stimulus” bill of perhaps $200 billion or more, new, Draconian regulations and tax hikes on the nation’s troubled financial system, and moving ahead with costly health care plan, job-killing climate change bills and other legislation that will drive up the government’s massive debt.
“All in all, the risk facing our economy from these policy uncertainties is severe,” Cogan told me this week. “This uncertainty will certainly retard the economy’s recovery this year and, depending on what policy actions are taken, it could profoundly damage the economy in 2011 and subsequent years.”
Mr. Lambro is a nationally syndicated columnist and chief political correspondent for the Washington Times.
http://www.humanevents.com/article.php?id=35341
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I remember how the Reagan rate cuts were phased in over three year. Laffer predicted huge growth kicking in as the final lowest rate kicked in. Monetarist Milt Friedman, reading his monetary tea leaves predicted quite the contrary. Laffer was proven right.
I think his analysis is dead on here unless BO dramatically reverses course.
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Invest in metals.
Guns, ammo and canned food.
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In this issue:
The Statistical Recovery has Arrived
This Time Is Different
A Crisis of Confidence
Greeks Bearing Gifts
Biotech, Conversations and Babies
"Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that 'this time is different.' That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy."
- This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)
When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. "The subprime problem will be contained," said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There's just so much to talk about.
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The Statistical Recovery Has Arrived
Before we get into the main discussion point, let me briefly comment on today's GDP numbers, which came in at an amazingly strong 5.7% growth rate. While that is stronger than I thought it would be (I said 4-5%), there are reasons to be cautious before we sound the "all clear" bell.
First, over 60% (3.7%) of the growth came from inventory rebuilding, as opposed to just 0.7% in the third quarter. If you examine the numbers, you find that inventories had dropped below sales, so a buildup was needed. Increasing inventories add to GDP, while, counterintuitively, sales from inventory decrease GDP. Businesses are just adjusting to the New Normal level of sales. I expect further inventory build-up in the next two quarters, although not at this level, and then we level off the latter half of the year.
While rebuilding inventories is a very good thing, that growth will only continue if sales grow. Otherwise inventories will find the level of the New Normal and stop growing. And if you look at consumer spending in the data, you find that it actually declined in the 4th quarter, both annually and from the previous quarter. "Domestic demand" declined from 2.3% in the third quarter to only 1.7% in the fourth quarter. Part of that is clearly the absence of "Cash for Clunkers," but even so that is not a sign of economic strength.
Second, as my friend David Rosenberg pointed out, imports fell over the 4th quarter. Usually in a heavy inventory-rebuilding cycle, imports rise because a portion of the materials businesses need to build their own products comes from foreign sources. Thus the drop in imports is most unusual. Falling imports, which is a sign of economic retrenching, also increases the statistical GDP number.
Third, I have seen no analysis (yet) on the impact of the stimulus spending, but it was 90% of the growth in the third quarter, or a little less than 2%.
Fourth (and quoting David): "... if you believe the GDP data - remember, there are more revisions to come - then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising - just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labor input has never before, scanning over 50 years of data, coincided with a GDP headline this good.
"Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed's National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won't do."
Finally, remember that third-quarter GDP was revised downward by over 30%, from 3.5% to just 2.2% only 60 days later. (There is the first release, to be followed by revisions over the next two months.) The first release is based on a lot of estimates, otherwise known as guesswork. The fourth-quarter number is likely to be revised down as well.
Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.
So should we, as Paul Krugman suggests, spend another trillion in stimulus if it helps growth? No, because, as I have written for a very long time, and will focus on in future weeks, increased deficits and rising debt-to-GDP is a long-term losing proposition. It simply puts off what will be a reckoning that will be even worse, with yet higher debt levels. You cannot borrow your way out of a debt crisis.
This Time Is Different
While I was in Europe, and flying back, I had the great pleasure of reading This Time is Different, by Carmen M. Reinhart and Kenneth Rogoff, on my new Kindle, courtesy of Fred Fern.
I am going to be writing about and quoting from this book for several weeks. It is a very important work, as it gives us the first really comprehensive analysis of financial crises. I highlighted more pages than in any book in recent memory (easy to do on the Kindle, and even easier to find the highlights). Rather than offering up theories on how to deal with the current financial crisis, the authors show us what happened in over 250 historical crises in 66 countries. And they offer some very clear ideas on how this current crisis might play out. Sadly, the lesson is not a happy one. There are no good endings once you start down a deleveraging path. As I have been writing for several years, we now are faced with choosing from among several bad choices, some being worse than others. This Time is Different offers up some ideas as to which are the worst choices.
If you are a serious student of economics, you should read this book. If you want to get a sense of the problems we face, the authors conveniently summarize the situation in chapters 13-16, purposefully allowing people to get the main points without drilling into the mountain of details they provide. Get the book at a 45% discount at Amazon.com.
Buy it with the excellent book I am now reading, Wall Street Revalued, and get free shipping.
A Crisis of Confidence
Let's lead off with a few quotes from This Time is Different, and then I'll add some comments. Today I'll focus on the theme of confidence, which runs throughout the entire book.
"But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."
"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government's policies, a financial institution's ability to make outsized profits, or a country's standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget."
And this is key. Read it twice (at least!):
"Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.
"Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public's expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to "multiple equilibria" in which the debt level might be sustained - or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite."
How confident was the world in October of 2006? I was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. I was on Larry Kudlow's show with Nouriel Roubini, and Larry and John Rutledge were giving us a hard time about our so-called "doom and gloom." If there is going to be a recession you should get out of the stock market, was my call. I was a tad early, as the market proceeded to go up another 20% over the next 8 months.
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As Reinhart and Rogoff wrote: "Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits."
Bang is the right word. It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone "knew" that cooler heads would prevail.
We can look back now and see where we made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.
Now, there are bullish voices telling us that things are headed back to normal. Mainstream forecasts for GDP growth this year are quite robust, north of 4% for the year, based on evidence from past recoveries. However, the underlying fundamentals of a banking crisis are far different from those of a typical business-cycle recession, as Reinhart and Rogoff's work so clearly reveals. It typically takes years to work off excess leverage in a banking crisis, with unemployment often rising for 4 years running. We will look at the evidence in coming weeks.
The point is that complacency almost always ends suddenly. You just don't slide gradually into a crisis, over years. It happens! All of a sudden there is a trigger event, and it is August of 2008. And the evidence in the book is that things go along fine until there is that crisis of confidence. There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say "This is it." It is different in different crises.
One point I found fascinating, and we'll explore it in later weeks. First, when it comes to the various types of crises with the authors identify, there is very little difference between developed and emerging-market countries, especially as to the fallout. It seems that the developed world has no corner on special wisdom that would allow crises to be avoided, or allow them to be recovered from more quickly. In fact, because of their overconfidence - because they actually feel they have superior systems - developed countries can dig deeper holes for themselves than emerging markets.
Oh, and the Fed should have seen this crisis coming. The authors point to some very clear precursors to debt crises. This bears further review, and we will do so in coming weeks.
Greeks Bearing Gifts
On Monday, the government of Greece offered a "gift" to the markets of 8 billion euros worth of bonds at a rather high 6.25%. The demand was for 25 billion euros, so this offering was rather robust. Today, those same Greek bonds closed on 6.5%, more than offsetting the first year's coupon. Greek bond yields are up more than 150 basis points in the last month!
Why such a one-week turnaround? Ambrose Evans Pritchard offers up this thought: "Marc Ostwald, from Monument Securities, said the botched bond issue of €8bn (£6.9bn) of Greek debt earlier this week has made matters worse. Many of the investors were 'hot money' funds that bought on rumors that China was emerging as a buyer, offering them a chance for quick profit. When the China story was denied by Beijing and Athens, these funds rushed for the exit."
Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries.
When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That's a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.
Greece benefitted from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week's market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let's assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.
That would guarantee a very deep recession. Just a 10% suggested pay cut has Greek government unions already planning strikes. Nevertheless, the government of Greece recognizes that it simply cannot continue to run such huge deficits. They have developed a plan that aims to narrow the shortfall from 12.7% of output, more than four times the EU limit, to 8.7% this year. That reduction will be achieved even though the economy will contract 0.3%, the plan says. The deficit will shrink to 5.6% next year and 2.8% in 2012.
The market is saying they don't believe that will happen. For one thing, if the Greek economy goes into recession, the amount collected in taxes will fall, meaning the shortfall will increase. Second, it is not clear that Greek voters will approve such a plan at their next elections. Riots and demonstrations are a popular pastime.
Both French and German ministers made it clear that there would be no bailout of Greece. But here's the problem. If they ignore the noncompliance, there is no meaning to the treaty. The euro will be called into question. And the other countries with serious fiscal problems will ask why they should cut back if Greece does not. If Greece does not choose deep cutbacks and recession, the markets will keep demanding hikes in interest rates, and eventually Greece will have problems meeting just its interest payments.
Can this go on for some time? The analysis of debt crises in history says yes, but there comes a time when confidence breaks. My friends from GaveKal had this thought:
"What is the next step? Having lived through the Mexican, Thai, Korean and Argentine crises, it is hard not to distinguish a common pattern. In our view, this means that investors need to confront the fact that we are at an important crossroads for Greece, best symbolized by a simple question: 'If you were a Greek saver with all of your income in a Greek bank, given what is happening to the debt of your sovereign, would you feel comfortable keeping all of your life savings in your savings institution? Or would you start thinking about opening an account in a foreign bank and/or redeeming your currency in cash?' The answer to this question will likely direct the next phase of the crisis. If we start to see bank runs in Greece, then investors will have to accept that the crisis has run out of control and that we are facing a far more bearish investment environment. However, if the Greek population does not panic and does not liquefy/transfer its savings, then European policy-makers may still have a chance to find a political solution to this growing problem.
"What could a political solution be? The answer here is simple: there is none. So if Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro. But for us, an important question is whether it could also lead to a serious political backlash. Indeed, at this stage, elected politicians are likely pondering how much appetite there is amongst their electorate for yet another bailout, and for further expansions in government debt levels. The fact that the intervention would occur on behalf of a foreign country probably makes it all the more unpalatable (it's one thing to save your domestic banking system ... but why save Greece?)."
If Greece is bailed out, Portugal and Ireland will ask "Why not us?" And Spain? Italy? If Greece is allowed to flaunt the rules, what does that say about the future of the euro? Will Germany and France insist on compliance or be willing to kick Greece out?
A few months ago, the markets assumed that not only Greece but Portugal, Italy, Spain, and Ireland would have a few years to get their houses in order. This week, the markets shortened their time horizon for Greece.
Even so, we get this quote, which may end up ranking alongside Fisher's quote in 1929, that the stock market was at a permanently high plateau, or Bernanke's quote that "The subprime debt problem will be contained."
"There is no bailout problem," Monetary Affairs Commissioner Joaquin Almunia said today at the World Economic Forum's annual meeting in Davos, Switzerland. "Greece will not default. In the euro area, default does not exist."
The evidence in This Time is Different is that default risk does in fact exist. You cannot keep borrowing past your income, whether as a family or a government, and not eventually go bankrupt.
Are we at an inflection point? Too early to say. It all depends on the willingness of the Greek people to endure what will not be a fun next few years, for the privilege of staying in the Eurozone. And on whether the bond market believes that this time is different and the Greeks will actually get their fiscal house in order.
Oh by the way, did I mention that the history of Greece is not exactly pristine in terms of default? In fact, they have been in default in one way or another for 105 out of the past 200 years. Aristotle, can you spare a dime?
And one last thought. The US is running massive deficits. If we do not get them under control, we will one day, and perhaps quite soon, face our own "Greek moment." Look at the graph below, and weep.
Obama offering to freeze spending by 17% in US discretionary-spending programs, after he ran them up over 20% in just one year, is laughable. Greece is an object lesson for the world, as Japan soon will be. You cannot cure too much debt with more debt.
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Why the Slow Recovery?
Posted by David Boaz
“Wealthy Face Higher Taxes.” That’s the headline that greeted two million American businesspeople Tuesday when they opened their Wall Street Journals. Inside, another banner head: “Big Firms Would Face Deeper Tax Bite.” Turn to the New York Times: “A Red-Ink Decade/Obama Budget Sees Years of Deficits.” The Financial Times: “Obama to target overseas tax breaks.” Investor’s Business Daily: “Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.” And the Washington Post (not that many productive people get that on their doorstep): “Obama budget would spend billions more.”
And President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back? As the Economic Policy Institute illustrates, this is the slowest recovery of any postwar recession.
(http://www.epi.org/page/-/img/20100127_snapshot_580.jpg)
Let’s hope the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.”
Taxes, regulation, and uncertainty — and Obama asks why businesses aren’t lending, investing, and hiring.
http://www.cato-at-liberty.org/2010/02/03/why-the-slow-recovery/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Cato-at-liberty+%28Cato+at+Liberty%29
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Obama is looking pretty spiteful, considering his remarks about the supreme court. Is he now taxing big business extra in hopes of ruining their "campaign budgets"? :evil:
(saying in jest)
I just finished this months Wired magazine. It was talking about a new, second industrial revolution where small firms operating out of a garage with a 3d printer are able to mock up a product, and buy production time from a flexible manufaturing facility. Manufacturing will become more like machine shops which do "job lots" of a few hundred or thousand items. Thes niche developers would be able to compete with the big businesses because the internet leverages their skills and allows "top players" to network for a single project rather than having to talk between cubilcles in a larger firm, which usually has top talent in only a few positions.
Ezxamples would be the Aliph, Segway, and a couple of ninche start ups that haven't got their products out yet.
Maybe this would be the type of thing to pull us out of our doldrums- Niche Manufacture?
I can't find the article on the Wired website the title is "Atoms Are The New Bits", if it should show up. Here are 2 links from the article: local-motors.com/ (http://local-motors.com/) a car designed and built on the crowdsourcing concept. It is a diesel powered sports car using off the shelf parts, and custom built body panels. 500-1000 units. Then you have:http://brickarms.com/ (http://brickarms.com/) that builds litle guns for lego figurines. They look like real guns like AK's, M16's and Lewis MG's.
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A Perfect Storm of Ignorance
by Jeffrey Friedman
Jeffrey Friedman is the editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.
You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low-equity mortgages; and the role of the Community Reinvestment Act in mandating loans to "subprime" borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don't know the half of it. And neither does the government.
A full understanding of the crisis has to explain not just the housing and subprime bubbles, but why, when they popped, it should have had such disastrous worldwide effects on the financial system. The problem was that commercial banks had made a huge overinvestment in mortgage-backed bonds sold by investment banks such as Lehman Brothers.
Commercial banks are familiar to everyone with a checking or savings account. They accept our deposits, against which they issue commercial loans and mortgages. In 1933, the United States created the FDIC to insure commercial banks' depositors. The aim was to discourage bank runs by depositors who worried that if their bank had made too many risky loans, their accounts, too, might be at risk.
The question of whether deposit insurance was necessary is worth asking, and I will ask it later on. But for now, the key fact is that once deposit insurance took effect, the FDIC feared that it had created what economists call a "moral hazard": bankers, now insulated from bank runs, might be encouraged to make riskier loans than before. The moral-hazard theory took hold not only in the United States but in all of the countries in which deposit insurance was instituted. And both here and abroad, the regulators' solution to this (real or imagined) problem was to institute bank-capital regulations. According to an array of scholars from around the world — Viral Acharya, Juliusz Jablecki, Wladimir Kraus, Mateusz Machaj, and Matthew Richardson — these regulations helped turn an American housing crisis into the world's worst recession in 70 years.
WHAT REALLY WENT WRONG
The moral-hazard theory held that since the FDIC would now pick up the pieces if anything went wrong, bankers left to their own devices would make clearly risky loans and investments. The regulators' solution, across the entire developed world, was to require banks to hold a minimum capital cushion against a commercial bank's assets (loans and investments), but the precise level of the capital reserve, and other details, varied from country to country.
In 1988, financial regulators from the G-10 agreed on the Basel (I) Accords. Basel I was an attempt to standardize the world's bank-capital regulations, and it succeeded, spreading far beyond the G-10 countries. It differentiated among the risks presented by different types of assets. For instance, a commercial bank did not have to devote any capital to its holdings of government bonds, cash, or gold — the safest assets, in the regulators' judgment. But it had to allot 4 percent capital to each mortgage that it issued, and 8 percent to commercial loans and corporate bonds.
Each country implemented Basel I on its own schedule and with its own quirks. The United States implemented it in 1991, with several different capital cushions; a 10 percent cushion was required for "well-capitalized" commercial banks, a designation that carries privileges that most banks want. Ten years later, however, came what proved in retrospect to be the pivotal event. The FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision issued an amendment to Basel I, the Recourse Rule, that extended the accord's risk differentiations to asset-backed securities (ABS): bonds backed by credit card debt, or car loans — or mortgages — required a mere 2 percent capital cushion, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Thus, where a well-capitalized commercial bank needed to devote $10 of capital to $100 worth of commercial loans or corporate bonds, or $5 to $100 worth of mortgages, it needed to spend only $2 of capital on a mortgage-backed security (MBS) worth $100. A bank interested in reducing its capital cushion — also known as "leveraging up" — would gain a 60 percent benefit from trading its mortgages for MBSs and an 80 percent benefit for trading its commercial loans and corporate securities for MBSs.
Astute readers will smell a connection between the Recourse Rule and the financial crisis. By 2008 approximately 81 percent of all the rated MBSs held by American commercial banks were rated AAA, and 93 percent of all the MBSs that the banks held were either triple-A rated or were issued by a GSE, thus complying with the Recourse Rule. (Figures for the proportion of double-A bonds are not yet available.) According to the scholars I mentioned earlier, the lesson is clear: the commercial banks loaded up on MBSs because of the extremely favorable treatment that they received under the Recourse Rule, as long as they were issued by a GSE or were rated AA or AAA.
When subprime mortgages began to default in the summer of 2007, however, those high ratings were cast into doubt. A year later, the doubts turned into a panic. Federally mandated mark-to-market accounting — the requirement that assets be valued at the price for which they could be sold right now — translated temporary market sentiment into actual numbers on a bank's balance sheet, so when the market for MBSs dried up, Lehman Brothers went bankrupt — on paper. Mark-to-market accounting applied to commercial banks too. And it was the commercial banks' worry about their own and their counterparties' solvency, due to their MBS holdings, that caused the lending freeze and, thus, the Great Recession.
What about the rest of the world? The Recourse Rule did not apply to countries other than the United States, but Basel I included provisions for even more profitable forms of "capital arbitrage" through off-balance-sheet entities such as structured investment vehicles, which were heavily used in Europe. Then, in 2006, Basel II began to be implemented outside the United States. It took the Recourse Rule's approach, encouraging foreign banks to stock up on GSE-issued or highly rated MBSs.
THE PERFECT STORM?
Given the large number of contributory factors — the Fed's low interest rates, the Community Reinvestment Act, Fannie and Freddie's actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of "no-recourse" laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn's point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks' "Tier 2" capital, which is capped in relation to "Tier 1" capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive. It is meant
only to convey the welter of regulations that have grown up across different parts of the economy in such immense profusion that nobody can possibly predict how they will interact with each other. We are, all of us, ignorant of the vast bulk of what the government is doing for us, and what those actions might be doing to us. That is the best explanation for how this perfect regulatory storm happened, and for why it might well happen again.
By steering banks' leverage into mortgage-backed securities, Basel I, the Recourse Rule, and Basel II encouraged banks to overinvest in housing at a time when an unprecedented nationwide housing bubble was getting underway, due in part to the Recourse Rule itself — which took effect on January 1, 2002: not coincidentally, just at the start of the housing boom. The Rule created a huge artificial demand for mortgage-backed bonds, each of which required thousands of mortgages as collateral. Commercial banks duly met this demand by lowering their lending standards. When many of the same banks traded their mortgages for mortgage-backed bonds to gain "capital relief," they thought they were offloading the riskiest mortgages by buying only triple-A-rated slices of the resulting mortgage pools. The bankers appear to have been ignorant of yet another obscure regulation: a 1975 amendment to the SEC's Net Capital Rule, which turned the three existing rating companies — S&P, Moody's, and Fitch — into a legally protected oligopoly. The bankers' ignorance is suggested by e-mails unearthed during the recent trial of Ralph Cioffi and Matthew Tannin, who ran the two Bear Stearns hedge funds that invested heavily in highly rated subprime mortgage-backed bonds. The e-mails show that Tannin was a true believer in the soundness of those ratings; he and his partner were exonerated by the jury on the grounds that the two men were as surprised by the catastrophe as everyone else was. Like everyone else, they trusted S&P, Moody's, and Fitch. But as we would expect of corporations shielded from market competition, these three "rating agencies" had gotten sloppy. Moody's did not update its model of the residential mortgage market after 2002, when the boom was barely underway. And Moody's model, like those of its "competitors," determined how large they could make the AA and AAA slices of mortgage-backed securities.
THE REGULATORS' IGNORANCE OF THE REGULATIONS
The regulators seem to have been as ignorant of the implications of the relevant regulations as the bankers were. The SEC trusted the three rating agencies to continue their reliable performance even after its own 1975 ruling protected them from the market competition that had made their ratings reliable. Nearly everyone, from Alan Greenspan and Ben Bernanke on down, seemed to be ignorant of the various regulations that were pumping up house prices and pushing down lending standards. And the FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision, in promulgating one of those regulations, trusted the three rating companies when they decided that these companies' AA and AAA ratings would be the basis of the immense capital relief that the Recourse Rule conferred on investment-bank-issued mortgage-backed securities. Did the four regulatory bodies that issued the Recourse Rule know that the rating agencies on which they were placing such heavy reliance were an SEC-created oligopoly, with all that this implies? If you read the Recourse Rule, you will find that the answer is no. Like the Bank for International Settlements (BIS), which later studied whether to extend this American innovation to the rest of the world in the form of Basel II (which it did, in 2006), the Recourse Rule wrongly says that the rating agencies are subject to "market discipline."
Those who play the blame game can find plenty of targets here: the bankers and the regulators were equally clueless. But should anyone be blamed for not recognizing the implications of regulations that they don't even know exist?
Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register's state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects.
This is already happening. The SEC's response to the crisis has not been to repeal its 1975 regulation, but to promise closer regulation of the rating agencies. And instead of repealing Basel I or Basel II, the BIS is busily working on Basel III, which will even more finely tune capital requirements and, of course, increase capital cushions. Yet despite the barriers to equity capital and loan-loss reserves created by the conjunction of the IRS and the Basel Accords, the aggregate capital cushion of all American banks at the start of 2008 stood at 13 percent — one-third higher than the American minimum, which in turn was one-fifth higher than the Basel minimum. Contrary to the regulators' assumption that bankers need regulators to protect them from their own recklessness, the financial crisis was not caused by too much bank leverage but by the form it took: mortgage-backed securities. And that was the direct result of the fine tuning done by the Recourse Rule and Basel II.
HOW DID WE GET INTO THIS MESS?
The financial crisis was a convulsion in the corpulent body of social democracy. "Social democracy" is the modern mandate that government solve social problems as they arise. Its body is the mass of laws that grow up over time — seemingly in inverse proportion to the ability of its brain to comprehend the causes of the underlying problems.
When voters demand "action," and when legislators and regulators provide it, they are all naturally proceeding according to some theory of the cause of the problem they are trying to solve. If their theories are mistaken, the regulations may produce unintended consequences that, later on, in principle, could be recognized as mistakes and rectified. In practice, however, regulations are rarely repealed. Whatever made a mistaken regulation seem sensible to begin with will probably blind people to its unintended effects later on. Thus future regulators will tend to assume that the problem with which they are grappling is a new "excess of capitalism," not an unintended consequence of an old mistake in the regulation of capitalism.
Take bank-capital regulations. The theory was (and remains) that without them, bankers protected by deposit insurance would make wild, speculative investments. So deposit insurance begat bank-capital regulations. Initially these were blunderbuss rules that required banks to spend the same levels of capital on all their investments and loans, regardless of risk. In 1988 the Basel Accords took a more discriminating approach, distinguishing among different categories of asset according to their riskiness — riskiness as perceived by the regulators. The American regulators decided in 2001 that mortgage-backed bonds were among the least risky assets, so they required much lower levels of capital for these securities than for every alternative investment but Treasury's. And in 2006, Basel II applied that erroneous judgment to the capital regulations governing most of the rest of the world's banks. The whole sequence leading to the financial crisis began, in 1933, with deposit insurance. But was deposit insurance really necessary?
The theory behind deposit insurance was (and remains) that banking is inherently prone to bank runs, which had been common in 19th-century America and had swept the country at the start of the Depression.
But that theory is wrong, according to such economic historians as Kevin Dowd, George Selgin, and Kurt Schuler, who argue that bank panics were almost uniquely American events (there were none in Canada during the Depression — and Canada didn't have deposit insurance until 1967). According to these scholars, bank runs were caused by 19th-century regulations that impeded branch banking and bank "clearinghouses." Thus, deposit insurance, hence capital minima, hence the Basel rules, might all have been a mistake founded on the New Deal legislators' and regulators' ignorance of the fact that panics like the ones that had just gripped America were the unintended effects of previous regulations.
What I am calling social democracy is, in its form, very different from socialism. Under social democracy, laws and regulations are issued piecemeal, as flexible responses to the side effects of progress — social and economic problems — as they arise, one by one. (Thus the official name: progressivism.) The case-by-case approach is supposed to be the height of pragmatism. But in substance, there is a striking similarity between social democracy and the most utopian socialism. Whether through piecemeal regulation or central planning, both systems share the conceit that modern societies are so legible that the causes of their problems yield easily to inspection. Social democracy rests on the premise that when something goes wrong, somebody — whether the voter, the legislator, or the specialist regulator — will know what to do about it. This is less ambitious than the premise that central planners will know what to do about everything all at once, but it is no different in principle.
This premise would be questionable enough even if we started with a blank legal slate. But we don't. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can't possibly know what they all say, let alone how they might interact to create another perfect storm.
This article originally appeared in the January/February 2010 edition of Cato Policy Report.
http://www.cato.org/pubs/policy_report/v32n1/cpr32n1-1.html
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Michigan’s Blueprint for America
Behold the cratering of an economy, courtesy of one governor’s Obamaesque policies,
Detroit — Most Americans are just getting warmed up to the idea of a self-centered chief executive who has divined America’s future as a green economy and is brashly installing the industrial-policy tools to get us there. But we here in Michigan have been living it since Gov. Jennifer Granholm took office in 2003.
On Wednesday night, the flashy second-term governor celebrated the “change” she’s brought to Michigan in her final State of the State address. Read it and weep.
Granholm entered office on the tired heels of a three-term Republican with a wave of good tidings as the state’s first female governor. Beautiful, silver-tongued, and Harvard Law–educated, Granholm was a young pol with little executive seasoning. Supremely self-confident despite her inexperience, Granholm raised income taxes (as the state’s economy literally and figuratively headed south), “invested” billions of stimulus dollars in infrastructure that she predicted would create tens of thousands of jobs, mandated renewable-power standards, and backed them up with millions in government subsidies to transform Michigan from “the Rust Belt to the Green Belt.” In her 2006 State of the State address, she promised that “in five years, you’ll be blown away.”
Four years in and it’s blowing hard, all right. Michigan’s unemployment rate has more than doubled, to over 14 percent. Yes, the state’s per capita income drop from 20th in the nation to 40th has tracked a historic restructuring of the state’s auto industry, but Granholm’s Obamaesque policy prescriptions have been anti-growth while fueling budget deficits to record highs.
In her speech Wednesday, the governor declared herself a visionary. “The contours of the new Michigan economy are . . . taking shape in communities across our state,” she said before a legislature that her partisan tactics have hopelessly divided. The government shut down in 2007 and came to the brink again in 2009.
Granholm dismisses the thought that Michigan might be responsible for its own plight through onerous taxation or stubborn unions. She sees Michigan as a victim — of trade policies and greedy corporations taking jobs to Mexico — and her government as its savior. Government, she emphasized, is the mother of job creation. Not once (as has been her seven-year pattern) did she propose a fundamental fix to Michigan’s antiquated tax laws, union culture, or government programs. Instead, she focused on all the jobs she — me, me, me — had brought to the state:
A new electronics plant (that “my nine overseas jobs missions have brought” because “I was able to close the deal”) in Battle Creek, bought with government incentives.
A solar manufacturing facility in Saginaw, the result of a federal Department of Energy loan.
Homeland Security jobs and defense-contractor pork, funded by Uncle Sugar.
Wind-turbine production by Dowding Machining in Easton Rapids, bought with $7 million in federal stimulus funding.
And so on.
Granholm has presided over the cratering of a state economy. Michigan has led the nation in unemployment for 46 straight months.
She claims that she has “laid the foundation for Michigan’s new economy, steadily building each of six new sectors.” But God help you if you are not on the governor’s select list of favorites; the rest of the job-creating community has had to shoulder a new surcharge on top of the already onerous Michigan Business Tax. Her 2007 tax surcharge, according to the West Michigan Chamber Coalition, hiked taxes for 60 percent of Michigan businesses (most of them small companies), with tax bills doubling for 10 percent of them.
“Our legislators are busy voting on tax credits to a myriad of targeted industries, hoping that one of these ‘new-economy’ firms will save our state from collapse,” protests Bill Jackson of the Grand Rapids Chamber of Commerce. “Isn’t it time government puts an end to picking winners and losers and gives every Michigan job provider a ‘tax credit’?”
Her 2007 budget also increased the income-tax burden by 17 percent. Yet she has resisted reforming the public-employee pensions and health benefits that are bankrupting that state government and that are among the most generous in the country.
To massage her party pals, Granholm will punish even her favored sectors. Biotech is on her list, yet her budget seeks to repeal the state’s immunity from civil lawsuits for drug companies whose products are approved by the FDA. The law, passed in 1996, was specifically intended to give Michigan a comparative advantage and attract high-tech pharmaceutical jobs. This is precisely the kind of economic diversification Granholm claims she supports — yet she throws it overboard as a direct sop to Democrat-friendly trial lawyers.
In the new Michigan, perpetual public stimulus in the form of government-directed industrial policy means non-stop headlines for the chief executive as she picks winners and losers for “new jobs.” Redirecting commerce through the capital, the governor’s power profile grows even as the broader business climate chokes.
Welcome to Obama’s vision, America. Welcome to Governor Granholm’s Michigan.
— Henry Payne is an editorial writer and cartoonist with the Detroit News.
http://article.nationalreview.com/424065/michigans-blueprint-for-america/henry-payne
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This is a good story...Who do you all think is the plastic duck junkie?
[youtube]http://www.youtube.com/watch?v=UXPtdQYOgw8[/youtube]
Boyo
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Glad someone else sees it.
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http://www.youtube.com/watch?v=TRgRz3nSG7o&feature=player_embedded#
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Greece as Political Time Bomb
Friday, February 12, 2010, 11:11 AM
David P. Goldman
Although Greece is an EC member, its finances and political system have the character of a banana republic. EC membership, though, enabled Greece to borrow far more money than any banana republic, such that the country’s debt-to-GDP ratio is about triple that of Argentina just before the latter’s bankruptcy in 2000. And because Greece is an EC member, the size and adumbrations of a bankruptcy would be much, much larger than that of any Latin American country.
Earlier I had assumed that we were watching a negotiation: Brussels would shout “Never!,” the Greeks would throw tantrums, and eventually some compromise would be reached and the situation would be stabilized.
Closer examination of the political situation in Greece makes me less optimistic. Greece may be suffering from an inoperable cancer, in the form of a degree of corruption that make a resolution without bankruptcy very difficult to implement.
Here are some comments by a political observe in Athens who has written to me privately:
Corruption in Greece has been systematically cultivated by all governments and parties. Everyone has relatives living off the public sector in cushy, do-nothing jobs. They get paid through various funding sources that successive governments have created so even though the nominal wage is low the actual take home and all benefits are quite high. Another important dimension to the public participation in corruption is that the rich by and large do not pay any taxes. The only people who pay are those who can’t escape the clutches of the state: pensioners and civil servants i.e., sectors where the salaries can be accounted for. According to the President of the National Bank of Greece, 30% of the budget of the last administration was unaccounted for—yes, just disappeared into the coffers of their families and well-wishers, and I would guess the other 70% was never audited.
The common psychological traits of the corruption are what the ancients called alazoneia (brash presumption of knowledge by the ignorant) and anaischuntia (shamelessness). All public institutions have one purpose: Suck money from the EU (or via loans) and redistribute it through an inverted pyramid of chicanery with the the loaf going to the top, the crumbs to the bottom. Most people in their little niches of decay are “expert” at this. They “know” the ropes. As the country psychologically devolves there are no lines demarcating the “good from the “bad”, “responsibility” from irresponsibility”. No one ever goes to jail; no one gets punished.
The Europeans know the state of affairs in the country (which they contributed to for a variety of reasons). They know that no Greek government can implement reforms through a political process of consensus. The people are waiting for their doles; the students are waiting for their payback (cushy jobs somewhere), the unions, the coops are all poised to demand their due from the machines that serve them. Meanwhile the rich are sending money out of the country (Switzerland and Cyprus) in the billions out of fear that the government may have no recourse but to grab part of their accounts in the future.
Hence it seems to me that the only game in town is to put Greece under complete receivership with all orders coming from abroad for fiscal cutbacks and the like. Since the EU has no machinery for doing this and the Greek government could never have a consensus for such a program, these measures will be accomplished through fear. Greeks will be left dangling at the mercy of speculators and others, yet at the same time tacitly supported, so that with each assault the Greek government will be implementing (in a climate of panic and fear) some new unpopular measure to mollify the rating agencies and bondholders. The Greeks have not yet woken up to this new reality. They still think EU is Santa Claus or that someone will bail them out (maybe the Chinese!). The lollipops are being taken away and whatever sweets are left will probably go to prop up the banks.
There are two ways in which this scenario may fail: (1) the growing resentment of the German public especially and their unwillingness to bail out Greece. This raises the possibility that at some critical point the EU (due to populist outrage) may not be able to act decisively to stave off a run on the Greek banks. (2) Slide into anarchy in Greece itself. There is always the possibility that the combustible parts of the corrupt machinery start to ignite patches of fires here and there with hard-to-predict possibilities for touching off more general conflagrations.
For now the scenario is working. But nothing really has yet happened in the country. For the man on the street all of this talk about austerity is still just future legislation, measures in the pipeline, at worst manageable cutbacks that reflect the government’s rosy projections.
If all goes according to plan Greece will be ruled by the bankers from abroad with successive waves of crises leading to new cutback-measures and “reforms”. The road will be bumpy and the ride dangerous but manageable. But one should not discount the possibility that psychological despair and irrationality (fueled with desires to live the good life on a dole) may not spark suicidal actions along the way. Keep in mind that the youth have been completely alienated (corrupted and ‘consumerized’ by their parents) and their despair adds another factor of instability.
The country is sliding into psychological despair within a cocoon of unrequited desires that have been inflamed and legitimized over the years. Anger is rampant. Yesterday on the bus a student gave his ticket to a lady, telling her that she should use his ticket because he was getting off. Someone called out that this was shameful “thievery” to which the youngster responded: “I am stealing 50 cents but the government and the banks have stolen 50 billion!” Many nodded in approval.
Prime Minister Papandreou was on television last night, white as a ghost. He was telling the Greek press that he was thankful that the IMF was “offering” their technical expertise (technognosia) to Greece. Yes money is not coming, but how sweet of the IMF to be sending its experts to dictate terms over the next few weeks. It seems that someone in Europe gave him the unexpected news that the party is over. This reality has not yet even remotely begun to set in here. The media are giving the message that “the Europeans can’t afford to let Greece go under….that Europe stands to lose too much….that Merkel and those stuffy Northerners will have to come to Greece’s aid.”
When the reality does start seeping in—hold on to your hats….
One of the delusions is that there is a moral kernel in the country that we can turn to for consolation and renewal. There is no such thing. The corruption went too deep. The country is completely unprotected on the cultural and moral front. This too has not seeped in. And yet when people become desperate; when their world starts to crumble around them and all their delusions about themselves and their good life not only collapse, but do so without any legacy to fall back on and no dream to look forward to, then beware. We are in unchartered territory where Furies and Ate pilot the ship.
A Greek crisis is coming to America
By Niall Ferguson
Published: February 11 2010 02:00 | Last updated: February 11 2010 02:00
It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym . It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.
There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is "seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control", but at this point nobody wants to pretend that Greece's yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.
That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history - reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government's debt; or (most likely, as signalled by German officials yesterday) some kind of bail-out led by Berlin . Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horsetrading before one can be reached.
Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.
What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not "save" us half so much as monetary policy - zero interest rates plus quantitative easing - did. First, the impact of government spending (the hallowed "multiplier") has been much less than the proponents of stimulus hoped. Second, there is a good deal of "leakage" from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
For the world's biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the "safe haven" of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase "safe haven". US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Even according to the White House's new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years' time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That's right, never.
The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.
Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted - as is the case in most western economies, not least the US.
Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.
But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments - and you get up there pretty quickly with the average maturity of the debt now below 50 months.
The Obama administration's new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue - from a tenth to a fifth to a quarter.
Last week Moody's Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers' killer question (posed before he returned to government): "How long can the world's biggest borrower remain the world's biggest power?"
On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.
The writer is a contributing editor of the FT and author of The Ascent of Money: A Financial History of the World
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A PS to the two preceding posts:
We should heed the updated version of Lacoon’s warning from the Aeneid.
"Timeo Danaos exigo sum debitum."
Beware of Greeks selling their debt.
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STEVE FORBES, Forbes.com "Fact and Comment" (02/25/10): Debt-plagued
Greece dominates the headlines, along with such other troubled countries
as Portugal, Italy and Spain. Here at home several states--led by
profligate California--and numerous municipalities are also teetering on
the edge of insolvency. In all of these cases the problem is excessive
spending. True, revenues are down because of the recession, and markets
are skittish about financing suspect debtors, in part because of the lack
of transparency concerning these borrowers' using possibly explosive
derivatives to paper over budget shortfalls. But ever more obese budgets
have put many governments on the brink of bankruptcy.
Disaster, however, is not inevitable: A bracing and, indeed, inspiring
example of what must be done is rising in New Jersey. Newly minted
Republican Governor Chris Christie, facing a fiscal disaster, is doing the
unthinkable: slashing spending and pushing for tax cuts as a way to revive
New Jersey's moribund economy.
Last month Christie told the Democrat-dominated legislature that he was
impounding more than $2 billion of this year's budget. The scythe is
wide-sweeping. "I am cutting spending in 375 different state programs,
from every corner of state government. I will use my executive authority
to implement [these cuts] now. [They] will eliminate our $2 billion budget
gap," Christie asserted to stunned lawmakers. His cuts are even bigger
than they sound. "Upon arrival my administration had $6 billion of
balances from which to find $2 billion of savings. We had to cut one-third
of our available funds with only four and a half months to go in the
fiscal year."
While the reductions are huge, Christie was careful to use the scalpel,
not the meat axe. In education, for example, he does not take "one penny
from an approved school instructional budget. Not one dime out of the
classroom. Not one textbook left unbought. Not one teacher laid off. Not
one child's education compromised for one minute. Not one dollar of new
property taxes will be needed."
But the governor made it clear that ever more drastic surgery is needed in
next year's budget, which he will submit this month. The howls will then
be truly deafening.
School budgets will be hit hard as state aid is cut. But this dire
situation will finally force school districts--under the ever more
watchful eyes of tax-strapped parents--to cut bureaucratic bloat.
New Jersey's 566 cities and municipalities will also urgently do what they
should have done years ago--consolidate services across municipal lines.
The biggest push will be on pensions. "Pensions and benefits are the major
drivers of our spending increases at all levels of government--state,
county, municipal and school board," the governor declared. "The special
interests have already begun to scream their favorite word--which,
coincidentally, is my 9-year-old son's favorite word when we are making
him do something he knows is right but does not want to do--'unfair.' One
state retiree, 49 years old, paid, over the course of his entire career, a
total of $124,000 toward his retirement pension and health benefits. What
will we pay him? $3.3 million in pension payments over his life and nearly
$500,000 for health care benefits--a total of $3.8 million on a $120,000
investment. Is that fair?
"A retired teacher paid $62,000 toward her pension and nothing, yes
nothing, for full family medical, dental and vision coverage over her
entire career. What will we pay her? $1.4 million in pension benefits and
another $215,000 in health care benefit premiums over her lifetime. Is it
'fair' for all of us and our children to have to pay for this excess...?
Read on or post a comment:
http://www.forbes.com/forbes/2010/0315/opinions-fact-comment-steve-forbes-things-come.html
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When Responsibility Doesn’t Pay
Welfare always breeds contempt.
While Barack Obama was making his latest pitch for a brand-new, even-more-unsustainable entitlement at the health-care “summit,” thousands of Greeks took to the streets to riot. An enterprising cable network might have shown the two scenes on a continuous split-screen — because they’re part of the same story. It’s just that Greece is a little further along in the plot: They’re at the point where the canoe is about to plunge over the falls. America is farther upstream and can still pull for shore, but has decided instead that what it needs to do is catch up with the Greek canoe. Chapter One (the introduction of unsustainable entitlements) leads eventually to Chapter Twenty (total societal collapse): The Greeks are at Chapter Seventeen or Eighteen.
What’s happening in the developed world today isn’t so very hard to understand: The 20th-century Bismarckian welfare state has run out of people to stick it to. In America, the feckless, insatiable boobs in Washington, Sacramento, Albany, and elsewhere are screwing over our kids and grandkids. In Europe, they’ve reached the next stage in social-democratic evolution: There are no kids or grandkids to screw over. The United States has a fertility rate of around 2.1 — or just over two kids per couple. Greece has a fertility rate of about 1.3: Ten grandparents have six kids have four grandkids — ie, the family tree is upside down. Demographers call 1.3 “lowest-low” fertility — the point from which no society has ever recovered. And, compared to Spain and Italy, Greece has the least worst fertility rate in Mediterranean Europe.
So you can’t borrow against the future because, in the most basic sense, you don’t have one. Greeks in the public sector retire at 58, which sounds great. But, when ten grandparents have four grandchildren, who pays for you to spend the last third of your adult life loafing around?
By the way, you don’t have to go to Greece to experience Greek-style retirement: The Athenian “public service” of California has been metaphorically face down in the ouzo for a generation. Still, America as a whole is not yet Greece. A couple of years ago, when I wrote my book America Alone, I put the then–Social Security debate in a bit of perspective: On 2005 figures, projected public-pensions liabilities were expected to rise by 2040 to about 6.8 percent of GDP. In Greece, the figure was 25 percent: in other words, head for the hills, Armageddon outta here, The End. Since then, the situation has worsened in both countries. And really the comparison is academic: Whereas America still has a choice, Greece isn’t going to have a 2040 — not without a massive shot of Reality Juice.
Is that likely to happen? At such moments, I like to modify Gerald Ford. When seeking to ingratiate himself with conservative audiences, President Ford liked to say: “A government big enough to give you everything you want is big enough to take away everything you have.” Which is true enough. But there’s an intermediate stage: A government big enough to give you everything you want isn’t big enough to get you to give any of it back. That’s the point Greece is at. Its socialist government has been forced into supporting a package of austerity measures. The Greek people’s response is: Nuts to that. Public-sector workers have succeeded in redefining time itself: Every year, they receive 14 monthly payments. You do the math. And for about seven months’ work: For many of them, the work day ends at 2:30 p.m. And, when they retire, they get 14 monthly pension payments. In other words: Economic reality is not my problem. I want my benefits. And, if it bankrupts the entire state a generation from now, who cares as long as they keep the checks coming until I croak?
We hard-hearted small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest; he’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense.
The perfect spokesman for the entitlement mentality is the deputy prime minister of Greece. The European Union has concluded that the Greek government’s austerity measures are insufficient and, as a condition of bailout, has demanded something more robust. Greece is no longer a sovereign state: It’s General Motors, and the EU is Washington, and the Greek electorate is happy to play the part of the UAW — everything’s on the table except anything that would actually make a difference. In practice, because Spain, Portugal, Italy, and Ireland are also on the brink of the abyss, a “European” bailout will be paid for by Germany. So the aforementioned Greek deputy prime minister, Theodoros Pangalos, has denounced the conditions of the EU deal on the grounds that the Germans stole all the bullion from the Bank of Greece during the Second World War. Welfare always breeds contempt, in nations as much as inner-city housing projects: How dare you tell us how to live! Just give us your money and push off.
Unfortunately, Germany is no longer an economic powerhouse. As Angela Merkel pointed out a year ago, for Germany, an Obama-sized stimulus was out of the question simply because its foreign creditors know there are not enough young Germans around ever to repay it. Over 30 percent of German women are childless; among German university graduates, it’s over 40 percent. And for the ever-dwindling band of young Germans who make it out of the maternity ward, there’s precious little reason to stick around. Why be the last handsome blond lederhosen-clad Aryan lad working the late shift at the beer garden in order to prop up singlehandedly entire retirement homes? And that’s before the EU decides to add the Greeks to your burdens. Germans, who retire at 67, are now expected to sustain the unsustainable 14 monthly payments per year of Greeks who retire at 58.
Think of Greece as California: Every year an irresponsible and corrupt bureaucracy awards itself higher pay and better benefits paid for by an ever-shrinking wealth-generating class. And think of Germany as one of the less profligate, still-just-about-functioning corners of America such as my own state of New Hampshire: Responsibility doesn’t pay. You’ll wind up bailing out anyway. The problem is there are never enough of “the rich” to fund the entitlement state, because in the end it disincentivizes everything from wealth creation to self-reliance to the basic survival instinct, as represented by the fertility rate. In Greece, they’ve run out Greeks, so they’ll stick it to the Germans, like French farmers do. In Germany, the Germans have only been able to afford to subsidize French farming because they stick their defense tab to the Americans. And in America, Obama, Pelosi, and Reid are saying we need to paddle faster to catch up with the Greeks and Germans. What could go wrong?
— Mark Steyn, a National Review columnist, is author of America Alone.
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Till we start to see the same here. I have a feeling the guy at the Pentagon is only just for starters.
***Violent protests hit Greece as German backing sought
Mar 5 10:03 AM US/Eastern
Greek police clashed with demonstrators protesting sweeping budget cuts Friday as the government sought support from Germany to help it avoid default, only to be told not to expect a single cent.
Police fired tear gas after a union leader was struck and hurt by youths, an AFP reporter on the scene said, during protests against sweeping new budget and spending cuts announced Wednesday.
The violence erupted as Greek Prime Minister George Papandreou was to meet German Chancellor Angela Merkel later Friday, with Germany critical to any eurozone effort to help Greece restore its market credibility and already signalling it was not prepared to offer financial assistance.
Parliament meanwhile approved the budget and spending cuts worth 4.8 billion euros (6.5 billion dollars) announced by Papandreou on Wednesday as he sought to secure EU backing.
Papandreou told Germany's Frankfurter Allgemeine newspaper he was "not asking for money" but other forms of support.
Greek aid "unnecessary"
"We need support from the European Union and our partners to obtain credit on the markets at better conditions. If we do not receive this aid, we will not be able to enact the changes we foresee."
But speaking ahead of the Merkel-Papandreou talks, Germany's Economy Minister Rainer Bruederle said Berlin would not provide Greece with "one cent."
"Papandreou said that he didn't want one cent -- in any case the German government will not give one cent," Bruederle told reporters.
Luxembourg's Jean-Claude Juncker, who acts as the formal head in finance matters for the 16 nations that share euro, said he believed the Greek measures meant that Athens would not now need EU aid.
Greeks, Germans meet over finanical crisis
"The commitments taken by the Greek government are clearly paving the way towards an exit" from its debt and deficit crisis, Juncker said.
Juncker reiterated the agreed line among European Union leaders that they "stand ready to take coordinated and determined action if necessary (but) ... I don't think this action will be needed."
Europe's biggest economy, Germany is widely seen as the most likely candidate to help prevent a Greek default, which would be disastrous for the 16-nation eurozone.
But there is huge opposition in Germany against such a move, with angry editorials slamming alleged Greek corruption and wasteful spending and Merkel allies even suggesting Greece should sell some of its islands to free up cash.
There was also anger aplenty on the streets of Athens Friday.
Several thousand Communist protesters demonstrated in front of parliament as it voted on the latest austerity package.
"We say no to anti-popular measures, to taxes and allowance cuts," a Communist banner said.
Greece's two main unions brought traffic to a standstill with a public sector strike. No public transport ran in Athens in the morning, all Greek airports were to close for a four-hour period and giant traffic jams clogged the centre of the capital.
State hospitals ran on skeleton staff, while teachers, state and private media groups were also hit by the strike. Even the police union called on its members to join protests organised for the day.
Addressing parliament, Finance Minister George Papaconstantinou said the state was paying 26 billion euros in civil servant salaries, up 50 percent in the last five years.
"Where did this money go? Each and every minister would give benefits to whomever they wanted," Papaconstantinou said.
The government on Wednesday increased sales, tobacco and alcohol taxes and cut public sector holiday allowances. Pensions were also frozen in a package worth the equivalent of around two percent of gross domestic product (GDP).
Athens has promised the European Union that it will reduce its public deficit this year by four percentage points from 12.7 percent.
Merkel has welcomed the Greek package as "an important step" towards cutting its budget deficit and restoring trust in Athens and the euro.
Needing to borrow money urgently to pay its bills, Greece successfully raised an urgently needed 5.0 billion euros (6.8 billion dollars) via a bond issue on Thursday.
But it had to pay an interest rate of some 6.3 percent or about twice the rate at which Germany can borrow.
Greece's borrowing costs shot up late last year when it was hit with a triple downgrade by credit agencies after revealing that its official budget deficit figures had been grossly under-reported.
Copyright AFP 2008, AFP stories and photos shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium***
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I wonder to what extent this is true. Certainly there are people who are on unemployment because it is easier and more convenient then other alternatives. To deny human nature is a big lie. I had at lease one patient tell me he had a job offer but it was far from home and therefore by the time he accounted for the extra cost of travel he may as well stay home and collect.
Of course. If I could make just as much sitting at home collecting a check as I could get *working*, which do you think I would choose to do?
Why is it we can't just state the obvious?
Doles are cancers that just keep spreading.
Of course the phoney outrage from the left including this Huffington post.
****Tom Delay: People Are Unemployed Because They Want To Be
Former House Majority Leader Tom Delay called Sen. Jim Bunning (R-Ky.) "brave" on Sunday for launching a one-man filibuster of unemployment benefits, arguing that they dissuaded people from going out and finding work.
Appearing on CNN's "State of the Union," the Texas Republican said that Bunning's fiscal responsibility was commendable, even if his shenanigans (refusing to allow unemployment benefits to be considered by unanimous consent) nearly brought the Senate to a halt.
"Nothing would have happened if the Democrats had just paid for [the benefits]," Delay said. "People would have gotten their unemployment compensation. I think Bunning was brave in standing up there and taking it on by himself."
Asked whether it was bad strategy to make a budget stand on a $10 billion extension of unemployment (as opposed to, say, the Bush's $720 billion prescription drug package), Delay insisted that if the PR had been done right, Bunning would have been applauded. Helping the unemployed with federal assistance, he said, was unsound policy.
"You know," Delay said, "there is an argument to be made that these extensions, the unemployment benefits keeps people from going and finding jobs. In fact there are some studies that have been done that show people stay on unemployment compensation and they don't look for a job until two or three weeks before they know the benefits are going to run out.
Host Candy Crowley: Congressman, that's a hard sell, isn't it?
Delay: it's the truth.
Crowley: People are unemployed because they want to be?
Delay: well, it is the truth. and people in the real world know it. And they have friends and they know it. Sure, we ought to be helping people that are unemployed find a job, but we also have budget considerations that are incredibly important, especially now that Obama is spending monies that we don't have.****
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Nicole Gelinas
Supply-Side Financial Reform
Congress should unleash free markets to help protect consumers.
8 March 2010
Senate Democrats have tried for weeks to get Republicans to support the showpiece of their financial-reform package, a consumer financial-protection agency that would shield regular Americans from predatory financiers. But even the nimblest public agency cannot protect consumers from the biggest threat to their financial health: owing too much money. That threat will exist as long as the financial industry faces no ultimate market penalty—the consistent threat of failure—for lending too much too freely.
The proposed agency has a worthy goal. As Connecticut Senator Chris Dodd, who is leading the legislative effort with the White House’s support, sees it, the protection bureau would govern consumer financial products. Proponents, including economist Paul Krugman, say that such an agency could have helped America avoid the current crisis by prohibiting the most toxic mortgages.
But focusing on exotic products and fees misses the real problem: unfathomable debt levels. In the past quarter-century, the amount that families owe has risen more than sevenfold, from less than $2 trillion in 1984 to nearly $14 trillion, according to the Federal Reserve. Debt outran the cost of goods and services by nearly fourfold.
Many Americans can’t afford their debt unless their lenders use complex finance to suspend all disbelief. Exotic mortgage structures, then, were a symptom of the disease, not the disease itself.
How did it come to this? The financial industry has encouraged Americans to borrow so much because Washington has allowed the financial industry itself to borrow so much without consistent market consequences.
Since 1984, when the Reagan administration bailed out lenders to the nation’s eighth-largest bank, Continental Illinois, investors have understood that if a big commercial bank or complex Wall Street firm runs into trouble, Washington will ensure that the bondholders and other creditors to that firm don’t take losses. By creating this expectation of bailouts, Washington has subsidized lending to the financial industry. When government subsidizes something, it gets more of it. Over a quarter of a century, the amount of money that the financial industry has borrowed multiplied by more than 15 times. It should be no shock that banks and other institutions turned around and lent much of that money right back to consumers.
A financial-protection bureau could write thousands of rules. But it will never be able to overcome the signal that Washington continues to send. The message: lenders to financial firms will never lose money if the financial firms to which they lend, in turn, lend those borrowed funds irresponsibly to consumers.
Yet President Obama has continued to shield financial companies and their bondholders from the consequences of their poor decisions. Through mortgage-modification programs, for example, the White House has temporarily cut monthly payments for some homeowners. In doing so, the White House has enabled financial institutions to avoid cutting what people owe in line with house prices. Debt reductions, though they would mean more financial-industry losses, would be better for borrowers.
Shielding financial firms from market penalties has been a bipartisan effort. Half a decade ago, President Bush signed into law a bankruptcy “reform” act that made it harder for all but the poorest borrowers to escape credit-card debt. Financial institutions could more easily ignore the fact that consumers were borrowing beyond their means to repay. But you can’t legislate solvency. Lenders must face the realistic risk that borrowers will default when debt becomes unbearable. Otherwise, they’ll lend too copiously.
Congress and the president can protect consumers from impossible debt burdens by ensuring that lenders to financial firms, too, face the threat of borrower default. Only market discipline of bad behavior will curb behavior at the source.
To make it clear to the marketplace that no financial firm is too big to fail, Washington must put rules in place that make the economy better able to withstand financial-industry miscalculations and failures—without bailouts.
Required cash cushions on stock purchases helped the government avoid financial-industry bailouts when the tech-stock bubble burst a decade ago. They would have the same effect in other asset markets. Washington should thus require home buyers and purchasers of other speculative assets to make consistent down payments of 10 or 20 percent. Under such rules, financial firms would have more cash on hand—capital—to withstand the bursting of a future bubble.
This policy would directly benefit consumers, too. Fewer home purchasers would have taken on mortgages that they couldn’t afford in the last bubble. Lenders and borrowers alike could not have gotten around a consistent down-payment rule. Exotic financing structures—the kinds that the new bureau is supposed to police—would have been irrelevant.
The same principle holds for high finance. If Washington had required insurer AIG to trade its own exotic financial instruments—credit-default swaps—on transparent exchanges and to put some consistent cash down at the outset to cover these bets, the cash cushion would have helped the economy to withstand AIG’s bankruptcy, averting a bailout and forcing AIG’s own creditors to take losses.
Just as important, such rules likely would have kept AIG from making such fanciful promises—in effect pledging to protect investors in tens of billions of dollars’ worth of mortgage-backed securities for a negligible cost—in the first place. If AIG hadn’t promised investors in mortgages—lenders—that they wouldn’t lose money, or had charged handsomely for the promise, investors would not have felt so free to lend to homebuyers.
Senate Democrats should understand that they can protect consumers from bad financial products only by making it clear to the financial industry and own lenders that there’s a consistent market penalty for bad lending.
If lawmakers absorb this lesson, they’ll achieve an immediate political benefit, too. Dodd’s proposal, which needs GOP votes in a closely divided chamber, faces uncertain prospects at best. Republicans are wary of giving the government more power to micromanage consumer finance. However, they surely couldn’t object to holding financial firms and their investors accountable in the marketplace for their ill-considered decisions.
Nicole Gelinas, author of After The Fall: Saving Capitalism From Wall Street—and Washington, is aCity Journal contributing editor and Manhattan Institute senior fellow.
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The always thoughtful and well-informed Scott Grannis:
http://scottgrannis.blogspot.com/2010_03_01_archive.html
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I have always been pretty amazed at how people consider economic growth much over 5% normal. If you look at long term that is usually the average? I wish I had references, but that is a number/conclusion I remember reaching from some research better than 10 years ago when I was looking at the .com bubble. 2-3% when we were looking at a crash is awesome as far as I am concerned. Now I hope the banks get themselves paid off with those loans so they can get rid of the economic Obamanator. He may have saved things in the short term by nationalizing some banks, but long term that is a very dangerous socialistic trend. It will go a long way in Keeping the dollar an international standard too.
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Entitlement Apocalypse
From the March 22, 2010, issue of NR.
Our long-term budget challenge can be summarized in one word: entitlements. Without Social Security, Medicare, and Medicaid, the budget would be roughly in balance over the coming decades. But with these programs, and without reform, a fiscal crisis is inevitable. To balance the budget over the next 25 years would require an immediate and permanent 30 percent increase in all federal taxes. That is the future we face, and it is a future of our own making.
Entitlements traditionally have paid generous benefits — financed by affordable taxes — to rich and poor alike, because the ratio of workers to beneficiaries has been high. Those days are gone and will not return. Maintaining entitlements in their current form will require either crippling taxes or crippling debt. Alternatively, we can rethink the entitlement philosophy, focusing resources where they’re needed most, empowering individuals to make choices and giving them incentives to reduce waste, and buttressing personal retirement savings.
We spend 9.7 percent of GDP on entitlements today, and by 2030 we will spend around 14.4 percent. Two forces bear primary responsibility for pushing entitlement spending upward: population aging and health-care-cost growth.
Population aging is easily understood: The Baby Boom generation is retiring, seniors are living longer, and families are having fewer children. The ratio of workers to beneficiaries, which is now over three to one, will fall to around two to one by 2030. Aging alone will ultimately raise entitlement costs by nearly 50 percent.
As for health-care costs, they are rising for three reasons. First, as incomes rise, the value of health increases relative to that of other goods. (As you make more money, the marginal value of new goods falls, and you would rather live longer with the stuff you have than buy more stuff and die sooner.) Second, technology generates treatments we gladly would have purchased in the past but couldn’t, because they didn’t exist. Today they do, and we buy them. Third, the falling share of health care that is paid out-of-pocket — 47 percent in 1960, 12 percent today — encourages patients to purchase even marginally useful treatments. MIT economist Amy Finkelstein concluded that this factor alone accounts for 40 percent or more of health-care-cost growth.
Income effects and new technologies would increase health-care costs even in a totally free market. But the falling out-of-pocket share, which encourages waste and cannot be shown to contribute much to patient health, is due to government policy.
The political economy of reform is complicated by the fact that the budget automatically allocates funds rather than requiring new congressional appropriations each year. As a result, outlays can grow well out of proportion to our willingness and capacity to fund them. Entitlements are on autopilot, and the autopilot is steering us into the ground.
While traditionally called the “third rail of politics,” Social Security — which provides payments to disabled workers, retirees, and retirees’ survivors at an annual cost of $700 billion, making it the biggest federal program — might also be known as “the fixable entitlement.” It is the program whose problems — and their potential solutions — are best understood.
Social Security’s costs are driven primarily by the effects of population aging on the program’s pay-as-you-go financing, which redistributes taxes from workers as benefits to retirees. But Social Security’s inability to save money is important as well: While the program has a $2.5 trillion trust fund, several econometric studies have shown that policymakers don’t actually save its surpluses, but rather spend them or use them to finance tax cuts. As a result, future taxpayers will be no better off than they would have been had the trust fund never existed.
In addition, Social Security paid extraordinarily high returns to early participants, a practice that prevented it from building savings that, had they actually been saved, would have helped it weather the looming demographic crisis. A typical individual retiring in 1965, for instance, received benefits amounting to eight times what he had paid in Social Security taxes. Earlier retirees did even better. Had these participants received only what they contributed, plus interest, the trust-fund balance would today be around $15 trillion higher.
Most Social Security–reform plans tweak tax and benefit formulas so that, over time, revenue aligns with costs. But it would be better to start reform efforts by asking, “What kind of retirement system will someone retiring 50 years from now need?” A Social Security program for the future must do three things: save more money, give people incentives to retire later in life, and target resources where they are needed most.
First, everyone who can save for retirement on his own should do so. President Obama and many Republicans support automatic enrollment in 401(k) and IRA pension plans. If all Americans saved just 10 percent of their wages, the need for Social Security payments would be greatly reduced. And, upon retirement, individuals should convert part of their savings to annuities; perhaps annuitized funds could be withdrawn tax-free while other withdrawals are taxed. For the typical person, these steps alone would accomplish most of what Social Security now achieves.
Second, able-bodied individuals should remain in the workforce longer. In the 1950s, the typical worker claimed Social Security around age 68. Today, despite a longer lifespan and work that is less physically demanding, the median American claims Social Security at age 62. It is an economic, budgetary, and moral mistake for Americans to spend one-third of their adult lives in retirement at the expense of those who work. The early and normal retirement ages for Social Security should be raised.
But we should use carrots as well as sticks. My research has shown that the typical worker nearing retirement age receives only around three cents in extra benefits for each additional dollar he pays into Social Security. To give this worker a good reason to keep working, the Social Security payroll tax should be reduced or eliminated for individuals older than 62.
Third, Social Security benefits for high earners should be reduced. While liberals object that “a program for the poor is a poor program” — a view based on the uncharitable assumption that if Americans know a program is redistributive, they won’t support it — the current system gives about $27,000 per year in benefits to every retiree who earned more than $100,000 per year when working. This is a luxury a program facing insolvency cannot afford.
Social Security’s benefit formula also needs repair. As my research has shown, most of the redistribution in Social Security is based on factors other than income. In fact, a worker’s earnings level is a poor predictor of how generously Social Security will treat him. Single-earner couples do better than dual-earner couples; short working careers produce higher benefits than do longer ones; divorced women whose marriages lasted ten years or longer do better than those who divorced earlier. This means that some low-earning households receive relatively low benefits, while some high-earning households receive relatively generous ones. A flatter, simpler benefit structure would make Social Security more understandable and would more effectively prevent poverty.
The experiences of other countries might teach us something. The United Kingdom is moving to increase its benefits, coupled with automatic enrollment in pension accounts. These accounts will invest an amount equal to 8 percent of workers’ earnings, with contributions split between workers, employers, and the government. Australia requires all workers to save 9 percent of their wages in individual accounts; for low earners, it provides a minimum benefit.
Meanwhile, New Zealand offers a flat universal benefit to all retirees, with voluntary “Kiwi Saver” retirement accounts providing additional income. Such a setup would be a significant change from our current system, but would allow us to give the household of every retired and disabled worker a poverty-level benefit with a payroll tax of under 6 percent. A reform that effectively eliminated poverty for retirees and generated income above the poverty level by means of individual savings would be good policy, and might even be good politics.
Reforming Social Security is important not only for its own sake, but to conserve resources for Medicare, where it will be harder to supplant dwindling government benefits with personal savings.
Medicare’s fiscal challenge is like Social Security’s on steroids. Medicare faces all of Social Security’s demographic challenges, and also bears the burden that health expenditures have long been growing faster than the economy.
Medicare costs around $450 billion per year. That’s a lot of money, but at least seniors are receiving better health care, right? Actually, it’s far from clear. MIT’s Finkelstein and Wellesley’s Robin McKnight found that Medicare raised seniors’ hospital spending by 37 percent in its first ten years (it was created in 1965) without lowering their death rates. It is true that seniors who might otherwise have no insurance now benefit from Medicare, but we could cover them for a fraction of the current cost. Seniors who can afford their own insurance pay less out of pocket with Medicare, but their health isn’t much better for it: When at age 65 they shift from private plans to Medicare, they experience no reduction in mortality.
In today’s dollars, Medicare will spend $775 billion by 2020 and $1.4 trillion by 2030, according to Congressional Budget Office projections. But Medicare’s problem isn’t just rising costs; it’s also that so much of what we spend is wasted. An entitlement program that refuses no qualified claim, pays on a fee-for-service basis, and charges low deductibles invites disregard for cost effectiveness.
To restrain the rise of costs, Medicare reimburses health-care providers at rates about 20 percent lower than those paid by private insurers. But to compensate, many providers simply conduct extra procedures, according to a recent Department of Health and Human Services study. Others refuse to take Medicare patients: In a 2008 survey, the Medicare Payment Advisory Commission found that 29 percent of seniors looking for new physicians had difficulty finding a doctor who accepted Medicare.
The Obama administration has proposed taking certain Medicare-policy decisions away from Congress, which is politically risk-averse and heavily lobbied by providers, and transferring them to an expert advisory commission. This is a good idea, but the Senate health legislation, which provides for such a commission, renders it ineffectual: It would not be allowed to alter doctor or hospital payments in its first four years, and even afterward could not restrict benefits, increase co-payments or deductibles, or modify eligibility requirements. Worse yet, the commission could make no proposals in years in which overall national health-care expenditures grew faster than Medicare outlays — which means most years.
And congressional Democrats accepted the idea of such a commission only in exchange for the rest of the health-care bill — that is, only to achieve the longtime liberal goal of increasing the federal government’s power over the private medical sector. Without this inducement, many Democrats would accept nothing at all.
The recent episode in which a government panel recommended that women not receive mammograms until their 50s shows the limits of the commission approach. The recommendation — exactly the type such panels would make in Obama-style reforms — was immediately attacked by lawmakers, who wrote their rejection of it into their health-care legislation.
If stripping Congress of its Medicare oversight isn’t possible or won’t work, a consumer-oriented approach might be a viable alternative. One such approach is “premium support”: Medicare would provide each beneficiary a fixed supplement, adjusted for age, income, and health status. The Federal Employees Health Benefits Plan operates on this basis, with a government contribution set at 72 percent of the average premium. Using these funds, plus their own money, participants choose from up to two dozen providers.
Since consumers pay any premiums above the government share, and are free to choose between competing plans, they have an incentive to spend efficiently, which in turn gives providers an incentive to provide quality care at an affordable cost. The point of such a policy isn’t to design and impose the best plan, but to create a market structure that will find the best plan by means of competition and innovation. And the best plan may not be the same for each person, which is another reason we should empower individuals to make their own health-care choices.
Premium support was politically unpopular when proposed on a bipartisan basis in the 1990s, and it is hard to imagine the Obama administration — which never uses a carrot when a stick is at hand — supporting consumer choice. Rep. Paul Ryan’s proposed “Roadmap” reform — which also addresses Social Security, taxes, and private health care — takes a similar approach, which is why he is already being accused of wanting to “privatize” Medicare. But increased Medicare efficiency would reduce the pain of the inevitable cuts in benefits. Medicare savings of even 10 percent would amount to $75 billion by 2020 and $135 billion by 2030. And other solutions are not presenting themselves.
That brings us to Medicaid, a means-tested state/federal program that provides health care to low-income and disabled individuals. Medicaid does not have a single structure; rather, each state runs its own program, consistent with certain federally imposed requirements, and decides how much to spend. About a third of Medicaid spending goes toward long-term care for the elderly. In 2010, Medicaid spending will likely top $500 billion — even more than Medicare outlays — with costs split roughly 60-40 between Washington and the states. Medicaid is responsible for around 15 percent of all U.S. health-care spending, and is the biggest line item in state budgets.
Medicaid spending has grown — and, in consequence, crowded out private insurance — in part because of population aging and rising health-care costs, but also because states have significantly expanded eligibility in recent years. And that is largely because such expansions bring more federal funds to their coffers.
The federal government covers 50 to 75 percent of Medicaid costs, depending on the state’s average income. This means that the states can provide $2 to $4 in total benefits for each $1 they spend. Under such terms, even an obviously wasteful benefit extension makes budgetary sense from the state’s perspective. And cuts work the same way: Paring Medicaid spending by $4 million would save Mississippi only $1 million, while New York must cut $2 million to save $1 million. The result is a ratchet effect whereby costs increase in good times and hold steady in bad times.
The matching formula also skews Medicaid resources from poor states to rich ones, since only the rich can afford to run large Medicaid programs. Among the largest net beneficiaries of Medicaid funding are New York and Maine, whose average incomes are hardly low by national standards.
As with Medicare, the key to reforming Medicaid is shifting incentives — this time, for state lawmakers. A modest but helpful change would be simply to reduce matching rates as Medicaid spending rises, so that if states choose to expand Medicaid into the middle class they must bear the cost themselves.
A farther-reaching reform would be to fund Medicaid through block grants to the states while expanding the states’ flexibility with regard to program design. (A similar approach was part of the 1996 welfare reform.) If a state wished to expand Medicaid beyond what the block grant paid for, it would have to do so with its own dollars.
All Americans should save for their own retirement and health-care needs. Only those whose savings are insufficient should receive supplements. Innovation, competition, and choice, which make American consumer markets the most vibrant in the world, should play a central role. Entitlement-reform policy isn’t much more complicated than that.
In entitlement politics, however, it is far easier to play defense than offense. In 2005, when asked when the Democratic party would present a plan to reform Social Security, Nancy Pelosi’s answer was: “Never. Is never good enough for you?” Likewise, in this year’s health-care debate, Republicans have prospered by opposing, not proposing.
But while voters do not always reward those who make difficult choices, entitlement reform should be seen as its own reward, for without it, America will soon be crushed by either taxes or debt. The true compensation is a prosperous future consistent with our principles.
— Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Previously he was the principal deputy commissioner of the Social Security Administration and, in 2005, he worked at the White House National Economic Council on Social Security reform. This article first appeared in the April 5, 2010, issue of National Review.
http://article.nationalreview.com/429780/entitlement-apocalypse/andrew-g-biggs
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http://www.realclearmarkets.com/articles/2010/04/01/will_spending_under_obamacare_trigger_the_next_financial_crisis_98403.html
Thanks Obama!
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The following piece from POTH (so caveat lector) brings up the case of Lithuania, which apparently is following the radical idea of cutting spending. As such Lithuania bears watching.
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VILNIUS, Lithuania — If leaders of the world’s many indebted countries want to see what austerity looks like, they might want to visit this Baltic nation of 3.3 million.
“You have to do the most difficult cuts as quickly as possible,” Prime Minister Andrius Kubilius said of the austerity plan.
Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent. And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.
The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.
But austerity has exacted its own price, in social and personal pain. Pensioners, their benefits cut, swamped soup kitchens. Unemployment jumped to a high of 14 percent, from single digits — and an already wobbly economy shrank 15 percent last year.
Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.
To be sure, Mr. Kubilius has many critics here and abroad. Government austerity in the midst of a recession runs counter to the Keynesian approach of increasing public expenditures to fight a downturn. That was the path most countries chose. But Mr. Kubilius and his team say that with a budget deficit of 9 percent of G.D.P., a currency fixed to the euro and international bond markets unwilling to lend to Lithuania, the government had no choice but to show the world it could impose its own internal devaluation by cutting public spending, restoring competitiveness and reclaiming the good will of the bond markets.
Another motivation was to conform to the rules of membership for the euro currency union, which Lithuania hopes to join by 2014.
Indeed, outside of Ireland, no country in Europe has come close to replicating Lithuania’s severe spending cuts without the aid of the International Monetary Fund. Ireland passed the most austere budget in the country’s history, and public sector pay cuts were a centerpiece of the government’s reform effort. The Finance Ministry has forecast growth of 1.5 percent this year, and this week Moody’s increased its outlook on the Lithuanian economy to stable, from negative.
“From a credit rating perspective, Lithuania has put itself on positive trajectory,” said Kenneth Orchard, a senior credit officer in Moody’s sovereign risk group.
As European nations consider what the social and political costs will be when they take steps to cut public sector spending, Lithuania offers a real-time case study of the societal trade-offs. Speed and communication are the most crucial to success, Mr. Kubilius said in an interview in his office last week.
“You have to have a dialogue with your social partners, and you have to do the most difficult cuts as quickly as possible,” he said. “I told them this is history. You need to decide now how you want to be described in our history books.”
Like Latvia and Estonia, Lithuania rode a boom driven by banking and real estate earlier this decade. Construction came to dominate the economy, and low interest rates spurred a housing boom. Many Lithuanians took out low-interest-rate mortgages denominated in foreign currencies. With the onset of the crisis, house prices plunged, building ground to a halt and quite suddenly thousands lost their jobs and began to default on their debts.
While the quaint cobblestone streets of Vilnius may project an air of prosperity, one does not need to travel far to witness the pain many Lithuanians are feeling. Monika Midveryte, a university student, and her mother are now supporting the family after her father lost his construction job. Now, she said, he sits at home in front of the television drinking his troubles away. “He has no hope.”
The psychological toll has been immense. Suicides have increased in a country where the suicide rate of 35 per 100,000 is already one of the world’s highest, local experts say. According to figures collected by the Youth Psychological Aid Center, telephone calls to its hot line from people who said they were on the verge of committing suicide nearly doubled last year to 1,400, from 750.
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(Page 2 of 2)
As the president of Solidarumas, one of Lithuania’s largest trade unions, Aldona Jasinskiene has an acute understanding of how bad things are — not just as the head of her union, but as a mother. For more than a year, her salary has paid the 2,300 litas, about $900, in monthly mortgage payments for her 40-year-old son, who lost his construction job. Ms. Jasinskiene says his mental health is suffering, he is fighting with his wife and his family of four dines on potatoes three times a day. Now, with her own pension having been slashed, she is left with just 300 litas a month to support herself and her 15-year-old granddaughter.
Ms. Jasinskiene said she signed the agreement with the government because unions, which are extremely weak in Lithuania, were not capable of calling the type of general strike well known in other parts of Europe, and because she wanted to do what she could to prevent even deeper cuts. While Mr. Kubilius points to positive signs like renewed growth, busy cafes in Vilnius and upgrades by the credit agencies, from her vantage point, Ms. Jasinskiene sees no upturn.
“He is telling you a fairy tale,” she said. “Unemployment is going up and up.”
Algirdas Malakauskis, a priest at St. Francis and St. Bernardine Friary, has also experienced the recession’s toll firsthand. He has had to preside over an increasing number of funerals for people who have taken their own lives. Parishioners now come to him seeking work, and his elderly parents, whose pensions have been cut, are angry.
Like a surprising number of people here, however, he has not turned on the government. “You can see they are doing everything that they can to keep the situation stable,” he said.
Still, the tough measures have drawn criticism outside Lithuania.
“The internal devaluation strategy may have succeeded in delivering short-term stabilization, but at what cost?” asked Charles Woolfson, a professor of labor studies at the University of Glasgow who has expertise in the Baltics. Professor Woolfson points out that deepening social alienation in Lithuania has resulted in the sharpest rise in emigration since the country joined the European Union in 2004.
“Then it was the migration of the hopeful,” he said. “Now it is the migration of the despairing.”
There is no greater totem to the excesses of the lending frenzy that gave Lithuania one of the highest growth rates in Europe in 2007 than the sparkling Swedbank office building. Completed just last year, it is 16 stories high and monopolizes the modest Vilnius skyline. Swedbank is the dominant bank in Lithuania, and its aggressive lending to first-time home buyers — including Ms. Jasinskiene’s son — continues to be a millstone for many here.
“People are angry,” said Odeta Bloziene, who runs a unit within the bank that gives advice to Lithuanians who are having trouble repaying their loans. “But we never run away from our customers.”
In the reception area of the bank’s headquarters, bankers laughed and drank beer from a well-stocked bar as rock music played in the background. It is a far remove from the soup kitchen at St. Peter and St. Paul’s Church in Vilnius, where 500 people a day line up for a free meal of soup and Lithuanian pancakes.
Mecislovas Zukauskas, 88, a retired electrician, has lived through the devastations of World War II, the Soviet occupation and, most recently, the death of his wife. He is taking his pension cut in stride.
“The government does what it wants to do,” he said. “We can do nothing.”
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http://www.nypost.com/f/print/news/business/small_biz_big_tax_Tm9zntbp2I339WyBwwOgzK
Jobbing small business
The 26 million small businesses in the US — like Eneslow Shoes, headed by CEO Robert Schwartz— are getting buried under an avalanche of new taxes, which include:
* An increase of 4.6% in federal taxes from 35% to 39.6% (expiration of Bush tax cuts)
* An increase in capital gains taxes from 15% to 20% (expiration of Bush tax cuts)
* A new tax of 3.85% on investment income, dividends, rents, royalties mandated in the new health care bill
* An increase in the Medicare payroll tax to 2.35% as mandated in the new health care bill
* In states like New Jersey and others, state and municipal taxes have been raised by the average of almost 2%
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http://online.wsj.com/article/SB10001424052702304830104575172280848939898.html?mod=WSJ_hpp_LEFTTopStories
A friend comments:
The Wall Street Journal reports major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks, which includes Goldman Sachs (GS), Morgan Stanley (MS), J.P. Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C), understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters. Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter. According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
It does me; specifically, that Michael Lewis article (published in Vanity Fair). Remember how the brokerages would mark down the value of Burry's holdings at quarter's end to mask the mounting crisis in their own portfolios? Hey, if it worked then...
David
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all the more reason to get your money to a local neighborhood bank. I have a couple friends to point these shennanigans out to.
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Well I guess that the "recovery" is based all on funny/monopoly money - that's why.
Why be glum about a 20 trillion debt???
***Why So Glum? Numbers Point to a Recovery
By FLOYD NORRIS
Published: April 8, 2010
That is what usually happens after particularly sharp recessions, so it is surprising that many commentators, whether economists or politicians, seem to doubt that such a thing could possibly be happening.
Usually you can depend on the White House to view the economy with the most rose-tinted glasses available. But it was not until last week, after a strong employment report, that President Obama started to sound a little optimistic.
“The tough measures that we took — measures that were necessary even though sometimes they were unpopular — have broken this slide and are helping us to climb out of this recession,” he said in a speech at a factory making battery components in North Carolina.
Note, however, that he seemed to believe the country remained in recession. It is virtually certain that is not accurate, as least as will be determined by the arbiters of recession at the National Bureau of Economic Research. “The recession is over,” one of those arbiters, Jeffrey Frankel of Harvard, wrote this week.
But the White House is unwilling to make that claim.
Why is good news being received with such doubt? Why is “new normal” the currently popular economic phrase, signifying that growth will be subpar for an extended period, and that the old normal is no longer something to be expected?
It is possible, of course, that I am wrong and the prevalent pessimism is correct. Many economic indicators, including Thursday’s retail sales report, are looking up, but that does not prove the recovery will be self-sustaining. There are issues relating to over-indebted consumers and local governments. The housing collapse will have an impact for some time.
But there are, I think, a number of reasons for the glum outlook that are unrelated to the actual economic data.
First, the last two recoveries, after the downturns of 1990-91 and 2001, were in fact very slow to pick up any momentum. It is easy to forget that those recessions were also remarkably shallow. If you are under 45, you probably don’t have much recollection of the last strong recovery, after the recession that ended in late 1982.
Add to that the fact that the vast majority of the seers did not see this recession coming. Remember Ben Bernanke assuring us the subprime problem was “contained”? In mid-2008, after the recession had been under way for six months, the Fed thought there would be no recession, and the most pessimistic member of its Open Market Committee thought the unemployment rate could climb to 6.1 percent by late 2009. It actually went over 10 percent.
In January of this year — after the recession had probably been over for at least a few months — the most optimistic member of the committee expected the unemployment rate to fall to 8.6 percent by late this year. The consensus was for a rate no lower than 9.5 percent.
Having been embarrassed by missing impending disaster, there is an understandable hesitation to appear foolishly optimistic again.
But even without that factor, it is normal for recessions to make people pessimistic. “Go back and read what people were saying in 1982 or 1975,” said Robert Barbera, the chief economist of ITG. “Nobody was saying, ‘Deep recession, big recovery.’ It is quite normal to expect an abnormally weak recovery. It is also normal for that expectation to be wrong.”
But if that is normal, one factor that brings optimism to some forecasts is absent this time. Both Republicans and Democrats have good reasons to be negative. Republicans are loath to give President Obama credit for anything, and no doubt grate when he points to his administration’s stimulus program as a cause of the good economic news, as he did in North Carolina.
Democrats would love to give the president credit. But much of the Democratic Party wants another stimulus bill to be passed, notwithstanding worries about budget deficits. Chances for that are not enhanced by the perception the economy is getting better.
The employment report for March, released a week ago, was a milestone that has been little noted. The household survey, from which the unemployment rate is calculated, showed a gain during the first quarter of this year of 1.1 million jobs, the best performance since the spring of 2005.
True, the more widely reported numbers from the survey of employers are not as good. But those numbers are subject to heavy revision as better data becomes available. At the turning points for employment after the last two downturns, those numbers turned out to be far better than was reported at the time.
Employment is a lagging indicator. Employers can be slow to cut back when business turns down, and slow to rehire when it picks up. It stands to reason that when employers cut back sharply — as happened in this cycle — they will have to rehire faster than if they had been slow to fire, as was true in the two previous downturns.
I looked back at the recoveries after seven recessions from 1950 through 1982 and found that, on average, such a strong three-month performance of the household survey, defined as a gain of at least 0.8 percent in the total number of existing jobs, came seven months after the recession had ended, with a range of two to 13 months.
If the 2007-9 recession ended in August, as the index of coincident indicators would seem to indicate, the lag this time will have been seven months.
The lag was 28 months after the 1990-91 recession ended, and an amazing 42 months after the 2001 downturn concluded. Those really did deserve the title of “jobless recovery.” But they were very different from what appears to be unfolding now.
The stock market’s recent performance may be sending a similar message. Prices have been rising, but there is not much volume. Why? A lot of money managers are fully invested, but many investors remain fearful and are not putting cash into mutual funds. To judge from anecdotal evidence, some of the buying now is short-covering by hedge funds that expected the economy to be much weaker than it is, and thought corporate earnings reports would devastate investors. Instead, they are hearing from companies that business is stronger than expected.
Some Americans are in deep trouble, to be sure, and the days of paying for second homes by refinancing the mortgage on the first will not return soon. But many Americans — both individuals and businesses — who cut back sharply when fear was at a peak a year ago are now finding that they overreacted. The businesses need to hire to meet demand, some of it coming from individuals who are less fearful now of losing their own jobs.
In 1982, Democrats scoffed at a surging stock market and thought a severe recession would last for a very long time. They were confident that the economy would doom Ronald Reagan’s re-election campaign in 1984. All they had to do was make clear they offered a stark alternative to the failing policies of the incumbent.***
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Agreed, but the author raises a valid point. It does look there is a psuedo recovery under way and this most certainly can help BO and the Demogogues in a big way come November-- "He/they saved us!" the sheeple will bleat.
Tis for sure that in great part the Patricians a.k.a. the Republicans have offered minimal coherent alternatives.
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I noticed that Brian Wesbury predicts 4% GDP growth by year end. The campaigns of both sides will have a variety of statstics to claim as their evidence of success and failure. I would assume unemployment will stay high as long as investment taxes remain punitive. Republicans will need to make the connection to working people that overtaxing employers does not bring in free money.
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http://www.ocregister.com/opinion/percent-243349-tax-government.html
Mark Steyn: Income tax payer an endangered species
We are nearing the climax of "tax season." That's the problem right there, by the way: Summer should have a season, and baseball should have a season, but not tax. Happily, like candy canes and Christmas tree lights on Dec. 26, the TurboTax boxes will soon be disappearing from the display racks until the nights start drawing in, and the leaves fall from the trees and tax season begins anew in seven or eight months' time.
And yet, for an increasing number of Americans, tax season is like baseball season: It's a spectator sport. According to the Tax Policy Center, for the year 2009 47 percent of U.S. households will pay no federal income tax. Obviously, many of them pay other kinds of taxes – state tax, property tax, cigarette tax. But at a time of massive increases in federal spending, half the country is effectively making no contribution to it, whether it's national defense or vital stimulus funding to pump monkeys in North Carolina full of cocaine (true, seriously, but don't ask me why). Half a decade back, it was just under 40 percent who paid no federal income tax; now it's just under 50 percent. By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever-shrinking minority of the population still dumb enough to be net contributors to the federal treasury. In less than a quarter-millennium, the American Revolution will have evolved from "No taxation without representation" to representation without taxation. We have bigger government, bigger bureaucracy, bigger spending, bigger deficits, bigger debt, and yet an ever smaller proportion of citizens paying for it.
**Read it all**
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A couple of points and a piece continuing on the projection that the economy of this year's elections will have a mixture of statistics for both sides to point to as evidence of why they deserve your vote. The Dems are better at finding and using obscure stats to make their point than the R's are at findinig and using obvious ones.
1. Remember 1992. The smallest of slowdowns was spun as the biggest recession since the great depression and our unenthused Presdent, who was guilty only of signing on with a promise breaking Dem budget, took the entire hit even though the tax and spend bills all came out of a D-congress.
2. Remember 2006. We were on a 50 consecutive months roll of job growth coming out of the crash of 2000 and the attacks and recession of 2001. Dems found a twist or two in the statistics to make record, explosive growth look like a bad economy.
3. Dems took power Jan 2007, announced a full list of anti-growth agenda items and killed off all growth with the most inflated of all bubbles crashing first and hardest, but with unemployment from anti-growth policies becoming the lagging and enduring result. Despite this sequence, most voters in 2008 blamed Bush and the Republican congress that has been gone since 2006 for the problems coming into the Obama Presidency and most may still blame them today. Certainly every administration official is required to re-state that blame in almost every economic sentence.
4. There are and will be signs of growth in Nov 2010, if current projections are at all accurate. We (if you are conservative leaning or Republican)have been losing the PR battle in all but the most obvious of situations. So don't take this electoral shift opportunity for granted.
That said, here is a piece from the Atlantic warning Dems that recovery won't be strong enough or soon enough for them to count on:
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http://www.theatlantic.com/business/archive/2010/04/how-will-the-economy-affect-midterm-elections/38801/
How Will the Economy Affect Midterm Elections?
It is by now conventional wisdom that the economy is going to cost Democrats big in the midterm elections . . . so it's refreshing to see folks like James Surowiecki challenge that wisdom. After all, the economy has started growing again, and, in what must be an astonishing coincidence, we're just about to get a big river of stimulus money sluicing through voter pockets.
Possibly. But conventional wisdom has a lot going for it. I agree with Surowiecki that what matters is not the headline numbers on the newspaper page, but peoples' actual felt experience with the economy, particularly real income growth. That felt experience is maybe improving a tiny amount. Consider the following, however:
* At this point, there is not enough time for employment to recover significantly. We lost a lot of jobs, and if analysts are right that this represents mostly structural change in the economy (rather than a temporary collapse in aggregate demand), employment will rebound only slowly. It took years under the Bush administration to work off the relatively modest collapse around 9/11.
* Most peoples' major asset will still be worth a whole lot less than it used to be. And people who are pinched will not have the housing piggybank to cushion their anxiety.
* Delinquencies are finally slacking of, but the backlog of foreclosures is eventually going to come on the market, further pushing down home values in many areas.
* We can't really afford to expand the various forms of housing support much further . . . but if we stop them, housing markets will look even worse.
* Low inflation means the cost of living doesn't go up . . . but people are now conditioned to expect nominal wage increases. Money illusion is going to make people perceive the labor market, and income growth, as worse than they actually are.
* Health care costs are going up due to selection effects in individual and small business markets--healthy people are cutting the expense when they lose their jobs, landing companies with a smaller, sicker pool. That's going to further cut into any wage growth.
* Budget deficits are almost certainly going to keep going up in the short term. People get especially touchy about deficits when they are personally strapped.
* Oil prices are still rising.
I'm not saying the Democrats can't pull it out. Nothing is impossible, and they have GDP growth on their side. On the other hand, they're facing some pretty strong headwinds--much stiffer than Bill Clinton faced when he lost the House to the Republicans in 1994. And contra what I was assured by many Democrats, health care reform has not gotten more popular since it passed; arguably, it's gotten slightly less popular.
That base had better be very motivated.
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"The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer."
- Lawrence H. Summers, 1999, current Obama White House economic adviser
http://online.wsj.com/article/SB10001424052702303828304575180243952375172.html
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Nice find, Doug. When I get panhandled I invite the panhandler to walk with me to the nearest restaurant to see if they are hiring dishwashers. Never been taken up on it, I suspect because panhandling while one the dole proves more lucrative.
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Thanks BBG, these guys had to at least once study or write about incentives and disincentives even if they deny the effects of their policies today. Regarding the panhandlers, when they wave the cup of coins past me I always say no thanks, I have plenty. I am acutely aware that if I throw a buck in the jar I only reinforce their view of how to get money.
In line at a Target store the other day I stood behind 3 cute little girls begging their mom for candy during the wait for checkout. The mom said 'no' almost a dozen times and I almost congratulated her, but kept my mouth shut. At the end she said 'yes but just this once'. Begging insistently led to candy and the lecture after the yes is not the lesson they take from it.
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" Regarding the panhandlers, when they wave the cup of coins past me I always say no thanks, I have plenty."
:-o :-o :-o :lol:
PS: I wish to make clear that there are times I do give to a panhandler. A few days ago there was an oldtimer who shyly and humbly approached me. I read him as being someone who, like a goodly number of people these days, never expected to find himself having to beg and being too old to work. I gave him $5.
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I usually will share food if I have it, never money. Giving a panhandler money is enabling him to continue feeding whatever monkey is riding him, I will not do that. Food however is something everyone genuinely needs, by sharing it acknowledges a human connection.
I find that the large majority choose not to approach me again........... Their choice.
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A new report from Americans for Limited Government (ALG) clearly shows that the Democrats have destroyed our economy since they took control of our lives in January of 2007.
The most eye catching of ALG’s data items is the sad comparison of the rate of 4.6% unemployment at the start of 2007 and today’s alarming 9.7%. In real terms this means while there were about 7 million unemployed workers when the Democrats took over, today that number has more than doubled to 14.8 million out of work Americans.
http://www.getliberty.org/content.asp?pl=10&sl=5&contentid=422
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They were saying 4.6% was a crisis level, when it is really more of the churn you get with people changing jobs for all sorts of reasons.......... Doubleing the stat is definately something to worry about. They are saying their programs will work, we are just waiting for the bottom............
That is the main thing that peeves me about the politicians of both sides, when the other side has an increasing number of what ever magnitude it is a MAJOR OMFG catastrophe, but when their side has numbers that are worse and trending even further it is "Momentum from last year when THEY were running things. Let's give it a minute to reverse"
One side does do this more than the other and sadly enough people fall for the trauma drama game rather than the reason game way easier.
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By GERALD P. O'DRISCOLL JR.
Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism.
Thomas Carlyle, the 19th century Victorian essayist, unflatteringly described classical liberalism as "anarchy plus a constable." As a romanticist, Carlyle hated the system—but described it accurately.
Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. That conception of government and its duties was articulated by the Declaration of Independence and embodied in the U.S. Constitution.
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Chad Crowe
Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. While protecting citizens against force, both at home and abroad, is the government's most basic function, protecting them against fraud is closely allied. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function.
Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the Securities and Exchange Commission the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. The SEC chose to ignore the evidence brought to its attention. Banking regulators allowed a kind of mortgage dubbed "liar loans" to flourish. And so on.
We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month.
Are we to believe that regulators were unaware? Last week Goldman Sachs was accused in a civil fraud suit of deceiving many clients for the benefit of another, hedge-fund operator John Paulson.
The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. Better than multiplying rules, financial accounting should be governed by the traditional principle that one has an affirmative duty to present the true condition fairly and accurately—not withstanding what any rule might otherwise allow. And financial institutions should have a duty of care to their customers. Lawyers tell me that would get us closer to the common law approach to fraud and bad dealing.
Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve's Jackson Hole Conference in 2008, economist Willem Buiter described "cognitive capture," by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in "Staffer One Day, Opponent the Next."
Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.
Nobel laureate Friedrich Hayek described the price system as an information-transmission mechanism. The interplay of producers and consumers establishes prices that reflect relative valuations of goods and services. Subsidies distort prices and lead to misallocation of resources (judged by the preferences of consumers and the opportunity costs of producers). Prices no longer convey true values but distorted ones.
Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct.
In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.
If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.
Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.
Mr. O'Driscoll is a senior fellow at the Cato Institute. He has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas.
http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html?mod=WSJ_hp_mostpop_read
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Meet the Real Villain of the Financial Crisis
By BETHANY McLEAN
TODAY, we will have the pleasure of watching outraged members of the Senate Permanent Subcommittee on Investigations fire questions at a half-dozen executives from Goldman Sachs. The firm first attracted anger for its return to making billions, and paying its employees millions, right after the financial crisis. And since the Securities and Exchange Commission this month charged Goldman with fraud over an investment tied to subprime mortgages, politicians have turned the firm into the arch-villain of the economic collapse.
But the transaction at the heart of the S.E.C.’s complaint is a microcosm of the entire credit crisis. That is, there are no good guys here. It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government.
Each of the supposed victims here was, at best, a willing accomplice. Let’s start with those who bet that the investment in question, Abacus 2007-AC1, would be profitable for them: a bond insurer called ACA Capital Holdings and a German bank named IKB Deutsche Industriebank. These companies allegedly didn’t know that Goldman, in exchange for $15 million in fees, had allowed a client, the hedge fund manager John Paulson, to help design the investment in order to improve the odds that it would fail.
But there was nothing hindering ACA’s ability to see that mortgages sold to people who probably couldn’t pay weren’t great investments. Meanwhile, the company’s insurance arm was covering as many subprime mortgages as it could to increase its own short-term profits. In some ways, the ACA story is the A.I.G. story: The company thought it had found free money — and basically bankrupted itself.
Similarly, the German bank advertised itself as a sophisticated investor, but didn’t seem to have bothered to analyze the subprime-backed bonds it was buying. The bank just relied on the AAA rating and, not surprisingly, pretty much bankrupted itself, too.
Which brings us to the rating agencies that stamped over 75 percent of Goldman’s Abacus securities with that AAA rating, meaning the securities were supposed to be as safe as United States Treasury bonds. They did the same to billions of dollars worth of equally appalling securities backed by subprime mortgages at other firms. Without the cravenness of the rating agencies, there would have been no Abacus, and no subprime mortgage crisis.
None of this excuses Goldman. Whether the transaction was legal or not, there’s a difference between what’s legal and what’s right. Goldman, where I worked at a junior level from 1992 to 1995, has always held itself up as a firm that adheres to a higher standard. “Integrity and honesty are at the heart of our business” is one of Goldman’s 14 principles. There is no way to square this principle with the accusation that Goldman did not tell a customer who didn’t want to lose money — the very definition of a buyer of AAA-rated securities — that the investment it was selling had been rigged to amplify the chances that it would, yes, lose money.
Transactions like this one open up a window into modern finance, and the view is downright ugly. This deal didn’t build a house, finance a world-changing invention or create any jobs. It was just a zero-sum game that transferred wealth from what Wall Street calls “dumb money” (often those who manage the public’s funds) to a hedge fund. It certainly belies what Lloyd Blankfein, the firm’s chief executive, told me last fall: “What’s good for Goldman Sachs is good for America.” Could the scary truth be that, at best, the success of one has nothing to do with the success of the other?
Yet, in the end, it comes down to this: Goldman Sachs, ACA Capital, IKB Deutsche Industriebank and even the rating agencies never had any duty to protect us from their greed. There was one entity that did — our government.
But it was the purported regulators, including the Office of the Comptroller of the Currency and the Office of Thrift Supervision, that used their power not to protect, but rather to prevent predatory lending laws. The Federal Reserve, which could have cracked down on lending practices at any time, did next to nothing, thereby putting us at risk as both consumers and taxpayers. All of these regulators, along with the S.E.C., failed to look at the bad loans that were moving through the nation’s banking system, even though there were plentiful warnings about them.
More important, it was Congress that sat by idly as consumer advocates warned that people were getting loans they’d never be able to pay back. It was Congress that refused to regulate derivatives, despite ample evidence dating back to 1994 of the dangers they posed. It was Congress that repealed the Glass-Steagall Act, which separated investment and commercial banking, yet failed to update the fraying regulatory system.
It was Congress that spread the politically convenient gospel of home ownership, despite data and testimony showing that much of what was going on had little to do with putting people in homes. And it’s Congress that has been either unwilling or unable to put in place rules that have a shot at making things better. The financial crisis began almost three years ago and it’s still not clear if we’ll have meaningful new legislation. In fact, Senate Republicans on Monday voted to block floor debate on the latest attempt at a reform bill.
Come to think about it, shouldn’t Congress have its turn on the hot seat as well? Seeing Goldman executives get their comeuppance may make us all feel better in the short term. But today’s spectacle shouldn’t provide our government with a convenient way to deflect the blame it so richly deserves.
Bethany McLean, a contributing editor for Vanity Fair, is writing a book about the financial crisis with Joe Nocera of The Times.
http://www.nytimes.com/2010/04/27/opinion/27mclean.html?ref=opinion
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Obamacon Doves vs. Hard-Money Heartland Hawks
A battle royale is brewing at the Fed.
President Obama has appointed three new doves to the Federal Reserve Board, thereby taking command of the nation’s central bank. But there’s a split developing inside the Federal Reserve System: The Reserve Bank presidents, appointed by their own district boards of directors, are increasingly likely to wage a battle royale against the central-bank headquarters in Washington and its free-money, ultra-easy policies.
The new Obama appointees include Janet Yellen, president of the San Francisco Fed, Peter Diamond of MIT, and Sarah Bloom Raskin, the top Maryland state banking supervisor who blames Wall Street greed for much of the financial crisis.
Now, Ms. Yellen is a highly credentialed and respected former Clinton economist. But the new Fed vice chair is also a devotee of targeting the unemployment rate as a key monetary-policy gauge. The Keynesian idea here is that too many people working cause inflation. So with a 9.7 percent unemployment rate, she can be expected to back Fed head Ben Bernanke in his quest for continued free money, with the other new doves following suit.
Make no mistake about it. These appointees (along with Daniel Tarullo, an earlier Obama appointee and another dove) make for an easy-money, pro-regulation Fed. As for monetary soundness, price stability, and a reliable King Dollar, these highly credentialed academics won’t pilot us there.
California economist Scott Grannis recently blogged about “easy Fed, strong gold.” The yellow metal, which has proven to be the best indicator of currency confidence, continues its upward trend against the dollar, and for that matter against the euro and Japanese yen. Grannis also has been writing about the surge in commodity prices, which are marching onward and upward in a V-shaped recovery. Grannis, in other words, is tracking the appropriate indicators.
Many supply-siders, including myself, believe that commodity prices in the open market are the best measures of whether money is too tight or too loose. But no one on this new Obama monetary team will be paying much attention to gold and commodities. They believe in the so-called Phillips Curve tradeoff between inflation and unemployment, despite the breakdown of that model back in the 1970s, when both measures rose together, and for most of the 1980s and 1990s, when both measures fell together.
Indeed, more people working more productively will create more economic growth to absorb the money supply and maintain very low inflation. On the other hand, the $2 trillion Fed balance sheet — which embodies the creation of a massive new volume of the high-powered monetary base, to draw on Milton Friedman’s analysis — sets the stage for too much money chasing too few goods and a steady depreciation of the dollar.
In this scenario, enter one Thomas Hoenig, head of the Kansas City Fed.
Hoenig is a rising monetary superstar who has dissented at each of the last three Fed open-market meetings. He believes money is too loose, and says that if this continues, we risk a new financial bubble that ultimately will come to no good end. I believe Hoenig’s warnings are right on target.
At its meeting this week, the Fed chose to ignore clear signs of a stronger-than-expected V-shaped recovery, along with the bubbling-up of commodity prices and double-digit gains in the producer price index. This is a high-risk strategy. It points to no plan for exiting the zero-interest-rate policy that continues to govern long after the financial and economic emergency has passed.
My own view is that we need a dose of what I call cowboy monetarism. By that I mean the Fed should surprise Wall Street traders with unexpected policy restraint in order to keep them from taking excessive risks in their financial dealings. Like the cowboy’s of the Old West, who would act in their own defense at a moment’s notice, the Fed should not be afraid to pull the trigger on some small restraining moves now to prevent new financial bubbles and an outbreak of inflation down the road.
Wall Street economist Mike O’Rourke criticizes the Fed for cutting and pasting the same predictable phrases from the same predictable policy at each successive Fed meeting. The Fed basically did it again this week. And this is exactly the same mistake it made during the 2002-05 period when the last bubble was born.
Some small restraining signals now might save us a lot of aggravation later. But the Obama doves are going to resist this approach.
Not only will a stubborn adherence to failed monetary theory put these soft-money Obamacon doves at war with the hard-money Reserve Bank hawks, it could also do great damage to hopes for a recovery in American prosperity in the years ahead.
— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic$.
http://article.nationalreview.com/433076/obamacon-doves-vs-hard-money-heartland-hawks/larry-kudlow
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The Dollar's Inevitable Demise
By Vasko Kohlmayer
Consider these figures. The current size of the American economy is roughly $14 trillion. As of this writing, the federal government's total public debt stands at nearly $13 trillion.
In its first midsession review, the White House Office of Management and Budget estimated that at the end of 2010, the national debt will breach the $14-trillion mark. This means that America's sovereign debt will be soon equal to the annual output of our economy. In other words, our national debt will shortly reach 100 percent of GDP. History and experience show that most governments that assume such levels of debt are ultimately not able to contain them. In most cases, this kind of situation eventually leads to the disintegration of the country's monetary regime and the collapse of its currency.
This outcome is not inevitable, given that -- in theory, at least -- a debt of 100 percent of GDP is still manageable. But to bring things under control would require strict fiscal discipline. Unfortunately, there no indication that our federal government can muster any. Quite the contrary. Last year the federal budget deficit reached a record $1.4 trillion. At nearly 10 percent of GDP, this was the highest peacetime deficit in history. Despite the numerous assurances that the 2009 shortfall was a one-off event brought on by the financial crisis, this year's deficit will go even higher. According to the analysis submitted by the Congressional Budget Office last month, it will climb to $1.5 trillion. This will amount to 10.3 percent of GDP.
There is every reason to believe that the deficit will grow even faster in the years to come, as the federal government further increases its involvement in health care. The estimates by the Office of the Management and Budget which we quoted above do not factor in the costs associated with the recently passed health care reform. Even the more conservative estimates project that the legislation will cost well over one trillion during the program's first ten years. It is almost certain, however, that this figure is grossly understated, as government programs have a tendency to exceed their initial cost projections by grotesque multiples.
This, however, is not the worst of it, because the national debt represents only a relatively small portion of our government's total financial obligations. The far greater bulk is made up of long-term liabilities inherent in entitlement programs. According to the latest estimates by the Dallas Federal Reserve, the combined liabilities of Medicare, Social Security, and Medicaid amount to an astounding $104 trillion.
When we add the national debt and entitlements together, we get a figure of some $117 trillion. This figure represents the amount of money the federal government will have to come up with in the years ahead in order to discharge its obligations.
The sheer magnitude of this number makes it difficult to grasp. To give a sense of scale, it is about twice the current economic output of the whole world. It is also more than eight times the size of the American economy. With today's tax revenues it would take more than fifty-five years to pay for these obligations. This assumes there is no interest on the debt and that the federal government spends no money on anything else.
There is only one conclusion that reasonably can be drawn on the basis of these figures: The American federal government is simply not in the position to make good on its obligations.
There is a growing recognition of this fact. When discussing America's national debt in his lecture at the Mises Institute, the noted financial analyst Peter Schiff said this:
We're not going to pay the Chinese back their money. It's impossible. We can't. We can't possibly.
Given the figures, Schiff only stated the obvious.
Sooner or later, our government's ability to finance deficit spending with low yield bonds will come to an end. Deprived of the source of cheap cash and pressed by the need to meet its vast array payments, the government will be left with two options: It will either have to default, or it can seek to meet the payment schedules by creating new money.
Given the dollar's status as the world's reserve currency, default would be a cataclysmic global event that would result in the disintegration of the world's financial system. Needless to say, this kind of calamity would bring about the dollar's sudden collapse with ruinous consequences for the American people.
The second option -- paying its outstanding bills with new money -- looks initially more attractive. On this scenario government would discharge its liabilities with freshly created dollars. This is actually the most likely course our government will take, since money creation is the route that over-leveraged governments usually take in an effort to service their excessive obligations.
At first sight this may seem like an easy way out, but it has bad consequences down the line. As the government pumps new dollars into the system, the value of the money stock is diluted and inflation occurs. In light of the enormous depth of our indebtedness, inflation will in the end eat away most of the dollar's value.
It should be noted that inflation is really only default in disguise. On the inflationary scenario, creditors will only get paid back a portion of their original investment while entitlement beneficiaries will only receive a portion of the value of their promised benefits.
Whichever of the two possible options our government chooses to pursue, the final result will be currency destruction. Outright default would result in the dollar's immediate collapse, while inflation would produce a more gradual decline, at least initially. Needless to say, given the immense weight of the government' financial burden, the inflationary route will ultimately wipe out most of the greenback's worth. Either way, we will end up with a greatly debased, if not completely worthless, currency and all the painful repercussions inherent in that downfall.
To put it bluntly, the dollar's days are numbered and its demise is inevitable. Anyone who still hopes there may be a way around it, must answer that ultimate money question: Where in the world is the American federal government going to get $117 trillion?
Any suggestions?
Page Printed from: http://www.americanthinker.com/2010/05/the_dollars_inevitable_demise_1.html at May 04, 2010 - 12:48:59 PM CDT
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Although I tend to be more apocalyptic, as always Scott Grannis is a beacon of quality economic analysis:
http://scottgrannis.blogspot.com/
This is quality stuff folks!
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May 12, 2010
http://www.realclearpolitics.com/articles/2010/05/12/depression_2010_105530.html
Depression 2010?
By Robert Samuelson
WASHINGTON -- It is now conventional wisdom that the world has avoided a second Great Depression. Governments and the economists who advise them learned the lessons of the 1930s. When the gravity of the financial crisis became apparent in late 2008, the response was swift and aggressive. Central banks like the Federal Reserve and the European Central Bank dropped interest rates and lent liberally to threatened financial institutions and rattled investors. The United States and many countries approved "stimulus" programs of tax cuts and additional spending. Panic was halted. A downward spiral of falling private spending and rising unemployment was reversed. The resulting economic slump was awful. But it was not another Great Depression. The worst has passed.
Or has it? Greece's plight challenges this optimistic interpretation. It implies that celebration is premature and that the economic crisis has moved into a new phase: one dominated by the huge debt burdens of governments in advanced societies. Comparisons with the Great Depression remain relevant -- and unsettling. Now, as then, we may be prisoners of deep and poorly understood changes to the world economic system.
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Although, as I just mentioned, I admire Scott's work greatly-- I do not share his optimistic conclusions, as tempered as they may be. I think (fear?) that this time is different; that we have kept kicking the day of reckoning upstream until we have reached a point where the world as a whole is rather bankrupt and a world wide bubble is in the process of bursting.
Glenn Beck makes the interesting point that in the aftermath of WW2 that world-wide economic integration was seen as a good and necessary way to prevent another world-wide conflagration, but that now that we are all integrated into one world-wide economy, when the excrement hits the fan that everyone is going to get splattered.
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When next you chat with Scott can you ask how he thinks this record debt with more in the healthcare pipe will resolve itself?
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These are two very bright, very insightful men and they have some genuine insights and what just happened and where it may be heading.
Highly recommended.
PS: I'm working on persuading Scott to join us as his busy schedule allows.
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Woof,
What? With all the community organizing in Chicago and hard work in the state government that Obama did, and now this? How is this even possible?
http://www.msnbc.msn.com/id/37136518/ns/us_news-life
P.C.
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Prentice, Your illustration of Illinois going bankrupt is right on the money. The "community organizing" was always in the direction of anti-capitalism. Lobbying the government to take from those who earned it and give to those who didn't. They fought the rights of property owners to evict, the rights of mortgage holders to foreclose and the right of lenders to discriminate based on creditworthyness. The assumption is that the rich are so rich, America is so rich that no effort at 'social justice', welfare 'rights', expansion of government, bloated public employees payrolls and pensions, increase of tax rates, destruction of incentives etc etc will have any negative affect on the economy or jobs whatsoever.
They were wrong.
What they should have been doing is establishing free market zones starting with the legalization of lemonade stands in the worst neighborhoods of Chicago and show the youth early how to build earned wealth.
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I agree with Crafty that Scott's site is a wonderful read for economic analysis. He has very timely and telling charts analysis from a very wide range of great sources with his own excellent insights. I also agree with Crafty that I am not as optimistic going forward as the some of the best supply side economists.
Asking economists to tell us the future is not fair. I am perfectly happy to judge them by their ability to analyze what has already happened which is hard enough. In economics, hindsight is NOT always 20/20. I have found Scott to be among the very best in the profession, along with IMO Brian Wesbury, David Malpass and others. I have benefited greatly from Scott's insights at Gilder and OP as well as currently at the Calafia Beach Pundit site.
What we have right now is an unknown impending storm of negative public policy forces attacking the most successful private market system in history. It is impossible IMO to say right now who will win.
Some form of socialized medicine already passed but no one knows the impact on the economy because of the delay to implement and the possible change of power in congress later this year.
We have cap and trade policies coming to destroy our industries or we don't.
We have a massive tax hike on investors and employers ("ending the Bush tax cuts on the rich") at the end of this year or we don't.
We have a domino effect coming from collapsing countries and states or it will be somewhat isolated and we mostly survive it.
Our trillion and a half dollar annual deficit will either be financeable until we can get it under control or it won't.
And our currency... either we have already set ourselves on a course where we have borrowed, expanded and printed it to the point of it becoming worthless and meaningless or we haven't. Depends on some other factors partly unknown.
The very best golf (or fight) analyst can tell you the all about the players in the game, past performance, swing dynamics, training techniques, equipment changes, confidence levels, etc. but none will tell you accurately what their scores of the Masters will be before the tournament. That's why they play the game.
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Well said, Doug.
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Ditto.
Actually a big part of my disconnect here is precisely my supply side instincts; it is hard to see how big tax rate increases via taxes or inflation are not already baked into the pie-- and this is VERY bad.
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http://www2.macleans.ca/2010/05/20/not-just-their-big-fat-greek-funeral/
Own it, Obama voters.
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:-o :-o :-o :-P
The gathering clusterfcuk , , ,
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Well they better hurry and get to it- the cluster method is about they only way they'll turn the population around :-D
They just built that beautiful bridge too, as a way to help with the economy. Too bad that "transworld highway" segment they are building thru the country may not get built now to use the bridge and get some of that investment returned? Looking at those, I thought that they may actually turn things around, but I was unaware of the 14 month work year that the Greek gov sector was being paid for. Just trimming that a few years back may have made most of the difference. That would be a 20%, givr or take a bit, cut in payroll. Payroll is always the biggest item, that would have allowed some room to work on cutting the materials/ tools factors. (redtape and processes?)
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http://reason.com/blog/2010/06/02/the-silver-lining-of-cash-for
Reason Magazine
The Silver Lining of Cash for Clunkers: Studies in Stupid Stimulus Spending
Katherine Mangu-Ward | June 2, 2010
There was never a lot to love about last summer's Cash for Clunkers program. We pointed out the ways it could be scammed, how it made used cars more expensive, destroyed useful goods, and even its backers admitted the claims about environmental benefits were most a bunch of hot air—and last we checked it was threatening to spawn lookalikes.
But finally, someone has found a silver lining. The excellent Coyote Blog sums it up:
I have found a reason to love the Cash for Clunkers program: it is a fabulous demonstration project for just how utterly pointless government stimulus programs can be. Stimulus programs tend to be hard to evaluate in our complex economy — sort of like trying to calculate the effect of a butterfly flapping its wings on world climate. But since cash for clunkers only lasted a few weeks and hit only one industry, we can learn a lot about the effectiveness of government stimulus.
(http://reason.com/assets/mc/kmw/2010_06/clunker.gif)
You'll notice that the dotted line—which simply averages the month o' clunkers and the month after—lands pretty much where the trend line would have been without that $3 billion in federal spending.
Via Reason contributor Will Wilkinson.
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Paul Krugman and Robert Reich are two leftist opinion leaders who think the world works according to demand side (Keynesian) economics and that a trillion and a half deficit is too small of a stimulus for the problems we face. If we had more diversity of thought on the board, these opinions would be posted and argued here regularly. Filling that void, here is the latest from Robert Reich (below). It takes me about 2 days of my life that I will never get back to answer all this drivel point by point. I'm hoping someone else will do it. :-)
http://www.huffingtonpost.com/robert-reich/my-father-and-alan-greens_b_618921.html
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Doug,
I read the piece.
I am not an economist but even so nearly everything he says seems wrong headed and stubborn just to support his present day liberal desires.
He is totally nuts.
Or according to his logic we should be praying for a gigantic war with tax rates skyrocketing to the 90% range for the highest incomes.
The war must devastate our competitors, China, Europe, etc. so we emerge on top like 1945.
Like you I don't want to spend any more time on this nonsense.
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The G-20 Fiscal Fight: A Pox on Both Their Houses
Posted by Daniel J. Mitchell
Barack Obama and Angela Merkel are the two main characters in what is being portrayed as a fight between American “stimulus” and European “austerity” at the G-20 summit meeting in Canada. My immediate instinct is to cheer for the Europeans. After all, “austerity” presumably means cutting back on wasteful government spending. Obama’s definition of “stimulus,” by contrast, is borrowing money from China and distributing it to various Democratic-leaning special-interest groups.
But appearances can be deceiving. Austerity, in the European context, means budget balance rather than spending reduction. As such, David Cameron’s proposal to boost the U.K.’s value-added tax from 17.5 percent to 20 percent is supposedly a sign of austerity even though his Chancellor of the Exchequer said a higher tax burden would generate “13 billion pounds we don’t have to find from extra spending cuts.”
Raising taxes to finance a bloated government, to be sure, is not the same as Obama’s strategy of borrowing money to finance a bloated government. But proponents of limited government and economic freedom understandably are underwhelmed by the choice of two big-government approaches.
What matters most, from a fiscal policy perspective, is shrinking the burden of government spending relative to economic output. Europe needs smaller government, not budget balance. According to OECD data, government spending in eurozone nations consumes nearly 51 percent of gross domestic product, almost 10 percentage points higher than the burden of government spending in the United States.
Unfortunately, I suspect that the “austerity” plans of Merkel, Cameron, Sarkozy, et al, will leave the overall burden of government relatively unchanged. That may be good news if the alternative is for government budgets to consume even-larger shares of economic output, but it is far from what is needed.
Unfortunately, the United States no longer offers a competing vision to the European welfare state. Under the big-government policies of Bush and Obama, the share of GDP consumed by government spending has jumped by nearly 8-percentage points in the past 10 years. And with Obama proposing and/or implementing higher income taxes, higher death taxes, higher capital gains taxes, higher payroll taxes, higher dividend taxes, and higher business taxes, it appears that American-style big-government “stimulus” will soon be matched by European-style big-government “austerity.”
Here’s a blurb from the Christian Science Monitor about the Potemkin Village fiscal fight in Canada:
This weekend’s G-20 summit is shaping up as an economic clash of civilizations – or at least a clash of EU and US economic views. EU officials led by German chancellor Angela Merkel are on a national “austerity” budget cutting offensive as the wisest policy for economic health, ahead of the Toronto summit of 20 large-economy nations. Ms. Merkel Thursday said Germany will continue with $100 billion in cuts that will join similar giant ax strokes in the UK, Italy, France, Spain, and Greece. EU officials say budget austerity promotes the stability and market confidence that are prerequisites for their role in overall recovery. Yet EU pro-austerity statements in the past 48 hours are also defensive – a reaction to public statements from US President Barack Obama and G-20 chairman Lee Myung-bak, South Korea’s president, that the overall effect of national austerity in the EU will harm recovery. They are joined by US Treasury Secretary Tim Geithner, investor George Soros, and Nobel laureate and columnist Paul Krugman, among others, arguing that austerity works against growth, and may lead to a recessionary spiral.
http://www.cato-at-liberty.org/2010/06/25/the-g-20-fiscal-fight-a-pox-on-both-their-houses/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Cato-at-liberty+%28Cato+at+Liberty%29&utm_content=Google+Reader
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http://hotair.com/archives/2010/06/29/consumer-confidence-plunges-in-june/
Consumer confidence plunges in JuneShare posted at 11:36 am on June 29, 2010 by Ed Morrissey
In yet another milepost for “Recovery Summer,” a new report on consumer confidence has the Dow down over 200 points this morning. The Conference Board shows that consumers have pulled back much more significantly than analysts predicted, losing ten points in May:
Americans, worried about jobs and the sluggish economic recovery, are having a relapse in confidence, causing a widely watched index to tumble in June and raising concerns about consumer spending in the critical months ahead.
The Conference Board, a private research group based in New York, said Tuesday that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May. Economists surveyed by Thomson Reuters had been expecting the reading to dip slightly to 62.8.
June’s reading marked the biggest drop since February, when the index fell 10 points. The index had risen for three straight months since then.
Both components of the index — one that measures how consumers feel now about the economy, the other that assesses their outlook over the next six months — dropped. The Present Situation Index decreased to 25.5 in June from 29.8 in May. The Expectations Index declined to 71.2 from 84.6.
The AP avoids the use of its favorite adverb until farther in the piece, when it describes the collapse in new-home sales previously announced this month. Investors haven’t been fooled, however, as they note that the Dow has fallen almost 10% over the last two months. Those holding capital have begun sheltering themselves from the storm.
Anne D’Innocenzio gets it right when she notes that unemployment is the big problem — and that it’s about to get worse:
Economists already had believed confidence will remain weak for at least another year because of stubbornly high unemployment. … A key issue is jobs. The Labor Department is expected to report on Friday that employers eliminated 110,000 jobs in June, and the jobless rate is expected to tick up slightly to 9.8 percent, from 9.7 percent in May, according to economists surveyed by Thomson Reuters. That follows a bleak report in May, which showed employers added 431,000 jobs but the vast majority were temporary census positions.
Recovery Summer, or Recovery Bummer? Economists are beginning to wonder whether we’re heading into a double-dip recession, or whether the first one ever really ended:
Monday’s weak consumer spending data is the latest in a string of reports that has many Americans worried about a “double-dip” recession.
Then again, considering the unemployment rate has remained elevated, many Americans would be forgiven for thinking the recession that began in December 2007 still hasn’t ended. Notably, that’s the view of the National Bureau of Economic Research (NBER), the nation’s official arbiter of economic expansion and contraction.
Among the signs suggesting the NBER is right to hold off in declaring the recession over:
Housing Rolling Over: Last week’s housing numbers were horrific, especially the steep drop in new home sales. Still, Coldwell Banker CEO Jim Gillespie tried to put some lipstick on the proverbial pig on Tech Ticker last week.
Jobs Still Hard to Come By: Despite signs of recent progress, “there’s no possibility to restore 8 million jobs lost in the Great Recession,” a notably candid Vice President Joe Biden said Monday. Friday’s jobs report is expected to show overall payrolls declined by 115,000 in June.
Instead of Recovery Summer, it looks more like Midterm Malaise.
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A recession is not fully defined but generally looked at as a decline in GDP over a couple of quarters or more. GDP is measured many ways but one is consumption+investment+government+net exports.
Recession or economic stagnation might also be looked at in terms of net job losses over a similar time frame while economic expansion is also noted with prolonged job growth statistics.
I would contend that only private sector 'production' or employment should count as economic growth, with government being just the parasite feeding off the host - economically. (If the gov't programs performed as promised they would be accompanied with private sector job growth.) If you include government job growth or accelerated government expenditures as economic growth it seems to me you are measuring something artificial and unsustainable without the corresponding private sector growth. In particular you can't realistically count the $4 trillion in spending as increased economic 'results' if you only raise 2.5 trillion of it in funding, leaving the rest as accumulated debt that accumulates interest into eternity and brings down the value of the unit (dollars) that you were measuring in the first place.
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WSJ articles I keep reading give serious "circle the wagons" inspiration. If money has to be spent- spend it on necessity, not on nice to have or risky items. I think a lot of the business community has been forced into that by Obama Administration policies and attitude. about 20% of the economy is now effectively nationalized, hardly a democratic, much less free concept.
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Note the Art Laffer piece I posted in the Tax thread recently. IMHO Laffer is quite right. The tax increases due to the expiration of the Bush rate cuts have caused many to accelerate activity and profit taking. This bubble will burst too.
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As I've said before, invest in metals. Guns, ammo and canned food.
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http://www.cnbc.com/id/37973984
US State Budget Crises Threaten Social Fabric
Published: Monday, 28 Jun 2010 | 10:43 AM ET Text Size By: By Matthew Garrahan, Financial Times DiggBuzz FacebookTwitter More Share
The small southern California city of Maywood has hit on a unique solution to its budget crisis. Crushed by the recession and falling tax revenues, the city is disbanding its police force and firing all public sector employees.
Maywood has opted for an extreme solution, by contracting out all public services, including the most basic, to save cash. But it is not alone.
States around the US are cutting costs wherever possible as they prepare budgets for the fiscal year that starts this week for most of them. Their combined deficit is projected to reach $112 billion by June 2011.
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Hmmm, that is an experiment to watch? Will the private security contractor fill the police gap? I wonder what else Maywood has to deal with they are right in the middle of Metroville. Sewage, water, streets are definately going to be an issue. They aren't the areas where I grew up, where a house 5 minutes out of town usually had its own septic tank and well and a gravel driveway. You have paved roads, storm drains, sewer, etc. I wonder how a private company would find a business model that would work?
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The LA County Sheriff's Dept. will provide police services under contract to Maywood.
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I figured as much, better to get stretched some than let a crime bazaar develop. That would take serious effort to fix. Isn't the LAPD dealing with budget issues too?
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Every law enforcement agency is struggling right now.
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http://www.nytimes.com/2010/07/04/your-money/04stra.html?_r=2
His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.
Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”
The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”
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http://hotair.com/archives/2010/07/07/state-local-govts-eyeing-layoffs-as-porkulus-expires/
Running out of other people's money.
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Prechter has an absolutely horrendous track record. Alan Reynolds has a really good one. Here is what he says (btw I disagree quite a bit, but I do respect the man and pay attention to what he says):
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Money
Get Real: This Is Not 1932
Brian S. Wesbury and Robert Stein
07.07.10, 6:00 AM ET
Want to be invited to A-list parties? Want people to think you are smart? Then don't smile and don't say anything positive--especially about the economy. Pessimism has become so pervasive that people will believe just about anything, as long as it is negative.
Over the July 4 weekend, after a jobs report that showed 83,000 new private-sector jobs were created in June, the Drudge Report had not one but two headlines that compared the U.S. economy of 2010 to that of 1932. In other words, the U.S. is back in Depression. This is a complete overreaction and is indicative of the severe case of economic hypochondria that seems to have gripped the nation and the world.
One symptom of this disease is that common sense is suspended. The simple explanation is tossed aside and data releases are dredged and sifted to find the most dire possible explanation for any economic information.
For example, every 10 years the United States Government conducts a census, and every 10 years the government hires hundreds of thousands of very temporary workers to help in the effort. Some time between April and June total employment goes up and down by an amount that often swamps the underlying trends of employment.
In May total payrolls increased 433,000, but then fell by 125,000 in June. So rather than explain this to people, the Pouting Pundits of Pessimism said things like, "All the jobs in May were government jobs." And then last Friday, after the June jobs report, they said, "Jobs fell for the first time in seven months." Both of these reactions were misleading.
They could have said, "Once we adjust for the Census, private-sector payrolls increased by 33,000 in May, and then accelerated in June to 83,000." While both months were disappointing when compared with previous recoveries, the data shows six consecutive months of private-sector job creation.
Another interpretation that defies common sense involves labor force data. When 805,000 more people said they were looking for a job in April, the pessimists said, "See how many people had been discouraged ... the unemployment rate will never fall as they start looking again." And in June, when the labor force fell by 652,000, they said, "This is the only reason that the unemployment rate fell."
This is crazy. It defies common sense. Economic data is volatile, so quarterly data might be better. And in the second quarter the U.S. added 357,000 private-sector jobs--more than 50% greater than the 236,000 added during the first quarter.
New orders for durable goods, a leading indicator, are up 10% at an annual rate in the past three months. Excluding transportation, they are up 25%. If we look at just machinery orders, they are up 63% in the past three months and 23% in the past 12 months. This is not a depression.
Yes, housing has fallen. But what should we expect after a huge government program to support housing activity ends? Remember Cash for Clunkers? Activity was artificially boosted by the program, then it fell, then it recovered as the normal forces of economic activity kicked in again. The same thing will happen with housing in the months ahead.
So could we be repeating 1932? We suppose anything is possible, but these fears are based on a faulty comparison with history. In 1932 the M2 measure of the money supply fell by 16.5% -- the third of four consecutive yearly declines between 1929 and 1933. Meanwhile Herbert Hoover pushed through the largest tax hike in American history. The lowest tax rate rose from 1.5% to 4% (at $1 dollar of taxable income), the 6% rate (which kicked in at $10,000) rose to 10%, and the top rate more than doubled from 25% to 63%.
Today the M2 measure of money is growing, and tax rates, while scheduled to go higher in 2011, are nowhere near the levels of the 1930s. And there is no Smoot-Hawley Tariff Act.
None of this is to say that the government is not making it more difficult for business. Clearly the uncertainty of new laws, spending, taxes and regulations is throwing a wet blanket over the entrepreneurial side of the American economy.
But two things are true. First, productivity is so strong that the economy is growing despite massive increases in the size of government. The U.S. is creating jobs, even if the rate of growth is less than previous recoveries. Profits are still rising. In fact, analysts are still raising earnings estimates.
Second, the market has so much negativity priced in that it is cheap on just about any basis. Based on forward earnings, the PE ratio for the S&P 500 is under 12. And our capitalized profits model shows that stocks are severely undervalued. Based on very conservative inputs, we continue to believe the fair value for the Dow Jones industrial average is 14,500.
Pessimism creates value. Optimism has traditionally been rewarded. We remain optimistic.
Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.
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2010 is Not 2008
by Duncan Frearson, Smith Street Capital
July 6, 2010
"Fool me once shame on you, fool me twice shame on me." This saying appears to be governing market behavior lately. Soft economic data has become the calling card for a market rout. Managers, fearful of another unforeseen collapse, have been selling down positions and de-risking their portfolios.
Why then should an investor buy what seemingly smart managers are selling? I believe the “rottenness” has already been purged from the system, to paraphrase Andrew Mellon, and the healing has begun.
Anyone who has kids knows when the lights go out, the boogey man appears. We are in the unfortunate position where problems in Europe, the end of some government stimulus programs, some large budget gaps and a growing oil leak have turned off the market’s lights. The boogey man has entered the mind of the market causing some fearful behavior.
At the end of day the earnings power of a company is all that matters and thus understanding customer behavior is paramount. For the economy as a whole we should ask ourselves: are we currently spending beyond our means? Individuals are earning at record levels – around $10,103 billion for real disposable personal income in Q2 and we are only just beginning to push real spending beyond Q4 2007 levels leading to a savings rate in the 3.5% range, according to government data. The debt service coverage ratio and the financial obligations ratio both indicate the consumer is de-leveraging into a more stable financial foundation.
Source: Federal Reserve
The only real historical precedent for a double dip that is relevant happened in the early 1980s. A look at this prior period indicates a double dip recession is possible, but it requires action to make it happen.
The 1980s double dip came courtesy of a Federal Reserve that began to fear a pick up in inflation after the economy began to recover.
Of course their fear was warranted given inflation was the main reason for the prior economic malaise, but it would seem unlikely that the Federal Reserve will put any brakes on this time around (in fact they have stated they will not) and thus with a more stable consumer in the mix a collapse back to the late 2008/early 2009 level of economic activity appears highly unlikely.
On the corporate front, cash positions are at record levels for S&P 500 companies giving these firms confidence in their current operations and reducing the risk of sharp resource reductions.
U.S. states and EU nations are reducing budget gaps. They have provided liquidity and spending as the private sector reduced activity.
In the EU, the reduction in spending of the core nations will be slow allowing fears to eventually subside and any funding problems will be offset by ECB bond buying and the emergency SPE fund.
In the 1930s, U.S. government spending virtually doubled as a percentage of GDP creating an enormous economic dependence on this stimulus and thus a significant dip in activity when it was turned off. In the core EU nations no such boost has occurred and thus a reduction in economic activity from a cut in spending will be muted, at best, given their stable employment picture.
The longer the reductions are strung out and the longer stability is maintained, the more consumers will feel comfortable about increasing their spending. Ironically, U.S. states are increasing general fund expenditures in their FY 2011 budgets to $635.3 billion from $612.9 billion in FY 2010, according to the National Governors Association. Increased tax revenue from improving economic activity, the usage of remaining American Recovery Act Funds and “rainy day” funds will help stabilize a recovery.
Clearly, the U.S. received an initial boost from exports and government spending but this has provided a pathway for private sector restructuring. The Chinese have begun to talk down their economic activity somewhat but we should look to what they do as opposed to what they say.
Their interests are aligned with our interests, and their export sector needs a healthy global economy to continue to bring a few hundred million people out of the countryside. They maintain adequate gold reserves under the ground domestically and their willingness to backstop the U.S. dollar and their aid in keeping U.S. stimulus spending virtually interest free is a testament to their desire to move the global economy out of recession.
Confidence is slowly returning as employment stabilizes. Gallup polls suggest higher income consumers are beginning to spend more and this will filter down to middle income and eventually to lower income consumers even in light of the declining equity markets due to restructured personal balance sheets. Companies, in turn, will respond with increased production, inventory rebuilding and increased hiring.
Given this, I expect to see buyers enter the marketplace as interest rates drop and affordability increases. It is very unlikely we will have the same situation in 2010 that occurred in 2008 where no financing was available for purchasing activity.
We need to be patient as the healing occurs after such an economic downturn. The larger macro economic picture has improved and with global coordination among central bankers of the world we can get back to business as usual, albeit with a little less leverage this time around.
Duncan Frearson, CFA, is a co-managing partner at Smith Street Capital.
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The arguments for and against a double dip recession are a media-inflamed straw man. Whether or not it occurs is irrelevant. The salient issue is whether or not real GDP can resume a consistent growth rate sufficient to cause the millions of unemployed to get hired at compensation packages equivalent to their pre-layoff situation less any decline in their household debt service and discretionary spending costs. Unless that occurs quickly, there will be more structural changes in the US economy for the worse.
On his blog, Scott Grannis (Marc: SG has been recommended here many times) notes that corporate profits are rising but corporations are not reinvesting most of those profits into their businesses with hiring. That’s because anyone in this email circular who has ever operated his or her own business knows that you don’t hire new people until you need to hire them. Businesses are finding that they don’t need to hire more people yet, because they can make do at current staffing levels and bring in temps when needed. In fact, businesses are still laying off temporary and full time workers. That’s why weekly jobless claims still exceed 450,000.
The other issue is demographic. A lot of private sector layoffs occurred to higher income baby boomers in what would normally be their peak earnings years. Also, a lot of them have seen their retirement nest eggs destroyed twice in the past decade. Wages are the best way a person has to recoup lost investment funds. However, the older baby boomers now must compete with younger workers and entry level workers for the same jobs. Right now, they are losing most of those battles. The result will be a greater demand for social security benefits by age 62-66 boomers. This will destroy the current actuarial assumptions of social security.
The pessimists like Roubini forecast growth in real GDP. They just see annualized growth of <2% in the second half of this year. So, let’s discuss the real issue in the US. How does an economy that was 60-70% consumer spending dependent and that grew for the past 10 or more years primarily based upon leverage resume those same growth rates with less leverage, with disposable income concentrated in less people, and with a government taxation and expenditure system that must itself deleverage? I question whether the traditional macro-economic indicators cited in the article are merely correlations. And, this time, we are experiencing another low probability economic event. After all, since Q4 1960, there have been only 5 quarters in which nominal GDP declined on an annualized basis. Three of those five quarters were Q4 2008, Q1 2009 and Q2 2009.
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Rick, the economy is not dependent on consumer spending, and consumer spending is not dependent on leverage. You're using Keynesian thinking (demand drives supply) rather than supply side thinking (supply drives demand). The only things that make the economy grow are 1) more work, 2) more efficient work, 3) investment, and 4) risk taking. If you have those, then you have the wherewithal for consumers to spend more. Leverage doesn't create new demand, it only redistributes demand (Peter borrows from Paul; Peter spends more, Paul spends less).
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Interesting debate Crafty. All sides make good points though I find Scott's supply side conclusion compelling. Leveraging and de-leveraging will change consumption patterns somewhat - like we saw with the artificial 'wealth effect' of people borrowing back paper gains from the equity in their homes. But real wealth is created on the production side by investing, risk taking, producing and selling the goods and services across the globe.
A perfect example of why Keynesian, demand side domestic policies fail is the cash for clunkers program. We put free money into the program to re-energize Ford, GM and Chrysler. The administrative costs were as high as the credit. The main beneficiaries turned out to be Toyota and Honda. Some of the money from Japanese companies stays in the U.S. but the program is inefficient (understatement) when it is working and the after-affect is zero - or negative.
(I also find targeted programs of tax credit or public spending initiatives to be a violation of equal protection principles.)
Meanwhile, while we are allowing our successful tax rate cuts to expire - the opposite of stimulus - Taiwan is lowering its corporate tax rate again to stay competitive with Singapore. China lowered its rate in Jan. 2008, right when our recession was beginning. When a liberal tells you that after raising taxes on the rich the rates won't be that much worse than those under Reagan, remember this: We aren't competing in a 1983 world.
Regarding double dip vs slow growth vs crash etc... we will see. I really don't know how far we can go in the wrong direction on the policy front before it all comes crashing down. And if we take the root canal approach, chopping public spending while leaving nothing but pain and uncertainty for the private sector investor/employer, it could be a long hard grind out of this mess.
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I apologize if I have misused any economics jargon. When I use the term “consumer spending”, I mean those personal consumption expenditures on goods and services that comprised about 70% of nominal GDP in the final revision for Q1-2010. Those numbers tell a story of survival on a personal level unique to every household affected by this recession.
The three largest categories of increased personal consumption spending between 12/31/08 and 3/31/10 occurred in the categories of gasoline (+$59 billion), health care (+$42 billion) and financial services/insurance (+$21 billion). Federal government consumption expenditures increased $42 billion during the same period. The difference between total federal consumption expenditures plus investment of $1.2 trillion and actual amount of federal expenditures of nearly $4 trillion during the same 15 month period is very sobering. Therefore, about $2.8 trillion of federal transfer payments occurred during a time that nominal GDP rose $236 billion. A tad more than 50% of that nominal GDP increase occurred in the three PCE categories of gas, healthcare and financial services/insurance. However, the real value of those expenditures only increased $15.9 billion – all but $100 million was in health care. So, people were mostly paying more to keep the same level of necessary expenses while their health issues increased.
As to employment and the corporate hoarding of cash, I believe that my argument is very supply-side with a slight Austrian twinge. The longer people remain unemployed, the more they rely upon government transfers and their savings. With interest rates low to “stimulate” the economy, people do not receive any meaningful returns on their savings. Eventually, they must sell assets whether in the form of retirement account withdrawals, housing or other assets.
As to leverage, it is often needed for liquidity. It can be in the form of a credit card, home equity loan, business credit line or even a pay day loan. Most people use leverage to buy homes, cars, vacations and other big ticket items.
As to the money supply, if most of the money sits on bank balance sheets as capital and in corporate bank accounts as cash, then your four factors of economic growth stagnate. There is not more work. Employable people lose their skills so that they become less productive. Employed people work longer hours to the point that they become less productive. Corporations don’t invest in growing their outputs. Risk taking declines because the people with the cash are less willing to take the risk and the people willing to take the risk don’t have the cash. Sam’s Club can’t finance every risk taker with vendor financing.
All of this has caused me to question the validity of the entire discipline of macroeconomics. Maybe it’s all a crock similar to MPT and the risk management models that failed in the credit markets. Yes, that may be a low probability event. Of course, in 2003, the housing crash was a low probability event for the Fed.
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Timothy P. Carney: President’s initiative revs up corporate welfare
By: TIMOTHY P. CARNEY
Examiner Columnist
July 9, 2010
President Obama is not "anti-business," as many conservative critics charge. He's just anti-free market. To better understand this distinction, just look at his latest initiative: trying to double U.S. exports in five years.
Obama's National Export Initiative, embraced by the big business lobby, is a raft of subsidies, handouts and "public-private partnerships." Obama uses the phrase "free trade" to describe this push, but there's nothing free about corporate welfare.
The heart of Obama's initiative is accelerating the activity of the Export-Import Bank, a government agency that subsidizes U.S. exports. Ex-Im lends money directly to foreign companies or governments -- or guarantees private bank loans -- so that the foreign buyers will buy American.
Calling Ex-Im "corporate welfare" isn't a slur -- it's a description. The White House brags that, as part of Obama's export initiative, "Ex-Im has more than doubled its loans to support American exporters from the same period last year. ... "
Perhaps to blunt the corporate-welfare charge, the administration portrays Ex-Im as a savior of small business. Last month, Ex-Im Chairman Fred Hochberg held a photo op in Centennial, Colo., trumpeting the jobs saved at Stolle Machinery by a subsidy enticing a Saudi Arabian company to buy machinery from Stolle.
But check out the minutes from the Ex-Im board meeting at which the Stolle subsidy was finalized. The other subsidies given either final or preliminary approval weren't so photo-op friendly: a federal guarantee for JP Morgan to subsidize a Boeing aircraft sale to Turkey's Pegasus Airlines; another loan guarantee for Boeing to sell jets to Asiana Airlines; $20 million in financing to subsidize GE turbines going to Slovakia; a direct loan of more than $20 million to the Pakistani government to buy GE locomotives; and yet another Boeing subsidy guaranteeing jet sales to Nigeria.
If you think Boeing's showing up a lot, you're getting the point. Last year, Ex-Im dedicated 64 percent of loans and long-term guarantees to subsidize Boeing sales. Yes, this federal agency exists mostly to subsidize one corporation.
Which brings us to the President's Export Council. Its chairman is Jim McNerney, CEO of Boeing. It makes sense that the nation's largest exporter should hold this seat -- and pocket most export subsidies -- but this just goes to show why increasing government tends to benefit the biggest businesses.
If there were no Ex-Im, and no President's Export Council, Boeing's size wouldn't be so advantageous.
McNerney this week expressed his confidence that Obama's council will advance policies to "expand free and fair trade." Of course, "free trade," when spoken by a politician, lobbyist or CEO, really means "subsidized trade."
And the other Export Council nominees bring with them a whiff of subsidy suckling. Jeff Kindler is CEO of Pfizer and chairman of the Pharmaceutical Researchers and Manufacturers of America.
PhRMA, the country's largest single-industry lobby, was a key champion -- and top beneficiary -- of Obama's health care bill. In fact, Pfizer justified Kindler's raise this year by pointing to his successful lobbying for Obamacare.
Patricia Woertz, another Export Council nominee, runs Archer Daniels Midland, a legend in the field of subsidy suckling. ADM's core business for decades has been corn-based ethanol -- a fuel that exists only because of federal subsidies and mandates. Ironically, ADM also depends on protectionism -- tariffs on imported ethanol, but also sugar quotas that drive up the price of sugar and thus create demand for corn syrup as a sweetener.
These sorts of businesses -- that live off of subsidies, handouts and government protections -- thrive under Obama. As a result, more businesses will come to the government teat. Meanwhile, increased taxes and regulations make it harder to make an honest buck.
It's reminiscent of how Ronald Reagan described the 1970s. "Back then," he said, "government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."
Timothy P. Carney is The Washington Examiner's lobbying editor. His K Street column appears on Wednesdays.
Read more at the Washington Examiner: http://www.washingtonexaminer.com/opinion/columns/Obama-revs-up-corporate-welfare-98062834.html#ixzz0tDPN5oyE
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http://www.ft.com/cms/s/0/83c978de-8b8a-11df-ab4d-00144feab49a.html
America: Optimism on hold
By Alan Beattie and Robin Harding
Published: July 9 2010 20:40 | Last updated: July 9 2010 20:40
Shopped out: downtime at the Mall of America, one of the biggest in the US. Job growth remains too slow to support the rise in consumption required for a self-sustaining recovery
A month ago, it all seemed to be going so well. Growth in the US economy was picking up. The financial system was, mainly, functioning. The risk of contagion from Europe had diminished after an unprecedented €110bn ($139bn, £91bn) bail-out from the European Union and the International Monetary Fund. Things were creeping back towards normality.
Then in early June, as Alan Greenspan, former Federal Reserve chairman, put it, the economy hit “an invisible wall”. The US had a run of bad news – disappointing job growth; unexpectedly low employment; indices suggesting manufacturing and services losing momentum; renewed jitters from Europe’s sovereign debt markets and its banks. While most economists think it unlikely this heralds the famous double-dip recession feared by policymakers, it does come at a time when America’s monetary and fiscal authorities are struggling for room to manoeuvre.
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WSJ editorialized a while back - that 'Keynes is Dead', the way of thinking, not the man.
Scott Grannis says Supply Side is the key.
Yet we still run our policies through the failed Demand Side model,
from Krugman to Obama, to all of the committees in congress.
Keynesian in a nutshell says: you can "stimulate' the economy
with deficit spending, dropping oodles of money on people, and you will alleviate the downturns.
It must be true, both Obama and Krugman are Nobel Laureates. (So is Yassir Arafat)
It must be true, even though...
In the time of the Great Depression - we had a stock market crash,
like we did in 1987, and at other times,
but for the Great Depression we had the New Deal.
We opened the spout and poured money around.
Money we didn't even have.
And unemployment grew. And it grew and it grew.
So more we spent... and unemployment went to 20...and stayed there.
But this time is different,
or is it so different???
We had the crash - this time it was housing.
We had the panic with the banks, and we had the bank failures.
So we spent and we spent.
The deficit exploded, from 160B to 1.6T, a tenfold expansion.
So what is the result?
Unemployment more than double, from under 5, to just over 10.
What next? you might ask...
Double again.
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Since Pelosi-Obama took control of congress and the federal government in Jan. 2007 deficit spending increased tenfold and unemployment went from 5% to 10%.
Seems like just numbers on a page? Watch it happen month by month, county by county in full color across the fruited plain:
http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
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http://news.yahoo.com/s/ap/20100712/ap_on_bi_ge/us_governors_debt_commission
Debt commission leaders paint gloomy picture
By GLEN JOHNSON, Associated Press Writer Glen Johnson, Associated Press Writer – 2 hrs 36 mins ago
BOSTON – The heads of President Barack Obama's national debt commission painted a gloomy picture Sunday as the United States struggles to get its spending under control.
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Sounds like panic mode if you ask me. There is nothing magical about Clinton. He was fortunate to have an internet boom/bubble while he was in office along with improved efficiencies/productivity that all burst just after he left. Tax cuts kept things going for awhile.
I don't think one needs to be an economist (whose predictions are next to guessing anyway) to see that until we lower expectations, raise retirement on Soc. Security on a national scale and localities stop allowing public employees to retire before 65 with pensions funded by tax payers, somehow hold down medical costs, and people wake up and realize they have to accept jobs they don't like (at least younger people who are fit to work physical labor) instead of sitting at home collecting checks then I don't see any long term upside. Even tax cuts will only do so much for so long.
Although I am a primary care physician and the "medical home" model is bieng pushed, quite frankly, I don't see it as a means to reign in on costs unless, one means rationing care. This idea of saving money by keeping people "healthy" (as though I can get everyone to start excercising and eating like a vegetarian etc.) is absurd. Indeed it may/probably raises long term costs by keeping people alive longer utilizing more Soc. Sec. Medicare, and health care dolllars on the backs of fewer workers.
When people died within three years of retirement (in the 1930's) rather than 15 (or if you are a public employee who can retire at 48, thus *35* years) the costs to taxpayers/workers was obviously less than it is now. And of course this is even without stating the fact that there are far more older non working people for far fewer workers today.
Unless Clinton is ready to face these facts than forget about him. And until Cans can do the same, tax cutting while I agree with overall is great and a lot better than bigger government, is unfortunately not the long term answer by itself.
****Obama enlists Bill Clinton's aid on economy
WASHINGTON (Reuters) – President Barack Obama sought Wednesday to lift sagging confidence in his economic stewardship by enlisting the help of predecessor Bill Clinton, as a leading business group issued a scathing critique of the administration's policies.
Clinton, who presided over the 1990s economic boom, was to join Obama at a White House meeting with business leaders at 2:35 p.m. Eastern time to encourage job creation and investment, including in clean energy.
The U.S. Chamber of Commerce, a leading business group, issued a rebuke of Obama's economic agenda, accusing him and his Democrats in Congress of neglecting job creation and hampering growth with burdensome regulatory and tax policies.
Four months before the November congressional elections, Republicans have tried to paint Obama and his Democrats as anti-business.
Obama is increasingly turning to former President Clinton to help win over voters and the business community.
Clinton, seen by many in corporate America as sympathetic, has helped the White House by campaigning for Democratic candidates running in November's elections.
And Obama Tuesday named former Clinton administration veteran Jack Lew as the White House budget chief to help cut the huge deficit.
With unemployment stubbornly high, polls have reinforced Democrats' fears of big losses in November.
A survey by The Washington Post-ABC News showed 54 percent of Americans disapproved of Obama's leadership on the economy. In a CBS News poll, only 40 percent of Americans said they approved of Obama's handling of the economy.
JOBS SAVED
To counter such perceptions, the administration trumpeted an analysis from the White House Council of Economic Advisers that said government funding of clean energy, economic development, construction projects and other initiatives was spurring "co-investment" by the private sector.
The report, unveiled by CEA Chairman Christina Romer and Vice President Joseph Biden, estimated that Obama's $862 billion economic stimulus package had saved or created roughly 3 million jobs, and was on track to meet its goal of 3.5 million jobs by the end of this year.
"The impact of the fiscal stimulus suggest that the (Recovery Act) has raised the level of GDP as of the second quarter of 2010, relative to what it otherwise would have been, by between 2.7 and 3.2 percent," the report said.
"Real GDP growth is expected to remain steady in the second half of 2010 and throughout 2011."
But an open letter from the Chamber of Commerce threatened to overshadow that analysis. The Chamber's letter gave Obama credit for stabilizing the economy and preventing another Great Depression.
"But once accomplished, the congressional leadership and the administration took their eyes off the ball," the letter said.
"They neglected America's number one priority -- creating the more than 20 million jobs we need over the next 10 years for those who lost their jobs, have left the job market, or were cut to part-time status -- as well as new entrants into our workforce."
The Chamber released the letter to coincide with its "Jobs for America" summit in Washington Wednesday.
High budget deficits are among the complaints business groups have lodged against the Obama administration. A healthcare overhaul, financial regulatory reform and proposals to cap carbon emissions are cited by some corporate chieftains as examples of regulatory overreach.
(Additional reporting by Alister Bull and Patricia Zengerle; Editing by Alistair Bell and Eric Beech)****
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Forgive me, but fcuk the Chamber of Commerce. Not only were Stimulus 1,2, & 3 not responsible for preventing a depression (a point on which some reasonable people disagree) but more pertinently here it is not the fg job of the government to CREATE jobs!!! :x The CoC here is simply the corporate face of the same fascist economic model of which BO is the socialist face. BOTH are about the government directing the economy. I certainly don't remember hearing many complaints out of the CoC when Bush was getting the ball rolling.
It is the government's job to get out of the way!!!
PS: Regarding Willie, his presidency was a giant mess until Gingrich and the Reps took over Congress. Also relevant, but not due to Bill's doings, were the peace dividend from the collapse of the Soviet Empire; the rollback of welfare, and the cuts in the capital gains tax rate.
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Agree Crafty. Newt actually had to lead a congressional strike to get attention when the Republicans were a majority. It was labelled divisive, angry conservative, etc., but it got the budget under control. Is was so in control that Clinton later decided to claim he balanced the budget. Luuurve that slick move, he actually got away with it...........
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The CBO Warns the Nation; Is Anybody Listening?
By Janice Shaw Crouse
Warning signs are everywhere -- most of them carefully phrased and nuanced, but warnings, nevertheless. Greece and, closer to home, California are painful reminders of what could happen. CNBC is reporting that the Dow is repeating patterns that prevailed just before the Great Depression. The U.S. workforce suffered one its sharpest declines ever -- a drop of 652,000 -- in June. Economists claim that "wages are flirting with deflation." It's hard to find good news on the financial front. Now, the Congressional Budget Office (CBO) just released its "Long-Term Budget Outlook" to confirm what people already feared: The national debt is devastating for the future of America. According to the CBO, "the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II." As a result, the CBO paints a very bleak picture of our nation's future prospects. Further, as the world's remaining superpower, this country's terrible financial condition affects all other nations -- a fact that makes the CBO report even more alarming.
To compound the alarm, the CBO admits to understating the severity of the problem because its report does not include the negative impact that "substantial amounts of additional federal debt" would have on other aspects of the nation's economy.
We've been warned; is anybody listening?
The CBO made it clear that ObamaCare -- the health reform package that was shoved down the nation's throat -- did not "diminish" the problem; plus the economists at the CBO think that the president's pledge of tax cuts for the middle class will make matters worse and that health care costs will continue to "spiral out of control." Indeed, some analysts believe the Obama health care package locked in the unsustainable health care spending path. These expert evaluations confirm my recent report, Obamanomics, in which I noted: "Americans are learning that ObamaCare will pile on to an already insurmountable debt. ... It is obvious that ObamaCare is an unmitigated disaster for both our health care system and the nation's fiscal future." The CBO does not mention the failure of the stimulus bill -- the American Recovery and Reinvestment Act -- that was supposed to create jobs, but unemployment remains close to double digits, and there has been no impact on either employment or payrolls. In short, the national debt is pushing us toward a fiscal crisis, and ObamaCare is expected to add $10 trillion to that debt over the next decade.
Almost no one questions the assertion that ObamaCare and its impact on the national debt are devastating for the future of America.
Nile Gardiner, a D.C.-based foreign affairs analyst for the British Telegraph, wrote, "America is sinking under Obama's towering debt." Thomas R. Eddlem, in the New American, wrote, "CBO Labels Current U.S. Debt Path 'Unsustainable.'" While such headlines are alarmist, they are accurate. While Greece has already faced a financial meltdown and the U.K. is launching austerity measures to deal with its debt crisis, the Obama administration is ignoring the warning signs about the nation's debt crisis and downplaying the devastating report from the CBO.
The CBO report notes that the federal debt will likely reach 62 percent of GDP by the end of this year. One projection is that the debt-to-GDP ratio will be 80 percent by 2035, and another projection is far bleaker -- 87 percent by 2020. That latter, more likely scenario means "the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." As the CBO noted, such numbers are "uncharted territory." Put simply and appallingly, these numbers mean that "health care costs, Social Security and interest on the national debt will exceed all tax money coming in to the federal government by 2035."
Such an unheard of level of debt to GDP would "reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment -- which, in turn, would lower income growth in the United States. Growing debt would also reduce lawmakers' ability to respond to economic downturns and other challenges."
In other words, the U.S. would face an unprecedented fiscal crisis that would lead, inevitably, to America's decline and to international instability of unimaginable dimensions. John Shaw, at MarketNews.com, described previous CBO reports as seeming like a car headed "steadily, inexorably, toward a cliff and nobody seems able or willing to grab the steering wheel or slam on the brakes. Ahead a calamitous event looms." Shaw claims that this year's report is similar, only worse. "The car is still moving toward great danger, the cliff seems closer, the fall ahead seems more dangerous than ever -- and the margin for error is almost gone."
Sadly, Shaw's dismal picture is not sobering enough. Douglas W. Elmendorf, director of the CBO, noted that the nation's debt to GDP surged from 40 percent to 62 percent in just two years. Elmendorf's most realistic scenario is 87 percent debt to GDP by 2020, 223 percent by 2040, and a "mind boggling" 854 percent by 2080. All this, Elmendorf said, "could include higher interest rates, more foreign borrowing, less private investment and lower income growth, if not a full-blown fiscal crisis."
Note that nobody is talking about dismantling the out-of-control entitlement system, including ObamaCare, which is the cause of this crisis. Instead, the proposed "cures" include continuing with business as usual and "piling on" America's already beleaguered middle class. Those who recommend increasing revenues and cutting spending acknowledge that it would be an intricate balancing act, where the wrong action at the wrong time could make the "sharp deterioration in the fiscal situation" even worse. The situation is bad. And, as Robert Reich, former U.S. Secretary of Labor, said, "The booster rockets for getting us beyond it are failing."
Page Printed from: http://www.americanthinker.com/2010/07/the_cbo_warns_the_nation_is_an.html at July 16, 2010 - 04:18:34 PM CDT
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We were warned earlier in the year by economic optimists even with supply side credentials not to count politically on the economy staying weak through the mid-terms. Even if the real multiplier for the false stimulus is 0.5 or 0.8 instead of 1.5 as advertised, there still should be some temporary boost in the economy from the massive infusion.
But there are other factors: These hit and miss, piecemeal, drive-by 'stimulus' programs - cash for clunkers, homeowner credit, a bridge here and a building there - don't build any confidence as we know they are short-lived. Meanwhile a host of other issues put a cloud over the future on risk-taking, hiring and expansion: the coming tax hikes, the coming cap-trade penalties, the coming healthcare trainwreck, the debt crisis, the unfunded entitlement crisis, etc. etc. These new, lowered forecasts leave plenty of room to underperform as well as we continue to NOT address any of the challenges we face.
http://news.yahoo.com/s/ap/20100714/ap_on_bi_ge/us_fed_forecast
Fed paints weaker picture of growth and employment
AP
WASHINGTON – Federal Reserve officials have a slightly dimmer view of the economy than they did in April, reflecting worries about how the European debt crisis could affect U.S. growth and job prospects.
Fed officials said Wednesday in an updated economic forecast that they think the economy, as measured by the gross domestic product, will grow between 3 percent and 3.5 percent this year. That's a downward revision from a growth range in their April forecast of 3.2 percent to 3.7 percent.
The Fed's latest forecast sees the unemployment rate, now at 9.5 percent, possibly staying at that figure or in the best case falling to 9.2 percent. In the April forecast, the Fed had a slightly lower bottom number of 9.1 percent.
The Fed said in the minutes of its June 22-23 meeting that its lower economic projections reflected "economic developments abroad" — a reference to the debt crisis that began in Greece and threatened to spread to other European countries.
While reducing the forecast for growth and employment, the Fed also saw less of a threat from inflation.
The Fed predicted that a key inflation gauge that's tied to consumer spending would show prices rising 1 percent to 1.1 percent this year. That's down from an April forecast that consumer prices would increase by 1.2 percent to 1.5 percent.
The absence of inflationary pressures gives the Fed leeway to keep interest rates low to try to bolster growth as the economy recovers from the deepest recession since the 1930s.
The new forecast was compiled at the last meeting of the Fed's interest rate-setting Federal Open Market Committee on June 22-23. At that meeting, the FOMC, which is composed of Fed board members and the 12 Fed regional bank presidents, kept a key rate at a record low of 0 to 0.25 percent, where it's been since December 2008.
The Fed's new forecast made only minor changes to its outlook for growth, unemployment and inflation. But those changes underscored a view that economic prospects were slightly weaker.
The factors the Fed cited were household and business uncertainty, weak real estate markets, a tough job market, waning fiscal stimulus and still-tight lending by banks.
The Fed in April had said only a minority of Fed officials thought it would take more than five or six years to reach the Fed's goals for maximum employment with low inflation. But in the new minutes, the Fed changed that to say that "most" expected it to take "no more than five or six years."
Beyond this year, the Fed forecast growth in 2011 to be in a range between 3.5 percent to 4.2 percent. The upper limit of that range was reduced from 4.5 percent in the April forecast.
The expectation for the unemployment rate next year was also nudged higher to a range of 8.3 percent to 8.7 percent. That was up from a range of 8.1 percent to 8.5 percent in April.
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And think, these dynamics are about to come to medical care.
Public Transit: A Classic Example of Government in Action
Posted by Randal O'Toole
Since 1970, the number of workers needed to operate America’s public transit systems has increased by 180 percent while the inflation-adjusted cost of operating buses, light rail, and heavy rail (the only modes whose costs are known back to 1970) increased by 195 percent. Yet ridership on those modes increased by only 32 percent.
Flickr photo by Bradlee9119.
Each transit worker produced 53,115 transit trips in 1970, but only 26,314 trips by all modes in 2008. The real cost per rider grew by 124 percent, while subsidies (fares minus operating costs) grew by more than 8 times. Though capital cost data prior to 1992 are sketchy, capital costs also grew tremendously, almost certainly by more than operating costs. By any measure, then, transit productivity has declined more than 50 percent. “It’s uncommon to find such a rapid productivity decline in any industry,” noted the late University of California economist Charles Lave.
(All transit data are from the 2010 Public Transportation Fact Book, tables 1, 12, and 38. 1970 dollars adjusted for inflation using the GDP deflator.)
What accounts for this huge decline in productivity? Simple: government ownership. Prior to 1965, most transit systems were private and the industry as a whole was declining but profitable. In 1964, Congress passed the Urban Mass Transit Act, which promised federal capital grants to any government-owned transit systems. Cities and states quickly took over private transit systems, and transit agencies soon discovered that the federal government was just as willing to fund expensive transit systems as inexpensive ones, so they overbought, purchasing giant buses where small ones would do and building expensive rail lines where buses would do.
To cover their operating losses, transit agencies taxed as large an area as they could, but were then politically obligated to provide transit service to the entire taxed area. While transit’s main market is in the dense inner cities, agencies began running buses and, in many cases, building rail lines to relatively wealthy low-density suburbs that have three cars in every garage. The result of overbuying and extended service was lots of nearly empty buses and railcars: the average transit vehicle load is only about one-sixth of capacity, so if you are the sole occupant of a five-passenger SUV, you can be smugly proud that the car are driving has a higher occupancy rate than public transit.
On top of this, to be eligible for federal transit grants, Congress required transit agencies to obtain the support of local transit unions, giving unions leverage to negotiate generous pay and benefits packages. The highest-paid city employee in Madison, Wisconsin last year was a bus driver who earned nearly $160,000. The New York Times recently documented that more than 8,000 employees of the New York Metropolitan Transportation Authority (MTA) earned more than $100,000, with one collecting $239,000, last year.
Union employees reach such lofty pay levels by putting in lots of overtime. MTA even pays $34 million a year in overtime to employees who are on vacation, on the theory that if they weren’t on vacation they would probably be working overtime. When Los Angeles’ transit agency tried to save money by hiring more employees so it won’t have to pay as much overtime, union workers went on strike for 30 days and forced the agency to back down.
The American Public Transportation Association (APTA), a lobby group whose budget is several times larger than all of the highway lobby groups in DC combined, promotes increased subsidies for transit by claiming transit is better for the environment than automobiles — a claim the Cato Institute has refuted. Per passenger mile, transit and cars actually use about the same amount of energy and emit the same amount of pollution. In fact, all but a handful of transit system are far worse for the environment than cars. Moreover, cars are rapidly becoming more energy efficient, while transit has grown less energy efficient as agencies run more and more empty buses and trains into remote suburbs.
Urban transit buses are some of the most energy-intensive vehicles around because they are mostly empty. Yet private, intercity buses are some of the most energy-efficient vehicles in the country because the private operators know to run them where people want to go, and thus they average half to two-thirds full.
APTA’s other argument for transit is that it saves people money. Many transit agencies have a calculator on their web sites purporting to show how much people can save riding transit instead of driving their cars. But all these claims ignore the huge subsidies to transit.
This Cato briefing paper compared the costs of different forms of travel in 2006. Updating to 2008, auto owners spent about 22 cents a passenger mile driving, and subsidies to highways added another penny a passenger mile. Airfares averaged about 14 cents a passenger mile, and subsidies to airports added another penny. Amtrak fares averaged 30 cents a passenger mile, and subsidies brought the total to nearly 60 cents. Urban transit is about the most expensive form of travel in the United States, with fares averaging only about 21 cents a passenger mile but subsidies of 72 cents a passenger mile. This makes transit 4 times as expensive as driving.
In short, those who want to get people out of their cars and onto transit are trying to get people from an inexpensive, convenient, and increasingly energy-efficient form of travel to an expensive, inconvenient, and increasingly energy-wasteful form of travel.
The real solution for transit is privatization. Private operators would use smaller buses and would mainly serve the dense inner cities that have low rates of auto ownership. At a broader level, the transit industry offers lessons for anyone who thinks that government can do a better job at providing goods and services than the free market.
http://www.cato-at-liberty.org/2010/07/19/public-transit-a-classic-example-of-government-in-action/
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(Should be under Founding Fathers)
Milton Freidman as re-told by Scott Grannis as he views at the great pyramids:
http://scottgrannis.blogspot.com/
A politician and a union boss are walking by a construction site. They see two giant machines excavating the ground in preparation for the foundation of a large building. Each machine is operated by a single person. The union boss laments that if it weren't for the machines, there could be hundreds of workers digging the foundation with shovels, creating so many more jobs and (presumably) so much more prosperity. The politician sneers, and says, "just think how many thousands of people could be employed here if it weren't for shovels, and they had to dig the foundation with their hands!"
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Time permitting I will try to post and answer the thought leaders of left-economics like Krugman, Reich and Obama. Reich hits his facts mostly right on this one. These companies scaled back unprofitable operations, improved productivity and made money. Problem is that he mentions ONLY big businesses that are CLOSELY TIED to big government: GM, Ford, GE. These companies IMO have more in common with big government than they do with free enterprise. He fails to mention the reasons WHY they move operations off-shore: tax rates, regulations, energy availability, labor rules etc. etc. All the things he favors.
In this story, we see the 'success' of the chosen companies with their teams of lawyers and lobbyists that have successfully gamed the system to make money while employing fewer and fewer in the US. That is an accomplishment for them - at our expense with wind turbine tax credits for GE, hybrid tax credits for auto makers, artificial barriers to entry keeping competition down, etc. The story of the American economy today is everything that is not in this story. What are the rest of us supposed to do, the ones who did not have lobbyists cutting special deals, the ones who play by the rules and end up just having to pay for all the burdens we put on investors, employers, risk-takers and heaven forbid anyone who ends up eeking out a profit.
As an alternative, how about we all compete EVENLY on a level playing field, in a system designed to compete successfully in the 2010's globally competitive markets.
http://www.businessinsider.com/great-decoupling-of-corporate-profits-from-jobs-2010-7
The Great Decoupling Of Corporate Profits From Jobs
Robert Reich | Jul. 27, 2010
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"Time permitting I will try to post and answer the thought leaders of left-economics like Krugman, Reich and Obama."
Doug:
An excellent start on a most worthy mission. I look forward to more.
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Doug highlights a major part of the problem. The lobbies are financing elections and reelections, that has corrupted the process. That influence has disenfranchised the people for all practical purposes. With the everyday mom and pop out of the loop, is it surprising that congress ends up doing more harm than good?
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"The lobbies are financing elections and reelections, that has corrupted the process."
The lobbyists and campaign contributions make perfect sense when they are used to defend the business or industry against legislation that would harm them. But you would think that any proposed legislation designed with preferential treatment for an individual business or industry would be instantly rejected as opposing our founding principles. Not so.
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Right I have no problem with opposing new laws- defending. There are too many cases where these guys are proposing or writting the laws being passed...............
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Even Keynesian Accounting Can’t Find All That ‘Stimulus’
Posted by Alan Reynolds
From January 2009 to the present, President Obama and his team have repeatedly made grandiose claims about the economic benefits of shoveling money at shovel-ready projects or green jobs. “It is largely thanks to the Recovery Act that a second Depression is no longer a possibility,” said the President. He also claimed that lavish spending alone (not Federal Reserve actions or bank bailouts) is what prevented the unemployment rate from “getting up to . . . 15%.”
If any of that were remotely close to being true then, as a matter of simple accounting, rising federal spending would have shown up as a huge offset to falling GDP in 2009, and also as a major component of the modest increase in GDP growth in early 2010. On the contrary, the table below shows that the increase in federal nondefense spending contributed only two-tenths of one percent (0.2) to the change in GDP in 2009. That was no better than 2008 when the Recovery Act did not exist. If nondefense spending had not increased at all in 2009 (unlike 2008) then GDP would have fallen 2.8% rather than 2.6% — scarcely the difference between a recession and a “second Depression.” If nondefense federal spending had not increased at all in 2010, the economy still would have grown at a 3.6% pace in the first quarter, 2.1% in the second. Cutbacks in state and local spending were a trivial damper on GDP growth last year, contrary to recent speculation, and real state and local spending rose significantly in this year’s second quarter (unlike the first).
This is just an exercise in crude Keynesian accounting, not economics. Yet it nonetheless makes the stimulus bill look like a huge waste of money. The reason Keynesian accounting is no substitute for economics is that governments can only spend other peoples’ money. To claim that such spending is a net addition to “aggregate demand” is to ignore those other people — namely, current and future taxpayers.
Nobel Laureate Robert Lucas put it this way:
If the government builds a bridge . . . by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.
(http://www.cato-at-liberty.org/wp-content/uploads/201007_blog_reynolds301.jpg)
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Alan Reynolds is awesome 8-)
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Quantitative Easing Two:
Not even a week had passed since ECB President Trichet’s article, “Stimulate No More – It Is Now Time to Tighten,” before Federal Reserve Bank President James Bullard thrusts himself into the debate with his paper, “Seven Faces of ‘The Peril.’”
Dr. Bullard’s concluding sentences: “To avoid [the Japanese] outcome for the U.S., policymakers can react differently to negative shocks going forward. Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”
The New York Times (Sewell Chan) had a reasonable spin on Bullard’s piece: “A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening. … James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming ‘enmeshed in a Japanese-style deflationary outcome within the next several years.’ The warning by Mr. Bullard… comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed…”
Reading Dr. Bullard’s paper - and listening carefully to his comments – recalls Dr. Bernanke’s historic speeches back in late-2002: “Asset-Price ‘Bubbles’ and Monetary Policy”; “On Milton Friedman’s Ninetieth Birthday”; and “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Dr. Bernanke fashioned the backdrop – erudite academic justification for aggressive “activist” monetary management - and today the Federal Reserve appears poised to embark only farther into perilous uncharted waters. Last week, I presumed that Mr. Trichet’s stark warning against further stimulus was in response to market clamoring for additional quantitative easing from the Fed. It would now appear his comments may have been directed squarely at our central bank.
“The Peril” in Dr. Bullard’s title is in reference to a 2001 academic article “The Perils of Taylor Rules.” In simple terms, many accept the thesis that there is potential “peril” confronting a monetary management regime at the point when policymakers have lowered rates to near zero – yet the inflation rate remains stuck in negative territory (“deflation”). Japan is used as a contemporary example of how policymakers failed to act convincingly to ensure operators throughout the markets and real economy understood that deflationary pressures would not be tolerated.
From Bullard: “The policymaker is completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense (long after policy becomes passive), creating a second steady state for the economy. Many of the responses to this situation described below attempt to remedy this situation by recommending a switch to some other policy in cases when inflation is far below target. The regime switch required has to be sharp and credible. Policymakers have to commit to the new policy and the private sector has to believe the policymaker.”
Ten-year Treasury yields dropped to 2.92% today. Benchmark MBS yields sank 15 bps in two sessions to 3.49%. The markets are taking Dr. Bullard’s talk of a “sharp and credible” regime switch – Quantitative Easing Two – seriously. The dollar dropped another 1.1% this week and the CRB Commodities index jumped 2.9 %. The market backdrop is increasingly reminiscent of the summer of 2007. The initial ’07 eruption in subprime incited market weakness and volatility, an aggressive Federal Reserve response, a weak dollar and quite a run for commodities markets.
Back in 2002, I thought (and wrote as much) Dr. Bernanke’s monetary views were radical and dangerous. He burst onto the scene as the right guy at the right time to lead an epic battle against the scourge of deflation. I view the period 2001 through 2006 as a historic period of faulty analysis and failed monetary management. In short, zealous policy measures were implemented from a flawed analytical framework. While fighting so-called deflation risk, our central bank accommodated a perilous Bubble throughout mortgage and Wall Street finance. The Fed’s “activist” approach was an unmitigated disaster. Dr. Bullard’s paper addresses this period from an opposing perspective: “2003-2004… This period was the last time the FOMC worried about a possible bout of deflation.”
From Bullard: “The Thornton [St. Louis Fed economist] analysis emphasizes how the FOMC communicated during this period, and how the market expectations of the longer-term inflation rate responded to the communications. At the time, some measures of inflation were hovering close to one percent, similar to the most recent readings for core inflation in 2010. At its May 2003 meeting, the Committee included the following press release language: .... ‘the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level.’ At several subsequent 2003 meetings the FOMC stated that ‘…the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future.”
During the three-year period ’02-’04, benchmark MBS yields averaged 5.22%, down significantly from the 7.16% average from 2000-’01. The Fed was “successful” in jawboning rates lower, in spite of the unprecedented surge in demand for mortgage borrowings. “Activist” monetary policymaking circumvented market forces, allowing a huge increase in the demand for mortgage Credit to be satisfied at historically low market yields.
Well, you either believe that the market forces of supply and demand should be left to determine the price (market yield) of finance - or you don’t. And you either appreciate that the price of finance plays a fundamental role in the effective allocation of financial and real resources in a Capitalistic system – or you disregard this critical dynamic at the system's peril. Inarguably, Federal Reserve rate policy and communications strategy were instrumental in distorting market prices (MBS, real estate, stocks, etc.) and perceptions of risk and, in the process, fomenting the great mortgage/Wall Street finance Bubble.
Focusing instead on the general price level, or “inflation,” Dr. Bullard comes to a very different conclusion with respect to policy performance during this crucial period: “In the event, all worked out well, at least with respect to avoiding the un-intended steady state. Inflation did pick up, the policy rate was increased, and the threat of a Japanese-style deflationary outcome was forgotten, at least temporarily. Was this a brilliant maneuver, or did the economic news simply support higher inflation expectations during this period?”
Regular readers know that I use the terms “Keynesian” and “inflationism” interchangeably. Inflationism has been an influential concept for centuries; Keynes just created the most sophisticated and alluring conceptual framework. I argued against the Keynesians earlier in the decade. The critical flaw in their theoretical construct is that the Federal Reserve somehow controls “THE” general price level. This is a dangerous myth perpetuated by those committed to activist monetary management.
The Keynesians take Credit for thwarting the deflationary forces from earlier this decade. After declining to about a 1% y-o-y rate during the first half of 2002, inflation was a “safer” 4% or so by 2006. This, it was said, provided policymakers the latitude they required to ensure the U.S. did not succumb to the Japanese predicament. In the process, total U.S. mortgage Credit almost doubled in just six years. The aggregate of consumer prices may have been reasonably tame, but asset prices and economic maladjustment were not. The Fed used mortgage Credit to reflate the system and, not surprisingly, we now face a much worse predicament.
The problem with inflationism has always been that once it gets ingrained within the system – in the Credit system, the real economy, within market perceptions, expectations and asset prices – there’s just no turning back. The more protracted the inflationary Credit boom – and the more problematic the associated Bubbles – the more unpalatably painful the bust is viewed in the minds of politicians and central bankers. Historically, it often became a case of “just one more bout of money printing to get us over the hump.” Just get through the pressing crisis and then it will be time to find monetary religion.
It is the nature of protracted Credit Bubbles that devastating busts are held at bay only through increasingly expansive monetary stimulus. Invariably, this corrosive process destroys the soundness of system debt and the underlying currency. Too often, a crisis of confidence in private debt incites a dangerous cycle of public Credit (“money”) inflation. Commenting this morning on CNBC, Dr. Bullard stated, “In monetary policy, you can never say you’re done.” This is precisely the nature of inflationism.
Dr. Bullard makes passing mention of Bubble risk: “The FOMC’s near-zero interest rate policy and the associated ‘extended period’ language has caused many to worry that the Committee is fostering the creation of new, bubble-like phenomena in the economy which will eventually prove to be counterproductive. One antidote to this worry may be to increase the policy rate somewhat, while still keeping the rate at a historically low level, and then to pause at that level.”
When I read (and listen) to such comments from our leading central bankers, I can only scratch my head and ponder the degree to which they appreciate financial and economic history – including recent financial crises. Dr. Bullard’s paper suggests that the Japanese predicament of long-term substandard growth is the worst-case scenario for the U.S. economy. It is more likely the best-case.
And I find myself increasingly frustrated by the ongoing “inflation vs. deflation debate.” With today’s low level of consumer price inflation, those arguing that deflationary forces are the paramount systemic risk now dominate policy dialogue. Most tend to be inflationists. Most argue for additional stimulus and see little risk in such activist policymaking.
I see risks altogether differently. We are in the late-phase of a multi-decade historic Credit Bubble. The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system. The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost. It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system. The inflation rate is not the key issue. And efforts to try to inflate our way out of structural debt problems are a lost cause. We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit - or else risk a financial crash.
Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally. Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess. Our central bankers should heed Mr. Trichet’s warning. Additional quantitative ease will only fuel the Bubble and risk calamity.
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Regarding the Romer research paper that demonstrated that an exogenous tax increase, like the one coming Jan. 1, will be HIGHLY CONTRACTIONARY. Crafty wrote (over at Tax Policy): "Isn't C. Romer that chunky bureaucratic drone female who is BO's chief economist? Fascinating that she would think this AND publish it!'
We were all over this one, Romer is OUT. Gone like McChrystal. Publishing economic consequences of irresponsible policies is now considered insubordination. Let me guess, she wants to spend more time with family...
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http://www.washingtonpost.com/wp-dyn/content/article/2010/08/05/AR2010080506682.html
Christina Romer, chair of Obama's Council of Economic Advisers, to resign
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http://hotair.com/archives/2010/08/08/kudlow-panic-setting-in-at-wh-over-economy/
Kudlow: Panic setting in at WH over economy
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"Panic setting in at WH over economy"
The panic at the White House is over the loss of political power. The economic carnage is really not that surprising based on their stubborn adherence to anti-growth policies.
Kudlow is right. 4% growth is needed to move at all out of this conundrum. Economists typically consider breakeven 'growth' to be around 3.1% Anything less is moving in the wrong direction.
But sustained 4% growth is not possible with anti-growth, anti-wealth, anti-private-sector policies. Divided government alone, after the election, is not going to fix that. The Dem party needs to reform its views economically from the inside, but it is the liberals representatives in liberal districts that will survive this and the moderate Dems in conservative leaning districts that will be leaving congress.
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I know no one here is reading or following Krugman, our nation's Keynesian-Marxist spiritual leader, but here is Paul Ryan's reply to Krugman's latest attack on the 'Ryan Roadmap':
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http://www.jsonline.com/news/opinion/100160259.html
Despite watching European welfare states collapse under the weight of their own debt, those running Washington are leading us down precisely the same path. With the debt surpassing $13 trillion, we can no longer avoid having a serious discussion about how to address the unsustainable growth of government.
Unfortunately, rather than make meaningful contributions to this conversation and bring solutions to the table, Democrats have attempted to win this debate by default. Relying on demagoguery and distortion, the left would prefer that entitlements - often labeled the "third rail" of American politics - remain untouchable, and the column by Paul Krugman of The New York Times is indicative of the partisan attacks leveled against the plan I've offered, a "Roadmap for America's Future."
When I introduced the "Roadmap," my hope was that it would spur an open and honest discussion about how our nation can address its fiscal challenges. If we are truly committed to developing real solutions, this discussion must be free of the inflammatory rhetoric that has derailed past reform efforts. In keeping with this spirit, it is necessary to clarify some of the inaccurate claims and distortions made recently regarding the "Roadmap."
The assertion by Krugman and others that the revenue assumptions in the "Roadmap" are overly optimistic and that my staff directed the Congressional Budget Office not to analyze the tax elements of the "Roadmap" is a deliberate attempt to misinform and mislead.
I asked the CBO to analyze the long-term revenue impact of the "Roadmap," but officials declined to do so because revenue estimates are the jurisdiction of the Joint Tax Committee. The Joint Tax Committee does not produce revenue estimates beyond the 10-year window, and so I worked with Treasury Department tax officials in setting the tax reform rates to keep revenues consistent with their historical average.
What critics such as Krugman fail to understand is that our looming debt crisis is driven by the explosive growth of government spending - not from a lack of tax revenue.
Krugman also recycles the disingenuous claim that the "Roadmap" - the only proposal certified to make our entitlement programs solvent - would "end Medicare as we know it."
Ironically, doing nothing, as Democrats would prefer, is certain to end entitlement programs as we know them, and in the process, beneficiaries would face painful cuts to these programs. Conversely, the "Roadmap" would pre-empt these cuts in a way that prevents unnecessary disruptions for current beneficiaries.
It reforms Medicare and Social Security so those in and near retirement (55 and older) will see no change in their benefits while preserving these programs for future generations of Americans. We do not have a choice on whether Medicare and Social Security will change from their current structure - the true debate is if and how these programs will be made solvent.
Far from the "radical" label that critics have tried to pin on it, the Medicare reforms in the "Roadmap" are based on suggestions made by the National Bipartisan Commission on the Future of Medicare, chaired by Sen. John Breaux (D-La.). That commission recommended in 1999 "modeling a system on the one members of Congress use to obtain health care coverage for themselves and their families." With respect to Medicare and Social Security, the "Roadmap" puts in place systems similar to those members of Congress have. There has been support across the political spectrum for these types of reforms.
By dismissing credible proposals as "flimflam," critics such as Krugman contribute nothing to the debate. Standing on the sidelines shouting "boo" amounts to condemning our people to a future of managed decline. Absent serious reform, spending on entitlement programs and interest on government debt will consume more and more of the federal budget, resulting in falling standards of living and higher taxes as we try to sustain an ever larger social welfare state.
The American people deserve a serious and civil discussion about how to reduce our exploding debt and deficit. By relying on ad-hominem attacks and discredited claims, Krugman and others are missing an opportunity to contribute to this discussion and are only polarizing and paralyzing attempts to solve our nation's fiscal problems.
I reject the notion that these problems are too big or too difficult to tackle or that it is acceptable to leave future generations of Americans an inferior standard of living than we enjoy. The "Roadmap" shows that a European-style social welfare state is not inevitable, that it is not too late for our nation to choose a different path and that we can do so in a way that preserves our freedoms and traditions.
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ON the yahoo news, another liberal MSM outlet written by someone who read a NYT published article from David Stockton. I cannot pull up the NYT article since I don't subscribe. It is interesting how the claim is it is all the fault of Republicans. I see it more as the fault of liberals with Republicans trying to keep up with "conservative compassion" so to speak. I have pointed out before that I do agree the widening gap between wealth and non wealth is a huge problem that is getting bigger. It is not merely that wealthy people are the only ones with brains, the only ones who work hard. It is in our capitlistic society once they reach a certain lelel they do indeed hold all the cards. I have never heard an answer about this from the right. OTOH I don't believe welath confiscation and doles are the answer either.
In any case blaming republicans for this coming catastrophy and not dems is in my very humble and arm chair opinion ridiculous. Yet some points appear to have some merit on the face of the logic of the arguments.
Lastly I don't know how accurate this guy's assesment of Stocktons take is since no doubt he is a grinning liberal happy to post all over this hit piece on the Republicna party.
Aug 11, 2010, 12:06PM EDT - U.S. Markets close in 3 hrs 54 mins
Reagan Insider: 'GOP Destroyed U.S. Economy'
by Paul B. Farrell
Tuesday, August 10, 2010
ShareretweetEmailPrintCommentary: How: Gold. Tax cuts. Debts. Wars. Fat Cats. Class gap. No fiscal discipline
"How my G.O.P. destroyed the U.S. economy." Yes, that is exactly what David Stockman, President Ronald Reagan's director of the Office of Management and Budget, wrote in a recent New York Times op-ed piece, "Four Deformations of the Apocalypse."
Get it? Not "destroying." The GOP has already "destroyed" the U.S. economy, setting up an "American Apocalypse."
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Yes, Stockman is equally damning of the Democrats' Keynesian policies. But what this indictment by a party insider -- someone so close to the development of the Reaganomics ideology -- says about America, helps all of us better understand how America's toxic partisan-politics "holy war" is destroying not just the economy and capitalism, but the America dream. And unless this war stops soon, both parties will succeed in their collective death wish.
But why focus on Stockman's message? It's already lost in the 24/7 news cycle. Why? We need some introspection. Ask yourself: How did the great nation of America lose its moral compass and drift so far off course, to where our very survival is threatened?
We've arrived at a historic turning point as a nation that no longer needs outside enemies to destroy us, we are committing suicide. Democracy. Capitalism. The American dream. All dying. Why? Because of the economic decisions of the GOP the past 40 years, says this leading Reagan Republican.
Please listen with an open mind, no matter your party affiliation: This makes for a powerful history lesson, because it exposes how both parties are responsible for destroying the U.S. economy. Listen closely:
Reagan Republican: the GOP should file for bankruptcy
Stockman rushes into the ring swinging like a boxer: "If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation's public debt ... will soon reach $18 trillion." It screams "out for austerity and sacrifice." But instead, the GOP insists "that the nation's wealthiest taxpayers be spared even a three-percentage-point rate increase."
In the past 40 years Republican ideology has gone from solid principles to hype and slogans. Stockman says: "Republicans used to believe that prosperity depended upon the regular balancing of accounts -- in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses too."
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Visit the Banking & Budgeting Center
No more. Today there's a "new catechism" that's "little more than money printing and deficit finance, vulgar Keynesianism robed in the ideological vestments of the prosperous classes" making a mockery of GOP ideals. Worse, it has resulted in "serial financial bubbles and Wall Street depredations that have crippled our economy." Yes, GOP ideals backfired, crippling our economy.
Stockman's indictment warns that the Republican party's "new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one:"
Stage 1. Nixon irresponsible, dumps gold, U.S starts spending binge
Richard Nixon's gold policies get Stockman's first assault, for defaulting "on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world." So for the past 40 years, America's been living "beyond our means as a nation" on "borrowed prosperity on an epic scale ... an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves."
Remember Friedman: "Just let the free market set currency exchange rates, he said, and trade deficits will self-correct." Friedman was wrong by trillions. And unfortunately "once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors."
And without discipline America was also encouraging "global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve." Yes, the road to the coming apocalypse began with a Republican president listening to a misguided Nobel economist's advice.
Stage 2. Crushing debts from domestic excesses, war mongering
Stockman says "the second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40% of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970." Who's to blame? Not big-spending Dems, says Stockman, but "from the Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts."
Back "in 1981, traditional Republicans supported tax cuts," but Stockman makes clear, they had to be "matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration's hastily prepared fiscal blueprint, however, was no match for the primordial forces -- the welfare state and the warfare state -- that drive the federal spending machine."
OK, stop a minute. As you absorb Stockman's indictment of how his Republican party has "destroyed the U.S. economy," you're probably asking yourself why anyone should believe a traitor to the Reagan legacy. I believe party affiliation is irrelevant here. This is a crucial subject that must be explored because it further exposes a dangerous historical trend where politics is so partisan it's having huge negative consequences.
Yes, the GOP does have a welfare-warfare state: Stockman says "the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending, exempted from the knife most of the domestic budget -- entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion."
When Fed chief Paul Volcker "crushed inflation" in the '80s we got a "solid economic rebound." But then "the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts." By 2009, they "reduced federal revenues to 15% of gross domestic product," lowest since the 1940s. Still today they're irrationally demanding an extension of those "unaffordable Bush tax cuts [that] would amount to a bankruptcy filing."
Recently Bush made matters far worse by "rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures." Bush also gave in "on domestic spending cuts, signing into law $420 billion in nondefense appropriations, a 65% percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy." Takes two to tango.
Stage 3. Wall Street's deadly 'vast, unproductive expansion'
Stockman continues pounding away: "The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector." He warns that "Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation." Wrong, not oblivious. Self-interested Republican loyalists like Paulson, Bernanke and Geithner knew exactly what they were doing.
They wanted the economy, markets and the government to be under the absolute control of Wall Street's too-greedy-to-fail banks. They conned Congress and the Fed into bailing out an estimated $23.7 trillion debt. Worse, they have since destroyed meaningful financial reforms. So Wall Street is now back to business as usual blowing another bigger bubble/bust cycle that will culminate in the coming "American Apocalypse."
Stockman refers to Wall Street's surviving banks as "wards of the state." Wrong, the opposite is true. Wall Street now controls Washington, and its "unproductive" trading is "extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives." Wall Street banks like Goldman were virtually bankrupt, would have never survived without government-guaranteed deposits and "virtually free money from the Fed's discount window to cover their bad bets."
Stage 4. New American Revolution class warfare coming soon
Finally, thanks to Republican policies that let us "live beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore," while at home "high-value jobs in goods production ... trade, transportation, information technology and the professions shrunk by 12% to 68 million from 77 million."
As the apocalypse draws near, Stockman sees a class-rebellion, a new revolution, a war against greed and the wealthy. Soon. The trigger will be the growing gap between economic classes: No wonder "that during the last bubble (from 2002 to 2006) the top 1% of Americans -- paid mainly from the Wall Street casino -- received two-thirds of the gain in national income, while the bottom 90% -- mainly dependent on Main Street's shrinking economy -- got only 12%. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy."
Get it? The decaying fruit of the GOP's bad economic policies is destroying our economy.
Warning: This black swan won't be pretty, will shock, soon
His bottom line: "The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing ... it's a pity that the modern Republican party offers the American people an irrelevant platform of recycled Keynesianism when the old approach -- balanced budgets, sound money and financial discipline -- is needed more than ever."
Wrong: There are far bigger things to "pity."
First, that most Americans, 300 million, are helpless, will do nothing, sit in the bleachers passively watching this deadly partisan game like it's just another TV reality show.
Second, that, unfortunately, politicians are so deep-in-the-pockets of the Wall Street conspiracy that controls Washington they are helpless and blind.
And third, there's a depressing sense that Stockman will be dismissed as a traitor, his message lost in the 24/7 news cycle ... until the final apocalyptic event, an unpredictable black swan triggers another, bigger global meltdown, followed by a long Great Depression II and a historic class war.
So be prepared, it will hit soon, when you least expect.
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More pessimism. . . .
Is this finally the economic collapse?
By Keith R. McCullough, contributorAugust 11, 2010: 2:07 PM ET
FORTUNE -- The Great Depression. Wall Street in 1987. Japan in 1997. Points of economic collapse are generally crystal clear in the rear-view mirror. Professional politicians in Japan have been telling stories for 20 years as to why they can prevent economic stagnation. In the US, the storytelling started in 2007. All the while, stock market and real-estate prices have repeatedly rallied to lower-highs, then collapsed again, to lower-lows.
Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm -- debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.
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On July 2nd, we cut both our third quarter 2010 and full year 2011 GDP estimates for the US to 1.7%. At the time, the consensus around US economic growth estimates was about 3%. Now we're starting to see both big brokerage analysts and the Federal Reserve gradually cut their GDP estimates, but not by enough. Even our estimate for 2011 is still too high.
Slowing growth, both domestically and in China, is core to our bearish views on both the strength of the US dollar and US equities. There will be a downward bias to our US growth estimates as long as debt-financed-deficit-spending continues to be the solution politicians and central bankers turn to as a fix to our financial crisis.
Markets trade on expectations. Yesterday's zig-zag in the S&P 500 was unlike most sleepy August trading days in America. That's because the 'government is good' crowd leaked word that this second round of "quantitative easing," known as QE2, was coming, and that Ben Bernanke was going to respond to our buy-and-hope begging. (The first round of quantitative easing was the Fed's unprecedented purchase of agency debt to prop up the housing market, along with credit facilities for big banks, which began in 2008 and ended earlier this year.)
To think that we have institutionalized market expectations to this degree is downright frightening. It seems impossible but true that all rallies start and end with rumors about what Fed Chairman Ben Bernanke, a humble looking man of government, had to say at 2:15 PM EST yesterday afternoon, or any other day he makes a statement.
So now what?
With 40.8 million Americans on food stamps (record high) and 45% of the unemployed having been seeking employment for 27 weeks or more (record high), what's left if (or when) QE2 doesn't kick start GDP growth? Should we start begging for QE3? Should we cancel the bomb of the National Association of Realtors' existing home sales report, scheduled for public release on August 24th? Or should we bite the bullet and accept that current economic policy dictates 0% returns-on-savings, even as Washington continues to lever-up our future to the point of economic collapse?
Before the Fiat Fools -- Hedgeye's name for political actors and bankers who have placed their hopes of economic recovery in printing endless supplies of new cash -- run out campaigning for QE3, maybe they should analyze some real time market results to yesterday's announcement of QE2:
1)The US dollar is battling for resuscitation after 9 consecutive down weeks -- down 9% since June.
2) US Treasury yields are making record lows on the short end of the curve, with 2-year yields striking 0.49%.
3) The yield spread (in this case the difference in return between 10-year and 2-year Treasury bills, which shows a long-term confidence when high) continues to collapse, down another 4 basis point day-over-day to 223 basis points.
4) The S&P 500 is down below its 200-day moving average (a common signpost for the health of a market or stock) of 1115.
5) US Volatility (VIX) is spiking from its recent stability.
6) In Japan, long time quantitative easing specialists found their markets closing down overnight by 2.7%, which makes them down 11.9% for the year to date.
Lest our doom and gloom seem built entirely on technical measurements, what they boil down to is actually quite simple -- an idea about our country which dates back to 1835. Alexis De Tocqueville, author of Democracy in America, which was published that year, seemed to warn of this day when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."
-- Keith R. McCullough is CEO of Hedgeye, a research firm based in New Haven, Conn.
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Why I'm Not Hiring
When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits.
By MICHAEL P. FLEISCHER
With unemployment just under 10% and companies sitting on their cash, you would think that sooner or later job growth would take off. I think it's going to be later—much later. Here's why.
Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She's been with us for over 15 years. She's a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.
Daniel Henninger discusses how Robert Rubin and Alan Greenspan agree that Americans should send more of their paychecks to Washington. Also, Fannie and Freddie ask for more cash within weeks of an Obama pledge to end taxpayer rescues.
Before that money hits her bank, it is reduced by the $2,376 she pays as her share of the medical and dental insurance that my company provides. And then the government takes its due. She pays $126 for state unemployment insurance, $149 for disability insurance and $856 for Medicare. That's the small stuff. New Jersey takes $1,893 in income taxes. The federal government gets $3,661 for Social Security and another $6,250 for income tax withholding. The roughly $13,000 taken from her by various government entities means that some 22% of her gross pay goes to Washington or Trenton. She's lucky she doesn't live in New York City, where the toll would be even higher.
More
Some Firms Struggle to Hire Despite High Unemployment
Faces—and Fates—of the Jobless
Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.
Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers' comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally's Medicare and $3,661 for her Social Security.
When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally's job each year.
Because my company has been conscripted by the government and forced to serve as a tax collector, we have lost control of a big chunk of our cost structure. Tax increases, whether cloaked as changes in unemployment or disability insurance, Medicare increases or in any other form can dramatically alter our financial situation. With government spending and deficits growing as fast as they have been, you know that more tax increases are coming—for my company, and even for Sally too.
Companies have also been pressed into serving as providers of health insurance. In a saner world, health insurance would be something that individuals buy for themselves and their families, just as they do with auto insurance. Now, adding to the insanity, there is ObamaCare.
Every year, we negotiate a renewal to our health coverage. This year, our provider demanded a 28% increase in premiums—for a lesser plan. This is in part a tax increase that the federal government has co-opted insurance providers to collect. We had never faced an increase anywhere near this large; in each of the last two years, the increase was under 10%.
To offset tax increases and steepening rises in health-insurance premiums, my company needs sustainably higher profits and sales—something unlikely in this "summer of recovery." We can't pass the additional costs onto our customers, because the market is too tight and we'd lose sales. Only governments can raise prices repeatedly and pretend there will be no consequences.
And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company's vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.
A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government's message is unmistakable: Creating a new job carries a punishing price.
Mr. Fleischer is president of Bogen Communications Inc. in Ramsey, N.J.
http://online.wsj.com/article_email/SB10001424052748704017904575409733776372738-lMyQjAxMTAwMDAwODEwNDgyWj.html
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The projected revenues for health care are going to be massively out of synch too. It may be cheaper to just pay the penalty for your average citizen than to try and do it legally right? Washington doesn't even seem to understand people are going to try and minimize the economic impact of this massively unpopular legislation by doing the same thing the people did during prohibition. Bypass the government as best they can until a repeal can be arranged.......
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Friends, Americans (what is left of us), countrymen (also what is left of us),
One hospital where I work has just made pay and benefit cuts to all its employees. Another where I used to work has just laid off 200.
It is felt that this is just for openers. ONe MBA type states that 2011 will be far worse as the health care sector tends to lag the general economic business sector.
In my mind there is no question this is just the tip of an iceberg. As 45 more million people come on to the rolls the insurers will have to raise their rates so much there will be public outcry. Of course the Dems will rush to the "rescue" and continue consolidation towards the "end stage disease" (if you will pardon my medical imagery) of single payer full government controlled health care.
This IS the road map. Make no mistake or be fooled by anything else Bamster and the rest of the far left, which he certainly IS part of despite those hucksters on CNN claim he is not, want.
*Only* a political win this fall and in 12 will stop this steamroller. If not the groundwork they have put into place will lead the chemical reaction to its inevitable end - Czar Berwick as supreme dictator telling the masses what they can and cannot have, who gets what, who does not get what, everyone is the same and he and some mock panel of "experts" will decide it all.
That is not to say we don't need something done about health care. And I am the first to admit I am not sure what the answer is. But I am totally against this continued, forced, and expanding redistribution of wealth as the answer to the country's problems. It is destroying the leadership role of the US.
And make no mistake about it - you can't give access to care to 45 million without costs skyrocketing. Thus we will have rationing, restirctions, waits, and the rest.
Keeping people out of ERs won't save anywhere near enough to make up for the office visits, drugs screening and the rest.
It is total propaganda. They know this and they have their plan to respond to this ready in the wings - that is the ONLY answer is single payer gov controlled internet controlled care. And Bill Gates is heavily promoting this at least in part because he wants MSFT technology to have an in with the "revolution". I really wnat to see this blithering little weasel geek have his father or mother or he himself have to wait on line for a CT someday and maybe they will day waiting. Does anyone think that will happen to this guy or his family? I wouldn't bet a dime on it.
I have to get off my soap box now.
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CCP: "And make no mistake about it - you can't give access to care to 45 million without costs skyrocketing. Thus we will have rationing, restrictions, waits, and the rest."
A market has participants like buyers, sellers, investors, etc. A non-market like Healthcare has who knows what anymore, lobbyists, interests, special interests, union representatives, gatekeepers, caseworkers, and former professionals who are now public employees or worse.
My experience currently that I find relevant is with a public utility which is a government sanctioned monopoly. Aug. 1, I called for electrical service because it was shut off on my tenants who had moved out. (Aug. 1 was a Sunday, they don't answer phones.) August 2, never got passed 'on-hold'. Aug. 3 got my urgent need heard and secretly entered. Unfortunately they didn't tell anybody and my request died. Aug. 11 reached again told same thing. Aug 12, got someone out to verify old tenant gone. He said power back on probably 'tomorrow. Aug 13, told possibly 2 more weeks to get electric service - which involves re-connecting 3 wires on the pole, 5 minutes of work once a truck actually pulls in.
3-4 weeks without electricity, is this a 3rd world country? No, it's one of the wealthiest metros in the world. A rental home is my place of business. I can't clean carpets, light or show the place or collect any revenue while I wait - like a fool. I even bought a generator and created a new set of problems without solving any. Meanwhile, major damage sets in. I am unable to operate a sump pump or a dehumifier, water damage and mold is setting in. 'Customer Service Rep' today said, "we don't care about that..."
Why did this happen? No competition. Where else am I going to go? Nowhere and they know it. And frankly, no oversight. I contacted the public utility commission. They wrote back saying to download forms and file a complaint if not resolved. That is a neat trick without electricity. I'll use maybe a magic wand.
Soon that will be ALL of healthcare. One supplier, government sanctioned. If they tell you to wait in line, you can wait in line. If you leave and come back - go to the end of the line. If you ask how long, they can tell you any answer, or no answer, with no consequence and no oversight. If you wish to file a complaint, again - wait in line - you weren't the first to think of that.
I let my health coverage lapse lately. 10+ plus years self employed with absolutely no payout from the policy. New laws say they will have to let me back in at the same price as the people who kept coverage. That is not insurance and the new system will have no resemblance to a market.
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I'm having trouble wrapping my head around this story. Is there some fiscal restraint implicit in the gutting of one untouchable program to fund another?
Dems may use food stamp money to pay for Michelle Obama's nutrition initiative
By Russell Berman - 08/14/10 06:00 AM ET
Democrats who reluctantly slashed a food stamp program to fund a state aid bill may have to do so again to pay for a top priority of first lady Michelle Obama.
The House will soon consider an $8 billion child nutrition bill that’s at the center of the first lady’s “Let’s Move” initiative. Before leaving for the summer recess, the Senate passed a smaller version of the legislation that is paid for by trimming the Supplemental Nutrition Assistance Program, commonly known as food stamps.
The proposed cuts would come on top of a 13.6 percent food stamp reduction in the $26 billion Medicaid and education state funding bill that President Obama signed this week.
Food stamps have made multiple appearances on the fiscal chopping block because Democrats have few other places to turn to offset the cost of legislation.
Party leaders raided the budget to find off-setting tax increases and spending cuts to pay for their top legislative priorities, including the roughly $900 billion healthcare law. Congressional pay-as-you-go rules require lawmakers to offset all non-emergency spending.
Democrats have turned to the food stamp program because funding increases enacted in the stimulus package last year were already scheduled to phase out over time. The changes proposed in the state aid and nutrition bills would simply cut off that increase early, in March 2014. Because the cuts would not take effect for more than three years, Democratic leaders have voiced the hope that they will be able to stop them in future legislation.
But House liberals are balking now, saying that while they swallowed the food stamp cuts to pay for urgent funding for Medicaid and teachers, they will not vote for more cuts in the child nutrition bill. In a letter sent this week to Speaker Nancy Pelosi (D-Calif.), 106 House Democrats urged the speaker to take the House version of the child nutrition bill, which does not slash food stamps, rather than the Senate version.
“This is one of the more egregious cases of robbing Peter to pay Paul, and is a vote we do not take lightly,” the lawmakers, led by Reps. Jim McGovern (D-Mass.) and Keith Ellison (D-Minn.) said of their vote on the state aid bill.
The House version of the child nutrition bill, authored by Rep. George Miller (D-Calif.), passed the Education and Labor Committee earlier this year, but lawmakers must find a way to pay for it before it comes to the floor for a vote. “Chairman Miller is working to find other ways to pay for this bill,” a spokeswoman said when asked if cuts to the food stamp program would be used.
A House leadership aide noted that the food stamp decrease approved in the state aid bill will not take effect right away and will leave the program at the same funding level it was at before the stimulus law was signed. “That doesn’t mean many Democrats are not concerned about the issue, but this is a process which gives us time to deal with immediate issues (like jobs) and helping the economy grow, while giving you time to deal with the food stamp issue,” the aide said.
The nutrition bill is clearly a priority for Michelle Obama, who has made a push for healthy eating one of her signature policy issues at White House. When the House version of the nutrition bill won committee approval in July, it marked the first time she weighed in publicly on pending legislation.
The Obama administration has not directly addressed the debate over the food stamp cuts, but it is backing the Senate bill. “We strongly supported the Senate action and look forward to working with the House to get a final bill onto the president’s desk,” an administration official told The Hill.
The $4.5 billion Senate bill would expand eligibility for school meal programs, establish nutrition standards for all food sold in schools and provide a 6-cent increase for each school lunch to help cafeterias serve healthier meals. The $8 billion House version includes more money for expanding access to school lunches for children in low-income households.
The deeper food stamp reductions in the Senate version would set an earlier date — in November 2013 — for eliminating the increased benefits passed last year. A family of four would see their benefit reduced by $59 a month, or about 9 percent. The bill would also cut funding for nutrition education programs aimed at low-income neighborhoods and households.
“It’s very sad. I think it’s just illustrating what dire straits our federal government budget is in,” said Sheila Zedlewski, director of the Urban Institute’s Income and Benefits Center. “It’s unprecedented to raid one safety net program to feed another.”
This story was updated at 1:40 p.m.
Source:
http://thehill.com/homenews/house/114271-dems-consider-more-food-stamp-cuts-to-fund-child-nutrition-bill
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"I'm having trouble wrapping my head around this story. Is there some fiscal restraint implicit in the gutting of one untouchable program to fund another?"
Sorry BBG but you won't be able to see their logic with your brain screwed on frontwards; you have to turn it around backwards and tilt it a bit.
The First Lady's pet program has to be paid for, even though nothing is paid for when we already spend a trillion and a half a year more than revenues. Food for the poor never has to be paid for, even though that is a meaningless designation anyway. Democrats are confident in their ability to restore spending from food stamp cuts blindfolded, in their sleep, before breakfast, even restore the spending from their new position - in the minority.
Putting the poor and their self-centered needs for food aside for a moment, the main thing is that the first lady gets what the first lady wants.
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Obama's Bad Bets
"Recovery Summer" goes bust
BY James Pethokoukis
August 23, 2010, Vol. 15, No. 46
Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”
A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.”
Since then, however, the economy has fallen back to earth, and “Recovery Summer” looks more like a bad bet. Private sector job growth has fallen by two-thirds, and the unemployment rate is still at a sky-high 9.5 percent. And if the size of the U.S. workforce, as measured by the Labor Department, had stayed constant since April—instead of shrinking by a million—the unemployment rate would be 10.4 percent. Jobless claims are at their highest level since February. Worse yet, the expansion is decelerating. After growing by 5.7 percent in the final quarter of 2009 and 3.7 percent in the first quarter of 2010, GDP advanced by just 2.4 percent from April through June, according to the Commerce Department. And new data show the final second-quarter number may actually be closer to flat, with growth for the rest of the year just 1 to 2 percent at best.
The White House didn’t count on a summer swoon. Then again, it has suffered bouts of premature and unfounded economic optimism before, a malady that has led it to make a number of losing bets and faulty assumptions—which, in turn, have created an even worse environment for growth and jobs. Among them:
- High unemployment is a psychological anomaly. Republicans love to mock the now-infamous chart prepared by administration economists that showed the $862 billion stimulus would prevent unemployment from hitting even 8 percent. But the White House has continued to be overly hopeful about jobs. Here’s why.
Obama advisers noticed that the Great Recession seemed to be violating an economic rule of thumb called Okun’s Law (named after JFK adviser Arthur Okun), which describes the relationship between economic growth and unemployment. As bad as the recession was, unemployment shouldn’t have risen to 10.1 percent, according to Okun. Maybe just 9 percent or so. The administration’s explanation for the overshoot: Panicky businesses shed workers willy-nilly because they feared another Great Depression.
But now with the worst behind and the economy growing again, there should have been a “catch-up” phase during 2010 when job growth would far exceed GDP growth. (That, even though there’s no historical precedent for such an Okun mean reversion.) Yet revised GDP numbers show that the statistical fit between unemployment and growth has actually been much tighter than Team Obama first calculated. Unemployment rose so much simply because the downturn was deeper than preliminary numbers showed. Without much stronger growth, unemployment will stay high.
- America has economic immunity. The White House is no fan of the idea that the U.S. economy has entered a stagnant economic state, what Pimco bond guru Bill Gross has labeled the “New Normal.” It describes a situation where debt overhang after a financial meltdown forces consumers and businesses to retrench for years. The result is a lengthy period of slow economic growth, high unemployment, and big budget deficits.
There’s plenty of academic research to back Gross up. The economists Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland have found that the aftermath of bank crises in places like Scandinavia and Japan is usually marked by “deep and lasting effects on asset prices, output, and employment.” Similarly, the Cleveland Federal Reserve Bank concluded that such banking events cause “negative long-term effects on the economy, such as slow growth, high interest rates, and lower living standards.”
Sound familiar? Now even though all this seems to pretty accurately describe what America is currently going through, Team Obama has been continually dismissive of such scenarios. They argue the U.S economy is so big and unique—it possesses the world’s reserve currency, for instance—that international comparisons are misleading at best, useless at worst. As the saying goes, it can’t happen here.
- Ben Bernanke’s got our backs. During the 2000 presidential campaign, Senator John McCain joked that if former Federal Reserve chairman Alan Greenspan died, it would be wise to prop up his corpse and keep him on the job, like the title character in the movie Weekend at Bernie’s. Few observers hold Fed chairmen or the central bank in such high esteem these days. But the White House apparently does. After passing a giant stimulus in 2009, the administration pivoted to “the agenda”—health care, financial reform, cap and trade. Jobs and the economy? Certainly the combination of higher government spending and oodles of monetary stimulus from Ben Bernanke & Co. would be enough to spur a return to growth.
Yet the deluge of Fed money seems to be sitting on the sidelines. As economist David Gitlitz of High View Economics points out, interbank lending, a major funding source for consumer and business loans, has shrunk from nearly $500 billion to less than $175 billion since the fourth quarter of 2008. The Fed’s low interest rate policy is great for bank profits—institutions are able to get a decent return by borrowing cheap and plowing the money into government debt—but that has done little to boost lending to job creators or the rest of the economy.
And Obama may now start to comprehend the frustration of predecessors such as George H.W. Bush and Richard Nixon when the Fed seemed to be unaccommodating to their economic and political concerns. Even though the recovery looks to be faltering, the Fed’s recent policy meeting showed the central bank is taking only the tiniest of baby steps toward another round of “quantitative easing” by buying more Treasuries or other securities. Not that “QE2” would be a magic bullet for the economy. The White House is learning, as CNBC’s Lawrence Kudlow puts it, “the Fed can print more money, but it can’t print jobs.”
To some degree, the tendency of the Obama White House to “slide down the slope of hope” is understandable. A New Normal scenario, for instance, looks like an economic recipe for a one-term presidency. Easier to dismiss it than seriously consider and perhaps accept it. And relying on both the Fed and its own onetime, trillion-dollar dose of fiscal steroids to restore prosperity—set it and forget it—freed the administration to spend its remaining political capital on passing its domestic policy wish list.
But the results of that policy positivism have been gloomy and seem unlikely to brighten. A recent analysis by the San Francisco Fed of forward-looking economic indicators finds that “the macroeconomic outlook is likely to deteriorate progressively starting sometime next summer, even if the data suggest that a renewed recession is unlikely over the next several months.” The job market is also full of worrisome signs. The extended period of high unemployment may be turning from cyclical to structural, where there are not enough qualified and employable applicants for new job openings. If that happens, even higher economic growth may do little to lower unemployment.
Of course, the administration could dramatically change course and join with a more Republican Congress next year to both lower the long-term debt outlook and boost the economy by slashing taxes on capital and corporations (which mostly passes through to workers). But don’t bet on it.
James Pethokoukis is a columnist for Reuters.
Source URL: http://weeklystandard.com/articles/obamas-bad-bets
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"police firefighters retiring at 50 then getting other jobs for 30 years"
I know there are at least some officers who come to this board.
I would like to clairfy this comment.
I did not post this to disparage them or their service in any way. But times are changed. People are living longer. We cannot afford to have public empolyees retiring sooner than the average employee with pensions that pay out for the term of their life. There must be a better way to reward them or compensate them that makes more sense. Perhaps increase their pay by 5 or 10% and have the extra go into a 401K. Maybe have a 50% employee match or something. But I am sorry and hope I don't offend anyone here. Yet when I lived in Florida we would see retired police all the time. Age 48 or 50. How would I not resent this. I never agreed to pay for them to have 40% of their lives paid for through taxation. Yes they do risk life and limb. But not that much. It is rare for police of firefighters to be killed in action.
I cannot make it equivalent that someone who serves in law enforcement or fire protection is the same as those who serve in the military wherein I do want them taken care of for life in return for their service.
Anyone is welcome to respond. Call me out, cuss me out but please feel free to respond. I do think many people feel as I do. I also think many are really afraid to say anthing about this in public. No one wants police to be mad at them. Of course this board is public anyway since it goes right to the internet and I know everything I do online is monitored in my unique circumstance.
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Pay cops and firefighters minimum wage, no benefits. Let's see how that works out.
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So are you saying we need to continue the pensions or else no one will become a police officer or firefighter?
Perhaps you are correct. I don't know. :|
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I can't comment on firefighters, but for police officers the expectation is that it takes about 3-5 years working patrol (after the academy and field training) to be fully proficient at the job. Working special details, detectives also has a long learning curve involved. There is also such a thing as institutional knowledge from veterans on patrol, but patrol like the combat arms of the military, is a young man's game. You would be fine having a 60 year old detective working a case, but you don't want a 60 yr. old patrol officer trying to run down a mugger.
I've seen conflicting stats on police life spans, but it's not just the line of duty deaths you have to factor in, it's the physical and psychological stressors related to the job. It's the cumilative injuries that add up. Just wearing 20-30 pounds of duty gear every day on your waist results in long term back pain for most everyone. No matter where you work, you see the worst of humanity, you learn the sights, sounds and smells of the ugliest things that can possibly happen. I just finished another series of blood tests for all the wonderful things commonly floating around, having had my forearm torn open by the fingernails of a career offender at work.
The realities of the job are far from glorious, and these days the job just gets worse and worse. The only thing that keeps a minimally acceptable amount of recruits coming in is the bad economy and the fact that there are fewer LE jobs these days.
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http://formerspook.blogspot.com/2010/08/unsustainable.html
Saturday, August 14, 2010
The Problem With Petty Officer Gurney
Petty Officer First Class Ethan Gurney will retire from the Navy this fall, after 20 years of service. Critics of the military retirement system say that's too soon, creating long-term fiscal problems for the Defense Department (Stars and Stripes photo).
According to a Pentagon advisory board, Navy Petty Officer First Class Ethan Gurney represents what's wrong with the military retirement system.
Petty Officer Gurney joined the Navy out of high school, and has served honorably as an electronics technician for almost two decades. This fall, after reaching 20 years of active duty service, Gurney will retire from the Navy and begin drawing a retirement check--at the ripe old age of 38.
From the board's perspective, that's too soon. With advances in medicine and increasing longevity, Gurney and his fellow military retirees will live for decades after leaving active duty, collecting billions of dollars in pensions, health care and other benefits.
The Defense Business Board, tasked by Defense Secretary Robert Gates to find ways to cut Pentagon spending, says the current retirement system is "unsustainable" and must be fixed. Without reforms, payments for military retirees will grow from $47.7 billion this year, to just under $60 billion by 2020.
As Stars and Stripes recently reported:
The 25-member group of civilian business leaders suggests that the Defense Department look at changing the current system, even hinting at raising the number of years troops must serve before being eligible for retirement pay.
The current system “encourages our military to leave at 20 years when they are most productive and experienced, and then pays them and their families and their survivors for another 40 years," committee chairman Arnold Punaro told board members at their quarterly meeting late last month.
Among the "reforms" being suggested by the advisory panel: delaying payments to retirees, in exchange for earlier "vesting" in the program. One proposal being studied by the board would provide a limited retirement benefit for military members who serve as little as 10 years. Those personnel would receive their pension at age 60 under the reform plan, while those with 20 years of service would begin receiving checks at age 57--almost 20 years after some of them leave active duty.
The hypocrisy of the "reformers" is almost laughable. Board chairman Arnold Punaro worries about a system that "encourages [military members] to leave when they're most productive and experienced, then pays them, their family and their dependents for the next 40 years."
But Punaro hasn't declined his military retirement check. Turns out that Mr. Punaro is also a retired Major General in the Marine Corps. According to Forbes, he currently works as an executive Vice President at defense contractor SAIC, where his total compensation in 2009 topped $2.7 million. That's almost three times what Petty Officer Gurney will collect in military retirement pay, even if he lives to age 80. And we didn't include Punaro's USMC pension in that total, either.
Fact is, the typical military retiree is a lot closer to Gurney than General Punaro. When he leaves active duty later this year, Petty Officer Gurney will receive a gross monthly pension of just over $1,800. By the time you deduct federal and state taxes and allotments for such items
as the Survivor Benefit Plan (SBP), dental insurance and other expenses, Gurney's "rich" pension will be closer to $1,400 a month.
Indeed, the average person retiring from the military at the 20-year point is an E-6, the same rank as Petty Officer Gurney. Most are married, with kids in school, and (if they're lucky) that $1,400 pension will cover their mortgage payment. Compare that to say, the average annuity for a state employee in New York, New Jersey or California, and tell us
who's getting rich in retirement.
Punaro's critique also misses a pair of critical points. There are two primary reasons the military has always embraced an early retirement system. First, it's a powerful recruiting and retention tool, particularly for mid-level officers and NCOs, who form the backbone of our armed forces. Allowing retirement at the 20-year point keeps a lot of mid-level officers and non-commissioned officers in uniform, ensuring an adequate supply of experienced personnel.
By comparison, if the military allows individuals to earn delayed benefits after only 10 years of service, it would only accelerate the exodus of skilled troops. Individuals with highly marketable skills (including intelligence, nuclear power, special forces and contracting, to name a few) would leave at the first opportunity, further eroding experience levels at the most critical ranks.
Additionally, there's the matter of who's best suited for certain military jobs. No offense to General Punaro, but jobs like Marine rifleman, Army ranger, Air Force combat controller and Navy fighter pilot (to name a few) are best handled by the young. True, experience does improve with age, but reflexes, vision, hearing and physical conditioning tend to deteriorate as we get older. And sometimes, experience is no substitute for the strength, speed and stamina found in younger troops.
Another critic of the current system, Nathaniel Fick of the left-leaning Center for a New American Security, has wondered "Why we're paying 38-year-olds" as they embark on their second full career. Fick, a former Marine Corps officer, made the comment in a recent article published at the Foreign Policy website.
We think the best rejoinder to that argument comes from Petty Officer Gurney, a man who is (supposedly) the poster boy for problems in our military pension system. For 20 years of dedicated and faithful service, Gurney simply expects the Navy to meet the promise it made to him. And he observes that (relatively) few people are willing to meet the demands for that 20-year pension:
"No rational person would put up with 20 years of the hardships that you’re forced to endure if it wasn’t for the brass ring at the end of it all called instant retirement,” said Petty Officer 1st Class Gurney.
[snip]
“The continuous deployments, living conditions, remote and hazardous duty stations are unique to the military,” he said. “This isn’t a civilian company, so any civilian model that you use to compare to the military is impertinent. To do so is irresponsible at best.”
Bravo Zulu, Petty Officer Gurney. Couldn't have said it better ourselves. Unfortunately, Secretary Gates now views the military retirement system as Fiscal Problem #1, so some sort of reforms appear inevitable. Never mind that the current system has served the military well, and payments will eventually decline, as retirees from Korea, Vietnam and the Reagan eras pass on.
One more thing: we find the current fixation on military retirement rather curious, for other reasons. The Pentagon has suddenly discovered that its payments for retiree medical coverage are out-of-control, just months after the Obama Administration pushed through national health care coverage. Gee...doesn't DoD have the option of potentially pushing military retirees into the national plan, saving billions of dollars each year--and creating more "urgency" for preserving the new system? Coincidence? You decide.
Likewise, Secretary Gates (and his bosses in the White House) would like to find other ways to save money at the Pentagon. If they can put off pension payments for years after military retirees leave active duty, so much the better. I'm sure that DoD's actuaries have already calculated the number of personnel who will die during that "gap" between their retirement ceremony and the age of 57 or 60, when the first retirement check rolls in. How much would DoD save using that approach, and where will that money goes? So far, Dr. Gates hasn't answered that one.
Equally galling is the growing demand for the reform of military retirement benefits, while the "big" entitlement programs (Social Security, Medicare, Medicaid) just keep on growing. Even at the inflated totals cited in the Stars and Stripes article, military pensions represent only a fraction of our annual Social Security payments--and that system will go broke long before the armed forces retirement system. But it's (apparently) more important to fix military pensions, with little regard for the long-term impact on retention and experience levels in the ranks.
Go figure.
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It is not (IMO) the amount civil servants are paid, it is the process that is screwed up. I don't know what amount of money it would take to hire and retain good people for key positions in any location but we all know stories of where it is all skewed. I remember my daughter's principal saying he had one thousand applicants for each teaching position open - this was during economic boom, not recession. You could call it high pay or low pay, fair or unfair pay, but we know for certain it is above market pay. That principal went on to retire right as he entered what would have been the peak of his business executive career at age 55, left the community, draws a good check, and entered another career. A family member retired from the federal government with full pension in his 40s, an air traffic controller. They want the controllers out of traffic control because of the stressors, but same employer also hires national park attendants or whatever. Move the beat cop to detective if deserving or other position that fits his/her current abilities. If still on the beat at 55-65, I would give the deserving officer a firearm with a little better range. In Minneapolis, the police don't run down muggers or investigate the crime anyway, so here age shouldn't be an issue. Note that I did see DBMA video of a youthful aging athlete training on hills with very heavy packs at beachside and I (similar age) still enjoy defeating college athletes at my sport (tennis), though the aches and pains do increase over time. My parents age 85 self-employed still work, by their own choice.
I wouldn't want to judge the real value of what anyone does, the danger that military, fire or police officers face, nor would they want to pay full value for my sacrifices and dangers as an inner city landlord. We get what the market will bear and what it will take to get the right person to come in and do the job.
What I hate is when they disguise or deny the money we pay. Telling us a teacher makes 50 or 60k when we pay out 90k because they aren't counting the deferred money or the benefits as pay. It is all pay. If they want portions of their pay in forced savings, health benefits, pension funds, taxes or anything else, that is their business.
The concept of public employees union violates the reason I thought that workers needed to organize - the greedy capitalist has disproportionate power over the lowly worker. How can it be that a government of the people, by the people and for the people needs it's power to negotiate curtailed?
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Our country may have a problem when we see that government jobs are becoming more attractive than private sector. This serves to increase the power and limitlessness of government.
I certainly don't want my policemen to be pissed off or feel cheated anymore than I want to go to a doctor who would feel the same way.
Why are there not more detectives? There are certainly huge amounts of crime out there that goes unattended to. At least if we are paying people to they die why cannot they do some work investigating crime till say 60 or 65?
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Deficits and out of control public spending are not caused by police costs. Real governing and public service functions make up a tiny fraction of the total we pay. Police forces are cut first to punish us for wanting to cut or even contain costs.
OTOH, real public functions like police work don't have much market discipline to control costs. Requires wise and responsible management to look for innovation and searches for new efficiencies. Often their hands are tied with work rules and union contracts.
Our small town contracts with other neighboring towns for police and some other services. We can negotiate a half of a cop of coverage or we can contract with a different neighboring force for cost sharing so there is in fact some choice and competition. But we have almost no crime. Problem here is that in a county larger than several states we are also paying for all the third world behaviors and the welfare-destroyed culture of a major inner city with all its problems spilling over to the inner ring suburbs.
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What I hate is when they disguise or deny the money we pay. Telling us a teacher makes 50 or 60k when we pay out 90k because they aren't counting the deferred money or the benefits as pay. It is all pay. If they want portions of their pay in forced savings, health benefits, pension funds, taxes or anything else, that is their business.
I agree!
No one in private industry that I can think of has a defined benefit plan that begins to pay out after only 20 years of service. They may/will be vested after 20 years, but they cannot begin collecting the money
until they turn age 65. And frankly, in private industry defined benefit plans are dying; they are too costly. The cost in the military and for other public employees plans however don't seem to be subject to cost cutting or controls; rather they just take the money out of our taxes. It's hidden and it's easy.
Let's look at our healthy Navy Petty Officer First Class, but it could be almost any healthy public employee. He is age 38 and will begin drawing a pension that is approximately 50% of his final salary.
Plus, don't forget each year there are 2-3% cost of living adjustments (compounded that is huge). And free medical care etc. is provided.
If his pension is $1800.00 a month, and he is only age 38 therefore he has 27 years to go until retirement, the government is going to give him over $600,000+ AND he will continue
to receive this pension like other workers in the private sector from age 65 until he dies of old age. Most Police, Firemen, and many public employees fall into this category. And don't forget, if your salary
is higher, than the retirement will be that much higher as well, often times over a million dollars of extra compensation is paid before age 65. And of course additional money will paid out
after age 65 with cost of living increases, etc......... All this while the individual can be working at a second job and acquiring a second pension. Nice huh?
Maybe this form of retirement plan is appropriate, maybe not, but I think deferred compensation should be discussed and counted as "pay". And this huge number should not be disguised or hidden;
rather when Military, Police or Firemen, or any other government employee's pay is being discussed, the public should be aware. Let's talk total deferred compensation in the newspapers, let the public
know the full package not just current salary. I might be sympathetic to a fireman "only" being paid $60,000, but then again maybe not if I knew that after 20 years he might be given a
"bonus" of 1.2 million dollars from age 38 - 65. Plus medical coverage for life. And then of course full retirement benefits from age 65 with continuing cost of living adjustments.
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JDN,
I agree with you. While I really don't want to dissect another person's income salary benefits there is another side to the story when public employees are allowed to have unions that negotiate not with taxpayers directly but some sort of small group of representatives of those payers such as councilmen, school boards or state elected officials and the real payers have little say in the process. Of course taxpayers might be able to be more involved by going to meetings, newspaper editorials, or perhpas by speeches from local politicians. Indeed I am totally ignorant (my fault) about local politics. I am ignorant how and who sets pay and benefits for essentially all public officials.
It is easier for some officials to give in to pressure when it is public and not their personal monies involved I would guess. Then there is the old "if you scratch my back I will scrach yours" that is rapant in local politics.
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I'm amazed at what some cops get paid in places like California. In my state, outside of the metropolitan areas, the police wages are very low and the benefits are far from impressive. In much of the state, a entry level officer with a wife and 2 kids is eligible for food stamps.
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http://www.policeone.com/careers/
http://officer.com/jobs/
Let me know how impressive the pay and benefits look.
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GM
Yep, you should come to LA!
Starting salary, mind you just the base starting salary, on day one for a new recruit with only a High School Diploma is over $45K. A few thousand dollars more if you have two years of college and even more than that if you have a college degree. And check out the benefits. Medical, Dental, a superb retirement plan, flexible work schedule, a sick leave and vacation plan unmatched in the private sector, etc. Note, upon retirement unused sick leave and vacation are paid out in a lump sum. It's hard to find any starting job in the private sector paying as much.
I'm not saying the LAPD isn't worth every penny, I just want to see the "value" fully disclosed to the public. "We "only" make $45K is their rallying cry. But benefits more than double that amount. And of course the longer you serve salary goes up. And even more as you are promoted. And after 20 years of service, well life is good. You receive a superb "retirement" immediately payable for the rest of your life and you can get a second job. Only LA loses; they have to train a new recruit; training a new LAPD officer costs a lot of money.
Again, I am not necessarily disputing the total amount, maybe it is appropriate, I just want full disclosure including their very benefits including their retirement plan.
In summary, per the LAPD.....
California police jobs and LAPD Officers enjoy tremendous benefits, including flexible work schedules and generous vacation pay benefits.
Compressed Work Schedule
A compressed work schedule is available for many patrol and special assignment units. Officers who work on compressed schedules work the same number of hours but can have more consecutive days off, by working longer days. Depending on assignment, available schedules include three 12-hour days and four 10-hour days.
Health and Dental Plans
Excellent health and dental plans are available for Police Officers and their eligible family members/domestic partners. The City contributes to all plans.
Pension Plan
The City has an independent pension system for whom the LAPD is eligible.
Sick Leave and Disability Benefits
Sworn employees receive 12 days of 100 percent paid sick leave, five days at 75 percent, and five days at 50 percent, upon hiring and each year while employed. Employees may accumulate up to 100 days at 100 percent, 75 percent, and 50 percent paid sick leave. Employees are eligible for a service-connected disability retirement from the date of graduation from basic training.
Vacation and Holidays
Sworn employees receive 15 days of vacation per year after one year of service and 23 days per year after ten years. Every sworn employee also receives a total of 13 paid floating holidays per year; one day every four weeks.
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Most cops in this country work for small agencies with small budgets. The LAPD does better than most, and Cali agencies from cities with deep tax bases have real nice pay and bennies, although for how long as California implodes?
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Cops, Crime, and the Economy
Economic recovery on a local scale, whether in Los Angeles, Oakland, or St. Louis, is largely dependent on the willingness of citizens to live and spend money there.
August 16, 2010 - by Jack Dunphy
http://pajamasmedia.com/blog/cops-crime-and-the-economy/?singlepage=true
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The idea that some police are eligible for food stamps is nothing short of shameful.
Isn't this also true of some military personel?
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Yep, service members who are in the lower 3 ranks with kids can qualify for some welfare programs............
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"service members who are in the lower 3 ranks with kids can qualify for some welfare programs"
Of course it shouldn't be that way but there are some factors to consider: a) a lot of their compensation is deferred, b) a significant part is not counted as income such as education benefits, housing, food, medical care, etc. c) our social welfare programs are screwed up so qualifying doesn't for sure mean you are poor, and d) there is some market aspect to military recruiting - they have budget constraints but they have to come up with packages sufficient to recruit the numbers needed in the ranks.
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Some of the lower 3 ranks are from a "welfare" background too. A case of too many kids and not enough income, and a faulty sense of priority between needs and wants. One of those challenges that the services have dealt with since.........? The police are probably in the same boat, depending on their expenses Vs. income balance, also depending on the economics of their jurisdiction. The large majority of government employees are enjoying a +30% income above equivalent civilian sector jobs. Some rebalancing of the budget is in order, like prioritizing between needs and wants............
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http://www.huffingtonpost.com/robert-reich/mitt-romneys-wetnoodle-ec_b_686662.html
http://www.robertreich.org/
Watch for these liberal pretend economist arguments to slip into the political debate in your own congressional districts and senate races. As Reich puts it: "supply-side economics won't create jobs. It's pushing on a wet noodle. Businesses create jobs only if consumers are pulling the noodle from the other end." Corporations are sitting on plenty of cash but won't hire with it. Tax cuts won't help that he argues. In reality he means tax rate increases that are coming won't make it that much worse...
First of all, the publicly traded companies of Dow and NASDAQ are not the small businesses of America that will generate the next expansion.
Reich forgets that a good part of our existing demand is used up purchasing foreign made products and services because the climate and cost and regulatory structure are prohibitive. And too much of the demand elsewhere in the world is directed toward also purchasing non-USA products where we once were the leaders.
Some of our hiring is held up by the uncertainty of future costs and penalties associated with new healthcare requirements, ccap and trade energy restrictions, tax increases, property tax increases, energy cost increases and who knows what else might be coming down the pike between now and when this anti-business, anti-freedom, anti-growth crowd loses their power. Tax cuts alone do not make up a 'supply side' policy. The regulatory maze and the flood of public spending competing for resources are big parts of the puzzle also.
You can't tell me that pro-growth policies that would bring unemployment down from 10% back to 5% would not increase consumer demand and business product and services in this country. You cannot convince me that making it easier and less costly to hire and produce here would not shift some production to here and some consumer purchasing to American goods and away from the foreign competitor. You cannot even convince me that even if all the sales of new production here went to overseas markets that the money coming back wouldn't provide a burst and a boost to our own economy our own demand and lead to new hiring. You cannot tell me that lowering corporate tax rates from the highest in the world of western civilization to the median of the OECD countries would not have an affect on keeping and attracting new jobs to our economy.
What Mr. Reich needs to do is first get all the parties in power such as Obama, Pelosi, Valerie Jarret and Van Jones (is he still around?) to at least admit and declare publicly that real economic growth is a public good of value, not something to be attacked, before we can seriously argue out what is the best set of policies to achieve it.
Currently the US Dollar is within about 5% of its all-time historic low. You cannot convince me that this would not be a perfect time to be selling Made-in-USA goods all around the globe - if only we were still producing anything.
So much for pushing on a wet noodle.
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I think Frank's motives are suspect, thought it's good to see this realization percolating in unlikely corners.
Frank Comes Home to the Facts
The Massachusetts congressman acknowledges that market processes work. Can Obama?
Can you teach an old dog new tricks? In politics, the answer is usually no. Most elected officials cling to their ideological biases, despite the real-world facts that disprove their theories time and again. Most have no common sense, and most never acknowledge that they were wrong.
But one huge exception to this rule is Democrat Barney Frank, chairman of the House Financial Services Committee.
For years, Frank was a staunch supporter of Fannie Mae and Freddie Mac, the giant government housing agencies that played such an enormous role in the financial meltdown that thrust the economy into the Great Recession. But in a recent CNBC interview, Frank told me that he was ready to say goodbye to Fannie and Freddie.
“I hope by next year we’ll have abolished Fannie and Freddie,” he said. Remarkable. And he went on to say that “it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” He then added, “I had been too sanguine about Fannie and Freddie.”
When I asked Frank about a long-term phase-out plan that would shrink Fannie and Freddie portfolios and mortgage-purchase limits, and merge the agencies into the Federal Housing Administration (FHA) for a separate low-income program that would get government out of middle-income housing subsidies, he replied: “Larry, that, I think, is exactly what we should be doing.”
Frank also said that any federal housing guarantees should be transparently priced and put on budget. But he added that the private sector must be encouraged to re-enter housing finance just as the government gradually withdraws from it.
Some would say Frank’s mea culpa is politically motivated in advance of an election where bailout nation and big government are public enemies number one and two. Of course, poll after poll shows that the $150 billion Fan-Fred bailout, which the Congressional Budget Office estimates could rise to $400 billion, is detested by voters and taxpayers everywhere.
In fact, these failed government agencies are in such bad shape that they can’t even pay Uncle Sam the dividends owed under the conservatorship deal reached two years ago. That’s right. In order to pay a $1.8 billion dividend on Treasury department stock, Fan and Fred had to borrow $1.5 billion from — you guessed it — the Treasury.
Then there’s this head-scratching detail: In an absolutely outrageous move last Christmas Eve, President Obama signed off on $42 million in bonuses for the top twelve Fannie and Freddie executives, including $6 million apiece for the two CEOs. (Hat tip to attorney Stephen B. Meister.)
Voters are on to all this. So politics may indeed be motivating Barney Frank’s turnaround. But I’m going to credit him with more than that.
I think Chairman Frank watched these government behemoths descend into hell and then witnessed the financial catastrophe that ensued. And I think he has come to realize that the whole system of federal affordable-housing mandates that was central to the real-estate collapse — including the mandates on Fannie and Freddie and the myriad bad decisions made by private banks and other lenders in response to the government’s overreach — simply needs to be abolished.
Noteworthy is the fact that Treasury Secretary Tim Geithner has come to a similar conclusion. Geithner told a recent Washington conference on the future of housing finance that the system needs fundamental change. He said, “We will not support a return to the system where private gains are subsidized by taxpayer losses.”
Of course, the withdrawal of housing markets from government programs, and the onset of a reinvigorated private sector for providing mortgages, must be done gradually over a period of years. But it is possible that the federal mortgage madness is coming to an end.
We will have to see if Congress really does say good-bye to Fan and Fred, as Republicans like Jeb Hensarling are advocating. Equally important, we will have to see if the federal affordable-housing mandates created by Congress and implemented by HUD and banking regulators are similarly repealed.
And then we will have to see if reformed federally guaranteed housing insurance includes larger down-payments, stricter underwriting standards, and greater reliance on private capital markets, lenders, and insurers. In other words, we need to see if housing will be restored to a market-based system and removed from the government-backed system that has proved so disastrous.
The broader lesson here is that government planning doesn’t work. And if left to their own devices, market processes will work. I don’t know if President Obama gets this. But my hat goes off to a man who does, Chairman Barney Frank.
— Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic$.
http://www.nationalreview.com/articles/244382/frank-comes-home-facts-larry-kudlow
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http://hotair.com/greenroom/archives/2010/08/24/the-phantom-priority/
The Phantom Priority
posted at 1:05 am on August 24, 2010 by Doctor Zero
After the passage of his massive health-care plan, President Obama promised a “hard pivot” to dealing with our flagging economy. Job creation was said to be his new “top priority.” Politicians make a habit of declaring lots of top priorities. Mark Knoller of CBS News recently put together an amusing list of thirteen items the President has declared to be his top priority. The promise to put the economy first was repeated loudly and often. It will still be ringing in the ears of voters when they clean Democrats out of Congress with an electoral leaf blower this autumn.
In reality, job creation and economic growth are nowhere to be found on this Administration’s list of priorities. The “hard pivot” was actually the feeble ring of ruby slippers clicking together.
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http://www.cnbc.com/id/38826988
Strap in.
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http://www.cnbc.com/id/38831550
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See, We Told You So
The Obama administration fesses up to another bank bailout under HAMP.
Can I let you in on something hilarious going around the Internet these days? No, I’m not talking about the Double Rainbow video. I’m talking about the reaction — just as amusing, though not nearly as joyful — of a number of left-wing political bloggers and commentators to the discovery that the administration’s foreclosure-mitigation program was actually a slow-motion bailout for Fannie Mae, Freddie Mac, and the banks, and not really designed to help underwater borrowers at all. Imagine Neo’s reaction when he’s told what the Matrix is, only pretend that the Matrix was something that was obvious all along, and you’ll get why I’m laughing.
The program’s intention was clear from the outset, as the editors of National Review Online noted when it was announced 18 months ago:
So, cui bono? Put simply, this program is designed to benefit Fannie and Freddie shareholders, not the great majority of Americans struggling with their mortgages. The only loans that can be restructured are those held in Fannie/Freddie portfolios or securitized by the twins. Just in time to benefit from a refinancing boom, Fannie and Freddie plan to raise their fees to as high as 3.5 percent on April 1. (Note that date, taxpayers, and ask yourselves who is being played for the fool.) And only a tiny slice of homeowners will be eligible — those who are in relatively weak positions (house payments exceed 31 percent of gross income) but not too weak (house payments do not exceed 38 percent of gross income) and who are, despite their mortgage difficulties, still creditworthy enough to pass bank underwriting standards. Fannie and Freddie get new capital, new income, and better loans in their portfolios. Most homeowners get nothing, and taxpayers get the bill.
At the time, a lot of supporters of the administration argued that only heartless Republicans and conservatives would oppose such a well-intentioned and generous program to keep struggling borrowers in their homes. The plan was the subject of CNBC commentator Rick Santelli’s famous rant, which drew angry condemnation from liberals and kicked off the tea-party movement that continues to drive them insane.
It turns out that conservatives were right: The program was full of bad incentives for borrowers and backdoor bailouts for banks. Neil Barofsky, the special investigator in charge of overseeing TARP spending, recently blasted the Home Affordable Modification Program (HAMP): “The American people are essentially being asked to shoulder an additional $50 billion of national debt without being told . . . how many people Treasury hopes to actually help stay in their homes as a result of these expenditures,” Barofsky’s report stated. The report also noted that HAMP “has not put an appreciable dent in foreclosure filings,” because, among other reasons, “the number of trial and permanent modifications that have been cancelled substantially exceeds the number of homeowners helped through permanent modifications.”
But the real eye-opener for left-wing supporters of the program came when a handful of financial bloggers posted write-ups of their visit to the Treasury Department last week. Treasury Secretary Tim Geithner and Co. had invited these bloggers to a private briefing as part of the department’s outreach efforts leading up to its big seminar on the future of housing finance. One of the subjects the bloggers and the Treasury officials discussed was HAMP. According to blogger Steve Waldman’s write-up, Treasury officials were “surprisingly candid” about the program’s failures:
The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least. There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks.
In a word, duh. It’s not like no one saw this coming. We did (see above). But here’s the funny part: Many left-wing commentators apparently trusted the administration’s good intentions to the point of being “shocked” by these revelations.
Duncan Black, who blogs as Atrios, wrote, “Conning homeowners by announcing a government program designed to help them when in fact it was designed to help the banksters is, in my world, ‘cruel.’”
Mike Konczal at Rortybomb, who attended the briefing, wrote, “The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative — it’s explicitly extend-and-pretend, and also fairly cynical.”
But my favorite was economist/blogger Brad DeLong, who summed up his blindsided take with the headline: “Department of ‘Huh?!’: HAMP Edition.”
Huh? What? Obama effectuated a “cynical” and “cruel” bailout of Fannie and Freddie under the guise of a compassionate mortgage-modification program? The mind reels! The heart aches! What else has he lied to us about?
It’s actually worse than all that. The administration’s program created an incentive for underwater borrowers who weren’t yet behind on their mortgage payments to fall behind on purpose in order to qualify for a modification under HAMP. An aide to a Republican congressman tells NRO, “People who could have made their mortgage payments end up three months behind, and they can never recover from the penalties and late fees, so they end up in worse shape than if the program had never existed from the outset.”
The aide, who works on constituent issues, says, “I’ve had at least one case where the person gets a letter saying that they qualify for HAMP, and from their point of view, it would really help them out if they were able to qualify for a lower payment, but if they had to make the payment they were making, they could have done it by cutting back on other parts of their life.
“Then at the end of the process, they’re denied the modification, and they’re three months behind on their mortgage,” he says.
Why have so many been denied modifications? According to ProPublica’s Ryan Knutson, it’s because “the Treasury Department . . . encouraged banks to start trials quickly, causing banks to make trial offers to people without fully vetting their eligibility, and ultimately letting in many homeowners who were destined to fail.”
But from the banks’ point of view, even if many of these borrowers end up in foreclosure, at least the program juiced a few trial payments out of those who had stopped making payments altogether. And it eased the crush of foreclosures for awhile, giving Fannie, Freddie, and other financial institutions room to breathe. It was designed, as Treasury officials are now candidly admitting, to help banks, not homeowners. Supporters of the program are shocked by this turn of events. They wouldn’t be, if they had listened to us.
— Stephen Spruiell is a National Review Online staff reporter.
http://www.nationalreview.com/articles/244535/see-we-told-you-so-stephen-spruiell
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Government Strangles High-Tech Growth
Published on August 28, 2010 by Ernest Istook
The CEO of Intel has joined the ranks of those labeling big government as the cause of our economic slump, not the solution.
Paul Otellini says it already costs Intel an extra billion dollars to build a microchip plant in the U.S., rather than overseas. In his illustration, it's an extra 25% to create a $4 billion facility.
He told this to an Aspen gathering of the Technology Policy Institute, adding that government is killing America's leadership for jobs of tomorrow. Otellini said, "We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case."
While promoting education, research, favorable trade policies, and broadband expansion, he made it clear that tax policies are key--policies that are the opposite of what Congress and the Obama Administration are promoting:
As CNET reported on his speech, "Take factories. 'I can tell you definitively that it costs costs1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States,' Otellini said. The rub: Ninety percent of that additional cost of a $4 billion factory is not labor but the cost to comply with taxes and regulations that other nations don't impose."
How do we get companies to expand in America rather than overseas? The Intel CEO explained, "Adjust the U.S. corporate tax rate to a rate that is competitive world-wide. At Intel, we generate 75% of our revenue and much of our profit abroad. The U.S. tax treatment of that income makes it extremely expensive to repatriate that profit and invest here. If our tax rate approached the rest of the world, corporations would have a natural incentive to invest here given many of the natural advantages that exist in this country."
He suggested lowering the rate to 25%. That reduction echoes a Heritage Foundation proposal in its "Solutions for America," which recommends, "The U.S. corporate tax rate should be set at or below the Organisation for Economic Co-operation and Development average of 26% to eliminate the incentive to move businesses and jobs overseas."
Otellini also stressed the need not to penalize companies when they repatriate their foreign earnings and bring them back to the U.S. He's joined by many others in the high-tech community who warn that what some call "closing tax loopholes" actually hurts the ability to create jobs in America. Sybase CEO John Chen has written, "President Barack Obama has proposed to raise taxes on the international operations of U.S. businesses. There is one thing the proposal can effectively achieve: make the United States an even less friendly place to do business, and thus delay the economic recovery. . . . Although intended to keep investments and jobs from leaving our country, in the long run the measures in the proposal will drive investments away, and kill jobs in the U.S."
The high-tech sector's complaints are part of a growing chorus from job creators who describe how Washington is smothering economic growth.
The Business Roundtable sent a 50-page letter to the White House describing how Obama's agenda is stifling growth and killing jobs. A GOP letter complained of 191 intended rules and regulations that EACH would impose $100-million or more of growth-killing cost burdens on businesses.
Worried about what their own government is doing to them, businesses continue to sit on a $1.8-trillion cash stockpile, holding it back for the extra costs they face from more taxes and more regulation.
The White House happy talk of a "Recovery Summer" grates like nails on a blackboard. That rhetoric collapses with news that second quarter growth was at a 1.6% annual rate--less than half the first quarter rate and well below original White House numbers.
To put America back to work, it's time to heed those who create jobs, rather than politicians who create more government. Intel and others should not face a $1-billion hurdle to expanding in the USA instead of overseas.
Former Congressman Ernest Istook is a distinguished fellow at The Heritage Foundation.
http://www.heritage.org/Research/Commentary/2010/08/Government-Strangles-High-Tech-Growth
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http://hotair.com/archives/2010/09/04/romer-hey-we-gave-it-our-best-shot/
**Reminds me of Blutosky from Animal House. "Hey, you fcuked up, you trusted us".
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http://www.politico.com/news/stories/0910/41765.html
Whoops! Sorry!
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http://hotair.com/archives/2010/09/06/obama-to-propose-50-billion-in-infrastructure-spending-for-stimulus/
Insanity: doing the same thing over and over again and expecting different results.
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http://www.ft.com/cms/s/0/ca09873c-bb6c-11df-a136-00144feab49a.html
Goldman forecasts emerging equities bonanza
By Stefan Wagstyl in London
Published: September 8 2010 18:32 | Last updated: September 8 2010 18:32
China could overtake the US in terms of stock market capitalisation by 2030 as the market value of equities in emerging nations soars, powered by expanding investment and by economic growth, says a report by Goldman Sachs.
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My prediction: China is a big bubble which will burst before then. I might add that GS did not predict the bursting of our bubble (in public at any rate).
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http://www.realclearpolitics.com/articles/2010/09/10/the_nanny_state_has_blown_the_bank_107091.html
Will the death of the nanny state be the death of us?
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http://www.breitbart.com/article.php?id=CNG.a64b6fa820c23d9ef2058a22276ce3a1.2c1&show_article=1
Boston University professor Laurence Kotlikoff, who warned as far back as the 1980s of the dangers of a public deficit, lent credence to such dark predictions in an International Monetary Fund publication last week.
He unveiled a doomsday scenario -- which many dismiss as pure fantasy -- of an economic clash between superpowers the United States and China, which holds more than 843 billion dollars of US Treasury bonds.
"A minor trade dispute between the United States and China could make some people think that other people are going to sell US treasury bonds," he wrote in the IMF's Finance & Development review.
"That belief, coupled with major concern about inflation, could lead to a sell-off of government bonds that causes the public to withdraw their bank deposits and buy durable goods."
Kotlikoff warned such a move would spark a run on banks and money market funds as well as insurance companies as policy holders cash in their surrender values.
"In a short period of time, the Federal Reserve would have to print trillions of dollars to cover its explicit and implicit guarantees. All that new money could produce strong inflation, perhaps hyperinflation," he said.
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A George Will piece posted from Sunday was excellent. link follows.
A well intended piecemeal program of targeted leftism that mostly benefited Honda and Toyota with new car sales, got a few people with plenty of cash in their pocket into new wheels with taxpayer help and left ordinary working or poor people with an 11% higher price to pay for the remaining stock of used cars in the government tampered market.
I wonder if even one left-leaning moderate can read a true and recent story of another command economy experiment failing for the people like that and learn something about how freedom to make our own choices, good or bad within reason, is a better way to run the private economy.
Let government focus on core issues of governing, not try to run the private sector for us too.
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http://www.chron.com/disp/story.mpl/editorial/outlook/7199488.html
The clunker school of economics
By GEORGE F. WILL
WASHINGTON POST
Sept. 13, 2010
Looking back with pride, the British are commemorating the 70th anniversary of the Battle of Britain, when Churchill said of the pilots fighting the Luftwaffe: Never "was so much owed by so many to so few." Looking ahead with trepidation, Americas are thinking: Never have so many of us owed so much.
Actually, they owed slightly more when the recession began, when household consumer debt was $2.6 trillion. The painful but necessary process of deleveraging is proceeding slowly: Such debt has been reduced only to $2.4 trillion. Add to that the facts that the recession has reduced household wealth by $10 trillion, and that only 25 percent of Americans expect their incomes to improve next year. So they are not spending, and companies are worried. Hence, rather than hiring, companies are sitting on cash reserves much larger than the size of last year's $862 billion stimulus.
Democrats who say another stimulus is necessary for job creation, but who dare not utter the word "stimulus," are sending three depressing messages: The $862 billion stimulus did not work; the public so loathes the word that another stimulus will not happen; therefore prosperity is not "just around the corner," as Herbert Hoover supposedly said (but did not). Consumers and businesses are responding to those messages by heeding Polonius' advice in Hamlet: "Neither a borrower nor a lender be."
Hoover — against whom Democrats, those fountains of fresh ideas, have been campaigning for 78 years — is again being invoked as a terrible warning about the wages of sin. Sin is understood by liberals as government austerity, which is understood as existing levels of government spending, whatever they are, whenever. Treasury Secretary Tim Geithner recently said that Germans favoring reduced rather than increased state spending sounded "a little bit like Hoover." Well.
Real per capita federal expenditures almost doubled between 1929, Hoover's first year as president, and 1932, his last. David Kennedy, in Freedom from Fear, writes of Hoover:
"He nearly doubled federal public works expenditures in three years. Thanks to his prodding, the net stimulating effect of federal, state and local fiscal policy was larger in 1931 than in any subsequent year of the decade."
Barack Obama has self-nullifying plans for stimulating the small-business sector that creates most new jobs. He has just endorsed tax relief for such businesses but opposes extension of the Bush tax cuts for high-income filers, who include small businesses with 48 percent of that sector's earnings. The stance of other Democrats seems to be that the Bush cuts were wicked in conception, reckless in execution — and should be largely, and perhaps entirely, extended.
Does this increase anyone's confidence? About as much as noting the one-year anniversary of the end of another of the administration's brainstorms.
The used car market is an important mechanism for redistributing wealth to low-income persons: The price of a car drops when it is driven out of the dealership, but much of its transportation value remains when it enters the used car market. Unfortunately for low-income people, the average price of a three-year-old automobile has increased more than 10 percent since last summer. This is largely because the Car Allowance Rebate System, aka "cash for clunkers," which ended in late August 2009, cut the supply of used cars.
Cash for clunkers provided up to $4,500 to persons who traded in a car in order to purchase a new car with better gas mileage, but stipulated that the used car had to be scrapped. A study by Edmunds.com shows that all but 125,000 of the 700,000 cars sold during the clunkers program would have been bought even if no subsidy had been available. If this is so, each incremental sale cost taxpayers $24,000.
Obama is desperately urging consumers and investors to have confidence in his understanding of economics. They may, however, remember his characteristic certitude that "cash for clunkers" was "successful beyond anybody's imagination."
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Why Democrats Can't Win on Taxes
Many Democrats up for re-election do not want to vote for any tax increases, but Obama has drawn a line in the sand against tax cuts "for the rich."
By KIMBERLEY A. STRASSEL
To listen to Senate Majority Leader Harry Reid and Speaker Nancy Pelosi, Democrats are fired up for a tax debate. Republicans are holding "hostage" the "middle class" with their insistence that the Bush tax cuts be extended for all. Democratic leaders claim they can't wait to bring this line to voters this fall.
There comes a point in Washington debates when the losing side has little left but bluff, and here's a good example. What Democrats know, but won't say, is that the party has walked itself into a lose-lose-lose tax fight. Their choices now range from bad to worse to problematic.
They are in this fix because the tax debate they are having is not the tax debate they had planned. By now, the $800 billion "stimulus" was supposed to have the economy roaring back and unemployment well below 8%. The administration was supposed to be resting on its legislative laurels, the public showing growing appreciation for its agenda. The economy and polls firmly in hand, President Obama would then pivot to the deficit to argue that it was now responsible for a once-again-prosperous nation to pay its bills by letting some tax cuts expire.
The majority stuck to this vision despite all evidence it was imploding. At any point Democrats could have pre-emptively embraced the tax question, perhaps intelligently enough to help the economy, and take credit. They didn't. Tax hikes looming, they must now confront this debate on the back of 9.6% employment, a teetering economy, an unpopular agenda, an angry business community, and an emboldened GOP. Which brings us back to options.
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David Gothard
Option No. 1 is for congressional leaders to plunge once again into the legislative breach, this time to threaten and bribe their caucus into passing the Obama plan, which extends tax cuts only for those making less than $250,000. This is a heavy lift, partly because it is hard to find a Democrat who likes the Obama plan.
Mrs. Pelosi's liberals are unenthusiastic, since most would prefer to let all the tax cuts expire. Mrs. Pelosi's Blue Dogs are petrified, since a vote to retain only some cuts will be turned by the GOP into ads explaining that what Democrats in fact voted for was a $700 billion tax increase on small businesses and capital at a time of economic difficulty.
For the 75-plus House Democrats whose seats are in danger, having to defend that vote, in addition to health care, stimulus or cap and trade, would be ghastly. As the election approaches and Democrats find themselves with more seats to defend with limited cash, party moneymen also worry such a vote would alienate businesses and further dry up campaign donations. There's also the small problem of the Senate, where Minority Leader Mitch McConnell wields a potential filibuster.
Option No. 2 is to do nothing and kick the issue beyond the election. This approach allows the leadership to avoid the headaches of Option 1, and it may explain why neither Mr. Reid nor Mrs. Pelosi has bothered to introduce a bill.
This option is, however, not so popular among many rank-and-file Democrats. Perhaps the only thing worse than being accused of voting for $700 billion in tax increases is being accused of doing nothing and allowing $4 trillion in tax increases, most of them on average Americans. Democrats will blame Republicans, but that will be hard to do if Democrats don't even go through the vote motions.
Option No. 3 is for the congressional leadership to give in to the growing pressure and allow members to vote with Republicans to extend all the 2001 and 2003 tax cuts. That pressure is already notable: No fewer than 31 House Democrats signed a letter this week demanding that all the cuts continue, and five Senate Democrats now support that position. Democratic leaders are clearly worried those numbers will grow, one reason Mrs. Pelosi yesterday refused to rule out a full extension.
This option would not only help vulnerable Democrats, it'd be great for the economy and taxpayers. The political problem Democrats have is self-created. Rather than embrace the winner of full tax relief, President Obama has chosen to draw an ideological line and to motivate his liberal base with his position against tax cuts "for the rich." Democrats are now fearful that if they cave it will demoralize that base, and further handicap them in midterm races.
And so, the bluff. It's a weak hand, but the GOP shouldn't underestimate it. The Democrats' best shot is procedural, to somehow allow only one vote—on extending rates for just the "middle class"—and dare Republicans to vote against it. Democrats might then peel off GOP support and provide themselves cover this fall. If the majority senses fear—like what emanated from Minority Leader John Boehner this past weekend when he suggested he wouldn't take that dare—it'll take this shot.
Republicans should call and raise. If Mr. Obama has such a winner tax position, it isn't clear why his leaders are ducking tax bills and his members are running for cover. And if the GOP can't run on universal tax relief in this of all years, it's not clear when it ever can.
http://online.wsj.com/article/SB10001424052748703440604575496223092291204.html
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http://www.bloomberg.com/news/2010-09-24/gold-rises-to-record-on-dollar-hedge-demand-silver-gains-to-30-year-high.html
Gold futures rose to a record $1,300 an ounce in New York as investors sought a protection of wealth and an alternative to a weakening dollar. Bullion traded at an all-time in London and silver reached the highest price since 1980.
The dollar headed for a weekly drop against the euro on concern the Federal Reserve is moving closer to boosting debt purchases, while European equities declined. Gold, which usually moves inversely to the greenback, advanced to a record for the fourth day this week. Silver, which is used in industrial applications, headed for a fifth weekly advance in London.
“Gold is showing there is no confidence in the dollar,” said Bernard Sin, head of currency and metal trading at bullion refiner MKS Finance SA in Geneva. Recent “data has been showing signs of a troubled economy. That’s why we’ve seen this huge buying for investors as a safe haven.”
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PAAS is my silver play and has been doing very well for me. I first bought somewhere in the 8s, and recently added at 22.
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Un-Stimulating Bureaucracy
Posted by Tad DeHaven
An essay from economist Arnold Kling in the latest Cato Policy Report discusses what Kling calls the “knowledge-discrepancy problem.” This occurs when knowledge is dispersed but power is concentrated, and it is particularly acute in government.
In short, it’s impossible for government “experts” to aggregate the vast amount of knowledge that is dispersed throughout the economy in order to optimally direct economic activity. And as Kling notes, concentrating power over the economy in the hands of experts leads to ever more undesirable government interventions:
As we have seen, the expectations placed on government experts tend to be unrealistically high. This selects for experts with unusual hubris. The authority of the state gives government experts a dangerous level of power. And the absence of market discipline gives any errors that these experts make an opportunity to accumulate and compound almost without limit. In recent decades, this knowledge-power discrepancy has gotten worse. Knowledge has grown more dispersed, while government power has become more concentrated.
The failure of the administration’s stimulus plan illustrates the problem with empowering government experts to “fix” our incredibly diverse $14 trillion economy.
A Wall Street Journal article on the inability of government bureaucracies to utilize stimulus funds demonstrates the inherent inefficiency of government planning. For example, the stimulus provided $5 billion to the states for weatherization projects. But when a local official in Detroit began soliciting applications to weatherize houses, she ran into a buzz saw of federal and state red tape:
But on the same day in March 2009 that Shenetta Coleman picked up applications from 46 companies, she received an email from the Michigan Department of Human Services telling her she couldn’t award work to anyone.
The problem: Ms. Coleman hadn’t met requirements for her advertisement. Those included specifying the precise wages that contractors would have to pay, and posting the advertisement on a specific website. There were other rules—federal, state and local—for grant and contract-award processes, historic preservation and labor standards.
The bureaucratic obstacles Ms. Coleman hit took more than a year to clear. Some were mandated by the stimulus bill, the same legislation that was supposed to rapidly create jobs. For example, there is a union-backed provision that requires that weatherization workers receive the prevailing wages in the area.
The stimulus is also distorting employment by incentivizing workers to obtain job-skills on the basis of government planning. The WSJ article cites the example of an unemployed worker who enrolled in a weatherization training class when she learned that Detroit would be receiving $30 million in weatherization funds:
She studied energy-saving principles, practiced drilling holes into walls and blowing in insulation, and learned how to install windows. She graduated in March, at the top of her class. For the next four months, she couldn’t find work. “I was hanging on by a thread,” said Ms. Wallisch. In July, she was hired for energy-conservation work funded not by the stimulus plan, but by Michigan’s utility companies.
The recession, and consequent rise in unemployment, led to demands for the government to “create jobs.” However, merely throwing taxpayer money at government job-creating schemes, which was the solution the government’s “experts” came up with, was never a viable solution. The experts simply do not have the requisite knowledge to match millions of workers possessing diverse job-skills with the diverse needs of millions of employers.
From Kling:
What the issue of job creation illustrates is the problem of treating government experts as responsible for a problem that cannot be solved by a single person or a single organization.
Economic activity consists of patterns of trade and specialization. The creation of these patterns is a process too complex and subtle for government experts to be able to manage.
The issue also illustrates the way hubris drives out true expertise. The vast majority of economists would say that we have very little idea how much employment is created by additional government spending. However, the economists who receive the most media attention and who obtain the most powerful positions in Washington are those who claim to have the most precise knowledge of “multipliers.”
As I have previously discussed, the average citizen has become conditioned to reflexively turn to the government to in times of crisis. Government officials are only too happy to oblige as they are naturally inclined to operate on a short-term horizon (i.e., the next election). Fortunately, more and more Americans appear to be realizing that the government and its experts are the problem rather than the solution.
http://www.cato-at-liberty.org/un-stimulating-bureaucracy/
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http://www.businessinsider.com/mauldin-2010-10
Gas Is Going To $5 A Gallon, Consumer Spending Is Dead, And House Prices Will Fall Another 20%
Read more: http://www.businessinsider.com/mauldin-2010-10#ixzz11KBdIA8y
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"Gas Is Going To $5 A Gallon, Consumer Spending Is Dead, And House Prices Will Fall Another 20%"
If it were based only on our failed energy supply policies gas wouldn't stop at $5 but would go to $25/gallon and beyond. But of course it is also based on affordability so the suppliers do not maximize revenues by raising up with no limit. High energy prices were a contributor to our recent economic downfall, but rising prices are partially a sign of global economic strength. There is no new pipeline coming in from Alaska or from anywhere else, no new refineries (as well as no new coal plants and no new nuclear plants that need many years of lead time to get going) so short supply is also a cause of the price rise.
Consumer spending was a bubble like housing in this throw away society and a correction is not all bad. When you can't bump up your home equity loan and you are buying down your credit cards, logic starts to compete with emotion. Other than three wise men baring gifts I don't recall anything in scripture about seasonal shopping mall madness. These are more recent phenomena. Now I see Goodwill more crowded.
Housing markets are all intertwined but primarily regional. Maybe they will drop further with still more foreclosures coming on line and most foreclosure buyers are thoroughly exhausted in more than one sense. I bought another investment property for an amazingly low price last week, while other buyers sit out. It is a little scary being a contrarian, I just figure in that next 20% drop now and assume that the people who don't jump from their office window will have to live somewhere. As soon as the income and employment situation rebounds (we probably need a war to change those policies), housing will do just fine. If not, I'm screwed anyway so who cares.
This is no longer a plunging economy on the brink. Two years past Sept 2008 this economy is what it is. We elected anti-growth, anti-production policies. We vote for trillion and a half dollar deficits and we get stagnation with impending inflation along with energy scarcity and too many regulations for anyone to want to hire or manufacture. Still we rebound slowly because that is what Americans, the half who contribute, do.
It is always surprising to me that economists who strongly oppose PelosiObamanomics like our own Scott Grannis are still rather upbeat about the outlook. His most recent 4 or 5 posts are fairly positive and based on real data, and that theme there has been consistent for months: http://scottgrannis.blogspot.com/
Auto sales point to ongoing economic recovery
ISM indices continue to point to moderate growth
Unemployment claims situation is slowly improving
Online job demand points to rising employment
Tech and consumer stocks have recovered nicely
The housing market has adjusted to new realities
Household financial obligations have eased considerably
Commodities reach new all-time highs
Capex continues very strong
No shortage of money
Housing market remains weak - oops, mostly positive.
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I'll state for the record that the economy will be much worse than it is now. Think double dip with an L-shaped bottom. We have a narrow window (The next two elections) to pull out of this death spiral.
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The market tries to measure the present value of future income and profits. With BO coming in, it crashed. With a good chance of the Reps being in a position to stymie BO, the future looks brighter than it did and the market climbs.
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The market isn't entirely rational, and is still overvalued due to various attempts to keep things overinflated. Home prices are still very overvalued. Most states are deep in the red and would be coming apart at the seams were it not for the federal money infusions. We are still coasting on wishful thinking and illusion as we continue to run up the national credit card and worsen the consequences when the card gets cut up.
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GM wrote: "I'll state for the record that the economy will be much worse than it is now. Think double dip with an L-shaped bottom. We have a narrow window (The next two elections) to pull out of this death spiral."
I agree with you on the time frame. It is not the election cycles but the policies that come out of it with a 180 degree change in thinking, and I am pessimistic about it even if elections go nominally well.
I posted a Krauthammer piece a while back called "Decline is a Choice". The title says it all for where we are now. People say they voted for Obama because they didn't like Bush, and before that in 2006 for similar reasons, having a Republican congress didn't mean anything positive even in a growing economy. But they also chose these policies. As Obama told the activists in the last week, he has accomplished 70% of it so far. Now people allegedly will vote against Pelosi-Reid-Obama because of policies, a vague dislike for the expansion of government and the lack of positive results from it. I don't buy that people can really change their thinking that radically, that quickly. Not enough people get it economically, from my point of view, in terms of recognizing a distinction between pro-growth and anti-growth policies and choosing enough economic freedoms and incentives to get things rolling again. On top of that there is an impending demographic trainwreck headed at us that we are totally unprepared for.
Reminds me of what they said about Japan in about 1990 IIRC, only worse. The only thing that would avoid the stagnation and deflation coming (in Japan at that time) was bold action, and the one thing their form of government was incapable of was bold action of any kind, so the pessimistic predictions all came true.
A large grass roots movement is ready for change. Not necessarily a majority. What really is missing is one leader who can do it, communicate it, get it right, and win. Unfortunately I don't see one and the time frame is running short.
Imagine 1980 with no Reagan. Reagan was a front runner but barely got himself separated from a crowded field. People barely understood what he meant by the Kemp-Roth cuts and mostly didn't know if he was serious or if it would work. Plenty of people still don't know it worked. Does anyone think a quarter century economic expansion would have begun or the cold war would have ended in 8 years with eastern Europe free and the Soviet Union gone if moderate George H.W. Bush had won then, or Senate Minority Leader Howard Baker, or John Connally, or Illinois Congressmen John Anderson and Phil Crane had won the nomination or if the Incumbent President James Carter had been reelected or if his challenger Teddy Kennedy had won it all? What were any of them going to do that would have lifted out of that hole? That is the roughly the question I would ask this crowded field that is developing today and I am skeptical about hearing a convincing answer.
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"I don't buy that people can really change their thinking that radically, that quickly. Not enough people get it economically, from my point of view"
I agree. As long as we continue expanding doles like a cancer the slope of the uphill climb steepens.
We are going to have to work our ways out of this - not sit back and let government bail us out.
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http://hotair.com/archives/2010/10/05/tax-hikes-to-drive-a-second-collapse/
Congress left Washington without addressing the massive tax hikes that will come at the end of the year as the tax-rate reductions of 2001 and 2003 expire. Absent action on Capitol Hill, those increases will take $4 trillion out of the economy over the next ten years — and even if the lower tax bracket reductions get extended, $700 billion of capital will get redirected from the private sector to Washington. How will that impact economic growth in the US? Peter Ferrara argues that it will create not just a double-dip recession, but a second economic collapse — one worse than what we experienced in 2008.
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"Absent action on Capitol Hill, those increases will take $4 trillion out of the economy over the next ten years"
Worse yet, the higher rates may capture no new revenues as the players in the economy respond to impending doom with a "contractionary" response.
What most liberals, progressives etc. don't get whatsoever is that even if these new increases never happen, the fact that they have been looming and promised really since Nov. 2006 when Pelosi-Reid-Obama-Hillary et al took control of congress has already caused immeasurable carnage to our economy that had 50 consecutive months of job growth when power shifted. One simple measure is unemployment. For certain there were other factors (not all other things held equal or constant), but when the party promising extension of tax cuts was in power, the last unemployment figures were: "adult men (3.9 percent), adult women (4.0 percent)", 4.5% overall http://www.bls.gov/opub/ted/2006/dec/wk2/art01.htm, compared with 9.6% overall today with across the board tax increases coming: http://www.bls.gov/news.release/empsit.nr0.htm, the last figures available for the leftist regime leaving power.
A doubling of unemployment is not a punishment to the rich, as it was intended. The filthy rich have individually lost millions but are doing fine. Shrinking the payroll for them is not all bad. Fewer government forms to fill out. Smaller parking lot to seal coat, probably could plant some greenery on the unused employee parking spaces and help the environment as well.
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The dem's class warfare is boosting investment..... overseas. Anyone notice that Steve Wynn has moved most of his company to asia?
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"The dem's class warfare is boosting investment..... overseas."
GM, correct! Unfortunately.
The main beneficiaries of cars for clunkers were Honda and Toyota.
Here is a nice explanation of how a stimulus can get away:
"Andy Xie has an interesting angle on why U.S. stimulus won't work this time around...
Essentially, the world is too globalized today, whereby demand remains local but 'supply is global'.
In the past, when a government stimulated demand within a country, such as the U.S., this stimulated an investment expansion within the U.S.. Companies invested in domestic expansion in order to increase their product supply and meet stimulated American demand. This domestic investment expansion adds jobs, which sets off a cycle of economic expansion.
Yet in today's globalized world, companies don't need to expand within the U.S. in order to meet stimulated U.S. demand. They can expand their facilities in other countries, say China, in order to meet stimulated American demand. Thus American stimulus doesn't create a sustainable cycle of economic expansion within the U.S. as it used to -- it creates jobs in places like China rather!"
Read more: http://www.businessinsider.com/american-stimulus-jobs-in-china-andy-xie-2010-8#ixzz11VUfRCNY
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http://pajamasmedia.com/blog/obama-and-ben-bernanke-have-us-facing-the-abyss/?singlepage=true
If the congressional midterms, gubernatorial races, and various state and local electoral contests result in the large-scale repudiation of the left so many are expecting, it will represent only the barest of beginnings towards a genuine long-term national economic recovery.
Only now is it beginning to dawn on many American just how deep our short-term and long-term holes really are. Many others, including politicians who appear to be on their way to key positions after the elections, still don’t seem to get it. This column will focus on the near-term economy — because if we don’t get a handle on a quickly mushrooming mess, and soon, there may not be a long-term.
This nation’s government just completed its second fiscal year with deficits of well over a trillion dollars, a number that was unthinkable just two years ago. Despite claims to the contrary, true cash flow from federal government operations during fiscal 2010 was more negative than the previous year. It only looks better because of increased receipts from the Federal Reserve (more on that in a bit) and cleverly manipulated non-cash accounting entries that arbitrarily and artificially reduced this year’s reported outlays. Net tax collections are still about 20% below where they were two years ago, and are only showing bare signs of turning upward.
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From GM's post: "Net tax collections are still about 20% below where they were two years ago"
I never understood why big spenders from the Dem side never latched onto the successes with the big revenue surges from supply side incentives, such as after the JFK rate cuts, the Reagan rate cuts, the Gingrich Clinton capital gains rate cuts or the Bush tax cuts. I don't think any sane company president ever got away with saying that our revenues are down 20%, let's raise our prices until we make up the shortfall and start growing again.
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Remember that wonderful moment during the primaries (perhaps it was Conneticutt?) wherein a reporter actually asked BO an intelligent prepared question? After pointing out the increase in revenues from the Gingrich-Clinton Cap Gains cut (and some other example as well) he aked BO how he could be for increasing the Cap Gains rate when it would lead to less revenues-- and BO's answer was that it was a matter of "equity/fairness".
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"...asked BO how he could be for increasing the Cap Gains rate when it would lead to less revenues-- and BO's answer was that it was a matter of "equity/fairness". "
The teleprompter was off and the truth slipped out. Raising that rate was more important to him than raising revenue. A successful campaign idea - go after the rich - was more important than governing, the best interests of the country, following the constitution or following the ten commandments, like covet, steal or worship other gods. I do remember that and it was pretty much the same as the Joe the Plumber incident. When caught Obama did not back off of misguided, poorly articulated ideas. I don't understand why he won't back off of bad ideas now, while governing. To him, this is still a campaign and that is what he knows. Everyday was a campaign to Bill Clinton too, but it was a campaign to promote himself and to shift himself when necessary, not a campaign to stick with bad ideas no matter the political cost or the real damage caused to the country or to the economy.
Like a large voice on radio said: I hope he fails [to accomplish what he has set out to do].
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Friday's unemployment report for September, the last before the election, brought more bad news for the Barack Obama Democrats.
Noteworthy is the fact that stocks rallied a bit on the lackluster and tepid jobs numbers, pushing through the 11,000 mark. But more and more, it seems bad economic news illustrating the failure of Obamanomics becomes good news for stocks on the expectation of a GOP tsunami in November.
The unemployment rate itself held at 9.6 percent. It's been over 9.5 percent for 14 straight months. Meanwhile, the marginally unemployed -- or the so-called impairment rate (U-6) -- jumped to 17.1 percent from 16.7 percent.
These headlines are political poison for Democrats. Voters are going to keep asking, What exactly did we get for a $1 trillion stimulus-spending package that puts us deeper in hock?
Overall, nonfarm payrolls fell 95,000 for September, largely from a drop in census workers and state and local government employees. Private payrolls increased 64,000, only a third of what's necessary to sustainably reduce unemployment.
Average hourly wages were flat, as was the workweek.
Looking back, the jobs story was much stronger in the first four months of the year through April. But job creation has slowed markedly since then, along with the overall economy.
The household survey, which picks up small businesses, is the better story. This report has grown by 1.6 million jobs year-to-date (adjusted for census workers), or 178,000 per month. And in the payroll survey, corporate jobs have increased 863,000 in the private sector, coming to 96,000 per month. Yet both surveys must grow over 200,000 per month in order to truly dent stubbornly high unemployment.
There is no double-dip recession here. The recovery is probably advancing at about a 2 percent to 3 percent rate. But that's a sluggish pace at best. We should be growing at least twice as fast.
Precisely because of the obvious failure of the Obama stimulus-spending program to adequately create jobs, the Federal Reserve is moving toward re-priming the pump. It's the addition of yet another bad policy of dollar destruction to the first mistake of massive spending.
Think of it this way: The Fed is probably going to add another $1 trillion of new cash to the financial system. But as all those new dollars are created, the dollar excess sinks the greenback exchange rate. And that means investors will take the new money the Fed creates and drain it out of the U.S. financial system into more reliable currencies. Go figure Ben Bernanke's logic.
The same thing happened between 2002 and 2006. The Fed was too loose for too long, the dollar fell too far, and all that cash fled the country, thereby undermining the George W. Bush tax cuts.
Meanwhile, with today's rapid rise in gold and commodity prices, a new inflation tax will be imposed on consumers and businesses. Bad for growth. Oil has jumped to $83 a barrel, and gas at the retail pump is heading toward $3 a gallon.
And on top of all this, a world currency and trade war beckons. Treasury Secretary Tim Geithner is rapidly escalating the China-bashing rhetoric, as he blames the Chinese yuan for American economic woes. Shades of the 1930s. Neither the Treasury nor the Fed seems interested in defending the dollar's world-reserve-currency status, or U.S. global economic leadership. And no one in official Washington seems interested in global-currency stability backed by a golden anchor.
But here's the real problem. New numbers from the Congressional Budget Office show a 9 percent increase in federal budget spending for fiscal 2010. That's about six-times the inflation rate. Astronomical.
Federal spending is now 25 percent of gross domestic product, way past the historical norm of 20 percent. And the budget gap is $1.3 trillion. So how can you blame investors or businesses for asking this simple question: How high are my taxes going to go to finance all this?
Until this question is answered to their satisfaction, the job-creating engines will remain dormant. Obamacare is a massive tax and regulatory threat. And so is the spending and deficit problem. The Fed can pour all the new money it wants into the economy, but it cannot change any of this.
Then again, the elections can.
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Doug writes:
"I don't understand why he won't back off of bad ideas now, while governing."
Some, including O'Reilly give Obama more credit than her deserves on this point. That is they would hold he is true to his core beliefs and that he is governing more to take the country in a direction that he believes is right and not governing by polls and "isn't that admirable?"
I believe it is much less noble and more sinnister. I believe it is because of his personality disorder. He is clearly a narcisstic personality disorder with megalomanic proportions. This is all about him. Not some beliefs. This is reflective of his disdain for anyone who disagrees with him. He is the smartest knowingist person on the planet. You disagree with him you are therefor inferior. His self loves knows no bounds. If things go wrong it is NEVER due to his actions it is externalized and the fault of someone or something else. He is right and everyone else is wrong. That is why he will NEVER (in fact he is due his disorder - unable todo so) admit that his policies are wrong headed. If he is low in the polls it is due to liars like Fox news, like the miserable sick Republicans. Like the white racists.
I believe this guy is truly incapable of anything else. That is why we are seeing what is a anger that is reflective of an underlying disorder. This guy is far from normal.
When he have a President pitting with imagry one American against another in "hand to hand combat", this is a fight about "slavery", et. we have a huge problem
This supports my personal conclusion this guy IS NUTS.
And THAT is what I mean when I say he will fold like a lawn chair when he has to deal with house(s) majorities that have no sypmpathy with him. He will not give in or acquiece but he will continue to be delusional, he will continue to drag the country down fighting for what in HIS mind is a delusional idea that HE is the ONE, he is the savior of the world.
I think it is becoming more and more apparent as time goes on this guy IS NUTS. Remember he said to one Dem legislature - don't worry, "you have me". "I have a gift".
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http://www.nytimes.com/2010/10/08/business/08views.html?_r=1&src=busln
America’s standard of living could turn out to be the main casualty of the debt crisis. For a decade, the middle class made up for stagnant incomes by getting ever deeper into debt. Without housing wealth to tap, a bout of inflation is one of the few alternatives to a decade of austerity.
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GM:
That may well turn out to be the case, but I would like to suggest that this article has a simple, primal fundamental flaw (gee, from POTH, who would have thought? :lol: ) It does not consider the option of GROWTH.
Serious amounts of money now sit on the sidelines due to uncertainty and stupidity emanating from the White House and Congress. A not insignificant portion of our deficit spending is due to fed revenues contracting due to economic contraction. If we start getting the government out of the way (e.g. no tax increases-- and maybe even tax rate cuts such as cutting corp tax to levels of other advanced countries, blocking the implementation of Obamacare, stopping the madness of massive deficits, start drilling for oil and gas, etc etc) I think we will be amazed at what will happen.
The November elections are of historic significance-- as will be what the new Congress does and does not do. If the elections fall short (and they might) and/or the Republicans fall short (and they might!) then the article will be right.
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Agreed.
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Whoa:
http://www.economist.com/content/global_debt_clock
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So how will this all play out?
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When the governments all default, will we be able to take back their assets, like the 30% of American land that the federal government owns? http://www.nationalatlas.gov/printable/images/pdf/fedlands/fedlands3.pdf
Crafty, yes, growth is the only way out other than collapse and implode. NY Timers hasn't considered that because they oppose it.
If debt burden is x% of all income, then double your income while you pay down one dollar of debt, and your debt burden is cut by more than half - survivable.
Instead we have income stuck and runaway deficits while we wait for a tax rate increase we know will be contrationary.
The new congress will have its hands tied in vetoes unless some new light comes on in his anti-productive-economy brain and there is certainly no sign of that.
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I dunno how this will play out. All I'm sure of is that with incentives this perverse--borrowing money to fling at underproductive constituencies--and debt this immense, all sorts of unintended consequences will follow.
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Heh. Should riff on this in 2012.
We Should Copy the Clever British Campaign against Higher Capital Gains Tax Rates
October 17, 2010 by Dan Mitchell
Here are a handful of the posters being used in the United Kingdom to fight the perversely-destructive proposal to increase tax rates on capital gains. (for an explanation of why the tax should be abolished, see here)
Which one is your favorite? I’m partial to the last one because of my interest in tax competition.
By the way, “CGT” is capital gains tax, and “Vince” and “Cable” refers to Vince Cable, one of the politicians pushing this punitive class-warfare scheme.
(http://danieljmitchell.files.wordpress.com/2010/10/uk-cap-gains-1.jpg?w=500&h=253)
(http://danieljmitchell.files.wordpress.com/2010/10/uk-cap-gains-2.jpg?w=500&h=253)
(http://danieljmitchell.files.wordpress.com/2010/10/uk-cap-gains-3.jpg?w=500&h=247)
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A Limited Government Amendment
JEFFREY H. ANDERSON
In the eyes of America's founders, unlimited government was a recipe for tyranny. It was with this in mind that they designed a series of carefully planned restraints for our republic, establishing a government with powers that are specifically enumerated, and explicitly granted by the people. Indeed, in Federalist No. 45, James Madison stressed that the new Constitution would not be the "same doctrine" of the "old world" — namely, "that the people were made for kings, not kings for the people" — simply "revived in the new, in another shape." Rather, Madison promised, "The powers delegated by the proposed Constitution to the federal government are few and defined."
But Madison's expectations about the self-containing nature of America's new government proved a bit too optimistic. In the two centuries since, the size and scope of the federal government have sporadically, but steadily, expanded. And in the past few years, a $700 billion bailout for Wall Street, a $787 billion economic-stimulus package, and the passage of a major health-care overhaul — which aims to inaugurate a trillion-dollar-plus entitlement and dramatically reshape the relationship between individuals and the state — have brought the tension over federal spending to a head. Tea Party protests have sprung up across the country; their participants object primarily to the centralization of power in Washington at the expense of individual liberty, and to the profligacy of Congress at the expense of the nation's future solvency. To a degree not seen in many decades, Americans appear determined to provide a correction to the expansion of federal power.
In Madison's defense, however, this expansion has not been a product of the Constitution as written and ratified, but rather of changes to it, through rulings and amendments. These include the Supreme Court's expansive reading of the power to regulate interstate commerce, its severing of the power to tax from Congress's other enumerated powers, its narrow reading of the Tenth Amendment's reservation of powers to the states or the people, and, above all, the addition of the 16th Amendment, granting the federal government essentially unlimited power to tax Americans' income. All are developments that have inflated federal power well beyond the limits originally established by the Constitution.
Yet this warping of the framers' intent is less a cause for alarm than for action. If nothing else, the growth of the state clarifies our responsibilities as citizens. After all, the Constitution didn't emerge from the clouds: It was written by flesh-and-blood Americans, in response to the events and challenges of their day. And it includes an amendment provision allowing later generations to adapt the document to the events and challenges of our own times. Today, a correction is in order — and our founders wisely furnished us with the means to provide it.
THE PERILS OF THE BOTTOMLESS PURSE
In short, we need to pass a constitutional amendment to limit our federal government. The surest and best way to impose such a constraint is to cut off the source of government's growth, by limiting its power to spend. The great powers of government are those of the sword and the purse — and ours needs to be told that the purse is not bottomless.
Our government was not designed to serve as a clearinghouse for Americans' money — far from it. In the words of the Declaration of Independence, governments derive their "just Powers" from "the Consent of the Governed," and "are instituted" "to secure" "certain unalienable Rights," among which are the rights of "Life, Liberty, and the Pursuit of Happiness." Yet as with the Constitution, this early principle, too, has been altered over the years by those seeking to expand government's reach. In crafting the 1936 Democratic platform, President Franklin Roosevelt replaced government's duty to secure the right to pursue happiness with a government responsibility to promote happiness itself: "We hold these truths to be self-evident — that the test of representative government is its ability to promote the safety and happiness of the people," Roosevelt declared. Of course, this is not exactly what the founders had in mind.
The Declaration's language is rooted in the political philosophy of John Locke, who wrote that we have a natural right to property in three forms: "Lives, Liberties, and Estates, which I call by the general Name, Property." Therefore, according to the Declaration of Independence (as informed by Locke), the purpose of just governments is not to act without limit, in any manner they wish, but rather to secure our natural and inalienable right to property, broadly understood. As James Madison asserted, "Government is instituted to protect property of every sort," adding: "This being the end of government, that alone is a just government which impartially secures to every man whatever is his own."
Conversely, a government that views itself as the provider for nearly every conceivable human need — rather than as the securer of that which has already been provided by nature, by nature's God, or through the industrious efforts of particular human beings — is liable to have a very different record of activity (and thus of spending). As the Declaration's principal author wrote in an 1816 letter from Monticello, the lesson "that private fortunes are destroyed by public as well as private extravagance" is indeed an important one. Thomas Jefferson continued:
And this is the tendency of all human governments. A departure from principle in one instance becomes precedent for a second; that second for a third; and so on, till the bulk of the society is reduced to be mere automations of misery, to have no sensibilities left but for sinning and suffering. Then begins, indeed, the bellum omnium in omnia [war of all against all], which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.
It is unlikely that Jefferson would have anticipated the state in which America finds itself today: having amassed $13 trillion in federal debt, including, incredibly, $3 trillion in just the past three years. But he certainly understood the ill effects that follow swiftly upon such government extravagance, and the threats to our well-being and liberty that we face if we fail to change course.
The growth of government is therefore at the heart of our dilemma, and limiting its future expansion is the key to restoring some semblance of limited, constitutional authority. Both to highlight that problem and to solve it, we need a Limited Government Amendment, to read as follows:
Section 1: The annual rate of growth in total federal spending shall not exceed the rate of inflation, plus two percentage points, and neither budgeted nor actual spending shall exceed this limit, apart from the exceptions listed below. If no budget is passed, then the most recently passed budget, excluding any exceptions granted in Section 2, shall apply.
Section 2: Defense spending shall not be limited during a time of formally declared war, and further exceptions to the spending limits specified in Section 1 may be granted by the legislatures in three-quarters of the several states, upon the application of two-thirds of both houses of Congress, as they deem necessary; but any such exceptions shall not be included in determining spending limits for subsequent years.
Section 3: The spending limit for the first fiscal year following the cessation of hostilities in a declared war shall be the limit that was established for the fiscal year preceding the declaration of war, excluding any exceptions granted in that year, and adjusted for compounded inflation through all fiscal years completed in the interim.
Section 4: The rate of inflation used in determining spending limits shall be the rate from the most recently completed fiscal year prior to the passage of a given year's budget, and the method of measuring inflation shall not be altered substantially from long-established norms. Spending that is not defense spending shall not be characterized as such; each exception granted by the states shall apply only to one fiscal year if not granted anew; and every citizen of the United States shall have standing to sue in federal court to enforce the language of this amendment.
Such an amendment, far-fetched as it might seem at first, would be both practical and reasonable. Merely proposing it and forcing a debate on it would put the question of the size and scope of government squarely before the American people; it would also force the champions of a ballooning welfare state to make a case against any real limit on government's growth. And were the amendment actually to be enacted, it would not only dramatically reduce future deficits and debt, but would also revive the principle that government has limited ends which it ought to pursue by limited means.
A NEEDED RESTRAINT
Of course, the mere mention of a constitutional amendment — let alone one that would, after a century of ever-expanding government, so explicitly constrain the growth of the state — is likely to draw claims of "extremism." But there is nothing extreme, at least in the American context, about the notion of the citizenry limiting the government. The founders universally embraced the idea as a necessary condition of liberty and prosperity, even as they recognized that it would require ongoing diligence on the citizens' part.
And indeed, the Constitution has undergone frequent updates since 1787 — particularly throughout the first half of the 20th century, and as recently as 1992. In that year, the 27th Amendment — a provision to prevent a sitting Congress from changing its own salary — was enacted. The amendment had originally been proposed in 1789 along with the amendments that became the Bill of Rights; it was part of Madison's effort to inspire public trust in the new government. The proposal was passed by Congress but ratified by only six states, and had lain mostly dormant for nearly two centuries — until an undergraduate at the University of Texas discovered the proposed amendment while doing research for a course paper. Realizing it had no expiration date, and recognizing that congressional pay was still a thorny issue, he began a ten-year letter-writing campaign to state legislatures, undertaken at his own expense. Eventually, his effort succeeded; the amendment was ultimately ratified by 45 states. It was a classic case of an average citizen remaining vigilant over the Constitution — and a fairly recent case at that.
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Even so, there are some who now say that citizen action isn't in order; that the centralization and consolidation of power in Washington is simply the irreversible wave of the future; that we no longer have anything to fear from such power (or anything to lose); that the founders' experiment is an anachronism; that limited government is dead.
But that is the extreme view. The reasonable view, plainly supported by the events of recent years, is that federal spending is out of control and needs to be limited. This would also appear to be the popular view, as the Tea Party indicates a groundswell of support for limited government. The challenge, however, is channeling that salutary energy, momentum, and civic engagement into concrete action of lasting significance. The Limited Government Amendment would have just that sort of profound impact.
And yet it would not require us to do something unrealistic or untried. The amendment would not even prevent the growth of government; it would merely limit that growth to not more than 2% per year in real terms. This is hardly an unheard-of degree of austerity in modern times. Looking at the presidents who took office after 1950, the average annual growth in real federal spending was lowest under Eisenhower (-0.4%), followed by Clinton (1.5%), the first Bush (1.8%), Reagan (2.6%), Ford (2.9%), Nixon (3.1%), Carter (4.3%), the second Bush (4.6%), Kennedy (4.7%), Johnson (6.0%), and Obama (12.7% so far, based on projected 2010 figures). In these tallies, the 2009 omnibus spending bill signed by President Obama is actually counted toward President Bush's spending, since it provided funding related to his 2009 budget. And the portion of the economic-stimulus funds that was spent in 2009 after the program was proposed by President Obama didn't count in his tally, either — because the funds weren't appropriated in Obama's first fiscal year. If they were added to Obama's 2010 spending, his tally would be 22.5%.
As these numbers indicate, limiting the growth of real annual federal spending to 2% has not been typical, but it certainly has been achieved — under a variety of circumstances, without putting the nation's security in peril, and without resorting to extreme austerity. No one would argue that fiscal policy during the Clinton years was a model of tight-fisted parsimony, or that it prevented the nation from responding to challenges at home and abroad. Indeed, during the 1990s — a decade that included the final stages of the Cold War, a new hot war, a sharp economic downturn, and a return to economic growth — both Presidents George H. W. Bush and Clinton kept the average growth in spending below the amendment's limit.
In other words, we have kept federal spending under control before — and we can do it again. But clearly most politicians are not inclined to try. The kind of discipline such an effort would require over the long run thus seems possible only with the help of a constitutional amendment.
Over time, though, the results of such discipline would be extraordinary. Consider that, from 1970 to 2009, in real (inflation-adjusted) dollars, annual federal spending increased from $1.1 trillion to $3.5 trillion. Under this proposed amendment (assuming no exceptions because of declared wars or via the approval of state legislatures), annual spending would have increased from $1.1 trillion in real dollars to no more than $2.5 trillion — $1 trillion less than actual spending. Total federal spending across the four decades would have fallen from $51.4 trillion to $43.6 trillion in today's dollars, a reduction of $7.8 trillion. All other things being equal, our staggering $13 trillion debt would have been reduced to just over $5 trillion. And that's even if Congress had spent every cent it was constitutionally allowed to under this amendment. If Congress had shown any additional restraint, even in some years, the debt tally would have fallen yet further.
Even looking at a much smaller time window — one starting in 2000 — the amendment would still have made a tremendous difference. In the past decade alone, annual federal spending increased from $2.3 trillion to $3.5 trillion in real dollars. Under this amendment, it would have increased from $2.3 trillion to no more than $2.7 trillion in real dollars. Thus, the real-dollar increase would have been, at most, about $400 billion instead of about $1.2 trillion — or only about one-third as much. Total federal spending across the decade would have been reduced by $2.6 trillion (in actual dollars), and 2009 spending would have been only 76% as high as it actually was. Moreover, the highly unpopular $787 billion economic-stimulus package wouldn't have become law, unless three-quarters of the state legislatures had granted an exception to pass it — an unlikely scenario — or Congress had budgeted so frugally as to allow itself the wiggle room for an extra $787 billion in spending (more unlikely still).
The real question, though, is what the amendment would do going forward. Assuming the continuation of the average inflation rate across the past quarter-century of 2.7% — and assuming that, without this amendment, federal spending would continue to increase at the 7.6% rate at which it has grown across the past decade (a reasonable assumption, given that the non-inflation-adjusted rate of increase in federal spending across the past 40 years has been 7.8%) — the results of the amendment would be quite dramatic.
In this scenario (again, assuming no exceptions because of declared wars or via the approval of state legislatures), the 2020 budget would be $7.7 trillion without the amendment, but no more than $5.7 trillion — only 76% as high — with the amendment, a difference of at least $2 trillion in 2020 alone. Total federal spending for the decade of 2011 to 2020 would be $56.9 trillion without the amendment, but no more than $47.1 trillion with the amendment — a difference of at least $9.8 trillion. (In reality, both inflation and federal spending may well be significantly higher in the coming decade; overall, however, the amendment's effects would be much the same.)
When we look at a 30-year period, the savings become astronomical. The 2040 budget would be $33.5 trillion without the amendment, but no more than $14.4 trillion — only 43% as high — with it, a difference of at least $19.1 trillion in that one year alone. Total federal spending across the three decades from 2011 to 2040 would, amazingly, be $422 trillion in today's dollars without the amendment, but no more than $240 trillion with it — a mind-boggling difference of $182 trillion.
Keep in mind that these numbers are not based on the worst-case scenarios for spending without the Limited Government Amendment, but rather on mid-range expectations. Forget the proverbial $64,000 question: When it comes to deciding whether we want this amendment, Americans face a $182,000,000,000,000 question.
Since a trillion — or a million millions — can be hard to conceptualize, here's another way of thinking about it. One hundred and eighty-two trillion dollars over 30 years is a total of $482,311 for every man, woman, and child that the Census Bureau projects will be living in the United States at the end of that period — or $16,077 per person, per year. If you're the sole income earner for a family of four, your share is $1.9 million, or $64,308 per year. That's what average Americans stand to save, annually, from the passage of this amendment.
COLLATERAL BENEFITS
The amendment offers other important benefits and advantages. It would, for one thing, allow the nation the flexibility to address unforeseen challenges. Alexander Hamilton wrote in Federalist No. 23 that "[t]he circumstances that endanger the safety of nations are infinite, and for this reason no constitutional shackles can wisely be imposed on the power to which the care of it is committed." This warning certainly applies to the spending power; thus, the Limited Government Amendment would not place any limits whatsoever on defense spending during a time of declared war. It would also allow for exceptions in other moments of crisis, when the need for additional spending is so plain that the great majority of Americans — through their state legislators — acknowledge it.
As prudent and necessary as the exception for wartime spending would be, it would be equally imprudent and unwise to grant an exception for defense spending on undeclared wars or other conflicts. It is worth noting that the last time the United States made a formal declaration of war was during World War II; all the conflicts since have had some other form of congressional approval (like the Gulf of Tonkin resolution that led to Vietnam, and the vote authorizing the ongoing war in Afghanistan), or no congressional sanction at all (like Korea and other ventures sponsored by the United Nations, and those forays launched by presidential action, like our uses of force in Grenada and Somalia).
Whatever one's views about the wisdom of these undeclared wars, it is hard to dispute that they have proven contentious over the years, deeply dividing the American public. An additional advantage of this amendment — and its explicit tying of defense-spending exceptions to a declaration of war — is that it would force elected officials to be much more careful about entering into foreign entanglements, and would move Congress to accept its constitutional responsibilities and formally declare war when the nation has clearly entered one. Every member of Congress would be on the hook and accountable for the conduct and outcome of each war he voted to authorize. And no use of force could take place without the implicit approval of the American people, through their duly elected congressional representatives.
As further security against unforeseen developments or emergencies that might arise, three-quarters of the state legislatures — upon the application of two-thirds of both houses of Congress — could grant one-year exceptions to the amendment's spending limits for any reason whatsoever, and could re-issue such exceptions as often as they deemed appropriate. If there is truly a reason why the federal government must spend more money, then three-quarters of the states will likely concur. It is hard to imagine, for instance, more than one-quarter of the states objecting to extra funding for the Gulf Coast in the aftermath of Hurricane Katrina, or to help Lower Manhattan recover from the attacks of September 11th.
By the same token, however, requiring broad approval from the states for such emergency funding would also likely impose useful constraints. If the money appropriated for such aid is limited to what three-quarters of the states will authorize, rather than drawn from an endless federal slush fund (as is the practice today), government authorities (federal, state, and local) will have much more incentive to ensure that recovery work and spending are done efficiently, and to root out expensive fraud and waste — both of which were problems in the aftermaths of Katrina and September 11th.
The provision requiring a two-thirds congressional majority for spending exceptions, meanwhile, provides an important protection against federal extortion of the states. For instance, it is easy to imagine a scenario in which Congress might try to make federal grants to the states — such as the massive amount of funding tied to Medicaid — part of an exceptions-spending provision, rather than funding these programs through the regular budget. With almost every state thoroughly dependent on federal money, most states would simply have to approve the exceptions measure — regardless of whether they approved of all the spending provisions contained therein — simply to preserve their own fiscal solvency. But by requiring two-thirds of the members of Congress to risk their jobs by supporting such shenanigans, the amendment significantly reduces the appeal of federal schemes plotted at the states' expense.
The use of an inflation-adjusted limit, too, offers advantages. First, it would tie the growth of government to real spending power, rather than to economic growth. Attempts by government, through the Treasury and Federal Reserve, to influence the inflation rate itself (in order to permit more government spending) would thus prove futile, since they would only reduce the purchasing power of the additional spending. Second, the level of permitted spending would likely increase faster in tough economic times (when inflation tends to be higher, while economic growth is lower) and more slowly in good times — allowing for countercyclical fiscal policy within reasonable bounds. And because the amendment places limits on the definition of inflation, it would allow for changes in economic thinking to be reflected in economic policy — but would still prevent policymakers from playing fast and loose with terms to a degree that would make the inflation-adjusted cap on spending meaningless.
Among the amendment's greatest benefits, however, are its provisions for enforcement. For one thing, it sets Congress and the president against each other as checks: The president cannot unilaterally violate the amendment, because he doesn't control the purse; Congress cannot unilaterally violate it either, because it is the president — not Congress — who actually carries out government's spending. Furthermore, the amendment turns the American people into an enforcement mechanism, as they would be able to vote out lawmakers who violated the terms of the amendment. Election Day would thus become both a punishment for and deterrent against politicians' engaging in such lawlessness.
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Finally, per section four, every citizen would have the standing to sue in order to ensure the amendment's enforcement. This provision is intended to prevent a situation in which the president and Congress have colluded to violate this new section of the Constitution and yet no citizen — or only a very few citizens — can demonstrate enough direct ill effects to establish standing to sue in federal court. By having the language of the Constitution itself explicitly grant every American this standing, the amendment makes it easier for any citizen to challenge the laws that fund annual budgets if these measures violate the amendment — and so make it easier for the judiciary to strike down such laws as unconstitutional.
CHECKS AND BALANCES
Like all constitutional modifications, the Limited Government Amendment could be proposed either by Congress or through a convention called upon the application of two-thirds of state legislatures. Given the nature of this amendment, the state legislatures would almost certainly need to be the originating source. But Congress might ultimately be coaxed into action: If the American people could persuade anything approaching two-thirds of state legislatures to advance this idea, then Congress might prefer to propose the amendment itself, rather than inviting a convention to do so.
It is true that the constitutionally sanctioned process of having state legislatures call a convention to propose an amendment has never been utilized. One possible reason for inaction in this vein has been the theoretical possibility of a runaway convention; in light of the very real and pressing dangers that we already face to our liberty and solvency, however, such potential concerns are comparatively trivial. Besides, there are two reliable checks against potential mischief.
First, the state legislatures could legally constrain their respective convention delegates to vote only on this particular amendment. This measure would be similar to many states' current policies that legally bind their Electoral College delegates to vote for the candidate who receives the largest share of the state's popular vote. If even a significant minority of states were to undertake this precaution, it is unlikely that any other potential amendments could achieve the majority support they would need to be formally proposed.
Second, if any other potential amendments were to be officially proposed, they would still have to be ratified by three-quarters of the state legislatures or by conventions in three-quarters of the states — whichever Congress preferred — to have any legal effect. Such a supermajority requirement is unlikely to be met by ill-advised proposals.
It should be no surprise that this second check is in place. The founders, after all, knew what they were doing. And they presumably would not have empowered state legislatures to call a subsequent convention to propose a constitutional amendment if they had thought this provision would subvert the work they were in the midst of completing at Independence Hall.
THE RIGHT AMENDMENT
Frustration with federal excess has spawned other constitutional-amendment proposals in recent years. Most noteworthy are a Term Limits Amendment, a Balanced Budget Amendment, and Georgetown law professor Randy Barnett's recent proposals for a Federalism Amendment. Each of these proposals represents an attempt to rein in excesses of federal power, and each has its merits — but each addresses something other than the real problem. In expelling many of the shameless spendthrifts who populate Capitol Hill, a Term Limits Amendment would also remove from office many good, cost-conscious members of Congress; the mix would by no means be guaranteed to improve. A Balanced Budget Amendment, meanwhile, would limit deficits but not necessarily spending; it might only succeed in causing taxes to be raised to European levels.
Barnett's Federalism Amendment would repeal the 16th Amendment and severely curtail the federal government's ability to interfere in states' policies and activities. In addition to being a somewhat immoderate proposal, calling for federal judges or supermajorities of states to rein in the federal government seems overly optimistic. Judges have consistently shown their willingness to apply tortured readings of the Constitution to avoid checking Congress. And state governments are often nearly as bloated and profligate as the federal government, run by representatives too similar to their free-spending counterparts in Washington.
The only other direct option for constricting government would be to place limits on government's funding source. But at a time when America owes $13 trillion, cutting off revenue would be unwise. Besides, as our Congress has consistently shown, it doesn't have to have money to spend it. Furthermore, over time, if our government's ability to spend becomes limited, its appetite for taxation will be limited, too: After all, taxing and spending isn't much fun without the latter part. So the real problem is excessive spending, and that is what we must stop.
Obviously, an amendment to constrain the growth of spending would not have an easy time getting enacted. It would require a protracted effort, and it would face long odds. But it is worth remembering that most other constitutional amendments did at some point, too — not to mention the Constitution itself.
A further advantage of the Limited Government Amendment over other recent proposals is that it is designed to generate constructive debate in the course of that enactment struggle. The amendment's advocates would not need to argue against government as such — or even against the need for modest expansions of government's activities over time — but simply for some prudent limits. Its opponents, meanwhile, would have to make the case not only for allowing government to expand, but for allowing it to expand without limit. Such a debate would be enormously clarifying for the country. It could also have the added benefit of inspiring similar amendments to state constitutions. At a time when many states are awash in red ink and some even teeter on the brink of bankruptcy, such proposals might prove of great use to cost-conscious governors and legislators (not to mention state taxpayers), and offer a useful proving ground for the national-level amendment.
Above all, both as a proposal and as a ratified amendment to our Constitution, the Limited Government Amendment would focus the country on the right issue: the question of spending. With spending comes regulation; with spending comes taxation; with spending comes the consolidation of power. The danger inherent in such consolidation was already evident to Alexis de Tocqueville back in the 1830s, when he warned against it in Democracy in America. To Tocqueville, the surest way to undermine people's incentive and ability to actively govern themselves was to consolidate money and power in a centralized government. Government action, he believed, would then increasingly take the place of free human action and interaction, leading to a scenario in which, as he put it,
the sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which the most original minds and the most vigorous souls cannot clear a way to surpass the crowd; it does not break wills, but it softens them, bends them, and directs them; it rarely forces one to act, but it constantly opposes itself to one's acting; it does not destroy, it prevents things from being born; it does not tyrannize, it hinders, compromises, enervates, extinguishes, dazes, and finally reduces each nation to being nothing more than a herd of timid and industrious animals of which the government is the shepherd.
But in the wake of this stunningly prescient description, Tocqueville also offered encouragement and advice on how we should proceed. He wrote that the "perils" he described are not "insurmountable," and that our instincts to combat them "will always be found because they come from the foundation of the [democratic] social state, which will not change. For a long time," he added, this "will keep any despotism from being able to settle in, and [it] will furnish new arms to each new generation that wants to struggle in favor of men's freedom."
It would appear that the time has come for this generation's struggle to reclaim some of America's lost freedoms. The majority of Americans have reached the limits of their tolerance for obtrusive centralized power — and, as is evident in the Tea Parties and other popular appeals to the early days of the republic, many are eager to restore the founders' vision.
Still, there are some who, though alarmed by the unbridled expansion of government, might be reticent about championing a Limited Government Amendment. For them, a thought experiment is in order. Suppose that everything falls into place for the repeal of Obamacare, the greatest immediate threat to limited government in our day. Suppose opponents of that entitlement, most of them Republicans, take the House in 2010. They also take the Senate in 2010 or 2012, by a significant (but likely not filibuster-proof) majority. They win the White House in 2012. With President Obama himself having been removed from office, supporters of Obamacare read the clear writing on the wall and don't dare to filibuster in the Senate. Opponents subsequently pass a law in January 2013 to repeal Obamacare, thereby removing that scourge to liberty and fiscal solvency from the books. Celebrations ensue, and a great victory for American ideals and limited government has been won.
Then what?
AN ESSENTIAL REVISION
It is our duty as American citizens to keep vigil over our Constitution, strengthening and maintaining it, rather than blithely expecting it to maintain itself. Thomas Jefferson warned against those who would refuse to tend to our founding documents, writing: "Some men look at constitutions with sanctimonious reverence and deem them like the ark of the covenant, too sacred to be touched. They ascribe to the men of the preceding age a wisdom more than human and suppose what they did to be beyond amendment." And President George Washington, in his farewell address, shared with his fellow citizens his fondest hopes that "the free Constitution, which is the work of your hands, may be sacredly maintained — that its administration in every department may be stamped with Wisdom and Virtue." He certainly did not think that the document would maintain itself.
Our forefathers wrote and ratified our Constitution to include an amendment process, so that if a correction, or recalibration, were needed, we could provide it. Adapting the Constitution to the concerns of the day doesn't mean allowing judges to mold the document into a vehicle to impose their will: That is lawlessness. Rather, it means that the Constitution can be changed, through the proper legal process, by the American people.
We find ourselves in a moment at which the freedoms our forefathers intended for us are endangered by the very government meant to secure those freedoms. Were the founders here today, they would almost certainly urge Americans to take action to avoid the pitfalls of "public debt," excessive taxation, and the "wretchedness and oppression" that follow — let alone to combat the dangers that an overbearing government poses to our civic fabric and way of life. The best way to take up that call is through the Limited Government Amendment. And given the urgency of America's predicament, the best time to advance it is now.
Jeffrey H. Anderson is director of the Benjamin Rush Society, which promotes lower costs and increased access to health care through greater competition and choice.
http://nationalaffairs.com/publications/detail/a-limited-government-amendment
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Sounds good to me.
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“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.”
The U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful startups.
http://blogs.forbes.com/richkarlgaard/2010/10/20/what-grows-an-economy/?boxes=opinionschanneleditors
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Interesting new ad:
[youtube]http://www.youtube.com/watch?v=OTSQozWP-rM&feature=player_embedded[/youtube]
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BBG, can you post a link? I'm not seeing what you posted.
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http://www.youtube.com/watch?v=OTSQozWP-rM&feature=player_embedded
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Good thing you don't work for NPR. I'm sure that's hate speech too..... :roll:
This should be on constant rotation on prime time tv.
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http://www.telegraph.co.uk/finance/economics/6584906/China-turns-to-Adam-Smith.html
Smith’s first masterpiece, the Theory of Moral Sentiments, has been translated into Chinese for the first time, and Chris Berry, professor at Glasgow University, where Smith wrote the book, will next week deliver lectures on it at Fudan University in Shanghai.
China’s Premier, Wen Jiabao, has said he often carries the work – which preceded his more famous work The Wealth of Nations – in his suitcase when he goes abroad. Prof Berry said the earlier book emphasised the importance “not only [of] their material prosperity but also their moral welfare”.
**Anyone think Barry-O will flip through a chapter or two between golf sessions? Me either.**
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This should be on constant rotation on prime time tv.
Rumor has it there's a million dollar ad buy that'll be showing in toss up districts.
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http://www.npr.org/templates/story/story.php?storyId=124740579
Hemmed in by mountains and the sea, Wenzhou’s land shortage forced its inhabitants into trade. Now, it’s China’s capital of capitalism. Ninety-nine percent of all business in the city is private sector, according to Wenzhou government statistics.
And those entrepreneurs have been phenomenally successful: Last year, one in every three Chinese tourists overseas was from Wenzhou and one-tenth of China’s luxury cars ended up in this city of 8 million.
Nowhere is the Wenzhou love of making money — and flaunting it — more apparent than the city’s only Louis Vuitton store. As soft Muzak chimes in the background, brand-conscious shoppers finger the $300 key rings and ogle the leather bags.
“We all like LV (Louis Vuitton) for bags, since everyone knows this brand,” says a man who identifies himself as Mr. Wu. He does a quick inventory of his wardrobe: bag by Louis Vuitton, shoes by Gucci, stripy cotton sweater by Paul & Shark with a $600 price tag. “Very expensive, but it’s worth it,” he adds, beaming in a self-satisfied manner.
Mrs. Jin is more sniffy about Louis Vuitton. “It’s too vulgar nowadays,” she says dismissively. “The streets are awash with it. I prefer Chanel, it’s more elegant.”
Millionaire
Chen Wenda started a lighter-parts factory at age 18. Two decades later, the millionaire owns a shoe factory, a wine business, real estate interests and a soccer team. He started the wine business to appeal to the brash, high-rolling millionaires of Wenzhou, where Chen says people like to flaunt their wealth more than in any other place in China.
Diversify, Diversify, Diversify
One 30-something millionaire, Chen Wenda, is aiming to cash in on the famed Wenzhou flashiness with his wine cellar stuffed full of Chateau Lafite and Petrus.
His trajectory follows a typical Wenzhou path. In 1988, at age 18, he started a lighter-part factory. Then he diversified. Now he has a shoe factory, an import-export business, a wine business, real-estate interests, and for the past two years, his own personal soccer team, which costs him half-a-million dollars a year. He describes the Wenzhou way of making money.
“I set up businesses and drop those that don’t make money, like the lighter-part factory. No one puts their eggs in one basket,” he explains.
“In Wenzhou, every single person does real estate. Everyone is pushing up the prices of buildings. We dare to do stuff. We’re not scared. And everyone wants to be their own boss,” he says.
These days, one in every ten bottles of wine drunk in China is guzzled in Wenzhou, as an accompaniment to deal-making. But Chen says the businessmen here are too busy making money to bother with the niceties of wine drinking.
“If they think that wine is too sour, they might add Coke to make it go down smoothly. If that’s what they want to do, that’s fine,” he adds. “I don’t see the need to emphasize European wine culture. Wenzhou people are too busy to do all of that. They have to meet people and do business.”
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http://hotair.com/greenroom/archives/2010/10/24/how-george-w-bush-destroyed-the-economy-in-only-eight-short-years/
How Bush Destroyed the Economy In Only Eight Short Years
posted at 2:50 pm on October 24, 2010 by directorblue
[ Economics ]
The conventional wisdom among the denizens of the left is that George W. Bush took a surplus and destroyed the economy in only eight short years. The following illustrated story shows just how he pulled off this difficult task.
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I was aware of the points made here. Convenient to have the facts in one place. I've just forwarded this in search of moving some people's understanding forward.
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Amusing little video:
http://www.ij.org/about/3554
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Its from POTH, so caveat lector:
DETROIT — When executives from General Motors begin pitching its public stock offering to investors this week, they will extol the company’s financial turnaround, its snazzy new car lineup led by the plug-in Chevrolet Volt, and its growing operations in China and other international markets.
Ron Bloom, the administration’s point man in dealing with G.M., has kept in close touch with the top company executives.
Absent from the pitch? The extraordinary role that the federal government has played in fixing the nation’s biggest automaker.
While the government’s $50 billion bailout last year saved G.M. from liquidation, the Obama administration has taken great pains to distance itself from any appearance of running the company. Even a hint of government meddling, administration officials say, could have a negative effect on the value of the American taxpayers’ stake in a publicly traded company.
Yet interviews with G.M. and federal officials show decisions by the government have played a pivotal role in shaping the automaker’s leadership, its business strategies, and now its initial stock offering, which will raise an estimated $10.6 billion at the same time that it reduces the taxpayers’ stake in the company from 61 percent to below 40 percent.
People familiar with the contact between G.M. and the Treasury Department say Ron Bloom, a senior adviser to the Treasury secretary Timothy F. Geithner, is told about actions that G.M. management and the board are contemplating before they occur.
In April, for example, Edward E. Whitacre Jr., the chairman of the G.M. board who also served until recently as its chief executive, discussed a number of possible moves at a meeting in Washington with Mr. Geithner and Mr. Bloom, including G.M.’s plan to buy a finance company.
Similarly, Mr. Bloom was informed beforehand of Mr. Whitacre’s decision to resign as chief executive and the board’s decision to name Daniel F. Akerson — who was one of the government’s hand-picked directors — to succeed him.
Large private investors, like Kirk Kerkorian or Warren E. Buffett, rarely involve themselves in the day-to-day running of companies they hold major stakes in. Instead, they tend to recommend broad strategic parameters and appoint directors to oversee the execution. The Obama administration has taken a similar tack with G.M., the interviews show.
To ensure a fresh start for the company, the government chose a new chairman and several new directors for its board, which in turn picked two of its members to serve as successive chiefs of the company.
The government also set parameters for G.M.’s strategic direction — fewer brands and models, a leaner organization, and a sweeping overhaul of its plodding corporate culture.
And now the government is playing an integral role in the stock sale by deciding how many of its 304 million shares it will sell off and at what price.
“The government has not abdicated control, they have exercised it through the board of directors,” said M. P. Narayanan, a finance professor at the University of Michigan. “If you own 60 percent of the company, you set the direction and let your board carry it out.”
Publicly, the Treasury Department has taken a hands-off approach to current management at G.M. and says it is eager to sell off its shares as soon as possible. It has been a delicate balancing act; while the government avoids direct involvement in decisions at G.M., it still requires management to keep it informed of any major move.
“Demonstrating our discipline on two fronts is integral to protecting the American taxpayer,” said Brian Deese, a member of the president’s auto task force that shepherded G.M. through bankruptcy. “One is letting G.M. make its own decisions and run the business. The other is making good on our commitment to exit as quickly as practicable.”
The point man for the Obama administration has been Mr. Bloom, a central member of the auto task force. Since G.M.’s emergence from bankruptcy in July 2009, Mr. Bloom has kept in regular contact with Mr. Whitacre and Mr. Akerson, who succeeded Mr. Whitacre as chief executive in September.
Otherwise, the revamped board has carried out much of the agenda that the administration’s task force laid out for G.M. after bankruptcy. With Mr. Whitacre taking the lead role, the board hired a new chief financial officer and replaced a number of longtime G.M. executives with younger people and outside hires.
“The government wanted to see new faces in senior management, and the board took care of that,” said David Cole, a founder of the Center for Automotive Research in Ann Arbor, Mich.
Mr. Cole, whose father was once the president of G.M., said the government had “behaved prudently” in allowing the new management team sufficient latitude to make day-to-day business decisions.
“It’s certainly easier for the administration to take that point of view given how G.M. has performed,” he said. “They can afford to stay out of the details because the company is making money again and is positioned well in the marketplace.”
G.M. was profitable in the first six months of this year, and is expected to report a third-quarter profit as well. The company is also investing in new products, adding jobs, and making moves to cut its debt and fund pension obligations in advance of the stock offering.
The Treasury Department has taken a more direct role in influencing the stock sale at G.M.
Regarding the size of the offering, Washington has been somewhat at odds with G.M. and the Wall Street underwriters.
Whereas G.M. and its bankers wanted the largest offering possible, the Treasury was more interested in getting the best price for the taxpayers’ shares. The government ultimately agreed to sell about one-third of its holdings for a price ranging from $26 to $29 a share after a three-for-one stock split, which it hoped would give the stock room to appreciate in value and bring bigger returns on future divesting.
Mr. Whitacre said in August that he hoped the government would sell all of its shares in the offering and remove the “government motors” label for good.
But that notion ran counter to the Treasury’s goals, and G.M. abruptly stopped commenting on what the government might do with its shares. Even with a sale of a third of its stock, the government will still be the largest shareholder in G.M. for some time to come, perhaps years.
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second post of the morning
http://online.wsj.com/article/SB10001424052748704462704575590642149103202.html
By RANDALL SMITH and SHARON TERLEP
General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.
GM, which plans to begin promoting its relisting on the stock exchange to investors this week, wiped out billions of dollars in debt, laid off thousands of employees and jettisoned money-losing brands during its U.S.-funded reorganization last year.
Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.
The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.
Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts.
But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.
Neal Boudette discusses GM's IPO plans, which will raise up to $10 billion and cut the government's stake to below 50%.
."The Internal Revenue Service has decided that the government's involvement with these companies, both its acquisitions plus its disposals of their stock, means they should be exempt" from the rule, said Robert Willens, a New York tax consultant who advises investment banks and hedge funds.
The government's rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail.
GM declined to comment.
The $45.4 billion in future tax savings consist of $18.9 billion in carry-forwards based on past losses, according to GM's pre-IPO public disclosure. The other tax savings are related to costs such as pensions and other post-retirement benefits, and property, plants and equipment.
GM may avoid paying up to $45 billion in taxes for up to 20 years, according to people familiar with the situation. Above,GM's Cadillac logo is displayed on the grill of a Cadillac SRX.
.The losses were incurred by "Old GM," the company that remained in bankruptcy after the current "New GM" resulted from the reorganization last June.
.Investors typically view tax-loss carry-forwards losses as important assets in bolstering a company's balance sheet.
GM's chief domestic rival, Ford Motor Co., last year adopted a plan to preserve deferred "tax assets" which stood at $17 billion at the end of 2009. Ford can use the tax attributes in certain circumstances to reduce its federal tax liability. Ford declined to comment on the GM tax ruling.
Write to Randall Smith at randall.smith@wsj.com and Sharon Terlep at sharon.terlep@wsj.com
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Various links in the original piece to proposal to cut .25 to .50 trillion dollars from the US budget.
What Spending Should the GOP Cut?
Posted by Chris Edwards
Congratulations to the wave of Republicans who successfully ran on promises to tackle rising government debt and cut the hugely bloated federal budget. On the campaign trail, most candidates were not very specific about how they would cut the budget, but when they come to Washington they will be looking for good reform targets.
Newcomers to Congress can find a wealth of budget-cutting ideas in recent plans by various D.C. think tanks:
At the Heritage Foundation, Brian Riedl has come up with $343 billion in proposed annual cuts.
At the Committee for a Responsible Federal Budget, Bill Galston and Maya MacGuineas have proposed $400 billion in annual cuts.
Esquire magazine assembled four former senators who came up with $476 billion in annual cuts.
The National Taxpayers Union teamed up with the U.S. Public Interest Research Group to propose $600 billion of cuts over five years.
Michael Ettlinger and Michael Linden of the Center for American Progress offer one plan that would cut annual spending by $255 billion.
Cato’s website, www.downsizinggovernment.org, also provides a treasure trove of spending cuts, and I will be publishing a detailed budget-reform plan in coming days.
Some of the above budget plans include tax increases, but voters gave a resounding message yesterday that they want Congress to focus on cutting spending, not raising taxes.
Out of the starting gate next year, fiscal reformers in Congress should push for an across-the-board cut to discretionary spending for the rest of the current fiscal year. One approach would be for House leaders to propose a continuing resolution that extends spending at last year’s levels, less some substantial percentage cut applied to every program.
For the upcoming fiscal year of 2012, reformers need to carefully target some major program cuts and eliminations. The president and the Democrats in the Senate will likely resist proposed cuts, but the point is to further the national debate that has begun about the proper size and scope of the federal government.
Some initial targets for GOP reformers, with rough annual savings, could include: community development subsidies ($15 billion), public housing subsidies ($9 billion), urban transit subsidies ($9 billion), and foreign development aid ($18 billion). On the entitlement side, initial cuts could include raising the retirement age for Social Security and introducing progressive price indexing to reduce the growth rate of future benefits.
We will not get federal spending under control unless we begin a national discussion about specific cuts. And we won’t get that discussion unless enough members of Congress start pushing for specific cuts. Ronald Reagan was able to make substantial cuts to state grants in the early 1980s because policymakers had discussed such reforms throughout the 1970s. Republicans in the mid-1990s were able to reform welfare because of the extended debate on the issue that preceded it.
The electorate wants spending cuts, and they will support the policymakers who take the lead on cuts if they are pursued in a forthright and serious-minded manner.
http://www.cato-at-liberty.org/what-spending-should-the-gop-cut/
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This WSJ editorial is dated Sept 20 2010. The topic is timeless. I apologize if already posted. We need economic growth not equality. In good times I think people take growth for granted and have time to focus/whine about inequality.
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http://online.wsj.com/article/SB10001424052748703440604575495933472536928.html
Wealth and Poverty
How's that inequality thing working out?
If there is a single unifying principle behind the Democratic agenda of the last two years, it is this: Reduce income inequality. So yesterday's annual Census Bureau review of American incomes is a kind of progress report on how this agenda is working out. In a word, our wealth isn't spread any more equitably, though more of us are poor.
The Current Population Survey shows that in 2009 the poverty rate climbed to 14.3% from 13.2% in 2008—the highest since 1994. That figure translates into 43.6 million Americans living below the poverty line, the largest absolute number in the half-century for which comparable data are available. At $49,777, the real median household income fell slightly, though not in a statistically significant way. It declined 1.8% among families and rose 1.6% for individuals.
In a statement yesterday, President Obama attributed these results to the financial panic and recession, and that's true in part. The Census data also overstate the true level of poverty because they don't include noncash government payments like housing subsidies, food stamps, the earned income tax credit or entitlements like Medicaid.
But then Mr. Obama couldn't resist adding that "Even before the recession hit, middle class incomes had been stagnant and the number of people living in poverty in America was unacceptably high, and today's numbers make it clear that our work is just beginning." So to address the rising poverty on his watch, the President wants to plow ahead with the same policies that aren't reducing poverty.
We draw a different lesson, which is the continuing imperative of rapid economic growth. Census Bureau figures over the last 50 years show that poverty falls most rapidly during times of the most sustained growth—the 1960s, 1980s and second half of the 1990s. The poverty rate also fell in the mid-2000s before heading up again when the recession hit. The most important goal of economic policy should be to increase society's overall wealth. This helps the poor and everybody else.
Yet starting with his first budget proposal, Mr. Obama has made clear that his main policy purpose is reducing inequality. As the White House budget scribes put it, "There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . . It's a legacy of irresponsibility, and it is our duty to change it."
Thus the 2009 stimulus was assembled around social programs and redistribution, defying even Keynesian precepts about immediate job creation. Among its many other goals, ObamaCare is intended to produce "a leveling" of the "maldistribution of income in America," as Senate Finance Chairman and chief author Max Baucus put it. Even now, amid a mediocre recovery and 9.6% unemployment, the inequality imperative is driving Democrats to insist on a huge tax increase—no matter the impact on growth.
The irony is that, while there has been a modest widening of the income gap in recent decades, the Census (as measured by the "Gini index") shows that inequality has remained mostly unchanged since the early 1990s—regardless of which party is in power. The reasons are many and rooted in larger economic and social forces that can't be fixed with higher taxes and White House social engineering.
More important, this preoccupation with inequality is actively harmful because it leads to economic policies that inhibit growth. That's the real warning in the new Census data. Democrats are succeeding in their goal of punishing business and the wealthy, but to the extent that this has produced anemic growth it is also punishing the poor and middle class.
The moral claim of Obamanomics is that it ensures that everyone pays his "fair share," but its early returns show this agenda is producing more poverty. In their obsession with income shares and how many people have how much wealth, the Obama Democrats are imposing policies that ensure only that there will be less wealth for everyone to spread around.
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Spreading the wealth
The gap between rich and poor in the U.S. is bigger than at any time since the 1920s. Is that really what most Americans want?
By Michael I. Norton and Dan Ariely
November 8, 2010
The gap between the wealthiest Americans and the poorest is bigger than at any time since the 1920s — just before the Depression. According to an analysis this year by Edward Wolff of New York University, the top 20% of wealthy individuals own about 85% of the wealth, while the bottom 40% own very near 0%. Many in that bottom 40% not only have no assets, they have negative net wealth.
A gap this pronounced raises the politically divisive question of whether there is a need for wealth redistribution in the United States. This central question underlies such hot-button issues as whether the Bush tax cuts should be allowed to expire and whether the government should provide more assistance to the poor. But before those issues can be addressed, it's important to understand how Americans feel about the country's increasing economic polarity.
We recently asked a representative sample of more than 5,000 Americans (young and old, men and women, rich and poor, liberal and conservative) to answer two questions. They first were asked to estimate the current level of wealth inequality in the United States, and then they were asked about what they saw as an ideal level of wealth inequality.
In our survey, Americans drastically underestimated the current gap between the very rich and the poor. The typical respondent believed that the top 20% of Americans owned 60% of the wealth, and the bottom 40% owned 10%. They knew, in other words, that wealth in the United States was not distributed equally, but were unaware of just how unequal that distribution was.
When we asked respondents to tell us what their ideal distribution of wealth was, things got even more interesting: Americans wanted the top 20% to own just over 30% of the wealth, and the bottom 40% to own about 25%. They still wanted the rich to be richer than the poor, but they wanted the disparity to be much less extreme.
But was there consensus among Americans about their ideal country? Importantly, the answer was an unequivocal "yes." While liberals and the poor favored slightly more equal distributions than conservatives and the wealthy, a large majority of every group we surveyed — from the poorest to the richest, from the most conservative to the most liberal — agreed that the current level of wealth inequality was too high and wanted a more equitable distribution of wealth. In fact, Americans reported wanting to live in a country that looks more like Sweden than the United States.
So, if Americans say they want a country that is more equal than they believe it to be, and they believe that the country is more equal than it actually is, the question becomes how we lessen these disparities. Our survey didn't ask what measures people would be willing to support to address the wealth gap. But to achieve the ideal spelled out by those surveyed, about 50% of the total wealth in the United States would have to be taken from the top 20% and distributed to the remaining 80%.
Few people would argue for an immediate redistribution of 50% of the nation's wealth, and such a move would unquestionably create chaos. In addition, despite the fact that individual Americans give large amounts to charitable causes each year — in effect, a way of transferring wealth from the rich to the poor — the notion of government redistribution raises hackles among many constituencies.
Despite these reservations, our results suggest that policies that increase inequality — those that favor the wealthy, say, or that place a greater burden on the poor — are unlikely to reflect the desires of Americans from across the political and economic spectrum. Rather, they seem to favor policies that involve taking from the rich and giving to the poor.
Michael I. Norton is an associate professor of business administration at the Harvard Business School; Dan Ariely is the James B. Duke Professor of Behavioral Economics at Duke University and the author of "The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home."
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"Spreading the wealth - The gap between rich and poor"
JDN, Following rant not aimed at you. From what I can see your post agrees with my view. Historic efforts to spread wealth just made everything worse.
We have now found 2 ways to worsen the gap. Income inequality, we know, widens in a freely growing economy. And now we know income inequality also grows when we throw the brakes on and try to even things up.
My theory in the fall of 2008 was that inequality would drop during a crash because the invested class was losing wealth while the lower income/wealth groups just kept plugging away at their paycheck to paycheck struggles, with constant income. Not true.
Capital employs labor. 9.6% unemployment isn't the half of it. Real unemployment in some areas is closer to 20%. You can't have an all-out frontal assault on key groups that you share an economy with including employers, investors, potential employers and your largest customers and suppliers and then scratch your head wondering what happened to your own income.
The whole point of measuring inequality is a chase down the wrong street. IT IS NONE OF OUR BUSINESS WHAT SOMEONE ELSE MAKES legally and pays proper taxes on (IMHO). What the hell ever happened to a right of privacy.
"When we asked respondents to tell us what their ideal distribution of wealth was, things got even more interesting: Americans wanted the top 20% to own just over 30% of the wealth, and the bottom 40% to own about 25%. They still wanted the rich to be richer than the poor, but they wanted the disparity to be much less extreme."
This sounds like a Jaywalking question or from that Canadian video explaining that Canadian hours and and minutes need to be converted into American time.
Income disparity is a fact, and it is irrelevant because you can join in or climb to any level that you want or deserve. The questions that should be asked are things like: Are their unfair barriers to entry in investment banking and other lucrative professions? Are there public infusions of money going into colleges, medicine or other industries that skew the costs artificially upward beyond what their customers can afford to pay? Are public servants paid on a scale and structure equal and competitive to a private free market? Are people discriminated in employment or investment for wrongful reasons? Are there laws and taxes that unreasonably keep people from unleashing their entrepreneurial potential?
This is a land of opportunity, not outcome. When we focus on outcomes, we end up screwing up opportunity, and outcomes, IMHO.
The more people that are rich around you, the better your opportunities to advance as well, but it doesn't all move together in lock-step. Focus on economic opportunity and tear down the barriers.
The best and simplest description I have read about how to grow the economy is this: We need to start in this country at least 125 new companies EVERY YEAR that will grow to a billion dollars in revenue within 20 years. http://blogs.forbes.com/richkarlgaard/2010/10/20/what-grows-an-economy/?boxes=opinionschanneleditors
To do that we probably need to start hundreds of thousands of other businesses that don't go quite as far but provide a good living and market value for the services of the people who work there.
People can play any role in this that they want. Inventor, banker, human resources, customer service, front desk, warehouse, sales, marketing, supplier, customer, you name it. But the jobs won't all pay the same; each needs to be competitive, and if you are taking shares instead of pay in a start up you might be measured as poor today when in fact you are not.
In a market, your services are worth what the second highest bidder is willing to pay.
Crafty's post elsewhere of the top 10% of Cubans coming to Florida in the 1950s brought a flashback to me of a Cuban American I knew in business past who had been a founder of the Intel memory systems division in the late 1960s. I will bet that few people in or outside of their group knew then the future impact of what they were doing or what wealth and jobs it would create. They just needed to believe in their own ideas and their own capbilities - in an environment with the freedom to unleash it. What is the proper worth of his contribution? I have no idea. Let a free market decide. What were the odds of any of that happening if he had stayed in a government enforced, equal society? Zero.
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There is a reason that one of God's TEN BIG RULES is "Thou shalt not covet thy neighbor's stuff"-- it is precisely because of how easy it is to feel envy and how pernicious the consequences of that envy are. Our Founding Fathers knew this. It is, in essence, why we are a Constitutional Republic and not a democracy.
When I ran for Congress I would tell a parable as a story: "My friend an I were eating at a restaurant. Three people at a neighboring table finished and received their bill. They got up to leave and handed it to us and said "This is a democracy. There are three of us and two of you. We had a vote. You're paying."
Separate point: As the Reagan tax rate cuts kicked in, the chattering classes began blathering about a massive increase in the concentration of wealth. What these economic illiterates did not comprehend was that under the 70% top rate regime, wealth hid in tax shelters. At the 30% rate most of the the shelters ceased making sense and the rich folks who invested in them decided to allow their income/profits/gains to be exposed to taxation. Result? Data showing a huge spike in the number of the rich and a dramatic increase in the concentration of wealth.
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Rich people don't take their money and store it in vaults so they can swim through it like Scrooge McDuck. They invest it and spend it, which creates jobs for the non-rich.
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http://pajamasmedia.com/victordavishanson/stay-worried/?singlepage=true
Economics 101
What worries me about President Obama is really one general issue: his very concrete enjoyment of the good life as evidenced by his golf outings, Martha’s Vineyard vacations, and imperial entourages that accompany him abroad, and yet his obvious distrust of the private sector and the success of the wealthy. Yet my discomfort here is not even one that arises from an obvious hypocrisy of, say, a Michelle on the 2008 campaign trail lecturing the nation about its meanness or her own previous lack of pride in her country, juxtaposed with her taste for the publicly provided rarefied enjoyments of a Costa del Sol hideaway at a time of recession.
No, my worries run deeper. Apparently, the president is unaware that after some 2,500 years of both experience with and abstract thought about Western national economies, we know that a free, private sector increases the general wealth of a nation, while a statist redistributive state results in a general impoverishment of the population. At the root of that truth is simple human nature — that people wish to further their own interest more fervently than the more abstract public good (e.g., why the renter does not wash the rental car, or why the public restroom is treated differently from its counterpart at home), and can be encouraged to invent, create, and discover which in turn helps the less fortunate, lucky, healthy, or talented.
Texas or California?
We all accept, of course, that the question is not one of a laissez-faire, unchecked robber baron arena, versus a Marxist-Leninist closed economy, but rather in a modern Western liberal state the finer line between a Greece and a Switzerland, or a California and a Texas.
In the former examples, the desire to achieve an equality of result through high taxes, generous public employment, and lavish entitlements destroys incentive in two directions — creating dependency on the part of the more numerous recipients of government largess, and despair among the smaller but more productive sector that sees the fruits of its labor redistributed to others — with all the obligatory state rhetoric about greed and social justice that legitimizes such transfers.
In the latter examples, an equality of opportunity allows citizens to create wealth and capital on the assurances that the incentives for personal gain and retention of profits will result in greater riches for all.
Neither Baron nor Insect
We in America more or less understood that dichotomy, and so neither idolized a Bill Gates or Warren Buffett with titles like count, lord, or baron, nor demonized them with revolutionary spite (i.e., “insect,” “enemy of the people,” or even “greedy” and “selfish”). Instead, we assumed that Buffett had enriched his investors and more or less could not possibly use all the vast billions he accumulated (he, in fact, lived rather modestly and much of his treasure will probably end up in the Gates Foundation). One way or another, it was worth having Microsoft Word with the expectation that the zillionaire Bill Gates’ shower is still no hotter than ours, and his private jet goes not much faster than our own cut-rate Southwest Airlines flights. All that seems simple enough — until now.
So, again, what troubles me is that the president seems unaware of this old divide — that what allowed the pre-presidential Obamas, respectively, to make quite a lot of money as a legislator, author, professor, lawyer, or hospital representative was a vibrant private sector that paid taxes on profits that fueled public spending and employment or made possible an affluent literary and legal world. All that was contingent upon the assurance that an individual would have a good chance of making a profit and keeping it in exchange for incurring the risk of hiring employees and buying new equipment.
Grows on Trees?
Instead, Obama seems to think that making money is a casual enterprise, not nearly so difficult as community organizing, and without the intellectual rigor of academia — as if profits leap out of the head of Zeus. I say that not casually or slanderously, but based on the profile of his cabinet appointments, his and his wife’s various speeches relating Barack Obama’s own decision to shun the supposed easy money of corporate America for more noble community service in Chicago, and a series of troubling ad hoc, off-the-cuff revealing statements like the following:
As a state legislator Barack Obama lamented the civil rights movement’s reliance on the court system to ensure equality-of-result social justice rather than working through legislatures, which were the “actual coalition of powers through which you bring about redistributive change.” To Joe Wurzelbacher, he breezily scoffed that “my attitude is that if the economy’s good for folks from the bottom up, it’s gonna be good for everybody. I think when you spread the wealth around, it’s good for everybody.” When Charlie Gibson pressed presidential candidate Obama on his desire to hike capital gains taxes when historically such policies have decreased aggregate federal revenue, a startled Obama insisted that the punitive notion, not the money, was the real issue: “Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.” And as President Obama, again in an off-handed matter, he suggested that the state might have an interest on what individuals make: “I mean, I do think at a certain point you’ve made enough money.”
In other words, for most of his life Barack Obama has done quite well without understanding how and why American capital is created, and has enjoyed the lifestyle of the elite in the concrete as much as in the abstract he has questioned its foundations. Does he finally see that the threat of borrowing huge amounts to grow government to redistribute income through higher taxes risks greater impoverishment for all of us, despite the perceived “fairness”? That suspicion alone explains why those with trillions of dollars are sitting on the sidelines despite low interest, low inflation, and a rebounding global economy. In short, millions of profit-makers believe not only will it be harder to make a profit, but far less of it will remain their own— and all the while the president will deprecate the efforts of those who simply wish do well for themselves. With proverbial friends like those, who needs enemies?
Until that mindset changes and can be seen by the public to change, the recession will not so easily end.
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http://taxprof.typepad.com/taxprof_blog/2010/11/sullivan-the-.html
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http://pajamasmedia.com/blog/avoiding-the-abyss-the-national-economic-rescue-initiative/?singlepage=true
First, the good news: The Congressional midterms, gubernatorial races, and various state and local electoral contests resulted in the large-scale, unmistakable repudiation of the political tax-and-spend culture that so many of us were hoping for.
Now for the bad news: The distance between where we are and a genuine long-term national fiscal and economic recovery is daunting. This is no time for disengagement.
Many Americans have begun to recognize just how deep the short-term and long-term financial holes we face really are. Others, sadly including many politicians who won key races last week and their party overlords, still don’t seem to get it.
The near-term situation is scary enough, and needs to be stabilized soon, or, as I said a month ago, there won’t be a long-term. But even if we satisfactorily resolve the short-term, the long-term problems we face are intimidating at levels most people have only begun to absorb.
Focusing on the short-term for a bit: Fiscal 2010, which ended on September 30, was the second time the U.S. government ran an annual deficit of well over $1 trillion. Fiscal 2009 was the first. As I noted two weeks ago, this year’s real spending deficit was worse than the first. Some departments went hog-wild. Spending at the Department of Education was up 30%. Spending increases at the Energy Department and the EPA (36%) were ridiculous. I could go on and on.
Federal collections on the whole came in barely higher than a year earlier, and were still about 20% lower than fiscal 2008 before subtracting IRS stimulus payments. Tax collections in most categories were down. The only reason receipts increased was that collections from the Federal Reserve increased by $42 billion.
Federal Reserve collections … what’s that all about? It’s about Ben Bernanke performing the 21st century’s equivalent of printing money. The Fed calls it “Quantitative Easing” (QE).
Properly employed, QE can be a stabilizing mechanism to keep an economy from nose-diving and assist it as it recovers. The Fed creates money out of nothing and invests it in government bonds, mortgage-backed securities, and corporate bonds for a while. It is supposed to wind down those investments when condition warrant.
The trouble is that conditions don’t warrant pulling back, because a) there hasn’t been a meaningful recovery, and b) fiscal policy is a scandalous mess. What little economic improvement has occurred has not been enough to put people back to work. Unemployment has been stuck at over 9% for the longest period since the Great Depression.
Because of the deficits created by fiscal policy and the weak recovery that has accompanied it, the Fed can’t pull back on QE without significantly disrupting the economy. We can argue all day and night about whether the pullback should happen, but the fact is that at least for now Bernanke & Co. are determined not to let it happen, even as the administration continues to push for more historically ineffective stimulus and continued trillion-dollar deficits. The Fed has embarked on “QE2,” a second round of quantitative easing that will increase the Fed’s investment portfolio by another $600 billion.
The deeper the QE hole, the harder it will be to dig out, and the worse the consequences will be if — hopefully we catch it in time before it becomes “when” — the American people and foreign governments (not necessarily in that order) come to realize that the house of cards is unsustainable. That’s why government spending must be slashed and the government’s budget must be brought into balance — and soon.
But even if that occurs, there are serious long-term problems. They come in four major areas:
• Social Security
• Medicare, Medicaid and Health Care
• Military
• All other spending
Social Security’s actuarial deficit was over $7.6 trillion a year ago. The actuarial deficit in Medicare alone is five times as large. As the Baby Boomers continue to retire and age in record numbers, both numbers are moving higher — and quickly.
Sadly, projected spending in the first two categories above threatens to totally wipe out the government’s ability to spend any money in the other two, even though they happen to be the areas where the specifically defined constitutional duties of the federal government (defense, courts, etc.) are carried out.
Today, the PJ Institute, the research and education arm of Pajamas Media, is introducing the National Economic Rescue Initiative (NERI) to the American people. While its timing in the euphoria of the Tea Party wave that has swept the nation is perfect, its overall warning is stark, sobering, and demands action:
Because of decades of overspending by both Democrats and Republicans, our nation will reach a time (possibly around 2020 or sooner) when we can no longer borrow to finance our annual trillion dollar deficit.
If lenders are no longer willing to buy our debt, we will be unable to continue to fund the government’s operations through borrowing. If spending is not drastically cut, Americans will need to pay taxes at much, much higher levels.
What needs to be done to prevent this will involve much more than a little tweaking. It will require a wholesale rethink of what the government is capable of doing and should be doing — and conversely, what individuals, families, and communities are capable of doing better, and should be doing themselves.
The Congressional Budget Office projects that if we continue on our current course, federal debt owed to the public will increase from $9 trillion today to about $550 trillion a mere 70 years from now — and that’s after inflation, while assuming (many believe naively) that the government will be able to continue to borrow at low, risk-free rates.
We’re not kidding. But if 70 years sounds too far off to be believable, how about these intermediate threshold crossings: $20 trillion in 2022, twelve years from now; $40 trillion in 2032, just ten years later; or $100 trillion in 2046? Keep in mind that our current Gross Domestic Product in current dollars is about $14.7 trillion.
Nobody can possibly believe that our current financial path is sustainable.
This is where those reading this column and the American people come into play. Please, go to the NERI web site and educate yourself. Utilize its tools, and then visit its interactive Solutions Design Center.
If it hasn’t become obvious to readers during the past several years, let’s make it obvious now: The time for the American people to assume that the country’s problems can be solved with minimal citizen involvement has ended. Additionally — and this will be addressed in future NERI subscription-based offerings designed to be extremely beneficial yet very affordable — the idea that people can just “wing it” in their own personal money management, retirement savings, and overall financial planning, or play catchup after years of neglect, is similarly over.
This nation does not have the luxury of blowing this off. Failing to deal with the problem while there is still time will condemn future generations to a standard of living which will be a mere shadow of ours, and which will ultimately threaten our form of government, i.e., whether we will continue to genuinely have government of the people, by the people, for the people.
So go there. Take action. Make suggestions. Encourage others to do the same.
The country you help save will be your own.
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Dan Henninger at the WSJ has a simpler answer to the economic doldrums than the technical adjustments of 'quantitative easing'. Stop throwing Molotov cocktails at business. http://online.wsj.com/article/SB10001424052748703805004575606750168419176.html
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This is a very different take than much of what is posted around here, but Brian Wesbury is a superb supply side economist with an outstanding record with his predictions.
It's a Self-Sustaining Recovery
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/29/2010
In the four months between June and October, retail sales surged 10.2% at an annual rate and are up 7.3% over the past 12 months. Still, consumers get no respect from the majority of analysts and economists, who during the summer and early fall, could not stop talking about a double dip recession.
But instead of going wobbly, consumers seem to be standing strong. ComScore says online sales versus last year were up 28% on Thanksgiving Day, 9% on Black Friday, and 13% so far in November. Coremetrics, another online data gatherer, reports sales from Thanksgiving Day thru Saturday are up 14%. The National Retail Federation (NRF) reported 8.7% more people visited stores this year versus last year and the average shopper spent 6.4% more than a year ago.
The only report that was “remotely negative” came from ShopperTrak (and its network of 70,000 US malls) – sales were up 0.3% versus a year ago. However, the ShopperTrak data have a weakness - free-standing big box stores are not classified as malls. Clearly, this could lead to underestimating sales.
Meanwhile, more data is coming this week. Car and light truck sales probably totaled more than 12-million at an annual rate for the second month in a row – the fastest pace since September 2008, except for during “cash-for clunkers.”
This is not just “pent-up demand.” Nor is it a “new normal.” The surge in consumer spending has its roots in improving fundamentals. Private sector wages and salaries are up 4% in the past year and small business income is up 5.8%. Productivity is boosting incomes for workers and companies.
In addition, the jobs picture is steadily getting brighter, with private sector payrolls up an average of 106,000 per month over the past six months. At 407,000, initial jobless claims have fallen to their lowest level in years, which points to continued improvement in payroll growth.
Meanwhile, consumers are still paying down debts, but they are doing it more slowly, leaving more money to spend than a year ago. And the share of after-tax earnings that households need to service their debts and make other recurring payments (rent, car leases, property taxes, etc.) has fallen below its long-run average and will soon be back to 1995 levels.
As we have said over-and-over again, things are far from perfect. Unemployment is still too high, government growth is creating uncertainty, the financial situation in Europe seems precarious, and fear seems to be an investment strategy. Nonetheless, a self-sustaining recovery is underway.
The Fed is easy, productivity is strong, the “panic” is over, and government policy (in the US and abroad) has taken a turn for the better. As a result, economic growth will surprise to the upside. As this strength becomes more self evident, confidence in equity markets will grow. Look out above.
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There's No Escaping Hauser's Law
Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.
By W. KURT HAUSER
Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration's budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues.
Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law."
Over this period there have been more than 30 major changes in the tax code including personal income tax rates, corporate tax rates, capital gains taxes, dividend taxes, investment tax credits, depreciation schedules, Social Security taxes, and the number of tax brackets among others. Yet during this period, federal government tax collections as a share of GDP have moved within a narrow band of just under 19% of GDP.
Why? Higher taxes discourage the "animal spirits" of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation. Lower taxes increase the incentives to work, produce, save and invest, thereby encouraging capital formation and jobs. Taxpayers have less incentive to shelter and shift income.
On average, GDP has grown at a faster pace in the several quarters after taxes are lowered than the several quarters before the tax reductions. In the six quarters prior to the May 2003 Bush tax cuts, GDP grew at an average annual quarterly rate of 1.8%. In the six quarters following the tax cuts, GDP grew at an average annual quarterly rate of 3.8%. Yet taxes as a share of GDP have remained within a relatively narrow range as a percent of GDP in the entire post-World War II period.
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Getty Images/Imagezoo
This is explained once the relationship between taxes and GDP growth is understood. Under a tax increase, the denominator, GDP, will rise less than forecast, while the numerator, tax revenues, will advance less than anticipated. Therefore the quotient, the percentage of GDP collected in taxes, will remain the same. Nineteen percent of a larger GDP is preferable to 19% of a smaller GDP.
The target of the Obama tax hike is the top 2% of taxpayers, but the burden of the tax is likely to fall on the remaining 98%. The top 2% of income earners do not live in a vacuum. Our economy and society are interwoven. Employees and employers, providers and users, consumers and savers and investors are all interdependent. The wealthy have the highest propensity to save and invest. The wealthy also run the lion's share of small businesses. Most small business owners pay taxes at the personal income tax rate. Small businesses have created two-thirds of all new jobs during the past four decades and virtually all of the net new jobs from the early 1980s through the end of 2007, the beginning of the past recession.
In other words, the Obama tax increases are targeted at those who are largely responsible for capital formation. Capital formation is the life blood for job creation. As jobs are created, more people pay income, Social Security and Medicare taxes. As the economy grows, corporate income tax receipts grow. Rising corporate profits provide an underpinning to the stock market, so capital gain and dividend tax collections increase. A pro-growth, low marginal personal tax rate stimulates capital formation and GDP, which triggers a higher level of tax receipts for the other sources of government revenue.
It is generally accepted that if one taxes something, one gets less of it and if something is subsidized one gets more of it. The Obama administration is also proposing an increase in taxes on capital itself in the form of higher capital gains and dividend taxes.
The historical record is clear on this as well. In 1987 the capital gains tax rate was raised to 28% from 20%. Capital gains realizations as a percent of GDP fell to 3% in 1987 from about 8% of GDP in 1986 and continued to fall to below 2% over the next several years. Conversely, the capital gains tax rate was cut in 1997, to 20% from 28% and, at the time, the forecasts were for lower revenues over the ensuing two years.
In fact, tax revenues were about $84 billion above forecast and above the level collected at the higher and earlier rate. Similarly, the capital gains tax rate was cut in 2003 to 15% from 20%. The lower rate produced a higher level of revenue than in 2002 and twice the forecasted revenue in 2005.
The Obama administration and members of Congress should study the record on how the economy reacts to changes in the tax code. The president's economic team has launched a three-pronged attack on capital: They are attacking the income group that is the most responsible for capital formation and jobs in the private sector, and then attacking the investment returns on capital formation in the form of dividends and capital gains. The out-year projections on revenues from these tax increases will prove to be phantom.
Mr. Hauser is chairman emeritus of the Hoover Institution at Stanford University and chairman of Wentworth, Hauser & Violich, a San Francisco investment management firm. He is the author of "Taxation and Economic Performance" (Hoover Press, 1996).
http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html?KEYWORDS=hauser
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Thank you BBG for posting the Hauser piece. You nailed it with this: "Better to cut rates and get 19% of a larger pie."
I would add, why not constitutionally limit federal spending to 19% of most recently measured GDP since that is the most we know we can afford.
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The Dead Enders
Even after their defeat, Democrats keep insisting on a tax increase.
'It is not a sensible way to run a country to have this magnitude of tax issues left to annual uncertainty," said Treasury Secretary Tim Geithner earlier this month, and he's certainly right about that. But at the current moment the single biggest obstacle to more certainty is his boss, President Obama, who still refuses to compromise on the tax increase set to whack the economy in a mere 30 days.
After meeting with Congressional leaders yesterday, Mr. Obama dispatched Mr. Geithner and budget director Jacob Lew to negotiate a deal. Yet the President is still holding out against even a temporary extension of the 2001 and 2003 tax rates. Republicans won 63 House seats running against those tax increases, but Mr. Obama still seems under the spell of the dead enders led by soon-to-be-former House Speaker Nancy Pelosi.
The magnitude of the looming tax increase ought to snap him out of this hypnosis. If the Democrats who still run Capitol Hill for another month fail to act, tens of millions of American households will see their paychecks shrink immediately in the New Year.
Capital gains and dividend tax rates will climb to 20% and 39.6%, respectively, from 15%, and the top two income tax rates will climb to 38% and 41% (including deduction phaseouts), from 33% and 35%. The typical family with an income between $40,000 and $75,000 a year will pay as much as $2,000 more in 2011, as the 10% tax rate bracket and the $1,000 per child tax credit vanish.
This could have been resolved months ago, except that the White House and Congressional Democrats insist that some taxes must be raised. Mr. Obama wants the lower rates to expire on incomes of $200,000 for individuals and $250,000 for couples. Dozens of Democrats revolted against that in the campaign, so the latest gambit, courtesy of New York Senator Chuck Schumer, would raise that threshold to $1 million.
Republicans shouldn't be suckered into raising taxes on anyone, especially not on small business job creators. The U.S. corporate tax rate of 39% (a combination of state average and federal rates) is already about 15 percentage points above the international average, and for the first time in a generation the personal rate of 41% would rise above the average of our overseas rivals. That's all before the 3.8% surtax on investment income arrives in 2013, courtesy of ObamaCare.
Because most nations tax their companies at a business rate lower than the personal rate, the Tax Foundation says the Obama plan would mean that many Subchapter S corporations in the U.S. would pay "virtually the highest tax rates in the world on their business income." In other words, the after-tax rate of return on investment in the U.S. would fall relative to investing in Europe or Asia. This is an invitation to outsource more jobs. The U.S. should be cutting tax rates to become more competitive, as President Obama's deficit reduction commission and tax reform advisory panel have recommended.
About half the income taxed above $250,000 is business income, so small businesses get hammered from the Obama plan. Mr. Schumer argues that if the income threshold for higher taxes is raised to $1 million, Republicans will no longer be able to claim that this plan taxes small business income.
Not so. The Small Business Administration classifies a small business as an entity with fewer than 500 employees. The Schumer plan shifts the tax onto larger, more profitable firms from relatively smaller ones. But this still puts jobs at risk. A business with $1 million or $10 million of net income has many times more employees and does a lot more hiring than a business with, say, $60,000 of net income or one that is losing money.
The Tax Foundation estimates that of tax filers reporting income of more than $1 million a year, about 80% have business income and that more than 60% of millionaire income is either business or investment income. So about two of every three dollars raised would come directly out of business coffers—i.e., from the capital that businesses need to expand their operations.
Democrats say a millionaire surtax would raise about $50 billion a year, but don't count on it. Millionaires tend to be financially sophisticated and are well equipped to respond to higher rates by finding tax shelters, exploiting loopholes (municipal bonds!) or simply working less. If high tax rates were irrelevant to economic decisions, the soak-the-rich states of New York, New Jersey and California wouldn't be losing millionaires to better tax climates.
Tax payments by millionaire households more than doubled to $273 billion in 2007 from $132 billion after the tax rates were cut in 2003. The number of tax returns with $1 million or more in annual reported income doubled over that period thanks to the strong economic rebound. Tax payments by millionaires also increased dramatically after the Reagan and Kennedy tax rate reductions.
Republicans shouldn't oversell an extension of the current tax rates as an economic panacea. Making the lower rates permanent would do far more for economic growth by removing one more source of uncertainty. And there are many spending and regulatory threats to growth that must be removed. But at least an extension would avoid a tax blow to a recovery that is still struggling to become a sustainable expansion.
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Even in this lame duck liberal Congress, there is a bipartisan majority in both houses to prevent this tax increase. The only obstacles are a defeated, willful liberal minority that wants to extract one more pound of flesh from the private economy, and a President who still fails to comprehend that jobs and wealth are created outside of government and politics. If Democrats won't compromise this month, the first vote in the new Republican House in January should be to repeal the Obama-Pelosi-Schumer tax increase.
http://online.wsj.com/article/SB10001424052748703326204575616843991237032.html?mod=djemEditorialPage_h
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Non-farm productivity (output per hour) rose at a 2.3% annual rate in the third quarter To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/1/2010
Non-farm productivity (output per hour) rose at a 2.3% annual rate in the third quarter and is up 2.5% versus last year.
Real (inflation-adjusted) compensation per hour in the non-farm sector increased at a 0.8% annual rate in Q3 and is up 0.2% versus last year. Unit labor costs declined at a 0.1% rate in Q3 and are down 1.1% versus a year ago.
In the manufacturing sector, the Q3 growth rate for productivity (0.6%) was much lower than among non-farm businesses as a whole. Output grew faster in manufacturing but the growth of hours worked was higher as well, resulting in slower growth in output per hour. Real compensation (0.1%) was softer in manufacturing but unit labor costs (1.0%) were stronger than in the non-farm business sector, a function of slower productivity growth.
Implications: Productivity growth was revised up for Q3, exactly as the consensus expected. This is a solid rebound from its decline in Q2, which had some analysts worried. Productivity has increased in six of the last seven quarters and we believe the trend will continue. In the past year, productivity has grown at a 2.5% annual rate despite the fact that hours worked have increased in each of those quarters as well. Even as output rebounds, technology will continue to increase efficiency, allowing workers to do more per hour. In other news this morning, the ADP Employment index, a measure of private-sector payrolls, increased 93,000 in November, the largest gain so far in the recovery. In the past six months, on average, the ADP index has underestimated growth in the official Labor Department measure of private payrolls by 55,000. It has a long way to go, but the recovery in the labor market is well underway. In other recent news, the Case-Shiller index, a measure of home prices in the 20 largest metro areas around the country, declined 0.8% in September (seasonally-adjusted), the third straight monthly decline. However, smoothing out the upswing and downswing related to the homebuyer credit, national average prices are still up 0.6% versus a year ago. Prices are still 3.2% above the bottom in May 2009 and we do not anticipate going below that level.
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I am a big fan of Wesbury; he was my pick for Fed chair. That said, ...
2.3% and 2.5% are growth rates that never get us out of this funk. We are not coming out of this IMHO because all of the underlying problems are still staring us in the face and still getting worse.
The productivity increases come from success of layoffs, not from growth.
The huge tax increase coming on employers, investment and capital is sure to keep the growth rate low, if positive at all.
My recollection from my readings and analysis is that 3.1% growth is breakeven or ordinary growth, not even improving circumstance or solving our unsolvable fiscal challenges. Maybe it is some other number but it isn't the growth we have now.
Yesterday I saw that Rep. Mike pence re-proposed the flat tax. http://www.realclearpolitics.com/video/2010/11/30/rep_mike_pence_proposes_flat_tax.html Maybe if this miserable economy is stagnant long enough people will reach for a bold growth strategy and leave these days of covet, encumber and capture behind us. Tax each dollar the same and then, besides economic growth, we would have good one example of equal protection under the law.
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I too have a high opinion of Wesbury (and, in a similar vein, Scott Grannis) but find myself quite torn between Glenn Beck et al and them. I recently signed up for missives from Wesbury and will be posting some of it here-- I think we need to stay in touch with intelligent non-apocalyptic lines of thought, even though we may disagree :lol:
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I wish Wesbury and Grannis would address how we won't be crushed by debt and other looming catastropies. It sure looks bleak to me, I'm hoping that I'm wrong.
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Agreed.
Grannis does say that there will be some (i.e. too much) inflation.
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Data Watch
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The ISM non-manufacturing index rose to 55.0 in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/3/2010
The ISM non-manufacturing composite index rose to 55.0 in November from 54.3 in October, beating the consensus expected gain to 54.8. (Levels above 50 signal expansion; levels below 50 signal contraction.)
Most key sub-indexes were higher in November, and all remain at levels indicating economic growth. The new orders index increased to 57.7 from 56.7, the employment index rose to 52.7 from 50.9, and the supplier deliveries index rose to 52.5 from 51.0. The business activity index fell to a still strong 57.0 from 58.4 last month.
The prices paid index fell to 63.2 in November from 68.3 in October.
Implications: The service sector rebound continues after the Summer swoon, with today’s report beating expectations for the third month in a row. The ISM non-manufacturing index increased to 55.0 from 54.3 in October, showing that economic growth is continuing to accelerate into the end of the year. The most encouraging detail in the report was the employment index, which reached its highest level in over three years. The new orders index rose to 57.7 from 56.7 in October as well, which means the outlook for the service sector looks bright. On the inflation front, the prices paid index fell to 63.2 from 68.3 in October. Despite this drop, the index remains at elevated levels. In other recent news, automakers sold cars and light trucks at a 12.3 million annual rate in November. This is faster than the 12.1 million the consensus expected and 13% higher than a year ago. On the housing front, pending home sales – contracts on existing homes – soared 10.4% in October, the largest percentage increase for any month on record (dating back to 2001). This suggests existing home sales, which are counted at closing, will rebound sharply in November.
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OUTCOME OF THE STIMULUS AND THE BURDEN OF PROOF
e21 team | December 2, 2010
At e21, we have observed that arguments in favor of fiscal stimulus are often predicated on mechanistic assumptions regarding the role of government spending in increasing employment levels. We have called for a more empirical approach that uses real-world data to assess the impact of the 2009 ARRA fiscal stimulus legislation.
On the tax cut portion of stimulus legislation, we have highlighted research by Claudia Sahm, Matthew Shapiro, and Joel Slemrod that drew on survey data suggesting that only 13% of households reported higher spending levels due to the one-time tax cuts in the fiscal stimulus. This casts doubt on the models used by the CEA and the CBO to assess the impact of ARRA, and on various private forecasting models that relied on the same set of assumptions.
A new study by Daniel Wilson at the San Francisco Fed calls into question the idea that the stimulus legislation as a whole — including the state transfers and direct spending portion — failed to generate the promised improvements in employment.
It is difficult to properly calculate the effects of the 2009 ARRA bill, as it was a nation-wide program. Though employment and growth failed to respond to ARRA as the Administration had suggested, fiscal stimulus advocates have argued that employment levels would have been lower still without the program.
Wilson’s study makes an important contribution to this debate by focusing on state-by-state comparisons. A large portion of stimulus funding at the state level was based on criteria that were entirely independent of the economic situation that states faced. For example, the number of existing highway miles was used to calculate additional transportation spending.
The study uses this resulting variation in state-level stimulus funding to determine what impact ARRA funding had on employment — including both the direct impact of workers hired to complete planned projects, as well as any broader spillover effects resulting from greater government spending. Administration economists have repeatedly emphasized the importance of this indirect employment growth in driving economic recovery.
The results suggest that though the program did result in 2 million jobs “created or saved” by March 2010, net job creation was statistically indistinguishable from zero by August of this year. Taken at face value, this would suggest that the stimulus program (with an overall cost of $814 billion) worked only to generate temporary jobs at a cost of over $400,000 per worker. Even if the stimulus had in fact generated this level of employment as a durable outcome, it would still have been an extremely expensive way to generate employment.
Interestingly, federal assistance to state Medicaid programs appears to have decreased local and state government employment. One possibility is that requirements to maintain full Medicaid benefits in order to receive federal aid proved sufficiently expensive that state governments pushed though additional rounds of layoffs in non-health related areas. This finding may suggest a potential pitfall with the Wyden-Brown proposal to decentralize health reform efforts at the state level: if comprehensive insurance requirements are retained, the net effect of reform may only shift safety-net spending towards healthcare and away from other urgent priorities such as education or welfare assistance.
The results of this one study should not be seen as definitive. As Wilson emphasizes, the results only apply to the variation caused by additional state-level spending. It is possible that the stimulus did generate a certain level of base employment growth to all states — or that the stimulus “crowded out” private investment on a nation-wide basis.
It is also difficult to determine the counterfactual employment growth that would have resulted in the absence of the fiscal stimulus law. To address this issue, Wilson includes other variables predictive of future employment growth. However, it is possible that employment would indeed have been worse in all states without a stimulus. It is also possible that employment would have been better than projected — for instance, if the Fed or Treasury had responded to higher unemployment through their own interventions.
Still, this result should be taken seriously, as it represents one of the few actual analyses of the stimulus program that does not rely on outdated multiplier estimates that assume their result.
Importantly, the results are also consistent with another recent analysis of government spending during Great Depression by economists Price Fishback and Valentina Kachanovskaya. During a period in which unemployment was extremely high and the costs of implementing a public works program were far lower than today, one might expect that fiscal stimulus might have proven more effective. Yet Fishback and Kachanovskaya find that a similar state-by-state analysis suggests that fiscal stimulus during the Great Depression failed to yield durable employment gains.
The burden of proof is now increasingly on the side of fiscal stimulus advocates. It is easy to point out possible flaws in each of the studies mentioned here — though the biases may end up either exaggerating or diminishing the estimates of the effects of the stimulus. But where is the evidence that the 2009 ARRA fiscal stimulus enhanced employment recovery in a cost-effective and sustainable manner?
http://www.economics21.org/blog/outcome-stimulus-and-burden-proof
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Forty minute evisceration of the Fed:
[youtube]http://www.youtube.com/watch?feature=player_embedded&v=yLynuQebyUM#![/youtube]
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Bailing out … the Irish, Greeks, Spanish, Portuguese or whoever - SIMPLE
It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit. On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich German will not suspect anything. At that moment the German comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism. And that, ladies and gentlemen, is how the bailout package works.
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makes a case for bullishness:
http://scottgrannis.blogspot.com/
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Housing prices will be down at least 10% lower than they are today, at a minimum. 12/10/10
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It's A Good Deal To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/13/2010
As the Senate votes to pass the tax cut deal announced by President Obama last Monday night, political debate rages on. What’s left of the Left in Congress hates the deal. It’s the second drubbing in a row (November 2nd, being the first). The deal says “lower tax rates are better than higher tax rates.”
After years of complaining about the Bush tax cuts on the wealthy, two Democratic Presidents (Clinton and Obama) have now come out in support of them. President Obama’s chief political advisor, David Axelrod, called that part of the deal “odious” on the Sunday talk shows.
Some Republicans don’t like the deal because it includes, by their count, more than $300 billion in “spending” that they feel they were elected to stop. This includes the one-year reduction in the payroll tax rate, extending the program of 99 weeks of unemployment benefits, plus other tax credits.
There is still a small chance that Congress will add so many goodies as the bill is written (like continued credits for ethanol), that the deal becomes unsupportable. But, the odds of any crack-up on the way to passage remain very low. We expect it to pass within the next week or two with very minor additions.
The benefits of the deal outweigh its costs by a significant margin. The consensus seems to expect about a 1% kick to real GDP growth from a deal, but that is in comparison to “no deal.” We have been more bullish than the consensus and have expected the extension of Bush era tax rates. As a result, we have raised our forecast a small amount – from 3.7% real GDP growth in 2011 to 4%.
Many have argued that the “cost” of the deal is $900 billion, but this is Washington speak and has little to do with reality. After bottoming at an annual run rate of $2.0 trillion (roughly 14.5% of GDP) in 2009, total tax revenues to the federal government have climbed to about $2.2 trillion (15% of GDP) in the past year. This has happened without higher tax rates. And as long as the economy continues to recover, revenues will continue to climb, eventually rising back to 19% of GDP, where they were before the Panic of 2008. After that, “bracket creep” generated by economic growth will push revenue even higher relative to GDP.
In other words, the US does not need higher tax rates in order to gather more revenue and balance the budget. If government spending were frozen at current levels, the budget would be balanced at the end of 2014. If government spending were cut back to 2008 levels, a balanced budget could be achieved sooner than that. In other words, this deal does not spin the budget out of control. On the contrary, it focuses all the energy of those who want to balance the budget on the spending side of the ledger rather than the tax side. This is great news.
Some analysts are trying to tie rising Treasury bond yields to fears about a bigger deficit and the “cost” of the deal. This is a misreading of the markets. Treasury bond yields are rising because a tax hike has been avoided and economic growth is likely to be robust. The bottom line is that stocks remain cheap, while bonds are certainly not.
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Woof All:
A lot of bearish sentiment has been expressed around here-- including by me. Worth noting IMHO that when the PIIG Flu acts up in Europe, the dollar rises. Also, if I am not mistaken, rising interest rates here in the US tend to strengthen the dollar. If the scenario envisioned below reifies, we could be surprised by where things go for the dollar.
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Stratfor Summary
Standard & Poor’s said Dec. 14 that it likely will downgrade Belgium’s credit rating due to the size of the country’s government debt and budget deficit, along with its inability to form a stable government. The announcement indicates that Europe’s financial woes are spreading from the PIIGS — Portugal, Italy, Ireland, Greece and Spain — to more established economies, particularly Belgium and Austria.
Standard & Poor’s warned Dec. 14 that Belgium’s mix of high government debt, a high budget deficit and the chronic inability to form a stable government would likely force the ratings agency to downgrade the country’s credit rating (currently at AA+), possibly within six months. Such an event is not yet inevitable, but the mere announcement of the “negative watch” heralds the spread of Europe’s ongoing financial troubles to Europe’s more established states.
Until now nearly all concern for the financial stability of eurozone states has focused on the PIIGS, an acronym investors created to refer to Portugal, Italy, Ireland, Greece and Spain. These states share certain characteristics that include large — and in many cases, popped — bubbles in real estate and finance, high budget deficit and debt levels, and political difficulty in addressing the problems.
To this list of states in distress, STRATFOR would like to add two more developed Western European countries: Austria and Belgium, both of which share key negative characteristics of the PIIGS.
Belgium is certainly the worse off of the two. It suffers from a residential real estate bubble roughly as bad as Spain’s, roughly half again as bad in relative terms as the U.S. subprime crisis. Belgium’s 2009 headline government debt level clocked in at 96 percent of gross domestic product (GDP), 20 percentage points worse than Portugal — the next PIIGS state that STRATFOR expects will need a bailout. But perhaps most important is that modern Belgium cannot seem to hold a government together. Since the last elections in April 2007 it has had three separate governments, and that does not include the 18 months of interim governments required to hash out coalition deals that were complex and unstable in equal measure. The soon-to-be-mounting obsession among investors is that such political dysfunction will make the austerity required to fix the budget next to impossible.
Austria is better off than Belgium by all of these measures. Its debt and deficit are both considerably lower (68 percent of GDP versus 96 percent of GDP and 3.5 percent of GDP versus 6 percent of GDP, respectively), its political system is more or less in order, and its housing sector — nearly alone within Europe — was never overbuilt. Austria’s biggest outlier is that its banks are listing badly, due to their overexuberance in lending into the now-popped credit bubble that plagues Central Europe.
(click here to enlarge image)
The point that Austria and Belgium have most in common, however, is one they share with the weaker states of the PIIGS grouping: They are largely dependent upon external financing to manage their sovereign debt loads. Austria, Belgium, Greece and Ireland are all relatively small states with limited indigenous financial resources. When a state faces financial duress, the first thing the government does is hash out a deal — often forcefully — with its own financial sector, applying those resources to the problem. Such is standard fare in major states such as Germany and Italy. Smaller states often lack such options, forcing the governments to turn to international investors for cash. In good times this is irrelevant, but when money gets tight and investors get scared, an investor stampede can crush a state’s finances overnight. Such a calamity was precisely what forced the Greek and Irish breakdowns and bailouts. The exposure of all four of these states to such outsiders is more than 50 percent of GDP, which as Greece and Ireland have already demonstrated so vividly, is an amount that simply cannot be coped with in a panic.
Austria and Belgium are advanced, technocratic economies with sophisticated financial sectors. Any financial contagion that breaks into the developed states of Western Europe via these two countries would terrify investors who have been fairly convinced that the euro’s problems were safely sequestered in the somewhat manageable states of the PIIGS grouping. Should Austria or Belgium go the way of Greece, all bets will be off in Europe.
Read more: Europe's Financial Troubles Spread to Belgium, Austria | STRATFOR
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second post of day
Industrial production increased 0.4% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/15/2010
Industrial production increased 0.4% in November, beating a consensus expected gain of 0.3%. Production is up at a 2.8% annual rate in the past six months.
Despite a 6.0% drop in auto production, manufacturing output rose 0.3% in November despite a 6.0% decline in autos. Non-auto manufacturing rose a strong 0.7%. In the past six months, auto production is down at a 4.7% annual rate while non-auto manufacturing is up at a 3.1% rate.
The production of high-tech equipment was up 0.9% in November and is up at a 2.9% annual rate in the past six months.
Overall capacity utilization rose to 75.2% in November, the highest since October 2008. Manufacturing capacity use increased to 72.8%, the highest since the failure of Lehman Brothers.
Implications: Another month, another increase in factory output and no sign of a double dip. Many analysts are using the election and tax deal to turn bullish. They are scrambling to catch up to an economy that was already growing before a single person cast a vote. Like retail sales, manufacturing output rose for the fifth consecutive month in November. Due to a 2% increase in utility output, overall industrial production rose 0.4%. Look for another surge in utility output next month as December is turning out to be unusually cold in much of the country. In mid-2009, capacity utilization was at a 45-year low of 68.2%. Now, only 17 months later, capacity utilization is 7 percentage points higher, at 75.2%. Two factors are boosting utilization: expanding output and a depreciating capital stock. In fact, because of depreciation, total capacity (the ability to produce) in manufacturing has fallen back down to 2007 levels. Assuming we are correct that real GDP expands 4% in 2011, capacity utilization will climb to near the long-term average of 80% next year. Not only will companies be forced to invest but the Federal Reserve will face greater fears of inflation coming from a constrained sector of the economy. In other news this morning, the Empire State index, a measure of manufacturing in New York, rebounded sharply in December, climbing from -11.1 in November to +10.6.
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Tuesday, December 21, 2010
Fear subsides, prices rise
http://scottgrannis.blogspot.com/
I must have shown this chart at least a dozen times since late 2008, but it is so important that repetition is justified. (Here is a post from May '09 as an example) The main message here is that fear was the key driver of the 2008-2009 recession: fear of a global depression, fear of a global banking collapse, fear of deflation, and fear of a huge increase in future tax burdens thanks to an equally huge increase in the size of government. Fear drove us to the brink of what was expected to be an awful depression, and the reduction of fear is putting us back on a growth track.
The correlation between fear (represented by the red line, the Vix index inverted) and equity prices that is evident in this chart speaks for itself. The Vix has now returned to its pre-recession levels, and equity prices are on track to do the same, though the S&P 500 will need to rise another 25% to recover its previous highs.
Fears have been assuaged relentlessly since March '09. Swap spreads narrowed sharply. Credit spreads narrowed sharply. Signs of a recovery displaced expectations of a depression. Public reaction to the stimulus plan was mixed. Obama's popularity began declining, and the implementation of his agenda started facing headwinds. The Fed took strong action to expand the money supply. Financial markets began healing instead of collapsing. Commodity prices and gold prices started rising. Global trade got back in gear. Since the recession ended 18 months ago, the economy has proven the skeptics wrong more than once, and the forces of recovery have been working steadily behind the scenes, albeit slowly. Housing stopped collapsing and started stabilizing. A sea-change in the mood of the electorate resulted in a huge change in the congressional balance of power; the private sector now has a friend in Congress, and capital once again is held in high regard. More recently, a major increase in tax burdens was avoided, and a gargantuan omnibus spending bill went down in flames.
Short-term interest rates have been essentially zero for two years now. Investors, faced with the steep cost of safety (i.e., accepting a zero return for the safety of cash) have been realizing that the risks were not as great as they once feared, and they have been slowly deploying their cash hoards. Fearful investors have climbed countless walls of worry along the way, only to see the prices of risk assets moving higher. Consumers have been slowly drawing down their cash hoards, with the result that retail sales have now made a complete recovery. The next shoe to drop will be when corporations begin deploying their immense cash hoards to fund expansion plans and new hiring.
It's hard to see how this self-reinforcing process of recovery can be derailed.
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"It's hard to see how this self-reinforcing process of recovery can be derailed."
Um......Howabout states defaulting on debt? Govenment shutdowns? Trillions in new nat'l debt? QE2?
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My questions exactly, but I think Scott makes a fair point about the market being a forward looking mechanism. The market tanked when BO passed McCain in the polls and McCain showed his progressive stripes at the same time-- worth noting is that Palin vigorously participated in some of this too).
I will see if I can get some comments from Scott.
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Word from the man himself in response to this thread! 8-)
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All the worries about federal state and local budget cuts have been out there for a very long time, and progress is already being made on addressing the issue. Public sector jobs are already shrinking (I'm excluding census workers), down 340K since early last year, marking the first time in decades (or perhaps ever) that we have seen a meaningful decline in the public sector workforce.
Furthermore, it was the huge increase in the public sector that is a problem for the economy. As Milton Friedman always said, the burden of the public sector is best measured by the amount of spending relative to the economy, not by the deficit. Government spends money inefficiently, and thus is a drag on the economy. Cutting back government spending should therefore free up resources for the private sector, thus boosting the economy going forward.
We should not fear budget cutbacks, we should welcome them!
Defaults are very likely to happen, but those are being priced in already. Defaults will only serve to reinforce discipline on the public sector, and that is a good thing.
Finally, I would argue that the self-reinforcing forces of recovery lead to growth, and growth solves all kinds of problems related to debt and budgets. Growth is already boosting federal revenues, which are growing at a 10% annualized rate.
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States and local governments aren't just cutting spending, some like California are deep in debt where they may well start defaulting as well as no longer being able to provide core services.
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http://www.cbsnews.com/stories/2010/12/19/60minutes/main7166220_page4.shtml?tag=contentMain;contentBody
The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.
"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.
"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."
Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.
"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.
Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.
"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.
No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.
The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.
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Krugman is usually an ass, but is the main point here a valid one?
Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months.
So what’s the meaning of this surge?
Is it speculation run amok? Is it the result of excessive money creation, a harbinger of runaway inflation just around the corner? No and no.
What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.
Some background: The last time the prices of oil and other commodities were this high, two and a half years ago, many commentators dismissed the price spike as an aberration driven by speculators. And they claimed vindication when commodity prices plunged in the second half of 2008.
But that price collapse coincided with a severe global recession, which led to a sharp fall in demand for raw materials. The big test would come when the world economy recovered. Would raw materials once again become expensive?
Well, it still feels like a recession in America. But thanks to growth in developing nations, world industrial production recently passed its previous peak — and, sure enough, commodity prices are surging again.
This doesn’t necessarily mean that speculation played no role in 2007-2008. Nor should we reject the notion that speculation is playing some role in current prices; for example, who is that mystery investor who has bought up much of the world’s copper supply? But the fact that world economic recovery has also brought a recovery in commodity prices strongly suggests that recent price fluctuations mainly reflect fundamental factors.
What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve, by printing lots of money — it’s not actually doing that, but that’s the accusation — is setting us up for severe inflation. Stagflation is coming, declared Representative Paul Ryan in February 2009; Glenn Beck has been warning about imminent hyperinflation since 2008.
Yet inflation has remained low. What’s an inflation worrier to do?
One response has been a proliferation of conspiracy theories, of claims that the government is suppressing the truth about rising prices. But lately many on the right have seized on rising commodity prices as proof that they were right all along, as a sign of high overall inflation just around the corner.
You do have to wonder what these people were thinking two years ago, when raw material prices were plunging. If the commodity-price rise of the past six months heralds runaway inflation, why didn’t the 50 percent decline in the second half of 2008 herald runaway deflation?
Inconsistency aside, however, the big problem with those blaming the Fed for rising commodity prices is that they’re suffering from delusions of U.S. economic grandeur. For commodity prices are set globally, and what America does just isn’t that important a factor.
In particular, today, as in 2007-2008, the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.
And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. True, alternative sources, like oil from Canada’s tar sands, have continued to grow. But these alternative sources come at relatively high cost, both monetary and environmental.
Also, over the past year, extreme weather — especially severe heat and drought in some important agricultural regions — played an important role in driving up food prices. And, yes, there’s every reason to believe that climate change is making such weather episodes more common.
So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.
But that’s for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it’s not about us.
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They got it right in a Krugman column? Sounds like he is on vacation and an aide mailed this in. :-)
"world commodity prices have risen by a quarter in the past six months"
Maybe a sign of global recovery, but not that pronounced.
It makes sense to me that oil goes up ever day we consume without committing to any new production. Copper is another unique commodity worthy of further analysis. Gold is tied to inflation expectations. Crop related commodities are facing record worldwide freezes.
He notes that commodity prices were also high before the last collapse. Time will tell what this all really means.
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Also relevant for cotton prices were the severe floods in Pakistan. More generally, his point that some price increases are due to a change in the general level of demand and not inflation, is, IMHO, plausible in the current environment.
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Monday Morning Outlook
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First Trust Sees 4% Real GDP Growth in 2011 To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/27/2010
Sometime back in 2009, conventional wisdom argued that while the economy would appear to recover from the subprime crisis, the recovery would be tenuous. A growing chorus argued real GDP would grow at 2% or less, consumption would be lackluster, and any signs of real strength would be ephemeral – based on pent-up demand.
Of course, when real GDP grew at an annualized 4.4% over the winter (2009-10) and 3% in the first year of the recovery, the conventional wisdom had an excuse. “Most of it was inventories,” they said, “and don’t expect this to continue.” So, when real GDP slowed to 1.7% annualized growth in Q2, they raised the stakes. They called it a “soft-patch” and argued that a “double-dip” was a real possibility. At most, they expected a 2% growth rate in the second half of 2010.
Instead, we were focused on three things. First, the economy was not broken. Once the panic ended, a natural recovery would start. Second, even without quantitative easing, the Fed was very easy. And third, productivity would remain robust. As a result, we predicted 3% growth for the second half (September 20, 2010 MMO).
That forecast looks pretty good. In fact, it may be too low. Real GDP growth clocked in at a 2.6% annual rate in Q3. All we need is a 3.4% growth rate in Q4 to get our 3% average, but the data suggest real GDP could expand by more than 4% annualized in Q4, possibly even 5%+.
Some of the acceleration in Q4 is because the economy is really picking up speed. But some of the acceleration in Q4 is also due to a problem the government is having seasonally adjusting oil prices. This problem artificially boosted growth in late 2009, but reduced growth in mid-2010. In other words, the soft-patch was never as bad as many thought. (For further discussion of the problem with oil prices, see our MMO dated November 8, 2010).
In 2011, we expect 4% real GDP growth. The biggest difference between the First Trust forecast and the conventional wisdom is deleveraging. We do not view the deleveraging process in as negative a light as the conventional wisdom. Once deleveraging begins to slow, it will not hurt the economy. If a consumer (or a business) pays down debt but pays down less than she did the prior year, then her spending can go up faster than her income (or profits). Higher saving is not going to be a negative for the economy.
Here are the assumptions behind our forecast for 4% real GDP growth in 2011.
Consumption: Auto sales in October/November were up about 30% from early 2009 levels, and JD Power and Edmunds.com are forecasting even higher sales in December. Still, the pace of sales remains below the long-term trend in “scrappage,” suggesting further strong gains in sales in the year ahead. Meanwhile, consumers’ financial obligations are now the smallest share of their after-tax incomes since 1995, and headed lower. Consumption will grow 3.3% next year, adding 2.3 percentage points to GDP.
Business Investment: Corporate profits and cash on balance sheets are at, or near, record highs. Meanwhile, capacity utilization has grown from a low of just 68% in mid-2009 to 75% and is on its way to 80% (the long-term average). Our industrial capacity is depreciating and needs to be updated. We are on the cusp of a boom in investment in equipment and software. Business investment should grow about 12% in 2011, adding 1.2 points to GDP growth.
Home Building: Home builders still face the headwind of substantial excess inventories. However, once those inventories are gone, the pace of housing starts is going to have to be about 150% higher than recent levels. It may take several years to get there, so we have home building growing 17.5% next year, adding 0.4 points to real GDP growth.
Government: Real government purchases will grow about 2.5% this year. We assume they will grow at a 1.5% rate next year (below the 30-year average of 2.2%), adding 0.3 percentage points to the GDP growth rate.
Inventories: Inventories were razor-thin by the end of 2009. They started to rebound this year and we expect that rebound to continue, but not accelerate significantly. As a result, we expect the inventory re-build to add only 0.1 point to GDP growth.
Trade: Unless the government fixes its measure of oil prices, expect a wild quarter-by-quarter ride of ups and downs for trade in 2011, just like this year. Either way, though, trade should, on average, subtract 0.3 points from the GDP growth rate, as the trade deficit expands slightly.
Add ‘em all up and you get a 4% real GDP growth rate for 2011. Strap in, it’s going to be better than you think.
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So, when do the jobs come back? Real jobs, not census workers or holiday temps.
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A key question no doubt. My SWAG is that ulitmately that they don't really come back very much; that for those who do have jobs things can seem OK-- apart from the tension that come with the diminished margin of error-- and a lot of working poor will simply become poor, and a lot of middle class folks have fallen and will fall further than they ever thought possible.
A lot of Americans have focused their economic endeavors based upon the false signals of the various bubble economies and now that these bubbles have burst, they are finding themselves stranded by the receding tide. A lot of Americans are profoundly insufficiently educated and much of what they know isn't so.
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There is a very common belief in the US that what we've had as a way of life and a standard of living is just the natural order of the universe, and prosperity and safety are inherent, no matter how far we stray from the core principles that allowed such things to come about.
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The ISM Manufacturing index increased to 57.0 in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/3/2011
The ISM Manufacturing index increased to 57.0 in December from 56.6 in November, exactly as the consensus expected gain. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
The major measures of activity were mixed in December but all remain well above well above 50.0, signaling continued growth. The new orders index increased to 60.9 from 56.6 and the production index increased to 60.7 from 55.0. The supplier deliveries index declined to 55.9 from 57.2 and the employment index also fell slightly to 55.7 from 57.5.
The prices paid index increased to 72.5 in December from 69.5 in November.
Implications: Manufacturing continued to show strong growth in December, with the ISM index coming in at 57.0, the highest level since May. The new orders and production indices both rose back above 60, suggesting more strong growth ahead. While the employment index fell slightly, it remained solidly above 50 for the 13th straight month. According to the Institute for Supply Management, which publishes the report, an overall index level of 57.0 is consistent with real economic growth at a 5% annual rate, right on pace with our forecast for Q4. On the inflation front, the prices paid index rose to 72.5 from an already elevated 69.5 in November. In other news this morning, construction increased 0.4% in November and an even stronger 1% including upward revisions to prior months. The upward revisions were for both home building and commercial construction. The 0.4% gain in November was primarily due to home building and office construction by the federal government. In other recent news, last week’s report on the Case-Shiller index shows that home prices in the 20 largest metro areas around the country declined 1% in October (seasonally-adjusted) and are down 0.8% in the past year. However, home prices are still 1.8% higher than the cycle low hit in May 2009. We do not believe the recent decline is a sign of a double-dip in housing. Rather, it’s an aftershock of the government’s tax credit for home buyers. We expect home prices to rise in 2011.
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The ISM non-manufacturing composite index increased to 57.1 in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/5/2011
The ISM non-manufacturing composite index increased to 57.1 in December from 55.0 in November, easily beating the consensus expected gain to 55.7. (Levels above 50 signal expansion; levels below 50 signal contraction.)
The key sub-indexes were mixed in December, but remain at levels indicating robust economic growth. The new orders index increased to 63.0 from 57.7 and the business activity index rose to 63.5 from 57.0, both multi-year highs. The employment index fell to 50.5 from 52.7 and the supplier deliveries index fell to 51.5 from 52.5.
The prices paid index increased to 70.0 in December, the highest since the collapse of Lehman Brothers, from 63.2 in November.
Implications: The early stage of the economic recovery was dominated by the manufacturing sector. That phase is now over: the service sector is growing rapidly, too. The US economy continues to pick up steam, supporting our forecast of a 5% real GDP growth rate in Q4. Today’s ISM Services headline of 57.1 is the highest reading since May 2006. The business activity index, which has an even higher correlation with real GDP growth, hit 63.5, the highest since 2005. The new orders index was also the highest since 2005. On the inflation front, the prices paid index increased to 70.0, the highest since the financial panic started in late 2008. In other news this morning, the ADP employment index, a measure of private sector payrolls, increased by 297,000 in December, the largest increase in the index’s history, dating back to 2000. As a result, we are lifting our forecast for the gain in private sector payrolls in Friday’s official Labor Department report to 230,000. (Non-farm payrolls should climb about 215,000 due to ongoing layoffs by states and localities.) In other news from late yesterday, automakers reported that sales of cars and light trucks hit a 12.5 million annual pace in December, up 2.3% from November and up 13% versus a year ago. The service sector is getting stronger, firms are hiring again, and workers are confident enough about the future to ramp up their purchases of big-ticket items. What a great way to start a new year.
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http://senseofevents.blogspot.com/2011/01/crush-depth-of-debt.html
Monday, January 3, 2011
The crush depth of debt
By Donald Sensing
The wreck of Germany's U-352, sunk off North Carolina in May 1942.
What happens when a submarine reaches its crush depth? The question answers itself. World War II U-boat Capt. Hebert Werner related in his postwar book, Iron Coffins, that no one knew how deep a U-boat could dive. "Because," he said, "the only crews that found out were crushed a half-meter later."
The United States is approaching its financial crush depth. The liberal media (but I repeat myself) have proclaimed that the 111th Congress was the "most productive" in generations. One thing the Triple One did produce was debt - not merely mountains of debt but a whole Himalaya range. In fact, this Congress borrowed more money than all 110 previous Congresses combined. In the right-hand column of this site I run a widget that counts the federal debt as it winds toward the orbit of Pluto; as of today at 1.40 p.m. C. it stood at just under 14 trillion, 27 billion dollars.
(http://3.bp.blogspot.com/_8vNzwxlohg0/TSImTw_ephI/AAAAAAAABSM/-589-tN5RXM/s1600/Federal+debt.jpg)
Can you imagine what $14 trillion looks like? Let's start with a drawing of $1 billion in 10 stacks of $100,000,000 each, in $100 bills. As you can see, you could carry all this money by yourself to a commercial van in maybe 20 minutes and drive away with it. Note the red-shirted figure - the money reaches only to his waist.
(http://4.bp.blogspot.com/_8vNzwxlohg0/SpCKtQEfdiI/AAAAAAAAAus/BGpyX_QYncg/s1600/1_billion.jpg)
Now here is a trillion dollars, still using $100 bills in stacks of $100M each. What is a trillion dollars? Well, it's a million million. It's 1,000 of the picture above.
(http://1.bp.blogspot.com/_8vNzwxlohg0/SpCKtk6cu-I/AAAAAAAAAu0/wIJcX518TLg/s320/1_trillion.JPG)
Note that the red-shirted fellow is standing at the lower-left corner. Note also that the money is stacked twice as high as the first picture. As we begin the New Year, the federal government is in debt to the sum of 14 of these drawings, more than $44,000 for every American infant, child, man and woman.
So beginning in the first week of the New Year, as the 112th Congress convenes, our national task will not be merely to slow our descent toward financial crush depth, but reverse it. Herbert Stein chaired the Council of Economic Advisors under two presidents. He observed, "Economists are very good at saying that something cannot go on forever, but not so good at saying when it will stop." Fact is, like the sub crews we cannot know in advance what our crush depth is. We will only find out when we've reached it and borrowed one dollar more. And then it will be too late. We have to stop the descent, level off and then head back toward the sunlight by shedding debt. This can only be done by both cutting spending and increasing tax revenue. (Do not confuse the latter with increasing tax rates - tax revenues will rise when the nation's wealth increases; increasing tax rates stunts growth out of a recession.)
The road will be very difficult. I wrote in a column on Right Network that the American people (Tea Partiers included, I think) collectively want to cut the budget but individually don't want it done on their own backs. The two most profligate Congresses in our history were the 111th and (surprise!) its immediate predecessor, the 110th, both entirely controlled by Democrats. Fortunately, the 112th will be dominated, though not controlled, by Republicans. Unfortunately, the 112th's Republicans are still mostly of the political class who did not feel the voters' heat enough to see the light.
Herbert Stein also said, "When something can't go on forever, it won't." Sinking in an ocean of red ink cannot go on forever. Eventually the nation will become insolvent and collapse will follow. But how much longer can it go on? Unlike the old sub crews, we will physically survive reaching the crush depth of debt. But whether we can survive as a great nation is unclear at best, and highly unlikely in probability.
Making sure we do not discover our national, financial crush depth is the most urgent task before us. It must be the number one resolution for the New Year and the new Congress.
Closing note: Compare the live clock below with the image grab I posted above:
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Interesting interview with Thomas Sowell. Quoting the last question and answer below about why he gave up on Marxism. Interestingly Milton Friedman didn't change his mind at U. of Chicago. Watching the government from the inside did.
He just came out with a 4th edition of Basic Economics, they joke about how thick it is. Buy the book. Read it all. And read the chapter he took out and posted on the internet. There is a lifetime of wisdom there. The easy and failing government answers to today's problems aren't new.
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I read that you identified yourself as a Marxist in your college days. What prompted your change in ideology?
TS: I was a Marxist I guess for a decade from about the time I was 20 to 30 roughly. What changed my mind was not anything I had read. I was a Marxist when I went into Milton Friedman’s course at [the University of] Chicago and I was a Marxist when I came out of it.
What changed me was working as an economic intern in the government in 1960 and discovering what the government bureaucracies were like in terms of their motivations and how they do their job. I immediately realized government is not the answer. Life taught me. I think that is true for most people.
Most of the leading conservatives were not conservatives when they were young. Milton Friedman was a liberal, he even described himself in his autobiography as Keynesian in his thinking. Friedrich Hayek was a socialist. Ronald Reagan was so far left that the FBI was keeping an eye on him. So you run through the list — of course the whole neoconservative movement was on the left initially. And the same thing happened in Europe and elsewhere. A lot of the indoctrination that takes place in educational institutions begin to erode when people get into the real world and start thinking for themselves.
http://dailycaller.com/2011/01/24/thomas-sowell-speaks-to-thedc-about-the-financial-crisis-health-care-and-his-ideological-transformation-from-marxism-to-conservatism/#ixzz1By5Svi1F
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http://finance.yahoo.com/news/Higher-pump-prices-coming-apf-1797090788.html?x=0
Gas pump prices that are around $3 a gallon now may seem like a bargain by the time your kids are on Easter egg hunts.
Pump prices have risen nearly 9 percent since Dec. 1 and topped $3.10 a gallon this week. That's the highest level since October 2008. The price may rise or fall a little over the next few months, but analysts expect it to range between $3.20 and $3.75 gallon by March and April ahead of the summer driving season.
The national average for regular gasoline about $3.12 a gallon on Friday, according to AAA, Wright Express and Oil Price Information Service. That's nearly 12 cents more than a month ago and 38 cents above a year ago.
Average pump prices range from $2.81 to $3.70 in major cities. For example, the average in Salt Lake City is $2.74 a gallon and in New Orleans it's $2.97 a gallon. Drivers in San Francisco pay $3.44 a gallon, and in Honolulu gas is $3.58 a gallon.
Americans typically drive less in the winter. Demand is about 1 percentage point higher than a year ago but remains weaker than the historical average, said energy analyst Jim Ritterbusch. The nation's gasoline supplies remain above the five-year average.
Over the next couple of months, refineries will conduct regular maintenance to prepare for the changeover to summer driving mixes. That could affect supplies, but gas prices should remain steady to a few cents more, according to oil analyst Tom Kloza of Oil Price Information Service.
By spring he expects the average price to rise to between $3.50 and $3.75 a gallon. Ritterbusch expects $3.20 to $3.25 a gallon by Memorial Day.
For every penny the price at the pump increases, it costs consumers overall an additional $4 million, according to Cameron Hanover analyst Peter Beutel. If the price goes up a dime a gallon, consumers pay $40 million more each day for that increase.
_______________________________________________________________________________
http://www.businessinsider.com/david-rosenberg-the-wile-e-coyote-market-2011-1#
(http://static.businessinsider.com/image/4d2dce2349e2ae4801090000-386-276/wile-e-coyote.png)
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BW makes his case. Watch this clip and tell me what you think GM (and anyone else)
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http://www.theglobeandmail.com/report-on-business/staggering-debt-belies-developed-worlds-wealth/article1880232/
Which country is the world’s wealthiest? When asked this question, economists generally refer to gross domestic product per capita. By this measure, according to the IMF, the top eight for 2010 are Luxemburg, Norway, Qatar, Switzerland, Denmark, Australia, Sweden and United Arab Emirates. The U.S. ranks ninth, the Netherlands 10th and Canada 11th.
But does GDP per capita really measure the wealth of a country? Think about it in personal terms: What if your income ranked among the top tier in the country, but your debt also ranked among the highest? Would you be “wealthy”? Not if your debt were so large that, even with your high income, you have no hope of ever paying it off. Similarly, GDP per capita is an income measure that says nothing about a country's balance sheet.
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That seems a valid point, but what do you make of this Brian Wesbury clip?-- which I see my previous post forgot to include :oops:
http://www.ftportfolios.com/blogs/EconBlog/2011/1/24/wesbury-101---drudge-report-negativity-misleading
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I think Wesbury is wrong, though I hope he's right. I've listed already the profound problems we are facing economically. We are but one serious bump away from real catastrophe and nowhere near anything like a real recovery, but only time will tell who is correct.
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http://www.nationalreview.com/exchequer/256396/massive-inflation-right-under-our-noses
Massive Inflation, Right under Our Noses
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http://seekingalpha.com/article/248043-a-message-from-the-baltic-dry
Meaningful or not?
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I know Scott Grannis uses the BDI. In the rush of life I have neglected visiting his blog recently. What is he saying right now?
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http://scottgrannis.blogspot.com/
Coach Obama still doesn't understand the game
From a taxpayer's perspective, Obama's biggest weakness is his lack of understanding of how the economy really works. That weakness has already cost us $1 trillion, and what he said in his SOTU speech last night shows that this was a lot of money down the drain, because he learned very little from his failures these past two years. He continues to believe that enlightened politicians can boost economic growth much like a good coach can whip a team or a star player into shape. Last night's SOTU peech was Coach Obama's pep talk before the big game. Problem is, he still doesn't understand the game of economic growth, so there is little chance that his coaching will prove effective.
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http://finance.yahoo.com/news/Newhome-sales-in-2010-fall-to-apf-452650344.html?x=0&.v=1
WASHINGTON (AP) -- Buyers purchased the fewest number of new homes last year on records going back 47 years.
Sales for all of 2010 totaled 321,000, a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.
The year ended on a stronger note. Buyers purchased new homes at a seasonally adjusted annual rate of 329,000 units in December, a 17.5 percent increase from the November pace.
Still, economists say it could be years before sales rise to a healthy rate of 600,000 units a year.
"The percentage rise in sales looks impressive but 10 percent of next-to-nothing is still next-to-nothing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, referencing the December increase. "New home sales are bouncing around the bottom and we see no clear upward trend in the data yet."
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http://hotair.com/archives/2011/01/27/initial-jobless-claims-jump-51000/
**Not exactly roaring back.....
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Not disagreeing, but balancing out with intellingent counter POV:
Data Watch
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New orders for durable goods declined 2.5% in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/27/2011
New orders for durable goods declined 2.5% in December, coming in well below the consensus expected increase of 1.5%. Excluding transportation, orders increased 0.5%, falling short of the consensus expected gain of 0.9%. Orders are up 6.9% versus a year ago, 11.5% excluding transportation.
The overall decline in orders in December was mostly due to transportation equipment, specifically civilian aircraft/parts (which are extremely volatile from month to month). Other major categories of new orders were mixed.
The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure rose 1.7% in December (2.0% including upward revisions to prior months). These orders increased at a 6.4% rate in Q4 versus the Q3 average.
Unfilled orders fell 0.4% in December but are up at a 3.2% annual rate in the past three months.
Implications: Today's headlines on durable goods orders and unemployment claims were disappointing. However, the details of the durables report and extenuating circumstances on claims suggest the case for robust economic growth remains intact. Almost all the weakness in orders was due to civilian aircraft, which are extremely volatile and which hit a 20-year low in December. Including revisions to prior months, new orders for durable goods excluding transportation rose 1.5%. Meanwhile, shipments of “core” capital goods (which exclude civilian aircraft and defense) showed a strong gain in December, rising 1.7% after a 1.4% increase in November. We expect orders for durable goods to move higher in 2011 as firms are loaded with cash earning near zero percent interest and capacity utilization is approaching long-term norms. In other news this morning, new claims for unemployment insurance rose 51,000 last week to 454,000. The four-week moving average is now 429,000. Continuing claims for regular state benefits rose 94,000 to 3.99 million. Initial claims that would have been filed the prior week were delayed due to unusual southern snowstorms. The true underlying trend is likely near the 4-week moving average. On the housing front, pending home sales – contracts on existing homes – rose 2.0% in December. With three strong months in a row now, existing home sales, which are counted at closing, should continue to gain in January.
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The first estimate for Q4 real GDP growth is 3.2% at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/28/2011
The first estimate for Q4 real GDP growth is 3.2% at an annual rate, slightly lower than the consensus expected.
The largest positive contributions to the real GDP growth rate were net exports, which added 3.4 points to the real GDP growth rate, and personal consumption, which increased at a 4.4% annual rate.
The weakest component of real GDP, by far, was inventories, which alone reduced the real GDP growth rate by 3.7 points.
The GDP price index increased at a 0.3% annual rate in Q4. Nominal GDP – real GDP plus inflation – rose at a 3.4% rate in Q4 and is now up 4.2% versus a year ago.
Implications: Real GDP grew at a 3.2% annual rate in Q4. This was slightly lower than the consensus (3.5%), but significantly lower than our much publicized forecast of 5.4%, which was the highest forecast in the consensus survey. But don’t throw us out as being those crazy optimists just yet. Our forecast was largely based on a key insight about how the government (mis)measures oil prices, so we predicted net exports would add 3.3 points to the GDP growth rate, much higher than anyone else. And guess what? Net exports added 3.4 points to the GDP growth rate! And because we were so bullish on trade, we predicted real final sales (real GDP excluding inventories) would grow at a 7.1% annual rate, the fastest pace since 1984. And, guess what? Real final sales came in at exactly that 7.1% growth rate! Where we were off, was with government spending (much weaker than we had expected), personal consumption and home building (stronger than we expected) and inventories (substantially below both our forecast and the consensus). Inventories alone subtracted 3.7 points from real GDP growth. In other words, manufacturers and retailers underestimated consumer demand and ran down inventories dramatically in the fourth quarter. Anecdotal reports suggest that low inventory levels are having a cost in the form of lost sales. Moreover, prices are not likely to be slashed to reduce excess inventories after the holidays. What this means is that there is more room for production increases in 2011 and inflation will continue to move higher. Our original forecast of 4% real GDP growth this year is probably too low. Real consumer spending grew at a 4.4% annual rate in Q4, the fastest in almost five years, while business investment continued to advance and home building increased without any assistance from homebuyer tax-credits.
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Would inflation distort the stats on consumer spending?
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http://hotair.com/archives/2011/01/28/oil-rigs-and-jobs-already-moving-out-of-gulf/
Jobs, jobs, jobs.
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Of course there is no such thing as a laser-like focus. There are lasers and there are other methods of focus. This was more like my teenage daughter saying she will be home at like-10.
Obama also said we can do more than one thing at once. Lasers don't make very effective flood lights.
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http://www.foxbusiness.com/markets/2011/01/27/peter-morici-japan-sound-insolvent/
Morici: Japan Sound, U.S. Insolvent
S&P has downgraded Japan's long-term debt from AA to AA-, indicating the U.S. AAA rating should be taken down several notches to less than AA-.
National economies must generate foreign currency for their governments to pay foreign creditors, and national governments must be able to tax, sell bonds or print money, without causing inflation, to cover operating expenses and pay interest.
Japan's ability to pay is simply much stronger than the United States.
Japan has a strong current account surplus-thanks to a powerful manufacturing export machine-and the Bank of Japan sits on $1 trillion in foreign currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The United States can hardly make such a claim.
Domestically, Japan does suffer from deflation, slow growth and maintains a large budget deficit to prop up domestic demand, because Japanese citizens save so much. With prices falling, even in the face of global commodity inflation, the Japanese government has adequate latitude to sell bonds to its savers, and the BoJ has more than enough flexibility to purchase those bonds as needed-monetarize debt-without instigating domestic inflation or creating other adverse macroeconomic consequences.
The United States is a wholly different situation. The U.S. has a gaping current account deficit-on oil and with China-and policies pursued by the Bush and Obama Administrations are worsening those conditions. Owing to the large current account deficit, the United States must run a huge budget deficit, close to 10 percent of GDP, just to sustain growth at 3.5 percent and keep unemployment from flying out of control.
The large U.S. current account deficit indicates the U.S. economy as a whole is not generating adequate revenues to pay foreign creditors interest due on U.S. debt, and Washington must service the interest on externally held debt by printing more bonds and selling those abroad, but foreign private demand for those bonds is satiated. Consequently, the United States is much too dependent on the government of China to print yuan to buy dollars, and in turn, to use those dollars to buy Treasuries to finance the U.S. private economy's current account deficit and the federal budget deficit.
Read more: http://www.foxbusiness.com/markets/2011/01/27/peter-morici-japan-sound-insolvent/
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http://www.bloomberg.com/news/2011-01-28/moody-s-says-time-shortens-for-u-s-rating-outlook-as-s-p-downgrades-japan.html
Moody's Says Time Shortens for U.S. Rating Outlook as S&P Downgrades Japan
Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.
The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.
“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.
The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.
U.S. debt has increased from about $4.34 trillion in mid-2007 as the government increased spending to bail out the financial system and bring the economy out of recession. The budget deficit has increased to 8.8 percent of the economy from 1 percent in 2007.
‘Trajectory Is Worse’
“Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before,” Hess said in a telephone interview.
Moody’s said it expects there will be “constructive efforts” to reduce the deficit and control entitlement spending. It predicted 10-year Treasury yields will rise toward 5 percent without surpassing that level.
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http://hotair.com/archives/2011/01/29/imf-to-us-better-start-taking-care-of-business/
We better.
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Personal income increased 0.4% in December while personal consumption increased 0.7% To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/31/2011
Personal income increased 0.4% in December, exactly as the consensus expected. Personal consumption increased 0.7%, beating the consensus expected gain of 0.5%. In the past six months, personal income is up at a 3.7% annual rate while spending is up at a 5.8% rate.
Disposable personal income (income after taxes) was up 0.4% in December and is up at a 3.0% annual rate in the past six months. The rise in December was led by private-sector wages and salaries, interest, and dividends.
The overall PCE deflator (consumer inflation) increased 0.3% in December and is up 1.2% versus a year ago. The “core” PCE deflator, which excludes food and energy, was unchanged in December and is up 0.7% since last year.
After adjusting for inflation, “real” consumption was up 0.4% in December, is up at a 3.7% annual rate in the past six months, and at a 4.6% annual rate in the past three months.
Implications: Watch out above! Consumer spending accelerated into the end of 2010. “Real” (inflation-adjusted) consumer spending increased 0.4% in December and was up at a 4.6% annual rate in the last three months of the year. Why are consumers spending more? First, their incomes are rising. In the past year, real private-sector wages and salaries plus small business incomes are up 3.2%. Second, although consumers are still paying down debt, they’re doing so at a slower pace. Notice that this means spending can grow faster than income, not slower. Third, consumers’ financial obligations – their debt-related monthly payments plus other recurring charges like rent, car leases, and homeowners’ insurance – is now the lowest share of after-tax income since 1995. On the inflation front, consumption prices are up only 1.2% versus a year ago but seem to be accelerating, with prices up at a 2.0% annual rate in the past six months and a 2.4% rate in the past three months. Meanwhile, “core” inflation, which excludes food and energy, remains very subdued, up only 0.7% in the past year. Low core inflation is the excuse the Federal Reserve is using for quantitative easing. We think the Fed needs to focus more on overall inflation, not just the core. So do the Egyptians.
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http://www.europac.net/pentonomics/gdp_joke
Pentonomics - The GDP Joke
January 28, 2011 - 8:13am — mpento
Friday, January 28, 2011
By:
Michael Pento
The MSM is running around today applauding our 4th quarter GDP report, which increased at a 3.2% annual rate. However, the current dollar or nominal GDP growth rate was 3.4%. That’s correct; the BEA is suggesting that inflation grew at just over a .2% annual growth rate in Q4 2010! Does anybody that’s not a politician or central banker really believe that the rate of inflation for goods produced domestically was growing at a .2% annual rate?
To make matters worse, personal consumption expenditures were up 4.4% and final sales surged 7.1%. I say worse because the savings rate is dropping as consumers and business ramp back up their borrowing. Household purchases, which account for about 70 % of the economy, rose at a 4.4% pace last quarter, the most since the first three months of 2006. The increase added 3 percentage points to GDP.
To be able to consume one must first have produced. If you consume without having produced, you are spending either borrowed or printed money. And the money that is being spent isn’t used to purchase capital goods, which can expand the productive output of the economy. Consumer credit is up two months in a row and we are spending borrowed and printed money, not money earned from growing real incomes.
The Fed’s preferred inflation metric, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.4% annual pace, the smallest gain in data going back to 1959. So we should expect more borrowing and more Fed printing, as Mr. Bernanke feels inflation is perilously low.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
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Interesting. FWIW here's Wesbury coming to very different conclusions:
The ISM Manufacturing index increased to 60.8 in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/1/2011
The ISM Manufacturing index increased to 60.8 in January from 58.5 in December. The consensus expected a decline to 58.0, First Trust forecast an increase to 58.8. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
All of the major measures of activity were up in January and all remain well above well above 50.0, signaling continued growth. The new orders index increased to 67.8 from 62.0 and the production index increased to 63.5 from 63.0. The supplier deliveries index rose to 58.6 from 56.7 and the employment index also rose to 61.7 from 58.9.
The prices paid index increased to 81.5 in January from 72.5 in December.
Implications: The manufacturing sector is absolutely booming. Today’s ISM report blew away the consensus (which expected a decline), increasing to 60.8. This is the highest level since May 2004, more than six years ago. The sub-indicies of the report show robust growth in manufacturing, and many of them reached multi-year highs as well. The new orders index rose to 67.8, also the highest level since 2004, and the production index rose to 63.5. The employment index rose to 61.7, the highest level for the index since 1972, suggesting that Friday’s manufacturing payroll number might surprise to the upside. The only bad news in today’s report was on the inflation front, where the prices paid index rose to 81.5 from an already elevated 72.5 in December. The index is quickly approaching levels seen during the summer of 2008, when energy prices spiked. The Fed’s loose monetary policy continues to become more and more inappropriate as the recovery continues. In other news this morning, construction declined 2.5% in December versus a consensus expected gain of 0.1%. Including slight downward revisions to prior months, construction was down 2.8%. The decline in December was led by home building (primarily home improvements) and government construction (primarily schools, roads, and federal office buildings).
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GM: Remember that prediction of yours, made when the DOW was at 6,500 that 6,000 was next? :-D If I remember correctly, I did not disagree :oops:
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Non-farm productivity rose at a 2.6% annual rate in Q4 To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/3/2011
Non-farm productivity (output per hour) rose at a 2.6% annual rate in the fourth quarter. Non-farm productivity is up 1.7% versus last year.
Real (inflation-adjusted) compensation per hour in the non-farm sector declined at a 0.6% annual rate in Q4, but is up 0.3% versus last year. Unit labor costs declined at a 0.6% rate in Q4 and are down 0.2% versus a year ago.
In the manufacturing sector, the Q4 growth rate for productivity (5.8%) was much higher than among non-farm businesses as a whole. The faster pace of productivity growth was due to declining hours. Real compensation per hour was up in the manufacturing sector (+0.2%), but, due to rapid productivity growth, unit labor costs declined at a 2.9% annual rate.
Implications: Productivity beat consensus expectations in the fourth quarter, rising at a 2.6% annual rate, equaling the robust average pace of the past ten years. What’s impressive about the fourth quarter is that the gains in productivity came at the same time that the number of hours worked increased at a healthy 1.8% rate. Oftentimes, once a recovery gets to the point where firms are vigorously increasing hours, the pace of productivity growth slows down. Although that happened in the first half of 2010, in the latter half of the year companies found a way to generate efficiencies while still demanding more hours. Not only are hours up but compensation per hour is up as well. Despite this, productivity is pushing down unit labor costs – how much companies have to pay workers per unit of production. In other words, productivity growth has been rapid enough to both generate pay increases and, at the same time, make it worth more for companies to hire. As a result, we expect private sector hiring to accelerate in 2011. In other news this morning, new claims for unemployment insurance declined 42,000 last week to 415,000. Continuing claims for regular state benefits fell 84,000 to 3.93 million. In other recent news on the job market, the ADP Employment index, a measure of private-sector payrolls, increased 187,000 in January. This is consistent with our forecast that the official Labor Department report, released tomorrow morning, will show an increase of 195,000 in private payrolls.
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The ISM non-manufacturing composite index increased to 59.4 in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/3/2011
The ISM non-manufacturing composite index increased to 59.4 in January from 57.1 in December, easily beating the consensus expected gain to 57.2. (Levels above 50 signal expansion; levels below 50 signal contraction.)
The key sub-indexes were all higher in January and remain at levels indicating robust economic growth. The new orders index increased to 64.9 from 61.4 and the business activity index rose to 64.6 from 62.9, both multi-year highs. The employment index increased to 54.5 from 52.6 and the supplier deliveries index rose to 53.5 from 51.5.
The prices paid index increased to 72.1 in January, the highest since the collapse of Lehman Brothers, from 69.5 in December.
Implications: The US economy continues to pick up steam and we are now seeing strong economic growth in both the manufacturing and service sectors. Today’s ISM Services report delivered a broad array of data that continued to trace out a V-shaped (possibly a check-mark-shaped) recovery. The overall services index was at 59.4, the highest since 2005. The business activity index, which has an even higher correlation with real GDP growth, hit 64.6, also the highest since 2005. The new orders index was the highest since 2004 and the employment index increased to 54.5, the highest level since 2006. The employment index has been above the key 50 level for five straight months. On the inflation front, the prices paid index increased to 72.1, the highest since the financial panic started in late 2008. The Federal Reserve’s ultra-easy monetary policy is getting increasingly inappropriate. In other recent news, cars and light trucks were sold at a 12.6 million annual rate in January, up 0.6% versus December and up 17.4% versus a year ago. Over the next couple of years, these sales will continue to increase to about a 15-16 million annual rate, the pace that offsets the annual scrappage of autos as well as changes in the driving-age population. The service sector is getting stronger, firms are hiring again, and workers are confident enough about the future to ramp up their purchases of big-ticket items.
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Hey, if you step up to the plate and swing, you aren't always going to connect. :|
I'm still not seeing a roaring economy, and I see a lot of unresolved structural problems, but no one at CNBC wants to ask me my take on the economy.
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http://finance.fortune.cnn.com/2011/02/02/how-inflation-is-turning-breakfast-into-a-luxury-item/?section=magazines_fortune
(http://fortunewallstreet.files.wordpress.com/2011/02/unrest_normal.png?w=610&h=304)
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http://reason.com/blog/2011/02/03/coming-soon-a-300-percent-incr
Coming Soon: A 300-Percent Increase in Foreclosures
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I enjoyed both the question as well as the answer regarding a botched stock market prediction. I have given this some thought. How can the market go up when everyone knows the economy is lousy and nothing has been fixed. This is what I came up with: More money chasing fewer companies.
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Why would things get better when we have done nothing to fix what is wrong?
Here is The Economist with some comment on the lousy jobs report that just came out:
http://www.economist.com/blogs/freeexchange/2011/02/americas_jobless_recovery
So this is the new year?
Feb 4th 2011, 14:15 by R.A. | WASHINGTON
LOOK almost anywhere in the recent economic data and the signs point to an accelerating recovery. A solid fourth quarter GDP report contained a truly blockbuster increase in real final sales. Manufacturing activity is soaring. Consumer spending is up and the trade deficit is down. Markets are trading at their highest level in over two years. And so economists anxiously awaited the first employment figures for 2011, hoping that in January firms would finally react to better conditions by taking on lots of new help.
Instead, the Bureau of Labour Statistics has dropped a puzzler of an employment report in our laps—one which points in many directions but not, decidedly, toward strong job growth. In the month of January, total nonfarm employment grew by a very disappointing 39,000 jobs. This was not at all what forecasters were expecting. Earlier this week, an ADP report indicated that private sector employment rose by 187,000 in January; the BLS pegged the figure at just 50,000. There were some compensating shifts. December's employment gain was revised upward from 103,000 to 121,000. November's employment rise, which was originally reported at 39,000, has been revised to a total gain of 93,000.
But there is bad news, as well. The BLS included its annual revision of the previous year's data in this report, and while job growth over the year looks stronger than before, the level of employment looks worse. In March of last year, 411,000 fewer Americans were working than originally reported. And thanks to a weaker employment performance in April through October, 483,000 fewer Americans were on the job in December than was originally believed to be the case. For now, the economy remains 7.7m jobs short of its previous employment peak.
The labour market picture becomes foggier still when one turns to the household survey data. America's unemployment rate fell 0.4 percentage points in January for a second consecutive month, dropping the rate to 9.0%. Why? According to the household data, employment grew by 117,000 over the month while the number of unemployed Americans fell by 622,000. A word of caution is in order: new population estimates are used each year to compute the household figures, which means that the January household survey numbers are not directly comparable to the December figures. It would seem from this report that the decline in the unemployment rate is mostly driven by departures from the labour force (which fell substantially), but the employment-population ratio actually rose for the month, thanks to a reported decline in the population of working adults. But according to the BLS, practically the entire drop in the labour force total is due to the population adjustment. If one were going to compare December numbers to January numbers by stripping out the annual adjustment (and this is a dicey proposition) the household survey would show a slight rise in the labour force and a substantial gain in employment (of 589,000) nearly equal to the drop in unemployment (of 590,000).
But the sample size of the household survey is quite small, which means that it would be unwise to read too much into any one aspect of the report. Meanwhile, economists are pointing to the annual adjustments and to bad weather as major factors clouding the picture. But we can say a few things with some certainty. The 39,000 payroll increase will almost certainly be revised upward in coming months. Apart from construction, private sector employment continues to grow, and in manufacturing it is growing strongly. But for another month, the economy has not added the number of jobs we would expect to correspond to the level of observed economic activity. And far too much of the drop in unemployment appears to be due to the exit from the labour force of long-term unemployed workers and early retirees.
So for another month, Americans will wait, frustrated and uncertain, to see when growth will once again mean new employment opportunities.
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http://pajamasmedia.com/blog/soaring-oil-price-threatens-u-s-economy/?singlepage=true
Soaring Oil Price Threatens U.S. Economy
As chaos spreads through the Arab world, here's one way we can protect ourselves.
February 8, 2011 - by Robert Zubrin
In recent weeks, the price of oil has climbed above $90 per barrel. As chaos spreads through the Arab world, we could soon see much worse. With these facts in mind, it is essential that U.S. policymakers act to protect the U.S. economy from this ever-worsening trend.
The likely impact of a new oil price rise is shown in the graph below, which compares oil prices (adjusted for inflation to 2010 dollars) to the U.S. unemployment rate from 1970 to the present. It can be seen that every oil price hike for the past four decades, including those in 1973, 1979, 1991, 2001, and 2008, was followed shortly afterwards by a dramatic rise in American unemployment.
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http://finance.yahoo.com/news/Treasurys-fall-after-weak-apf-3481748546.html?x=0&sec=topStories&pos=5&asset=&ccode=
NEW YORK (AP) -- Treasurys extended a weeklong fall on Tuesday after the government's auction of $32 billion in new debt met with tepid demand. The yield on the 10-year note rose to the highest level in 10 months.
The government auctioned three-year notes at a yield of 1.34 percent. That's the most expensive borrowing cost the government has had to pay on those notes since last May.
Foreign buyers showed weak interest in the sale. Indirect bidders, a rough proxy for foreign funds and banks, took 27 percent of the notes, the lowest share since May 2007.
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These interest rates are still well below the rate of inflation-- and if we add tax considerations into the calculation the rates are even more negative in real terms.
At these rates, working from memory here, we are currently paying something like 1/8 of our tax revenues on interest payments on the national debt. Double interest rates i.e. take them up to something like zero or slightly positive in real terms, and the contradictions of what we are doing are going to become a lot more apparent. Take them into normal positive range and , , ,
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http://directorblue.blogspot.com/2011/02/obamas-tough-budget-cuts-in-pictures.html
President Obama's 2012 budget will be roughly $3,800,000 million ($3.8 trillion).
The anticipated 2012 budget deficit will be $1,500,000 million ($1.5 trillion). This means we are borrowing that amount from our children to fund all of the Democrats' Utopian spending programs.
Finally, the president has proposed "tough budget cuts" that total $775 million. No, that's not a joke.
Let's illustrate the magnitude of Obama's cuts.
**Read it all.
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If I have my zeros correct $1.5T divided by 320M Americans is about $4,700 for each one of us.
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The January employment report was a complete snow job. Abominable winter blizzards across the country caused 886,000 workers to report "not at work due to bad weather," according to the Bureau of Labor Statistics. This is 600,000 more than the normal 300,000 not at work for the average January of the past decade.
So the bad weather has distorted the numbers. The actual 36,000 increase in non-farm payrolls and the 50,000 gain in private payrolls really don't have a snowball's chance at being accurate. The 1 million people in January who wanted a job but didn't look for one because of "other" reasons hints again at the bad-weather distortion. So does the 4.9 million jump in the part-time workforce.
As for the 9 percent unemployment rate, it's not likely to last as more people are recorded re-entering the labor force in the months ahead. The household employment survey (on which the unemployment rate is based) increased 117,000 in January, following a near 300,000 gain in December.
On the plus side (if anything can be believed in these numbers), average hourly earnings increased by 0.4 percent -- a much bigger gain than in recent months. Over the past year, wages are rising 1.9 percent.
But here's a key point: Manufacturing jobs in January rose by nearly 50,000. That's consistent with the blowout ISM manufacturing report for January published a few days ago. Manufacturing has been the biggest surprise in the recovery. Additionally, the ISM non-manufacturing services report was also gangbusters for January.
These reports are more accurate and more significant than the jobs calculation. And if you piece them together with record-breaking profits, which are the mother's milk for stocks, business and the whole economy, it's hard not to conclude that the pace of recovery is actually picking up steam -- despite the lackluster jobs performance.
The downside of the upside is mounting inflation pressure. Both ISM reports registered very strong prices paid. Those outsized price increases are picking up the huge commodity-price increases that Ben Bernanke continues to ignore.
Bond-market rates have moved up to 3.64 percent for the 10-year Treasury and 4.73 percent for the 30-year. Those rising yields are signaling inflationary growth. Along with soaring commodity prices, the abnormally steep Treasury yield curve is signaling the Fed to stop creating new dollars with its QE2 pump-priming.
Right now, stronger economic growth, higher profits and rising inflation continue to help the stock market, which actually increased after Friday's weird jobs report. But the risk here is that reported inflation for the CPI may rise faster than anyone thinks. And that could take a bite out of stocks and the recovery.
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http://www.gallup.com/poll/125639/Gallup-Daily-Workforce.aspx
**Whom to believe?
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GM posts the Gallup data, unemployment at 10.3% and so-called U6 the larger measure at 19.7% and asks: "**Whom to believe?"
The government publishes two main measures, the unemployment rate from BLS and another figure measured completely differently the household survey from the Census Bureau. The Gallup figure gives you a third source.
Serious answer on economic data is trust none of them precisely. More practical is to use all of them for trends from previous measurements, commonalities, differences, being careful to know how they measure and what the weaknesses or flaws are. A good opportunity to remember that all economic data is loaded with measurement errors. Best follow up is to read economists you learn to trust who watch this closer than we do and see how they analyze what comes in. On this board those have become Brian Wesbury and Scott Grannis who are honest about numbers published, separate from having their own take on the future. Other sources of analysis: look at the Fed's own analysis or look to other economists.
Simple answer to unemployment numbers is that they are too damn high by more than two-fold; tenths of a point are not significant. U6 is an interesting measure including underemployment, or to measure by sub-group like black teenagers, or by state: MN is in the 6% range and ND is 3.5, meaning the colder it is the harder people work, or just some states lure in fewer lazy, confused workers than others.
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My favorite economic quote of the last year was that our economy needs to generate x number of (many, many) new start up companies every year that grow to a billion dollars. While I was dithering about whether the economy would go up or down, my tennis partner founded, built from scratch a storage networks company and just announced the sale of his suburban Mpls company to Dell for 960 million. Part of that economic story is that to build a data storage product for medium sized companies with success and have 140 million in the bank in this economy means that someone out there is making capital investments if you have a product that delivers what they need.
http://www.itweb.co.za/index.php?option=com_content&view=article&id=40374%3adell-to-snap-up-compellent&catid=77
These stories are too few and far between, but I am grateful that it is still possible.
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Doug: Interesting circles you travel in!
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Retail sales and sales excluding autos both increased 0.3% in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/15/2011
Retail sales and sales excluding autos both increased 0.3% in January. Both fell slightly short of consensus expectations.
Including revisions to November/December, sales were up 0.2% in January while sales ex-autos were unchanged. Retail sales are up 7.8% versus a year ago; sales ex-autos are up 6.2%.
The increase in retail sales for January was led by grocery stores, gas stations, department stores and warehouse clubs, internet/mail-order, and autos. The weakest category of sales, by far, was building materials.
Sales excluding autos, building materials, and gas increased 0.4% in January, but were unchanged including downward revisions for November/December. These sales are up 5.1% versus last year. This calculation is important for estimating GDP.
Implications: Today’s report on retail sales was lukewarm. Sales increased less than the consensus expected and were revised down slightly for prior months. However, the modest growth in sales in January was primarily due to one category – building materials – which was held down by the unusually harsh winter weather in much of the country. Most major categories of sales increased in January. Despite this, “core” sales, which exclude autos, gas, and building materials (all of which are volatile from month to month) increased a healthy 0.4% and were up for the 15th time in the last 18 months. We expect consumer spending to continue to move higher. Worker earnings are up, consumer debt has stabilized at much lower levels, and consumers’ financial obligations are now the smallest share of income since the mid-1990s. In other news this morning, the Empire State Index, a measure of manufacturing activity in New York, increased to +15.4 in February from +11.9. On the inflation front, import prices increased 1.5% in January and are up 5.3% in the past year. Excluding petroleum, import prices increased 1.1% in January and are up 3.2% versus a year ago. Export prices rose 1.2% in January and are up 6.8% in the past year. Excluding farm products, export prices still gained 0.9% in January and are up 5.3% from a year ago. These widespread gains in trade prices are a leading sign of higher inflation that will ultimately hit the US consumer.
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....But that hangnail seems to be getting better!
(http://o.aolcdn.com/photo-hub/news_gallery/7/0/705638/1297709547965.JPEG)
(http://o.aolcdn.com/photo-hub/news_gallery/7/0/705641/1297710076413.JPEG)
http://www.aolnews.com/2011/02/14/opinion-just-how-deep-are-obamas-spending-cuts/
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Crafty: "interesting circles"
More interesting of course if not for him being banned by law from ever saying anything at all about a publicly traded company. It is a great story. Thanks for having a place to share it. They were a rumored takeover target for 2 years.
The anti-capitalists will say that his share is more than anyone deserves, but what the economy needs is for him to do it again, this was this 3rd startup success, and for people everywhere to be inspired by success and give it a try.
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Industrial production fell 0.1% in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/16/2011
Due to a 0.7% decline in mining and a 1.6% drop in utilities, industrial production fell 0.1% in January. Including upward revisions to prior months, production increased 0.2%. The consensus expected a gain of 0.5%. Production is up at a 5.1% annual rate in the past year.
Manufacturing, which excludes mining/utilities, was up 0.3% in January (+0.8% including upward revisions to previous months). The gain in January was led by auto production, which increased 3.2%. Non-auto manufacturing increased 0.1% and was revised upward for prior months. Auto production is up 5.4% versus a year ago while non-auto manufacturing has risen up 5.5%.
The production of high-tech equipment was up 1.1% in January, was revised up for prior months, and is up 13.7% versus a year ago.
Overall capacity utilization slipped to 76.1% in January. Manufacturing capacity use increased to 73.7%, the highest since August 2008.
Implications: Today’s headline decline of 0.1% for industrial production is not something to worry about. The fall was largely due to a decline in mining (which is normally volatile) and utilities (January was not as unusually cold as December). Including revisions to prior months, industrial production was up 0.2%. Manufacturing is still a bright spot, expanding for the 7th consecutive month at a healthy 0.3% pace in January (+0.8% including upward revisions to prior months). Auto manufacturing surged and should continue to add to production growth in the coming year as autos sales rise. Industrial production is going to continue to move higher and will likely keep being led by business equipment. Corporate profits are approaching a new record high and cash on the balance sheets of non-financial companies – earning nearly zero percent interest – had already reached a record high. Now, finally, Bloomberg is reporting that S&P 500 companies are starting to reduce their cash hordes and increase capital spending more rapidly. It makes sense that these larger companies take the lead given that they have access to the capital markets (through bond sales) and are better able to get a bank loan when they need one. Commercial and industrial lending is now up three straight months, a far cry from the 20% year-over-year declines of early 2010.
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Just for a yardstick of comparison, the economic growth rate during "Reagan's first six recovery quarters: real GDP averaged 7.7 percent annually."
http://www.realclearpolitics.com/articles/2011/02/13/reality_check_on_obamas_economic_policies.html
3-4% growth would be normal if we weren't digging out of a hole.
0-2.5% growth is the kind that keeps you in a hole. Negative growth coming out of a bad spell is probably no time to call yourself The Gipper.
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(http://keithhennessey.com/wp-content/uploads/2011/02/obama-long-term-policy-clean.png)
http://keithhennessey.com/2011/02/16/long-term-problem-begins-now/
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http://taxprof.typepad.com/taxprof_blog/2011/02/unlv-prepares-to-fire.html
UNLV to Fire Tenured Faculty, Close Schools in Face of 'Fiscal Collapse'
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http://www.scribd.com/doc/49755779/Economic-Warfare-Risks-and-Responses-by-Kevin-D-Freeman
Economic Warfare.
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http://www.washingtontimes.com/news/2011/feb/28/financial-terrorism-suspected-in-08-economic-crash/
Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.
The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that “a three-phased attack was planned and is in the process against the United States economy.”
While economic analysts and a final report from the federal government's Financial Crisis Inquiry Commission blame the crash on such economic factors as high-risk mortgage lending practices and poor federal regulation and supervision, the Pentagon contractor adds a new element: “outside forces,” a factor the commission did not examine.
“There is sufficient justification to question whether outside forces triggered, capitalized upon or magnified the economic difficulties of 2008,” the report says, explaining that those domestic economic factors would have caused a “normal downturn” but not the “near collapse” of the global economic system that took place.
Suspects include financial enemies in Middle Eastern states, Islamic terrorists, hostile members of the Chinese military, or government and organized crime groups in Russia, Venezuela or Iran. Chinese military officials publicly have suggested using economic warfare against the U.S.
Michael G. Vickers, assistant secretary of defense for special operations, said the Pentagon was not the appropriate agency to assess economic warfare and financial terrorism risks. (Associated Press)Michael G. Vickers, assistant secretary of defense for special operations, said the Pentagon was not the appropriate agency to assess economic warfare and financial terrorism risks. (Associated Press)
In an interview with The Times, Mr. Freeman said his report provided enough theoretical evidence for an economic warfare attack that further forensic study was warranted.
“The new battle space is the economy,” he said. “We spend hundreds of billions of dollars on weapons systems each year. But a relatively small amount of money focused against our financial markets through leveraged derivatives or cyber efforts can result in trillions of dollars in losses. And, the perpetrators can remain undiscovered.
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Non-farm payrolls increased 192,000 in February To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 3/4/2011
Non-farm payrolls increased 192,000 in February. Revisions to December/January added 58,000, bringing the net gain to 250,000. The consensus expected a gain of 196,000.
Private sector payrolls increased 222,000 in February, the 12th consecutive monthly gain. December/January were revised up 46,000, for a net gain of 268,000. February private-sector gains were led by administrative/support services (+35,000), health care (+34,000), manufacturing (+33,000), and construction (+33,000). The largest decline was for retail (-8,000).
The unemployment rate fell to 8.9% in February from 9.0% in January.
Average weekly earnings – cash earnings, excluding benefits – were unchanged in February but up 2.3% versus a year ago.
Implications: Very good report on the labor market this morning. Including upward revisions to prior months, non-farm payrolls increased 250,000. But this includes a decline in government; private sector payrolls were up 268,000 (again, including upward revisions to prior months). The strength was confirmed by figures on civilian employment – an alternative measure of jobs that is better at picking up the self-employed and small start-up businesses – which increased 250,000 in February. Meanwhile, the increase in jobs pushed down the unemployment rate to 8.9%, the lowest in almost two years. Once again, what was particularly good about the drop in the jobless rate was that it was all due to full-time workers, showing that employers are getting more confident. In fact, the net share of private industries adding jobs was at the highest level since 1998. Getting into the details of the report, we see signs of a recovery in home building: in the past two months, residential construction payrolls have increased 19,000, the most since early 2006. Although average hourly earnings were unchanged in February, the number of hours worked increased 0.2%. As a result, total cash earnings for workers increased at a healthy 3.2% annual rate in February and are up 3.7% in the past year. So far, this is more than enough for workers, as a whole, to keep up with inflation. Given better economic news on both manufacturing and service output, as well as auto sales and chain store sales, the underlying trend in job growth will continue to accelerate in the months ahead.
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Woof,
Where did the big brains that Obama got to work on the economy and the stimulus, get the idea that they had big brains? Unless maybe they do have big brains and they are using them to destroy our economy. :-P
http://money.msn.com/market-news/default.aspx?feat=92a9ff49-a640-4946-9c29-7c67703c7c72>1=33009 (http://money.msn.com/market-news/default.aspx?feat=92a9ff49-a640-4946-9c29-7c67703c7c72>1=33009)
P.C.
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PC,
Cloward-Piven.
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http://www.nationalreview.com/exchequer/261796/biggest-bond-fund-dumps-us-debt
Biggest Bond Fund Dumps U.S. Debt
March 9, 2011 7:42 P.M.
By Kevin D. Williamson
Tags: Debt, Deficits, Despair, Fiscal Armageddon
So, the guy behind the world’s largest bond fund is dumping U.S. government debt.
Got your attention yet?
Bill Gross of Pacific Investment Management Co. (PIMCO) is no great fan of U.S. government debt to start with: His fund also zeroed out its holdings of Uncle Sam’s IOUs back in 2009, but had added some back into the portfolio. No more. He’s not buying what Washington is selling, and he’s urging others to dump U.S. bonds, too. Bloomberg reports:
Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old-fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.
So, what’s wrong with U.S. government debt? With deficits running at insane levels but interest rates still low, the risk-reward ratio is out of whack, even compared to “emerging-market” countries — read: those Third World regimes whose farcical finances we used to regard with a mixture of scorn and pity, until we began emulating them. All the money-printing down at the Fed is taking a toll:
Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.
What this means, of course, is pressure on the U.S. government to offer higher interest rates on its bonds. Gross says that the rates need to go up about 1.5 percent to reflect market realities. And market realities, ignored for the past few years, are going to start reasserting themselves as “quantitative easing” ends and the Fed stops buying U.S. debt that the markets don’t want.
As things stand, interest on the debt (at about 6 percent of all federal spending) is equal to about one-third of all discretionary spending combined (about 19 percent of the budget). Current forecasts have debt-service costs alone amounting to nearly $1 trillion by 2020, consuming 20 percent of all federal tax revenues. That’s a vicious circle: Bigger deficits add to the total debt, which drives up the cost of debt service, which creates bigger deficits, shampoo, rinse, repeat, and wake up in Argentina circa 1999–2002.
Which gets us back, as usual, toward the one inevitable, undeniable fact of American life at this moment: The major entitlement programs — Social Security, Medicare, Medicaid — other “mandatory” spending, national defense, and interest on the debt make up more than 80 percent of federal spending. Everything else put together accounts for less than $1 in $5 of government outlays. Assuming we don’t default on our national debt, interest on the debt is the one spending item that is truly off the table. Even if we cut national-defense spending to zero, that would only get us just over halfway toward eliminating the trillion-dollar deficit headed our way in 2012. (We aren’t cutting national-defense spending to zero.) Meaning that major reform of the entitlement programs is not optional. It is do or die.
Bernanke & Co. have baked inflation into this cake, and catastrophic state and local finances mean that Washington really can’t pass off its spending schemes onto the governors, mayors, and state legislatures.
You may think the Ryan Roadmap looks harsh and disruptive. But we simply must start dealing with these things right now, while we have some resources, some options, and some time. It will be much more harsh and disruptive to try to deal with these things after the fiscal crisis is upon us, when inflation is skyrocketing, unemployment is through the roof, and the markets start demanding a very high premium to finance the debt of Washington, the states, and the cities, if indeed investors are willing to do so at all.
We are in an extraordinarily dangerous period, one that calls for real leadership in Washington, where the geniuses in charge are currently locked in a death struggle over whether to cut nothing or next to nothing.
NPR? Foreign aid? Food stamps? That isn’t going to do it. The fact that we’re even having a discussion about whether we have to federally subsidize experimental opera companies in Topeka suggests that the message has not quite hit home. Maybe when the Social Security checks stop coming, Americans will notice. Which is to say, when it’s too late.
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PIMCO's Gross is a highly regarded heavy hitter and what he says is watched closely.
I see the market is down about 180 right now; will we crack down through 12,000?
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Woof,
Easy, look for 11,000
P.C.
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Woof GM,
This chick? I know about her.
www.bigjournalism.com/dloesch/2011/01/24/suddenly-radical-frances-fox-piven-is-old-widowed-college-professor/ (http://www.bigjournalism.com/dloesch/2011/01/24/suddenly-radical-frances-fox-piven-is-old-widowed-college-professor/)
P.C.
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PC,
Yup. If a president was trying to make her ideas become reality, would that president be doing anything different than what Obama is doing now?
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Japan Quake's Financial Impact: Five Things to Watch
Published: Friday, 11 Mar 2011 | 1:12 PM ET
Text Size
By: Jeff Cox
CNBC.com Staff Writer
While commodity and currency markets took the biggest immediate hit from Friday's earthquake and tsunami in Japan, the damage will be felt throughout the world's economy and the US.
Fukishima Minpo | AFP | Getty Images
A factory building has collapsed in Sukagawa city, Fukushima prefecture, in northern Japan. A massive 8.9-magnitude earthquake shook Japan, unleashing a powerful tsunami that sent ships crashing into the shore and carried cars through the streets of coastal towns.
In addition to the massive human toll, the quake and ensuing tsunami will exact an economic toll on Japan, which is still struggling to shake the detritus of its "lost decade" brought on by economic stagnation.
The price on both fronts is impossible to calculate at this point, but it no doubt will be profound.
"It's going to be of the most expensive disasters in history before it's done," Dennis Gartman, hedge fund manager and author of The Gartman Letter investor bulletin, told CNBC. "This is not just a Japanese circumstance, this is on both sides of the Pacific and the dollars are going to add up very quickly."
Here, then, is a look at five of the main financial effects of the crisis:
http://www.cnbc.com/id/42028804
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5 lies the economists are feeding us
Reassurances from the Fed on down about low inflation and falling unemployment are ringing hollow as stagflation looms. They aren’t fooling us, but they might be kidding themselves.
http://money.msn.com/exchange-traded-fund/5-lies-the-economists-are-feeding-us-mirhaydari.aspx
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http://www.realclearpolitics.com/articles/2011/03/21/pray_for_japan_worry_for_europe_109281.html
Pray for Japan, Worry for Europe
By Robert Samuelson
WASHINGTON -- While the world has been transfixed with Japan, Europe has been struggling to avoid another financial crisis. On any Richter scale of economic threats, this may ultimately matter more than Japan's grim tragedy. One reason is size. Europe represents about 20 percent of the world economy; Japan's share is about 6 percent. Another is that Japan may recover faster than is now imagined; that happened after the 1995 Kobe earthquake. It's hard to discuss the "world economic crisis" in the past tense as long as Europe's debt problem festers -- and it does.
Just last week, European leaders were putting the finishing touches on a plan to enlarge a bailout fund from an effective size of roughly 250 billion euros (about $350 billion) to 440 billion euros ($615 billion) and eventually to 500 billion euros ($700 billion). By lending to stricken debtor nations, the fund would aim to prevent them from defaulting on their government bonds, which could have ruinous repercussions. Banks could suffer huge losses in their bond portfolios; investors could panic and dump all European bonds; Europe and the world could relapse into recession.
Unfortunately, the odds of success are no better than 50-50.
Europe must do something. Greece and Ireland are already in receivership. Private investors won't buy their bonds at reasonable rates. There are worries about Portugal and Spain; Moody's recently downgraded both, though Spain's rating is still high. The trouble is that the sponsors of the bailout fund are themselves big debtors. In 2010, Italy's debt burden (the ratio of its government debt to its economy, or gross domestic product) was 131 percent; that exceeded Spain's debt ratio of 72 percent. Debt ratios were high even for France (92 percent) and Germany (80 percent).
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http://opinion.financialpost.com/2011/03/24/peter-foster-keynesian-%C2%ADtsunami/
The ‘stimulus’ of rebuilding Japan is a boneheaded fallacy
It is disturbing to see the Broken Window fallacy being regurgitated so often in the wake of the Japanese earthquake/tsunami/nuclear disaster. The fallacy, coined by the great French satirical economic journalist Frederic Bastiat, refers to the boneheaded notion that a broken window is an economic boon since it provides work for the Acme Glass Company. This ignores the cost to the owner of the window, who now has to pay again for something he already had. Similarly, numerous pundits have declared that the destruction in Japan — which is estimated at between US$200-billion and US$300-billion — has a “silver lining” since it requires massive amounts of rebuilding. This, they claim, will provide a “stimulus” to the Japanese economy, and spillover benefits to other countries.
Rebuilding will indeed boost demand for all sorts of products and services, and some individual companies will undoubtedly benefit from new orders related to the disaster. However, the notion that there might be a net economic benefit represents economic illiteracy of the highest order. It is analogous to suggesting that Libyans should rejoice at the potential economic boost from their country being bombed. Such illiteracy has a name. It is called Keynesianism.
While our hearts must go out to those displaced and grieving the dead from this calamity, we should not forget that the Japanese economy has certainly not suffered two “lost decades” because of lack of government intervention. Until the end of the 1980s the Land of the Rising Sun was the darling of reflexive statists, and has always been a model of beggar-thy-neighbour mercantilism, a protectionist export-booster whose demographic future is darker because of its aging population and restrictive immigration policies. Meanwhile, its nuclear program was also rooted in delusive notions of energy autonomy. The Japanese national debt is twice its GDP, worse than that of any subprime European government. Reconstruction means even more government debt, plus the diversion of resources from other productive activities. The repatriation of Japanese funds — which has led to a soaring yen and G7 intervention — and disruptions to Japanese industrial demand and global manufacturing supply chains, while not of major statistical significance to the global economy, certainly won’t help. Indeed, they may cause more-than-marginal losses in major trading partners such as Australia.
****Read it all.
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Every time I get panhandled I offer to walk the panhandler to the nearest restaurant and offer to help them apply for a job as a dishwasher. Never been taken up on it, but believe handing 'em money doesn't do them any favors, either, as this piece explains.
March 25, 2011 04:57 PM UTC by John Stossel
Freeloading Doesn't Help the Freeloaders
No group has been more "helped" by the American government than American Indians. Yet no group in America does worse.
Almost a quarter of Native Americans live in poverty. 66 percent are born to single mothers. They have short life spans. Indian activists say the solution is -surprise- more money from the government. But Washington already spends about $13 billion on programs for Indians every year.
There are special programs in 20 different Departments and Agencies: Empowering Tribal Nations Initiative, Advancing Nation to Nation Relationships, Protecting Indian Country, Improving Trust Land Management, New Energy Frontier Initiative, Climate Change Adaptation Initiative, Construction, Improving Trust Management, Tribal Priority Allocations, Resolving Land and Water Claims, Indian Land Consolidation Program. This is just a partial list.
But that's still not enough for Indian activists. In my Fox News Special "Freeloaders" (10 pm ET tonight), Elizabeth Homer, who used to be the U.S. Interior Departments Director of American Indian Trust, argues the government must do more.
I say government already does too much. Indians would be better off without government handouts. I have evidence: tribes not recognized by the federal government, tribes that get no special help, often do better.
Members of the Lumbee tribe from Robeson County, NC, own their own homes. They succeed in business. Lumbee tribe members include real estate developer Jim Thomas, who used to own the Sacramento Kings. Lumbee Jack Lowery helped start the Cracker Barrel Restaurants. Lumbees started the first Indian owned bank, which now has 12 branches.
The political class doesn't understand that its independence, not government management, that allows people to prosper. Congressman Mike McIntyre (D-NC) is pushing a bill called the Lumbee Recognition Act. This bill would give the Lumbees the same "help" that other tribes get. That would give the Lumbees about $80 million a year.
"We shouldn't take it!" says Lumbee Ben Chavis, another successful businessman. Chavis says not getting any handouts is what makes his tribe successful, and if the federal money starts coming, members of his tribe "are going to become welfare cases. Its going to stifle creativity. We don’t need the government giving us handouts."
http://stossel.blogs.foxbusiness.com/2011/03/25/freeloading-doesnt-help-the-freeloaders/
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Rather than various and sundry gov't programs, the USG should meet treaty obligations and leave it at that.
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I listened to Brian Wesbury on the radio this evening; he has been ripped pretty hard here lately for his positive forecasts. His politics are diametrically opposite to Obama's, similar to mine. Given that, his optimism under Obama's policies is puzzling. I picked up a couple of points he made. Our total assets are 155 Trillion, he says, not counting infrastructure. Our income (GDP) is 15 T. Our deficit is 1.5T/yr, presumably shrinking. Debt is 14T going to 16, etc. He asks in simple terms: If you had the opportunity to inherit 155 million (or thousand or hundred) but it had liabilities of 16 million, would you take it? He basically thinks we face the same debt doom and gloom that GM and others warn; he just thinks we are a few years further from the precipice and more likely to break out and solve this. He thinks equity investors should be long (invested) because stocks are undervalued and you will miss the takeoff if you are out. I take the last part with a grain a salt a) because he works for an investment company and b) because it relates to the future which is a known unknown. Personally I am 100% neutral on the question of whether other people should have their money in or out of the market.
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Economist Alan Reynolds has perhaps been reading the forum: "Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP—8% and 18%, respectively— regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP."
"Mr. Obama's hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed."
http://online.wsj.com/article/SB10001424052748704529204576257261171406994.html?mod=WSJ_Opinion_LEADTop&_nocache=1302921140735&mg=com-wsj
Obama's Soak-the-Rich Tax Hikes Won't Work
Income tax revenues have been remarkably stable at 8% of GDP, regardless of tax rates. The way to increase revenue is to grow the economy.
By ALAN REYNOLDS
President Obama's response to congressional efforts to curb runaway federal spending is to emphasize, once again, his resolve to greatly increase tax rates on married couples whose joint incomes are above $250,000. This insistent desire to raise taxes—which he repeated in a speech yesterday while complaining about "trillions of dollars in . . . tax cuts that went to every millionaire and billionaire in the country"—is a distraction. It won't solve our nation's fiscal problem.
Preliminary estimates from the Congressional Budget Office (CBO) project that federal spending under the president's 2012 budget plan would average 23.3% over the coming decade—up from 19.7% in 2007 and 18.2% in 2001.
Even if the president could persuade Congress to enact all of his proposed tax increases, in addition to surtaxes already included in ObamaCare, the CBO finds we would still face endless budget deficits averaging 4.8% of GDP.
The Deficit Speech
"Federal debt held by the public would double under the President's budget," says the CBO, "growing from $10.4 trillion (69% of GDP) at the end of 2011 to $20.8 trillion (87% of GDP) at the end of 2021, adding $9.5 trillion to the nation's debt from 2012 to 2021."
And yet, enormous as they are, these deficit and debt estimates assume that the higher tax rates called for under the president's 2012 budget plan do no harm to the economy, that interest rates stay unusually low, and that the economy avoids recession for a dozen years. Those assumptions require taxpayers to behave much differently than they ever have before.
The revenue estimates are even more unbelievable. According to the Office of Management and Budget, total revenues would supposedly exceed 19% of GDP after 2015, rising to 20% by 2021—a level briefly reached only at the height of World War II (1944-45) and the pinnacle of the tech-stock boom (2000). Moreover, these unprecedented revenues would supposedly come from the individual income tax, which is even less plausible.
It is not as though we have never tried high tax rates before. From 1951 to 1963, the lowest tax rate was 20% to 22% and the highest was 91% to 92%. The top capital gains tax rate approached 40% in 1976-77. Aside from cyclical swings, however, the ratio of individual income tax receipts to GDP has always remained about 8% of GDP.
The individual income tax brought in 7.8% of GDP from 1952 to 1979 when the top tax rate ranged from 70% to 92%, 8% of GDP from 1993 to 1996 when the top tax rate was 39.6%, and 8.1% from 1988 to 1990 when the highest individual income tax rate was 28%. Mr. Obama's hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed.
Federal revenue from the individual income tax exceeded 9% of GDP only eight times in U.S. history—during World War II (9.4% in 1944), the recessions of 1969-70, 1981-82 and 1991-92, and the tech-stock boom-bust of 1998-2001. Revenues were a high share of GDP during the three recessions because GDP fell.
The situation of 1997-2000 was unique. Individual income tax revenues reached an unprecedented 9.6% of GDP from 1997 to 2000 for reasons quite unlikely to be repeated. An astonishing quintupling of Nasdaq stock prices coincided with an extraordinary proliferation of stock options, which the Federal Reserve's Survey of Consumer Finances found were granted to 11% of U.S. families by 2001, and with a reduction in the capital gains tax to 20% from 28%, which encouraged much greater realization of taxable gains through stock sales. Revenues from the capital gains tax rose to 10.8% of all individual income tax receipts in 1997 and 13% by 2000. The unexpected revenue windfalls in President Bill Clinton's second term were largely a consequence of lower tax rates on capital gains.
Using IRS data, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley have estimated that realized capital gains accounted for just 13%-22% of reported income among the top 1% of taxpayers from 1988 to 2006, when gains were taxed at 28%—but that fraction swiftly reached 29%-32% in 1998-2000, when the capital gains tax fell to 20%.
The average tax rate of such top taxpayers was mechanically diluted by the greatly increased realizations of capital gains after 1997 and 2003, since a larger share of reported income consisted of capital gains. Yet the amount of taxes paid by top taxpayers reached record highs for the same reason—there was more revenue to be had from taxing many gains at a low rate than from taxing fewer gains a high rate. Nobody can be forced to sell assets in taxable accounts. To complain that a low tax on realized capital gains is "unfair" is to suggest it would be fairer for affluent investors to sit on unrealized gains, as though an unpaid tax is morally superior to one that collects billions.
As a result of the conventional confusion between tax rates and revenues, some stories in the media have abetted the delusion that the huge gap between spending and likely revenues could be narrowed by simply increasing the highest tax rates on capital gains and/or dividends.
A recent cover story in Bloomberg Businessweek by Jesse Drucker, "The More You Make, the Less You Pay," reported that, "For the well-off, this could be the best tax day since the early 1930s. . . . For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30% in 1995 to just under 17% in 2007, according to the IRS."
Among the top 400 taxpayers (rarely the same people from one year to the next), the average tax rate fell to 22.3% in 2000, when the capital gains tax was 20%, from 29.9% in 1995 when the capital gains tax was 28%. But that same IRS report also shows that real tax revenues from the top 400 more than doubled after the capital gains tax fell, rising to $11.8 billion in 2000 from $5.2 billion in 1995, measured in 1990 dollars.
The same thing happened after 2003, when the capital gains tax was further reduced to 15%. The average tax rate of the top 400 fell to 16.6% in 2007 from 22.9% in 2002. Even though there was no stock market boom as in 1997-2000, real revenues of the top 400 nevertheless doubled again—to $14.5 billion in 2007 from $6.9 billion in 2002. Instead of paying less when the capital gains tax rate went down in 1997 and 2003, the top 400 instead paid much, much more.
The trendy talking point of blaming projected deficits on "tax cuts for the rich" is flatly absurd.
Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP—8% and 18%, respectively— regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press 2006).
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http://www.youtube.com/watch?v=kFJLkoEUMY8
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I like Dick Morris. He's a very good pollster, and like me, he loathes the Clintons. That does not mean however that he does not get outside of his lane from time to time and IMHO political economics is outside his lane. While I am hostile to the IMF (see e.g. my pointing out that the bailouts of Greece and Ireland cost the US about $300B and that we should withdraw from the IMF) and DM makes some sound points regarding its make-up and distribution of power, after watching this twice I cannot tell wtf it is that has DM upset here. That announced some standards. So? Without further explication, I'm not seeing the substance.
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Stimulus by Fed Is Disappointing, Economists SayBy BINYAMIN APPELBAUM
Published: April 24, 2011
WASHINGTON — The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.
But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.
As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.
“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.
Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.
“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.
But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.
The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.
The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially. (MARC: Oy vey!)
A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.
“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”
The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle.
The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.
As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.
But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return.
“Such purchases seem likely to have their largest effects during periods of economic and financial stress,” he said.
The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.
But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.
A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.
Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. (Marc: Duh!) Until they do, some economists argue that the Fed is pushing on a string.
“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”
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" 'giving something back' should be the admonition to thieves and social parasites: people who have taken and given nothing in return."
Walter E. Williams
Ideas on Liberty, January 2000
http://econfaculty.gmu.edu/wew/articles/fee/capitalism.html
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There isn't one thing that turns this mess around. It is the whole gamut. A weaker dollar that people wanted for the China imbalance, or a corporate tax rate lowered to 25% when no one is making a profit or paying the tax does nothing to change the fact that manufacturers have to pay four times what should for natural gas required in manufacturing or fuel required to deliver product and services or the investors face excess uncertainty and employers face growing burdens.
We are punting right now on one of the best opportunities ever to grow our economy. This recession ended in June 2009 (2 years ago!) and recoveries typically have twice the growth rate of ordinary times. Investment and job growth these last 2 years would have been an amazing help for the foreclosure situation not to mention the budget deficit. Yet we sputter.
One does not need to understand economic terms like Keynesianism to see that we currently have the wrong policy mix for what is so badly needed right now, private sector growth. Please read this Wall Street Journal editorial:
http://online.wsj.com/article/SB10001424052748704463804576290943139855726.html?mod=WSJ_Opinion_LEADTop
The Keynesian Growth Discount
The results of our three-year economic experiment are in.
For three long years, the U.S. has been undertaking an experiment in economic policy. Could record levels of government spending, waves of new regulation and political credit allocation, and unprecedented monetary stimulus re-ignite growth? The results have been rolling in, and they represent what increasingly looks like an historic mistake that deserves to be called the Keynesian growth discount.
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The latest evidence is yesterday's disappointing report of 1.8% in first quarter GDP. At this stage of recovery after a deep recession, the economy is typically growing by 4% or more as consumer confidence returns and businesses accelerate investment as their profits revive. Yet in this recovery consumers are still cautious and business investment remains weak.
Some of the first quarter's growth slump is due to seasonal factors such as bad weather and weaker defense spending. In the silver lining department, the private economy grew faster than the overall GDP figure because government spending declined. But even maintaining the 2.9% growth rate of 2010 would mark an historic underachievement for a recovery after a recession that was as deep as the one from late 2007 to mid-2009.
The most recent recession of comparable depth and job loss was in 1981-1982, when unemployment hit 10.8%. Huge chunks of industrial America shut down and never re-opened. Yet once the recovery began in earnest in the first quarter of 1983, the economy boomed. As the nearby table shows, growth exceeded 7.1% for five consecutive quarters, and it kept growing at nearly a 4% pace for another two years. Growth didn't dip below 2% in any quarter until the second three months of 1986. This was the Reagan boom.
Now look at the first seven quarters of the current recovery. Only briefly has growth hit 5%, in the fourth quarter of 2009 as businesses rebuilt inventories that had been pared to the bone. Growth has been mediocre ever since, sputtering to a near-stall in the middle of last year, accelerating modestly late last year, and now slowing again. This recovery is as weak as the much-maligned "jobless recovery" of the last decade, which followed a mild recession and at least gained speed after the tax cut of 2003.
Most striking is that this weak growth follows everything that the Keynesian playbook said politicians should throw at the economy. First came $168 billion in one-time tax rebates in February 2008 under George W. Bush, then $814 billion more in spending spread over 2009-2010, cash for clunkers, the $8,000 home buyer tax credit, Hamp to prevent home foreclosures, the Detroit auto bailouts, billions for green jobs, a payroll tax cut for 2011, and of course near-zero interest rates for 28 months buttressed by quantitative easing I and II. We're probably forgetting something.
Imagine if President Obama had introduced his original stimulus in February 2009 with the vow that, 26 months later, GDP would be growing by 1.8% and the jobless rate would be 8.8%. Does anyone think it would have passed?
Liberal economists will blame this latest slowdown on spending cuts across all levels of government, and government spending did fall in the first quarter. But those modest declines follow the biggest government spending binge since World War II that was supposed to kick start the economy and then stop. Remember former White House chief economist Larry Summers's mantra that stimulus spending should be timely, targeted and temporary?
With deficits this year estimated to hit $1.65 trillion, are we really supposed to believe that more deficit spending will produce faster growth? Would $2 trillion do the trick, or how about $3 trillion? Two years after the stimulus debate began, the critics who said all of this spending would provide at most a temporary lift to GDP while saddling the economy with record deficits have been proven right.
The good news is that the private economy seems to have enough momentum to avoid a recession in the near term, but the danger is that growth will continue to be subpar. The evidence is that the combination of spendthrift fiscal policy and a wave of new regulatory costs and mandates are restraining business expansion and hiring.
Then there's the threat of higher tax rates on investment and business that we dodged for two years after the GOP won Congress but that President Obama has now promised for 2013 if he is re-elected. This too deters the animal spirits necessary for robust growth. The great risk is stagflation, a la the 1970s, when easy money tried to compensate for bad fiscal and regulatory policy, which led to sluggish growth, rising prices and declines in real wages.
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The contrast in results between the current recovery and the Reagan years is instructive because the policy mix was so different. In the 1980s, the policy goals were to cut tax rates, reduce regulatory costs and uncertainty, let the private economy allocate capital free of political direction, and focus monetary policy on price stability rather than on reducing unemployment. This is the policy mix we need to rediscover if we are going to escape our current malaise and stop suffering from the Keynesian discount.
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Peter Ferrara / Forbes makes a familiar point about the current, failed policy mix, with great summary, analysis, comparison and extensive facts and figures. Obama like to compare himself with Reagan. I think that will backfire.
http://blogs.forbes.com/peterferrara/2011/05/05/reaganomics-vs-obamanomics-facts-and-figures/
Reaganomics Vs. Obamanomics: Facts And Figures
May. 5 2011
In February 2009 I wrote an article for The Wall Street Journal entitled “Reaganomics v Obamanomics,” which argued that the emerging outlines of President Obama’s economic policies were following in close detail exactly the opposite of President Reagan’s economic policies. As a result, I predicted that Obamanomics would have the opposite results of Reaganomics. That prediction seems to be on track.
When President Reagan entered office in 1981, he faced actually much worse economic problems than President Obama faced in 2009. Three worsening recessions starting in 1969 were about to culminate in the worst of all in 1981-1982, with unemployment soaring into double digits at a peak of 10.8%. At the same time America suffered roaring double-digit inflation, with the CPI registering at 11.3% in 1979 and 13.5% in 1980 (25% in two years). The Washington establishment at the time argued that this inflation was now endemic to the American economy, and could not be stopped, at least not without a calamitous economic collapse.
All of the above was accompanied by double -igit interest rates, with the prime rate peaking at 21.5% in 1980. The poverty rate started increasing in 1978, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982. In addition, from 1968 to 1982, the Dow Jones industrial average lost 70% of its real value, reflecting an overall collapse of stocks.
President Reagan campaigned on an explicitly articulated, four-point economic program to reverse this slow motion collapse of the American economy:
1. Cut tax rates to restore incentives for economic growth, which was implemented first with a reduction in the top income tax rate of 70% down to 50%, and then a 25% across-the-board reduction in income tax rates for everyone. The 1986 tax reform then reduced tax rates further, leaving just two rates, 28% and 15%.
2. Spending reductions, including a $31 billion cut in spending in 1981, close to 5% of the federal budget then, or the equivalent of about $175 billion in spending cuts for the year today. In constant dollars, nondefense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms! Even with the Reagan defense buildup, which won the Cold War without firing a shot, total federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989. That’s a real reduction in the size of government relative to the economy of 10%.
3. Anti-inflation monetary policy restraining money supply growth compared to demand, to maintain a stronger, more stable dollar value.
4. Deregulation, which saved consumers an estimated $100 billion per year in lower prices. Reagan’s first executive order, in fact, eliminated price controls on oil and natural gas. Production soared, and aided by a strong dollar the price of oil declined by more than 50%.
These economic policies amounted to the most successful economic experiment in world history. The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990, when the tax increases of the 1990 budget deal killed it. This set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.
During this seven-year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third-largest in the world at the time, to the U.S. economy. In 1984 alone real economic growth boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%. Unemployment fell to 5.3% by 1989.
The shocking rise in inflation during the Nixon and Carter years was reversed. Astoundingly, inflation from 1980 was reduced by more than half by 1982, to 6.2%. It was cut in half again for 1983, to 3.2%, never to be heard from again until recently. The contractionary, tight-money policies needed to kill this inflation inexorably created the steep recession of 1981 to 1982, which is why Reagan did not suffer politically catastrophic blame for that recession.
Real per-capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20% in just seven years. The poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak. The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade.
In The End of Prosperity, supply side guru Art Laffer and Wall Street Journal chief financial writer Steve Moore point out that this Reagan recovery grew into a 25-year boom, with just slight interruptions by shallow, short recessions in 1990 and 2001. They wrote:
We call this period, 1982-2007, the twenty-five year boom–the greatest period of wealth creation in the history of the planet. In 1980, the net worth–assets minus liabilities–of all U.S. households and business … was $25 trillion in today’s dollars. By 2007, … net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.
What is so striking about Obamanomics is how it so doggedly pursues the opposite of every one of these planks of Reaganomics. Instead of reducing tax rates, President Obama is committed to raising the top tax rates of virtually every major federal tax. As already enacted into current law, in 2013 the top two income tax rates will rise by nearly 20%, counting as well Obama’s proposed deduction phase-outs.
The capital gains tax rate will soar by nearly 60%, counting the new Obamacare taxes going into effect that year. The total tax rate on corporate dividends would increase by nearly three times. The Medicare payroll tax would increase by 62% for the nation’s job creators and investors. The death tax rate would go back up to 55%. In his 2012 budget and his recent national budget speech, President Obama proposes still more tax increases.
Instead of coming into office with spending cuts, President Obama’s first act was a nearly $1 trillion stimulus bill. In his first two years in office he has already increased federal spending by 28%, and his 2012 budget proposes to increase federal spending by another 57% by 2021.
His monetary policy is just the opposite as well. Instead of restraining the money supply to match money demand for a stable dollar, slaying an historic inflation, we have QE1 and QE2 and a steadily collapsing dollar, arguably creating a historic reflation.
And instead of deregulation we have across-the-board re-regulation, from health care to finance to energy, and elsewhere. While Reagan used to say that his energy policy was to “unleash the private sector,” Obama’s energy policy can be described as precisely to leash the private sector in service to Obama’s central planning “green energy” dictates.
As a result, while the Reagan recovery averaged 7.1% economic growth over the first seven quarters, the Obama recovery has produced less than half that at 2.8%, with the last quarter at a dismal 1.8%. After seven quarters of the Reagan recovery, unemployment had fallen 3.3 percentage points from its peak to 7.5%, with only 18% unemployed long-term for 27 weeks or more. After seven quarters of the Obama recovery, unemployment has fallen only 1.3 percentage points from its peak, with a postwar record 45% long-term unemployed.
Previously the average recession since World War II lasted 10 months, with the longest at 16 months. Yet today, 40 months after the last recession started, unemployment is still 8.8%, with America suffering the longest period of unemployment that high since the Great Depression. Based on the historic precedents America should be enjoying the second year of a roaring economic recovery by now, especially since, historically, the worse the downturn, the stronger the recovery. Yet while in the Reagan recovery the economy soared past the previous GDP peak after six months, in the Obama recovery that didn’t happen for three years. Last year the Census Bureau reported that the total number of Americans in poverty was the highest in the 51 years that Census has been recording the data.
Moreover, the Reagan recovery was achieved while taming a historic inflation, for a period that continued for more than 25 years. By contrast, the less-than-half-hearted Obama recovery seems to be recreating inflation, with the latest Producer Price Index data showing double-digit inflation again, and the latest CPI growing already half as much.
These are the reasons why economist John Lott has rightly said, “For the last couple of years, President Obama keeps claiming that the recession was the worst economy since the Great Depression. But this is not correct. This is the worst “recovery” since the Great Depression.”
However, the Reagan Recovery took off once the tax rate cuts were fully phased in. Similarly, the full results of Obamanomics won’t be in until his historic, comprehensive tax rate increases of 2013 become effective. While the Reagan Recovery kicked off a historic 25-year economic boom, will the opposite policies of Obamanomics, once fully phased in, kick off 25 years of economic stagnation, unless reversed?
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Retail Sales increased 0.5% in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/12/2011
Retail sales increased 0.5% in April (1.1% including large upward revisions to February/March). The consensus had expected a gain of 0.6%. Retail sales are up 7.6% versus a year ago.
Sales excluding autos were up 0.6% in April (1.0% including upward revisions to February/March). The consensus expected a gain of 0.6%. Retail sales ex-autos are up 6.9% in the past year.
The increase in retail sales for April was led by gas stations and grocery stores. There were no signficiant declines in any category of sales.
Sales excluding autos, building materials, and gas increased 0.2% in April and were up 0.5% including revisions for February/March. These sales are up 5.5% versus last year. This calculation is important for estimating GDP.
Implications: The US consumer is on a roll. Retail sales increased for the tenth straight month in April – the longest winning streak since the late 1990s – and are up 7.6% versus a year ago. Including upward revisions for prior months, overall sales were up 1.1% in April and 1% excluding autos. This was not all fueled by higher gas prices. Not even close. “Core” sales (which exclude autos, building materials, and gas) were up a solid 0.5% including upward revisions to prior months. Even if these sales are completely unchanged for the rest of the second quarter they will still be up at a roughly 4% annual rate in Q2. Auto sales, which took a breather last month after eight straight monthly increases, bounced back in April and were revised higher for prior months as well. Consumer spending is rising for two main reasons. First, earnings are growing due to more jobs, more wages per hour, and more hours per worker. Second, due largely to debt reductions, consumers’ financial obligations (debt service plus other recurring payments like rent, car leases, homeowners’ insurance, and property taxes) are now the smallest share of disposable income since 1995. All of this bodes well for spending in the months to come.
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Reagan is an Icon of the right, but even he saw the necessity of raising taxes. As did other pragmatic Republicans.
It seems Tom Coburn is also rather pragmatic.
"Sen. Tom Coburn, a staunch conservative from Oklahoma, triggered a heated debate among conservatives when he acknowledged that tax increases might be necessary if Congress really wants to reduce the deficit."
http://www.cnn.com/2011/OPINION/05/09/zelizer.reagan.taxes/index.html
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Reagan raised taxes by 100% in the 1980s. Those were REVENUES not rates.
I know that liberal punditry is full of accusations that he raised taxes many times - many more times than he cut them, but they were all examples of closing loopholes to get and keep marginal rates lower. (Please show me an example of where that was not true!)
After all the "raising", tax rates went from 70% to 28%. What a bunch of BS. JDN, as our valued centrist, we want you to sniff out when either side is lying, not just be our devil's advocate. :wink:
In George H.W. Bush famous break of his promise that cost him his job, he was talked into only $1 of tax hike for every $2 of spending cuts. Pretty good compromise with a DEMOCRATIC congress, don't ya think? Guess what? The tax hikes kicked in like clockwork, virtually irreversible, and the spending cuts never happened. Who knew?!? Sort of like what Obama and company want to do now.
Let's say Republicans cave today on their promises and principles and go along with a similar, so-called compromise. How much lower will spending be, in dollars, in total, in future years, after tax rates go up on the wealthy, on employers and on investments?
I think we all know the answer. Tax hikes, if approved, will happen. Spending cuts won't.
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I look upon my role as the "valued centrist" and maybe "devil's advocate". :-)
There are plenty of people on this site that will sniff out any lies or discrepancies with their own beliefs. :-)
As for Bush, sorry he lost his job. The compromise he formulated seems fair to me. I'm all for nailing down the agreed spending cuts in exchange.
As for Reagan, I'm a big fan. He did a lot of good, but he also compromised to achieve his objectives (I think that is good). I understand, he lowered income taxes, but he raised a lot of "taxes" too.....
"Reagan raised taxes not once but 6 times and the increase in 1983 was the largest in history at that time.
In 1982 alone, he signed into law not one but two major tax increases. The Tax Equity and Fiscal Responsibility Act (TEFRA) raised taxes by $37.5 billion per year and the Highway Revenue Act raised the gasoline tax by another $3.3 billion.
According to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history. An increase of similar magnitude today would raise more than $100 billion per year.
In 1983, Reagan signed legislation raising the Social Security tax rate. This is a tax increase that lives with us still, since it initiated automatic increases in the taxable wage base. As a consequence, those with moderately high earnings see their payroll taxes rise every single year.
In 1984, Reagan signed another big tax increase in the Deficit Reduction Act. This raised taxes by $18 billion per year or 0.4 percent of GDP. A similar-sized tax increase today would be about $44 billion.
The Consolidated Omnibus Budget Reconciliation Act of 1985 raised taxes yet again. Even the Tax Reform Act of 1986, which was designed to be revenue-neutral, contained a net tax increase in its first 2 years. And the Omnibus Budget Reconciliation Act of 1987 raised taxes still more."
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I don't really see how the end of QE2 can't be a big deal, but David Malpass does:
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Concerns about the end of QE2 have put downward pressure on equities and bond yields. We think this will ease.
We expect the consensus outlook to improve as it did in the face of Y2K. Like the June 30 end of QE2, Y2K crash warnings had a date certain, January 1, 2000, to worry about, causing months of hand-wringing due to the uncertainty. Equities ended up rallying over 15% in the final three months of 1999 and went higher in following months. We expect a substantial flow from bonds to equities in coming months as the growth outlook improves, inflation rises and the uncertainty over the end of QE2 is finally resolved.
The $16 billion 30-year bond auction had the weakest number of bids per bond since November. We think this signals a decline in risk aversion and a weakening of the bond squeeze that has dominated bond yields in recent weeks (see Bond Squeeze Nearly Over on May 3.) Short-term interest rates and Treasury bond yields were being squeezed down by what we think were temporary factors, giving a false impression of market-based pessimism and risk aversion and a disconnect between falling bond yields and rising equities. Several factors caused what we think was an artificial month-long decline in bond yields from April 11 through May 6 including the April risk that the $14.3 trillion debt limit might have suspended Treasury issuance while the Fed was still buying heavily – but due to strong April tax receipts and technical factors, Treasury now has headroom to continue regular deficit funding into August, lifting the squeeze (see a list of the temporary squeeze factors in the attachment).
The April low point in the consensus outlook had a long list of concerns beyond QE2 and falling bond yields. These included the oil price spike, the ECB’s rate hike on April 7, Japan’s severe crisis, China’s aggressive monetary tightenings, the first quarter weather-related letdown in U.S. GDP and the deterioration in peripheral European debt markets. While each of this is a negative, we don’t think they will derail the global expansion, leaving room for an improvement in the outlook (see Tall Wall of Worry; Good Second Half Outlook on April 15.)
We note several positive developments:
Retail stocks are rising. Consumer credit has increased six months in a row (through March) after 20 months of shrinkage. We disagree with the view that consumer debt will constrain consumption – the key variable in consumption is the employment climate which is gradually improving. Today’s retail sales data was a bit weaker-than consensus, but there were upward revisions to previous months and the net result is consistent with our expectation of over 3% real growth in the second quarter. Retail sales are up 7.6% yoy. Excluding autos, gas and building materials (which is an input for GDP), sales are up 5.5% yoy.
April tax receipts were strong. This suggests economic strength. More importantly, it helped Treasury delay the debt limit problem beyond the Fed’s final QE2 bond purchases in June. We think the timing change for the debt limit increase broke the bond squeeze and will reduce the sensitivity of financial markets to the debt limit increase.
April payroll data was strong, consistent with today’s sizeable upward revisions in February and March retail sales data.
Bearish sentiment and continuing confusion about QE2 provides upside – for example, some analysts are asserting that M2 growth will drop when QE2 ends because that Fed will stop increasing excess reserves (yet excess reserves aren’t part of M2).
We expect the U.S. to continue very loose monetary and fiscal policy – meaning a near-zero Fed funds rate and over $3.7 trillion per year in federal spending. We look for a moderate 3%-3.5% U.S. growth rate in coming quarters -- that’s disappointing given the severity of the recession and won’t create the surge in small-business jobs needed to pull the unemployment rate quickly below 8% but is fast enough to dispel the QE2 concerns and QE3 predictions.
David Malpass
David Malpass is President of Encima Global and GrowPAC.com. He also served in the Reagan Treasury Dept, the Bush (41) State Dept and was Chief Economist at Bear Stearns.
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I think the concerns about Y2K and actions taken as a result may well have kept Y2K from being anything noteworthy.
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Reading between the lines, Malpass is saying (IMO) that QE1 and QE2 will be followed by QE-unspecified. We aren't changing Fed Chairmen and we aren't changing directions: "We expect the U.S. to continue very loose monetary and fiscal policy – meaning a near-zero Fed funds rate and over $3.7 trillion per year in federal spending." The Fed still thinks its half-mission is to manage/cure unemployment.
Our economy has a fine 8 cylinder engine with maybe 4 or 5 cylinders firing and partly bald tires. It is making noises and bellowing out smoke (unemployment, deficits, govt. dependency, etc.) Malpass is saying it should keep on sputtering up to the next exit, not purr down the freeway coast to coast on cruise control. We are not even ahead of breakeven 'growth' or in any condition to withstand an unforeseen storm.
This economy IMO with all this idle capacity is capable of probably 8+% sustained growth right now if the full range of pro-private-sector-growth policies were implemented. (I think Malpass would agree with that.) The recession technically ended June 2009, two years ago, and nothing resembling a recovery (growth significantly above about 3.1% breakeven growth) has begun to occur. This stagnation presents an amazing opportunity for the next President and the next election cycle if people can get their thinking straight and survive the next 1 1/2 years.
My prediction past QE2 in June is neutral. I have no idea what a car running on half its cylinders and refusing a tune up will do next.
My brother knows cars better than me. If I tell him that I felt the sputtering, heard the noises and saw the smoke but kept driving, hoping it would get better on its own, he gives me the stupid look and asks: Really?? When did that work for you?
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I don't understand how the end of QE2 can not mean the beginning of strong increases in interest rates.
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"I don't understand how the end of QE2 can not mean the beginning of strong increases in interest rates."
Agree- if that meant an impending tightening of money. I believe he is saying/predicting that quantitative expansion, no matter what it is called, or if it is hidden or denied, will continue.
Paul Volcker in 81-82 tightened money before the productive incentives of Reagan-Kemp-Roth kicked in and the economy tanked. Bernanke has shown no inclination of heading down that path. In fact he said the opposite. The dual mandate to him means that unemployment is of equal importance to the value of the dollar.
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Back to Jdn's reply to me recently, repeating and clarifying: HW Bush did not compromise. He was duped. The Tefra Reagan example witht eh wikipedia description of it is not an example of raising tax rates similar to what Dems want now. After and including Tefra, rates under Reagan dropped from 70% to 28% and revenues exploded. To discuss this intelligently, we will need to obsessively distinguish between the following:
a) tax rates applied to income earned
b) tax revenues - actual, and
c) the BS static analysis calculations made by idiots in high places who use super computers to assess policy impact but put in the false assumption that incentives and disincentives have no affect on economic behavior.
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I"m not one to throw stones at Reagan, but I'm a simple guy; if more is going out of my pocket, that's a tax increase.
Take Social Security for example, Reagan raised the base, therefore wage earners above the base had to pay higher taxes. What is the
difference between this "tax" and a small percentage raise on income taxes for high earners? The net is the same.
Take away my deductions, and in essence you have raised taxes; Reagan did this too. For example, if we do away with the home mortgage
deduction (a good idea I say) isn't that a tax increase to American's owning a home?
As for spending, Reagan did his share.
http://mises.org/freemarket_detail.aspx?control=488
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"Take away my deductions, and in essence you have raised taxes"
I think George W Bush put it this way: "You keep more of your own money."
In both cases, people ignore the effects of marginal rates and incentives and disincentives, that is... the amount you would keep of what you make on the next dollar of income, instead talk about divvying up the slices of a fixed pie.
It isn't a zero-sum, fixed pie economy. Income, in the aggregate, is not a fixed amount to divide. If you can't see that in decades of looking at varying policies tied to widely ranging results, I don't know how to make you see it.
To those who deny the role that incentives play in policy and in the economy, I have no way (beyond the hundreds and hundreds of posts) of trying to persuade you. :-(
Reagan's domestic spending, BTW, was his compromise. You write and link about his spending without acknowledging that all that spending came out of a Dem congress and that he sold 1/3 of his soul to get what he needed on tax rate reductions, economic turnaround and military readiness to compete with and bring down an existence threatening enemy.
JDN, you are roughly my age and lived through those same times. If you think Reagan wanted to grow the size and power of government over people's lives or are willing to make that false inference, I once again do not know how to make you see it differently.
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Doug, perhaps/obviously I don't express myself. Overall, I think we agree more than you think. And I think many in the middle do as well.
We just need to be persuaded. :-D
"To those who deny the role that incentives play in policy and in the economy..." I agree with your point, and I think most Americans do too. Incentives are an
intergal part. That said, I think packaging is important. Reagan did a great job of selling and packaging.
Yes, Reagan "sold 1/3 of his soul to get what he needed on tax rate reductions...." and that is what I love about him. He kept his
basic principles, but he compromised to achieve 2/3's of those goals. Not bad in my opinion. His (positive) legacy lives on.
Why not give and take a little? Taxes? Amnesty? Etc. Reagan did...
And you are probably right, we are roughly the same age, both midwestern boys and have lived through the same times. And
we both believe America can do better than it is doing now. But midwesterners compromise, they try to get along with their neighbors; they join together to solve problems;
I wish Congress would do the same.
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they try to get along with their neighbors; they join together to solve problems;
I wish Congress would do the same.
Like the dems did with W?
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Remind me of how Obama reached out to Paul Ryan again.....
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Tax increases now, spending cuts many years from now. Charlie Brown as the kicker and Lucy as the football holder , , ,
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"Charlie Brown as the kicker and Lucy as the football holder"
Lucy representing Leftist policies and Charlie Brown representing a trusting nation.
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A Verdict on Obama's "Stimulus" Plan
May 15, 2011 John Hinderacker Powerlineblog.com
Economists Timothy Conley and Bill Dupor have studied (36 page pdf)
http://web.econ.ohio-state.edu/dupor/arra10_may11.pdf
the effects of the American Recovery and Reinvestment Act (the purported stimulus bill) with great rigor. Earlier this week, they reported their findings in a paper titled "The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled." The paper is dense and rather lengthy, and requires considerable study. Here, however, is the bottom line:
Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.
So the American people borrowed and spent close to a trillion dollars to destroy a net of more than one-half million jobs. Does President Obama understand this? I very much doubt it. When he expressed puzzlement at the idea that the stimulus money may not have been well-spent, and said that "spending equals stimulus," a shocking level of economic ignorance.
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As always, and as a balance to the doom and gloom tendencies around here, Scott Grannis is always a worthy read:
http://scottgrannis.blogspot.com/
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Public Policy Looking Better To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/16/2011
We think there are five (5) reasons to be bullish about the US economy. First, monetary policy is loose and likely to remain so. Second, the financial panic is over, thanks to the end of overly-strict mark-to-market accounting rules. Third, technological advances continue to boost productivity growth. Fourth, our free market economy is incredibly resilient, much more so than the pessimists believe. And fifth, the policy environment is improving.
Despite what Ben Bernanke might say (that quantitative easing lifted stock prices), we think the 15% total return in the S&P 500 since late last year has more to do with a positive shift in government policy. Not only were the lower Bush-era tax rates extended for two years, but lawmakers are becoming even more serious about cutting spending.
The debate over the 2011 budget, which resulted in some very slight reductions in spending, is over. But now a more serious fight about the “debt ceiling” is taking shape. We don’t want to get too far ahead of ourselves; after all we are dealing with politicians here. But, it appears that we can expect some modest, but noticeable, reductions in the size of government in the years ahead.
Our “most likely” outcome (about 50%) from this political wrangling expects the path of discretionary spending to be lowered and that entitlements would be tinkered with. We would be moving in the right direction, but the Congress would “kick the can” of major entitlement reform down the road for another time. This would be good for markets, but it would not be a watershed moment.
The next most likely outcome (about 30%) would be “market neutral.” In this scenario, Congress caves on the debt ceiling and we see little more than token measures to improve the long-term fiscal outlook. In this scenario, the stock market treads water.
There is obviously a small chance (make it 5%) that the Congress goes back on a spending binge and doesn’t cut spending at all. It seems impossible, but it is Congress.
The final option, and the one that intrigues us most, is the still small, but growing, possibility of a major breakthrough – a watershed moment – on the US’s long-term entitlement problems. To be careful, we would put relatively low odds (say 15%) on this scenario. But if it does happen the positive effect on the stock market could be huge, rivaling the impact on the markets of the change in policy direction that resulted from the 1994 election.
One reason we are intrigued by this option is how fast the political landscape has changed. On April 21, 2011, when Brian Wesbury wrote this very short piece for National Review Online (link here), he was among a small minority who thought using the “debt ceiling” as a political tool to force spending cuts was a wise, or even doable, thing. Even last Monday morning, when Brian participated in this press conference (see C-Span coverage here), the conventional wisdom, even among those who advocate for smaller government, was that the debt limit would have to be raised regardless of whether significant policy improvements could be achieved.
Congressional leaders were scared about using the debt ceiling as a political tool and many of them were angry with members of the Tea Party and other members of Congress who stood firm. But in just a few short days, many of these same congressional leaders are saying they won’t support lifting the debt limit unless trillions are cut from the budget. In other words, the odds of some very significant cuts in government spending are growing.
The political battles of the next decade are going to be fierce. And the outcomes of those battles will have major implications for the long-term growth path of the economy and financial markets. The sooner and more favorably those battles get resolved the longer and stronger the current bull market will be.
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Industrial production was unchanged in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/17/2011
Industrial production was unchanged in April, coming in below the consensus expected gain of 0.4%. Including revisions to prior months, production declined 0.5%. Production is up 5.0% in the past year.
Manufacturing, which excludes mining/utilities, was down 0.4% in April. Including downward revisions to prior months, manufacturing fell 1.1%. The decline in April was due to auto production, which dropped 8.9%. Non-auto manufacturing increased 0.2%. Auto production is up 8.3% versus a year ago while non-auto manufacturing has risen 4.5%.
The production of high-tech equipment increased 2.3% in April and is up 13.6% versus a year ago.
Overall capacity utilization declined slightly to 76.9% in April. Manufacturing capacity use declined to 74.4%.
Implications: Industrial production took a breather in April coming in unchanged, which was below the consensus expected gain of 0.4%. While mining and utility production both increased for the second straight month, manufacturing declined 0.4%. However, all of the drop in manufacturing was due to a 8.9% decline in auto production. Given temporary shortages of parts related to the earthquake, tsunami, and nuclear/electricity problems in Japan, some US automakers are shifting their traditional summer shutdowns into the spring. As a result, auto production will slip in Q2 and then surge sharply again in Q3. So for the next few months, we will continue to focus on manufacturing excluding autos in order to figure out the underlying trend. This measure of output was up 0.2% in April and is up 4.5% versus last year, so no problems there. High tech equipment continues to grow, up 2.3% in April and, despite downward revisions for prior months, up at a 23.1% annual rate in the past six months. Production is going to continue to move higher and will likely keep being led by business equipment. Inventories are low, corporate profits are at a record high and so is cash on the balance sheets of non-financial companies. In other recent news on the manufacturing sector, the Empire State index, a measure of manufacturing activity in New York, declined to a still solid +11.9 in May from +19.6 in April, suggesting continued growth in the factory sector, but not quite as quickly as earlier this spring.
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Calling the President's Bluff
by William Poole
Within a matter of weeks, the Treasury will run up against the debt ceiling. It can finance the government for some weeks after that through a variety of gimmicks. Democrats and Republicans are preparing for thrust and parry on a variety of specific spending and nonspending issues. We have already seen a dress rehearsal in the maneuvering over the expiration of the continuing resolution on April 8. That episode went to the 11th hour, literally. The president derided the conflict as being over nickels and dimes. For the most part, he was right about that.
Republicans have an opportunity for a much more important debate, which will frame the election campaign next year. Republicans should tell President Obama they will vote to increase the debt ceiling, in a clean bill with no other provisions, provided he promises three things:
The administration will submit a revised budget that will deal with the deficit. Upon the president's agreement, the first installment of the debt ceiling increase should be $500 billion; further installments will await the revised budget. The nation has a right to expect that the president will be serious about the deficit issue.
Republicans will support a second clean increase of $500 billion in the debt ceiling when the president submits the revised budget. The president agrees that the Congressional Budget Office should score the revised budget according to its "alternative budget scenario." The February budget systematically understates future outlays and overstates future revenues. CBO's alternative scenario scores the budget on what is most easily described as a current services principle rather than according to current law, which understates the likely future deficit. For one example of this problem, current law and the president's budget include the assumption that doctor reimbursements under Medicare and Medicaid can be cut in future years. The CBO alternative scenario is based on the more realistic assumption that reimbursements will be at about the current level.
When the CBO analysis is in, the president will submit a second revised budget reflecting that analysis. At that time, Republicans will agree to accept an increase in the debt ceiling large enough to finance the government through mid-2013.
What if Obama refuses to make this promise? Then, instead of a clean bill, the Republicans should attach a clause requiring that the president submit a revised budget to address the deficit. The point would not be to argue about how to address the deficit -- we already know that the parties are deeply split on their vision as to the role of the federal government -- but instead to require that Obama present an actual plan. A Treasury default would then be squarely the president's responsibility because he refused to present a plan to address the deficit.
The president's plan and Ryan's plan will be at the center of next year's election debate over the role of government and how to finance it.
Republicans should emphasize that the debt ceiling issue is not about the substance of how to address the deficit, but that the president present a plan voters can judge.
The substance will be the election debate next year.
How can the president not accept a deal in which he presents proposals to reduce the deficit over time? Is that too much to ask?
Americans understand the responsibility of the president to address the deficit, and his refusal to do so will stand in stark contrast to the plan proposed by Rep. Paul Ryan (R-Wis.). The president must not be allowed to trash the Republican proposal without presenting his own alternative.
In the academic world, the saying goes if you are in a horse race, you have to have a horse; if you don't like a theory, you have to have a better theory. In politics, unfortunately, the reverse seems to be true. It seems more effective to demagogue your opponent's spending or tax proposals than to present your own.
In the debt ceiling debate, Republicans have the opportunity to force Obama to explain how he proposes to finance the spending commitments now on the books, or which spending commitments will be cut back.
The president's plan and Ryan's plan will be at the center of next year's election debate over the role of government and how to finance it. Democrats should surely welcome the opportunity to defend their vision.
http://www.cato.org/pub_display.php?pub_id=13111
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For all the accusations of no compromise, what if we said no more deficit spending right now. The recession ended 2 years ago. The Keynesian flood experiment of stimulus spending failed miserably to stimulate. The resulting dependency on government is harming our families and destroying our cities. Make do with what we actually take in is not even on the table. Too extreme.
We take in about 2.2 trillion a year right now and are already borrowed to the hilt. What is the correct amount of spending for that level of income? A do-nothing congress could actually solve this right now.
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This could also belong in the Budget thread.
Maybe I am missing something, but IIRC all spending bills must originate in the House of Representataives-- which is controlled by the Republicans. So why don't they just pass spending bills as they see fit and leave it to the Senate and BO to take the blame for not passisng it?
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Because the republicans tend to have the political killer instincts of a teacup poodle?
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By SARA MURRAY And JON HILSENRATH
The world's largest economy may be facing a growth problem.
After a disappointing first quarter, economists largely predicted the U.S. recovery would ramp back up as short-term disruptions such as higher gas prices, bad weather and supply problems in Japan subsided.
But there's little indication that's happening. Manufacturing is cooling, the housing market is struggling and consumers are keeping a close eye on spending, meaning the U.S. economy might be on a slower path to full health than expected.
"It's very hard to generate a rapid recovery when rapid recoveries are historically driven by housing and the consumer," said Nigel Gault, an economist at IHS Global Insight. He expects an annualized, inflation-adjusted growth rate of less than 3% in coming quarters—better than the first-quarter's 1.8% rate, but too slow to make a meaningful dent in unemployment.
A growing number of forecasters are downgrading their second-quarter growth predictions. JPMorgan Chase & Co. economists revised down their estimate to a 2.5% rate from 3%, while Bank of America Merrill Lynch economists cut theirs to 2% from 2.8%. Deutsche Bank cut its forecast to 3.2% from 3.7%.
Companies are similarly cautious. Applied Materials Inc., the largest maker of machines used in producing computer chips, said it expected growth in its semiconductor and solar markets to slow following one of its best quarters ever. Hewlett-Packard Co. cut its fiscal-year outlook amid weak computer sales and negative effects from the disaster in Japan. Clorox Co. offered a more guarded outlook for its household goods business as executives noted that higher prices may hurt sales.
The dimming outlook raises a deeper question about the economy's health: Has it emerged from the financial turmoil of 2008 and 2009 with a chronic growth problem?
Some economists think it has. "We keep expecting the economy to perform along norms that are very difficult to achieve when you have this much private debt and public debt," said Carmen Reinhart, an economist at the Peterson Institute for International Economics. She thinks the Federal Reserve's forecasts have been too optimistic, and the U.S. could be in for a protracted period of subpar growth and high unemployment.
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.In their April forecast, Fed officials projected the economy would grow between 3.1% and 3.3% in 2011 and between 3.5% and 4.2% in 2012. That's more optimistic than private forecasters, who on average project growth of 2.9% in 2011 and 3.1% in 2012, according to Blue Chip Economics, which surveys forecasters monthly.
Even after temporary headwinds subside, the economy could face challenges as the Fed scales back its stimulus efforts, state and local governments trim spending to balance their budgets and Congress looks to cut federal spending next year.
To be sure, some corners of the economy are showing strength. Job growth has been relatively robust in recent months and expansion in emerging markets is helping to buoy export demand. But it will take strong, sustained job gains to inspire households to spend freely, economists say.
Judy Sheppers, 70, of Aiken, S.C. has no doubt the economy is improving. She recently found a job at a real estate company after being laid off in 2008 and is now able to splurge on lunches and dinners out. But she's holding back on more substantial spending. "I'd love to travel," said Ms. Sheppers, but with a tight budget, she and a few friends are planning road trips to nearby beaches. "I do the driving, they pay for the gas."
Meanwhile, with home prices falling and sales depressed, both builders and buyers are on edge.
After starting off the year on a high note, Victor DePhillips' optimism is waning. The chief executive of Signature Building Systems, which manufactures modular homes in Moosic, Pa., and employs about 165 workers, says he has seen orders slow in the past month or so.
While things aren't nearly as bleak as they were during the depths of the downturn, qualified buyers seem to be holding back, possibly because they think prices still have further to fall. "It's a little scary," Mr. DePhillips said. "I don't know what to attribute it to."
Since the recession officially ended in mid-2009, the economy's annualized growth rate has averaged 2.8%. That's no better than its performance after the much-milder 2001 recession, and far worse than the 7.1% growth rate after the similarly deep 1982 recession.
"There are pretty big costs to not really generating a sizeable recovery," said Joseph Lupton, an economist at JP Morgan Chase & Co. Most notably: high unemployment. Some 5.8 million people have been out of work for more than six months, and prolonged slow economic growth makes it less likely that they will rejoin the labor force.
Slow growth could become a central focus in the weeks ahead. Fed officials revised down their 2011 growth forecast in April. With new forecasts due June 22, they might be forced to do so again. If growth disappoints, that could mean less inflation pressure, reducing the likelihood the Fed would raise interest rates anytime soon.
Write to Sara Murray at sara.murray@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com
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From GM. Moved here at the request of our host: "An outstanding question". Open to EVERYONE, not just BD.
"Ok, BD. You are the new president to be sworn in 1/2013. What policies would you want to dig us out of our economic crisis."
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GM, do you want unrealistic campaign promises or items that as president I can actually change as president?
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Serious policies you'd pursue, if the job was yours come 2013.
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http://www.realclearpolitics.com/video/2011/06/05/this_week_roundtable_where_are_the_jobs.html
Krugman: We need a new stimulus, a new boot from the Fed.
Woman from Reuters is completely oblivious to damage done by uncertainty now in regards to FUTURE tax rates and interest rates.
Chamber of Commerce economist: 400-500 major projects waiting for regulatory approval could be started tomorrow. The economy is broad and diverse. This government needs to get out of its way.
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Economic Rapture? To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/6/2011
Radio-host Harold Camping predicted the Biblical end-times (specifically, the “rapture’) would begin on May 21st. Forget the theological meaning of all this. For most people, Camping’s prediction was simplified to mean the "end of the world" as we know it. Obviously, that did not happen. Or, did it?
Let’s imagine that the world really did end. Let’s imagine that we’re now living in an artificial world. Federal Reserve Chairman Ben Bernanke is making the sun rise with monetary policy. Federal spending is generating oxygen and enormous increases in federal debt are making water. Everything seems relatively normal, but it’s all ultimately just a mirage, created by artificial means, and it can't last forever.
Of course this is an extreme example, but that's what it seems many believe about the economy today.
It all goes back to 2008 when the economy crashed, supposedly all by itself, in what was called "the worst crisis since the Great Depression." The pundits said capitalism had failed. Many predicted the complete collapse of the economy, a worthless dollar, and a “new normal” – it was the “end of the world” as we knew it.
And while the economy could be doing better, real GDP has expanded for seven straight quarters – we’re now in the eighth. Corporate profits are at a record; the S&P 500 is up 100% from the bottom; consumer spending is $450 billion above its pre-panic 2008 peak, and private sector payrolls have expanded for 15 straight months.
So, which is it – fake, or real? Did the economy crash and burn, only to be supported in an artificial state by government actions? Or, was all that “end of the world” talk a prediction that did not come true? Are all the same old real world things – like creative destruction, supply and demand, innovation, or trial and error – still happening like they always have?
If the former – the artificial state – then there is lots to worry about. QE2 will end this month. Stimulus spending has wound down and politicians are debating large spending reductions. The political class seems to have gotten “religion” about federal debt. In other words, to those in the artificial camp, things don’t look good.
In contrast, if the world really did not end back in 2008, if we are experiencing a relatively normal recovery, things look a great deal better. This is what we believe.
We do not believe that capitalism failed and that the world as we knew it is over. The crisis was caused by a failure of government policy. The bubble in housing was caused by low Fed rates and housing subsidies. The Panic of 2008 was caused by a set of misguided reactions to the bursting of that bubble (mark-to-market accounting and TARP).
In our view, quantitative easing has had little impact – the money supply (M1 or M2) is not expanding as rapidly as many think. Moreover, and this is key, the massive increase in government spending has been a drag on growth, not a boost. In other words, the end of quantitative easing, spending cuts and a new focus on government debt reduction are things to rejoice about.
We are not in the majority, nor are we ignoring our economic problems. We just believe the economy did not come to an end back in 2008 and we do not believe recent growth has been created artificially.
But a large, loud and sincere group is still convinced the economy is broken and fragile. They see the recent slowdown in economic growth – real GDP growth looks to be growing at only a 1.5% annual rate in Q2 – as another sign that it really has been the end of the economic world. Gloom and doom are back on the table.
Never mind that much of the slowdown is so obviously tied to temporary Japan-related disruptions in manufacturing and tornado-related dips in home building. That doesn’t matter if you really believe the end is near.
But, when we move through these temporary problems, when auto production overcomes the parts-related slowdown and spikes back up at about a 100% annual rate in Q3, real GDP will sharply accelerate again.
At that point, we suppose that those predicting the end of the economy will postpone their forecast once again.
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From GM. Moved here at the request of our host: "An outstanding question". Open to EVERYONE, not just BD.
"Ok, BD. You are the new president to be sworn in 1/2013. What policies would you want to dig us out of our economic crisis."
Let me begin with some caveats and such. 1, I do not have a staff of economists and policy experts whose sole job is to inform me on the issues. 2, I do not currently have as much time to divulge in non-professional research as I would like. 3, I will likely be unable to respond to the inevitable criticisms I face for at least a few days. 4, as a new president, I must remind you that I am new kind of president. In this case, I ran because I fear the accumulated powers that this office has gained in the era of the "modern presidency." 5, and related to 4, the Constitution does not have a place for the president in the budget process. The president's role, most directly is related to the 1921 Budget and Accounting Act. I would like to cede some of the budgetary powers back to Congress. This stance will generally help to inform many of my budget stances.
So, here goes:
According to
http://nationalpriorities.org/resources/federal-budget-101/budget-briefs/federal-discretionary-and-mandatory-spending/, about 60% of the discretionary budget is military. Therefore, we have to start there. I would cut 10% of the military budget, but would focus on military pork projects. The numbers and examples are dated, but I hope we can all agree with Cato here: http://www.cato.org/pubs/handbook/hb105-8.html.
I would increase the Social Security tax by 5%. I would also increase the age of retirement to 70, or perhaps even 72.
I would have a welfare to work program. Not only would it get people off of the govt. dole, it would increase the tax revenue.
I would cut non-military executive branch officials by 25%. Smaller WH staff, EOP staff, and the like by either cutting the programs or eliminating them outright.
I would encourgage MOCs to limit their staffs, by matching the cuts I make in my staff. I have even toyed with the idea of asking for a constitutional amendment mandating a shift to a unicameral legislature.
Relatedly, govt. bureaucrats actually earn more than the private sector equivalents, on average. I would cut retirement benefits, and institute a pay freeze for all federal employees for the first three years of their employment.
I would cut subsidies to farmers who don't grow food.
Let the chorus of boos and the spittle begin to fly. I am sure I have angered at least one of you.
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Cheers to Bigdog for coming through. I would suggest everybody post their own plan before criticizing. I will try to write and post by the end of the week. That said, I offer these quick comments and one question.
cut 10% of the military budget, but would focus on military pork projects. - agree
increase the Social Security tax by 5%. - Clarifying, not 5 points higher, just 5% increase. Rough numbers from memory. If we are talking about the full FICA they used to call it, it is split into employee and employer halves. For the self employed I think the self employment tax was .93 * 15.3% which is 14.3%. Add 5%, new tax is 15%. I don't personally agree, but acknowledge it is a very reasonable compromise between funding and cutting.
increase the age of retirement to 70, or perhaps even 72 - agree
welfare to work program. Not only would it get people off of the govt. dole, it would increase the tax revenue. - agree
cut non-military executive branch officials by 25%. Smaller WH staff, EOP staff, and the like by either cutting the programs or eliminating them outright. - agree
encourgage MOCs (members of congress) to limit their staffs, by matching the cuts I make in my staff. - agree
Relatedly, govt. bureaucrats actually earn more than the private sector equivalents, on average. I would cut retirement benefits, and institute a pay freeze for all federal employees for the first three years of their employment. - agree
I would cut subsidies to farmers who don't grow food. - agree
Let the chorus of boos and the spittle begin to fly. - I hope not.
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Question: The complaint from the left (ex: Krugman, Reich) is that austerity is not stimulative. Your answer to them?
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Well if we are increasing retirement to 70 which I have been saying is necessary for years (thus I agree with this) then why do we need to increase SS tax 5%?
Also don't the Dems borrow from SS for their projects? What ever happened to "lock box"?
I would cut subsidies to farmers who don't grow food"
Problem with this is the loop holes. Does anyone think Bruce Springsteen is really in the organic farming business yet he gets a nice tax break in NJ (though I guess this is a state not federal loophole).
Do we really need to subsidize this at all?
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Gentlemen:
It occurs to me that we already have a thread with many ideas on cutting spending, (see nearby) where I have just posted. I would like to ask that we continue this conversation there so as to take advantage of the accumulated wisdom already to be found there. As for the post already here, please feel free to repost them there or incorporate them by reference.
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http://www.nationalreview.com/articles/268973/obama-kills-war-powers-act-rich-lowry
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on an opinion of the war power act's constitutionality.
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http://www.pjtv.com/?cmd=mpg&mpid=86&load=5559
Reality bites.
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A question posed recently: "You are the new president to be sworn in 1/2013. What policies would you want to dig us out of our economic crisis."
(I would like to see everyone in on this with their own plan.)
My plan:
Table of contents
a) Energize: Open up our own production and supplies of essential domestic energy sources
b) Healthcare: Repeal and Replace
c) Government Spending - Roll back and restrain the growth of spending
d) Regulations - eased, re-evaluated and reauthorized
e) New tax Code, on one sheet of paper
f) Value the Dollar
g) Reform Entitlements, really!
h) Employment Mentoring: Welfare reform revisited
i) Unleash Innovation - the result of the above policies
a) These all need to be virtually simultaneous, but energy reform is first because of the long lead times. Must send a strong signal now. The energy plan is move forward on all fronts. Get the best and the cleanest with the safest possible techniques. ANWR, yes. Fill the Alaskan pipeline before that trickle peters out altogether. Offshore, yes, but learn from everything that happened in Deepwater. Natural gas, yes, but with the smartest real protections an minimal releases. Nuclear, yes, but learn everything we can learn from Daichi Fukushima. Coal, yes. Find its cleanest and most cost effective use and let's permit and start building. If any part of CO2 emissions can be sequestered cost efficiently, sequester them. Natural gas hybrids, yes, but in a free private sector. Conservation, yes, but not at the expense of individual liberty or choking our economy.
b) Healthcare: Repeal Obamacare, get those new taxes, expenses and new regulations off the table now. Implement the best of the Republican proposals updated from last year that both parties can agree to. Do it all in one vote. Pre-existing condition reform, universal availability of coverage, malpractice and liability reform, and the advance of making competitive plans available across state lines are things we likely can all agree on once the government centric system is taken off the table.
c) Government Spending - rolled back and restrained. The Ryan Plan referred to a roll back to 2008 levels. Spending is 3.8 trillion, revenues are 2.5. We can't close the gap only with cuts, and we can't close it without meaningful cuts. Set targets, set priorities and make meaningful cuts, then really truly curtail the overall growth of spending - to a rate no more than half the rate of growth of production and revenues - until the gap is closed. Put spending on a downward path to 3 trillion until the trillion and half dollar Obama deficits are down to 0.5 trillion. Then close the rest with economic growth to full private employment accompanied with sustained spending restraint.
d) Regulatory easing. Put moratoriums, delays on ALL non-health/safety/essential regulations. Delay and re-authorize where necessary. The limited discussion of tax and spend to balance the budget at full employment is fatally flawed. Federal taxes are only a part of the government caused burdens on employment and production. Shine the light on ALL of it. One simple reform to help create new jobs would be to allow startup employers to issue 1099's to all new hires in their first calendar year. The market is tough enough out there without having to instantly learn every rule about payroll deductions, withholdings, forms, compliance and the like. The new entity has enough to do jumping out of the gate. Do we want startups or DON'T WE?
e) Tax reform. My plan would eliminate deductions with the exceptions ofother taxes paid, half of home mortgage interest paid and half of charitable contributions made. I would set a minimum and a maximum tax rate, let's say 6.25% minimum and 25% maximum. Everybody is in. Set the limit point and make rates continuously variable in between. Every dollar gets taxed and no dollar of income shall receive cruel or unusual punishment. Make up for lower rates with higher velocity. Lower the corporate rate from 35 (highest in the world) to 22.5%, just below the OECD average. Lower inheritance tax double taxation from 55% to 7.5%, but make it apply to all people and all dollars. Lower the capital gains rate from 15% to 12.5%, or introduce indexation of all gains to inflation. (States need to index capital gains too.)
f) Value the Dollar. Accompany our repair of competitiveness across the globe with the tying of our supply of total dollars to the total supply of goods and services in the economy, imagine that! Prohibit Federal Reserve inflation targets of more than 0.5% per year and end the flawed 'dual mission' of the Fed. The Fed's mission is to protect and preserve the value of our currency. That's it.
g) Reform entitlements - really! We already know how, so do it. Pawlenty spelled it out. Raise the age, but not for the people already in or close. Cap the escalators, but not for the people without other means. Get the reforms done and let the markets know we are serious. It is unacceptable that every man, woman, transexual, child and fetus owes $560,000 per person right now in unfunded liabilities.
h) Employment mentoring. Welfare reform revisited. Set a national goal that no one goes on assistance or stays on any of it without a plan for getting off of it and that plan with all its action items gets reviewed every month. I would offer to the outgoing President and First Lady immediately the unpaid positions of national employment mentoring leaders, in charge of getting the best and brightest from all professions to agree to mentor at least one person until all citizen recipients of assistance are matched up and on a plan to develop themselves, produce and contribute to the best of their capabilities.
i) Unleash innovation! This is the result of the above. Whatever is stopping us from innovating better than ever and better than anywhere else in the world, fix it. Decline is a choice. Stop choosing it. Set goals, make the hard choices and move this economy forward - like we've never seen before.
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Soft Patch Already Fading To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/13/2011
For the record, in our professional lives, we don’t really care that much about Republicans or Democrats. Our constituency is the investor. But everything is politicized. Conservatives get mad at us because we are optimistic about the economy – they want to say Obama is hurting it. Liberals get mad because we think investors are better served by a much smaller government – they want a bigger one.
We are in “no-man’s-land,” taking fire from both sides. Some argue the end of stimulus is certain death for the economy. Others argue government growth is causing the next great depression. Anyone in the middle (like us), that says, “yes, the economy would be more robust (and unemployment lower) if we had less government, but, the US economy is still growing anyway” is a target for politicized anger.
And now that a “Soft Patch” in economic data and some softness in stock prices have developed, the political rhetoric has ramped up. We think it’s all temporary, but that suits almost no one in the political sphere. Investors who let politics interfere with their economic or investing thought-process are making a grave mistake. We think the pessimism is overdone and this is a great buying opportunity.
Take a deep breath and start looking for signs of economic life. Start looking at Calafia Beach Pundit, a blog written by a fabulous economist, Scott Grannis. Scott has been optimistic for the past two years and recently highlighted commercial and industrial lending, what he calls “a good measure of bank lending to small and medium-sized businesses.” These loans expanded for the seventh straight month in May and are up 12.2% at an annual rate in the past three months.
How about tax receipts? Up 19.2% in May compared to a year ago, despite a cut in payroll tax rates. Net individual income tax payments were up 55% versus May 2010 – a burst due to a sharp rise in “non-withheld” payments (final settlement for taxes owed for 2010). But, according to the Congressional Budget Office, withheld receipts – for income and payroll taxes combined – were still up 10% versus a year ago.
Meanwhile, exports hit a record high in April, up 18.8% versus year-ago levels. And aggregate hours worked (total employment times the length of the workweek) are up 3.5% at an annual rate during the three months ending in May. Commercial construction expanded for the third straight month in April. And this week, we’ll get a key report on May retail sales. Weak auto sales will drag the top-line number down, but chain store sales were up in May and we expect ex-auto retail sales to be up about 8% above May 2010 levels.
None of this fits the dour, and politically-hyped, forecasts of economic Armageddon so prevalent these days. The soft patch is nothing more than a temporary and superficial blow to the economy. If it was anything more than Japan’s disasters and the tornado season, the good numbers we’ve been seeing lately – on lending, tax revenue, trade, hours-worked, ex-auto sales, and commercial building – wouldn’t be happening.
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Retail sales declined 0.2% in May To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/14/2011
Retail sales declined 0.2% in May (-0.6% including downward revisions to March/April). The consensus had expected a drop of 0.5%. Retail sales are up 7.7% versus a year ago.
Sales excluding autos were up 0.3% in May (0.2% including revisions to March/April). The consensus expected a gain of 0.2%. Retail sales ex-autos are up 8.2% in the past year.
The drop in retail sales for May was led by autos, which fell 2.9%. The largest move outside the auto sector was an upswing in non-store retailers (mail order and internet).
Sales excluding autos, building materials, and gas increased 0.2% in May and were up 0.4% including revisions for March/April. These sales are up 6.1% versus last year. This calculation is important for estimating GDP.
Implications: Despite dire headlines and political rhetoric, the US is nowhere near a double-dip recession. While overall retail sales dipped 0.2% in May, this reflects what we already knew, which is that supply-chain disruptions due to Japan’s disasters have temporarily reduced auto sales. Excluding autos, sales came in very close to consensus expectations. In the past year, total retail sales are up 7.7% and sales excluding autos are up 8.2%. Once the supply-chain issues are resolved, within the next month or so, auto sales will pick up again. The details of the report show strength. “Core” sales (which exclude autos, building materials, and gas) were up a solid 0.4% including upward revisions to prior months. Even if these sales are unchanged for the rest of the second quarter they will still be up at a 5% annual rate in Q2. Factoring-in services as well as inflation, real consumer spending will probably be up at a 2% to 2.5% annual rate in Q2. Consumer spending continues to rise for two key reasons. First, earnings are growing due to more jobs, more wages per hour, and more hours per worker. Second, consumers’ financial obligations (debt service plus other recurring payments like rent, car leases, homeowners’ insurance, and property taxes) are now the smallest share of disposable income since 1995. Add on top of that a recovery in the auto sector as Japan heals, and the future looks bright for retail sales.
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There are three main reasons why the president’s policies have made this recovery weaker than usual: Regulatory uncertainty, tax uncertainty, debt uncertainty - Ryan nails it. I like that he puts excessive regulations front and center and that uncertainty coming from the public sector is a major cause of the inaction from investors in the private sector. Also, more people need to equate spending with debt. Everything we spend at the margin - beyond the first two and a half trillion and beyond essential government functions like funding the court system and national security - is permanent debt, a burden that grows literally with the magic of compound interest.
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http://www.foxnews.com/opinion/2011/06/13/obamas-economic-experiment-has-failed-time-to-get-back-to-what-works/#ixzz1PGltBqCY
Obama's Economic Experiment Has Failed -- Time to Get Back to What Works
By Rep. Paul Ryan
Published June 13, 2011
A flurry of recent economic news – especially the May jobs report – confirms what many have feared for some time: This president’s leadership deficit has caused a disastrous jobs deficit, and where he has led, his policies have made things worse.
The president clearly inherited a difficult fiscal and economic situation when he took office. But his response to the crisis has been woefully inadequate. The president and his party’s leaders have made it their mission to test the hypothesis that more government spending and greater government control over the economy can jump-start a recovery better than the private sector can.
That experiment has failed. The stimulus spending spree failed to create jobs. Massive overhauls of the financial sector and health-care sector are fueling uncertainty and hindering our recovery.
House Republicans are charting a new course with a better plan – starting with a budget that frees the private sector from regulatory uncertainty, punishing tax increases, and the crushing burden of debt that is weighing on this recovery. But making progress on this plan will require leaders in Washington to relinquish the idea that government knows best, and many just don’t seem ready to face that reality.
The May jobs report was yet another reminder that the government-knows-best crowd got it wrong. When he came into office, the president’s economic team predicted that a stimulus bill of unprecedented size and scope would hold unemployment below 8 percent and steadily lower it to 7 percent by the first quarter of this fiscal year.
These estimates weren’t just off by a little bit – they completely missed the mark. The jobless rate went all the way up to 10.1 percent, never fell below 8.8 percent, and has now ticked back up to 9.1 percent. Private-sector hiring continues to stagnate. The cost of gas and groceries continues to rise. And the national debt continues to climb, casting a long shadow over economic activity and job creation.
This recovery pales in comparison to past, private-sector-led recoveries. Unemployment today has fallen by just 1 percentage point from its recessionary peak. By contrast, unemployment at the same point in the past ten recoveries dropped by an average of 5 percentage points in past recoveries. The dismal jobs record underscores the fact that the Great Recession is far from over for millions of American families.
There are three main reasons why the president’s policies have made this recovery weaker than usual:
1. Regulatory uncertainty: After the stimulus passed, the president turned his attention immediately to costly overhauls of the nation’s financial and health-care sectors. These overhauls needlessly transferred more control over America’s economy to government bureaucrats in Washington, without fixing the problems they were intended to address. The transfer of so much power to the arbitrary dictates of federal regulators has made it hard for businesses to plan for the future with confidence, and things will remain this way until these laws are replaced with real reforms.
2. Tax uncertainty: The president’s ad hoc tax policies, with a mix of tax hikes on job creators and temporary rebates for others being the hallmarks of his approach, have left businesses in the lurch. Moreover, the president’s new health care law imposes a crushing $800 billion tax hike, and he continues to threaten businesses and families with higher rates in the future, even as he dithers on his vague promise to address America’s uncompetitive corporate tax rate, which is the highest in the developed world.
3. Debt uncertainty: The president has not put forward a plan that saves Medicare from bankruptcy, even though nonpartisan experts tell us that this could happen in 9-13 short years unless we act. Each year that we fail to put our critical government health and retirement programs on a path to long-term solvency, we are making trillions of dollars of unfunded promises to future retirees. We are already borrowing 40 cents of every dollar we spend, and Washington’s inability to solve its spending problems is leading rating agencies such as Standard & Poors to downgrade our credit outlook. Government under this administration is failing at its number-one economic job, which is to create a stable, predictable environment for job creators.
By contrast, the Republicans have put forward a plan to tackle each of these problems head-on. Our budget, which we call The Path to Prosperity, reduces regulatory uncertainty for businesses by repealing the new health care law. It reduces tax uncertainty by promoting low, stable rates and clearing out loopholes and deductions that go primarily to the well-off. And it reduces debt uncertainty by dealing with our long-term unfunded liabilities, saving Medicare from bankruptcy, and putting us on a path to pay off the debt.
This debate comes down to one big philosophical difference: Who should we put in the drivers’ seat when it comes to jobs and the economy: government bureaucrats in Washington, or a vibrant private sector freed from uncertainty?
The president’s economic experiment has failed. It is time to get back to what we know works: empowering free citizens with the tools they need to prosper. To close the alarming budget deficit and the painful jobs deficit, we must first erase Washington’s leadership deficit by providing real solutions for a real recovery.
Rep. Paul Ryan is chairman of the House Budget Committee and represents Wisconsin's 1st district.
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Entitlement Overstretch
This great country has reached such a point of fiscal insanity that we may need a monumental crisis to save it.
In the late 1980s, Prof. Paul Kennedy of Yale achieved academic celebrity with his bestseller, The Rise and Fall of the Great Powers. In it, he wrote that the United States was likely to collapse because of a phenomenon he called “imperial overstretch.” As Kennedy saw it, the approximately 6 percent of GDP the United States spent on maintaining its military and meeting other global commitments was too great a burden. It was only a matter of time until our ambitious agenda would push us into decline and eventual collapse. This thesis, as it applied to the United States, was simple, beautiful, and spectacularly wrong.
Kennedy’s overstretch theory was not, however, without merit. Hindsight makes clear that much of what Kennedy wrote provides a valid description of the Soviet Union’s collapse. Furthermore, while Kennedy misjudged America’s ability to sustain its military commitments, if he had looked deeper into our national balance sheet, he would have seen the true danger: entitlement overstretch. What the historian failed to see — because there was no historical precedent for him to analyze — was the dangers brought on by the rise of the entitlement state. The 6 percent of GDP spent on national security that so concerned Kennedy is dwarfed by projected entitlement expenditures that are far beyond America’s ability to pay.
There is a basic law of economics: What can’t happen won’t happen. As it is impossible for a $14 trillion economy to pay $60 trillion or more of unfunded liabilities, it won’t happen. Even after raising taxes to crippling levels and sucking every other revenue source dry, the United States will still face tens of trillions of dollars of expected payments it cannot meet. That being the case, only one question remains: What form will the nation’s default take?
The first option is a default in expectations. Unfunded liabilities are not yet debt, as the money has not been spent. The government is therefore free to change its implicit contract with the citizenry. In other words, it can renege on its promises with regard to Social Security, Medicare, and Medicaid. This requires a huge amount of political courage and a willingness to pay a severe price at the ballot box. As neither side of the political divide has shown any inclination toward taking the draconian measures that restoring fiscal sanity requires, there is little reason for optimism along this path.
The second option is the historical favorite of countries that find themselves in a fiscal crisis: debasing the currency. Because the dollar is the key global reserve currency and is viewed by many — irrationally, of late — as a secure store of value, the United States is able to issue all its debts denominated in dollars. Therefore, by pressing a few computer keys, the Federal Reserve can create $60 trillion in an instant. Of course, the Fed would be much cleverer about it and spread its money creation over a number of years or even decades. No matter how the debasement is done, though, the results are easy to foresee. Inflation on a scale that could see us envying Weimar Germany’s fiscal propriety would wreck the U.S. economy as the nation’s wealth and savings were destroyed. Unfortunately, this option always seems the most appealing to policymakers, as it is easy and apparently painless. Well, it is painless — right up until the cataclysm, the onset of which no doubt will be as sudden as the crisis of 2008. We must all hope that our elected officials are wise enough not to go down this road. Of course, betting on the wisdom of politicians is more often than not a fool’s wager.
The final option is to keep going as we are, making cosmetic changes of the type we have seen recently. This head-in-the-sand option will work just fine, until the calamity can no longer be postponed. In this scenario, the government runs up taxes until the economy falters while continuing to issue debt until it can no longer afford even the interest payments. This, for worse or worse, is the road we are heading down. Make no mistake about it: The final outcome will be crushing. Entitlement overstretch will cause the collapse of the national economy and end America’s global dominance.
But only for a time.
Modern nations do not just disappear. After a default, the United States will still have a productive population, a sound economic base, and, most important, a clean balance sheet. If we are lucky, our chastened politicians, given all these advantages and a clean slate, will then undertake only those commitments the economy can afford. If so, there is reason for optimism that, after the harrowing experience of default, the United States will roar back stronger than before. Conversely, if politicians prove incapable of mending their ways, then the country will join the list of serial defaulters and begin an inevitable and ugly decline.
It is a sad state of affairs when one has to pin the long-term hopes of this great nation on a crisis so monumental that one has to count on the “day after” to return reason to the nation’s fiscal policy. But at a time when proposals to cut a mere 1 percent from the budget can bring vested interests to the barricades, there appears little hope that policy sanity can be restored in any conditions short of a fiscal implosion.
Rumor has it that Professor Kennedy is now updating his seminal work for a new edition. One must hope that, this time around, he puts his finger on the true crisis undermining America.
— Jim Lacey is professor of strategic studies at the Marine Corps War College. He is the author of the recently released The First Clash and Keep from All Thoughtful Men. The opinions in this article are entirely his own and do not represent those of the Department of Defense or any of its members.
http://www.nationalreview.com/articles/269604/entitlement-overstretch-jim-lacey
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By John H. Cochrane And Anil Kashyap
Greek debt is in trouble—again. After a month of dickering, it seems likely that the International Monetary Fund and the European Union will agree to roll over Greece's debt so bondholders will be paid in full. Why is Europe so terrified of letting bondholders bear some of the risk that comes with high yields?
The answer is that most of those bondholders are banks. If Greece defaults, then important French and German banks will be in deep trouble. Even a small rescheduling would force the banks to admit their losses.
If Greece is allowed to default, reschedule or abandon its restructuring, Ireland, Portugal, Spain and Italy may soon follow. This scenario is beyond the EU's bailout capability. And it would leave the European financial system in shambles, because, again, the banks are holding that debt.
There are four key facts to recognize:
First, the Greek government has borrowed more than it can plausibly afford to pay and certainly more than it will choose to pay. It now owes more than one and a half years' economic output. The reforms necessary to produce strong economic growth and drastically cut spending are very unlikely.
Keep in mind, Greece is not being bailed out. Greece's bondholders are being bailed out. Greece would rather default. Cleared of its debts, it would likely be able to borrow again soon.
Financial markets have figured this out. As of yesterday, it cost $182 per year to insure $1,000 five-year Greek debt, implying a 63% probability of total loss in five years. Yes, the write-down is inevitable.
Second, European banks are holding the bag. This week the Moody's rating agency put three large French banks under review for a potential downgrade because of their Greek exposure. Beyond direct exposure, banks throughout Europe lend to each other and write insurance against sovereign defaults. Even U.S. prime money market funds are indirectly exposed.
One would think that wise regulators would have required hefty capital against sovereign lending, or lending to other banks whose main investments are Greek debt. One would think that given a full year, those regulators would have at least increased the capital requirements for sovereign debt, run serious stress tests against sovereign default, or forced banks to buy credit-default swap insurance from counterparties other than Greek banks. But one would be wrong. (This is a sobering lesson for the U.S.'s plan under Dodd-Frank to trust that our wise regulators will spot all dangers, require adequate capital, and keep banks from getting into trouble.)
Third, the European Central Bank (ECB) is now involved as well. It started buying secondary-market Greek debt last May. The ECB has now lent in excess of 80 billion euros to Greek banks, replacing private funding that has run away, and typically receiving Greek government debt as collateral.
If there is even a minor credit event, the ECB could no longer legally take that collateral. If Greece defaults and Greek banks fail, the ECB is stuck with junk collateral. This explains why ECB President Jean Claude Trichet insists that there must be "no credit event, no selective default."
Fourth, in the end this is all about Ireland, Portugal, Spain and Italy. If Greece were the only country in trouble, it would have been allowed to default. European governments would have plugged the holes in their banks, bailing out those deemed "too big to fail" and reorganizing the others so that deposit and lending operations continue unimpeded. After all, Greece is small.
But Spain, Portugal and Italy are also experiencing slow growth, high unemployment, and have unpopular governments with limited ability or desire to implement reforms. The banks in each of these countries are chock full of their government's debt. Other euro-area banks are lending to them, indirectly taking on additional exposure. And the ECB is full in, holding their sovereign debt and lending vast amounts of money to their banks, taking sovereign debt as collateral.
Germany would like banks to roll over their Greek debt. But Greece cannot possibly pay 17% interest rates for 10 years. So if banks roll over debt at market rates, Greece's eventual default is ensured. Banks cannot roll over at low rates without enduring huge losses. Thus, the only way to get banks to "voluntarily" roll over the debt is by letting them carry the debt at artificial "hold to maturity" valuations, which leaves the danger to the financial system.
Germany knows it's likely to bear the brunt of bailouts. The German sentiment that bondholders should bear risk is nice. Alas, the chance to do that is passing quickly. All the private bondholders will soon have cashed in their debt, and only the ECB, IMF, governments and government-guaranteed banks are left.
So what to do? Prepare for the worst. Europe needs to expunge the rot from its banks so that the inevitable write-downs do not imperil its financial system. Sovereign debt and sovereign exposure must face large capital buffers. Sovereign debt must be marked to market. Banks must run serious stress tests to find implicit sovereign exposure. Banks with inadequate capital must raise it, find buyers, or reorganize. If that means bailouts of "systemically important" banks, then governments must do so, face their taxpayers, and make their regulators explain how they let this happen.
Sovereign defaults often follow financial crises. But with a more proactive policy, any European sovereign defaults need not create a second financial crisis.
Messrs. Cochrane and Kashyap are professors of economics and finance at the University of Chicago Booth School of Business.
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[youtube]http://www.youtube.com/watch?v=Jr9pAsH-1Ao&feature=player_embedded[/youtube]
http://www.youtube.com/watch?v=Jr9pAsH-1Ao&feature=player_embedded
Hope!
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How Today's Conservatism Lost Touch with Reality
By Fareed Zakaria
"Conservatism is true." That's what George Will told me when I interviewed him as an eager student many years ago. His formulation might have been a touch arrogant, but Will's basic point was intelligent. Conservatism, he explained, was rooted in reality. Unlike the abstract theories of Marxism and socialism, it started not from an imagined society but from the world as it actually exists. From Aristotle to Edmund Burke, the greatest conservative thinkers have said that to change societies, one must understand them, accept them as they are and help them evolve.
Watching this election campaign, one wonders what has happened to that tradition. Conservatives now espouse ideas drawn from abstract principles with little regard to the realities of America's present or past. This is a tragedy, because conservatism has an important role to play in modernizing the U.S. (See "The Heart of Conservative Values: Not Where It Used to Be?")
Consider the debates over the economy. The Republican prescription is to cut taxes and slash government spending — then things will bounce back. Now, I would like to see lower rates in the context of tax simplification and reform, but what is the evidence that tax cuts are the best path to revive the U.S. economy? Taxes — federal and state combined — as a percentage of GDP are at their lowest level since 1950. The U.S. is among the lowest taxed of the big industrial economies. So the case that America is grinding to a halt because of high taxation is not based on facts but is simply a theoretical assertion. The rich countries that are in the best shape right now, with strong growth and low unemployment, are ones like Germany and Denmark, neither one characterized by low taxes.
Many Republican businessmen have told me that the Obama Administration is the most hostile to business in 50 years. Really? More than that of Richard Nixon, who presided over tax rates that reached 70%, regulations that spanned whole industries, and who actually instituted price and wage controls?
In fact, right now any discussion of government involvement in the economy — even to build vital infrastructure — is impossible because it is a cardinal tenet of the new conservatism that such involvement is always and forever bad. Meanwhile, across the globe, the world's fastest-growing economy, China, has managed to use government involvement to create growth and jobs for three decades. From Singapore to South Korea to Germany to Canada, evidence abounds that some strategic actions by the government can act as catalysts for free-market growth. (See a dozen Republicans who could be the next President.)
Of course, American history suggests that as well. In the 1950s, '60s and '70s, the U.S. government made massive investments in science and technology, in state universities and in infant industries. It built infrastructure that was the envy of the rest of the world. Those investments triggered two generations of economic growth and put the U.S. on top of the world of technology and innovation.
But that history has been forgotten. When considering health care, for example, Republicans confidently assert that their ideas will lower costs, when we simply do not have much evidence for this. What we do know is that of the world's richest countries, the U.S. has by far the greatest involvement of free markets and the private sector in health care. It also consumes the largest share of GDP, with no significant gains in health on any measurable outcome. We need more market mechanisms to cut medical costs, but Republicans don't bother to study existing health care systems anywhere else in the world. They resemble the old Marxists, who refused to look around at actual experience. "I know it works in practice," the old saw goes, "but does it work in theory?" (See "When GOP Presidential Candidates Skip, They Quickly Stumble.")
Conservatives used to be the ones with heads firmly based in reality. Their reforms were powerful because they used the market, streamlined government and empowered individuals. Their effects were large-scale and important: think of the reform of the tax code in the 1980s, for example, which was spearheaded by conservatives. Today conservatives shy away from the sensible ideas of the Bowles-Simpson commission on deficit reduction because those ideas are too deeply rooted in, well, reality. Does anyone think we are really going to get federal spending to the level it was at under Calvin Coolidge, as Paul Ryan's plan assumes? Does anyone think we will deport 11 million people?
We need conservative ideas to modernize the U.S. economy and reform American government. But what we have instead are policies that don't reform but just cut and starve government — a strategy that pays little attention to history or best practices from around the world and is based instead on a theory. It turns out that conservatives are the woolly-headed professors after all.
http://www.time.com/time/nation/article/0,8599,2077943,00.html
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So much distortion and DNC talking points in the Zakaria piece, it's a good example of why Time magazine is on it's way to extinction.
Unlike the good old days, there is real global competition. Business goes where the business climate is best for the business in question. In the wake of WWII, the US was the last country left standing. 2011 is a very different place. Detroit was once the booming city that could be the only one to supple cars to the US and elsewhere. Now, after decades of dems running things, Detroit looks like a post-apocalyptic movie set and the GM operation in China is the only real profit center GM has right now.
Obama promised to use the money we are borrowing from China for "shovel ready" infrastructure projects. Instead, we saw the money go to "fork ready pork" with no real impact on infrastructure needs but more massive debt that increases the potential for global economic crisis.
The free market has an amazing way of raising living standards and reducing consumer costs, yet somehow healthcare is immune to market forces? So, the government that loses vast amounts of money every year on the post office and Amtrak will somehow outperform the free market on providing healthcare? Look at the mortality rates and the gov't death panels in europe and despite the leftist adulation of europe, it's nothing we'd want to dupicate here. The whole world glides along on the technological advances done in the US related to medicine and pharma. Obamacare will kill that off, as well as kill off many Americans and dig us even deeper into crushing debt.
Starving gov't of all but the most essential funds is the path to saving ourselves from what looms ever closer.
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Look at the mortality rates and the gov't death panels in europe and despite the leftist adulation of europe, it's nothing we'd want to dupicate here. The whole world glides along on the technological advances done in the US related to medicine and pharma. Obamacare will kill that off, as well as kill off many Americans and dig us even deeper into crushing debt.
:?
"Healthcare is (not) immune to market forces?" But is that good? Whatever surgery pays the most, that's the one the doctor does here in America. Whenever I go to see a doctor,
I see the Drug Rep. in the lobby with free samples and tickets for the Lakers, etc. Is that good?
Look at longevity rates; America is tied at 36th. That is terrible. I think the whole of Europe is ahead of us, not to mention Japan which also has a national health care plan.
Also, not to mention Hong Kong and yes Israel which also has a national health care plan. It seems all the leading countries do. And they are healthier than we are....
http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy
Death Panels? You mean Medical Boards that determine that a 92 year old shouldn't get a heart transplant? Like my friend's friend here in LA who did get one? Well someone needs to say "No".
Both from a humanitarian reason - let a younger person get the heart and from a cost standpoint.
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If you think your surgery is being done by your Dr. because of a profit margin rather than medical need, I suggest finding another doc. Something you can't do with a Nat'l Health Service. In addition, if Obamacare is so wonderful, why the clamor for exemptions?
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http://www.city-journal.org/html/17_3_canadian_healthcare.html
I was once a believer in socialized medicine. I don’t want to overstate my case: growing up in Canada, I didn’t spend much time contemplating the nuances of health economics. I wanted to get into medical school—my mind brimmed with statistics on MCAT scores and admissions rates, not health spending. But as a Canadian, I had soaked up three things from my environment: a love of ice hockey; an ability to convert Celsius into Fahrenheit in my head; and the belief that government-run health care was truly compassionate. What I knew about American health care was unappealing: high expenses and lots of uninsured people. When HillaryCare shook Washington, I remember thinking that the Clintonistas were right.
My health-care prejudices crumbled not in the classroom but on the way to one. On a subzero Winnipeg morning in 1997, I cut across the hospital emergency room to shave a few minutes off my frigid commute. Swinging open the door, I stepped into a nightmare: the ER overflowed with elderly people on stretchers, waiting for admission. Some, it turned out, had waited five days. The air stank with sweat and urine. Right then, I began to reconsider everything that I thought I knew about Canadian health care. I soon discovered that the problems went well beyond overcrowded ERs. Patients had to wait for practically any diagnostic test or procedure, such as the man with persistent pain from a hernia operation whom we referred to a pain clinic—with a three-year wait list; or the woman needing a sleep study to diagnose what seemed like sleep apnea, who faced a two-year delay; or the woman with breast cancer who needed to wait four months for radiation therapy, when the standard of care was four weeks.
I decided to write about what I saw. By day, I attended classes and visited patients; at night, I worked on a book. Unfortunately, statistics on Canadian health care’s weaknesses were hard to come by, and even finding people willing to criticize the system was difficult, such was the emotional support that it then enjoyed. One family friend, diagnosed with cancer, was told to wait for potentially lifesaving chemotherapy. I called to see if I could write about his plight. Worried about repercussions, he asked me to change his name. A bit later, he asked if I could change his sex in the story, and maybe his town. Finally, he asked if I could change the illness, too.
My book’s thesis was simple: to contain rising costs, government-run health-care systems invariably restrict the health-care supply. Thus, at a time when Canada’s population was aging and needed more care, not less, cost-crunching bureaucrats had reduced the size of medical school classes, shuttered hospitals, and capped physician fees, resulting in hundreds of thousands of patients waiting for needed treatment—patients who suffered and, in some cases, died from the delays. The only solution, I concluded, was to move away from government command-and-control structures and toward a more market-oriented system. To capture Canadian health care’s growing crisis, I called my book Code Blue, the term used when a patient’s heart stops and hospital staff must leap into action to save him. Though I had a hard time finding a Canadian publisher, the book eventually came out in 1999 from a small imprint; it struck a nerve, going through five printings.
Nor were the problems I identified unique to Canada—they characterized all government-run health-care systems. Consider the recent British controversy over a cancer patient who tried to get an appointment with a specialist, only to have it canceled—48 times. More than 1 million Britons must wait for some type of care, with 200,000 in line for longer than six months. A while back, I toured a public hospital in Washington, D.C., with Tim Evans, a senior fellow at the Centre for the New Europe. The hospital was dark and dingy, but Evans observed that it was cleaner than anything in his native England. In France, the supply of doctors is so limited that during an August 2003 heat wave—when many doctors were on vacation and hospitals were stretched beyond capacity—15,000 elderly citizens died. Across Europe, state-of-the-art drugs aren’t available. And so on.
But single-payer systems—confronting dirty hospitals, long waiting lists, and substandard treatment—are starting to crack. Today my book wouldn’t seem so provocative to Canadians, whose views on public health care are much less rosy than they were even a few years ago. Canadian newspapers are now filled with stories of people frustrated by long delays for care:
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http://pajamasmedia.com/blog/the-doctor-is-in-infant-mortality-comparisons-a-statistical-miscarriage/?singlepage=true
The Doctor Is In: Infant Mortality Comparisons a Statistical Miscarriage
Babies don't do better in countries with socialized medicine.
August 3, 2008 - 12:00 am - by Dr. Linda Halderman
Q: If socialized medicine is so bad, why are infant mortality rates higher in the U.S. than in other developed nations with government or single-payer health care?
A: U.S. infant mortality rates (deaths of infants <1 year of age per 1,000 live births) are sometimes cited as evidence of the failings of the U.S. system of health care delivery. Universal health care, it’s argued, is why babies do better in countries with socialized medicine.
But in fact, the main factors affecting early infant survival are birth weight and prematurity. The way that these factors are reported — and how such babies are treated statistically — tells a different story than what the numbers reveal.
Low birth weight infants are not counted against the “live birth” statistics for many countries reporting low infant mortality rates.
According to the way statistics are calculated in Canada, Germany, and Austria, a premature baby weighing <500g is not considered a living child.
But in the U.S., such very low birth weight babies are considered live births. The mortality rate of such babies — considered “unsalvageable” outside of the U.S. and therefore never alive — is extraordinarily high; up to 869 per 1,000 in the first month of life alone. This skews U.S. infant mortality statistics.
When Canada briefly registered an increased number of low weight babies previously omitted from statistical reporting, the infant mortality rose from 6.1 per 1,000 to 6.4 per thousand in just one year.
According to research done by Canada’s Bureau of Reproductive and Child Health, “Comparisons of infant mortality rates by place and time should be adjusted for the proportion of such live births, especially if the comparisons involve recent years.”
Norway boasts one of the lowest infant mortality rates in the world. But when the main determinant of mortality — weight at birth — is factored in, Norway has no better survival rates than the United States.
Pregnancies in very young first-time mothers carry a high risk of delivering low birth weight infants. In 2002, the average age of first-time mothers in Canada was 27.7 years. During the same year, the same statistic for U.S. mothers was 25.1 — an all-time high.
Some of the countries reporting infant mortality rates lower than the U.S. classify babies as “stillborn” if they survive less than 24 hours whether or not such babies breathe, move, or have a beating heart at birth.
Forty percent of all infant deaths occur in the first 24 hours of life.
In the United States, all infants who show signs of life at birth (take a breath, move voluntarily, have a heartbeat) are considered alive.
If a child in Hong Kong or Japan is born alive but dies within the first 24 hours of birth, he or she is reported as a “miscarriage” and does not affect the country’s reported infant mortality rates.
The length of pregnancy considered “normal” is 37-41 weeks. In Belgium and France — in fact, in most European Union countries — any baby born before 26 weeks gestation is not considered alive and therefore does not “count” against reported infant mortality rates.
Too short to count?
In Switzerland and other parts of Europe, a baby born who is less than 30 centimeters long is not counted as a live birth. Therefore, unlike in the U.S., such high-risk infants cannot affect Swiss infant mortality rates.
Efforts to salvage these tiny babies reflect this classification. Since 2000, 42 of the world’s 52 surviving babies weighing less than 400g (0.9 lbs.) were born in the United States.
The parents of these children may view socialized medicine somewhat differently than its proponents.
Dr. Linda Halderman was a Breast Cancer Surgeon in rural central California until unsustainable Medicaid payment practices contributed to her practice's closure. She now serves as a policy advisor in the California State Senate.
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http://www.biggovhealth.org/resource/myths-facts/infant-mortality-and-premature-birth/
Infant Mortality and Premature Birth
Myth: The U.S. infant mortality rate is higher than that of other countries
Fact: The U.S.’ infant mortality rate is not higher; the rates of Canada and many European countries are artificially low, due to more restrictive definitions of live birth. There also are variations in the willingness of nations to save very low birth weight and gestation babies.
The ethnic heterogeneity of the U.S. works against it because different ethnic and cultural groups may have widely different risk factors and genetic predispositions. (G M-Imagine the impact of illegal aliens and the pathologies from the inner cities and how that might skew the statistics, as well as the costs.)
Definitions of a live birth, and therefore which babies are counted in the infant mortality statistics very considerably. The U.S. uses the full WHO definition, while Germany omits one of the four criteria. The U.K. defines a still birth “a child which has issued forth from its mother after the twenty-fourth week of pregnancy and which did not at any time after being completely expelled from its mother breathe or show any other signs of life.”1
This leaves what constitutes a sign of life open and places those born before 24 weeks in a gray area. Canada uses the complete WHO definition but struggles with tens of thousands of missing birth records and increasing numbers of mothers sent to the U.S. for care.2 France requires “a medical certificate [that] attests that the child was born ‘alive and viable’” for baby who died soon after birth to be counted, which may be difficult to obtain.
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Myth: The U.S. premature birth rate is higher than that of other countries.
Fact: In the Netherlands, babies below 25 weeks gestation are no longer resuscitated, but rather given only palliative treatment. Those at 25 to 26 weeks are generally resuscitated and kept alive, but the decision depends on the facts of each case.3 The result is underreporting the number babies that may be live-born but who are not offered aggressive treatment.
Switzerland only uses two of the four WHO criteria, respiration and heart beat, and does not aggressively treat very premature babies. In some cantons, the baby must be 30 cm long to be registered as a live birth. Switzerland also requires registration of still births only from 6 months gestation and has no rule regarding registration of live births. Studies have found significant underreporting of premature births in Switzerland, which can alter the overall mortality rate by more than a percentage point.4
1 Births and Deaths Registration Act 1953, paragraph 41, modified by Still Birth Definition Act 1992.
2 Lisa Priest, “Canada’s U.S. baby boom,” The Globe and Mail, 5 May 2008; Caroline Abraham, “Red tape denies baby Sonja her brief life; To the dismay of parents, thousands of births go undocumented in Ontario,” The Globe and Mail, 22 July 2006.
3 From the newsletter of the Dutch Paediatric Association, quoted in “The Dutch Policy,” BBC News, 22 September 2004, http://news.bbc.co.uk/go/pr/fr/-/2/hi/programmes/panorama/3677278.stm.
4 Martina Müller, Gero Drack, Christian Schindler, and Hans Ulrich Bucher, “Live and Stillborn very low birthweight infants in Switzerland: comparison between hospital based birth registers and the national birth register,” Swiss Medical Weekly, vol. 135, (2005).
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http://www.dailymail.co.uk/news/article-1234276/Britain-sick-man-Europe-Heart-cancer-survival-rates-worst-developed-world.html
If I recall correctly, JDN, your wife survived cancer, right? What would he chances have been had she had to wait months for diagnosis and months for treatment?
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http://news.scotsman.com/health/Revealed-the-true-scale-of.2786966.jp
Revealed: the true scale of NHS cancer waiting times
Published Date: 25 June 2006
By EDDIE BARNES
POLITICAL EDITOR
Full table
See the full table of cancer treatment waiting times for Scotland here
THE shocking extent of cancer treatment delays in Scotland has been revealed in official new figures which also lay bare the postcode lottery facing patients across the country.
Despite repeated promises and billions of pounds invested, the hospital-by-hospital breakdown reveals some patients are waiting more than a year between GP referral and treatment.
The statistics also expose massive variations in average waiting times across Scotland, with some units beginning treatment for lung cancer in 10 days while others take 10 weeks.
Ministers last night admitted the situation was "unacceptable". Health minister Andy Kerr ordered health boards to explain the lengthy delays and widespread variations.
But one of Europe's leading cancer specialists, Professor Gordon McVie, said the NHS could provide "no excuses" for routinely delaying potentially life-saving treatment.
And one health board, NHS Lothian, issued an unreserved apology for a bowel cancer patient waiting over 300 days between referral and treatment.
Cancer claims the lives of 15,000 Scots every year, and one in three people will fall prey to the disease. Ministers have made combating cancer one of their top health priorities, and rapid treatment is seen as an essential plank in that strategy.
Scotland on Sunday has obtained the latest Scottish Executive figures for 32 hospitals, showing the time between referral and treatment for 10 different types of cancer.
The figures, for patients diagnosed between October and December last year, reveal that:
• Eighteen out of 32 hospitals forced bowel cancer patients to wait an average of two months or more to receive treatment. In the most extreme case, a patient at Monklands hospital in Airdrie was finally treated 335 days after being referred for treatment by a GP.
• Patients diagnosed with bladder, prostate and kidney cancer suffered extraordinary delays. The 13 patients treated at Glasgow Royal Infirmary waited an average of 168 days for treatment. A patient at Falkirk and District Royal Infirmary waited 379 days.
• Six breast cancer patients at Belford hospital, Inverness, waited an average of 80 days before getting treatment for a disease that becomes virtually incurable if it spreads.
• There remains a 'postcode lottery' of cancer in Scotland. The 18 bowel cancer patients at Ayr hospital waited an average of 18 days, compared with the 127 days suffered by those at Wishaw General.
One health board chairman last night launched an immediate investigation after he was confronted with the case of a bowel cancer patient at the Western General, Edinburgh, who waited 305 days before being treated. The delay has been blamed on an "administrative error".
Brian Cavanagh, chairman of NHS Lothian, said: "This is completely unacceptable. I have already asked for a report into how this occurred and have asked for an assurance from the University Hospital Division that it will not happen again."
Mike Grieve, Director of Operations, University Hospitals Division, NHS Lothian, added: "I would like to apologise unreservedly for this lengthy delay."
Kerr has now asked all cancer services across Scotland to probe the long waits, demanding that they show evidence that any long delays can be explained. "I have asked cancer services across Scotland to examine very long waits and confirm that there were indeed clinical or other relevant reasons for long delays over six months," he said.
"Long waits are unacceptable. If a patient's condition demands
immediate access to treatment, I would expect that need to be recognised by clinicians and acted upon appropriately. Patients should be diagnosed and have their treatment according to their individual clinical need and personal needs."
Ministers have set a two-month maximum limit for treatment for the most urgent cases. Executive officials and health chiefs insist that for many 'non-urgent' cases, which are included in the new figures, waits may be longer because patients could be too ill or too frail to receive aggressive treatment.
But one of the world's leading cancer experts said this could not be used as an excuse. He said that in all but a tiny number of cases, a modern-day health service should treat cancer patients within two months of referral.
Professor Gordon McVie, consultant to the European Institute of Oncology, said: "For the majority of common cancers there is cut-and-dried, five-star evidence to suggest that delay in treatment will affect prognosis and the likelihood of a cure."
He added: "It is nonsense to suggest that there are clinical reasons for lots of delays. That will only affect a very small number of people. Things are slowly getting better in Scotland but they were shocking to start with. Both Scotland and England are not up to acceptable standards of efficiency."
Kerr has now identified cancer waiting times as among his top priorities, with ministers desperate to avoid damaging statistics in the run-up to next year's Scottish Parliament elections. Opposition parties agreed the figures revealed a postcode lottery of care. SNP health spokeswoman Shona Robison said: "Depending on where you live decides how long it takes for you get treated. There are too many patients being let down because of the performance of the health boards which they live within."
Jenny Whelan, head of Cancerbackup in Scotland - which runs a helpline for cancer patients - said: "Cancerbackup receives many calls from anxious patients concerned about long delays to their treatment, at a time when they should be focusing on trying to recover. It's imperative people are treated as quickly as possible and do not have the added stress of lengthy waits between diagnosis and the start of treatment."
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"If you think your surgery is being done by your Dr. because of a profit margin rather than medical need, I suggest finding another doc. "
Looks to me like GM has the points covered I would try to make back to JDN. Allowing for-profit activities in healthcare does not mean all decisions are 100% economic. I don't get a dollar more in rent every time I try to do something extra for a tenant. I mostly just try to keep them as a customer.
Pretending to make healthcare non-profit is silly, and ignorant of what profits are and what they do... the most efficient and effective way known to allocate scarce resources.
State law here requires all hospitals to be non-profit, what a joke. A friend is CFO of one of the largest groups. They own for-profit businesses within the non-profit building like the pharmacy in the front entry (as you point out) that can make up for all of anti-capitalistic legislation people can think of. An argument I make to a different friend (of the stalinist-socialist persuasion) is that it meaningless to call a building non-profit if all of the people walking in and out of it are pulling down 300k or more.
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"Look at longevity rates; America is tied at 36th. That is terrible. I think the whole of Europe is ahead of us, not to mention Japan which also has a national health care plan."
Does anybody ever compare Europe with European Americans, African Americans with Africans and Hispanic Americans with outcomes for people south of the border or do we just throw around bullshit and to see if a false point can be proven?
A look at differences in educational outcomes based on varying diversity is helpful, please read Iowahawk: Longhorns 17, Badgers 1. http://iowahawk.typepad.com/iowahawk/2011/03/longhorns-17-badgers-1.html White students in Texas (wild west) do better than white students in (unionized) Wisconsin. Hispanics in Texas do better in Texas than Hispanics in Wisconsin. Blacks in Texas do better than blacks in Wisconsin. But every reporting out there is about the highest test scores coming out of Iowa, MN or Wisc.
The graduation rate at my daughter's very large public high school is 99% with the strictest standards of any state and the on-to-college rate is 91%. See how that or any healthcare outcome measures up with say immigrant-based Malmo Sweden with national healthcare. Let's compare Scandinavian Americans here with Sweden's Islamic and see what part is genetic or cultural differences and what part is systemic.
Where, JDN, is the highest survival rates for the ailments you and/or your wife (update: no one can stay ahead of GM on this) are most likely to get (hypothetically, not personally)? My guess is the good old US of A.
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Just a few points.
GM - Why twice bring up excuses for America's poor infant mortality rate? In contrast, I brought up, much more importantly, longevity. Fact - people consistently live longer in countries that have national health care systems.
As for profit margin? Sorry, even excellent doctors will order tests and do procedures that pay the most. That's just how it is. I'm not saying those procedures don't work, or that these doctors don't truly care about their patients, actually we have great doctors here; just that they often do tests/procedures that are not necessary. But that is how the doctor/hospital get paid. And it inflates the doctors and hospital's income.
I'm too lazy/busy tonight to look it up, but time after time studies will show doctors when given a choice perform surgeries that are the highest paying. Studies further show
than when the profit motive is deleted (reimbursement levels lowered) the frequency of the same surgery/test is significantly lowered. Imagine that? Maybe it's because the average American doctor makes nearly double what his counterpart makes in Europe or Japan or Hong Kong. But higher salaries for doctors does not translate to longevity. Nor do needless tests and procedures
mean longer longevity.
Worse, in in this country if you can't pay top tier, well you simply don't get top tier care. That's ok for buying a car; some drive an old used VW bug, others a new top of the line Benz, either way you get there, but I'm not sure it's right that the poor guy next door gets marginal care and maybe dies versus the guy with the big bucks who gets the newest and latest and the best. Something immoral about that in my opinion. But that is one of the reasons our nations's longevity as a group is pitiful compared to other nations.
As for my wife, please leave her out of it....
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1) Would not the infant mortality rate affect the longevity rate?
2) Does not the fact that we are (as best as I know) the fattest population on the planet have something to do with our longevity rate?
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The silent ending to every sentence in economics is 'all other things equal'. A doctor might be expected to respond to a monetary incentive, 'all other things held equal'. That you think he/she will perform a test or procedure unnecessarily only to make an extra buck only tells us something about principles or the absence of them. I don't know any doctors who knowingly or intentionally waste resources.
What JDN is finding fault with is crony capitalism, known on the board as fascism. Third party compensators write the procedure rate book before anyone diagnoses the patient. Not exactly a free market or a healthcare systm. Then we compare that with nationalizing the whole system, aka Marxism, as if we didn't know a better way. The reason money/capital doesn't allocate resources best in this scenario is the distortion called third party pay. We discuss what a supplier would do for compensation and what some regulatory board will pay per procedure, need it or not, but if this were some form of market or capitalism, the supply question would have to be mapped against demand - what ordinary people are able and willing to pay. We remove that half of the equation, wonder why costs run up, then compare it only with complete statism. Something is missing.
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BTW, as I forgot to note in my previous post, the last several posts would be better placed if posted in the Health Care thread :-)
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White House’s Daley seeks balance in outreach meeting with manufacturers
By Peter Wallsten and and Jia Lynn Yang, Published: June 16
It was supposed to be the White House’s latest make-nice session with corporate America — a visit by Chief of Staff William M. Daley to a meeting with hundreds of manufacturing executives in town to press lawmakers for looser regulations.
But the outreach soon turned into a rare public dressing down of the president’s policies with his highest-ranking aide.
One by one, exasperated executives stood to air their grievances on environmental regulations and stalled free-trade deals. And Daley, the former banker tasked with building ties with industry, found himself looking for the right balance between empathy and defending his boss.
At one point, the room erupted in applause when Massachusetts manufacturing executive Doug Starrett, his voice shaking with emotion, accused the administration of blocking construction on one of his facilities to protect fish, saying government “throws sand into the gears of progress.”
Daley said he did not have many good answers, appearing to throw up his hands in frustration at what he called “bureaucratic stuff that’s hard to defend.”
“Sometimes you can’t defend the indefensible,” he said.
The exchange suggests the limits of the elaborate courtship of corporations begun by President Obama and his top aides after Democrats’ big losses in the 2010 elections — an effort that has taken on new urgency in recent weeks.
Top aides have been reaching out to business leaders as Obama’s reelection campaign seeks to expand its network of potential new donors and fundraisers. And the White House has hoped that a closer alliance with businesses would help spur job growth.
Even as the White House pledges more receptivity to corporate concerns, business continues to spar with the administration on numerous fronts.
Wall Street is lobbying to undo many of the new regulations signed into law last year. Manufacturers say environmental policies are hindering growth. And, in a high-profile case that tests the administration’s allegiances, aerospace giant Boeing is warring with labor regulators over its decision to open a plant in South Carolina, which is hostile to unions.
In his speech and during a question-and-answer session Thursday, Daley laid out the administration’s efforts to help business, promoting Obama’s support for changing the corporate tax structure and for new free trade agreements.
He pointed to the administration’s effort, led by regulatory czar Cass Sunstein, to identify hundreds of rules that could be costing businesses money and time.
When a paper company executive said Environmental Protection Agency regulations might cost her $10 million to $15 million to upgrade a mill, Daley said the number of rules and regulations “that come out of agencies is overwhelming.”
Later, he added: “We’re trying to bring some rationality to it.”
Daley’s appearance before Thursday’s meeting of the National Association of Manufacturers was an unusual public appearance for Obama’s relatively new chief of staff. He invited the executives to offer candid views and extended the question-and-answer session, at one point joking, “I’ll probably regret saying that.”
He acknowledged the touchy political calculation the White House faces as Obama tries to promote his economic record on the campaign trail while being sensitive to the reality that many Americans are struggling. This month, the White House was thrown a political curveball with a surprisingly glum jobs report in which the unemployment rate ticked up to 9.1 percent, giving several of Obama’s potential GOP rivals an opening to attack his leadership.
“You can’t sound Pollyannaish,” Daley told the business leaders. “I believe this economy of ours is better than the perception right now.”
Daley offered blunt assessments on key issues of interest to executives in the room.
On the status of free-trade agreements with South Korea, Panama and Colombia, he suggested politics was proving to be a challenge. He said there are “people who lose from these agreements” and urged businesses to lobby their workers to help overcome opposition on Capitol Hill.
“No politician loses an election because they voted against trade,” he said.
On lowering the corporate tax rate, a top goal of business groups, Daley said again, “there are winners and losers.” He warned that some small businesses might face a tax increase.
Mary Andringa, head of NAM, described the meeting as “constructive” and was “quite pleased” that Daley devoted more than an hour to the group’s concerns.
But some business executives in the room said they were unimpressed by the White House’s attempts to woo industry.
“We think there’s a thin facade by the administration to say the right things, but they don’t come close to doing things,” said Barney T. Bishop III, chief executive of the business group Associated Industries of Florida. He called the efforts to streamline regulations “immaterial.”
“We love the platitudes, but we want to see action,” Bishop said.
White House officials described Thursday’s encounter as part of a work in progress. Spokesman Eric Schultz described the meeting as a “frank and open conversation . . . about steps we can take to drive private-sector job growth.”
Daley said afterward that he’s sympathetic to the gripes he heard. “This is a practical world you’ve got to live in,” he said. “These people run businesses.”
http://www.washingtonpost.com/politics/white-houses-daley-seeks-balance-in-outreach-meeting-with-manufacturers/2011/06/16/AG177yXH_print.html
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Balancing out the Bear with some Bull from Wesbury :lol: Seriously, he is a good economist and we need to keep an open mind. :-)
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Data Watch
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New orders for durable goods increased 1.9% in May To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/24/2011
New orders for durable goods increased 1.9% in May (2.8% including upward revisions to April). The consensus expected a gain of 1.5%. Orders excluding transportation rose 0.6% in May (1.9% including upward revisions to April). The consensus expected 0.9%. From a year ago, overall new orders are up 9.0%, while orders excluding transportation are up 7.2%
The overall increase in orders was led by civilian aircraft. Almost all other major categories of orders increased as well.
The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure rose 1.4% in May and even if unchanged in June, will be up at a 7.2% annual rate in Q2 versus the Q1 average.
Unfilled orders rose 0.9% in May and are up 6.3% from last year.
Implications: The economy is still alive and kicking, and today’s report on durable goods shows it. New orders for durable goods increased 1.9% in May, beating the expected increase of 1.5%, and were revised up for April as well. Most of the gain in May was due to civilian aircraft, which are very volatile from month to month. However, excluding the transportation sector, orders were still up 0.6% in May and up 1.9% including upward revisions for April. Moreover, the gains in May were widespread, with almost every major category of orders increasing. In other words, this is not just a Boeing story. Shipments of “core” capital goods (which exclude civilian aircraft and defense and which the government uses to calculate GDP) bounced back 1.4% in May. These shipments are up 7.7% versus a year ago and up at a much faster 14.9% annual rate in the past three months. Given record corporate profits and balance sheet cash, relatively low borrowing rates in the corporate sector, a recent rise in commercial and industrial lending, plus full expensing for tax purposes for 2011, we believe business investment will continue to increase substantially for at least the next couple of years.
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It's a sad day for Baseball in LA, "The Los Angeles Dodgers filed for bankruptcy court protection early Monday."
But what caught me attention was the comment,
"The bankruptcy filing lists numerous Dodgers players, past and present, among its largest creditors, with former player Manny Ramirez the largest creditor, owned almost $21 million.
Players are likely to be paid in full, though, as they have protections under in the collective bargaining agreement between their union and Major League Baseball."
http://money.cnn.com/2011/06/27/news/companies/dodgers_bankruptcy/index.htm?hpt=hp_t1
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JDN, The economics of pro sports is nuts, an extreme version of crony capitalism aka fascism where government picks winners and losers. I'm sure every town has their story. I wonder what baseball would look like if government considered treating all businesses equally.
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Doug, I absolutely agree. While I am no fan of McCourt, I simply don't get why the Commissioner is able to take over the team
when McCourt has documented that he is able to raise financing. Further, while I love the Dodgers, if McCourt wants to take some money out for
personal use, it would seem to me that is his prerogative; it's his team, his money. If you want to sell one of your buildings and buy that 50 foot Swan,
well, isn't that your right?
My post was to highlight that Unions were to be given priority in bankruptcy. Frankly, I didn't know that normal procedure. I thought Obama
made a rare, albeit necessary (?) exception for GM.
p.s. off topic, but a while ago you said you need a license to sail a boat in MN? You mean registration don't you?
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"p.s. off topic, but a while ago you said you need a license to sail a boat in MN? You mean registration don't you?"
Correct. Large govt fees required to harness the wind from my own property.
In the Boundary waters (BWCA) under federal control, sail boats are banned entirely. http://www.bwca.cc/tripplanning/rules.htm
If they knew anything about political economics or cared about wanting to save the world from the C02 that is growing our forests too rapidly, they might want to subsidize rather than tax and ban sailboats.
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http://www.weeklystandard.com/blogs/obama-s-economists-stimulus-has-cost-278000-job_576014.html
Who knew that a marxist community organizer would be such a failure as president?
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Avoiding the ad hominem attascks (as I accused on a post against Beck), I always try to refute Krugman point by point, rather than smear the person. Still I wonder how he came to his current status of liberal economist de facto in chief and I wonder what scholarly work he once did to earn the profession's highest award. This piece touches on the evolution of the famous journalist/economist of the NY Times and Princeton.
http://opinion.financialpost.com/2011/06/28/peter-foster-the-demons-in-krugmanomics/
Peter Foster: The demons in Krugmanomics
Financial Post, Jun 28, 2011
Paul Krugman’s affection for markets fell as he became obsessed with inequality, market instability and catastrophic climate change
Nobel economist Paul Krugman is due to address the Economic Club of Toronto Wednesday on whether the United States has “mortgaged its future.” If Mr. Krugman is true to form, he will tell his audience that it has not mortgaged its future enough. What is desperately needed is more government borrowing and spending.
Mr. Krugman is a Nobel-winning trade-policy academic economist who, over the past couple of decades, has gone increasingly to the liberal dark side, as evidenced in his columns in The New York Times. What seems to have driven him completely over the edge is a combination of Bush Derangement Syndrome and an evangelical desire to prove that Reaganomics was a failure. He criticizes Barack Obama for not going far enough. He hates Republicans with a passion and is Keynesian to the core. Thus he can only interpret the failure of government stimulus as evidence of “cowardice” or “lack of political will.”
Like most liberal moralists, Mr. Krugman demonizes his opponents as not merely wicked and/or stupid/and or venal, but also “furious” because he is so right and they are so wrong. On election night 2008, he and his even more uncompromisingly liberal wife, Robin Wells, who is also a Princeton economist, had a party at which effigies of their enemies were burned. Salem, anyone?
Mr. Krugman constantly concocts conspiracies of the rich to grind the faces of the poor. He calls anti-Keynesians “The Pain Caucus.” He is currently lashed to the mast of not one but two sinking ships, the USS Keynes and the USS Draconian Climate Policy.
Modern American conservatism, he has written, “is, in large part, a movement shaped by billionaires and their bank accounts, and assured paycheques for the ideologically loyal are an important part of the system. Scientists willing to deny the existence of man-made climate change, economists willing to declare that tax cuts for the rich are essential to growth, strategic thinkers willing to provide rationales for wars of choice, lawyers willing to provide defences of torture, all can count on support from a network of organizations that may seem independent on the surface but are largely financed by a handful of ultra-wealthy families.”
Maybe he should check out what causes the Rockefeller, Carnegie, Pew, Hewlett and Packard foundations are actually promoting. It certainly isn’t climate change denial.
Mr. Krugman’s Nobel Prize for work in international trade and economic geography was widely praised. Early in his career he was a fan of markets and free trade, and attacked “popular” economists such as John Kenneth Galbraith, Lester Thurow and Robert Reich, who catered to economic misconceptions beneath a cloak of liberal good intentions. However, that cloak in the end proved too attractive not to try on.
Mr. Krugman’s affection for markets has declined as he has become obsessed with inequality, market instability and catastrophic climate change. He doesn’t think consumers can be trusted to make the “right” choices any more, and has taken to the remarkably annoying habit of condemning free marketers as people who believe that people are always rational and markets perfect. Then again, straw men are easy to torch.
Mr. Krugman’s take on the ongoing crisis is remarkable not merely for wishing to keep doing more of what has failed, but his blindness to the role of government policy in its creation. Fannie and Freddie? Mere bystanders who only decided to help blow up the system “late in the game.” Greece? It’s all the euro’s fault.
Anthropogenic global warming has become an article of religious faith for Mr. Krugman, which has required him to go through astonishing convolutions in the face of growing evidence of corruption. Climategate? A “fake scandal.” Remember those emails about a “trick” to “hide the decline”? According to Mr. Krugman this was an “anomalous decline.” Well, no. The decline was in actual temperature readings which failed to concur with the proxy data from tree rings. These had to be “hidden” because tree ring data were essential to the credibility of the poster child “hockey stick” graph that presented the twentieth century as a thousand year anomaly. The decline had to be hidden because it exposed fake science.
The former free trader now thinks that carbon tariffs might not be such a bad idea, and since cap and trade represents an alleged “market solution” to the catastrophe-to-come, the conservatives who (successfully) opposed it are, in Mr. Krugman’s view, hypocrites.
Mr. Krugman leans towards the global salvationist posturing of Lord Stern, whose climate review is a monument to perverted cost-benefit analysis. “Stern’s moral argument for loving unborn generations as we love ourselves may be too strong,” Mr. Krugman has written, “but there’s a compelling case to be made that public policy should take a much longer view than private markets.”
The problem is that it doesn’t.
The evil of Mr. Krugman’s opponents is all embracing. He has written that “[T]hose who insist that Ben Bernanke has blood on his hands tend to be more or less the same people who insist that the scientific consensus on climate reflects a vast leftist conspiracy.” You see the connection? Leaving aside the blood libel, if you oppose further corruption of the monetary system you are clearly also a climate denier. And why doesn’t America have universal public health care? Simple, it’s due to “The legacy of slavery, America’s original sin.”
Once Mr. Krugman’s intellectual inspiration was Adam Smith. Now it’s Naomi Klein.
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America's Troubling Investment Gap
For the first time in decades, America is on net losing, not attracting, growth capital.
By David Malpass And Stephen Moore
In June, President Obama celebrated a rare sliver of good economic news: Foreign investment was up 49% last year over 2009. The president says that this boost in capital shipped to the U.S. by international companies or foreign investors leads to more businesses and higher-paying jobs here at home. He's right.
But this isn't the economic success story that the White House is spinning. The real truth of the recession and limping recovery is that for the first time in decades America is, on net, losing, not attracting, growth capital. That may be the single most important explanation for persistently high unemployment and stagnant wages.
It is true that foreign direct investment rose to $236 billion in 2010 from $159 billion in 2009. But that was still well below the $310 billion invested in 2008. The White House also neglected to disclose that in the first quarter of 2011 foreign investment fell by 51% from the first quarter of last year, according to data released last month from the federal Bureau of Economic Analysis. Foreigners of late have not found the U.S. to be a receptive, high-return home for investment.
Much more worrisome is that Americans are taking their investment dollars abroad at a faster pace than foreigners are bringing capital to these shores. In 2010, for example, U.S. investment abroad was $351 billion—$115 billion higher than foreign investment here. Economic recoveries are periods when investment capital usually surges into a country, but since this weakling rebound began in the middle of 2009 the U.S. has lost more than $200 billion in investment capital. That is the equivalent of about two million jobs that don't exist on these shores and are now located in places like China, Germany and India.
This is a recent and dramatic reversal of fortune. Huge net inflows of productive capital into the U.S. in the 1980s and '90s helped finance the 25-year boom in jobs and broad-based prosperity from 1982-2007. Over that period, foreigners invested just over $6 trillion more in the U.S. (in total capital) than Americans invested abroad, according to the Bureau of Economic Analysis, with most of it going into businesses.
That tidal wave of funds provided the capital to finance new American companies, while increasing the value of other assets, such as real estate. It also underwrote new factories owned by foreign companies like Honda. All of this investment contributed mightily to the 35 million new jobs in the 1980s and '90s. By 2008, the average job created with foreign investment paid $71,000 a year, about 30% above the U.S. average, according to a report issued in June by the White House Council of Economic Advisers, "U.S. Inbound Foreign Direct Investment."
So why did the investors put their money in the U.S. in those years? We'd say it was a combination of low tax rates, a strong dollar, low inflation and other free-market reforms. Capital flows to where it is most highly rewarded, and low marginal tax rates on the returns to capital and business income create a gravitational pull on global funds. A strong and stable currency allows businesses to invest in innovation, employees and productivity rather than inflation hedges. It also encourages investors to wait longer to cash in their profits without worrying about the losses of a depreciating dollar. In the high-tax, high-inflation 1970s, the U.S. was a net exporter of risk-taking capital. As we are now.
That's only part of the story behind the disappointing recovery we now face. To be sure, foreigners still park a huge amount of money in this country, but in the last several years they've shifted their investment toward U.S. Treasury securities and government-guaranteed bonds, and away from the private-sector staples—corporate bonds, intellectual property, ownership of businesses—that create sustainable jobs. Since 2009, foreigners have invested just over $1 trillion in U.S. Treasury bonds, according to the Bureau of Economic Analysis.
Some economists argue that investing in low-interest-rate government bonds works fine for America because it allows the government to boost spending on programs—the latest doozies are windmills, high-speed rail and 99 weeks of unemployment benefits. The low interest rates, this argument goes, prove there is no negative "crowding out" from America's near $1.5 trillion deficit.
That misses the point. To produce rapid growth, most capital must be allocated by markets. The effect of $4.5 trillion of borrowing since 2009 is that foreigners and Americans are buying Treasury bills instead of investing in the next Google, Oracle, Wal-Mart or biomedical company. Today, foreigners are financing food stamps and the next bridge to nowhere while Americans are building state-of-the-art production systems abroad. This is the real pernicious "crowding out effect" of the federal government's borrowing.
The free flow of capital across borders is unquestionably a positive sum game for everyone—in the same way free trade is—but the U.S. can only retain its status as a high-wage dynamic economy if we are enticing capital for new operations to these shores. The U.S. is still by far the world leader in the cumulative stock of foreign investment, which now stands at some $3.3 trillion. But the composition of that investment is tilting toward government securities.
Meanwhile, the best related measure of our competitiveness as a nation—the balance of foreign direct investment into the U.S. versus the investment capital going abroad—is a red flag.
Mr. Malpass is president of Encima Global. Mr. Moore is senior economics writer for the Wall Street Journal editorial page.
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The best that can be said for yesterday's June jobs report is that maybe, if we're lucky, it's a lagging indicator. Perhaps the meager 18,000 in net new jobs, and the increase in the jobless rate to 9.2%, are the trailing end of the 2011 slowdown that will turn around in the second half.
Let's hope so because the details of the report are every bit as ugly as the headlines. Revised numbers for May indicate a gain of only 25,000 jobs, instead of the initial report of 54,000. The separate and more volatile household survey found that the labor force shrank by 272,000. So the jobless rate rose even as the supply of workers fell.
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Wages declined by a penny to $22.99 an hour and the average workweek fell slightly to 34.3 hours. The combined rate for jobless and discouraged workers rose to 16.2%, and six million Americans, or 44.4% of the jobless, have been out of work for more than six months. The percentage of working age Americans with a paycheck fell to 58.2%, which is below the 58.5% at this time a year ago. The economy isn't generating President Obama's vaunted "green jobs," or blue- or white-collar jobs, or any color jobs.
Other recent economic indicators have pointed to a growth pickup. Corporate profits are healthy, the stock market (until Friday) had rebounded from its recent correction, manufacturing output has climbed, and consumers increased retail spending at a brisk 7% clip last month.
But it's no wonder that polls find that more than half of Americans believe the economy is still in recession. In six of the last eight recoveries, all the jobs lost were regained within two years of recession's end. In this recovery we are still seven million jobs below peak employment in 2008, and about two million fewer than if the $830 billion 2009 stimulus had worked as advertised and held unemployment below 8%.
President Obama's economic advisers have been leaving one by one to return to private life, and who can blame them. They used the entire Keynesian, liberal playbook to spur economic growth, and this is the result. The intellectual dissonance must be demoralizing.
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http://www.nationalreview.com/corner/271397/warren-buffett-s-worst-investment-kevin-d-williamson
Warren Buffett’s Worst Investment
July 8, 2011 Kevin D. Williamson
Barack Obama must be the worst investment Warren Buffett has ever made.
The billionaire investor famously supported Barack Obama, who in turn used Buffett as his amulet of normalcy: What, me radical? Tell it to this rich white guy from Omaha. One of the lamest things I can remember having seen in politics transpired in 2008 when Obama was challenged on his radical associations and used Buffett to change the subject. His phrasing was memorably odd: “Let me tell you who I associate with. On economic policy, I associate with Warren Buffett and former Fed chairman Paul Volcker. If I’m interested in figuring out my foreign policy, [Editorial aside: “If”?] I associate myself with my running mate, Joe Biden, or with Dick Lugar, the Republican ranking member on the Senate Foreign Relations.”
So, here’s the wisdom of Associate Buffett on the debt ceiling: “We raised the debt ceiling seven times during the Bush administration. . . . We had debt at 120 percent of the GDP, far higher than this, after World War II, and no one went around threatening that we’re going to ruin the credit of the United States or something in order to get a better balance of debt to GDP.”
Saving the world from Hitler was expensive, to be sure. But in 2011, we haven’t just saved the world from Hitler — we’ve just saved a bunch of bureaucrats and layabouts from honest labor. Not exactly comparable.
But what about World War II, anyway? Coming in at 25.3 percent of GDP, federal spending is higher today than it has been in any year since 1945. What did we do at the end of World War II? We cut spending — radically. In 1944, federal spending was 43.6 percent of GDP. By 1948 it was down to 11.6 percent of GDP. It edged up after that, but from 1948–60, federal spending averaged less than 17 percent of GDP. (Those were not the worst years in the history of the republic.)
What that means is that if federal spending as a share of GDP were reduced to that postwar average from 2012–16, we could balance the budget, start paying down the national debt, and cut taxes by $1 trillion over those five years. Grover Norquist could get his tax cuts, I could get my balanced budget, and Barack Obama still would preside over a government considerably bigger than FDR’s New Deal regime. Not my ideal outcome, but a decent compromise.
Inescapable conclusion: Spending is what is out of whack.
The federal government does a lot more today than it did in 1960. Are those things worth what they’re costing us? The price difference between Eisenhower’s Washington and Obama’s Washington is about 8.4 percent of GDP in 2011, or about $1.25 trillion, roughly the annual economic output of Australia, the thirteenth-largest economy in the world, or just shy of two Switzerlands.
If Warren Buffett thinks that’s a good buy, he’s losing his edge.
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I tacked this story on to another post elsewhere. but it bears repeating and inclusion in the great thread of political economics. Obama argues that he inherited a mess, but he was part of the political-economic group that took majorities in Washington by storm in Nov. 2006, not Jan. 2009. Pelosi-Reid-Obama-Biden-and Hillary were among the group that changed by 180 degrees the economic outlook for the country.
So what was their starting point?
4.4% unemployment! 50 months continuous job growth. A closing deficit. Revenues to the Treasury exceeding (static) estimates by hundreds of billions of dollars.
The most timely and succinct story I have found about the state of affairs prior to that power shift is this story from CNN Money, dated Nov 3 2006, completely oblivious to the change of direction that is 4 days away except to note that the election is not going to be about the economy. :-(
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"Never bet against a fully-employed American work force,"..."With full employment and wages on the rise, you can forget any talk of recession."
http://money.cnn.com/2006/11/03/news/economy/jobs_october/
Unemployment sinks to 5-year low
Rate posts unexpected drop to lowest since May 2001; job growth revised higher.
By Chris Isidore, CNNMoney.com senior writer
November 3 2006: 2:42 PM EST
NEW YORK (CNNMoney.com) -- The unemployment rate fell to the lowest level in more than five years in October, the government reported Friday, a sign of unexpected strength in the job market.
The jobless rate sank to 4.4 percent from 4.6 percent in September, the Labor Department said. It was the lowest since May 2001. Economists had forecast the rate would hold steady.
(http://i.cnn.net/money/2006/11/03/news/economy/jobs_october/chart_help_wanted.jpg)
But the September reading was revised up from the originally reported 51,000, and the increase, together with a revision to the August reading as well, had employment up 139,000 above earlier estimates heading into October. Those revisions and the modest October gain mean that 1.5 million jobs have been added so far this year, which is above forecast by most private economists, and blunts the effect of the modest October gain.
The Bush administration hailed the report, but one political analyst said it wasn't likely to help Republicans facing tough elections battles on Tuesday. Polls indicate the economy isn't the top issue in the midterm elections.
The tighter job market is apparently helping to lift wages, according to the Labor Department report, which showed that average wages rose 6 cents to $16.91 an hour last month, a shade above what economists had forecast.
Average wages are now up 3.9 percent over the last 12 months while the Consumer Price Index, the government's main inflation gauge, is up 2.1 percent for the 12 months ending in September, partly due to the recent sharp decline in oil prices. The spike in gas prices in September 2005, in the wake of Hurricane Katrina, also blunted the year-over-year gain in the price measure.
"All this points to a very robust labor market," said Steven Wieting, senior economist at Citigroup. "Almost all the data this week have been weak. It's possible that the cuts in production will clear the deck and set us up for strong growth in 2007."
Rich Yamarone, director of economic research at Argus Research, said he thinks the return to strong growth could come as soon as the fourth quarter.
"Never bet against a fully-employed American work force," he said. "With full employment and wages on the rise, you can forget any talk of recession."
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More famous people caught reading the forum :wink:, Thomas Sowell picks up on the point about damage done by uncertainty.
The fact that intelligent and informed investors have no clue what tax or regulatory scheme they would operate under if they invested in the U.S. today gives us characteristics of a 3rd world country and does more damage perhaps than the actual taxes and regulations. That damage of what positive economic activity did not happen because of these unknowns is immeasurable.
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http://www.realclearpolitics.com/articles/2011/07/12/unknown_unknowns_110534.html
July 12, 2011
Unknown Unknowns
By Thomas Sowell
When Donald Rumsfeld was Secretary of Defense, he coined some phrases about knowledge that apply far beyond military matters.
Secretary Rumsfeld pointed out that there are some things that we know that we know. He called those "known knowns." We may, for example, know how many aircraft carriers some other country has. We may also know that they have troops and tanks, without knowing how many. In Rumsfeld's phrase, that would be an "unknown known" -- a gap in our knowledge that we at least know exists.
Finally, there are things we don't even know exist, much less anything about them. These are "unknown unknowns" -- and they are the most dangerous. We had no clue, for example, when dawn broke on September 11, 2001, that somebody was going to fly two commercial airliners into the World Trade Center that day.
There are similar kinds of gaps in our knowledge in the economy. Unfortunately, our own government creates uncertainties that can paralyze the economy, especially when these uncertainties take the form of "unknown unknowns."
The short-run quick fixes that seem so attractive to so many politicians, and to many in the media, create many unknowns that make investors reluctant to invest and employers reluctant to employ. Politicians may only look as far ahead as the next election, but investors have to look ahead for as many years as it will take for their investments to start bringing in some money.
The net result is that both our financial institutions and our businesses have had record amounts of cash sitting idle while millions of people can't find jobs. Ordinarily these institutions make money by investing money and hiring workers. Why not now?
Because numerous and unpredictable government interventions create many unknowns, including "unknown unknowns."
The quick fix that got both Democrats and Republicans off the hook with a temporary bipartisan tax compromise, several months ago, leaves investors uncertain as to what the tax rate will be when any money they invest today starts bringing in a return in another two or three or ten years. It is known that there will be taxes but nobody knows what the tax rate will be then.
Some investors can send their investment money to foreign countries, where the tax rate is already known, is often lower than the tax rate in the United States and -- perhaps even more important -- is not some temporary, quick-fix compromise that is going to expire before their investments start earning a return.
Although more foreign investments were coming into the United States, a few years ago, than there were American investments going to foreign countries, today it is just the reverse. American investors are sending more of their money out of the country than foreign investors are sending here.
Since 2009, according to the Wall Street Journal, "the U.S. has lost more than $200 billion in investment capital." They add: "That is the equivalent of about two million jobs that don't exist on these shores and are now located in places like China, Germany and India."
President Obama's rhetoric deplores such "outsourcing," but his administration's policies make outsourcing an ever more attractive alternative to investing in the United States and creating American jobs.
Blithely piling onto American businesses both known costs like more taxes and unknowable costs -- such as the massive ObamaCare mandates that are still evolving -- provides more incentives for investors to send their money elsewhere to escape the hassles.
Hardly a month goes by without this administration coming up with a new anti-business policy -- whether directed against Boeing, banks or other private enterprises. Neither investors nor employers can know when the next one is coming or what it will be. These are unknown unknowns.
Such anti-business policies would just be business' problem, except that it is businesses that create jobs.
The biggest losers from creating an adverse business climate may not be businesses themselves -- especially not big businesses, which can readily invest more of their money overseas. The biggest losers are likely to be working people in America, who cannot just relocate to Europe or Asia to take the jobs created there by American multinational corporations.
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Industrial production increased 0.2% in June To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 7/15/2011
Industrial production increased 0.2% in June, coming in slightly below the consensus expected gain of 0.3%. Including revisions to prior months, production rose 0.1%. Output is up 3.4% in the past year.
Manufacturing, which excludes mining/utilities, was unchanged in June. Auto production fell 2.0% in June. Non-auto manufacturing increased 0.1%. Auto production is up 2.5% versus a year ago while non-auto manufacturing has risen 3.8%.
The production of high-tech equipment increased 0.6% in June and is up 10.0% versus a year ago.
Overall capacity utilization was unchanged at 76.7% in June. Manufacturing capacity use was unchanged at 74.4%.
Implications: Industrial production grew modestly in June but is going to surge sharply in July as automakers start to recover from the supply-chain disruptions coming from Japan. In the past three months, auto and light truck assemblies have dropped at a 39% annual rate, resulting in razor-thin inventories and slower sales (as auto companies and dealers curbed incentives). The reversal of that problem is going to generate eye-grabbing and positive headlines in the next few months. Since the multiple disasters that hit Japan, we have been following manufacturing production excluding autos to assess the underlying trend – even though some of these manufacturers were also temporarily hurt by the supply-chain problems. That production increased 0.1% in June, the most since the disasters hit in March, and was up 3.8% versus a year ago. In addition, we expect business investment in equipment to accelerate. Corporate profits and cash on the balance sheets of non-financial companies are at record highs. Meanwhile, companies can fully expense these purchases for tax purposes through year-end. In other news this morning on the manufacturing sector, the Empire State index, a measure of manufacturing activity in New York, increased to -3.8 in July from -7.8 in June. This is a smaller gain than the consensus expected but we expect better regional survey numbers where the auto industry is more prominent.
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**Of course the question is: If Buraq was trying to damage this country, what would he be doing differently from what he is now?
http://yidwithlid.blogspot.com/2011/07/house-report-obamas-gulf-oil-slowdown.html
Thursday, July 21, 2011
House Report: Obama's Gulf Oil Slowdown Costing 230,000 Jobs!
The oil lease regulatory process is holding holding back oil exploration and production activity in the Gulf of Mexico. This delay is and this is holding economic benefits that spread past the gulf states, to the entire country if the gulf oil activity activity were allowed to match industry capacity.
That was one of the important findings Restarting “the Engine”–Securing American Jobs, Investment, and Energy Security, a study done by IHS CERA and IHS Global Insight which was released by the House Oversight Committee today (and embedded below).
Committee Chair Rep Issa commented about the study's release.
"The Obama Administration has systematically blocked domestic energy production in the Gulf of Mexico, and today's report puts that action in stark terms. It documents a 250 percent increase in the deepwater exploration permit backlog with a decrease of nearly 80 percent for plan approvals and deepwater drilling. That means a loss of $9 billion dollars in capital investment in 2011, along with a projected loss to the government of $25 billion in royalties and tax payments over the next 3 years, to say nothing of the tens of thousands of jobs lost.
"Our domestic energy resources are the largest in the world. Tapping these resources will create more than 500,000 jobs in the next three years, grow the economy and put us on the path to recovery.
The study looks at the plan and permit levels in the six months following the lifting of the deepwater activity moratorium in October 2010. The analysis finds a:
•250% increase in the backlog of deepwater plans pending governmental approval
•86% drop in the pace of regulatory approvals for plans
•60% drop in all GoM drilling permits
•38% increase in the time required to reach each regulatory approval required.
One unexpected finding from the study was that “an increase in oil and gas activity reverberates throughout the broader economy,” said James Diffley, senior director of IHS Global Insight’s U.S. Regional Economic Group. “Each new hire (in the Gulf) results, on average, in more than three additional jobs in an array of industries around the country” – not just in the Gulf region.
The study reports that there is some sort of logjam in the regulatory process, however it does not report what the logjam is or how it was caused. That answer may come from a study Issa released in late May when Issa's House Oversight and Government Reform Committee issued a scathing report about the nation's energy saying in part that the President has deliberately created policies which would cause energy prices to rise.
"The United States has the largest reserves in the world—resources that can provide good paying American jobs and fuel our economic expansion. But standing between that energy and U.S. consumers is an obstacle course of government red tape, regulation, delays and obfuscations," Chairman Darrell Issa (R-CA) said. He pointed to statements by President Obama and Energy Secretary Chu about intentionally raising energy costs for Americans and how these goals are being implemented throughout the government.
The committee's report found that U.S. domestic energy resources are currently the largest on earth—greater than Saudi Arabia, China and Canada combined. It also said that the recent EPA and Department of Interior regulatory actions, some in collaboration with environmental groups or outside normal scope, are having a detrimental impact on independent energy producers.
Once again it seems as if the Barack Obama's politics has taken precedence of over the needs of the country, not just the energy needs but in this case a much-needed stimulus to the economy.
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http://globalpublicsquare.blogs.cnn.com/2011/07/21/who-owns-america-hint-its-not-china/?hpt=hp_bn2
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Tea Party would defeat Obama by supporting McConnell plan on debt
By George Will
http://www.JewishWorldReview.com | The Tea Party, the most welcome political development since the Goldwater insurgency in 1964, lacks only the patience necessary when America lacks the consensus required to propel fundamental change through our constitutional system of checks and balances. If Washington's trajectory could be turned as quickly as Tea Partyers wish — while conservatives control only one-half of one of the two political branches — their movement would not be as necessary as it is. Fortunately, not much patience is required.
The Goldwater impulse took 16 years to reach fruition in the election of Ronald Reagan. The Tea Party can succeed in 16 months by helping elect a president who will not veto necessary reforms. To achieve that, however, Tea Partyers must not help the incumbent achieve his objectives in the debt-ceiling dispute.
One of those is to strike a splashy bargain involving big — but hypothetical and nonbinding — numbers. This would enable President Obama to run away from his record and run as a debt-reducing centrist. Another Obama objective is tax increases that shatter Republican unity and dampen the Tea Party's election-turning intensity. Because he probably can achieve neither, he might want market chaos in coming days so Republicans henceforth can be cast as complicit in the wretched recovery that is his administration's ugly signature.
Mitch McConnell's proposal would require Obama to make three requests for additional debt-ceiling increases. Each time he would be required to recommend commensurate spending reductions. Concerning them, Congress would, of course, retain its constitutional power to do what it wishes.
Obama could muster sufficient Democratic votes (one-third plus one, in one house) to sustain his veto of Congress's disapproval of his requests. But this would not enhance presidential power. Rather, McConnell's proposal would put a harness on the president, tightly confining him within a one-time process.
Congressional primacy would be further enhanced by McConnell's proposed special congressional committee. It would not be another commission; it would have no administration members or other outsiders. Its proposals would be unamendable, and would be voted on this year.
Thanks largely to the Tea Party, today, more than at any time since Reagan's arrival 30 years ago, Washington debate is conducted in conservatism's vocabulary of government retrenchment. The debt-ceiling vote, an action-forcing mechanism of limited utility, has at least demonstrated that Obama is, strictly speaking, unbelievable.
Five months ago he submitted a budget that would have accelerated indebtedness, and that the Democratic-controlled Senate rejected in May, 97 to 0. Just three months ago he was demanding a "clean" increase in the debt ceiling, containing nothing to slow the spending carousel. Now he calls for "the largest possible" debt-reduction deal. Today, he says, "If you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up." Last year he advertised Obamacare as a sufficient reform of health care. He denounces Republicans as uncompromising regarding tax increases but vows "I will not accept" a deal that does not increase taxes.
Obama vaguely promises to "look at" savings from entitlements because "we need to find trillions in savings over the next decade." But when McConnell learned that negotiations chaired by Vice President Biden had identified a risible $2 billion in 2012 discretionary spending cuts — a sum equal to a rounding error on the GM bailout — McConnell concluded that Obama's frugality pantomime required a response that will define the 2012 election choice.
Obama's rhetorical floundering is the sound of a bewildered politician trying to be heard over the long, withdrawing roar of ebbing faith in a failing model of governance. From Greece to California, with manifestations in Italy, Spain, Portugal, Ireland, Illinois and elsewhere, this model is collapsing. Entangled economic and demographic forces are refuting the practice of ever-bigger government financed by an ever-smaller tax base and by imposing huge costs on voiceless future generations.
Richard Miniter, a Forbes columnist, is right: "Obama is not the new FDR, but the new Gorbachev." Beneath the tattered, fading banner of reactionary liberalism, Obama struggles to sustain a doomed system. Democrats' dependency agenda — swelling the ranks of government employees, multiplying government-subsidized industries, enveloping ever-more individuals in the entitlement culture — is buckling under an intractable contradiction: It is incompatible with economic growth sufficient to create enough wealth to feed the multiplying tax eaters.
Events are validating the Tea Partyers' arguments. Time is on their side — but not on America's, unless the impediment to reform is removed in 16 months.
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Very enlightening. I recall seeing before that China 'only' owns a trillion or so out of $14T, when you so often hear it implied that they own nearly all of it. The rest of the story is: who will buy the next $10 trillion or so coming down the pike, and at what cost?
They largest holder by far (19%) is the social security 'lockbox', which is a figment of our imagination, we owe ourselves that money? Isn't SS now at about a breakeven so that removes them from 'helping' with our debt going forward.
The idea of default on these borrowings reminds me of when people suggested dismantling the evil capitalist BP, only to find out the largest shareholder is the British pension system.
We already 'default' on our total debt roughly 2-3% on a good year compounded continuously with the never-ending inflation and devaluation of our currency. That alone wipes the slate nearly clean of dollar based debt in only a little over a couple of decades - if we would only stop borrowing more now.
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http://www.nationalreview.com/exchequer/272257/democrat-downgrade-reality-and-repercussions
Exchequer
NRO’s eye on debt and deficits . . . by Kevin D. Williamson.
The Democrat Downgrade: Reality and Repercussions
July 19, 2011 8:01 P.M.
By Kevin D. Williamson
Tags: Fiscal Armageddon
Question: How many U.S. banks and insurance companies do you think will remain rated AAA if the U.S. government gets downgraded?
That is not a rhetorical question.
The direct consequences of a downgrade of Uncle Sam’s credit on U.S. public finances would be pretty bad. But, as with natural disasters, the aftershocks of this man-made catastrophe might prove more devastating than the main event. In this case, imagine a tsunami of rolling corporate downgrades following the earthquake of a Treasury downgrade, a run on the banks, a discredited FDIC, frozen money-market funds, and a plunging dollar.
It’s not Beijing that’s going to take it in the shorts — it’s our still-fragile financial system.
Standard & Poor currently gives AAA ratings to six major insurance companies: New York Life, Northwestern Mutual, etc. Those companies already are on the watch-list for a downgrade, simply because of their extensive holdings of U.S. Treasury securities — regardless of the fact that Treasuries themselves have not yet been downgraded.
Many banks could find themselves downgraded as well, just because of all the U.S. government debt on their balance sheets. One of our old friends from the bailout days, the AAA-rated Temporary Liquidity Guarantee Program, could get downgraded as well, along with Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and, critically, the FDIC. And Fannie and Freddie still prop up a bunch of mortgage-backed securities. What happens to them? Here’s what Fitch says: “Ratings on bonds with direct credit enhancement provided by Fannie Mae, Freddie Mac, or other GSEs would generally reflect the ratings of the credit enhancement provider.” In English: If the government isn’t AAA, nothing that the government backs is AAA, either.
Fitch also warns that money-market funds could face “liquidity pressure,” something to keep in mind if there’s a run on downgraded banks backed by a downgraded FDIC.
So, who’s who in this world of hurt?
The ten major holders of U.S. Treasury debt are, in order: 1. the Fed, which has more than doubled its holdings of U.S. sovereign debt in the past few years; 2. individual investors, mostly in the United States; 3. the Chinese; 4. the Japanese; 5. pension funds; 6. mutual funds; 7. state and local governments; 8. the Brits; 9. the banks; and 10. insurance companies. (More here.) The national governments have worries of their own already — some of them are in pretty dire straits (the Japanese national debt is 200 percent of GDP) and some of their situations are basically unknowable (China). God alone knows what the Fed will do.
Even if the banks and insurances companies don’t get downgraded, a Treasury downgrade is still going to be enormously disruptive to their businesses. Typically, regulated financial institutions are required to hold “investment grade” assets, which does not limit them to AAA bonds. AA is still “investment grade.” So they don’t have to dump all their Treasuries. (Which is not to say they won’t.) But capital-requirement rules — which govern the amount of money a financial institution has to hold in reserve — naturally take into account whether bonds are AAA, AA, or something else. That’s because $1 worth of Exxon debt is not really worth the same thing as $1 worth of debt from Barney’s Subprime Bait-’n’-Tackle, and $1 million in Swiss bonds is not the same thing as $1 million in Haitian bonds. A downgrade of U.S. Treasuries would mean that basically every bank and insurance company of any stature would immediately have to raise a great deal of capital to offset the downgrade of the more than $1 trillion worth of U.S. Treasury debt they are holding. They’ll have to try to raise that capital in a market suffering a jacklighted panic over that sovereign downgrade, scrambling for investment in an environment in which the U.S. government is no longer considered a gold-plated, top-shelf safe haven. In terms of a “credit event,” that’s probably going to make 2008 look like a day relaxing upon the sandy beaches of Calais with tropical-themed umbrella-garnished drinks.
State and local governments are holding another $1 trillion or so in Treasuries, meaning that the credit profile of our already struggling states and cities would have about as much credibility as Dominique Strauss-Kahn’s wedding vows. A lot of that pension-fund exposure to Treasury debt is for state and local government retirees, too, so Austin and Sacramento and Boise and Augusta will be right between the hammer and the anvil, getting pounded. And so will Springfield — the Typhoid Mary of fiscal contagion at the state level. As I’ve written before, I suspect that Illinois will be the first state to go into something like a full-blown insolvency, largely due to its unfunded pension liabilities. Just Monday, Ben Bernanke confessed himself worried about the situation in Illinois and California. And if I may be forgiven for repeating myself: Most states have either statutory or constitutional obligations to pay those pensions, so they cannot just reduce them or walk away. There’s really no such thing as a state-bankruptcy law, so nobody knows how a default would unfold. How’s that for uncertainty in the markets?
Back to those banks and insurance guys: Contrary to what our dear leaders in Washington have claimed, the world’s financial system has not been reformed. In fact, a great deal of the bailouts and the legislation that followed them was designed specifically to prevent the kind of fundamental reforms that are needed. A global financial system brought to its knees by a raft of bad mortgages is going to be knocked ass-over-teakettle by a downgrade of U.S. Treasury debt.
I was in Washington Monday, debating Cato’s erudite Dan Mitchell about the no-new-taxes pledge. Mr. Mitchell and I agree on the fundamentals and differ on the politics. What I found mildly despair-inducing, however, was the question-and-answer session, during which the predominant concern expressed by the audience was how to ensure that our guys “win” the debt-ceiling debate. While I understand that you have to win elections to get things done, we simply must head off a downgrade, even if at great political cost. Nobody is going to “win” a downgrade.
The thing that has not been sufficiently understood, I think, is this: The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis. The credit agencies, wisely or not, aren’t worried about the short-term political fight leading to an immediate default, but about the near- to medium-term fiscal situation, which is plainly unsustainable.
I sincerely hope that in five or ten years, I will have to sheepishly admit that I was among the alarmists back in 2011. But right now, I believe that the question isn’t how to “win” the debt-ceiling fight, but how to survive the underlying economic disorder it represents.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism,published by Regnery. You can buy an autographed copy through National Review Online here.
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This piece makes an important distinction. That said, a short term debt ceiling so as to place the issue front and center for the elections would not be a problem IMHO. The real issue is whether the Rep Party can come up with the equivalent of Newt's "Contract with America" on how, when, where spending will be cut.
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A lengthy, wide-ranging, worthwhile (IMO) piece on pro-growth economics with global and historical perspective in Commentary Magazine: http://www.commentarymagazine.com/article/growth-is-the-only-way-out-of-this-mess/
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Taylor is one economist who Gov. Pawlenty named for backing his 5% aspirational economic growth goal. This piece is about policies and results, not candidates or parties.
The End of the Growth Consensus
America added 44 million jobs in the 1980s and '90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.
http://online.wsj.com/article/SB10001424053111903554904576457752586269450.html?mod=WSJ_Opinion_LEADTop
By JOHN B. TAYLOR
This month marks the two-year anniversary of the official start of the recovery from the 2007-09 recession. But it's a recovery in name only: Real gross domestic product growth has averaged only 2.8% per year compared with 7.1% after the most recent deep recession in 1981-82. The growth slowdown this year—to about 1.5% in the second quarter—is not only disappointing, it's a reminder that the recovery has been stalled from the start. As shown in the nearby chart, the percentage of the working-age population that is actually working has declined since the start of the recovery in sharp contrast to 1983-84. With unemployment still over 9%, there is an urgent need to change course.
Some blame the weak recovery on special factors such as high personal saving rates as households repair their balance sheets. But people are consuming a larger fraction of their income now than they were in the 1983-84 recovery: The personal savings rate is 5.6% now compared with 9.4% then. Others blame certain sectors such as weak housing. But the weak housing sector is much less of a negative factor today than declining net exports were in the 1983-84 recovery, and the problem isn't confined to any particular sector. The broad categories of investment and consumption are both contributing less to growth. Real GDP growth is 60%-70% less than in the early-'80s recovery, as is growth in consumption and investment.
In my view, the best way to understand the problems confronting the American economy is to go back to the basic principles upon which the country was founded—economic freedom and political freedom. With lessons learned from the century's tougher decades, including the Great Depression of the '30s and the Great Inflation of the '70s, America entered a period of unprecedented economic stability and growth in the '80s and '90s. Not only was job growth amazingly strong—44 million jobs were created during those expansions—it was a more stable and sustained growth period than ever before in American history.
Economic policy in the '80s and '90s was decidedly noninterventionist, especially in comparison with the damaging wage and price controls of the '70s. Attention was paid to the principles of economic and political liberty: limited government, incentives, private markets, and a predictable rule of law. Monetary policy focused on price stability. Tax reform led to lower marginal tax rates. Regulatory reform encouraged competition and innovation. Welfare reform devolved decisions to the states. And with strong economic growth and spending restraint, the federal budget moved into balance.
As the 21st century began, many hoped that applying these same limited-government and market-based policy principles to Social Security, education and health care would create greater opportunities and better lives for all Americans.
But policy veered in a different direction. Public officials from both parties apparently found the limited government approach to be a disadvantage, some simply because they wanted to do more—whether to tame the business cycle, increase homeownership, or provide the elderly with better drug coverage.
And so policy swung back in a more interventionist direction, with the federal government assuming greater powers. The result was not the intended improvement, but rather an epidemic of unintended consequences—a financial crisis, a great recession, ballooning debt and today's nonexistent recovery.
The change in policy direction did not occur overnight. We saw increased federal intervention in the housing market beginning in the late 1990s. We saw the removal of Federal Reserve reporting and accountability requirements for money growth from the Federal Reserve Act in 2000. We saw the return of discretionary countercyclical fiscal policy in the form of tax rebate checks in 2001. We saw monetary policy moving in a more activist direction with extraordinarily low interest rates for the economic conditions in 2003-05. And, of course, interventionism reached a new peak with the massive government bailouts of Detroit and Wall Street in 2008.
Since 2009, Washington has doubled down on its interventionist policy. The Fed has engaged in a super-loose monetary policy—including two rounds of quantitative easing, QE1 in 2009 and QE2 in 2010-11. These large-scale purchases of mortgages and Treasury debt did not bring recovery but instead created uncertainty about their impact on inflation, the dollar and the economy. On the fiscal side, we've also seen extraordinary interventions—from the large poorly-designed 2009 stimulus package to a slew of targeted programs including "cash for clunkers" and tax credits for first-time home buyers. Again, these interventions did not lead to recovery but instead created uncertainty about the impact of high deficits and an exploding national debt.
Big government has proved to be a clumsy manager, and it did not stop with monetary and fiscal policy. Since President Obama took office, we've added on complex regulatory interventions in health care (the Patient Protection and Affordable Care Act) and finance (the Dodd-Frank Wall Street Reform and Consumer Protection Act). The unintended consequences of these laws are already raising health-care costs and deterring new investment and risk-taking.
If these government interventions are the economic problem, then the solution is to unwind them. Some lament that with the high debt and bloated Fed balance sheet, we have run out of monetary and fiscal ammunition, but this may be a blessing in disguise. The way forward is not more spending, greater debt and continued zero-interest rates, but spending control and a return to free-market principles.
Unfortunately, as the recent debate over the debt limit indicates, narrow political partisanship can get in the way of a solution. The historical evidence on what works and what doesn't is not partisan. The harmful interventionist policies of the 1970s were supported by Democrats and Republicans alike. So were the less interventionist polices in the 1980s and '90s. So was the recent interventionist revival, and so can be the restoration of less interventionist policy going forward.
Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009).
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I wonder if there is any way to show graphically what affect big government programs like Obamacare, with increased taxes, increased spending, increased regulations and increased government takeover of private decisions has on employment... The break on the curve is the passage of Obamacare and the difference in the rate of job growth is ten-fold! I guess one could argue that there were other damaging policies and uncertainties coming out of Washington in that same time period.
(http://www.weeklystandard.com/sites/all/files/images/wm3316_chart1.ashx_.preview.gif)
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Touting my own post :oops: the graph in the previous post is extremely consequential. Go back and take a look if you missed it. Job growth under Obama dropped by tenfold after Obamacare. The political shift at that point was nothing compared to the economic shift that occurred.
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WIth Krugman down to sputtering nonsense it is time to tackle the other lead progressive economic voice: Robert Reich says cutting the deficit is (current example) to 'take 2.7 trillion out of the economy'.
Robert Reich, Fmr. Secretary of Labor: "There is a big lie being perpetrated by Republicans it it transcends our deficit/debt issue. And the lie is: If the government reduces its spending, somehow we create more jobs. That is exactly the reverse of reality, Ed (Schultz, the host).
"The reality is: Because of Medicaid and Medicare and Social Security payments people have more money to spend. Because of roads bridges and light rail and education and basic research and development, people have more jobs."
http://www.msnbc.msn.com/id/21134540/vp/43889146#43889146
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What's wrong with THAT picture?
a) we are already taking that $2.7 trillion out of the productive economy. The public sector, necessary and good up to a point that we passed a LONG time ago, rides on the wagon pulled by the private, productive sector. Paul doesn't get paid without robbing Peter. Heavier and heavier loads with fewer and fewer people proportionately pulling, Robert Reich and all Keynesians and progressives don't even see the host-parasite relationship. The government, even when it is governing, does not create jobs or employ resources. It is an overhead cost/burden on our productive resources, labor and capital.
b) If there was some change in the formula for the "more than 80 million checks a month" (http://www.washingtonpost.com/blogs/post-partisan/post/geithners-80-million-checks/2011/07/11/gIQATkJi9H_blog.html) we write, some of those people might work one more hour, one more month or one more year, changing with double magnitude the ratio between people pulling and people riding on the public expense wagon.
c) It always has to be a 'lie', not a difference in professional analysis or opinion. On MSNBC, Reich knows his audience.
d) He goes on to say that it would be okay if it were coupled with tax INCREASES. Huh? The part where I was going to agree with him is that cuts alone are only discretely stimulative. If you are of able mind and body and your check is cut, some will be stimulated to go do something productive AFTER they are conviced the government is not the reliable provider. Others, like public workers in Madison, will just get angry, holler and shout their welfare rights demands at least for one more election cycle.
The cuts (I mentioned once or twice) need to be coupled with overtly pro-growth policies or stagnation very likely will continue.
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Some immediate pro-growth possibilities if we were so inclined:
1) New corp tax code with the highest rate down to below the OECD average and every American operation paying something.
2) New individual tax code: Chop out all credits and all but about 2 deductions, lower the marginal rates and lower the jumps between brackets.
3) Jump start energy production with shall-issue permit legislation.
4) Moratorium on about 50,000 overly ambitious employment regulations. Offer first year businesses and first year new-hires a 1099 option instead of withholding and all payroll compliance regs.
5) Repeal Obamacare and replace with the most generous of the Republican options: limited amnesty for pre-existing conditions to jump into coverage now, medical liability reform and an opening of choices and competition across state lines.
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http://www.cnbc.com/id/43941459
The U.S. economy grew less than expected in the second quarter as consumer spending barely rose, and growth braked sharply in the prior quarter, a government report showed on Friday.
Growth in gross domestic product—a measure of all goods and services produced within U.S. borders—rose at a 1.3 percent annual rate, the Commerce Department said.
First-quarter output was sharply revised down to a 0.4 percent pace from 1.9 percent.
Economists had expected the economy to expand at a 1.8 percent rate in the second quarter.
In addition, fourth-quarter growth was revised down to a 2.3 percent pace from 3.1 percent, indicating that the economy had already started slowing before the high gasoline prices and supply chain disruptions from Japan hit.
Economists had expected the economy would show signs of perking up by now with Japan supply constraints easing and gasoline prices off their high, but data has disappointed.
This and the sharp downward revisions to the prior quarters suggest a more troubling and fundamental slowdown might be underway.
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I suspect he will say that he relied upon the data previously given and revises his opinion with the revision. :-D
More seriously now, this does not sound good at all. Wesbury has been my hope that the rest of me was been spooked by fearmongering , , ,
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Well, here we go:
Data Watch
The first estimate for Q2 real GDP growth is 1.3% at an annual rate To view this
article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 7/29/2011
The first estimate for Q2 real GDP growth is 1.3% at an annual rate, slightly less
than the consensus expected.
The largest positive contributions to the real GDP growth rate were net exports,
which added 0.6 points to the real GDP growth rate, and business investment which
added 0.6 points.
The weakest component of real GDP was government purchases, which reduced the real
GDP growth rate by 0.2 points.
The GDP price index increased at a 2.3% annual rate in Q2. Nominal GDP – real
GDP plus inflation – rose at a 3.7% rate in Q2 and is up 3.7% versus a year
ago.
Implications: Real GDP growth came in a bit slower than the consensus expected for
the second quarter and growth in the first quarter was revised down to only a 0.4%
annual rate. However, First Trust had anticipated a slower than consensus report for
Q2 and we still believe in a marked acceleration in the second half as the economy
gets over supply-chain disruptions from Japan. Also, most of the downward revision
for the first quarter was due to slower inventory accumulation, which leaves more
room for future growth. In other words, today’s revisions are not a sign of a
double-dip recession. Reinforcing this view is that today’s numbers include an
8.7% upward revision to corporate profits in the first quarter. Going back further
with the revisions, new data show the economic panic in late 2008 and early 2009 was
even worse than previously estimated but that growth in 2010 was faster.
Today’s data do not support the case for keeping short-term interest rates at
near zero. Nominal GDP – real GDP growth plus inflation – is up at a
4.1% annual rate in the past two years. More timely reports show the economy is
accelerating out of the first half slog. New claims for unemployment insurance
dropped 24,000 last week to 398,000. Continuing claims for regular state benefits
fell 17,000 to 3.70 million. On the housing front, pending home sales, which are
contracts on existing homes, increased 2.4% in June after an 8.2% surge in May.
These figures strongly suggest existing home sales (counted at closing) will rise in
July.
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I'm reminded of the black knight from Monty Python and the Holy Grail.
[youtube]http://www.youtube.com/watch?v=dhRUe-gz690[/youtube]
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When do the July numbers come out?
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The ISM Manufacturing index fell to 50.9 in July from 55.3 in June To view this
article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/1/2011
The ISM Manufacturing index fell to 50.9 in July from 55.3 in June, coming in well
below the consensus expected decline to 54.5. (Levels higher than 50 signal
expansion; levels below 50 signal contraction.)
The major measures of activity all fell in July, but most remained above 50.0,
signaling growth. The supplier deliveries index slipped to 50.4 from 56.3 and the
production index fell to 52.3 from 54.5. The new orders index declined to 49.2 from
51.6 and the employment index fell to 53.5 from 59.9.
The prices paid index declined to a still elevated 59.0 in July from 68.0 in June.
Implications: From time to time, the ISM index is a better measurement of sentiment
among manufacturers than actual levels of activity. We think July – a month
dominated by (misleading) headlines about a potential default on US Treasury
securities – was one of those months. As a result, we do not read much into
the ISM index coming in well below consensus expectations and anticipate a large
rebound next month. Taken at face value, the 50.9 reading on the ISM may be
disappointing, but it still correlates with 2.9% real growth according to officials
at the ISM. News from the auto sector suggests the supply-chain disruptions due to
Japan are dissipating. That was also the message from last week’s large drop
in initial unemployment claims. Auto production will keep rebounding as inventories
are low and getting more cars on lots will generate more sales. In other news this
morning, construction increased 0.2% in June and rose 2.5% including large upward
revisions for prior months. The revisions were widespread, including home building,
commercial construction, and government projects. The rise in June was due to
commercial construction, primarily manufacturing facilities, retail shops, and
communications structures. We did not go into a double-dip at the start of the
year, we are not entering one now, and there is no need for the third round of
quantitative easing.
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Personal income increased 0.1% in June, while personal consumption fell 0.2% To view
this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/2/2011
Personal income increased 0.1% in June, slightly less than the consensus expected.
Personal consumption fell 0.2% versus a consensus expected gain of 0.2%. In the past
year, personal income is up 5.0% while spending is up 4.4%.
Disposable personal income (income after taxes) was up 0.1% in June and is up 3.7%
versus a year ago. The gain in June was led by interest and dividend income, which
was up 4.6% from a year ago.
The overall PCE deflator (consumer inflation) fell 0.2% in June but is up 2.6%
versus a year ago. The “core” PCE deflator, which excludes food and
energy, was up 0.1% in June and is up 1.3% since last year.
After adjusting for inflation, “real” consumption was unchanged in June
but is up 1.8% versus a year ago.
Implications: Income and spending both came in below expectations in June, in part
due to a steep (and what now appears to have been a temporary) drop in commodity
prices. “Real” (inflation-adjusted) personal income was up a solid 0.3%
in June. Real personal spending was unchanged but will be one of the last greatly
affected by the supply-chain disruptions from Japan. Later today automakers will
report on car and light truck sales in July and those figures should show a rebound
that will boost the consumer spending data a month from now. Although overall
consumption prices declined in July due to commodities, the Federal Reserve
can’t see the report as vindication. “Core” consumption prices,
which exclude food and energy, increased 0.1% in June and are up at a 2.2% annual
rate in the past three months. That is above the Fed’s target of 2%. The Fed
must be confused about how core inflation could be rising when the unemployment rate
is above 9% and capacity utilization in the industrial sector is below 80%. In their
worldview, core inflation should only be rising when resources are constrained, and
we’re not even close to that environment in their thinking. Over the long run,
we think consumer spending should strengthen for a number of reasons. Consumer
balance sheets are healthier and financial obligations (monthly payments like
mortgages, rent, car loans/leases, as well as other debt service), are the smallest
share of disposable income since 1994. Meanwhile, the underlying trend in worker
income continues in a favorable direction, with real private-sector earnings (wages,
salaries, and small business profits) up 2.1% in the past year.
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Is this guy always too rosey or is it me?
One thing from hearing about the debt debate is it highlighted to me at least how much of a hole we are in.
With the population aging et al - I can't see it not getting worse before it gets better.
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"Is this guy [Brian Wesbury] always too rosey or is it me?"
Wesbury was my armchair pick for Fed Chair. He is right from my point of view on policy issues, a great analyst and formerly a great forecaster. He was especially good when things were going well.
Now I agree with CCP. Wesbury's employer is First Trust which I assume is an investment house. If the chief economist proclaims that all is going to hell, they won't do much business. So now I read his work for the facts, trends and analysis, not for macroeconomic forecasting.
He is very much a pro-growth supply-sider who I assume would be very comfortable with a freedom-based agenda from someone like a Marco Rubio or Ronald Reagan. But what he assumes, like leftist Dems do, is that the American economy is so strong and resilient that it can weather through bad policy after bad policy and continue some kind of growth at a snail's pace. Maybe so and maybe not.
I'm sure he voted against the Pelosi-Obama congress in 2006 and the Obama presidency in 2008, but I doubt he sufficiently anticipated in his writings the economic destruction that followed that change in direction.
Businesses and consumers may be sitting with money on the sidelines right now, but that does not change the fact that what the see out their is an economic world that is going to hell, laced with policial and economic uncertainty. Cases in point, how are the best companies in your area, 3M stock here for example, manufacturing and production, doing compared to gold which is a bet directly against innovation, our currency, and the productive economy?
Also remember that 'breakeven' growth is something like what they call 3.1% 'real' growth. Whether they revise the numbers to 0.1% or 2.9%, we are just arguing over how far and how fast we are moving backwards. Double dip IMHO is a fact right now, not something new to fear in the future. The long and hard argued budget deal now behind us does nothing significant in either direction to move us off our stagnation/decline path.
The rosy scenario view seems to believe that investors will start investing and innovators will start innovating again out of boredom rather than waiting for us correct any of the (fuct) fundamentals that put us in this downward spiral.
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I continue to post Wesbury because of his strong track record, credentials, and quality supply side analysis AND because this forum (most certainly including me!) definitely needs to be reminded of the bullish case.
That said, in the next month or so, his projections are going to be put to the test in a very definitive manner.
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Data Watch
Non-farm payrolls increased 117,000 in July and revisions to May/June added 56,000
To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/5/2011
Non-farm payrolls increased 117,000 in July and revisions to May/June added 56,000,
generating a net gain of 173,000, more than doubling the consensus expected gain of
85,000.
Private sector payrolls increased 154,000 in July. Revisions to May/June added
49,000, bringing the net gain to 203,000. July gains were led by professional &
business services (+34,000), health care (+31,000), retail (+26,000) and
manufacturing (+24,000). Government payrolls declined 37,000.
The unemployment rate declined to 9.1% in July (9.092% unrounded) from 9.2% in June
(9.182% unrounded).
Average weekly earnings – cash earnings, excluding benefits – increased
0.4% in July and are up 2.6% versus a year ago.
Implications: Private-sector payrolls rebounded sharply in today’s report,
rising 203,000 including upward revisions to May and June. Part of the rebound is
due to the auto sector, with jobs at automakers and autos/parts sellers increasing
17,000 in July. Hiring was solid elsewhere in the manufacturing sector, and at
retailers, and private health companies. In the past year private payrolls have
increased 150,000 per month. We think this trend will accelerate in the second half
as the economy recovers from Japan-related disruptions. Another strong part of
today’s report was that average hourly wages increased 0.4% in July and are up
at a 3.5% annual rate in the past three months. Some short-sellers may focus on the
fact that payrolls declined 1.23 million when not seasonally-adjusted. But
that’s a highly misleading number. The drop is almost all due to state/local
public school teachers, which fell 1.26 million. Not seasonally-adjusted
private-sector payrolls fell only 4,000, which for July is stronger than in nine of
the past eleven years. The only legitimately negative part of today’s report
was that household employment, an alternative measure of jobs, declined 38,000 and
is up only 63,000 per month in the past year. Usually this measure of jobs leads
payrolls in recoveries. It may be lagging this time as smaller firms are more likely
to remain credit constrained than their larger counterparts. In other recent news,
new claims for unemployment benefits dipped 1,000 last week to 400,000. The
four-week moving average fell to 408,000 versus 440,000 in May. Continuing claims
for regular state benefits increased 10,000 to 3.73 million.
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Beneath Jobs Report Surface Lies Some Ugly Truths
Published: Friday, 5 Aug 2011 | 10:20 AM ET Text Size By: Jeff Cox
CNBC.com Staff Writer
AP
Before getting too excited about the modest uptick in net job creation and a slight downward move in the unemployment rate, it’s probably worth a look under the hood.
As is usually the case, there is far more than meets the eye to the Labor Department’s report that the economy added 117,000 jobs last month and the unemployment rate fell to 9.1 percent.
Let’s start with the reality that fewer people actually were working in July than in June.
According to a Bureau of Labor Statistics breakdown, there were 139,296,000 people working in July, compared to 139,334,000 the month before, or a drop of 38,000.
But the job creation number was positive and the unemployment rate went down, right? So how does that work?
It’s a product of something the government calls “discouraged workers,” or those who were unemployed but not out looking for work during the reporting period.
Recession Seen Looming as Jobless Benefits End
This is where the numbers showed a really big spike—up from 982,000 to 1.119 million, a difference of 137,000 or a 14 percent increase. These folks are generally not included in the government’s various job measures.
So the drop in the unemployment rate is fairly illusory—stick all those people back in the workforce and you wipe out the job creation and the drop in unemployment.
For once, some of the government’s other tools of economic voodoo didn’t help the count.
The vaunted birth-death model, a byzantine approximation of business creation and failure, actually subtracted 18,000 from the total job creation after a five-month run where it added a total of 741,000 positions to the count.
And the so-called “real” unemployment rate, which adds in discouraged workers and others not counted as part of the headline unemployment rate, actually pulled back one notch to 16.1 percent.
But there’s plenty of bad news to go around otherwise.
The average duration of unemployment rose for the third straight month and is now at a record 40.4 weeks—about 10 months and now double where it was when President Obama took office in January 2009. The total number unemployed for more than half a year now stands at 6.18 million, 130 percent higher than when the president’s term began.
Among the nuggets of good news—the jobless rate for blacks slipped to 15.9 percent and for Latinos to 11.3 percent, both at four-month lows.
But how good or bad the unemployment picture really may not come into view until next month, because of distortions from seasonal adjustments.
Including teachers and others who experience seasonal unemployment, total joblessness actually rose 1.23 million.
CORRECTION: An earlier version incorrectly stated the percentage drop of employed people.
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**Thankfully Obama has liberated America from the oppressive burden of being a AAA rated nation. He really is a historic president!
http://hotair.com/archives/2011/08/05/breaking-sp-downgrades-u-s-to-aa/
Breaking: S&P downgrades U.S. to AA+; Update: S&P statement added
posted at 8:39 pm on August 5, 2011 by Allahpundit
With a “negative outlook” to boot.
America is now a risky investment.
U.S. Treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.
The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.
See the last few updates in the other thread for details on this afternoon’s drama between S&P and the White House. Supposedly the agency admitted privately that it goofed in using the wrong debt-to-GDP baseline — a $2 trillion error. But when you’re $14 trillion in the hole and set to add $6 trillion more by the end of the decade, what’s $2 trillion, really? A deadbeat’s a deadbeat.
Odds of that negative outlook turning into a further downgrade if the Super Committee chokes: High. Stand by for updates.
Update: A grumpy White House points to S&P’s math error and calls it “amateur hour.”
Update: Zero Hedge has the text of S&P’s statement. The debt-ceiling deal wasn’t good enough:
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade…
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability…
When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
Not only can’t the Super Committee fail, it’ll be under enormous public pressure to reach a grand bargain. That’s the silver lining in this cloud — they have to get serious now. They have no choice.
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I'm not really comfortable with that last line at all.
As I have previously posted, the alleged Medicare cuts are in payments to providers, not beneficiaries and as such are a scam for the reasons I discussed at the time, while the cuts to the military will be real and vast. My prediction: The Reps will fold again, agreeing to raise tax rates in order to defend the military and achieve the psuedo-cuts to Medicare. I find little reason to assume that tax rate increases will actually increase revenues and may well serve to depress economic activity further, thus setting off a vicious spiral of higher govt costs (e.g. food stamps, welfare, unemployment, etc) and lower revenues due to declining economic activity.
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"I'm not really comfortable with that last line at all."
The odds that a 50-50 committee will do the right thing is not better than 50-50.
Yes, the wrong 'solution' exacerbates the problem. You can't raise taxes in a recession, but you also can't say, as we do now, that we will raise them the instant we are out of the recession either. It has the same destructive effect without capturing any additional revenue.
The only thing I can think of to head off the wrong answer out of committee is to take offense with the public before they act, instead of playing defense after.
The serious, leading Pres. candidates need to shift from saying in 2011 what they would do as President in 2013 to being the leaders of the opposition party now, and call loudly and persuasively for a specific list of actions now. Call on the House and Senate, in response to the downgrade, to finish the job in September that could not be completed before the August 4 birthday deadline. The save the nation later plan is not capturing anyone's imagination or attention whatsoever.
If your house is on fire now (Marco Rubio's analogy is that you save the whole house), the discussion about what to do after it is just ashes smoldering seems rather academic.
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"The serious, leading Pres. candidates need to shift from saying in 2011 what they would do as President in 2013 to being the leaders of the opposition party now, and call loudly and persuasively for a specific list of actions now"
Hopefully a repub will start to emerge the party can rally around.
The journolist MSM is already going after every viable Repub with their hit squads most recently making a big deal out of Rick Perry calling for prayer. Suddenly they are trying to elevate this to scandal level to delegitimize him even before he announces.
It is now deemed scandulous to be a Christain or a Mormon.
Yet murderers screaming "ala akbar" (or whatever it was) are not "Muslim" terrorists.
They are just deranged or ill or from tough childhoods.
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Sunday Reflection: Why the GOP should give Obama the higher taxes he wants
By:Glenn Harlan Reynolds | 08/06/11 8:05 PM.
Well, the debt deal is behind us, but it's clear that the White House wants more taxes. Instead of fighting this head-on, the GOP might want to think about future ways of giving President Obama what he says he wants. Done properly, it just might be what academics like Obama call a "teachable moment."
One of the things that's been floating around the Web over the past week is a video clip from 1953. It's a short film produced by the motion picture industry, seeking the end of a 20 percent excise tax on movie theaters' gross revenues that had been imposed at the end of World War II as a deficit-cutting measure. (Yes, gross, not net).
In the film, figures ranging from industry big shots to humble ticket collectors talk about how the tax is hurting their industry and killing jobs, and ask Congress to repeal the tax.
They even explain, in a sort of pre-Art Laffer supply-side way, that a cut in theater taxes might actually produce an increase in federal revenues as the result of greater economic growth.
The effort -- which includes a call aimed at "Congressman John Dingell," father of the current Rep. John Dingell, who took over from his father a mere two years later in 1955 -- ultimately succeeded.
But while I'm usually for tax cuts, in this case I think that's too bad. Because with this battle over, Hollywood stopped talking loudly about the damage done by high taxes, pretty much for good.
When, since, have we seen such a firmly expressed appreciation of the harm that excessive taxation can do to the economy, voiced by representatives of the entertainment industries?
Today, those industries are a major source of Democratic contributions and spread-the-wealth rhetoric, even as they prosper based on this tax cut, and numerous other bits of favorable treatment scattered throughout the Internal Revenue Code. It's time for a change.
Were I a Republican senator or representative, I would be agitating to repeal the "Eisenhower tax cut" on the movie industry and restore the excise tax. I think I would also look at imposing similar taxes on sales of DVDs, pay-per-view movies, CDs, downloadable music, and related products.
I'd also look at the tax and accounting treatment of these industries to see if they were taking advantage of any special "loopholes" that could be closed as a means of reducing "tax expenditures." (Answer: Yes, they are.)
America, after all, is facing the largest national debt in relation to GDP that it has faced since the end of World War II, so a return to the measures deemed necessary then is surely justifiable now.
The president's own rhetoric about revenues certainly suggests so. Perhaps the bill could be named the "Greatest Generation Tax Fairness Act" in recognition of its history.
Should legislation of this sort be passed -- or even credibly threatened -- I think we can expect to see Hollywood rediscover the dangers posed by "job killing tax increases," just as pro-tax-increase Warren Buffet changed his tune once his own corporate-jet business was threatened.
And, given the entertainment industries' role as the Democrats' campaign finance ATM, it seems likely that the president might soon reconsider his rhetoric as well.
And that's not the only "revenue enhancement" we might employ. I note that FCC Commissioner Meredith Attwell Baker, who approved the Comcast merger, left the commission to take a lucrative job at Comcast, just as many members of the not-so-successful Obama economic team have left their government positions for lucrative jobs in private industry.
Obamacare drafters went to work for the health care industry at inflated salaries. And drafters of the Dodd-Frank financial bill have gone on to big-shot lobbying and consulting jobs at high salaries.
Because much of their value to their employers comes from their prior government service, I think that the taxpayers deserve a share of the return, say in the form of a 50 percent surtax on any earnings by political appointees in excess of their prior government salaries for the first five years after they leave office.
Some would say that a 75 percent tax on "revolving-door profiteers" would be more appropriate, and I'm certainly willing to entertain arguments to that effect; I'd also like to extend this to members of Congress, but I don't think Congress would ever pass that bill.
Democrats already understand this approach. Sen. Mark Udall, D-Colo., plans on attaching a "poison pill" to the Balanced Budget Amendment that would forbid tax cuts for people making over $1 million a year.
But why should Democrats be the only ones to enjoy the fun of taxing people they dislike?
Businesses that support Democrats have had a good deal up to now. When Democrats are in power, they get the kind of special deals that Democrats dole out to their supporters.
When Republicans are in power, their taxes don't go up because Republicans don't like tax increases. Well, perhaps Republicans should take Democrats seriously in their call for "shared sacrifice."
Such an action would, of course, run counter to the Republicans' no-new-taxes pledges, the importance of which was recently reaffirmed by Grover Norquist in the New York Times.
But even Norquist has allowed that in some cases loophole-closing may not be quite the same thing as a general tax increase, and perhaps he could be persuaded to make an exception, just this once, in favor of higher taxes -- for the educational value, if nothing else.
Because apparently Hollywood and the Democrats have a lot to learn.
Examiner Sunday Reflection contributor Glenn Harlan Reynolds, a law professor at the University of Tennessee, hosts "InstaVision" on PJTV.com.
Read more at the Washington Examiner: http://washingtonexaminer.com/opinion/columnists/2011/08/sunday-reflection-why-gop-should-give-obama-higher-taxes-he-wants
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Focus on the Economy To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/8/2011
Investors remain on edge and stocks are down about 2% around the world today. Combine last week’s sell-off, the intense debt ceiling debate, financial instability in Europe, the recent soft patch, and a downgrade by S&P and this fear is somewhat understandable. Short-sellers and pessimists are in their glory. And for the umpteenth time, Nouriel Roubini said that a double-dip recession is on its way.
We understand the uncertainty created by all this noise. What we don’t get is why it is so hard for economists to look at economic data. Yes, there was a “soft patch” – which we acknowledged at the time – but, no, it is not getting worse. In fact, economic data has been visibly improving.
Job growth, which slowed in the soft-patch – has now begun to pick up. Private-sector jobs grew 154,000 in July, after just 80,000 in June and 99,000 in May (both of which were revised upward from even weaker readings). Average hourly earnings – cash earnings, excluding fringe benefits – rose 0.4% in July and are up 2.3% versus a year ago. Combined with a 2% increase in the number of hours worked in the past year, worker incomes are outpacing inflation.
Meanwhile, high frequency data on the labor market show continued improvement. New claims for unemployment insurance fell back to 400,000 last week after peaking at 478,000 back in April.
Much of the “soft patch” was due to the disasters in Japan and now that those problems are dissipating, the economic numbers have been getting better. Auto production schedules continue to show very solid growth for the third quarter. Auto sales increased 6% in July from the recent bottom in June and the replenishment of dealer inventories should lift sales further. A virtuous cycle is taking hold, with more production generating more sales, which should in turn generate even more production as dealers opt to hold more inventories.
Even housing appears to be at an upward inflection point. Pending home sales – contracts on existing homes – are up about 11% in the past two months, suggesting a rebound in existing home sales when that report arrives late next week.
Meanwhile, home building is showing signs of the turn. Multi-family construction, particularly apartment buildings, has been on an upward trend since late 2009 even as single-family building has languished. But single-family starts increased 9.4% in June, the largest gain for any month in two years. And, for the first time in five years, the total number of homes under construction in the US is increasing.
Looking ahead over the next few weeks, we think the data will affirm the rebound from the soft-patch story. Retail sales, reported this Friday, should increase by about 0.7%. Next week’s report on industrial production should show a gain of about 0.4% and the following week’s report on July durable goods new orders could be an outright boom because of orders for new planes from Boeing.
In other words, we have yet to see any real, data-centric, sign that the economy is falling back into recession. Nouriel is finding a receptive audience because fear levels are high, not because he has the data to back up his forecast. And even though fundamentals remain robust, the markets have moved lower based on fear. As a result, the market is once again presenting a buying opportunity. Stocks were cheap two weeks ago, and even cheaper today.
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We'll be in a post-apocalyptic Mad Max scenario and Wesbury will be pointing out how a 0.2% drop in cannibalism means things are turning around.
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By ANDY KESSLER
Now that the debt-ceiling gyrations are over, the Obama administration is "pivoting" to its biggest problem—jobs. Unemployment ticked down to 9.1% in July, but the real unemployment rate, including discouraged workers, is still 16.1%. The stock market is not pleased. Why? Because the president's calls for "patent reform" and an "infrastructure bank" won't move the needle. It's time to go big or be sent home.
Can we agree that throwing money at the problem doesn't work? The 2009-10 stimulus package wasted more than $800 billion. The Federal Reserve's frantic quantitative easing, QE1 and QE2, printed money and bought mortgage paper on the street, helping banks and financial institutions recapitalize, but it hardly created jobs—not lasting ones anyway. Sadly, the economy grew at a subpar 1.3% rate in the second quarter instead of the typical 5% rocket out of a recession. What's missing is not capital, it's opportunity.
As Otter famously said in "Animal House," this situation "absolutely requires a really futile and stupid gesture be done on somebody's part." Well, at least a gesture that might appear stupid and futile but in reality kick-starts whole new industries and massive job growth. And all it will take is the stroke of a pen. Here are some instant job creators:
• Free spectrum. AT&T is trying to buy T-Mobile to get hold of valuable spectrum for wireless. But there's loads of spectrum lying around that is not being used. Try this: Tune into channel 37 on your TV. Static? Bingo. Put this spectrum in the hands of entrepreneurs and you'll create a million new jobs, not to mention new devices and apps not thought possible in our bandwidth-starved world—phones that work in elevators and subways, remote auto and medical diagnostics, real-time ads on smart phones and other devices ("Hey, your friends ate here last week!"), and that's just in the first six months.
But how? Either allow spectrum to be sold by current owners, typically broadcasters inefficiently using this spectrum, or implement a "use it or lose" it rule. The Federal Communications Commission can declare that if a swath of spectrum is not being used for a real application, then they will open it up to the public, the same way that Wi-Fi is open to all—anyone can use it as long as they don't interfere with others. (AT&T and Verizon will fight this, but so what?)
This is also true of government-owned spectrum. If an entrepreneur can prove far greater potential usage, it should revert to the public. Chips are available today that can be tuned to virtually any new spectrum. Apps can be written in weeks. Venture capitalists and Wall Street would gladly provide access to capital. So what are we waiting for? Start making those "Free the Spectrum!" T-shirts.
• Disease diagnostics. Have the Department of Health and Human Services declare that Medicare will pay for any diagnostic test or device that can be proven to save money over five years—for example, detecting a cancer at Stage I when it's cheaper to treat versus at Stage IV, when it is expensive and often fatal. Some will prove worthy, others won't. But it's a self-correcting process—if a test or device doesn't save money, then reimbursements stop. That will help focus entrepreneurs' efforts, and the resulting innovation will both save money and create private-sector jobs.
• End the mail monopoly. The U.S. Postal Service, which posted a net loss of $3.1 billion in the third quarter alone (there is only so much junk mail and Hallmark cards to deliver anymore), is finally starting to rationalize small post offices, recently putting 4,000 of them on a list for possible closing. Accelerate this task by ending the USPS monopoly on first- and third-class mail. Entrepreneurs will jump into action. Online bill payment will become ubiquitous. UPS and FedEx and a host of new companies will create more productive forms of delivery. The Postal Service won't end, it will just slowly fade away.
• Frack this. The revolution in natural-gas extraction, driven by hydraulic fracturing, or "fracking" of America's huge shale deposits, has boosted shale gas to 25% of America's gas supplies from 1% in 2001. But environmentalists are pushing to close down this booming industry due to concerns over contamination of water supplies. Here's a solution: Declare all hydraulic fracturing legal with the caveat that drillers put up a bond equal to the potential cleanup cost of environmental damage. This will force large players to consolidate what is mostly a "wildcat" market. The big guys will be much more careful in their extraction techniques, knowing mistakes cause huge losses.
• Government platform. The hardest thing to do is interact with the government—the Department of Motor Vehicles being the most painful example. I have yet to see any government agency with an up-to-date user interface. But this is easy to change.
In the technology world, companies view themselves as platforms for others to build on, and they publish what they call application programming interfaces (APIs) so others can easily tap their ecosystem. All government agencies should be required to publish their own APIs by the end of the year. What will happen next is a sea of programmers will emerge to write iPhone apps and other code to integrate government functions into our everyday lives. And yes, this will eventually get rid of entire layers of inefficient government workers, but new companies nowhere near the Beltway will proliferate with virtual connections to the government.
• Rental society. Create a six-month foreclosure amnesty, i.e., initiate foreclosure proceedings on your underwater mortgage, and it doesn't show up on your permanent record. Foreclosure then becomes an individual's choice, not something mired in government red tape or stuck in a bank's back office. This would lead to millions of homes and condos hitting the market at fire-sale prices. This is exactly the price discovery that the finance sector both dreads and needs to move forward. Within weeks, we'd see the rise of Web-based rental agencies and real-estate auctions.
I understand the politics against all these opportunities and doubt any administration has the political will to enable so much change so quickly. But any one of these ideas, while a futile gesture on the surface, would sound like a starting gun for entrepreneurs and get them off to the races. They don't need money—they need somewhere to invest their sweat equity. And that's the only true job creator.
Mr. Kessler, a former hedge-fund manager, is the author most recently of "Eat People" (Portfolio, 2011).
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http://www.newsmax.com/Headline/laffer-obama-reaganomics-gop/2011/08/10/id/406893?s=al&promo_code=CCF6-1
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While the talk on the forum and around the country might be about a Republican contest to try to change direction, the reality in the U.S. is that we are currently on an economic course of largely copying the European economic model and abandoning the American one. In that light, we should also check in with their results:
Euro Zone Second Quarter GDP Growth Slows to 0.2 Percent
Published: Tuesday, 16 Aug 2011 By: Reuters
The Eurostat agency estimated gross domestic product (GDP) for the 17-country euro zone increased 0.2 percent in the three months to end-June from the previous quarter, compared with economists' forecasts of growth of 0.3 percent.
http://www.cnbc.com/id/44154906
That was sharply off the rate of 0.8 percent in the first three months of the year.
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The man has not flinched in his call.
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Data Watch
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Industrial production surged 0.9% in July, blowing away the consensus expected gain of 0.4% To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/16/2011
Industrial production surged 0.9% in July, blowing away the consensus expected gain of 0.4%. Including revisions to prior months, production rose 1.2%. Output is up 3.7% in the past year.
Manufacturing, which excludes mining/utilities, was up 0.7% in July, but down 0.2% including revisions to previous months. Auto production rose 5.2% in July. Non-auto manufacturing increased 0.2%. Auto production is down 0.2% versus a year ago while non-auto manufacturing has risen 4.0%.
The production of high-tech equipment fell 0.1% in July but is up 8.3% versus a year ago.
Overall capacity utilization rose to 77.5% in July from 76.9% in June. Manufacturing capacity use increased to 75.0% in July from 74.6% in June.
Implications: As of July, the soft patch in manufacturing had ended. Industrial production surged 0.9% in July, the largest monthly gain this year. The July jump was fueled by a 5.2% expansion in auto production. This monthly increase – at an 83% annualized rate - suggests that the supply-chain disruptions coming from Japan have ended. We expect more increases like this in the next few months. Excluding autos, manufacturing production increased 0.2% in June, and is up 4% versus a year ago. Corporate profits and cash on the balance sheets of non-financial companies are at record highs. Meanwhile, companies can fully expense these purchases for tax purposes through year-end. This suggests business equipment purchases and production should rise as the second half of 2011 unfolds. Today’s report also showed that capacity utilization hit its highest level since August 2008, coming in at 77.5. As it did in 2010, the industrial sector has reasserted its leadership of the recovery. The rise in overall, nation-wide production during July suggests that the weakness reported by the Empire State manufacturing index (which fell to -7.7 in August from -3.8 in July) is unlikely to continue. We believe that purchasing managers surveys have become less reliable. They seem to be influenced more by emotion and uncertainty than they have in the past.
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"Euro GDP ... increased 0.2 percent" - Q2 2011
Flashback: "...Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works." - Paul Krugman, Jan. 10, 2010
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By Peter J Reilly | Forbes – Mon, Aug 15, 2011tweet20Share6EmailPrintRelated Content
The Real Reason Warren Buffett's Taxes are Low
Warren Buffett was in the New York Times today bragging about his low effective tax rate and saying how he would like to be paying more. Fellow Forbes contributor Tim Worstall weighed in quibbling about Mr. Buffet not factoring in the corporate taxes on Berkshire Hathaway's earnings. I'm just a simple CPA, whose firm won't even let him sign audit reports anymore. (That's true of all tax partners here by the way. I don't take it personally). I don't want to quibble with a quibble but apparently economists have a hard time figuring out the incidence of the corporate income tax (i.e. who is really paying it), so I think we can let go of that piece of the analysis.
Still Mr. Buffet is not sharing the real reason that he doesn't pay much in the way of income tax relative to his great fortune. The secret is hidden in plain sight. Mr. Worstall alludes to it when he mentions that Berkshire Hathaway does not in fact pay dividends. Mr. Buffet's secret which you can find blasted all over the Internet is one of his famous quotations:
Our favorite holding period is forever
You only pay income taxes at any rate on realized appreciation. An investment with a holding period of forever incurs a capital gains tax of 0%, while all along the holder can be getting wealthy from appreciation. That's the real reason Mr. Buffet does not pay a lot of income taxes.
http://news.yahoo.com/real-reason-warren-buffetts-taxes-low-171220991.html (http://news.yahoo.com/real-reason-warren-buffetts-taxes-low-171220991.html)
P.C.
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"Our favorite holding period is forever
You only pay income taxes at any rate on realized appreciation. An investment with a holding period of forever incurs a capital gains tax of 0%"
Thank you PC, excellent points. It is actually that tax rate being too high that causes tax revenue to be unrealized.
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Winston Churchill on tax cuts:
The hon. Gentleman spoke about the relation of the rate of Income Tax to unemployment. He said, “How foolish it is to imagine that by reducing Income Tax you improve employment.” The fact, however, is that the country with the highest rate of direct taxation is also the country with the highest unemployment. That is the fact. It may be a coincidence. But when the Income Tax was reduced by 1 shilling and then by 6d., there was a great improvement. When the Income Tax was 6 shillings in the Pound there were over 2-1/4 million persons unemployed. Now that the Income Tax has been reduced to 4 shillings 6d. in the Pound that figure has fallen to 1-1/4 million people unemployed.
http://www.powerlineblog.com/archives/2011/08/churchill-and-the-welfare-state.php
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Taxing Warren Buffett
Republican critics are seemingly oblivious that, in many ways, his tax ideas mirror those of Ronald Reagan.
August 18, 2011 L.A. Times
Investors might hang on Warren Buffett's every word when it comes to financial advice, but Republicans are less than enthusiastic about the Oracle of Omaha's opinions on taxation. After the billionaire chairman of investment firm Berkshire Hathaway wrote an op-ed in the New York Times complaining that the mega-rich are undertaxed in comparison to the middle class, conservatives urged him to voluntarily send more of his own money to the Internal Revenue Service and leave others alone. Not only are they willfully missing Buffett's point, they're seemingly oblivious to the fact that in many ways his tax ideas mirror those of Ronald Reagan.
Hard to believe as it may seem, it has been a quarter of a century since the last comprehensive overhaul of the U.S. tax code. Under the Tax Reform Act of 1986, which was signed by President Reagan, the number of tax brackets was reduced, loopholes were closed, the top tax rate was lowered and capital gains were taxed at the same rate as ordinary income. Yet in the years since, Congress has steadily drilled loopholes back into the code while lowering the tax burden for wealthy people who make money through investments rather than labor. That was the source of Buffett's complaint.
"The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes," Buffett wrote. "It's a different story for the middle class; typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot."
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Studies at the L.A. Times show that putting the words Ronald Reagan in the title increase readership significantly regardless of the lack of a connection demonstrated in the text.
a) Reagan lowered the top rate from 70% to 28%. What similar proposal does Buffet have for our time?
b) The 'payroll tax' is code for your social security (insurance) account, and Medicare. Premiums are capped because benefits are capped. Does Buffet accept then that if one person pays in 100 times more each year than the cap today his 'benefits' would also grow to be 100 times higher. If not, it becomes a generic, means tested, on-budget welfare program (as it should be) ready for the chopping block. Sure tax it all the way up, but then slash the payouts and reduce the tax rate to something that won't kill off investment, production and employment any further, maybe 3% across the board instead of 15.3%, and more than offset by larger cuts simultaneously in the other reforms. Reagan didn't show any interest in restructuring social security in spite of the false editorial title.
c) "...lowering the tax burden for wealthy people who make money through investments rather than labor"
Dividends are earned with after-tax investment capital and are already quadruple taxed. To simplify that is to deceive. How can a corp pay out dividends on earnings without first declaring earnings and pay a federal and state corporate tax on that, plus the next 15%. So what he calls 15% is, in our state, 35% + 10% + 15% +8% = 68% combined quadruple tax on the return on investment dollars. that were already taxed as ordinary income. Want to go higher and see if the economy grows?? You are better off in Communist China, and that's where much of those investment dollars went.
Long term capital gains are also being taxed at the state level as ORDINARY INCOME. 15% is bullshit because you are taxed on the nominal gain when by definition (long term) it includes a significant inflationary component. Why does a smart man like that need to deceive and inflame class warfare in order to make a cheap, political point? Because the point on its merits falls on its face.
d) Missing in the broken logic string is that after Reagan, under a Democratic President, we lowered the capital gains rate and the economy boomed, revenues surges and the budget balanced. A move in the opposite direction is based on class envy, not revenue collections. That the lower incomes are being punished is BS under the same logic. The lower half of workers pay zero in federal income tax and they are the ones who cling to the broken social security Ponzi scheme and will rely the heaviest on Medicare. The absence of honesty is glaring.
e) News to L.A.Time editorialists: We no longer compete in a 1980s global economy. Republicans have tried to drop all the obsession with Reagan and his policies and circumstances from 30 years ago. People who opposed his policies might consider the same.
f) "After the billionaire chairman of investment firm Berkshire Hathaway wrote an op-ed in the New York Times complaining that the mega-rich are undertaxed in comparison to the middle class, conservatives urged him to voluntarily send more of his own money to the Internal Revenue Service"
Did he? I think not. He still wants someone else to pay. BTW, it is conservatives who want to reform the code. What reform other than tax rate increases on job creators has the LA Times supported? Just curious.
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Arthur Laffer just might understand Reagan's thinking a little better than the leftists who opposed him at every turn. Laffer suggests:
Obama Must Use Reaganomics to Save Economy, Wednesday, 10 Aug 2011
The only way President Barack Obama can solve the nation’s economic woes is to adopt “common-sense” Reaganomics, the policy’s architect Arthur Laffer claims in an exclusive Newsmax interview.
Laffer said the White House called him in the spring and asked him to speak to Obama’s former Council of Economic Advisors’ chairman Austen Goolsbee – and he had told him exactly the same thing.
“Reaganomics would fix any economy that’s in the doldrums,” Laffer said. “It’s not a magic sauce, it’s common sense.
“You’ve got to get rid of all federal taxes in the extreme and replace them with a low-rate flat tax on business net sales, and on personal unadjusted gross income. That’s number one.
“Number two, you have to have spending restraint. Government spending causes unemployment, it does not cure unemployment.
“Number three, you need sound money. Ben Bernanke is running the least sound monetary policy I’ve ever heard of," Laffer said.
“Number four you need regulations, but you don’t need those regulations to go beyond the purpose at hand and create collateral damage. The regulatory policies are really way off here.
“And lastly you need free trade," Laffer said. "Foreigners produce some things better than we do and we produce some things better than foreigners. It would be foolish in the extreme if we didn’t sell them those things we produce better than they do in exchange for those things they produce better than we do.”
In the interview the veteran economist said Standard & Poor’s was quite right in downgrading the U.S. credit rating – in fact it should have done so far earlier.
The agency had no choice and if the other agencies, Moody’s and Fitch, don’t do the same they won’t be doing their jobs, said Laffer, who gave his name to the Laffer Curve which demonstrates that the maximum amount of government revenue does not come at the point of maximum taxes.
“If you had a company that had revenues of $2½ million and expenses of $4 million, with no change in sight, $1½ million in losses each year as far as the eye can see and it had already borrowed $10 million, what would you rate that company? I surely wouldn’t rate it AAA.
“That is the U.S. situation today," Laffer said. "Taxes are about $2½ trillion, government spending is about $4 trillion and we have about $10 trillion in net national debt. I don’t see that as being a AAA country.
“If the S&P and the others were doing their jobs correctly, they should have downgraded a long time ago.”
Laffer said he has no doubt the country will win its top rating back, but only when economic policies are completely turned around. He said President Barack Obama’s administration’s only economic plan seemed to be to expand government ownership of the means of production.
“They have nationalized the health care industry pretty extensively. They’ve done that with home building as well. They’ve tried it with the auto industry as well. So they have moved very, very deliberatively and purposefully toward extending the government ownership of the means of production.
“That to me, if you read the tealeaves, is what they are doing. It is not what they are saying they are doing, but that is what they actually are doing.
“People don’t work to pay taxes, people work to get what they can after taxes. It’s that very private incentive that motivates them to work. If you pay people not to work and tax them if they do work, don’t be surprised if you find a lot of people not working.”
Laffer said the current economic woes started to form under President George W. Bush but have been made worse by Obama’s policies.
“There’s a wedge driven between wages paid and wages received and that wedge is the tax/government spending wedge,” he said.
“That wedge has grown dramatically in the last 4 ½ years…under W and a Republican administration and…under Obama. Bipartisan ignorance has led us to this very disastrously desolate state.”
http://www.newsmax.com/Headline/laffer-obama-reaganomics-gop/2011/08/10/id/406893?s=al&promo_code=CCF6-1
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This is for you Doug.... :-)
I told my wife tonight that CA is now at 12% unemployment, the second worst in the the U.S. behind Nevada.
All she said was, "Of course! Unemployment compensation pays really well here." She said, "I have acquaintances making good money just staying
home doing nothing. Why should they work?" And then she gave me some examples. She finished with, "You (America) have a crazy system; you reward people who don't work." Rather strange she thought.
It does make some sense.
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Refresh our memory JDN please, from where is your wife?
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Refresh our memory JDN please, from where is your wife?
Japan. Although she is now an American citizen.
Japanese have their faults, but in general, they have pride in their work and they work hard.
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JDN, You have a very smart wife.
This is a chart of Calif. unemployment, please take a look:
http://data.dancingengineer.com/labormarket/CA/?graph=unemployment_rate&in=California
As with other social democracies, the rate of unemployment tends to be higher than freer states, about 3 points currently above the national average, but the trend lines look remarkably familiar and predictable:
Calif. unemployment hit some of its worst levels in the time after Paul Volcker tightened money and while congress was passing, but weakening, delaying and phasing in the Reagan tax rate cuts. Those two policy changes were supposed to be simultaneous.
Jan 1, 1983 when the Reagan tax cuts fully kicked in across the country - Calif. unemployment heads down continuously for the rest of the decade.
In 1990-1991 when Bush-I broke his read my lips pledge - unemployment headed back up.
In 1993 that recession ends but growth sputters, and unemployment barely heads down and then back up. When the capital gains rates were slashed, the recovery picked up steam and continued robustly until 2001. Unemployment worsened until the bush tax cut fully kicked in - 2003. Then Calif. had the same 50 months of job growth as the rest of the nation, ending exactly with the election of the Pelosi-Reid-Obama-Biden-HRC majority congress who promised to let the tax rate cuts expire. At that exact point, Calif unemployment heads steeply up until roughly the certainty of a Republican House taking over, and with divided government and policy direction stalled, unemployment has stayed relatively constant at these very high levels - waiting for an economic change of direction.
Can anybody else read a different explanation into these numbers and unnecessary human costs?
3 points of California unemployment is about mis-management and botched incentives inside the state and the other 9% is about incompetent, counter-productive economic management nationwide.
The only thing strange about the unemployment problem is that we know how to fix it and yet we don't do it.
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http://blogs.the-american-interest.com/wrm/2011/08/19/feeding-the-masses-on-unicorn-ribs/
August 19, 2011
Feeding The Masses On Unicorn Ribs
Walter Russell Mead
Besides healing the planet and returning the rising seas to their natural beds, then-Senator Obama promised that his administration would create beautiful green jobs: well paid, stable, abundant jobs, unionized, with full benefits and making the earth healthier and the American people richer. As President, he stayed on message: even after the truther-enabling “green jobs czar” Van Jones left the administration, green jobs have been one of the President’s signature policies for putting the American people back to work.
Obama promised to create 5 million green jobs within ten years. Investors’ Business Daily has a list of that plan’s successes so far.
- On his recent jobs tour Obama stopped at a Johnson Controls plant in southern Michigan, which received $300 million in green grants and plans to create a whopping total of 150 jobs, at a cost of $2 million per position.
- Evergreen Solar Inc., which received unknown amounts of green stimulus funds on the hope that it would create “between 90 and 100 jobs” two years ago, filed for bankruptcy this week, $485.6 million in debt. Their Massachusetts plant once employed 800 people; in March it was replaced with a factory in Wuhan, China.
- Green Vehicles, an electric car “maker” in Salinas, California, took $500,000 from the city and almost $200,000 from the state but has failed to produce even one car.
- And as reported earlier on this site, Seattle was one of a handful of cities that received $20 million in federal grants as part of Retrofit Ramp-Up, a program designed to refit houses with more energy efficient materials. Unfortunately, as KOMO4 of Seattle reports, after more than a year “only three homes had been retrofitted and just 14 new jobs have emerged from the program.”
I’ve posted about this failing strategy before; it’s nice to see (h/t Instapundit) that the New York Times has also figured it out that the administration’s green jobs initiative is an embarrassing mess.
As the paper of record reports,
Federal and state efforts to stimulate creation of green jobs have largely failed, government records show. Two years after it was awarded $186 million in federal stimulus money to weatherize drafty homes, California has spent only a little over half that sum and has so far created the equivalent of just 538 full-time jobs in the last quarter…
The Economic Development Department in California reports that $59 million in state, federal and private money dedicated to green jobs training and apprenticeship has led to only 719 job placements — the equivalent of an $82,000 subsidy for each one.
The belief that green jobs would drive a new era of American prosperity was — like the large majority of green policy chat — intellectually incoherent. The goods that drive renewable energy industries, like so much else in this world, are far cheaper to construct in Asia. As the NYT piece describes, SolFocus, a widely-celebrated solar power company based, only has 90 employees at their San Jose headquarters. The solar panels are assembled in China. Whether a product is an ordinary t-shirt or an admirable piece of world saving green technology like a wind turbine has zilch, zero, nada influence on the mind of the manufacturer trying to decide where it should be made.
There are perhaps some green jobs that would be exceptions; we could eliminate all forms of welfare and food stamps and offer the unemployed minimum wage jobs pedaling stationary bicycles hooked up to electric generators, solving our budget, poverty, obesity and energy independence problems all at once — but these are not the jobs either the President or his supporters have in mind.
It’s understandable and even forgivable that a political candidate would talk about green jobs on the hustings, especially when the Democratic Party is divided between job hungry blue collar workers and fastidious greens who break out in hives in the presence of coal. What worries me isn’t that the President’s team advised him to make a few speeches on this subject; if a candidate can’t throw chum to the base now and then what’s the point of having elections? What worries me is that they didn’t understand that making something this bogus a central plank of his actual governing plan on an issue as vital as jobs would have serious costs down the road.
Many liberals want green jobs to exist so badly that they don’t fully grasp how otherworldly and ineffectual this advocacy makes the President look to unemployed meat packers and truck drivers.
Let me put it this way. A GOP candidate might feel a need to please creationist voters and say a few nice things about intelligent design. That is politics as usual; it gins up the base and drive the opposition insane with fury and rage. No harm, really, and no foul.
But if that same politician then proposed to base federal health policy on a hunt for the historical Garden of Eden so that we could replace Medicare by feeding old people on fruit from the Tree of Life, he would have gone from quackery-as-usual to raving incompetence. True, the Tree of Life approach polls well in GOP focus groups: no cuts to Medicare benefits, massive tax savings, no death panels, Biblical values on display. Its only flaw is that there won’t be any magic free fruit that lets us live forever, and sooner or later people will notice that and be unhappy.
Cranach: The Garden of Eden (Wikimedia)
Green jobs are the Democratic equivalent of Tree of Life Medicare; they scratch every itch of every important segment of the base and if they actually existed they would be an excellent policy choice. But since they are no more available to solve our jobs problem than the Tree of Life stands ready to make health care affordable, a green jobs policy boils down to a promise to feed the masses on tasty unicorn ribs from the Great Invisible Unicorn Herd that only the greens can see.
Here in particular Senator Obama as he then was would have benefited from a less gushing, more skeptical press. If his first couple of speeches on this topic had been met with the incredulous and even mocking response they deserved, he probably would not have married himself so publicly to so vain and so empty a cause.
The cost is not simply the stimulus funds wasted on “investments” that don’t produce any jobs. It’s not just the opportunity cost as more practical and reasonable job creation agendas were shoved aside to make room for the unicorn hunt. It’s the credibility cost. The President cannot successfully make the case for stimulus so many of his supporters would like him to make when the opposition can cite figures like $2 million a job, or point to jobs shipped overseas and companies shut down. Worse, the failed unicorn barbecue undermines the President’s ability to convince the American people that he knows how to create jobs. Thirty months of poor job numbers while the White House was off chasing unicorns and hyping green jobs as a national strategy means that the administration has forfeited public confidence on the jobs issue. That is no small handicap in times like the present.
The green jobs fiasco is not the only failure sapping the President’s credibility as an economic policy maker. The administration was clearly caught off guard by the weakness in the economy this year, and only belatedly discovered how poorly constructed its stimulus really was. Not even administration spokespersons attempt to defend its housing policy when it comes to topics like mortgage relief.
A quick return to economic growth would put all these concerns in the background, but on the more probable assumption that the economy will still be struggling well into if not all the way through 2012, the White House needs to figure out how to change course — and how to communicate that change of course to a country that has come dangerously close to tuning out the President when he talks about jobs.
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First this, from the previous post:
"...$20 million in federal grants...after more than a year only three homes had been retrofitted and just 14 new jobs have emerged from the program.”
I wonder how many homes would have been updated privately in that if the government didn't take half your money and make you spend more than 6 months of your year working an tax and regulation compliance instead of tending to your own home, blowing in insulation and sealing up leaky windows.
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Stephen Moore, WSJ today
Obamanonics vs. Reaganomics
One program for recovery worked, and the other hasn't.
If you really want to light the fuse of a liberal Democrat, compare Barack Obama's economic performance after 30 months in office with that of Ronald Reagan. It's not at all flattering for Mr. Obama.
The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.
By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would "overheat." In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a "double-dip" recession. By the end of Reagan's first term, it was Morning in America. Today there is gloomy talk of America in its twilight.
My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn't.
The Reagan philosophy was to incentivize production—i.e., the "supply side" of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.
The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks. If you increase demand, prices go up. If you increase supply—as Reagan did—prices go down.
The Godfather of the neo-Keynesians, Paul Samuelson, was the lead critic of the supposed follies of Reaganomics. He wrote in a 1980 Newsweek column that to slay the inflation monster would take "five to ten years of austerity," with unemployment of 8% or 9% and real output of "barely 1 or 2 percent." Reaganomics was routinely ridiculed in the media, especially in the 1982 recession. That was the year MIT economist Lester Thurow famously said, "The engines of economic growth have shut down here and across the globe, and they are likely to stay that way for years to come."
The economy would soon take flight for more than 80 consecutive months...
Robert Reich, now at the University of California, Berkeley, explained that "The recession of 1981-82 was so severe that the bounce back has been vigorous." Paul Krugman wrote in 2004 that the Reagan boom was really nothing special because: "You see, rapid growth is normal when an economy is bouncing back from a deep slump."
Mr. Krugman was, for once, at least partly right. How could Reagan not look good after four years of Jimmy Carter's economic malpractice?
Fast-forward to today. Mr. Obama is running deficits of $1.3 trillion, or 8%-9% of GDP. If the Reagan deficits powered the '80s expansion, the Obama deficits—twice as large—should have the U.S. sprinting at Olympic speed.
In any case, what Reagan inherited was arguably a more severe financial crisis than what was dropped in Mr. Obama's lap. You don't believe it? From 1967 to 1982 stocks lost two-thirds of their value relative to inflation, according to a new report from Laffer Associates. That mass liquidation of wealth was a first-rate financial calamity. And tell me that 20% mortgage interest rates, as we saw in the 1970s, aren't indicative of a monetary-policy meltdown.
There is something that is genuinely different this time. It isn't the nature of the crisis Mr. Obama inherited, but the nature of his policy prescriptions. Reagan applied tax cuts and other policies that, yes, took the deficit to unchartered peacetime highs.
But that borrowing financed a remarkable and prolonged economic expansion and a victory against the Evil Empire in the Cold War. What exactly have Mr. Obama's deficits gotten us?
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From Doug's link from cognitive dissonance of the left moved here:
****No, Paul Krugman, WWII Did Not End The Great Depression
“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli
It’s a recurring fantasy for left wing academics fascinated by central planning that in cyclical downturns government should act decisively on a scale equivalent to war. Nobel Prize recipient Paul Krugman exemplifies this intellectual longing to steer our lives.
Krugman effortlessly slides into a war footing espousing intervention comparable to America’s crusade against Hitler, who, take note, centrally planned an economy himself:
“World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy.”
After WWII until its glaring failures manifest in the Seventies, Keynesianism inundated economic thought. Paul Samuelson’s textbooks became mainstays across the academy. Samuelson championed mathematical analysis, which transformed macroeconomics into a pseudo science spawning waves of budding planners infatuated with statistics.
From this basis the myth prevails that WWII finally overcame the Great Depression. History has revised Hoover, easily the most meddlesome peacetime president before FDR, into a laissez-faire reactionary. The New Deal – a disastrous example of everything not to do during downturns became beneficial, only it supposedly wasn’t aggressive enough.
Hoover tinkered with the economy throughout his term. The Smoot-Hawley Act of 1929 launched the trade war many believe precipitated the stock-market crash and the Depression. Then, fearing falling prices, he signed Norris-LaGuardia, Davis-Bacon and other acts, formed business cartels and farming associations all striving to arrest falling prices. Hoover also authored massive public works as he increased federal spending by 50%.
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No, Paul Krugman, WWII Did Not End The Great Depression
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Mr. Delosangeles, Thank you for the date correction. Production peaked in the summer [...]
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18 9 3 3 2 Page 2 of 3
After campaigning on fiscal discipline, FDR promptly accelerated Hoover’s initiatives, devising new economic experiments almost daily. As FDR’s economist Rexford Tugwell conceded, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” Despite ridiculing Hoover’s “extravagance,” FDR increased spending another 83% in his first three years.
The best unemployment result prior to WWII was 14% in 1937. European unemployment was far lower. By 1939, unemployment was back at 19% as FDR increased taxes and cut spending in preparation for war. As the government reined in its make-work projects, rather than weaning a sustainable recovery off the Keynesian incubator, the recovery reversed. The New Deal clearly failed to prime the private pump.
On the surface, wartime spending finally propelled America from the Depression’s pits. As war production expanded from roughly 2% of GDP to almost 40%, statistically, America rebounded. In 1940 dollars, GDP shot from $101.4 billion to $120.7 billion in 1941 up to $174.8 billion by 1945 while unemployment fell below 2%.
America didn’t officially enter the fray until December 1941. FDR had by then rescinded most New Deal regulations, scuttled the WPA and similar agencies and ceased his incessant public bickering with private business. Some surmise he stopped attacking industry recognizing he needed their help attacking fascism.
The pre Pearl Harbor boost stems from three factors: wartime spending by others, which does not reflect stimulus on Washington’s part; Lend-Lease, but giving away munitions abroad promotes no prosperity here, and the demise of the New Deal.
After netting out federal spending, GDP surged 17% from $91.9 billion in 1940 to $107.7 billion in 1941. Once engaged, our non-federal output trickled down to $101.4 billion by WWII’s conclusion in 1945. The private economy reflected little improvement, partly because private consumption was curbed. Living standards didn’t regain 1929 levels until America restored a market based economy in the aftermath of victory.
FDR dreaded the recession’s return as Keynesian theory suggested severe trouble when ten million plus soldiers returned home unemployed. The president proposed a “Bill of Economic Rights” predicated on aggregate demand maintenance. Congress thankfully repudiated it. Tax rates were slashed while war time rationing, price controls and regulations receded.
America was one of few industrial nations with its productive infrastructure intact. Despite federal spending falling from $93 billion in 1945 to under $30 billion by 1948 (in 1945 dollars), unemployment stabilized around 4% as Americans, free of New Deal shackles, launched an economic boom.
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Page 3 of 3
Portraying WWII as bounteous economically because statistical measures bettered is like confusing a high batting average with winning championships. You can hit well and still lose. Normally, hitting safely and decreased joblessness reflect success, but war is different. Unemployment lessened because the draft sent men into combat. Increasing production because women were forced into factories building bombs is deceptive.
Economics studies the transformation of scarce resources into that which best fulfills our unlimited desires. How does blowing up Germany boost American living standards? How is making men sleep in frigid fox holes under enemy fire enriching? How did rationing everything from the enjoyment of luxuries to our clothing and diets lift anyone’s material standing?
The military doesn’t jumpstart the economy, it protects producers. This represents patriotic sacrifice, not prosperity.
Production is the progenitor of wealth, but making things unvalued by markets doesn’t improve life. Neither does working harder to achieve the same result. Repairing damage caused by war or natural calamity through debt encumbrance does nothing to support sustainable growth. Once said project completes, we’re back where we started with debts to boot.
During the postwar era, both parties believed spending was stimulating and thought government intervention essential during downturns. But we almost invariably recovered before the spending packages even passed Congress. Unfortunately, rather than conclude that intervention is unnecessary, now, we rush spending bills through as if racing a deadline to preempt the natural ricochet so politicians can take credit.
Stimulus spending doesn’t augment aggregate demand unleashing our “animal spirits” towards growth. It invites crony capitalism, patronage and dependency. As funds flow through Washington, producers reorient from satisfying customers to lobbying politicians. War spending leads to the dreaded Military-Industrial Complex Republicans like Ike feared, but Neo-Cons today relish.
If resources were unlimited or little effort was necessary to extract value, we could consume at will. Instead, markets prioritize output by channeling resources via price signals. Government spending fails because politicians lack the vital feedback mechanism of profits and losses. It’s not their money. Military outlays exemplify this faulty prioritization. Once Congress gets involved, we can’t even cut defense projects the military finds redundant. What the military does demand is often exorbitantly overpriced.
Stimulus efforts allow politicians to dispense dollars in patronage schemes conferring power upon themselves at taxpayer expense. Congress buys votes with your money. Even if public spending did stimulate, such corruption is too repugnant to condone.
As government grows, it becomes increasingly self serving. Bureaucracy inevitably seeks its own expansion. Businesses succeed by producing efficiently and pleasing customers. Bureaucracies thrive via inefficiency. Exceeding one’s budget makes it easier to ask for more. Failure allows sinecures to grovel before Congress that greater funding can achieve what lower funding merely wasted.
Deficit spending has never once successfully stimulated recovery. Like our failed war on poverty or public education, interventionists consistently claim we haven’t spent sufficiently. Mimicking the New Deal’s failure, Keynesians today decry that the Bush and Obama stimulus bills were half-hearted.
Dr. Krugman so desperately seeks more spending that he wishes Congress would pretend aliens are invading. Washington could then control the economy – for our good, not theirs, he’d have us assume. Krugman assures us liberals have a conscience.
Whether they have any common sense is less certain.
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CCP:
This is the thread which I meant: http://dogbrothers.com/phpBB2/index.php?topic=1023.150
The reason is that this thread tends to deal with more transient matters, whereas you bring up matters of more lasting substance. (If you do decide to post there as well, trimming the trash out of the post would be appreciated, , , I know, I know, I can be a pushy bastard , , , :-D )
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July/August 2011
Václav Klaus
President,
Czech Republic
The Crisis of the European Union: Causes and Significance
Václav Klaus, the president of the Czech Republic, spoke to friends of Hillsdale College in Berlin during Hillsdale’s 2011 cruise in the Baltic Sea. The speech was delivered at Berlin’s Hotel Adlon on June 11, 2011.
As some of you may know, this is not my first contact with Hillsdale College. I vividly remember my visit to Hillsdale more than ten years ago, in March 2000. The winter temperatures the evening I arrived, the sudden spring the next morning, and the summer the following day can’t be forgotten, at least for a Central European who lives—together with Antonio Vivaldi—in le quattro stagioni. My more important and long-lasting connection with Hillsdale is my regular and careful reading of Imprimis. I have always considered the texts published there very stimulating and persuasive.
The title of my previous speech at Hillsdale was “The Problems of Liberty in a Newly-Born Democracy and Market Economy.” At that time, we were only ten years after the fall of communism, and the topic was relevant. It is different now. Not only is communism over, our radical transition from communism to a free society is over, too. We face different challenges and see new dangers on the horizon. So let me say a few words about the continent of Europe today, which you’ve been visiting on your cruise.
You may like the old Europe—full of history, full of culture, full of decadence, full of fading beauty—and I do as well. But the political, social and economic developments here bother me. Unlike you, I am neither a visitor to Europe nor an uninvolved observer of it. I live here, and I do not see any reason to describe the current Europe in a propagandistic way, using rosy colors or glasses. Many of us in Europe are aware of the fact that it faces a serious problem, which is not a short- or medium-term business cycle-like phenomenon. Nor is it a consequence of the recent financial and economic crisis. This crisis only made it more visible. As an economist, I would call it a structural problem, which will not, by itself, wither away. We will not simply outgrow it, as some hope or believe.
It used to look quite different here. The question is when things started to change. The post-World War II reconstruction of Europe was a success because the war eliminated, or at least weakened, all kinds of special-interest coalitions and pressure groups. In the following decades, Europe was growing, peaceful, stable and relevant. Why is Europe less successful and less relevant today?
I see it basically as a result of two interrelated phenomena—the European integration process on the one hand, and the evolution of the European economic and social system on the other—both of which have been undergoing a fundamental change in the context of the “brave new world” of our permissive, anti-market, redistributive society, a society that has forgotten the ideas on which the greatness of Europe was built.
I will start with the first issue, because I repeatedly see that people on other continents do not have a proper understanding of the European integration process—of its effects and consequences. It is partly because they do not care—which is quite rational—and partly because they accept a priori the idea that a regional integration is—regardless of its form, style, methods and ambitions—an exclusively positive, progressive and politically correct project. They also very often accept the conventional wisdom that the weakening of nation-states, and the strengthening of supranational institutions, is a movement in the right direction. I know there are many opponents of such a view in your country—at such places as Hillsdale—but it has many supporters as well.
A positive evaluation of developments in Europe over the past 50 years can be explained only as an underestimation of what has been going on recently. In the 1950s, the leading idea behind the European integration was to liberalize, to open up, to remove all kinds of barriers which existed at the borders of individual countries, to enable the free movement of goods, services, people and ideas across the European continent. This was undisputedly a step forward, and it helped Europe significantly.
But European integration took a different course during the 1980s, and the decisive breakthrough came with the Maastricht Treaty in December 1991. Political interests that sought to unify and create a new superpower out of Europe started to dominate. Integration had turned into unification, and liberalization had turned into centralization of decision making, the harmonization of rules and legislation, the strengthening of European institutions at the expense of institutions in the member states, and what can even be called post-democracy. Since then, Europe’s constituting elements—the states—have been consistently and systematically undermined. It was forgotten that states are the only institutions where real democracy is possible.
After the fall of communism, the Czech Republic wanted to reassume its place among European democracies. We did not want to sit aside—as we were forced to do throughout the communist era—and European Union membership was the only alternative. Nothing else legitimizes a country in Europe these days. Therefore we joined the EU in May 2004. However, for those of us who spent most of our lives in the authoritative, oppressive, and non-functioning communist regime, the ongoing weakening of democracy and of free markets on the European continent represents something we did not expect and did not wish for in the moment of the fall of communism.
The most visible European problem today is the European monetary union, which was presented as the most important unification achievement following the Maastricht Treaty. The realization of this monetary union has not delivered the positive effects that—rightly or wrongly—had been expected from it. It was intended to accelerate economic growth, reduce inflation, and protect member states against external economic disruptions or so-called exogenous shocks. It has not worked. After the establishment of the euro zone, the economic growth of its member states slowed down relative to previous decades, thus increasing the gap between the rate of growth in the euro zone countries and that in other major economies. The internal disequilibria—such as trade imbalances and state budget imbalances—became larger, not smaller. And there is no indicator pointing towards a growing convergence in the euro zone countries. During its first decade of existence, a common currency has not led to any measurable homogenization of the member states’ economies.
It should have been clear to all, as it was to me, that the idea of a single European currency was essentially wrong—that it would create huge economic problems and lead inevitably to an undemocratic centralization of Europe. To my great regret, this is exactly what has been happening. The euro zone, which comprises 17 countries, is not an “optimum currency area” as defined by economic theory. In a currency or monetary union—which amounts to an extreme form of fixed exchange rates—it is inevitable that the costs of establishing and especially maintaining it exceed its benefits. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the establishment of Europe’s common monetary area. In recent years, however, the negative effects of the straightjacket of a single currency have become more and more evident. When good economic weather prevailed, no visible problems arose. But when bad economic weather set in, the lack of homogeneity manifested itself quite strongly.
It is difficult to speculate about the future of the euro. I suppose that it will not collapse, because a huge amount of political capital was invested in its existence. It will continue to exist, but at a very high price in terms of large-scale fiscal transfers—the shuffling around of problems between countries, which amounts to a non-solution—and of low economic growth rates.
The second reason for European economic problems—not specifically European, but worse in Europe than elsewhere—has to do with the quality, productivity and efficiency of its economic and social system. Europe is characterized by a seemingly people-friendly, non-demanding, paternalistic and—in consequence—insufficiently productive economic and social system called die soziale Markwirtschaft, or social democracy. This system, with its generous social benefits, weakened motivation, shortened working hours, prolonged years of study, lowered retirement ages, diminished the supply of labor—both at the macro level and structurally—and led to very slow economic growth.
In Europe, we have witnessed a gradual shift away from liberalizing and removing barriers and towards a massive introduction of regulation from above, an ever-expanding welfare system, new and more sophisticated forms of protectionism, and continuously growing legal and regulatory burdens on business. All of these weaken and restrain freedom, democracy and democratic accountability, not to mention economic efficiency, entrepreneurship and competitiveness.
Europeans today prefer leisure to performance, security to risk-taking, paternalism to free markets, collectivism and group entitlements to individualism. They have always been more risk-averse than Americans, but the difference continues to grow. Economic freedom has a very low priority here. It seems that Europeans are not interested in capitalism and free markets and do not understand that their current behavior undermines the very institutions that made their past success possible. They are eager to defend their non-economic freedoms—the easiness, looseness, laxity and permissiveness of modern or post-modern European society—but when it comes to their economic freedoms, they are quite indifferent.
The critical situation in Europe today is visible to everybody. It is not possible to hide it. I had believed that this spectacle would be a help to the cause of political and economic freedom in Europe, but this is not proving to be the case. Of course, with the way your American government has been going, you might be able to catch up with us—in terms of our problems—very soon. But you are not as far along yet. So maybe seeing Europe’s crisis today will at least help you in America turn back toward freedom.
__________________________________________________________________________________
On Václav Klaus
Larry P. Arnn
President, Hillsdale College
The following remarks were made in introducing Václav Klaus to Hillsdale College cruisers at the Hotel Adlon in Berlin on June 11, 2011.
We will have lived fortunate lives if we meet more people than we can count on our fingers who have studied the art of politics and the principles of economics, and who have done high and courageous service in that art. Today we meet and hear from such a man.
Václav Klaus is the president of the Czech Republic, and has served twice as its prime minister. He was born in Prague in 1941, and holds his doctorate in economics from the University of Economics in Prague, where he still teaches. He also studied in Italy in 1966 and in the United States in 1969.
In 1989, large events began to unfold in the world, including events right outside this hotel where the Berlin Wall stood. These events were terribly significant in the native country of our speaker, who had begun his career as an academic, worked for a long time in a state bank, and eventually returned to the academy. In the month in which the prospect of freedom came in the Czech Republic—or Czechoslovakia as it was then—he was immediately appointed its finance minister, in which role he set out to restructure his nation’s economy.
Our speaker is a believer in the free market and a member of the Mont Pelerin Society, a society dedicated to freedom that was founded in 1947 by people like Friedrich Hayek and Milton Friedman. Lately he has been something incredible and unique in the context of European politics—a person in high authority who is critical of the steady advance of centralized power in the European Union, and of the absence of accountability in its government to the peoples who are ruled by it.
Our speaker is part of one of the greatest stories in modern times. The people of Czechoslovakia and the Czech Republic are among the handful of peoples who had the disaster strike them of being ruled first by the German Nazis and then by the Soviet Communists. Nothing could be more abusive than to have either of those things happen, except to have both of them happen. And there is something about the Czech Republic that it has always stood up against such rule. Churchill thought that one of the worst tragedies of the 1930s was to abandon that brave place to Hitler. When the Iron Curtain fell, it would be one of the first places to rally.
Today we meet a man who came forward to show the alternative to collectivist rule, based on a distinction that Churchill loved. It had been a government where the government owned the people. How then could it become a government where the people own the government? I think it is no exaggeration to say that one of the most clear-sighted, deeply learned, and steadily courageous of all of the servants of human freedom in our age is the president of the Czech Republic, Václav Klaus.
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Copyright © 2011 Hillsdale College. The opinions expressed in Imprimis are not necessarily the views of Hillsdale College. Permission to reprint in whole or in part is hereby granted, provided the following credit line is used: “Reprinted by permission from Imprimis, a publication of Hillsdale College.” SUBSCRIPTION FREE UPON REQUEST. ISSN 0277-8432. Imprimis trademark registered in U.S. Patent and Trade Office #1563325.33 East College St. Hillsdale, MI 49242 • Tel: +1 517 437-7341 • Fax: +1 517 437-3923
© 2007-09 Hillsdale College. All rights reserved.
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In our famous people reading the forum series, Hugh Hewitt in the Washington Examiner finally runs with my allegation that the 2007-2008 years were under 'their' watch as well:
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"The hope and change hangover the country is experiencing is 100 percent the consequence of the policies adopted in 2007 and 2008 by President Obama in concert with Nancy Pelosi and Harry Reid." (Short piece, read it all.)
http://washingtonexaminer.com/opinion/columnists/2011/08/hope-and-change-hangover#ixzz1WQzBhzIV
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100% blame is an overstatement and not all the destructive policies were adopted, but the fact that they have been looming over investors for all this time has been enormously destructive.
From an economic point of view, the inflection point on the curve coincides exactly with the elevation of the Pelosi-Reid-Obama-Biden-Hillary-Ellison group to the majority in congress promising to inflict specific, anti-growth policies against an economy experiencing 50 consecutive months of job growth. Taking the Presidency was just icing on their cake. Assuming it ends, this was a 6 year, not a 4 year, experiment.
(http://i603.photobucket.com/albums/tt114/dougmacg/unemployment.gif)
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Personal income increased 0.3% in July To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/29/2011
Personal income increased 0.3% in July, matching consensus expectations. Personal consumption rose 0.8%, easily beating the consensus expected gain of 0.5%. In the past year, personal income is up 5.3% while spending is up 5.1%.
Disposable personal income (income after taxes) was up 0.3% in July and is up 4.0% versus a year ago. The gain in July was led by private-sector wages and salaries as well as dividends.
The overall PCE deflator (consumer inflation) increased 0.4% in July and is up 2.8% versus a year ago. The “core” PCE deflator, which excludes food and energy, was up 0.2% in July and is up 1.6% since last year.
After adjusting for inflation, “real” consumption was up 0.5% in July and is up 2.3% versus a year ago.
Implications: Income and spending were doing well in July, before recent financial volatility, and revisions to prior months show more momentum for the economy. Personal income grew 0.3% in July, as the consensus expected, but a stronger 0.7% including upward revisions to prior months. Spending was up 0.8% in July, beating consensus expectations, and grew 1% including upward revisions to prior months. Spending on durable goods, such as autos, increased 1.9%, showing that supply-chain disruptions from Japan are abating. Overall consumption prices rose 0.4% in July and are up 2.8% in the past year. Meanwhile, “core” consumption prices, which exclude food and energy, continue to accelerate, up a tame 1.6% in the past year, but up at a 2.2% annual rate in the past six months and a 2.5% rate in the past three months. Higher core inflation makes it difficult for the Federal Reserve to justify doing any additional quantitative easing. In our view, it makes it tough to justify committing to short-term interest rates near zero for the next two years. The Fed must be confused about how core inflation could be rising when the unemployment rate is above 9% and capacity utilization in the industrial sector is below 80%. In their worldview, core inflation should only be rising when resources are constrained, and we’re not even close to that environment in their thinking. In other news this morning, pending home sales, which are contracts on existing homes, declined 1.3% in July. However, given the 2.4% increase in June we still expect an increase in existing home sales (which are counted at closing) in August.
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I happen to like and do photography in my spare time; it gives me pleasure and I make a few extra dollars. However I only shoot film;
not digital. I don't like digital, albeit it's easy and cheap; I prefer film, especially in black and white. The quality is superior and distinct.
I came across this quote today; I thought those on this forum would appreciate it. :-)
"Digital’s like socialism – it flattens everything out and makes everything the same.”
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http://www.theblaze.com/stories/ap-fact-check-obamas-jobs-plan-paid-for-seems-not/
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(http://pajamasmedia.com/instapundit/wp-content/uploads/2011/09/presidential-promises-and-unemployment-chart-JPG_0.jpg)
Hopefully, Obooba joins the unemployed soon.
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http://www.reuters.com/article/2011/09/09/us-obama-jobs-georgia-idUSTRE7880LV20110909
Georgia jobs program cited by Obama has big flaws
By Matthew Bigg
ATLANTA | Fri Sep 9, 2011 7:46am EDT
ATLANTA (Reuters) - A jobs program in the Southern state of Georgia, cited in President Barack Obama's plan to fight unemployment, needs big fixes and would not work as a federal initiative, says the official who runs it.
Obama told Congress on Thursday in a major speech on jobs that the state-run Georgia Work$ initiative, along with other measures, would help people unemployed for more than six months and he stressed that Republican leaders in Congress supported it.
"We have to do more to help the long-term unemployed in their search for work," Obama said. Fear the U.S. economy could slip back into recession is hurting the Democratic president's chances of re-election in 2012.
"This jobs plan builds on a program in Georgia that several Republican leaders have highlighted where people who collect unemployment insurance participate in temporary work as a way to build their skills while they look for a permanent job," Obama told Congress.
But Georgia Work$ is being restructured to overcome significant flaws. Even within the state, it is seen as "not a marquee program," said state Labor Commissioner Mark Butler, the Republican elected official who oversees it.
More than 30,000 people benefited from the program in the past, but in its current form, Georgia Work$ is tiny. Only 12 unemployed people signed up in August and 92 have done so since February, according to state Department of Labor statistics.
The voluntary program places unemployed people with firms for eight weeks of job training similar to an internship. Participants receive unemployment insurance plus a small stipend and have the chance of a job at the end of it.
Butler said the program he inherited in January was virtually bankrupt and "fraught with problems," so he is surprised it has attracted so much national attention.
Obama gave no details of how the program would be applied at a national level and Butler said his office had had no contact with the White House.
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As Doug, perhaps correctly has pointed out, I seem (maybe many Americans?) to be in the political middle.
One of my pet peeves is the repeated extension of unemployment benefits. I personally know quite a few people
who are collecting unemployment; "Why go back to work they say? I'm being paid nearly as much as before
and I don't have to work." Etc.....
That's terrible. It was suppose to be a short term bridge. Like state mandated short term disability. If you want Long Term
Protection, buy a Long Term Disability Policy, or i.e. put your own money away for a rainy day.
This seemingly "lifetime" "unemployment" benefit is a disincentive to return to work. Surely there is a better way....
I would vote against another extension.
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An uncommon event, we agree :-D
The Long Run is Now To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 9/12/2011
President Obama delivered his long-awaited economic address Thursday night and Friday’s reaction in equities was a major Bronx cheer. Obviously the news from Greece, with that country teetering on the edge of a default, was also a big negative.
But we believe the lion’s share of the problem is that, once again, a president is proposing policies that are both primarily oriented toward the short-run and unlikely to succeed at lifting the pace of economic growth.
Back in 2008, under President Bush, we got a relatively small short-term “stimulus” bill. Then, in early 2009, President Obama got exactly the “stimulus” bill he wanted, in both grand size and scope. He had the votes and no compromise was necessary. Then, late last year, the president and the outgoing Congress agreed to yet another stimulus bill.
Each of these policies has mostly failed, yet the president is pushing for another set of proposals cut from the same cloth, with temporary payroll tax breaks, a temporary extension of full tax-expensing for plant and equipment, and more (politically-driven) infrastructure spending.
The Administration is also asking for an extension of the 99-week program of unemployment benefits, so it can cover workers who lost their jobs back in late 2009 thru 2010. Without any sense of irony, he wants the program to cover workers who lost their jobs during periods that his past stimulus efforts failed to stimulate.
Lord Keynes famously said that “in the long run we are all dead.” But with year after year of round after round of policies focused on the short-term, it’s about time to realize we are all living in the long-term now. What we need is for our lawmakers to get off the treadmill of short-termism and start focusing on where we want our country’s policies to be for the next generation.
The biggest opportunity is on the tax treatment of business purchases of plant and equipment, where the president is asking for just one more year of 100% full expensing. We think, given the priority he’s putting on this bill, that lawmakers who know better should demand to make this policy permanent.
We do not believe the US is doomed to become another (larger) version of Greece. But with each proposal that has put a priority on the short run, we have taken a step in that direction. Now it’s time for policymakers to show they have learned something over the past few years. A thorough rejection of the president’s recent proposals would be a great start.
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Wow. Wesbury is starting to get tired digging for the pony.
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For our non-native English speakers, the reference is to a story that Ronald Reagan used to tell about his positive outlook.
Something to the effect of a boy who when he saw a pile of horse excrement was happy because it meant there was a pony somewhere nearby.
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Thank you JDN for that. Of course it is a political conundrum. Extend the benefits and you extend unemployment. Refuse to extend and you get painted as heartless etc. The tough love measures need to be accompanied with real pro-growth policies.
Unemployment is another one of those poorly defined and measured terms. We just know there is too much of it.
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Hey, I've got a great idea! Let's not drill for oil and develop green jobs instead!
Let's pump 500 million into Solyndra and just watch unemployment disappear!
What?
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WASHINGTON (AP) — The ranks of U.S. poor swelled to nearly 1 in 6 people last year, reaching a new high as long-term unemployment woes left millions of Americans struggling and out of work. The number of uninsured edged up to 49.9 million, the biggest in over two decades.
The Census Bureau's annual report released Tuesday offers a snapshot of the economic well-being of U.S. households for 2010, when joblessness hovered above 9 percent for a second year. It comes at a politically sensitive time for President Barack Obama, who has acknowledged in the midst of his re-election fight that the unemployment rate could persist at high levels through next year.
The overall poverty rate climbed to 15.1 percent, or 46.2 million, up from 14.3 percent in 2009.
Reflecting the lingering impact of the recession, the U.S. poverty rate from 2007-2010 has now risen faster than any three-year period since the early 1980s, when a crippling energy crisis amid government cutbacks contributed to inflation, spiraling interest rates and unemployment.
Measured by total numbers, the 46 million now living in poverty is the largest on record dating back to when the census began tracking poverty in 1959. Based on percentages, it tied the poverty level in 1993 and was the highest since 1983.
The share of Americans without health coverage rose from 16.1 percent to 16.3 percent — or 49.9 million people — after the Census Bureau made revisions to numbers of the uninsured. That is due mostly because of continued losses of employer-provided health insurance in the weakened economy.
Good thing the rest of the country isn't creating jobs like those stupid Texans!
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"Wow. Wesbury is starting to get tired digging for the pony."
Wesbury has his politics right from my point of view. What is in question is his optimism that things can improve anyway, without the policy corrections. I believe he posts honest views, but because he is employed by an investment house he selects from all his observations mostly positive things to say.
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....The poor would get even poorer.
They were right!
(http://ihartpolitics.com/special/census/bottom_change.jpg)
Why does Obama hate poor people?
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Once again the WSJ a day behind the forum but I still appreciate them reporting what most won't. A side effect of robust economic growth is that the people most invested tend to gain soonest and most. The obvious corollary is that when growth is negative and unemployment soars and stays, disparity may lessen, the rich are still rich but less rich, but people who relied on each and every paycheck are screwed.
http://online.wsj.com/article/SB10001424053111904265504576568973957080358.html?mod=WSJ_Opinion_AboveLEFTTop
The Wall Street Journal
REVIEW & OUTLOOK
SEPTEMBER 14, 2011
Growth and Inequality: 2010
The latest news on spreading the wealth.
An abiding—make that the primary—goal of the Obama Administration has been to reduce income inequality. When the Affordable Care Act finally passed, White House economists and liberal pundits did a victory dance in their favorite publications boasting about how the bill would spread the wealth. So how's that inequality project working out?
One answer came yesterday with the Census Bureau's annual snapshot on living standards. The official poverty rate—defined as a family of four earning less than $22,314—rose to 15.1%. That's up from 14.3% in 2009 and 12.5% in 2007. The official rate significantly overstates poverty by missing government income transfers, but this increase is faster than during any three-year period since the early 1980s.
Meanwhile, the share of Americans without health insurance rose to 49.9 million, or 16.3%, from 48.99 million, or 16.1% in 2009. The share of Americans on private insurance continued to decline while those on Medicare and Medicaid rose. ObamaCare doesn't fully kick in until 2014, but we already know that it isn't reducing the cost of health insurance.
President Obama inherited a recession, and some increase in poverty was inevitable on his watch. But the magnitude of the increase underscores how feeble the current economic recovery has been, and how essential rapid economic growth is to lifting incomes for lower-income Americans in particular.
The lesson we draw is that politicians who support policies that make economic growth their top priority raise everybody's incomes even if some incomes rise more rapidly than others. Politicians who put income redistribution above overall economic growth do worse by everybody, especially the poor.
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Besides that the Keynesian Stimulus doesn't work in the first place, these failed Obamanomic attempts weren't Keynesian anyway.
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http://www.washingtontimes.com/news/2011/sep/5/and-now-a-word-from-a-job-creator/
Mike Whalen, The Washington Times,Mon 9/5/2011
And now a word from a job creator …
As a job-creating entrepreneur out here in the hinterlands, I am amazed at the Keynesian priests in Washington calling for more stimulus fueled by debt.
“The Rev.” Paul Krugman, “the Rev.” Robert Reich and their many cohorts argue that the stimulus was too small to offset falling aggregate demand and that the prescription for our laggard economy is another, bigger stimulus.
Those who talk about Keynesian economic theory think economic contractions are worsened and prolonged because consumers and businesses hunker down in caution, causing aggregate demand to fall. We can all agree this has happened.
According to the Keynesians, the remedy for today’s economic problem is for the federal government, as the single biggest actor, to “prime the pump.” As government money starts to ripple through the economy, consumers and businesses will be encouraged and cautiously respond with limited increases of their own. Vroom! The economic engine steadily revs up in billions of responsive steps until happy days are here again. This pump-priming reaction is termed the “multiplier effect.”
I think John Maynard Keynes would be horrified at the slavish adherence to this simplistic strategy by so many policymakers and economic thinkers, as his theory was much more complex. This thinking might be correct under circumstances other than those in which we find ourselves. If the ratio of our national debt to gross domestic product was low - say 25 percent - and the federal government had run surpluses before the downturn, this college freshman-level Keynesian analysis would have great weight. Put another way, if Uncle Sam were a rock-solid financial entity with low debt to value and he had judiciously used debt for capital improvements that were accretive in value, as the biggest dog on the porch, a stimulus might work.
But with a national debt of more than $14 trillion and unfunded, future “off the books” debt of Social Security and Medicare combined at $104 trillion in present value, according to the Dallas Federal Reserve, Uncle Sam ain’t the man he used to be. This in turn makes American businesses that are sitting on a pile of cash focus on deleveraging. The American consumer is doing the same. In fact, from where I sit, it appears as though everyone except Uncle Sam is working like mad to strengthen his balance sheets. The legitimate fear across the country is that Washington’s refusal to join our common-sense parade will result in higher taxes, more regulations, more inflation and Japanese-style stagflation. In other words, Washington’s attempts at stimulus through spending are having the opposite effect. Businesses and consumers stay hunkered down.
I know this is counterintuitive to the college-freshman Keynesian analysis from above, but as a business owner, I can tell you an additional stimulus would create more fear and further dampen demand in the private sector. Keynes was correct in focusing on aggregate demand as critical, but the confidence context and potential behavior responses have to be considered, and that requires real-world, Main Street knowledge - not just textbook theory. In this environment, if the federal government announced a real road map to fiscal soundness, the impact would be truly stimulating. If American businesses and consumers saw that Washington was really cutting, not just reducing future increases, there would be tremendous relief and an increase in confidence across the country. Job creators would sing “hallelujah”; they would get off their wallets, start hiring, and then you’d see that Keynesian multiplier kick in.
Modern Keynesians suffer from the misguided notion that government is the great engine that will restore our economy to prosperity. In fact, the great engine is a diverse system of private citizens anxious to go to work to provide for their families and build their businesses.
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http://hotair.com/archives/2011/09/19/a-real-hockey-stick-graph/
A Real Hockey-Stick Graph
posted at 2:05 pm on September 19, 2011 by Karl
From The Economist (via AoSHQ and Dr. Mark J. Perry), a population-weighted history of the past two millennia:
(http://media.hotair.com/greenroom/wp-content/uploads/2011/09/economichistory.gif)
Measured in years lived, the present century, which is only ten years old, is already “longer” than the whole of the 17th century. This century has made an even bigger contribution to economic history. Over 23% of all the goods and services made since 1AD were produced from 2001 to 2010 ***.
For century after century, the human race remained mired in poverty. Life was nasty, brutish and short. Then an incredible explosion of prosperity. How did it happen?
In Civilization: The West and the Rest, Niall Ferguson argues that, beginning around 1500, the West came to dominate the rest of the world because it adopted a system including competition, science, property rights, medicine, the consumer society, and the work ethic. Yet the explosion comes centuries later. In Bourgeois Dignity, Deirdre N. McCloskey argues the explosion was ignited by a new attitude toward wealth and its creation — one that respected innovation and entrepreneurial drive.
In his column on McCloskey’s book, Rich Lowry notes:
Unfortunately, we have a president of the United States who has been a member his entire adult life of what McCloskey — borrowing from Samuel Taylor Coleridge — calls “the clerisy.” These are the intellectualoids who never lost their instinctual scorn for commercial activity. Can you imagine Barack or Michelle Obama routinely urging college students to contribute to hope and change by entering the innovative economy’s great swirl of creative destruction?
Unfortunately, special interests will always pursue anti-innovation trade and regulatory policies to protect their fiefdoms.
Unfortunately, it’s easier to prop up what’s old than foster what’s new. A few years ago, the Federal Reserve handed out billions upon billions of dollars to practically every large, established firm in America.
The problem may be larger than the clerisy’s antipathy to competition. They want to stifle scientific debate when it suits their politics. They have little regard for property rights. They will stifle medical innovation. They indiscriminately bemoan materialism. They never wanted welfare reform and have been busying themselves rolling it back. All of it done in the name of “progress,” of course.
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A simply OUTSTANDING performance yesterday by Paul Ryan in his interview by Chris Wallace yesterday!!! Would someone please find and post here the URL?
This is one of the very best and clearest expositions I have seen. The man is fg formidable in his grasp of the facts, the logic of the facts, and his ability to communicate about them.
Good interviewing by Wallace too.
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A simply OUTSTANDING performance yesterday by Paul Ryan in his interview by Chris Wallace yesterday!!! Would someone please find and post here the URL?
This is one of the very best and clearest expositions I have seen. The man is fg formidable in his grasp of the facts, the logic of the facts, and his ability to communicate about them.
Good interviewing by Wallace too.
http://www.youtube.com/user/RepPaulRyan#p/a/u/1/ufsAMqBO5l0
This is Ryan's youtube channel. It doesn't appear the most recent Wallace interview has been uploaded yet.
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But isn't there somewhere on youtube that would have it?
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[youtube]http://www.youtube.com/watch?v=lsTyHU65AUI[/youtube]
http://www.youtube.com/watch?v=lsTyHU65AUI
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http://www.propublica.org/article/our-sputtering-economy-by-the-numbers-poverty-edition
Our Sputtering Economy by the Numbers: Poverty Edition
by Braden Goyette
ProPublica, Sep. 20, 2011, 12:39 p.m.
People pick up lunch in the soup kitchen of St. Francis Center on Sept. 13, 2011, in Los Angeles, Calif. (Kevork Djansezian/Getty Images)
Last month, we detailed the dismal state of the nation's economy. Now that the Census Bureau has released new poverty figures, we wanted to give you another snapshot of how Americans are faring more than two years after the recession.
Americans below the poverty line in 2010: 46.2 million
Official U.S. poverty rate in 2007, before the recession: 12.5 percent
Poverty rate in 2009: 14.3 percent
Poverty rate in 2010: 15.1 percent
Last time the poverty level was this high: 1993
Poverty line in 2010: $22,314 for a family of four, or $11,139 for an individual
Rough amount the poor are living on per week: $200 or less
Poverty rate in American suburbs: 11.8 percent, the highest since 1967
Percentage of the population making less than half the poverty line in 2010: 6.7 percent
Percentage of the population making less than half the poverty line in 2007, before the recession: 5.2 percent
Poverty rate for white Americans in 2010: 13 percent
Poverty rate for African-Americans in 2010: 27.4 percent
Real median household income in 2010: $49,445
Decline in median household income since 2009: 2.3 percent
Decline in median household income since before the recession: 6.4 percent
The last time median household incomes have been this low: 1996
Real median household income in 1999, in 2010 dollars: $53,252
Median income for full-time male workers in 2010: $47,715
Median income for full-time male workers in 1973, in 2010 dollars: $49,065
Official unemployment rate in August 2011: 9.1 percent
Total unemployed people in August: 14 million
People who were employed part-time for economic reasons in August 2011: 8.8 million
People not counted in the labor force who wanted work: 2.6 million
Net jobs created in August 2011: 0
Long-term unemployed people as of August 2011: 6 million
Unemployed workers per job opening as of July 2011: 4.34 (3.2 million openings and 13.9 million unemployed people)
Uninsured Americans in 2010: 49.9 million
Percentage of Americans without health insurance in 2010: 16.3 percent
Percentage of Americans without health insurance in 2007, before the recession: 15.3 percent
Percentage of children who were uninsured in 2010: 9.8 percent
Percentage of children in poverty who were uninsured in 2010: 15.4 percent
Percentage of American households that had enough to eat throughout the year in 2007: 88.9 percent
Percentage of American households that had enough to eat throughout the year in 2010: 85.5 percent
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Whoops GM, I see I missed acknowledging and thanking you for the clip of Ryan. The first couple of minutes are not there, but it is most of it. Thank you.
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De nada.
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http://www.investors.com/NewsAndAnalysis/Article/585780/201109221859/Small-Wonder-Were-Sinking.aspx?src=IBDDAE
Editorial: We're Sinking Under Obama's Policies
Posted 09/22/2011 06:59 PM ET
Economy: The head-scratching continues as stocks take another leg down. Why, they ask, must the market be so negative? With an economy buckling under leftist incompetence, what, we ask, is there to be positive about?
Funny, because it's been going on for almost three years now, but hardly a day goes by without some bit of bad news the media calls "unexpected." But investors have noticed.
After selling off 2.9% on Wednesday, the S&P 500 dived another 3.2% Thursday. The Dow industrial average is testing a 52-week low.
Wednesday's drop came after the Fed unveiled its new plan for reviving the economy and as President Obama hit the road to sell his new but unimproved $447 billion stimulus.
Thursday's "unexpected" news was that the four-week moving average for jobless claims — a labor-market bellwether — rose to 421,000. Any number north of 400,000 is considered recession territory.
But should anyone really be surprised?
After all, we were promised in 2009 that $840 billion in stimulus would guarantee unemployment would not top 8%. Today, it's 9.1%, and has stayed above 9% for 26 of the last 31 months.
Since this president took office, U.S. businesses have shed 3.3 million jobs. We are still 6.9 million below our peak employment reached in January 2008. Ordinarily, more than two years after a recession has ended, well over a million jobs have been added to payrolls.
By any meaningful measure, then, our president has followed the least-successful economic policies of any U.S. leader since World War II. As recession seems ever more possible, the IMF warns of a U.S. "lost decade."
Whether it's jobs, economic growth, energy prices, incomes, regulation, weak foreign policy, or the quality of our lives and the nation's social fabric, America's current course looks questionable at best.
No wonder the markets are so volatile. They discount not the present, but the future. And the future for investors is murky at best and downright dark at worst.
So what's wrong? Here's a quick review of some of the federal policies launched in the name of "stimulus."
• Failed Fed policy. For three years, we've kept interest rates at record lows, undergone two rounds of quantitative easing and created $2 trillion in new money. On Wednesday the Fed announced its next move: the $400 billion "Operation Twist" — modeled on a failed Fed bond-buying program from the '60s to push down long-term interest rates. With so much Fed meddling, the markets can't help but be confused.
• Growing federal debt. In the European Union, debt-to-GDP ratios have hit an economy-crippling 140%. Greece, Italy, Ireland, Portugal and Spain all verge on default. But we have nothing to be smug about.
U.S. debt of $14.5 trillion already tops 100% of GDP, a level economists believe saps a nation's economic vitality. At the rate we're racking up deficits — $4 trillion in just three years — we'll soon join the EU in perpetual economic stagnation.
• Unstimulating stimulus. Faced with the clear failure of his previous stimulus, which wasted $840 billion, the president's new plan spends another $457 billion and imposes massive new taxes on the middle class, small businesses and entrepreneurs. Some 1.9 million new jobs will be created, the president reckons. In fact, jobs will be destroyed.
• Class warfare. The president relentlessly attacks "millionaires and billionaires," aided by the mainstream media's penchant for repeating his factually challenged assertions about who pays our taxes. In pushing the new "Buffett Rule" to raise taxes on the rich, the president absurdly claims that millionaires pay less in taxes than their secretaries.
But as blogger Noel Sheppard notes, IRS data disprove this canard: 99.6% of those earning above $1 million pay taxes at a higher tax rate than secretaries. And just over 200,000 wealthy taxpayers pay 20% of all federal income taxes. These are the very people who create new businesses and jobs.
• Anti-business bias. The president's war on small business and entrepreneurs has devastated American job creation, once the envy of the world. A House committee estimates more than half the taxes under the new "stimulus" will be paid by small businesses.
Refusing to sign an already negotiated free-trade bill, proposing onerous new taxes and regulations, and pursuing a money-wasting and corrupt "green jobs" strategy are leaving a wake of economic destruction.
• Regulatory siege. Federal regulation costs America $1.8 trillion a year — or roughly 13% of all our output. Whether it's the Environmental Protection Agency requiring power plants to shut down and others to be retrofitted with costly new equipment, or the National Labor Relations Board telling companies like Boeing where they can and cannot locate new facilities, or a moratorium on oil drilling in the Gulf of Mexico, or foot-dragging on the construction of a new pipeline from Canada that could boost U.S. energy security and lower prices, the government is a barrier to growth.
• ObamaCare. An estimated 4% of the U.S. chronically lacks health insurance — a serious, but manageable problem. Rather than address the real problem, the president and his allies in the Democrat-controlled Congress took over 17% of our economy. Now we're stuck with a health care program that studies show will provide lower-quality care at a cost of as much as $1 trillion over the next decade.
Health care reformers promised to "bend the cost curve down" and let Americans keep their current doctor if they wish. But a new study asserts that Obama-Care will raise premiums by 55% to 85%, while small-business surveys show that 30% or more will drop health coverage entirely — forcing employees into government-run health insurance "exchanges."
Such warmed-over leftist thinking, taken straight from the progressive playbook, is why markets are melting down. Not in 70 years have we had to deal with policies so ill-considered and poorly designed.
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"What we can do—and absolutely must—is knock down all hurdles that create disincentives for investment in business. Private enterprise works."
http://online.wsj.com/article/SB10001424052970204422404576596681526254692.html?mod=WSJ_Opinion_LEADTop
Every Job Requires an Entrepreneur
Someone took risks to start every business—whether Ford, Google or your local dry cleaner.
By CHARLES R. SCHWAB
In his speech before a joint session of Congress on Sept. 8, President Obama said, "Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers."
He is right. We can spark an economic recovery by unleashing the job-creating power of business, especially small entrepreneurial businesses, which fuel economic and job growth quickly and efficiently. Indeed, it is the only way to pull ourselves out of this economic funk.
But doing so will require a consistent voice about confidence in businesses—small, large and in between. We cannot spend our way out of this. We cannot tax our way out of this. We cannot artificially stimulate our way out of this. We cannot regulate our way out of this. Shaming the successful or redistributing income won't get us out of this. We cannot fund our government coffers by following the "Buffett Rule," i.e., raising taxes on Americans earning more than $1 million a year.
What we can do—and absolutely must—is knock down all hurdles that create disincentives for investment in business.
Private enterprise works. I founded Charles Schwab in 1974, when America was confronting a crisis of confidence similar to today's. We had rapidly rising inflation and unemployment, economic growth grinding into negative territory, and paralyzed markets. The future looked pretty bleak.
Sound familiar?
Yet I had faith that our economy would recover. My vision was simple: Investors deserve something better than the status quo. I launched the company with four employees, a personal loan on my home, and an audacious dream. I didn't know exactly how we were going to do it, nor could I foresee that over the decades we would end up building a business that serves over 10 million accounts. But we went for it.
Enlarge Image
schwab
Close
schwab
Bloomberg
What's the potential power of the entrepreneur's simple leap of faith? The success of a single business has a significant payoff for the economy. Looking back over the 25 years since our company went public, Schwab has collectively generated $68 billion in revenue and $11 billion in earnings. We've paid $28 billion in compensation and benefits, created more than 50,000 jobs, and paid more than $6 billion in aggregate taxes. In addition to the current value of our company, we've returned billions of dollars in the form of dividends and stock buybacks to shareholders, including unions, pension funds and mom-and-pop investors.
The wealth created for our shareholders—a great many of them average Schwab employees—has been used to reinvest in existing and new businesses and has funded a myriad of philanthropic activities. We've also spent billions buying services and products from other companies in a diverse set of industries, from technology to communications to real estate to professional services, thereby helping our suppliers create businesses and jobs.
That's the story of one company. There are thousands more like it, and a consistent supportive voice from Washington could enable thousands more ahead.
The simple fact is that every business in America was started by an entrepreneur, whether it is Ford Motor Co., Google or your local dry cleaner. Every single job that entrepreneur creates requires an investment. And at its core, investing requires confidence that despite the risks, despite the hard work that will certainly ensue, the basic rules of the game are clear and stable. Today's uncertainty on these issues—stemming from a barrage of new complex regulations and legislation—is a roadblock to investment. We have to clear that uncertainty away.
As we did after 1974, our country can and will thrive again. But the leaders of both parties, Republicans and Democrats alike, must lend their voices to encourage and support private enterprise, both for what it can do to turn our economy around and for the spirit of opportunity it represents.
They need to review every piece of existing legislation and regulation with a clear eye to what impact it will have on business and growth. If something is a job killer, put a moratorium on it. Stop adding to the litany of new laws and regulations until we've had time to digest those in place and regain some certainty about the future. Proposed laws and regulations should be put to a simple test: What will this do to encourage businesses and entrepreneurs to invest? What will it do for jobs?
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I know we banter a bit about Wesbury's relentless bullishness, but it cannot be said the man lacks the courage of his convictions. By the way, some of the data he is citing are not without persuasive power , , , If he turns out to be right GM should be first in line for the humble pie :lol:
New orders for durable goods slipped 0.1% in August To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 9/28/2011
New orders for durable goods slipped 0.1% in August, slightly better than the consensus expected decline of 0.2%. Orders excluding transportation also slipped 0.1% versus a consensus expected -0.2%. Overall new orders are up 12.3% from a year ago, while orders excluding transportation are up 7.8%.
The drop in orders was led by motor vehicles. Aircraft and related parts were the largest gainer while other categories of orders showed little change.
The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure rose 2.8% in August (3.3% including upward revisions to July) and even if unchanged in September will be up at a 17.7% annual rate in Q3 versus the Q2 average.
Unfilled orders rose 0.9% in August and are up 8.1% from last year.
Implications: This is not what a recession looks like. New orders for durable goods slipped a tiny 0.1% in August, both with and without transportation. But shipments of “core” capital goods, which exclude aircraft and defense and which the government uses to calculate the business investment part of GDP, increased a robust 3.3% (including upward revisions for July). This is the fourth straight monthly gain for core shipments, which are now at a new all-time record high. They are up 10.8% in the past year and are accelerating, up at a 19.6% annual rate over the past six months and an even faster 22.6% rate in the past three months. Increases in core shipments should continue: unfilled orders are up about 15% versus a year ago. In addition, non-financial corporate balance sheets are strong and loaded with cash earning nearly zero percent interest. Meanwhile, corporate profits are at a record high. As a result, the odds are stacked in favor of a substantial increase in business investment over the next few years. In other recent news, the Richmond Fed index, a measure of manufacturing activity in the mid-Atlantic, increased to -6 in September from -10 in August. Chain store sales were up 4.2% versus a year ago according to Redbook Research and 2.7% according to the International Council of Shopping Centers. On the housing front, the Case-Shiller index, a measure of home prices in the 20 largest metro areas, was unchanged in July (seasonally-adjusted) and down 4.2% versus a year ago. However, prices were up in nine of the twenty areas. The biggest losses in July and the prior three months were where many would expect: Phoenix, San Diego, San Francisco, Las Vegas, and Los Angeles.
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I'll happily step up for my serving. I'd much prefer things get better rather than live through "The greatest depression".
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I know we banter a bit about Wesbury's relentless bullishness, but it cannot be said the man lacks the courage of his convictions. By the way, some of the data he is citing are not without persuasive power , , , If he turns out to be right GM should be first in line for the humble pie
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I take that Wesbury report as a mixed bag, some measures up, some down. What we call his relentless bullishness is really just some positive spin on a sick, but fairly stable economy. We are lucky that there are some signs of life out there if you look closely enough. Unemployment is not getting better or worse lately. The future keeps getting worse in the sense that a) we are going to owe a whole hell of a lot more than we did when we finally get out of this malaise, b) our currency is being undermined, therefore our wealth will be eroding long past the beginnings of real recovery, and c) we have not done anything yet to address any of the underlying problems.
It is a matter of definitions to point to anything like 0.1% or 1.0% growth for examples and say this is no recession. He may be technically correct but people know that what quacks like a duck is really a duck.
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The president's jobs bills isn't a jobs bill and it isn't going to pass either chamber. If it passed it isn't going to grow a single job.
To ALL: The President today said that people who oppose his 'jobs bill' need to answer, what would YOU do? Anyone and everyone, this is your shot. Post the answer - right here. Let's find some agreement, and start writing to Washington. Waiting for a year from November, or really January 2013 and hoping a new group will win and do something isn't soon enough or good enough IHMO. Let's step up the pressure to fix this right now...
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http://www.theatlantic.com/business/archive/2011/10/the-99/246297/
The 99%
By Megan McArdle
Oct 6 2011, 11:42 AM ET708
I spent quite a lot of time on the "We are the 99%" website last night and this morning. There's been a considerable amount of carping about it from the conservative side, and to be sure, some of the stories strain plausibility (the percentage of people in the sample who have either taken up prostitution, or claim to have seriously considered doing so, seems rather high, for instance, and as far as I could tell, not a single person on the site had been fired for cause). Many of the people complaining made all sorts of bad decisions about having children, getting very expensive "fun" degrees, and so forth.
But quibbling rather misses the point. These are people who are terrified, and their terror is easy to understand. Jobs are hard to come by, and while you might well argue that any of these individuals could find a job if they did something different, in aggregate, there are not enough job openings to absorb our legion of unemployed.
(http://cdn.theatlantic.com/static/mt/assets/meganmcardle/Employment%20Gap.png)
When the gap between the number of job openings and the number of people who are out of work is so large, there are going to be a hefty number of unemployed people. Maybe these people individually could have done more to get themselves out of their situation, but at the macro level, that would just have meant that someone else was out of work and suffering.
I think it's hard to read through this list of woes without feeling both sympathy, and a healthy dose of fear. Take all the pot shots you want at people who thought that a $100,000 BFA was supposed to guarantee them a great job--beneath the occasionally grating entitlement is the visceral terror of someone in a bad place who doesn't know what to do. Having found myself in the same place ten years ago, I can't bring myself to sneer. No matter how inflated your expectations may have been, it is no joke to have your confidence that you can support yourself ripped away, and replaced with the horrifying realization that you don't really understand what the rules are. Yes, even if you have a nose ring.
I'm not sure that this constitutes the seeds of a political movement, however. For all the admiring talk about bravery and perseverance, it's not really al that difficult to get young, unemployed people to spend a couple of weeks camping out somewhere. They have a low cost of time, they're in no danger, and yes, I have to say it, demonstrating is fun. No, don't tut-tut me. I was at the ACT-UP die-ins, the pro-choice marches, the "Sleep Out for the Homeless" events and the "Take Back the Night" vigils. It's fun, especially when you can see yourself on television. This is not the Montgomery bus boycott we're talking about here.
So my question is, how does this coalesce into a broader platform? Does someone have a coherent, plausible answer for someone whose pricey liberal arts degree has not equipped them for a tough job market? And is it a coherent, plausible answer that they will believe? I don't think those kids in Zucotti park are waiting to hear about QE3 and the American Jobs Act.
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If we measured the number unemployed now against the total of jobs considered available when Obama took office, the unemployment rate would be 11.3%.
- James Pethokoukis, Biased Blogger at the right wing media outlets of Reuters and CNBC. He was Economics Columnist and Business Editor at U.S.News & World Report magazine.
http://blogs.reuters.com/james-pethokoukis/2011/08/17/obama-vs-perry-on-jobs/
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Those results are after $6 trillion of artificial 'Keynesian Stimulus' with no plan of lessening much less pay back.. Don't tell me we aren't moving backwards.
U6 = 16.5% http://www.bls.gov/news.release/empsit.t15.htm
Do you know what caused all this economic carnage? ... Government at all levels just got too small, Bush's fault, and economic liberties were too large and too widespread. People across the country, in all states and all industries, were under-taxed and under-regulated. We must correct urgently - with a new and improved government program.
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Doug what is your take on this:
As noted on Drudge the payroll rate up 103K this month. Yet 45K is simply Verizon workers going back to work after a strike!
What kind of crap is this? Those are not 45K new jobs.
What are we all this stupid? Why can we not have honesty if nothing else in our government?
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"Doug what is your take on this: As noted on Drudge the payroll rate up 103K this month. Yet 45K is simply Verizon workers going back to work after a strike! What kind of crap is this? Those are not 45K new jobs. What are we all this stupid? Why can we not have honesty if nothing else in our government?"
CCP, Great point, thanks for that! All economic measures are flawed so you work through it the best you can, knowing that your own lying eyes could have better accuracy than their data. If those people were getting unemployment compensation then I guess going back to work means new jobs created??? Unbleapingbelievable, but no surprise to me. I have posted for years that we measure the poverty rate while excluding their main sources of income and we measure oil reserves without including most known oil reserves. The real question is why do voluntarily striking workers qualify for compensation while choosing to not work during contract negotiations? The freedom to strike should be matched with the freedom to not get paid.
The main news of the day I thought had to do with some positive revisions of previous months figures. That makes just slightly better news than downward revisions, about like having Wesbury telling us that 0.3% growth is upward movement even if it is statistically identical to 0.3% in decline. Either way this economy sucks, everyone knows it, and the inflection point on the curve happens to be not when Obama assumed the Presidency, but exactly when Pelosi-Reid and Obama took the majority in congress and control of the domestic agenda. The record of the Obama administration has been only to lock us in at our very lowest point
As my daughter's sports team heads into the heat of their playoff season I can say that in economics like sports, if you focus on doing the fundamentals correctly the scoreboard will take care of itself.
The fundamentals in a nutshell right now are:
Unprecedented over-regulation which includes an uncertainty and fear right now at terroristic levels when it comes to business growth and expansion. The potential hirers do not even know if Obamacare is coming much less what it will mean to them, much less everything else to do with employment law. They don't know what EPA carbon rules will mean or what energy will cost. They are getting just killed with property taxation in the populated areas where workers live. They don't know what a dollar is worth today or tomorrow and they don't know to the nearest ten percentage points what their tax rate will be tomorrow will be on an investment made today. What they know is that we are not currently addressing ANY of our underlying problems.
Liberals and leftists actually have a stronger, blind belief in capitalism than right wing supply siders like myself do. They believe that you can keep piling little things like family leave, layoff notification laws,escalating healthcare penalties and ongoing threats of profits surcharges on top of OSHA and everything else already on them ini terms of state, federal and local tax, penalties and regulations and that the amazing American economy will still hit on enough cylinders to keep running. I am amazed that under this level of incompetence, uncertainty and restraints on economic freedoms that anyone goes to work or pays a bill at all.
For every stupid and piddly little $100 million in federal beekeeping or monkey-mating studies we have taken another dollar away from every member of the current workforce. How many more of these wealth transfers and boondoggles can we keep piling on before every worker and every investors just gets up and quits?
The less I make right now, the more that YOU will be paying for my daughter's college. What could possibly go wrong with that? Let me guess. Doctors our age are taking early retirement in droves, ready to scale back their earnings and their tax contributions.
http://americasmedicalsociety.com/first-casualty-of-obamacare-the-american-physician/
I have posed this question elsewhere without a serious answer: Please name for me, anyone, every tax and every regulation at every level of government that one must know inside and out before venturing to start a successful lemonade stand. You can't.
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Very good post from GM-- in a similar vein to what I just posted in the American Creed thread, good posts from Doug too.
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Finally, a GOP Growth Plan
Senators John McCain and Rand Paul have drafted an economic growth blueprint that they hope to be the rallying cry of all congressional Republicans.
By STEPHEN MOORE
The White House and congressional Democrats hope to use the Senate rejection of the Obama jobs plan this week as a campaign issue against "do nothing Republicans." Senate Democrats have crowed that "Republicans have no jobs plan of their own," but that's not true any longer. Senators John McCain of Arizona and Rand Paul of Kentucky have drafted a comprehensive economic growth blueprint that they hope to be the rallying cry of all congressional Republicans in the weeks ahead. We obtained a copy of the draft document which includes tax cuts, a balanced budget amendment, ObamaCare repeal, and a regulatory freeze.
In an interview, Mr. McCain said that the two GOP senators were asked by Senator John Cornyn of Texas to stitch together a counterpoint to the Obama $447 billion proposal that lost in the Senate on Tuesday. "Can you imagine a stranger pair than me and Rand Paul," laughed Mr. McCain of his co-sponsor, who is a libertarian Republican. "We found a lot of common ground, and that started with fixing the tax code," he adds.
The plan would also promote an America-first pro-drilling policy to expand U.S. industry and reduce the country's reliance on Middle East oil. That's an issue where Mr. Obama is highly vulnerable given the tens of billions wasted on wind and solar subsidies. On the regulatory front, federal agencies would not be able to issue new rules until the unemployment rate drops to 7.7%.
The plan, which would cut corporate tax rates to 25% from 35% is partly paid for by offering a reduced 5% tax on repatriated capital to the U.S. When that approach was tried in the Bush years, revenues rose as a flood of new capital that was trapped overseas poured back into the U.S. Mr. McCain fumed that the congressional score keepers won't count this maneuver "as a revenue raiser, even though we know it increase tax payments."
The plan won't get close to the 60 votes necessary in the Senate. But it does establish a polar star for Republicans to head toward. Republicans got a nice lift for the plan when a Chamber of Commerce poll asked 1300 business owners across the country whether they support the GOP plan of "permanent tax cuts and less regulation," or the Democratic plan of temporary payroll tax cuts and public works spending. More than eight of 10 said they favor the Republican approach.
Mr. Paul told Politico that it is critical that Republicans have a response on jobs to the White House offering. Now they have one, and we will see if Republicans actually fight for it.
http://online.wsj.com/article/SB10001424052970204002304576631170682383808.html?mod=WSJ_Opinion_MIDDLESecond
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As much as I cannot stand his dad, Rand Paul seems quite reasonable. Much of what he says resonates with me.
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Wynn’s comments, transcribed from the audio presentation, come after the casino executive, who has donated heavily to Democrat campaigns, called the Obama administration on a prior earnings conference call “the greatest wet blanket to business, and progress and job creation in my lifetime.” He added at that time: “I'm telling you that the business community in this country is frightened to death of the weird political philosophy of the President of the United States. And until he's gone, everybody's going to be sitting on their thumbs."
Question: How do you see the landscape politically now? Is there any reason for optimism given the current slate of candidates to give you hope for the regulatory environment improving for your business?
Wynn: "We had a debate here last night and we had a focus group, that actually took place in the Tryst last night ... It's very interesting about the folks who are occupying Wall Street. That group is quite diverse. There are people in there that think the government should give them more just because they are alive. There are people there who are opposing government spending. There are people there that are opposing bailouts. That group is not homogeneous by any means.
"What you do have on Wall Street is a reflection, a real reflection in my opinion, of the anxiety, the insecurity and the fear that is endemic in the United States of America about the way government has gotten into the business of managing its life and the ability of the government to manage the economy intelligently by increasing the emphasis in government spending rationally ... to the point that we want ... everybody's financial security.
"I am watching my employees' standard of living drop because of deficits. I think that the American public is beginning to make a connection between deficits and their own loss of living standard...
"The net result of all of this is frustration, anxiety and anger. You're seeing that on Occupy Wall Street. You can see it taken to the next level in Greece, where people are trying to break in to a Parliament primarily controlled by the unions and the very kind of government that the people who are trying to break down the census elected. There comes a moment when the population realizes that it has to stop, and sometimes it takes a form of tax the rich people, which is a reflection more of the lack of understanding of how the economy works.
"Rich people are now being defined by the administration as people who make $1 million. Well, most of the businesses in America, other than giant corporations, are paying taxes under Chapter S partnerships or individual proprietorships. So somebody shows that they've made $3 million or $2 million this year and they paid personal taxes on that money. They subtract the cost of living and then what's left after, and that does not show that probably 25% or 30% of their profits are tied up in accounts receivable or inventory, stuff that they can't spend or get their hands on, but to support their business and their employment. And then they take whatever is left, these so-called millionaires, and they open up another shop or another office. And that, that is the only known engine of growth in the United States of America.
"And we have an administration that is fanning the fires that this is somehow undeserved, profligate millionaires, and it is worse than hypocrisy. It is totally dishonest. It represents young people who don't know the difference, simple misunderstanding and the lack of understanding of how the economy works or what's going on in America, but if it's politician that does it or union leader, then it represents something much more pernicious. It represents a deliberate misleading of the public. And I think that Americans are waking up to this.
"And it's taking the form of anger and dissatisfaction with the government. And I think that's probably just right because until there is a change, until this all stops, it's only going to get worse. No matter what anybody says in some fancy speech, even if it's a President, it is going to get worse. People say we're angry at the government for not compromising on both sides. Well, we don't really have a situation that lends itself to what reasonable people would call compromise. We've got a situation that requires a change.
"That is to say one side is right here and the other side is wrong. You cannot sustain these deficits. You cannot undercut the people that form the jobs and create the employment in this country. I'll give you an example of Las Vegas in my own industry. Across the street from me is an empty piece of property that's 34 acres. It's owned by two Israelis that are friends of mine that bought it at a very high price and are sort of in a difficult position now.
"They even owe money against that property. They have come to me on a monthly basis to say, go ahead, Steve, you take it, build something, connect it to Wynn and Encore ... We are willing to take a very long-term approach, and we'll turn the property over to you even if we have to pay off the loan. Well, that's a very attractive offer, especially since they're willing to pay us for management, design and supervision, as well as inviting us to invest.
"But I have to tell both of these men who were friends of mine, look, I can't give you a reasonable projection of what this return on investment will be even if we spend $2 billion and create 10,000 direct jobs and another 30,000 indirect jobs for a total of 40,000 jobs. That's how many jobs I could create if I broke ground on the Frontier property in the next 6 months or a year. And we would know how to do that.
"But I can't tell the men who are willing to sacrifice any short-term benefit in exchange for a long-term opportunity because I cannot predict what healthcare costs are going to be, what regulatory load they're going to heap on us, what new taxes or other burdens this insatiable governmental appetite for money from the citizens will take us to. Now that is simply a statement of fact. It isn't a partisan political pitch.
"It's simply a statement of fact from a businessman who has supported probably more Democrats than Republicans. But I say right now that the Democratic agenda of spend and bribe the public has bankrupt this country, and until it stops, the citizens of this country are in for more hard times. And fancy speeches aren't going to change that, only a fundamental realization that citizens are going to have to take real sophisticated responsibility for how we allocate the resources of this country."
Read more: http://www.foxbusiness.com/markets/2011/10/20/steve-wynn-unbound/
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(http://thegatewaypundit.com/wp-content/uploads/2011/10/obama-iraq-war-cost-e1319323894122.jpg)
http://www.thegatewaypundit.com/2011/10/flashback-obamas-failed-stimulus-cost-more-than-9-year-iraq-war/
As the War in Iraq winds down remember…
The entire cost of the Iraq War was less than Barack Obama’s failed stimulus bill.
Nice work, champ!
FOX News reported:
As President Obama prepares to tie a bow on U.S. combat operations in Iraq, Congressional Budget Office numbers show that the total cost of the eight-year war was less than the stimulus bill passed by the Democratic-led Congress in 2009.
According to CBO numbers in its Budget and Economic Outlook published this month, the cost of Operation Iraqi Freedom was $709 billion for military and related activities, including training of Iraqi forces and diplomatic operations.
The projected cost of the stimulus, which passed in February 2009, and is expected to have a shelf life of two years, was $862 billion.
The U.S. deficit for fiscal year 2010 is expected to be $1.3 trillion, according to CBO. That compares to a 2007 deficit of $160.7 billion and a 2008 deficit of $458.6 billion, according to data provided by the U.S. Office of Management and Budget.
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http://www.investors.com/NewsAndAnalysis/Article/588856/201110201854/Wall-Street-Did-It-.htm
http://www.investors.com/image/ISSloan_111021_345.png.cms
(http://www.investors.com/image/ISSloan_111021_345.png.cms)
Wall Street Did It?
Posted 10/20/2011 06:54 PM ET
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Meltdown: If Republicans are to take back the White House and Senate, they need to do a better job tying Democrats and Washington to the subprime crisis. It's not hard, yet even their front-runner struggles to make the case.
On Wednesday night, CNN host Piers Morgan guilted Cain into allowing that banks were, as Morgan put it, "effectively preying on the most vulnerable elements of American society," and that Wall Street deserves at least partial blame for the crisis and should be held to account. "I wouldn't defend the banks," Cain said, "because I happen to think that the banks are part of the problem. Wall Street is."
Cain belatedly also faulted Fannie and Freddie, and the Democrats in Washington who protected them. Piers then pressed him to come up with a pie chart alloting blame — Washington vs. Wall Street—and Cain assigned neither a majority responsibility for the mess.
But based on the number of toxic loans in the system in 2008, the government was responsible for not just a simple majority, but more than two-thirds. It's quantifiable — 71% to be exact (see chart). And the remaining 29% of private-label junk was mostly attributable to Countrywide Financial, which was under the heel of HUD and its "fair-lending" edicts.
To be fair, the blame-Wall Street narrative has cemented in the public consciousness, and is hard to crack. That's because in the wake of the crisis, the Obama White House and Pelosi-Reid Congress engineered a cover-up of Washington's role in the mess through the Democrat-led Financial Crisis Inquiry Commission. The national media now defer to it as the final authority on what caused the crisis and ensuing recession.
"The FCIC's report put the majority of the blame squarely where it belonged: on the shoulders of the Wall Street executives," Bloomberg News opined.
While not blameless, Wall Street is an easy scapegoat. And investment houses that made billions slicing and dicing mortgages into CDOs, derivatives, credit default swaps and other exotic paper are easy to demonize. But the problem wasn't these financial instruments. Or even the obscene profits they generated. Mortgage-backed securities were nothing new, and we've always had speculation in the market.
The problem was the underlying assets: low-quality mortgages. We've never had so many junk home-loans poisoning the financial well before. And who poisoned the well? Washington and its affordable-housing policies.
It was Washington that declared prudent home-lending standards racist and gutted traditional underwriting rules in the name of diversity. It was government that created the risk on Main Street. Yes, Wall Street spread it, with the help of Treasury-backed Fannie and Freddie. But who's at greater fault for harming the village — the person who poisons the well or the one who distributes the water?
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The increases in domestic spending alone since Democrats took over congress cost more than deposing Saddam, overthrowing the Taliban, killing bin Laden, deposing Khadafy, 10 years in Afghanistan, 9 in Iraq, drone strikes in Waziristan and Yemen, all combined? Wow! Makes you wonder how much unemployment came down in 6 years with all that pure Keynesian stimulus. Unemployment was 4.4% in Oct 2006 coming into the Pelosi-Reid-Obama-Biden-Hillary takeover. It's more than double that now, but maybe they were helping minorities? Hispanic unemployment was 4.6%, 11.3% today. http://www.bls.gov/news.release/archives/empsit_01052007.pdf
http://www.bls.gov/news.release/pdf/empsit.pdf
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By ALLAN H. MELTZER
Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.
Why is the economic response to increased government spending so different from the response predicted by Keynesian models? What is missing from the models that makes their forecasts so inaccurate? Those should be the questions asked by both proponents and opponents of more government spending. Allow me to suggest four major omissions from Keynesian models:
First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing. Concern over future tax rates is one of the main reasons for heightened uncertainty and reduced confidence. Potential investors hold cash and wait.
Second, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment. Keynesian theory argues that each dollar of government spending has a larger effect on output than a dollar of tax reduction. But in reality the reverse has proven true. Permanent tax reduction generates more expansion than increased government spending of the same dollars. I believe that the resulting difference in productivity is a main reason for the difference in results.
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.Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs? ObamaCare is not the only source of this uncertainty, though it makes a large contribution. We also have an excessively eager group of environmental regulators, protectors of labor unions, and financial regulators. Their decisions raise future costs and increase uncertainty. How can a corporate staff hope to estimate future return on new investment when tax rates and costs are unknowable? Holding cash and waiting for less uncertainty is the principal response. Thus, the recession drags on.
Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama's latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs? Once the subsidies end, the jobs disappear—but the bonds that financed them remain and must be serviced. These medium and long-term effects are ignored in Keynesian models. Perhaps that's why estimates of the additional spending generated by Keynesian stimulus—the "multiplier effect"—have failed to live up to expectations.
The Federal Reserve, too, has long been overly concerned about the next quarter, never more than in the current downturn. Fears of a double-dip recession, fanned by Wall Street, have led to continued easing and seemingly endless near-zero interest rates. Here, too, uncertainty abounds. When will the Fed tell us how and when it is going to sell more than $1 trillion of mortgage-related securities? Will Fannie Mae, for example, have to buy them to hold down mortgage interest rates?
By now even the Fed should understand that we do not have a liquidity shortage. It has done more than enough by adding excess reserves beyond any reasonable amount. Instead of more short-term tinkering, it's time for a coherent program to start gradually reducing excess reserves.
Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there:
First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.)
Second, reduce corporate tax rates and expense capital investment by closing loopholes.
Third, announce a five-year moratorium on new regulations.
Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.
Now that the Keynesian euphoria has again faded, perhaps this administration—or more likely the next—will recognize the reasons for the failure and stop asking for more of the same.
Mr. Meltzer, a professor of public policy at the Tepper School, Carnegie Mellon University and a visiting scholar at Stanford University's Hoover Institution, is the author most recently of "Why Capitalism?" forthcoming from Oxford University Press.
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Came across an old read (Dec 1995), too long to post, about income disparity, well researched and still applies today. Read it and learn it if you are so inclined. These writers went on to start Powerline blog (biased blogger alert). Income inequality is the ladder up and gets 'better' only in times of no growth or opportunity.
http://americanexperiment.org/publications/reports/the-truth-about-income-inequality
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http://online.wsj.com/article/SB10001424052970204394804577009651207190754.html
A Slow-Growth America Can't Lead the World
After World War II, the U.S. promoted international economic growth through reliance on the market and the incentives it provides. Times have changed.
By JOHN B. TAYLOR
When President Obama meets with his counterparts from other G-20 countries in Cannes later this week, American economic leadership will, unfortunately, largely be absent.
At the most recent meeting a year ago in Seoul, the G-20 rejected the president's pleas for a deficit-increasing Keynesian stimulus and instead urged credible budget-deficit reduction and a return to sound fiscal policy. And on that trip he had to defend the activist monetary policy of the Federal Reserve against widespread criticism that its easy money was damaging to emerging-market countries, causing volatile capital flows and inflationary pressures.
With a weak recovery—retarded by new health-care legislation and financial regulations, an exploding debt, and threats of higher taxes—the U.S. is in no position to lead as it has in the past.
By contrast, in the years after World War II, the U.S. led the world in promoting economic growth through reliance on the market and the incentives it provides, the rule of law, limited government, and more predictable fiscal and monetary policy. It created a rules-based, open trading system by helping to found the General Agreement on Tariffs and Trade, which slashed tariffs multilaterally. The miraculous postwar European and Japanese recoveries came from greater adherence to these principles of economic freedom and direct support from the U.S.
After getting off track with interventionist policies in the 1970s, the U.S. put its economic house in order in the 1980s, adopting pro-growth policies and creating a long boom that lasted through the 1990s. Again its economic ideas were contagious, not just in Britain under Margaret Thatcher but in the developing world. Seeing the advantages of American-style economic liberty over state intervention and control, Deng Xiaoping expanded his initial and tentative market-based reforms in China and created an economic renaissance. The U.S. helped the countries in Central and Eastern Europe implement market-based reforms, and it encouraged other countries and the international financial institutions to do the same in Africa and Latin America.
As the U.S. has moved away from the principles of economic freedom—instead promoting short-term fiscal and monetary interventionism with more federal government regulations—its leadership has declined. Some, even in the U.S., may cheer the decline, but it is not good for the world or for the U.S.
Economic policies in America affect the world in ways that are often subtle. In the case of monetary policy, for example, decisions on interest rates by foreign central banks are influenced by interest-rate decisions at the Federal Reserve because of the large size of the U.S. economy. If the Fed holds its interest rate too low for too long, then central banks in other countries will have to hold rates low too, creating inflation risks. If they resist, capital flows into their countries seeking higher yields, thereby suddenly jacking up the value of their currencies and the prices of their exports.
Due to the Fed's low rates, the European Central Bank held short-term interest rates low in the euro zone in 2003-05. Economists at the Organization for Economic Cooperation and Development found that these low rates in Europe were the cause of the housing booms in Greece, Ireland and Spain. As with all unsustainable booms, these were associated with undue risk taking, bad bank loans, busts, and huge government borrowing to bail out banks or to finance spending when revenues fell during the ensuing recession. Excessive government borrowing and problem banks are the source of the current crisis in Europe, which has in turn increased economic and financial risks for the U.S.
Some countries, including Mexico and Brazil, are complaining that the Fed is exporting inflation with its near-zero interest rate and massive purchases of long-term government debt, which is rapidly growing due to U.S. fiscal deficits. And when global inflation picks up, as it has started to do in many emerging markets, it feeds back into more inflation in the U.S. through higher prices of globally traded commodities. With unemployment already high, the result would be stagflation—slow growth, high inflation, steady unemployment—as we saw in the 1970s. For the good of the world and for its own good, America needs to show some leadership and better adhere to sound monetary and fiscal policy.
American economic leadership is also essential for defining the appropriate role of government in a global economy in which China plays an increasingly important role. Despite the enormous success of Deng Xiaoping's reforms, the Chinese economic system still fails to meet some key principles of economic freedom. While relying on markets and incentives, it has a weak rule of law and still imposes many barriers to free trade. The Chinese government favors some firms over others, crony-capitalism style, in its procurement procedures, and it requires that foreign technology firms partner with government-owned Chinese firms, thereby transferring technology to potential competitors.
The U.S. government should work to prevent interventionist trade and other policies abroad. But this is hard to do if America is moving in an interventionist direction internally. And it will have less and less influence if it continues to depart from sound fiscal policy, becoming more indebted to the negotiators on the other side of the table.
The next meeting of the G-20 leaders will be in Mexico in 2012, though the exact date is undecided. In the meantime, the 2012 election in America promises to be a referendum on the role of government in the economy. If, as a result, the U.S. starts to return to the principles of economic freedom—the best route to improving its own economy—then perhaps it will be able to reassert its economic leadership, benefit the world economy, and in turn create an even more prosperous American economy in a grand virtuous circle.
Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis" (Hoover Press, 2009).
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Quite right.
Separately I would offer that GM's post of McCardle on 10/7 is worth rereading.
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Why We Can't Escape the Eurocrisis by Gerald P. O'Driscoll Jr.
from Cato Recent Op-eds
When is a bailout not a bailout? When the bailor is short of funds. The recently announced debt plan in the European Union comes up short in almost all respects.
The debt crisis is not just an EU problem, but a trans-Atlantic financial crisis. The overwhelming debt problems on either side of the pond are interlinked through the banking system.
First to the EU. The underlying dilemma is that governments have promised their citizens more social programs than can be financed with the tax revenue generated by the private sector. High tax rates choke off the economic growth needed to finance the promises. Economic activity gets driven into the underground economy, where it often escapes taxation.
Nowhere is this truer than in Greece, which has a long history of sovereign defaults in the 19th and 20th centuries. There is a bloated public sector, and competitive private enterprise is hobbled by regulation and government barriers to entry. Successive Greek governments ran chronic budget deficits, and the Greek banks lent to the government. Banks in other EU countries, such as France, lent to the Greek banks.
In Greece and elsewhere in the EU, the banks support the government by purchasing its bonds, and the government guarantees the banks. It is a Ponzi scheme not even Bernie Madoff could have concocted. The banks can no longer afford to fund budget deficits, yet they cannot afford to see governments default. Governments cannot make good on their guarantees of the banks.
Details differ by country. In Ireland, problems began with an overheated property sector that brought down the banks. The economy went into depression, which threw the government's budget into deficit. Further aggravating the deficit was the government's decision to guarantee bank deposits, converting private, financial-sector debt into public-sector debt. The details differ from Greece, but the linkage between the government and the banks is the common factor.
France's growth is weak to nonexistent. Germany's economy has performed well since the recession, but concerns are growing regarding its banks' exposure to greater EU risk. And U.S. banks and financial institutions are exposed to EU banks through funding operations, issuance of credit default swaps and unknown exposure in derivatives markets.
The Federal Reserve has engaged in currency swaps with the European Central Bank to support the dollar needs of EU banks. The ECB deposits euros (or euro-denominated assets) with the Fed and receives dollars in return. It promises to repay dollars plus interest.
The Fed maintains they cannot lose money because the ECB promises to repay the swaps in dollars. And yet, with the world awash in greenbacks, it is unclear why the Fed and the ECB even needed to engage in these transactions—except that it suggests funding problems at some EU banks. And if neither EU banks nor the ECB can secure enough needed dollars in global markets, there is a serious counterparty risk to the Fed. The ECB can print euros but not dollars. Sen. Richard Shelby (R., Ala.), ranking member of the Senate Banking Committee, was correct to raise concerns about the Fed's policy last week. Losses on the Fed's balance sheet hit the U.S taxpayer, not EU citizens.
The sad fact is that there is not enough money in the EU to pay off the public debts incurred by the governments. Most countries have long since squeezed as much tax revenue from their citizens as they can. That is why they have toyed with a tax on financial transactions, the one remaining untaxed activity in all of Europe.
Greece is the first of other sovereign defaults to come. With last week's bailout, the EU leaders might have bought time, perhaps a year. But at some point, the ECB will cave and monetize the debt, leading to euro-zone inflation.
The debt calculus changed dramatically this week with the announcement of a Greek referendum on the bailout agreement next January. If voters reject the agreement, the ultimate outcome is unpredictable.
Americans must not be smug about the suffering of Europeans—our financial system is thoroughly integrated with theirs. Moreover, the International Monetary Fund will most likely be involved in the event of future bailouts and will likely need large funds from its members, which ultimately means the taxpayers.
And, of course, the U.S. has its own large and growing public debt burden. We have not gone as far down the road to entitlements, but we are catching up. If you want to know how the debt crisis will play out here, watch the downward spiral in the EU.
Meanwhile, expect more volatility in financial markets. U.S. traders in particular simply have not grasped the enormity of the EU debt crisis.
Gerald P. O'Driscoll, a senior fellow at the Cato Institute, is a former vice president of the Federal Reserve Bank of Dallas and later Citibank.
http://www.cato.org/pub_display.php?pub_id=13817
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Crafty: "Quite right." [Prof. John Taylor's piece] "Separately I would offer that GM's post of McCardle on 10/7 is worth rereading."
Very telling in the McCardle piece is the dramatic graph. I would ask (or just point out again): where exactly on the time line were we when the two lines, the number of unemployed and the number of job openings, both turned away from each other? What was happening in this country in this country in January 2007? What were the headlines? When were employers and investors seeing when they began their retreat?
The answer is that the anti-growth politicians took over Washington. The face of it was San Francisco liberal Nancy Pelosi becoming the first female Speaker (and Minneapolis liberal Rep. Keith Ellison putting his hand on the Qur'an to take the oath), but others elevated to majority power included Sen. Barack Obama, Sen. Joe Biden, Sen. Hillary Clinton, Rep. Barney Frank, Sen, Chris Dodd, Ways and Means Chairman Charles Rangel, etc. etc. (Pres. George was demoted to lame duck status on all domestic issues and invested all remaining political capital into the surge in Iraq.)
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/04/AR2007010400802.html
http://www.usatoday.com/news/politicselections/vote2006/CA/2006-11-08-pelosi-profile_x.htm
http://abcnews.go.com/GMA/story?id=2607555&page=1
http://pushbacknow.net/2011/08/14/january-3-2007-the-day-democrats-took-control/
January 3, 2007 was the day that Democrats took control of both houses of Congress. Let’s take a factual look at what they inherited.
The DOW Jones closed at 12,621.77
The unemployment rate was 4.6%
The GDP growth rate for the previous quarter was 3.5%
The economy had just set a record of 52 straight months of job creation
26 million Americans were on food stamps
47 banks were on the FDIC problem list
The Social Security program took in the neighborhood of 100 billion more than it paid out
The national debt was approaching 9 trillion dollars
Barney Frank took over the House Financial Services Committee and Chris Dodd took over the Senate Banking Committee
Obama became a Senator from Illinois
Bush was on record requesting restraint on Freddie Mac and Fannie Mae 17 times
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Non-farm payrolls increased 80,000 in October To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/4/2011
Non-farm payrolls increased 80,000 in October but were up 182,000 including revisions to August/September. The consensus expected a gain of 95,000.
Private sector payrolls increased 104,000 in October. Revisions to August/September added 84,000, bringing the net gain to 188,000. September gains were led by health and education (+28,000), administrative/support (+26,000), leisure/hospitality (+22,000), and retail (+18,000). The biggest decline was non-residential construction (-24,000).
The unemployment rate ticked down to 9.0% from 9.1% in September.
Average weekly earnings – cash earnings, excluding benefits – increased 0.2% in September and are up 1.8% versus a year ago.
Implications: The US labor market continues to make progress and once again shows, without a shadow of a doubt, that the US economy is not in recession. Including upward revisions for August and September, nonfarm payrolls increased 182,000, almost doubling the consensus expected gain of 95,000. Civilian employment, an alternative measure of jobs that factors in small business start-ups, increased 277,000. This gain helped push down the unemployment rate to 9%. A year ago the unemployment rate was 9.7%. During this time, private payrolls have grown at an average monthly rate of 152,000 while civilian employment has grown at a rate of 140,000 per month. In other words, we don’t need 150,000 jobs per month just to keep the unemployment rate steady. Because of the aging of the labor force, 150,000 jobs per month is more than enough to push down the jobless rate. Very quietly, without fanfare, private sector payrolls have grown by 1.8 million in the past year, while the workweek has lengthened and hourly cash wages are up 1.8%. Total hours worked are up 1.7% in the past year. A 9% unemployment rate means the labor market is still far from operating at its full potential, but it is moving in the right direction as are other data. October chain store sales were up 3.7% versus a year ago, according to the International Council of Shopping Centers. This includes luxury department store sales up 4.5% and wholesale clubs (excluding fuel) up 7%. Meanwhile, compared to a year ago, core railcar loadings are up 5.8%, steel production is up 10.3%, and hotel occupancy rates are up 6.8%. Again, there are no signs of recession. Instead, plenty of signs of continued growth.
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This quote is pulled out of Bigdog's post on Constitutional Matters where military and veterans were joining with occupy protesters:
"The 99 percent have to take a stand," Bordeleau said, to rectify the biggest income gap between rich and poor since the Great Depression, fueled by what protesters say is Wall Street's overblown clout in Washington politics.
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What is the measure they are using for measuring a widening gap; looks to me like it narrowed during the worst part of the recession, and the recession is what is hurting people. What is the evidence of government causation? Which government programs caused it? If the rich have all the clout, how did they get a marginal tax rate higher than everyone else, why are they penalized with estate taxes that apply to no one else, why is there a limit on deductible home mortgage interest that applies only to rich people, why is the exemption for the entire profit from selling your home available to everyone except rich people, why are the rich taxed on social security income while others are not, why are rich people completely locked out of almost all social spending programs like food stamps, WIC, free school lunch, section 8 housing, cold weather assistance, free health care, free public defender, etc etc. Where is the clout? It makes no sense to me. What percent of rich people work on wall street? What if we put poor people in charge of Fannie Mae, Freddie Mac and Goldman Sachs. What would that solve?
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Let me see if I can remember these Mexican words of wisdom correctly.
"A los pobres, los hacen pendejos. A los pendejos los hacen politicos. A los policitos los hacen ricos. A los ricos los hacen pobres."
or something like that.
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My prediction: China is a big bubble which will burst before then. I might add that GS did not predict the bursting of our bubble (in public at any rate).
http://www.forbes.com/sites/gordonchang/2011/11/06/property-prices-collapse-in-china-is-this-a-crash/
11/06/2011 @ 9:23PM
Property Prices Collapse in China. Is This a Crash?
Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.
What started slowly in September turned into a rout by the middle of last month—normally a good period for sales—when Shanghai developers started to slash asking prices. Analysts then expected falling property values to move Premier Wen Jiabao to relax tightening measures, such as increases in mortgage rates and prohibitions on second-home purchases, intended to cool the market.
They were wrong. After a State Council meeting on October 29, Mr. Wen affirmed his policy, stating that local authorities should continue to “strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.” Then, the selling began in earnest as “desperate” developers competed among themselves to unload inventory. One builder—Excellence Group—even said it would sell flats in Huizhou at its development cost.
Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.
When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse. In any event, the markets are bracing for trouble. Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market, late last month said he is still not covering his short positions on China.
One does not have to agree that China will be “Dubai times 1,000—or worse”—Chanos’s memorable phrase—to understand that the unwinding of “the biggest housing bubble ever created” will be especially painful. Analysts have great confidence in Beijing’s technocrats because they managed to continue to manufacture growth through the global downturn, but most of us seem to forget that the Chinese, through massive stimulus, created even bigger challenges for themselves. At the moment, Beijing has yet to resolve two intractable problems: persistent inflation and artificially high property prices.
The dominant narrative at the moment is that China’s economic managers will skillfully deflate the property bubble and land the economy softly. As Time observes, “Many observers say a sharp economic decline won’t be permitted to happen before the change of leadership in 2012.”
Won’t be permitted? It is true that Beijing’s technocrats have had the advantage of working in a semi-closed system that has allowed them to use the considerable resources of the state to achieve outcomes not possible in freer economies. Nonetheless, they can continue to do so—in other words, defy economic principles—only as long as market participants—in this case builders, local officials, and homeowners—cooperate.
The last four weeks, however, must have been a sobering period for Premier Wen, and not only because developers began to lose their nerve. For one thing, recent purchasers have taken to the streets because they had suffered losses even before taking possession of their homes. A crowd of about 300 people in Shanghai smashed windows at the sales office of Longfor Properties on October 22, two days after the builder had ended a sales promotion on a project. The protestors had bought properties in earlier phases of the same project at prices as much as 30% higher than the discounted ones.
And then, on the 23rd, a smaller crowd—on the same street—demonstrated against another developer, Greenland Group. Protesters were injured in Shanghai at another demonstration, this time against a unit of China Overseas Holdings. There were also protests against builders in Beijing and in other cities, Hangzhou and Nanjing.
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http://www.theatlantic.com/business/archive/2011/11/the-financial-folly-of-fairness/248216/#
The Financial Folly of Fairness
By Megan McArdle
Nov 9 2011, 4:38 PM ET324
When I was a young and naive economics writer, I used to write about developing countries a fair amount. Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt. They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises. They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue. And the other journalists and I would cluck our tongues and say "Why can't they do the right thing when it's so . . . bleeding . . . obvious?"
Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. Even dictators have interest groups whose support they must buy.
This has come home to me forcefully several times over the last few years, but never more than now. The leaders of the eurozone have a dual mandate to keep the euro intact, and to not do the things which could keep the euro intact. They cannot fiscally integrate to the extent necessary because, as I wrote for the Daily the other day, the Greeks do not want to act like Germans, and the Germans do not want to share their credit rating with anyone who won't.
It is obvious that either Germany is going to have to guarantee massive ongoing fiscal transfers to the PIIGS, or Greece and probably Italy are going to have to undergo a massively contractionary austerity program, or they will have to leave the euro. Yet in the face of these three choice--which exclude both each other, and any other mathematically possible outcome--their governments have chosen d: half measures. No, half-measures is too generous. Quarter measures. Window dressing that only covers a single pane.
With Berlusconi's obviously counterproductive antics tanking markets worldwide, the sort of hopeful pessimism that has pervaded the economic commentariat has now turned to open despair. Their cri de coeur is ably summed up by Brad DeLong:
I have been complaining for some time now that Reinhart and Rogoff think that the time is always 1931 and that we are always Austria--that the great fiscal crisis is about to erupt and send us lurching down toward Great Depression II. Well, right now guess what? The time is 1931, and we are Austria. The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve Needs to do so now. Paul Krugman: >This Is The Way The Euro Ends: Not with a Bang, But with a Bunga-Bunga: [W]ith Italian 10-years now well above 7 percent, we're now in territory where all the vicious circles get into gear -- and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable -- a euro breakup -- has become all too thinkable: >>A eurozone built on one-sided deflationary adjustment will fail. That seems certain. If the leaders of the eurozone insist on that policy, they will have to accept the result. >Every even halfway plausible route to euro salvation now depends on a radical change in policy by the European Central Bank. Yet as John Quiggin says in today's Times, the ECB has instead been part of the problem. >I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy... the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind. I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what's needed to avoid that failure.
For all my cynicism, I too want to cray out, "For the love of Mike, why?"
Why can't they do the any of the obvious things--not even necessarily the right ones? Why are they picking the only path that is obviously not going to work?
But I come back to the answer above: they can't. Government, like soylent green, is people. And people are not always rational.
The things that fix economic crises are not always intuitive. As Brad De Long himself once remarked to me, it is nearly impossible to bail out the financial system without also bailing out people who are long assets--aka financiers and rich people. But oh, how that flies in the face of our intuitions! It should be true that the most prosperous system is the one which severely punishes everyone who didn't monitor the soundness of their investments. We feel, very deeply, that financial and economic efficiency should mirror our intuitive sense of justice. And probably it does, mostly, when you're living in a hunter gatherer tribe.
But in a complex world where mistakes are easy and detecting them is not, I just don't think this holds truet. The "just world" described above is not some bourgeois paradise; it is the western world during the Great Depression. It was not a better world for everybody; it wasn't even a better world for anybody that I can think of. After it had finished punishing people who made stupid decisions, it went on to wreak brutal vengeance on a lot of people who had been quietly minding their own business. Bank runs can afflict the soundest banks, if depositors panic.
Life savings were wiped out overnight not because depositors hadn't done a good job of choosing a sound bank, but because they'd happened to choose a bank which had credit exposure to other banks that had credit exposure to other banks that were unsound. Many of the most immiserated people were farmers who had quite innocently taken out the then-standard five year mortgages to invest in new farm equipment. Only back then, mortgages didn't usually amortize--they were what we'd call "balloon mortgages" today--and the standard practice was to roll them over when the notes came due. And when farm prices fell and credit dried up, they couldn't roll over those mortgages as they'd always done before, and they lost their farms. Then there were the people who had never had anything to begin with, and now had even less because unemployment shot up to 25% and they couldn't get the daily casual labor they needed to feed themselves.
The solution to the problem turned out to be throwing money at it: going off the gold standard, devaluing, and guaranteeing everyone's bank accounts. Oh, yes, there was moral hazard. There still is. What there aren't, is bank runs that wipe out peoples' life savings overnight, or an unemployment rate of 25%.
One can name dozens of examples of things that violate our sense of fairness and obligation, and thereby make us all richer, from limited liability to bankruptcy. But people most won't believe it. Oh, they may believe the part of it that supports some larger "fairness" agenda they're committed to. But their support is almost always piecemeal: try getting a liberal who loves easy bankruptcy to give a second chance to bankers who made a few stupid money decisions, or convincing conservatives who are avid for tort reform that debtors who ran up credit cards with unwise investments in expensive but rapidly depreciating motor vehicles and consumer electronics might also need legal protection from the fullest extent of their past mistakes.
In the years that I have been doing just that, it has been a losing battle on most fronts. Especially as regards the financial crisis, where the reaction is usually that I am either a worthless dupe, or a paid shill, for the banking industry. The people on the right who can explain it all in terms of moral hazard, and the people on the left who can explain it all in terms of insufficient regulation/punishment of bankers, can wrap economic and moral theory up in a neat package that claims to deliver justice and prosperity. All I've got to offer is messy tradeoffs.
So it is in Europe. The German people feel that it is not fair that they should be asked to pay for the bloated public sectors of nations where tax avoidance is an Olympic event. The Greeks feel that they should not be asked to take a 40% paycut so that a bunch of rich Germans don't have to bail out their banks. Berlusconi no doubt feels that he is entitled to keep a job to which he was duly elected.
You can try to explain to all of them why their sense of outrage is rather beside the point in the face of a looming financial explosion which is going to make everyone much worse off if it reaches critical mass. You can also go home and try to explain this to your microwave, for all the good it will do. As anyone who has ever spoken to a five year old knows, the sense of fairness is one of the most primal and intractable cognitive instincts we have. In the best of times, it takes years to change public opinion about what is fair. These are not the best of times, and we do not have years.
I am very much afraid that the euro zone is about to plunge us into phase two of the global financial crisis--and that as with the Great Depression, phase two may be even worse than the dismal years we've just endured. In search of fairness, we may all get a lot more justice than any of us really wants.
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Industrial production rose 0.7% in October To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/16/2011
Industrial production rose 0.7% in October; easily beating the consensus expected gain of 0.4%. Including revisions to prior months, production increased 0.5%. Output is up 4.0% in the past year.
Manufacturing, which excludes mining/utilities, was up 0.4% in October. Auto production spiked up 3.1%. Non-auto manufacturing increased 0.3%. Auto production is up 8.9% versus a year ago and non-auto manufacturing has risen 3.9%.
The production of high-tech equipment rose 0.1% in October and is up 7.0% versus a year ago.
Overall capacity utilization rose to 77.8% in October from 77.3% in September. Manufacturing capacity use increased to 75.4% in October from 75.1% in September.
Implications: Industrial production soared in October, easily beating consensus expectations and showing no sign of recession. Mining activity increased 2.3%, the most in three years. However, manufacturing was strong too, up 0.4% in October and 0.3% if a booming auto sector is excluded. From a year ago, manufacturing is up 4.5%, 3.9% excluding autos. Auto production is up at a 17.3% annual rate over the past six months, a rebound from the supply-chain disruptions that came from Japan earlier this year. It’s still an open question what temporary impact recent massive flooding in Thailand will have on auto production in November. The production of business equipment has been particularly strong in recent months, up 10.2% from a year ago and up at a 12.7% annual rate in the past six months. The outlook for continued growth in business investment looks good. Corporate profits are at a record high and so is cash on the balance sheets of non-financial companies. Meanwhile, capacity utilization looks set to be at the long-term average of 80% by the end of 2012, which will give firms more of an incentive to build out capacity.
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The Consumer Price Index (CPI) declined 0.1% in October To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/16/2011
The Consumer Price Index (CPI) declined 0.1% in October. The consensus expected no change. The CPI is up 3.5% versus a year ago.
“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) slipped 0.2% in October, but is up 4.1% in the past year.
The decline in the CPI was due to a 2.0% drop in energy prices. Food prices were up 0.1% and the “core” CPI, which excludes food and energy, was up 0.1%, matching consensus expectations. Core prices are up 2.1% versus last year.
Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – increased 0.3% in October but are down 1.6% in the past year. Real weekly earnings are down 1.7% in the past year.
Implications: Like producer prices, consumer prices also took a breather in October, with the CPI down 0.1%. However, the slight dip in consumer prices is going to be temporary and the Federal Reserve should not assume it has more room to execute another round of quantitative easing. The reason the overall CPI fell in October was that energy prices dropped 2%. But now, with oil pushing $100 per barrel again, we already know energy prices will likely be up in November. Meanwhile, despite the decline in overall prices in October, the CPI is still up 3.5% from a year ago. “Cash” inflation, which excludes the government’s estimate of what homeowners would pay themselves in rent, is up 4.1% in the past year. In our opinion, this is a more accurate measure of the inflation actually being felt by consumers. “Core” prices, which exclude food and energy (what the Fed seems to focus on) are up 2.1% in the past year, held down by owners’ equivalent rent (up just 1.6% in the past 12 months), which makes up one-third of the core. But, because of the shift from home ownership to rental occupancy, rents are now accelerating (see chart to right). As a result, core inflation is likely to accelerate in the year ahead. The best news in today’s report was that “real” (inflation-adjusted) earnings per hour were up 0.3% in October. Although these earnings are down 1.6% from a year ago, consumers have been able to increase their spending by slowing the pace at which they’re paying down debt. This makes sense with consumers’ financial obligations now at the smallest share of income since the early 1990s.
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http://hotair.com/archives/2011/11/22/q3-gdp-revised-from-2-5-to-2-0/
Q3 GDP revised from 2.5% to 2.0%
posted at 9:25 am on November 22, 2011 by Ed Morrissey
Thanks to the upcoming holiday, the Bureau of Economic Analysis released its first revision of the advance quarterly GDP report today — and the new number drops significantly from the figure released less than four weeks ago. Instead of a mediocre 2.5% annualized growth rate in Q3, the US now reports a 2.0% annualized growth rate, which means that we are still not coming up to last year’s stagnant growth levels:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
That’s a $15 billion difference. What changed? The BEA says that the initial estimates of some key indicators were, well, pretty darned rosy:
The “second” estimate of the third-quarter increase in real GDP is 0.5 percentage point, or $15.0 billion, lower than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to nonresidential fixed investment, and to personal consumption expenditures that were partly offset by a downward revision to imports.
It’s not unusual for the BEA and its parent Commerce Department to make tweaks to these numbers. That’s why we have a second and third quarterly GDP statement, so that additional data can offer a clearer view of economic activity. However, the initial figure missed the mark by more than just a tweak, and it’s not the first time that we’ve seen a significant downward revision in the GDP release in subsequent restatements.
Reuters prefers the rosy view:
The U.S. economy grew at a slightly slower pace than previously estimated in the third quarter, but weak inventory accumulation amid sturdy consumer spending strengthened views output would pick up in the current quarter.
“Slightly”? That’s not a slight adjustment; it’s a significant downgrade in output. Furthermore, it seems that Reuters didn’t bother to read the “revisions” section of the new statement, where the BEA noted that they had to revise “personal consumption expenditures” — in other words, “consumer spending” — downward. The new numbers look anything but “sturdy”:
Real personal consumption expenditures increased 2.3 percent in the third quarter, compared with an increase of 0.7 percent in the second. Durable goods increased 5.5 percent, in contrast to a decrease of 5.3 percent. Nondurable goods decreased 0.6 percent, in contrast to an increase of 0.2 percent. Services increased 2.9 percent, compared with an increase of 1.9 percent. …
Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 1.5 percent in the third quarter, compared with an increase of 1.0 percent in the second.
Was Q3 better than Q2? Sure, but that’s a low bar, since Q2′s GDP growth rate was 1.3%, barely above recessionary level. It’s not that much better, as these numbers show, and the new Q3 number is still below the stagnation levels of the “Recovery Summer” and fall of 2010.
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"Over the last two decades, the average income of the top 1% of Californians increased by 50%, after adjusting for inflation, while the average income of the middle fifth fell by 15%."
http://www.latimes.com/news/opinion/commentary/la-oe-andersonross-99percent-20111123,0,1203795.story
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"Over the last two decades, the average income of the top 1% of Californians increased by 50%, after adjusting for inflation, while the average income of the middle fifth fell by 15%."
http://www.latimes.com/news/opinion/commentary/la-oe-andersonross-99percent-20111123,0,1203795.story
Gee, I guess the PRK's redistrubitionist policies are destroying the middle class, at least a few wealthy amidst the teeming poor will be quite familiar to the masses of illegals that now make up a good portion of the state.
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Lacking GM's extraordinary google fu skills I am unable to lay my hands on the data (NO sarcasm here whatsoever!) but I do have a clear sense of having seen data in a variety of sources that seemed reliable to me concerning the remarkable % of net GDP profits that came from the financial sector in the 1990s and 2000s.
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LA Times: "Over the last two decades, the average income of the top 1% of Californians increased by 50%, after adjusting for inflation, while the average income of the middle fifth fell by 15%."
It's kind of sad that in Journalism and in economics that kind of deception can be passed along without consequence. The implication is clearly made that two groups of people were studied over a two decade period when in fact no actual person group of people was studied over an extended period. Income Mobility: The majority of Californians moved freely between quintiles, there is no indication whatsoever how many of the top 1% at the start remain in the top 1%, perhaps close to none, the group that makes up the middle quintile is completely different for a host of reasons. New Californians: For every immigrants that come in at the bottom of incomes, the middle shifts downward even if everyone in the state including that immigrant is making more than they made previously.
For all the fears about the success of 'the wealthy' starting with the title, 'California's Wealth Pyramid', isn't it strange that at no point to they measure or compare wealth. Income studies and wealth studies are not the same. Look at the unprecedented collapse of wealth in the last 3 years. Wouldn't that be problem solved? None of it is shown in the data.
"Policymakers should be mindful of the growing income divide and the millions of workers and families who have fallen behind." - Once again, for each poor person moving in to better him/herself, the income divide overall grows, and nowhere in the study does it document that anyone has fallen behind.
Before Pelosi-Obama took over congress, incomes were growing, covering most of those two decades. People may have been falling behind though in the sense of the increasing costs of all government interfered expenses and markets, including taxes, housing, tuition, energy costs and health care.
I like the ending in particular, they are with the nonpartisan California Budget Project, lol. Nonpartisan. Why on earth would you openly and intentionally deceive people if you had no agenda??
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http://www.europac.net/commentaries/whose_fuse_shorter
Whose Fuse is Shorter?
By: Peter Schiff
Wednesday, November 23, 2011
With fiscal time bombs ticking in both Europe and the United States, the pertinent question for now seems to be which will explode first. For much of the past few months it looked as if Europe was set to blow. But Angela Merkel’s refusal to support a Federal Reserve style bailout of European sovereigns and her recent statement the she had no Hank Paulson style fiscal bazooka in her handbag, has lowered the heat. In contrast, the utter failure of the Congressional Super Committee in the United States to come up with any shred of success in addressing America’s fiscal problems has sparked a renewed realization that America’s fuse is dangerously short.
Chancellor Merkel has been emphatic that European politicians not be given a monetary crutch similar to the one relied on by their American counterparts. Her laudable goal, much derided on the editorial pages of the New York Times, is to defuse Europe’s debt bomb with substantive budget reforms, and as a result to make the euro “the strongest currency in the world.” Much has been made of the poorly received auction today of German Government bonds, with some saying the lack of demand (which pushed yields on 10-year German Bonds past 2% --hardly indicative of panic selling) is evidence of investor unease with Merkel’s economic policies. I would argue the opposite: that many investors still think that Merkel is bluffing and that eventually Germany will print and stimulate like everyone else. It is likely for this reason that yields on German debt have increased modestly.
In contrast, the U.S. is crystal clear in its intention to ignore its debt problems. With the failure of the Super Committee this week it actually became official. American politicians will not, under any circumstances willingly confront our underlying debt crisis. While the outcome of the Super Committee shouldn’t have come as a great surprise, the sheer dysfunction displayed should serve as a wakeup call for those who still harbor any desperate illusions. Some members of Congress, such as John McCain, have even come out against the $1.2 trillion in automatic spending cuts that would go into effect in January 2013. Expect more politicians of both parties to cravenly follow suit.
Over the next decade, the U.S. government expects to spend more than $40 trillion. Even if the $1.2 trillion in automatic cuts are allowed to go through, the amount totals just 3% of the expected outlays. In a masterstroke of hypocritical accounting, $216 billion of these proposed “cuts” merely represent the expected reductions in interest payments that would result from $984 billion of actual cuts. These cuts won’t make a noticeable dent in our projected deficits, which if history can be any guide, will likely rise by much more as economic reality proves far gloomier than government statisticians predict. Finally, the cuts are not cuts in the ordinary sense of the word, where spending is actually reduced. They are cuts in the baseline, which means spending merely increases less than what was previously budgeted.
In the mean time, the prospect of sovereign default in Europe is driving “safe” haven demand for the dollar. So contrary to the political blame game, Europe’s problems are actually providing a temporary boost to America’s bubble economy. However, a resolution to the crisis in Europe could reverse those flows. And given the discipline emanating from Berlin, a real solution is not out of the question. If confidence can be restored there, each episodic flight to safety may be less focused on the U.S. dollar. Instead, risk-averse investors may prefer a basket of other, higher-yielding, more fiscally sustainable currencies.
The irony is that Europe is actually being criticized for its failure to follow America’s lead. This misplaced criticism is based on the mistaken belief that our approach worked. It did not. Sure, it may have delayed the explosion, but only by assuring a much larger one in the future. In the mean time, many have mistaken the delay for success.
However, if Merkel’s hard line works, and real cuts follow, Europe will be praised for blazing a different trail. As a result the euro could rally and the dollar sink. Commodity prices will rise, putting even more upward pressure on consumer prices and interest rates in the United States.
Any significant reversal of the current upward dollar trend could provide a long awaited catalyst for nations holding large dollar reserves to diversify into other currencies. My guess is that Merkel understands the great advantage the U.S. has enjoyed as the issuer of the world’s reserve currency. I believe she covets that prize for Europe, and based on her strategy, it is clearly within her reach.
There is an old saving that one often does not appreciate what one has until it’s lost. The nearly criminal foolishness now on display in Washington may finally force the rest of the world to cancel our reserve currency privileges. The loss may give Americans a profound appreciation of this concept.
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Not finding a category for 'Cognitive Dissonance of the Centrists, I will stick this here. So-called centrists like past candidate Perot IMO tend to be better at pointing to problems than structuring real solutions. Summers, like Volcker, was supposed to be one of the sane advisers to the President. Both are now long gone from the administration.
I will go along with his point one, but it is mostly nonsense. People without means can't participate evenly with the wealthy if the government decides to auction off public assets or licenses like an additional airwave for broadcast or land for energy exploration.
Point 2 is verbose but basically means make progressivity in taxation even worse while half already pay nothing. I would say worst case should be hold the line with progressivity where it is, cut the worthless loopholes and lower the rates proportionally for everyone who produces.
Point 3 is more BS. College tuition, along with a host of other things, is outrageous and unaffordable because of government interference and he proposes no solution.
Apologies to Thatcher, but we need to pursue a 'society' of haves, not choose between protecting or destroying a class of them. We need to unleash economic freedom and growth. In that context, government should do nothing that unnecessarily favors the rich and nothing that makes the natural inequalities of a free and prosperous society worse than what is natural and necessary.
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http://www.washingtonpost.com/opinions/three-ways-to-combat-rising-inequality/2011/11/20/gIQAvGb5fN_story.html
Three ways to combat rising inequality
By Lawrence Summers, Published: November 20
There has been a strong and troubling shift in market rewards for a small minority relative to the rewards available to most citizens. A recent Congressional Budget Office study found that incomes of the top 1 percent of the U.S. population (adjusted for inflation) rose 275 percent from 1979 to 2007, while income for the middle class grew only 40 percent. Even this dismal figure overstates the fortunes of typical Americans. In 1965, only one in 20 men ages 25 to 54 was not working; by the end of this decade, it is likely to be one in six, even if a full cyclical recovery is achieved.
Another calculation suggests that if the income distribution had remained constant from 1979 to 2007, incomes of the top 1 percent would be 59 percent, or $780,000, lower and that incomes among the bottom 80 percent would be 21 percent, or more than $10,000, higher.
Those looking to remain serene in the face of these trends or who favor policies that would disproportionately cut taxes at the high end — and exacerbate inequality — assert that snapshot inequality is all right as long as there is mobility within people’s lifetimes and across generations. In fact, there is too little of both. Inequality in lifetime incomes is only marginally smaller than inequality in a single year. And intergenerational mobility in the United States is now poor by international standards.
Why has the top 1 percent done so well relative to the rest? The answer lies substantially in changes in technology and in globalization. When George Eastman revolutionized photography, he did very well, and because he needed a large number of Americans to carry out his vision, the city of Rochester, N.Y., had a thriving middle class for two generations. When Steve Jobs revolutionized personal computing, he and Apple shareholders did very well, but those shareholders are all over the world, and a much smaller benefit flowed to middle-class American workers, both because production was outsourced and because the production of computers and software was not terribly labor-intensive.
The market system distributes rewards increasingly inequitably. On one side, the debate is framed in zero-sum terms, and the disappointing lack of income growth for middle-class workers is blamed on the success of the wealthy. Those with this view should consider whether it would be better if the United States had more, or fewer, entrepreneurs like those who founded Apple, Google, Microsoft and Facebook. Each did contribute significantly to rising inequality. It is easy to resent the level and extent of the increase in CEO salaries, but firms that have a single owner, such as private equity firms, pay successful chief executives more than public companies do. And for all their problems, American global companies have done very well compared with those headquartered in more egalitarian societies over the past two decades. Where great fortunes are earned by providing great products or services that benefit large numbers of people, they should not be denigrated.
Meanwhile, those who call concerns about rising inequality misplaced or a product of class warfare are even further off base. The extent of the change in the income distribution is such that it is no longer true that the overall growth rate of the economy is the principal determinant of middle-class income growth — how the growth pie is distributed is at least equally important. The observation that most of the increase in inequality reflects gains for those at the very top at the expense of everyone else further belies the idea that simply strengthening the economy will reduce inequality. Focusing on American competitiveness, as many urge, could easily exacerbate inequality while doing little for most Americans if the focus is placed on measures such as corporate tax cuts or the protection of intellectual property for the benefit of companies that are not primarily producing in the United States.
We need more and better responses to rising inequality. Here are three places to start.
First, government must not facilitate increases in inequality by rewarding the wealthy with special concessions. Where governments dispose of assets or allocate licenses, preference should be on the use of auctions to which all have access. Where government provides implicit or explicit insurance, premiums should be based on the market rather than in consultation with the affected industry. Government’s general posture should be standing up for capitalism rather than for well-connected capitalists.
Second, there is scope for pro-fairness, pro-growth tax reform. The moment when more great fortunes are being created and the federal deficit is growing is hardly the time for the estate tax to be eviscerated. And there is no reason tax changes in a period of sharply rising inequality should reinforce the trends in pretax incomes produced by the marketplace.
Third, the public sector must ensure greater equity in areas of the most fundamental importance. It will always be the case in a market economy that some will have mansions, art, etc. More troubling is that middle-class students’ ability to attend college has been seriously compromised by increasing tuitions and sharp cutbacks at public universities, and that, over the past generation, a gap has opened between the life expectancy of the affluent and the ordinary.
Neither the politics of polarization nor those of noblesse oblige on behalf of the fortunate will serve to protect the interests of the middle class in the post-industrial economy.
The writer, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and economic adviser to President Obama from 2009 through 2010.
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http://www.youtube.com/watch?feature=player_embedded&v=26QxO49Ycx0
Discussion between Thomas Sowell and Frances Fox Piven with Milton Friedman
http://miltonfriedman.blogspot.com/
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Doug:
The content of your post would seem to be of more lasting importance than the often transitory nature of this thread. May I request you post it on the Economics thread of the SCH forum as well?
TIA,
Marc
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http://www.theblaze.com/stories/kramer-were-two-stages-from-a-financial-collapse-so-huge-its-hard-to-get-your-mind-around/
Cramer: We‘re ’Two Stages From a Financial Collapse So Huge It‘s Hard to Get Your Mind Around’
Posted on November 29, 2011 at 7:39am by Jonathon M. Seidl
Nevermind the stock rally from Monday or the massive sales figures from Black Friday, CNBC’s Jim Cramer had a very grim outlook for the global financial markets going forward. In sum, the European crisis is so bad that the U.S. is grave danger. Business Insider explains:
In his opening segment on Mad Money tonight (via The Fly) Jim Cramer warns that Europe could easily spoil any party we’re having in the US due to the collapse in credit.
He walks through a fairly long (but very basic) explanation of what credit is, and how central it is to the economy, before (around the 6:30 mark) declaring that we’re in “DEFCON 3, two stages from a financial collapse so huge it’s hard to get your mind around.”
He tells everyone to “curb your enthusiasm.” If you want to stay happy, don’t watch the clips below. But if you want the hard truth, click play:
**Click the link.
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Obama administration wants high fossil fuel costs and lower consumption. Mission accomplished. That is the opposite of prosperity and it isn't a failure of capitalism.
American Airlines files for Ch. 11 protection
FORT WORTH, Texas (AP) — American Airlines' parent company is seeking Chapter 11 bankruptcy protection as it seeks to unload massive debt built up by years of accelerating jet fuel prices and labor struggles.
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Which November Jobs Report Estimate Is Wrong?
By Robert HolmesSenior Writer | TheStreet.com – 2 hours 23 minutes ago
BOSTON (TheStreet) -- After the best three-day winning streak for stocks since March 2009, there's a lot riding on Friday's employment report. Unfortunately, investors are faced with two separate estimates that paint two very different pictures about the U.S. labor market.
After yesterday's announcement of coordinated action by central banks around the globe to add liquidity to the banking system, the S&P 500 surged 4.3%, capping a 7.6% gain over three days. Amid the euphoria, investors cheered the ADP Employment Report, which estimated that the private sector added 206,000 jobs in November, double that of previous months. For investors, it was a loud signal to buy stocks.
"November's increase in employment normally would be associated with a decline in the unemployment rate," Joel Prakken, chairman of Macroeconomic Advisers, said in a statement Wednesday. "An acceleration of employment is consistent with data showing that GDP growth, which slowed sharply around the turn of the year, is gradually recovering."
ADP's estimate compares with economists' consensus of 126,000, according to a survey by Bloomberg. TrimTabs Investment Research is even more cautious. The company said Wednesday that the U.S. economy likely added only 64,000 jobs in November, an estimate that went unnoticed by investors caught up in the exuberance of a nearly 500-point gain on the Dow Jones Industrial Average.
"The sharp deceleration in job growth in November has us concerned," says Madeline Schnapp, director of macroeconomic research at TrimTabs. "It appears that hiring managers have rolled up the welcome mat due to the raging debt crisis in Europe."
How could two firms measuring employment come to such disparate figures? The difference between ADP's call of 206,000 and TrimTabs' 64,000 is a staggering 142,000. For some context, the Bureau of Labor statistics said the U.S. economy added only 80,000 jobs in October.
ADP says its estimate for private payrolls growth is derived from actual payroll data. Chances are that your paystub has the ADP logo in the top right corner, which means the firm is measuring jobs in the most direct way it can.
TrimTabs' employment estimates are based on an analysis of daily income-tax deposits to the U.S. Treasury from all salaried U.S. employees. Schnapp says that while the measure isn't perfect, it's a better view than a survey subject to revision.
"Everybody looks to the BLS Bureau of Labor Statistics as the be-all, end-all when those numbers are substantially revised," Schnapp says. "We have no idea what the BLS is going to publish. We just look at how much money is in people's pockets. That's a measure of wages and salaries. Ultimately, that will determine how good the economy is."
TrimTabs says estimates using tax deposits are historically more accurate than initial estimates from the Bureau of Labor Statistics. Schnapps says that once the government is through with revisions, TrimTabs' estimates are usually within 10% of the final figure.
So how did Schnapp react when she saw the ADP Employment Report show a substantially greater increase to private payrolls than her firm's estimates?
"It is frustrating because it moves the markets," she says of the ADP report. "One of us is going to be closer to the truth. Everyone looks at how close you are to the BLS. I can only call what the numbers are telling me."
The numbers are telling Schnapp that there was a "pretty substantial decay in November." To explain the difference between her estimate and ADP's, Schnapp says that companies may have postponed their tax deposits until December because of the Thanksgiving holiday, although that should be followed by a bounce in tax-withholding data that we haven't seen yet.
"It could also be that people changed their withholdings, but that doesn't happen until January," she says. "We're all over tax increases, so I doubt that's a factor. So you get back to that the tax withholdings are weaker. Considerably weaker. Unless there's something we don't know could be impacting the data. We'll find out tomorrow."
ADP didn't immediately respond to a request for comment. But as the chart below shows, the total employment data from the Bureau of Labor Statistics doesn't always match up perfectly to the private sector employment data ADP collects.
Even though the government's nonfarm payrolls data will be released at 8:30 a.m. New York time Friday, investors may not ultimately find out who was closest until all revisions to the data come in. As we've seen, it took the Bureau of Labor Statistics more than a year to revise employment data for the months during the financial crisis, which isn't a big help to investors.
-- Written by Robert Holmes in Boston.
http://finance.yahoo.com/news/Which-November-Jobs-Report-tsmf-3215130537.html?x=0
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Well, there is no way "the most transparent presidency evah" would cook the books to show a politically motivated drop in unemployment.
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BBG:
That is a very interesting post. If the bigger number is accurate, it lends strong support to the case that Wesbury has been making to general raspberries around here. If not , , ,
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http://www.cnbc.com/id/45521793
Great news but who in their right mind believes the numbers? Essentailly embezzling the numbers all it is.
We ain't seen nothing yet. Wait till election 12 nears. No one will know who to believe.
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Date: 12/2/2011
Non-farm payrolls increased 120,000 in November and were up 192,000 including
revisions to September/October. The consensus expected a gain of 125,000.
Private sector payrolls increased 140,000 in November. Revisions to
September/October added 42,000, bringing the net gain to 182,000. November gains
were led by retail (+50,000), restaurants and bars (+33,000), health and education
(+27,000), and temps (+22,000). The biggest decline was non-residential construction
(-12,000).
The unemployment rate plummeted to 8.6% from 9.0% in October.
Average weekly earnings – cash earnings, excluding benefits – declined
0.1% in November but are up 1.8% versus a year ago.
Implications: The labor market continues to improve. Private payrolls increased
140,000 in November and a stronger 182,000 including upward revisions for September
and October. Upward revisions have been a recurring pattern for the past year. For
example, private payrolls for September were originally reported up 137,000 but have
since been revised to 220,000, and who can forget August when nonfarm payrolls were
originally reported at 0 but were revised up in September to 57,000 and again
revised in October to 104,000 jobs. The average upward revision in the past year has
been about 35,000. Over that period, private payrolls (including revisions) have an
average gain of 157,000. Civilian employment, an alternative measure of jobs that
factors in small business start-ups, increased 278,000 in November and is up an
average of 178,000 in the past year. Some pessimists say a “birth/death”
model is artificially inflating payroll gains, but the employment survey does not
use a birth/death model and that survey is even stronger. The gain in civilian
employment helped push the unemployment rate down to 8.6%. However, the drop in
unemployment was also due to a 315,000 decline in the labor force (people working or
looking for jobs). As a result, we think a portion of the drop in the jobless rate
may reverse next month, but not all of it. Another cautious note in today’s
report was that average hourly earnings dipped 0.1% in November, although they are
still up 1.8% from a year ago. That gain from a year ago, combined with a 2.1%
increase in the number of hours worked (meaning total worker earnings are up 3.9%
from a year ago) and a slowdown in the pace of debt reduction, is making it easier
for consumers to spend. In other recent news, automakers sold cars and light trucks
at a 13.6 million annual rate in November, up 2.8% from October and 11% from a year
ago. The economy is still far from operating at its full potential, but it is
clearly moving in the right direction.
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"Average weekly earnings ... declined 0.1% in November but are up 1.8% versus a year ago."
"the drop in unemployment was also due to a 315,000 decline in the labor force" (People quit looking for work, why?)
The current economic growth rate is around 2%, it was 2.5% last quarter. Breakeven growth is roughly 3.1%. Typical or healthy growth rate coming out of a downturn this large is much higher. Average annual real GDP growth rate from 1983 to 1990 was 4.1% according to the Joint Economic Committee of congress: http://www.heritage.org/research/reports/2001/03/the-real-reagan-economic-record
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http://money.msn.com/top-stocks/post.aspx?post=e870b663-1471-467f-adc5-318f6cd40ea7
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http://money.msn.com/top-stocks/post.aspx?post=e870b663-1471-467f-adc5-318f6cd40ea7
They day the music stops gets closer.
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The U.S. added 120,000 jobs in November, but the unemployment rate posted a huge drop to 8.6% from 9% and a broader unemployment rate fell even more to 15.6% from 16.2%. Why?
The number of jobs added comes from a survey of establishment payrolls. The unemployment rate comes from a separate survey of U.S. households. The household survey is much smaller than the establishment survey, and as a result it can swing around a lot — and move the unemployment rate up and down when it does. That volatility is a big reason why economists usually, but not always, pay much more attention to the establishment report.
The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.
In October, the household survey showed the number of people unemployed fell by 594,000, but the labor force — the number of people working or looking for work — fell by a little more than half that amount. That means that though the number of employed people rose, a large group just stopped looking for work. That could be due to discouragement of the long-term unemployed or by choice over retirement or child care. So the decline in the unemployment rate to 8.6% was about half due to people finding jobs and half people dropping out.
Meanwhile, the broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, dropped by a 0.6 percentage point last month. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.
The key to the drop in the broader unemployment rate was due to a 378,000 drop in the number of people employed part time but who would prefer full-time work, that comes on top of a big drop in that category last month. That number could reflect people having their hours increased or part-time workers moving on to full time work.
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second post of evening:
Just read BD's post. Makes sense to me.
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Disability rolls are also on the rise. People are leaving the work force and desparatly getting onto disability and taking the easy way out.
I cannot seem to find number on this but I am suspect the Feds are allowing this to lower the unemployment numbers.
There is no way people are suddenly getting jobs in droves.
But Brockster takes the phoney numbers to Hawaii for some leisure time.
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"Just read BD's post. Makes sense to me."
"All of this distracts from an emerging truth: The global economy is rapidly falling into a new recession."
True, and excellent data is presented.
We are a cause, not a victim, of the global downward trend, IMHO. The only country capable of real leadership chose economic decline as a national economic policy and direction, and it is all interconnected. Instead of fixing underlying problems, now we will monetize Europe? With what?
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http://reason.com/blog/2011/12/01/federal-housing-authority-poised-to-re-s
Federal Housing Authority Poised to Re-Sink the Economy
Tim Cavanaugh | December 1, 2011
Back in the innocent days of 2007 or so, it was customary for experts to say that housing had led the recession and housing would lead us out. Whatever measure of truth there may have been in that cliché, the reality is that by refusing to accept the real estate correction as the healthful and decades-overdue solution it is, America’s leaders have created a new dynamic: Housing led us into the recession, and it continues to lead us into newer, deeper and more destructive recessions.
Last month Wharton School real estate finance professor Joseph Gyourko warned that the Federal Housing Authority is shaping up as the next likely target for a bailout. Although the full report [pdf] is worth reading, Gyourko’s central argument is pretty simple:
(1) FHA has become a much larger and riskier government entity since the housing crisis began because it has increased its risk exposure without anything close to a commensurate scaling up of its capital base; (2) it is underestimating future default risk and losses on its single-family mortgage guarantee portfolio by at least $50 billion; and, (3) this should be corrected with an immediate recapitalization of FHA sufficient to compensate for the high risks it faces.
The FHA issued a rebuttal, noting that it had upped its assets by $400 million over the last year – a pittance, as Gyourko notes, compared to the $213 billion in new guarantees it issued over the same period.
We’ll just have to wait and see whether HUD Secretary Shaun Donovan ends up lassoing taxpayers to shore up the insolvent FHA, but one thing is for sure: Everything has gotten worse, and FHA’s policies have become even more reckless, since Gyourko’s report.
In the middle of the month, the Obama Administration even managed to walk back one of the few things it has done right: allowing the expanded conforming loan limit for “high-cost areas” to lapse. At the start of the real estate correction FHA upped its conforming loan limit (the mortgage amount the federal government guarantees) to $729,750. That emergency increase expired October 1, and the high-cost conforming loan limit dropped back to $625,500.
But in a tribute to the lobbying power of Realtors®, the conforming loan limit got jacked back up a few weeks ago. The move makes negative sense. (Why do you need to increase the subsidy when house prices continue to fall?) It’s also offensive to the broadly held belief that public assistance should be reserved for actual poor people: Presuming a 20 percent down payment, you’re talking about a house in the high $900k range being subsidized by taxpayers. Who mourns for the million-dollar starter home? Apparently we all do.
It gets worse, however. In an email this morning, AEI Senior Fellow Edward Pinto, who has done crucial work on figuring out how the GSEs Fannie Mae and Freddie Mac defrauded taxpayers during the boom, reported on FHA’s recent financial deterioration:
• In October 2011 17.02% of FHA loans were at some stage of delinquency.
– Comparing October to September, FHA’s total delinquency (17.02% vs. 16.78%), 60-89 day (2.42% vs. 2.3%), and serious delinquency rates (9.05% vs. 8.77%) were all higher.
• The increase in the 60-89 day rate is a leading indicator of future claims problems.
– At 9.05%, the serious delinquency rate is now 0.8% higher than the 8.2% rate in June 2011 (Source: HUD Neighborhood Watch and FHA Outlook Reports).
• The June rate was used to prepare the recently released actuarial report.
– As a result, there were about 75,000 more seriously delinquent FHA loans in October compared to June.
• The Actuarial Study notes that FHA’s forward single-family program has total capital resources of $28.2 billion offset by $27 billion in negative cash flows on its outstanding business (Study, p. 25).
– This sounds reassuring; however a private company would be required to set aside this amount plus $13 billion more to cover expected losses from known 60+ day delinquent loans:
• FHA is responsible for 100% of the losses on the loans it insures. As a result its loss severities are extremely high.
• In 2009 FHA experienced a 64% loss ratio (Study, p. E-2).
• In October FHA had over 836,000 loans 60+ days delinquent with an estimated total outstanding balance of $117 billion (October 2011 HUD Neighborhood Watch).
• FHA would incur losses of $41 billion if 55% of these loans eventually go to claim and losses average 64% (calculation based on private mortgage insurance company reserving practices).
• This is $1.5 billion more than a similar calculation made for September. 2011.
– FHA would need another $21 billion to meet its congressionally mandated 2% capital cushion.
Well maybe it’s darkest before the dawn. Or darkest before things go completely black. Or something. In any event, Lender Processing Services reports that the percentage of mortgages in foreclosure is at its highest level ever. “Foreclosure inventories are on the rise,” LPS writes, “reaching an all-time high at the end of October of 4.29 percent of all active mortgages.” LPS notes that lenders are still doing their best to drag out the foreclosure process:
The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment, while the average days delinquent for loans 90 or more days past due but not yet in foreclosure decreased for the second consecutive month.
That second part may actually be a small piece of good news if it indicates lenders are at least getting serious about getting foreclosures started. Housing won’t lead us out of the recession until the market hits rock bottom. Even Bob Shiller admits that we’re a long way from there. But we will get there eventually. It’s just a question of how long the feds want the torture to last.
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Please post this in the Housing thread too. Thank you.
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http://www.tri-cityherald.com/2011/12/03/1739803/kennewick-construction-company.html
Kennewick construction company auctions itself off
By John Trumbo, Tri-City Herald
KENNEWICK -- It took Bob Bertsch 25 years to build his construction business and just a day for it all to go away.
Bertsch's Kennewick-based Ashley-Bertsch Group went on the auction block Friday at 9 a.m. By 4 p.m., Booker Auctions had sold off almost two dozen vehicles and trailers, tons of power tools and supplies, even the gas-fired fireplace in the office.
Bertsch, 65, said he is down-sizing because the tax burden got too expensive to stay in business.
After a quarter of a century of building a successful enterprise at 5903 W. Metaline Ave., Bertsch sat back and watched as about 200 people bid on what was left of his company -- boxes of electrical parts, a drafting desk, high-end office furniture, TVs, computers and even the phone system.
Anything that could be carried away, was.
"I am tired of carrying all the tax load," Bertsch said. "I renew 13 licenses here every year just so I can spend money in this city."
Bertsch makes no attempt to conceal his frustration with the costs government imposes on small businesses like his.
"Government is killing small business. We used to have 24 employees at our peak. Now, all of those people who used to work here are in unemployment lines," he said.
Seeing all his life work and hard-earned gain sold off wasn't easy, Bertsch said, but the sale was successful enough to ease the hurt.
"I wasn't as emotionally attached as I thought I'd be," Bertsch said at the end of the day while sitting in what used to be the company's conference room in the 5,000-square-foot office building.
Most of the auction action took place inside and outside a 4,000-square-foot warehouse.
The buildings and 3.2 acres of property already had been sold. The Kennewick School District paid $960,000 and plans to expand the Tri-Tech campus on Kellogg Street to the site, Bertsch said.
Bertsch, who is a commissioner for the Benton Public Utility District, said selling off the company's assets doesn't mean he is retiring.
"I like what I do. All of my work has been relationship-based, with mostly referrals and negotiated jobs," said Bertsch, who expects he will be doing much of the same in his home-based, husband-and-wife operation.
Bertsch told a friend at the auction he is selling out because government was taking more out of his business than he was.
But auctioneer Merle Booker said Bertsch's wife put it differently.
"She said Bob told her he was shedding his skin," Booker said. "I'm not retiring. Just slowing down."
Read more: http://www.tri-cityherald.com/2011/12/03/1739803/kennewick-construction-company.html
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http://www.cnbc.com/id/45569450/
Six More Reasons Why Jobs Market Is Still Bad
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The trade deficit in goods and services shrank to $43.5 billion in October To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/9/2011
The trade deficit in goods and services shrank to $43.5 billion in October, close to the consensus expected deficit of $43.9 billion.
Exports declined $1.5 billion in October, led by gold. Imports dropped $2.2 billion, led by petroleum and autos/parts. The decline in petroleum imports was mostly due to volume, but also due to a slight decline in price.
In the last year, exports are up 12.3% while imports are up 11.9%.
The monthly trade deficit is $4.0 billion larger than a year ago. However, adjusted for inflation, the trade deficit in goods is $1.8 billion smaller than last year. This is the trade measure that is most important for measuring real GDP.
Implications: We have known for some time that consumer spending and business investment have been growing. But it’s always an open question whether the production related to that spending is coming from the US or abroad. Today’s trade data for October show that an increasing share of what consumers and businesses are buying is being made here. Unless these figures are reversed sharply for November or December, net exports will add significantly to real GDP growth in the fourth quarter. Both exports and imports slipped in October, but imports slipped more, largely due to lower oil volume. The “real” (inflation-adjusted) trade deficit in goods has been shrinking in the past year. That shows greater US competitiveness. Usually, this measure of the trade deficit expands when our economy is growing. The improvement may reflect the large depreciation in the US dollar versus a decade ago. The problem is that this large dollar depreciation is also consistent with higher inflation, for which we will ultimately pay a price. Although the total volume of exports and imports declined slightly in October, the decline was from a record high set in September and was not a large change given normal month-to-month fluctuations. In other words, there is no sign that financial problems in Europe are hurting the ability of companies to do cross-border trade. In other recent news, new claims for jobless benefits declined 23,000 last week to 381,000. With the exception of one week back in February, it’s the lowest since July 2008, even before Lehman Brothers collapsed. Continuing claims for regular state benefits dropped 174,000 to 3.58 million. Meanwhile, same-store chain store sales keep rising: up 3.8% versus a year ago according to the International Council of Shopping Centers and up 3.2% according to Redbook Research.
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This strikes me as pretty plausible, and the political consequences quite spinnable by His Glibness , , ,
=======================
Monday Morning Outlook
________________________________________
Obama's 8%: Sounds Right To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/12/2011
Given his advisers’ track record, you would think President Obama would be very cautious when making predictions about the unemployment rate. Back in January 2009, fresh off his inauguration, his economic team forecast that the $800 billion “stimulus” bill would keep the jobless rate below 8%.
As we all now know, even though the “stimulus” bill was fully implemented, the jobless rate kept heading north, peaking at 10.1% in October 2009 and never once falling even remotely close to 8%. Nevertheless, President Obama is doing it again and predicting unemployment will be 8% around Election Day.
This time, we think he’s right.
It’s important to recognize that 8% unemployment is not good. The unemployment rate was lower than 8% for 25 straight years, from early 1984 through early 2009. During that time no one would have been proud of an 8% jobless rate.
The difference between then and now is the size of government. Spending, regulation and expanded jobless benefits have made the US look more like Europe, where even in the best of times unemployment rates rarely fall below 7%. Nonetheless, the US economy is growing today, it is creating new jobs, and unemployment will continue to fall in the months ahead just as the President has predicted.
Here’s why we think 8% makes sense. Just two years ago, in the last quarter of 2009, the jobless rate averaged 10%. In the current quarter, unemployment will probably end up averaging 8.8%. (We look for an 8.7% rate in December).
That’s a drop of 1.2 percentage points over two years, when real GDP was growing around 2.5% per year. And notice that the drop in the jobless rate was not due to people leaving the labor force. The labor force is up slightly versus two years ago.
We think the economy will grow in the 3 to 3.5% range in 2012, which makes a drop to an 8% unemployment rate a sensible forecast. Faster economic growth should generate a faster decline in the jobless rate. And remember, this faster growth is occurring without a new stimulus bill and without QE3. The fact that the government has done nothing new in the past few quarters is helping the economy accelerate again.
Some analysts keep waiting for a large surge in the labor force (more people looking for work), which would drive the unemployment rate up again, or at least makes it tough to get the jobless rate down further. But that’s unlikely.
The aging of the Baby Boom generation started putting downward pressure on the labor force participation rate about a decade ago and that process will continue. Any increase in the labor force in the year ahead should be modest compared to prior economic expansions.
Bottom-line: We think President Obama is right about the 8% unemployment rate. What’s interesting is that so many people have been so negative about the economy for so long that 8% is going to feel like a huge victory, even when it isn’t. This is the problem with creating negative expectations…even slight improvement could be considered a victory.
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This strikes me as pretty plausible, and the political consequences quite spinnable by His Glibness , , ,
**I wonder if Wesbury is actually Krugman in a "Mission Impossible" type mask......
http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-the-real-unemployment-rate-is-11-percent/2011/12/12/gIQAuctPpO_blog.html
Wonkbook: The real unemployment rate is 11 percent
Posted by Ezra Kleinat 07:51 AM ET, 12/12/2011
Typically, I try to tie the beginning of Wonkbook to the news. But today, the most important sentence isn't a report on something that just happened, but a fresh look at something that's been happening for the last three years. In particular, it's this sentence by the Financial Times' Ed Luce, who writes, "According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 percent."
Remember that the unemployment rate is not "how many people don't have jobs?", but "how many people don't have jobs and are actively looking for them?" Let's say you've been looking fruitlessly for five months and realize you've exhausted every job listing in your area. Discouraged, you stop looking, at least for the moment. According to the government, you're no longer unemployed. Congratulations?
Since 2007, the percent of the population that either has a job or is actively looking for one has fallen from 62.7 percent to 58.5 percent. That's millions of workers leaving the workforce, and it's not because they've become sick or old or infirm. It's because they can't find a job, and so they've stopped trying. That's where Luce's calculation comes from. If 62.7 percent of the country was still counted as in the workforce, unemployment would be 11 percent. In that sense, the real unemployment rate -- the apples-to-apples unemployment rate -- is probably 11 percent. And the real un- and underemployed rate -- the so-called "U6" -- is near 20 percent.
There were some celebrations when the unemployment rate dropped last month. But much of that drop was people leaving the labor force. The surprising truth is that when the labor market really recovers, the unemployment rate will actually rise, albeit only temporarily, as discouraged workers start searching for jobs again.
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GM:
Your point/the point of the piece you post, is quite correct.
I am looking to make an additional point-- which is that the number which is currently 8.6% is the number which people track; just as people (including me I might add) tend to follow "the DOW average" instead of the "S&P 500"-- which is a decidedly better overall metric. If people see if falling from 10+% to 8.0% (or even 7.9%) His Glibness will be all over it like white on rice and like stink on excrement selling it as "See, I inherited a terrible mess but I have managed to turn things around and now we are in the right direction. Give me another 4 years to fininsh the job. Don't put back in the people who got us into this mess in the first place!"
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GM:
Your point/the point of the piece you post, is quite correct.
I am looking to make an additional point-- which is that the number which is currently 8.6% is the number which people track; just as people (including me I might add) tend to follow "the DOW average" instead of the "S&P 500"-- which is a decidedly better overall metric. If people see if falling from 10+% to 8.0% (or even 7.9%) His Glibness will be all over it like white on rice and like stink on excrement selling it as "See, I inherited a terrible mess but I have managed to turn things around and now we are in the right direction. Give me another 4 years to fininsh the job. Don't put back in the people who got us into this mess in the first place!"
**Short of the koolaid drinking O-zombies, most people will notice their plummeting economic conditions, no matter what the MSM-DNC spins.
http://finance.yahoo.com/news/plummeting-income-shaves-household-cash-050010589.html
Plummeting income shaves household cash
By Frank Bass and Timothy R. Homan | Bloomberg – Thu, Dec 8, 2011 1:19 PM EST.. .
.
The housing market collapse, historically low interest rates and corporations stingy with dividends helped cut the median household income in two of every three U.S. counties, the U.S. Census Bureau reported today.
The number of American households that made money from rent, interest or dividends fell by one-third to 24.2 percent in 2010, including residents of counties that encompass New York City and San Francisco.
The census figures capture the lost financial opportunity experienced by Americans during a decade that saw the dot-com bust and then the worst recession since the Great Depression.
"We were expecting back in 2000 that our 401(k) would grow 4 to 6 percent a year," said Gayle Thompkins, 68, a resident of Green Valley, Arizona, whose husband used to work for Dow Chemical Co. (DOW) when the couple lived in Michigan. "Right now, if we break even, we'll feel lucky."
The plunge in the number of households with dividend, interest or rental income spanned the country, falling to 29.8 percent from 39 percent in 2000 in Manhattan; dropping to 13.1 percent from 23.5 percent in Miami; and declining to 50.3 percent from 69.6 percent in Anchorage.
"Over the last decade, income provided by financial market returns has declined, and pretty meaningfully," Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. "Consumer incomes are beginning the decade off at a lower starting point."
Alaska Cushion
The census figures were released as part of the five-year version of the American Community Survey, an annual poll of 3.5 million U.S. households that replaced the decennial census long- form survey.
In 2000, 16 counties with more than 100,000 households had a majority report they received income from interest, dividends or rentals. Anchorage, where full-time residents last year received an average $1,281 dividend from a state fund created by oil revenue, was the only one in 2010.
Nationwide, median household income fell to $51,914, a $2,678 drop over the decade when adjusted for inflation. Black households lost the most, with median household income falling 8 percent to $35,194. Hispanics reported $41,354, a 5.5 percent drop. The figure for white, non-Hispanic households fell to $56,466, a 4.3 percent decrease over the decade. Asian households reported $68,950, a 2.2 percent gain.
Impact on Affluent
Households in traditionally affluent areas, such as the New Jersey suburbs of Hunterdon, Somerset and Morris counties -- the sixth, ninth and 10th-wealthiest in the nation -- showed median income losses over the decade. Incomes fell in Westchester County, New York, to $79,619, a $3,037 drop; Putnam County, to $89,218, a $4,744 decline; and $82,534 in Rockland County, a $5,828 fall.
The greatest declines occurred in Great Lakes states and southern Appalachia. People in 82 of Michigan's 83 counties reported their household incomes dropped between 2000 and 2010. Households in Livingston County, a Detroit suburb, registered the largest drop in the nation, with incomes falling to $72,129, a $15,491 decrease from the 2000 real median of $87,620.
"This is the absolute nadir for us," said Lou Glazer, president of Michigan Future Inc., an Ann Arbor-based non-profit research group. During the last decade, 94 percent of the state's income growth came from government payments rather than private-industry sources, Glazer said.
Declining Dividend Payouts
Dividend payouts declined for the broader U.S. market between 2003 and 2010. The amount of dividends paid out as a percent of net income declined to 55.5 percent from 80.5 percent in that period, according to Russell 3000 Index data compiled by Bloomberg.
Prices for existing U.S. homes fell over the decade in one of five U.S. counties, according to data compiled by Bloomberg. Pitkin County, Colorado, homeowners were hardest hit. The median value of a home in the central Colorado county, home to the Aspen/Snowmass ski complex, fell $304,800, almost 10 times the decline in Oakland County, Michigan, the second-biggest loser.
The median sales price was $1.2 million for the 63 homes sold during the third quarter of 2010 in the Aspen area, said Ryan McMaken, chief economist for the Colorado Division of Housing. During the third quarter of 2011, 68 homes were sold with a median sales price of $637,000, he said.
"There aren't a lot of fire sales, but there hasn't been the sort of demand that existed prior to the financial crisis," McMaken said. "It's pretty clear there have been some declines."
Real-Estate Hangover
Even counties that gained the most during the real estate boom didn't end the decade much better. The median value of a home in Maricopa County, Arizona, climbed to $238,600 from an inflation-adjusted $167,960 in 2000, a 4.2 percent annual return over the decade.
The next decade isn't starting well for the next generation of workers, the census data showed. Civilian unemployment among 16 to 24 year olds rose to 16.7 percent in 2010, almost double the November U.S. jobless rate of 8.6 percent and a 23.7 percent increase from a decade ago.
In 2000, two counties had a young adult unemployment rate that topped 50 percent. Ten years later, 18 counties reported a majority of unemployed among 16 to 24 year olds. Carroll County in Mississippi's Delta region reported the nation's highest youth unemployment rate in 2010, rising to 81.7 percent from 22.4 percent in 2000.
The Bureau of Labor Statistics reported in June 2010 that younger workers made up 13.9 percent of the total labor force and 19.5 percent of all workers unemployed for 27 months or more.
"The fact that a huge portion of the unemployed have been out of work for more than a year really suggests that the income stagnation is a long-term phenomenon," said LeBas of Janney Montgomery Scott.
To contact the reporters on this story: Frank Bass in Washington at fbass1@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net
To contact the editor responsible for this story: Flynn McRoberts in Chicago at fmcroberts1@bloomberg.net
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[youtube]http://www.youtube.com/watch?feature=player_embedded&v=P36x8rTb3jI[/youtube]
http://www.youtube.com/watch?feature=player_embedded&v=P36x8rTb3jI
Koolaid bitter yet?
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[youtube]http://www.youtube.com/watch?v=6jJvkkNmR_8&feature=player_embedded#![/youtube]
http://www.youtube.com/watch?v=6jJvkkNmR_8&feature=player_embedded#!
Ah, the glory days of 2009.
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Careful GM. Bret Baier report today reported that the deficit is on track to come in under $1T this year. This is about 33% down from the peak. Another $250B and the statement will be true.
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"Careful GM. Bret Baier report today reported that the deficit is on track to come in under $1T this year. This is about 33% down from the peak. Another $250B and the statement will be true."
Baier is likely referring to the fiscal year with 10 months remaining and Obama is saying rather specifically: half of 1.3T ($650 billion) within his first term, which really is this fiscal year. Not spoken in the numbers is the total amount added to the debt, which is his central point - the burden of paying the interest.
Another lead indicator of misery subsiding will be the food stamp count, up more than 50% under Pres. Obama. Economic growth at the main street / kitchen table level is measured in number or percentage of families not needing assistance on something as basic as food - or health care.
Food stamp recipients at record
Recession, disasters, Obamanomics drive spike in assistance
THE WASHINGTON POST Thursday December 8, 2011
WASHINGTON — The nation’s struggling economy and an uptick in natural disasters have prompted more Americans than ever to apply for federal food aid.
More than 46.3 million people received a total of $75.3 billion from the Supplemental Nutrition Assistance Program, formerly known as food stamps, in fiscal 2011, according to U.S. Agriculture Department statistics released on Monday.
-------------------------
Flashback 3 years:
Food stamps recipients nearing record 30 million
November 26, 2008|WASHINGTON POST
WASHINGTON — Fueled by rising unemployment and food prices, the number of Americans on food stamps is poised to exceed 30 million for the first time this month, surpassing the historic high set in 2005 after Hurricane Katrina.
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http://news.investors.com/Article.aspx?id=594554&p=1
Obama Also Lists Clinton for Lousy Recovery
Posted 12/12/2011 06:43 PM ET
Economy: No longer content to blame President Bush for the country's economic ills, President Obama now accuses his Democratic predecessor of being a co-conspirator. Will he stop at nothing to escape responsibility?
In his "60 Minutes" interview this weekend, Obama claimed the economy is suffering "structural problems that have been building up for two decades."
Let's see, in the past 20 years we've had three previous presidents, one of whom was two-term Democrat Bill Clinton.
Of course, Obama doesn't really mean to say Clinton is at fault. After all, he's tapped several Clinton alumni to advise him, including Gene Sperling, who has served as head of the National Economic Council in both administrations.
All Obama's trying to do here is give himself a bigger excuse for the fact that his own policies have completely failed. After all, how can anyone expect him to produce strong growth after decades of economic mismanagement?
"I've always believed that this was a long-term project," Obama told CBS's Steve Kroft, and that it "was gonna take more than a year. It was gonna take more than two years."
The problem is that, once upon a time, Obama was saying pretty much the exact opposite. Examples:
• On Feb. 2, 2009, Obama told the "Today Show" that "a year from now I think people are gonna see that we're starting to make some progress," and that "if I don't have this done in three years, then there's going to be a one-term proposition."
On Feb. 12, 2009, he predicted that his $830 billion stimulus would "ignite spending by businesses and consumers" and unleash "a new wave of innovation, activity and construction ... all across America."
• On Feb. 26, 2009, Obama's first budget projected that by 2011 the economy would be cooking ahead at 4% real GDP growth, with unemployment at 7.1% and falling fast.
• On Feb. 7, 2010, he said "we are seeing the corner turn and the economy growing again."
• On June 4, 2010, Obama claimed the "economy is getting stronger by the day" and later that month said the recovery was "well under way."
It was only when the agonizingly slow pace of the recovery became obvious to everyone that Obama started pleading for patience and looking for someone or something else to blame.
And the longer the slog dragged on, the further back in time Obama has had to go with his finger pointing to affix blame.
The truth is, no one is to blame for the country's prolonged economic misery other than the current occupant of the White House.
Obama's prescription — massive spending, vast new regulations, a health care takeover and class warfare — has produced a recovery so weak that unemployment's never fallen below 8.6% since the recession ended 29 months ago, and GDP is a mere 0.1% above its pre-recession peak.
Now Obama is warning that dark clouds will last for years.
In contrast, when President Reagan confronted a comparably painful recession — the 1981-82 downturn lasted 16 months with unemployment peaking at 10.8% — he took the exact opposite approach.
Reagan cut taxes, deregulated the economy, championed the free market and worked to rein in spending during his two terms.
The result was that by this stage of the recovery, unemployment was just 7.3%, real GDP was 12% above its pre-recession peak, and Reagan was boasting that it was morning in America again.
In his "60 Minutes" interview, Obama said it could take "more than one president" to fix the economy.
He certainly has that part of the story right. And with any luck, that next president will be sworn in 13 months from now.
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By CONOR DOUGHERTY
The U.S. economy is on track to grow faster in the current quarter than any time since the second quarter of last year, though several risks—including a possible meltdown in Europe—are clouding the outlook.
In recent days, a number of economists have increased estimates for fourth-quarter growth, pointing to stronger-than-expected readings on trade, consumer spending and other gauges. Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago.
Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery.
This pace of growth is much stronger than economists were expecting a few months ago, when Europe's sovereign-debt problems started getting worse. A Wall Street Journal survey of economists in October showed they expected growth of just 2% in the fourth quarter. There was good reason for the subdued projection, including a third quarter that sparked little hope of an accelerating economy. Stock-market gyrations earlier this year erased huge amounts of wealth, while weak housing and job markets constrained consumer confidence.
But the economy looks much better now. The stock market has made up much of its losses, although new worries about Europe sent indexes lower Monday, and consumer sentiment has improved, prompting consumers to dip into savings and continue spending. Companies are not only selling more, they're restocking shelves when they become too lean. Retail sales rose 0.5% in October and were up 7.2% from the same month last year, according to the Commerce Department. Economists surveyed by Dow Jones Newswires estimate another 0.5% gain when November's retail-sales figures are released Tuesday.
A few months ago, Alan Levenson, chief economist at T. Rowe Price, predicted fourth-quarter growth would come in below 2%—a contrast with his current forecast of 3.5% to 4%.
That updated outlook comes with significant caveats. "My caution is that 3.5% is not the new trend and we're expecting substantial slowing to below 2% in the beginning of next year," he said.
Most economists see more reasons for caution than optimism. In the most recent Wall Street Journal survey, conducted in late November and released last week, 92% of economists said the euro zone now is in recession or faces an imminent recession. A number of manufacturing reports suggest growth has slowed in overseas economies including China and Brazil. In addition to a slowing manufacturing sector, China's cooling real-estate market could damp domestic demand.
Many forecasters also doubt that U.S. consumers can keep spending at their current pace. Home values continue to fall. The personal savings rate, after moving up sharply in the wake of the financial crisis, is heading back down. Americans saved 3.5% of their after-tax income in October, down from 5.2% at the start of the year.
Despite what is shaping up to be a strong fourth quarter, economists surveyed by the Journal said they expect a slowdown in the beginning of next year. They predict growth of 2.1% in the first quarter.
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Interesting rumination over what the unemployment rate would be if those who had stopped looking were counted:
http://www.shotsacrossthebow.com/index.php/site/comments/whats_the_real_unemployment_rate/
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A little bit long winded but worth the read for a history lesson on a government/private business that affected world history.
There are many present day comparisons in China, Russia, Venezuela, Brazil, oand others and some more occult situations in the US such as GE and Obama administration:
*****The East India Company
The Company that ruled the waves
As state-backed firms once again become forces in global business, we ask what they can learn from the greatest of them all
Dec 17th 2011 | from the print edition
A POPULAR parlour game among historians is debating when the modern world began. Was it when Johannes Gutenberg invented the printing press, in 1440? Or when Christopher Columbus discovered America, in 1492? Or when Martin Luther published his 95 theses, in 1517? All popular choices. But there is a strong case to be made for a less conventional answer: the modern world began on a freezing New Year’s Eve, in 1600, when Elizabeth I granted a company of 218 merchants a monopoly of trade to the east of the Cape of Good Hope.
The East India Company foreshadowed the modern world in all sorts of striking ways. It was one of the first companies to offer limited liability to its shareholders. It laid the foundations of the British empire. It spawned Company Man. And—particularly relevant at the moment—it was the first state-backed company to make its mark on the world.
Twenty years ago, as the state abandoned the commanding heights of the economy in the name of privatisation and deregulation, it looked as if these public-private hybrids were doomed. Today they are flourishing in the emerging world’s dynamic economies and striding out onto the global stage.
State-controlled companies account for 80% of the market capitalisation of the Chinese stockmarket, more than 60% of Russia’s, and 35% of Brazil’s. They make up 19 of the world’s 100 biggest multinational companies and 28 of the top 100 among emerging markets. World-class state companies can be found in almost every industry. China Mobile serves 600m customers. Saudi Arabia’s SABIC is one of the world’s most profitable chemical companies. Emirates airlines is growing at 20% a year. Thirteen of the world’s biggest oil companies are state-controlled. So is the world’s biggest natural-gas company, Gazprom.
State-owned companies will continue to thrive. The emerging markets that they prosper in are expected to grow at 5.5% a year compared with the rich world’s 1.6%, and the model is increasingly popular. The Chinese and Russian governments are leading a fashion for using the state’s power to produce national champions in a growing range of “strategic” industries.
The parallels between the East India Company and today’s state-owned firms are not exact, to be sure. The East India Company controlled a standing army of some 200,000 men, more than most European states. None of today’s state-owned companies has yet gone this far, though the China National Offshore Oil Corporation (CNOOC) has employed former People’s Liberation Army troops to protect oil wells in Sudan. The British government did not own shares in the Company (though prominent courtiers and politicians certainly did). Today’s state-capitalist governments hold huge blocks of shares in their favourite companies.
Otherwise the similarities are striking. Both the Company and its modern descendants serve two masters, keeping one eye on their share price and the other on their political patrons. Many of today’s state-owned companies are monopolies or quasi-monopolies: Brazil’s Petrobras, China Mobile, China State Construction Engineering Corporation and Mexico’s Federal Electricity Commission, to name but a few of the mongrel giants that bestride the business world these days. Many are enthusiastic globalisers, venturing abroad partly as moneymaking organisations and partly as quasi-official agents of their home governments. Many are keen not only on getting their government to provide them with soft loans and diplomatic muscle but also on building infrastructure—roads, hospitals and schools—in return for guaranteed access to raw materials. Although the East India Company flourished a very long time ago, in a very different world, its growth, longevity and demise have lessons for those who run today’s state companies and debate their future, lessons about the benefits of linking a company’s interests to a nation’s and the dangers of doing so.
The gifts of government
One of the benefits the Company derived from its relations with the state was limited liability. Before the rise of state-backed companies, businesses had imposed unlimited liability on their investors. If things went wrong, creditors could come after them for everything they possessed, down to their cufflinks, and have them imprisoned if they failed to pay. Some firms had already been granted limited liability, and the Company’s officers persuaded Queen Elizabeth that it should be given this handy status too.
A second benefit of state backing was monopoly. In the 17th century, round-the-world voyages were rather like space missions today. They involved huge upfront costs and huge risks. Monopoly provided at least a modicum of security. The third benefit was military might. The Company’s Dutch and Portuguese competitors could all call on the power of their respective navies. The English needed to do likewise in order to unlock investors’ purses.
Still, getting into bed with the government was risky for the Company. It meant getting close to courtiers who wanted to extract revenue from it and exposing itself to politicians who wanted to rewrite its charter. The Whig revolutionaries who deposed James II in 1688 briefly promoted a competing outfit that the Company first fought and eventually absorbed. Rival merchants lobbied courtiers to undermine its monopoly. But for the most part it dealt with these political problems brilliantly. Indeed its most valuable skill—its “core competence” in the phrase beloved of management theorists—was less its ability to arrange long-distance voyages to India and beyond than its ability to manage the politicians back home.
The Company created a powerful East India lobby in Parliament, a caucus of MPs who had either directly or indirectly profited from its business and who constituted, in Edmund Burke’s opinion, one of the most united and formidable forces in British politics. It also made regular gifts to the Court: “All who could help or hurt at Court,” wrote Lord Macaulay, “ministers, mistresses, priests, were kept in good humour by presents of shawls and silks, birds’ nests and attar of roses, bulses of diamonds and bags of guineas.” It also made timely gifts to the Treasury whenever the state faced bankruptcy. In short, it acted as what George Dempster, a stockholder, called a “great money engine of state”.
The Company was just as adept at playing politics abroad. It distributed bribes liberally: the merchants offered to provide an English virgin for the Sultan of Achin’s harem, for example, before James I intervened. And where it could not bribe it bullied, using soldiers paid for by Indian taxes to duff up recalcitrant rulers. Yet it recognised that its most powerful bargaining chip, both home and abroad, was its ability to provide temporarily embarrassed rulers with the money they needed to pay their bills. In an era when governments lacked the resources of the modern tax-and-spend state, the state-backed company was a backstop against bankruptcy.
State-backed monopolies are apt to run to fat and lose their animal spirits. The Company was a model of economy and austerity that modern managers would do well to emulate. For the first 20 years of its life it operated out of the home of its governor, Sir Thomas Smythe. Even when it had become the world’s greatest commercial operation it remained remarkably lean. It ruled millions of people from a tiny headquarters, staffed by 159 in 1785 and 241 in 1813. Its managers reiterated the importance of frugality, economy and simplicity with a metronomic frequency, and imposed periodic bouts of austerity: in 1816, for example, they turned Saturday from a half to a full working day and abolished the staff’s annual turtle feast.
The Company’s success in preserving its animal spirits owed more to necessity than to cunning. In a world in which letters could take two years to travel to and fro and in which the minions knew infinitely more about what was going on than did their masters, efforts at micromanagement were largely futile.
Adam Smith denounced the Company as a bloodstained monopoly: “burdensome”, “useless” and responsible for grotesque massacres in BengalThe Company improvised a version of what Tom Peters, a management guru, has dubbed “tight-loose management”. It forced its employees to post a large bond in case they went off the rails, and bombarded them with detailed instructions about things like the precise stiffness of packaging. But it also leavened control with freedom. Employees were allowed not only to choose how to fulfil their orders, but also to trade on their own account. This ensured that the Company was not one but two organisations: a hierarchy with its centre of gravity in London and a franchise of independent entrepreneurs with innumerable centres of gravity scattered across the east. Many Company men did extremely well out of this “tight-loose” arrangement, turning themselves into nabobs, as the new rich of the era were called, and scattering McMansions across rural England.
Money and meritocracy
The Company repaid the state not just in taxes and tariffs, but also in ideas. It was one of the 18th and 19th centuries’ great innovators in the art of governing—more innovative by some way than the British government, not to mention its continental rivals, and outgunned only by the former colonies of America. The Company pioneered the art of government by writing and government by record, to paraphrase Burke. Its dispatches to and from India for the 15 years after 1814 fill 12,414 leather-bound volumes. It created Britain’s largest cadre of civil servants, a term it invented.
State-backed enterprises risk getting stuffed with powerful politicians’ half-witted nephews. The Company not only avoided this but also, in an age when power and money were both largely inherited, it pioneered appointment by merit. It offered positions to all-comers on the basis of exam performance. It recruited some of the country’s leading intellectuals, such as Edward Strachey, Thomas Love Peacock and both James and John Stuart Mill—the latter starting, at the age of 17, in the department that corresponded with the central administration in India, and rising, as his father had, to head it, on the eve of the Company’s extinction.
The Company also established a feeder college—Haileybury—so that it could recruit bright schoolboys and train them to flourish in, and run, India. These high-minded civil servants both prolonged the Company’s life when Victorian opinion was turning ever more strongly against it and also provided a model for the Indian and domestic civil service.
The Company liked to think of itself as having the best of both private and public worlds—the excitement and rewards of commercial life, on the one hand, and the dignity and security of an arm of the state on the other. But the best of both worlds can easily turn into the worst.
The perils of imperialisation
In the end, it was not rapacious politicians who killed the Company, but the greed and power of its managers and shareholders. In 1757 Sir Robert Clive won the battle of Plassey and delivered the government of Bengal to the Company. This produced a guaranteed income from Bengal’s taxpayers, but it also dragged the Company ever deeper into the business of government. The Company continued to flourish as a commercial enterprise in China and the Far East. But its overall character was increasingly determined by its administrative obligations in India. Revenue replaced commerce as the Company’s first concern. Tax rolls replaced business ledgers. Arsenals replaced warehouses. C.N. Parkinson summarised how far it had strayed, by 1800, from its commercial purpose: “How was the East India Company controlled? By the government. What was its object? To collect taxes. How was its object attained? By means of a standing army. What were its employees? Soldiers, mostly; the rest, Civil Servants.”
Sir Robert Clive with wife, daughter and local help
The Company’s growing involvement in politics infuriated its mighty army of critics still further. How could it justify having a monopoly of trade as well as the right to tax the citizens of India? And how could a commercial organisation justify ruling 90m Indians, controlling 70m acres (243,000 square kilometres) of land, issuing its own coins, complete with the Company crest, and supporting an army of 200,000 men, all of which the East India Company did by 1800? Adam Smith denounced the Company as a bloodstained monopoly: “burdensome”, “useless” and responsible for grotesque massacres in Bengal. Anti-Company opinion hardened further in 1770 when a famine wiped out a third of the population of Bengal, reducing local productivity, depressing the Company’s business and eventually forcing it to go cap in hand to the British government to avoid bankruptcy.
The government subjected the Company to ever-tighter supervision, partly because it resented bailing it out, partly because it was troubled by the argument that a company had no business in running a continent. Supervision inexorably led to regulation and regulation to nationalisation (or imperialisation). In 1784 the government established a board to direct the Company’s directors. In 1813 it removed its monopoly of trade with India. In 1833 it removed its monopoly of trade with China and banned it from trading in India entirely. In 1858, the year after the Indian mutiny vindicated the Company’s critics, the government took over all administrative duties in India. The Company’s headquarters in London, East India House, was demolished in 1862. It paid its last dividend in 1873 and was finally put out of its misery in 1874. Thus an organisation that had been given life by the state was eventually extinguished by it.
A dangerous connection
Ever since its ignominious collapse the Company has been treated as an historical curiosity—an “anomaly without a parallel in the history of the world”, as one commentator put it in 1858, a push-me pull-you the like of which the world would never see again. But these days similarly strange creatures are popping up everywhere. The East India Company is being transformed from an historical curiosity into a highly relevant case study.
The Company’s history shows that liberals may be far too pessimistic (if that is the right word) about the ability of state monopolies to remain healthy. The Company lasted for far longer than most private companies precisely because it had two patrons to choose from—prospering from trade in good times and turning to the government for help in bad ones. It also showed that it is quite possible to rely on the government for support while at the same time remaining relatively lean and inventive.
But the Company’s history also shows that mercantilists may be far too optimistic about state companies’ ability to avoid being corrupted by politics. The merchants who ran the East India Company repeatedly emphasised that they had no intention of ruling India. They were men of business who only dabbled in politics out of necessity. Nevertheless, as rival state companies tried to muscle in on their business and local princelings turned out to be either incompetent or recalcitrant, they ended up taking huge swathes of the emerging world under their direct control, all in the name of commerce.
The Chinese state-owned companies that are causing such a stir everywhere from the Hong Kong Stock Exchange (where they account for some of the biggest recent flotations) to the dodgiest parts of Sudan (where they are some of the few business organisations brave enough to tread) are no different from their East Indian forebears. They say that they are only in business for the sake of business. They dismiss their political connections as a mere bagatelle. The history of the East India Company suggests that it won’t work out that way.*****
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That is a very interesting article and a worthy point of reference concerning what seems to me a very important question-- which is what becomes of free market companies in a world economy increasingly played by GSEs?
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"They miss growth when it is absent. They don't appreciate it so much when it is happening."
Voters want growth, not income redistribution
by Michael Barone
"A 2008 election widely regarded as heralding a shift toward the more government-friendly public sentiment of the New Deal and Great Society eras seems to have yielded just the reverse."
So writes William Galston, Brookings Institution scholar and deputy domestic adviser in the Clinton White House, in the New Republic. Galston, one of the smartest political and policy analysts around, has strong evidence for this conclusion.
He cites a recent Gallup poll showing that while 82 percent of Americans think it's extremely or very important to "grow and expand the economy" and 70 percent say it's similarly important to "increase equality of opportunity for people to get ahead," only 46 percent say it's important to "reduce the income and wealth gap between the rich and the poor" and 54 percent say this is only somewhat or not important.
In addition, by a 52 to 45 percent margin, Americans see the gap between the rich and the poor as an acceptable part of the economic system rather than a problem that needs to be fixed. In 1998, during the high-tech economic boom, Americans took the opposite view by the same margin.
As Galston notes, these findings suggest that Obama's much praised speech at Osawatomie, Kansas, decrying inequality, "may well reduce his chances of prevailing in a close race." Class warfare politics, as I have noted, hasn't produced a Democratic presidential victory in a long, long time.
Where Galston misses a step, I think, is that he seems to regard the move away from redistributionist politics in this time of economic stagnation as an anomaly in need of explanation. He seems to share the Obama Democrats' assumption that economic distress would make Americans more supportive of, or amenable to, big government policies.
That, after all, is what we have all been taught by the great and widely read New Deal historians, and that lesson has been absorbed by generations of politicians and political pundits.
I believe that historians have taught the wrong lessons about the 1930s. And I believe there is a plausible and probably correct reason why economic distress has apparently moved Americans to be less rather than more supportive of big government.
To understand the lessons of the 1930s, you need to read the election returns. Franklin Roosevelt's big victory in 1932 was a massive rejection of Republicans across the board. Republicans lost huge ground in urban and rural areas, in the West and Midwest and most of the East, even in their few redoubts in the South.
In 1936 FDR won re-election by a slightly larger margin, but with a different coalition. The rural and small town North returned to its long Republican allegiance, while Democrats made further big gains among immigrants and blue collar workers in big cities and factory towns.
The New Deal historians attributed these gains to Roosevelt's economic redistribution measures -- high tax rates on high earners, the pro-union Wagner Act, Social Security. These laws, the so-called Second New Deal, were passed in 1935. They replaced the different, non-redistributionist policies of the First New Deal that stopped the deflationary downward spiral underway when Roosevelt took office.
The problem with the historians' claims is that the shifts in the electorate apparent in 1936 also are apparent in the 1934 off-year elections. Democrats won big that year, but compared to 1932 they lost ground in rural areas and small towns and gained much ground in big cities and factory towns.
The 1936 realignment happened in 1934. It could not have been caused by redistributionist Second New Deal legislation, because it hadn't been passed before November 1934.
So why should voters be leery of economic redistribution in times of economic distress?
Perhaps because they realize that they stand to gain much more from a vibrantly growing economy than from redistribution of a stagnant economic pie. A growing economy produces many unanticipated opportunities. Redistribution edges toward a zero-sum game.
They miss growth when it is absent. They don't appreciate it so much when it is happening.
Roosevelt's 1934 and 1936 victories were won in periods of growth. After the economy shifted into recession in 1937, New Deal Democrats fared much worse, and Roosevelt won his third and fourth terms as a seasoned wartime leader, not an economic redistributor.
Lesson: If you want redistribution, you better first produce growth. Which the Obama Democrats' policies have failed to do.
http://campaign2012.washingtonexaminer.com/article/voters-want-growth-not-income-redistribution/277856
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Escaping mention in Krugman's drivel on Ireland is a better example much closer to home. Besides the opportunity to reign in government, cut tax rates while increasing revenues, who else is sitting on a treasure trove of energy?
http://news.investors.com/Article/596263/201112291827/tax-cuts-give-canada-economy-a-boost.htm
IBD Editorials
Tax Cuts, Less-Intrusive Gov't Help Canada Soar
Posted 12/29/2011
Success: Away from the low growth and high regulation of an America under Washington's thumb, our northern neighbor is economically strong. As 2011 ends, Canada has announced yet another tax cut — and will soar even more.
The Obama administration and its economic czars have flailed about for years, baffled about how to get the U.S. economy growing.
In reality, the president need look no further than our neighbor, Canada, whose solid growth is the product of tax cuts, fiscal discipline, free trade, and energy development. That's made Canada a roaring puma nation, while its supposedly more powerful southern neighbor stands on the outside looking in.
On Thursday, Canadian Prime Minister Stephen Harper announced that he will slash corporate taxes again on Jan. 1 in the final stage of his Economic Action Plan, dropping the federal business tax burden to just 15%.
Along with fresh tax cuts in provinces such as Alberta, total taxes for businesses in Canada will drop to 25%, one of the lowest in the G7, and below the Organization of Economic Cooperation and Development average.
"Creating jobs and growth is our top priority," said Minister Jim Flaherty. "Through our government low-tax plan ... we are continuing to send the message that Canada is open for business and the best place to invest."
It's not just that Canada's conservative government favors makers over takers. Harper's also wildly popular for shrinking government. "The Harper government has pursued a strategic objective to disembed the federal state from the lives of citizens," wrote University of Calgary Professor Barry Cooper, in the Calgary Herald.
Harper also has made signing free trade treaties his priority. Canada now has 11 free trade pacts in force, and 14 under active negotiation — including pacts with the European Union and India, among others.
"We believe in free trade in Canada, we're a free-trading nation. That's the source of our strength, our quality of life, our economic strength," Flaherty said last month.
Lastly, Canada has pursued its competitive advantage — oil. And it did so not through top-down "industrial policy," but by getting government out of the way.
Harper has enacted market-friendly regulations to accomplish big things like the Keystone Pipeline — and urged President Obama to move forward on it or else Canada would sell its oil to China.
These policies have been well-known since the Reagan era. But in a country that's been institutionally socialist since the 1950s, Harper's moves represent a dramatic affirmation for free market economics.
For Canada, they've had big benefits.
Canada's incomes are rising, its unemployment is two percentage points below the U.S. rate, its currency is strengthening and it boasts Triple-A or equivalent sovereign ratings across the board from the five top international ratings agencies, lowering its cost of credit.
Is it too much to ask Washington to start paying attention to the Canadian success story?
These sound principles work every time they are tried, and they have led to a transformation in Canada.
Imagine what they could do in the U.S.
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"How about Canada?"
I have always like Canada; beautiful country and nice people. They have an excellent National Health Care plan for example. :-) Canada's income tax rate is approximately 10% higher than ours. :-) Further, Canada's income tax system is more heavily biased against the highest income earners versus the U.S. :-) Makes sense to me... :-D
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"How about Canada?"
I have always like Canada; beautiful country and nice people. They have an excellent National Health Care plan for example. smiley Canada's tax rate is approximately 10% higher than ours. smiley Further, Canada's income tax system is more heavily biased against the highest income earners versus the U.S. smiley Makes sense to me... grin
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The policy arrow in Canada shifted the opposite of ours. Investors know it is becoming a better and better place to do business. Investors here keep getting the wait and see message out of Washington so the 'smart money' sits on the sidelines or goes elsewhere.
For all your Calif. expertise you probably shouldn't tell someone here about Canadian heathcare. Whether you look at Duluth, MSP or Rochester, MN, not only the medical clinics but the restaurants and hotels here benefit greatly from Canadian healthcare. Let's leave that to the healthcare threads.
The point of economic growth in Canada is that we used to outperform them.
The top federal income tax rate in Canada (29%) is not higher than in the US (39.6% after the Bush Obama 'temporary cut' expiration) and not counting the Harry Reid surcharge: http://online.wsj.com/article/SB10001424052970204262304577068470560665732.html
The top corporate rate in Canada is 15% effective Jan 1 2012: http://www.canadabusinesstax.com/corporate-income-tax-rates/
The top federal rate in the U.S is 35%. Besides cuts in Canada, China cut its corp rate (Jan 2008) right while the US economy began tanking and Japan tried to, delayed by an earthquake.
Canada values energy production as a booming industry. We prefer to pay Venezuela, subsidize Brazil and block pipelines out of Canada.
Government revenues come from private sector vigor. The question is not what kind of political economic system did Canada use to be. The question is: What changed?
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The Canadian economy is closely tied to its largest trading partner, but avoided the housing crash for one thing because the CRAp (Community Reivestment Act program) did not apply to Canadian banks or houses. Common sense regulations are as important as minimizing tax disincentives.
The Economist magazine stated that Canada had come out the recession stronger than any other rich country in the G7. http://www.economist.com/node/16059938
All is not perfect in Canada either, just noting current growth there that is very easy to do here.
'The Economist' notes the looming problems there, the national healthcare system in particular. Once in place, those monstrosities are hard if not impossible to remove:
"But there is also a large dollop of good fortune behind Canada’s resilience. If parts of eastern Canada resemble Europe in economic terms, the west looks more like Brazil. Its mines, oil and gas producers and farmers have benefited from the commodity boom brought about by China’s appetite for raw materials. This boom brings a problem: it is helping to drive up the Canadian dollar, which risks making life more difficult for manufacturers back east. And Canada’s fiscal health will soon come under strain from the treasured but expensive public health-care system and an ageing population. There is little sign that the country’s politicians are ready to deal with either."
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"How about Canada?"
I have always like Canada; beautiful country and nice people. They have an excellent National Health Care plan for example. smiley Canada's tax rate is approximately 10% higher than ours. smiley Further, Canada's income tax system is more heavily biased against the highest income earners versus the U.S. smiley Makes sense to me... grin
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The policy arrow in Canada shifted the opposite of ours. Investors know it is becoming a better and better place to do business. Investors here keep getting the wait and see message out of Washington so the 'smart money' sits on the sidelines or goes elsewhere.
I agree Canada is a great place to do business. that said, it's less competitive than America, with less peaks and valleys. People are simply more content; good and bad.
For all your Calif. expertise you probably shouldn't tell someone here about Canadian heathcare. Whether you look at Duluth, MSP or Rochester, MN, not only the medical clinics but the restaurants and hotels here benefit greatly from Canadian healthcare. Let's leave that to the healthcare threads.
I bring up Canada's Health Care plan since that is a very real part of political economics.
The point of economic growth in Canada is that we used to outperform them.
I agree, but that is true for a variety of reasons. Some include the good points you have made, but we have other unique problems like funding wars, (a trillion dollars plus) etc. that they don't have.
The top federal income tax rate in Canada (29%) is not higher than in the US (39.6% after the Bush Obama 'temporary cut' expiration) and not counting the Harry Reid surcharge: http://online.wsj.com/article/SB10001424052970204262304577068470560665732.html
The top corporate rate in Canada is 15% effective Jan 1 2012: http://www.canadabusinesstax.com/corporate-income-tax-rates/
The top federal rate in the U.S is 35%. Besides cuts in Canada, China cut its corp rate (Jan 2008) right while the US economy began tanking and Japan tried to, delayed by an earthquake.
In Canada total tax and non-tax revenue for every level of government equals about 38.4% of GDP,[1] compared to the U.S. rate of 28.2%.[2]
^ "Index of Economic Freedom 2009: Canada". 2009.
^ "Index of Economic Freedom 2009: United States". 2009.
Canada values energy production as a booming industry. We prefer to pay Venezuela, subsidize Brazil and block pipelines out of Canada.
Canada other than oil doesn't have much choice. We do. Further, I and many Americans are concerned about the environmental hazards of drilling. Frankly, I'ld rather pollute Venezuela etc. than America. Then again, the oil industry does offer good paying jobs. Pros and Cons....
Government revenues come from private sector vigor. The question is not what kind of political economic system did Canada use to be. The question is: What changed?
I don't think Canada changed a whole lot. I do agree we changed, albeit not all Obama's fault. I just finished Steve Jobs biography. Great book. He is a liberal democrat and even he met with Obama and pleaded for regulatory changes and pro business changes. Taxes were not the issue. I agree wholeheartedly with Jobs. We need to make the government supportive and more business friendly otherwise there will never be growth.
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You have points of agreement in there but I must say that if you would rather the U.S. buy our needed energy from Venezuela than from America, which causes our costs go up, our dollars to leave, our jobs lost, supports the wrong causes around the world, leaves us vulnerability to supply disruptions, we lose government revenues off the lost production, deficits, debt and interest payments forever on those losses, then I would rather defeat you than persuade you to think otherwise.
Is drilling "pollution" in Alberta really further from home than drilling "pollution" in ANWR. Besides the straw argument of drilling pollution, I would check your map on that one.
The current issue is over a pipeline. Is transport from Venezuela cleaner? (No!)
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The current issue is over a pipeline. Is transport from Venezuela cleaner? (No!)
I'll be honest, I don't follow the drilling arguments closely. But I thought the pipeline issue was over pollution and threats to our environment? And if I had to guess, drilling in Venezuela and transporting the oil here is cleaner than drilling in America. That said, while I have reservations about a pipeline from Canada, I agree, the advantages seem to out weigh the negatives. I'ld vote for it.
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Working properly, a pipeline transports the oil inside the pipe. :-) The issue at hand is constuent group politics versus jobs and earned dollars in the economy - an easy choice for the President. Freighters and vessels and trucks burn oil and pollute and crash more often than a pipeline. We already have pipelines from Canada and pipelines inside the US. How do people think natural gas gets around?
"I don't follow the drilling arguments closely." - Other than mistakes and catastrophes, it is a very clean process. The caribou were all for it. The Alaskans are for it. The North Dakotans are for it. The Texans are for it. But the Feds don't want you to do it. In some areas, they own all the land.
We drove past the largest refinery in the region recently from an 8 hour round trip drive to a college visit. My daughter commented on the plume of steam going into the air (extremely clean steam compared to how they used to be). I don't know if she recognized the irony even with my pointing it out, that not wanting energy produced isn't compatible with all these non-essential drives that make up her life; there are perhaps a hundred colleges closer. Much worse for business travel. We could let the Chinese do that. :-(
If you want homes heated now, natural gas is the best answer. If you want mobility, oil. If you want alternating current at the outlet, then you will need coal and nuclear at the power plants. For hobbies, I like wind and solar. Our economy has energy requirements. Earning income, enjoying freedom and building prosperity all involve energy consumption. Consumption requires production somewhere. If you don't produce it here, you will pipe dollars and jobs out in amounts that make the cost of two wars look like childs' play, and we are. http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm Regulation to make production as clean and safe as currently and reasonably possible are great. Policies that stop energy production in its tracks just punishes ourselves and is one of the ways we are screwing ourselves over for decades if not generations.
One big argument against drilling in ANWR is that it would take 10 years to get up and running! What do we care about oil 10 years from now? That was more than 20 years ago. Now we fund 'ugo to buy bad things from Mahkmoud with the same money. And then deploy forces to stop them? Who knew?
Look back ten years. All that bickering about who got invited to Dick Cheney's energy commission. No plan was ever implemented. Just worse and worse public policies. We have far more control over how safe and how clean our energy is produced and same for the other products manufactured if we do it here.
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Working properly, a pipeline transports the oil inside the pipe. :-)
Yeah, I suppose you could say working properly oil tankers merely transport the oil inside the tanker. :-) And oil wells working properly don't spill. :-)
Other than mistakes and catastrophes, it is a very clean process.
Again, probably the same could be said of oil tankers and drilling.
But I get your point; there are negatives, but on the surface the benefits of a pipeline probably outweigh them.
If you want homes heated now, natural gas is the best answer. If you want mobility, oil. If you want alternating current at the outlet, then you will need coal and nuclear at the power plants. For hobbies, I like wind and solar.
Each has pros AND cons.
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"Each has pros AND cons."
The energy use today is a fact, not an issue. The choice of sending the dollars and jobs out instead of producing here is a part of a larger policy of choosing economic decline, and it didn't make the planet any cleaner.
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Somehow I doubt the planet will be better off if the Chinese are the ones burning the Canadian oil instead of us.
Concerning Canada, with his permission here are some comments from Canadian Tricky Dog concerning the post on Canada:
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It is true - and yet beware the selective reporting of facts.
At the same time, Harper has _raised_ personal taxes by changing the rules for Canada Pension Plan and Employment Insurance. The limits on both have been raised such that many people will be paying up to $1000 more.
Oh there is more to this unreported tax increase.
It applies specifically to those with higher income. And the employer actually contributes about 2/3 toward this increase - so it impacts corporations directly too (as well as entrepreneurs and small business). And the increase relates specifically to our social safety net - pensions and assistance to the newly unemployed. So, in fact, this change reinforces one of our so-called "socialist" mainstays. Finally, the reason for this personal tax increase is due to address our rapidly mounting debt - which the corporate break will exacerbate significantly.
There is our inconvenient truth.
Think the Tea Party would follow suit for the good of the nation?
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There is a simple solution that applies to both the US and Canada. Don't spend more than you can afford to spend.
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Thank you Crafty for getting the feedback from over the border. To be clear, I did not assume all is good or solved in Canada. They just seem to be performing better than most places right now. The info I looked up was that individual rates were dropping to 29%. I didn't post that because I didn't know rest of the details like what Tricky Dog comments - if deductions changed or offsetting tax increases.
The general point is that incentives are a little better overall I think, though not as good as claimed, and the economy is relatively strong.
Certainly the energy policies improve personal income, corporate income and government revenues.
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This discussion brings out an important point, there are two very different effects that come out of the tax policies:
1) The marginal rate, especially the top marginal rate, is the key indicator for incentive vs. disincentive to make an additional investment, to build, to grow, to hire, and
2) the total tax tells you how much money you transferred out of people's pockets over to the public treasury.
If you leave the tax rates the same but eliminate deductions, people lose more money to the government, all other things were held equal. In that situation, a person might actually try to work more to replace income lost (or go broke). Overall, the private economy is worse because people have less to spend and cut back their buying, without offsetting pro-growth policies.
In supply side policies, you typically lower the marginal tax rate for the next dollar earned. If you end up collecting more in total it is because of the business that unleashes, not leaving people with less.
Sounds like the Canadian plan and most proposals like that here have both of those qualities: lower the marginal rate but with other offsets like closing so-called loopholes that were yesterday's great idea to stimulate something. On balance, it is probably a good thing anytime the marginal rate is cut significantly, but it depends on the rest of the details!
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Last point: "...debt - which the corporate break will exacerbate significantly. "
If I read it correctly, the top federal corp tax rate in Canada was 19.5% 2008, 19% 2009, 18% 2010, 16.5% 2011 and 15% effective January 1, 2012. (Plus substantial provincial rates) http://www.taxrates.cc/html/canada-tax-rates.html For one thing, that is an incentive to defer income into the out-years.
It will be interesting to see if revenues collected at the lower rates actually go down. I predict revenues instead will grow but that debt will go up anyway, if it is like here (and like GM points out), because of spending.
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Doug:
I get and agree with your point. Because I respect Tricky Dog's perspective (even though his politics are considerably different than mine and those of most of us here) I thought to get his input; we search for Truth around here :-)
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Doug:
I get and agree with your point. Because I respect Tricky Dog's perspective (even though his politics are considerably different than mine and those of most of us here) I thought to get his input; we search for Truth around here :-)
Can anyone look at the world and reasonably think big government and central planning of economics works? I mean marxists have been the flat earthers of economics forever, but now Keyensians are flaming out as well.
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Ummm , , , wasn't the original point that the Canadians are doing better than us now because in great part they are moving towards freedom and we are moving away from it?
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Exactly, economic freedom combined with the rule of law creates prosperity, while big gov't and central planning eventually crash and burn. No matter where we look. If we have gov't healthcare here, where will the Canuckistanis go for medical treatment?
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Tricky checking in after being away for the holidays. Thanks to Crafty for forwarding a short reply I made on the Canadian situation.
While I am likely of another ideological stripe than many of you (judging from the rhetoric), I am far more interested in the ground truth - and good critical thinking - than odiously repeating any dogma. Regardless of whether one personally appreciates the recent actions of our government, one can hardly attribute Canada's strong economic state to them. There simply has not been enough time to show the consequences.
Check back in 5-10 years once the effects from the changes have filtered down through the economy. And through the social fabric.
If you want to look at the current evidence as indication of anything, consider that the strong banking regulatory environment (established long ago by more liberal governments) is in part responsible for our solid footing. And that we are a heavily resourced country with high international demand, particularly from Asia where we have very strong ties. And that we in Canada have not experienced the same degree of instability because we are not as free-market based (even if you take a Friedmannian view that they are not free enough and any issues arising are due to the extant limitations) as the US. Our relatively strong system of checks and balances has meant that we could ride this period out with less direct and collateral damage.
The Harper government only just achieved a majority last fall - they have been riding a minority government for several years - so it would be misleading to read the current signs as if their policies of the last few months are responsible. Prior to that, the centrist (for Canada) Liberal government was in power for decades and was primarily responsible for most of the current policy and our economic position. So if you want to find something laudable about our strength, look a bit further back in our history instead of singling out decisions made in the last 2 months. It takes years to define a stable economic position.
Of course, one of the things the current Harper government is in the process of doing is dismantling many of those shielding mechanisms - the 67 year old Canadian Wheat Board (which buys from all wheat farmers and represents them on the international market) has just been killed off. Harper is certainly a fan of free(r) markets and believes this change long over due. And let's check back in 10 years and see if we are all that better off.
He is also dismantling our long gun registry (being contested by the provinces), introducing a new hard-on-crime bill (without explaining how the significant new costs will be borne - and despite the general view that the same approach has failed in the US, economically as well as socially), backing out of climate change commitments, turning away from the UN, and building up our military.
Which may sound like an attractive cup of tea - but note that he is simultaneously severely limiting debate in Parliament, raising personal taxes (as mentioned), reorganized the Senate by adding 35 new appointed senators, reducing the transparency and accountability of the government (e.g. closing committee meetings to the public watchdogs who are supposed to oversee and report on the government), dropping our detailed census (that provides facts for effective public policy), and committing the country to expensive, non-economic programs (e.g. military spending, military activity, new prisons, border security unification) without proper accounting and in the face of mounting debt.
Note that, although the government holds majority in House and Senate, they only won 40% of the popular vote - and yet they regularly claim a mandate from the people as the justification for rushing bills through without more than cursory debate.
So before anyone including the media starts cherry-picking facts from our experience and imagining a causal relationship with our economic performance, I would encourage you to research a little deeper.
There is a bald irony present: When our healthcare system was being referenced as a possible model for the US, most (including myself) were quick to say that Canada has a very different scale and nature. Any comparisons would hardly be appropriate or meaningful. But now that the actions of our current government align ideologically with a more conservative approach, Canada suddenly becomes a model for the US or proof of the value of a particular viewpoint? That is convenient and selective, not critical, thinking.
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"I am far more interested in the ground truth - and good critical thinking - than odiously repeating any dogma."
Agreed.
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I have just opened a Canada thread. Lets continue this conversation there.
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All The Emperors Are Naked - by Brian S. Wesbury
Hyperbole Alert! Washington’s latest legislation – the one extending the payroll tax cut – may be the worst piece of legislation ever passed.
I told you to get ready for hyperbole.
It clearly isn’t the most damaging piece of legislation ever passed. There are many others that were worse. But, this one little piece of legislation is the epitome of political nonsense.
It’s not that Democrats and Republicans can’t work together. It’s because they are working together. Getting something done is a religion in DC. The House passed this bill by unanimous consent. Not one (1) single member objected.
Many Republicans supported the bill because they thought they would lose votes in upcoming elections if they didn’t support something. Leading journalists told them so. Democrats got their payroll tax cut and extended unemployment benefits. They will call this “stimulus” and take credit for a growing economy.
But the bill, when looked at from an economic point of view makes absolutely no sense. Each of its five parts exposes a problem with Washington. Let’s look at them one by one.
The Payroll Tax Cut
So many people have been erased from the income tax rolls that cutting income tax rates does nothing for them. This leaves payroll taxes as the only populist tool for politicians.
But, a 2% cut in Social Security tax rates does not boost economic output because it is not a cut in the top marginal tax rates. This means the government must make up any revenue loss by cutting spending (which it never does), borrowing more or raising taxes on someone else. But, taking money from one group to give to another is a zero sum game, at best.
In the year since the 2% tax cut was initiated in January 2011, and with the Fed super easy, consumption increased at an annual rate of 4.3% – unchanged from the 4.2% growth rate for all of 2010, the year prior to the cut. The tax cut did nothing. Only marginal tax rate cuts will increase growth.
Unemployment Benefits Extension
This is the one that always trips up politicians because no one wants to be on record against it. Yet, it is clear that two-year unemployment benefits have done little to create jobs. This is a European-style, Keynesian pump-primer. It has never worked in Europe, and it won’t work in the US. The reason unemployment is so high these days is because government is so big. The US needs to cut spending, not increase it.
Increased Fees on Fannie Mae and Freddie Mac
Every bill Congress passes is supposed to be “paid for” by offsetting cuts in spending, or tax hikes. This explains the two month extensions. It’s cheaper to fund than a full year.
But even two month cuts need to be paid for, so Congress levied more fees on Fannie Mae and Freddie Mac. So what do fees on mortgage providers have to do with social security tax cuts? The answer is: nothing.
Social Security tax cuts should be paid for by cutting future social security benefits. If Congress was honest about this, Americans would probably not support a tax cut today for lower benefits tomorrow. It would be called eating our seed-corn. Unfortunately, we already ate it (we spend every dime Social Security brings in). So this tax cut just makes our already underfunded plan even more underfunded. Congress avoids this by putting more fees on home ownership.
But raising fees on Fannie and Freddie makes no sense. These companies are already losing money. Congress is not going to put these funds into escrow to pay for future losses…it is going to spend the money today. Future taxpayers will still be on the hook for losses. The fees also perpetuate the myth that Congress knows how to price mortgages by setting fees at the perfect level. They should be closing down Fannie and Freddie, not making them a bigger part of government.
The “Doc Fix”
Back in 1997, Congress passed a balanced budget act that was supposed to control spending, partly by holding back the growth rate of Medicare spending. Medicare payments to doctors were supposed to be held down by a formula. In the first few years, these reductions were small, but Congress avoided them anyway and by passing a “doc fix” every year, kept kicking the can down the road.
So, today, in order to comply with these cuts (which have never been allowed to happen), doctor reimbursements need to fall by a whopping 27.4%. If this were to happen, doctors who treat Medicare patients would be up in arms. No Congress-person wants that – it’s not good for business.
So, Congress used this bill to push off these cuts again. It also “kicked the can” on eleven other items as well. Along with the “doc fix,” Congress also made sure cuts to ambulance and mental health add-ons, bone mass measurement, outpatient treatments, and other varied items, did not happen.
This behavior, which everyone in Washington knows happens every year, is about to go into hyper-drive. President Obama promised roughly $500 billion of future Medicare cuts would help pay for Obamacare. These future cuts are based on formulas very similar in design to the 1997 bill. So, why would anyone believe Congress won’t do the same thing all over again? When faced with the choice of cutting spending or making a constituent mad…Congress always chooses the constituents…and not the ones who pay for it all.
But it gets even worse. Every year, the Congressional Budget Office (CBO) assumes that Congress will follow through on its 1997 agreement when it scores the budget. So, the deficit forecast for the next decade assumes a cut in doctor reimbursements that everyone knows won’t happen. When the budget deficit rises more than expected, everyone in Washington expresses amazement, regret and surprise and then blames it on the private sector and the rich for not paying enough taxes. Is this a messed up system or what?
The Keystone Pipeline
Republicans used this bill to force President Obama to make a decision within 60 days on the Keystone Pipeline extension. This project would have already been put in place if private businesses, and private money, were the only deciding factors. But, politicians in the US are subsidizing unprofitable solar and wind power, while holding-up and penalizing traditional, privately-funded, carbon-based fuel sources. From an economic point of view the pipeline is a no-brainer, making this the only economically sane part of this bill. But, it still highlights the broken nature of Washington.
The Worst Bill in History
Any business that ran this way would be out of business. Government, because it has so much control and power, can avoid the inevitable for a little longer. But eventually the game comes to an end. And that’s exactly what is happening in Europe right now. The Welfare State has come to its logical conclusion – bankruptcy.
Spain, for example, just admitted its deficit is 8.5% of GDP, not the 6% that it was publicizing. So, it is proposing a package of tax hikes and spending cuts equal to 1.5% of GDP. This will leave the deficit at 7% of GDP, even though it had promised under new rules to get it down to 4.5%.
Governments seem unwilling to deal with issues that are relatively straight-forward. It’s not hard to understand. Spending needs to be paid for by taxes, but taxes undermine the incentives to produce and invest and push business to other countries. Eventually government spends so much that the economy cannot support it (no matter how much tax rates rise) and bond buyers go on strike. Many European countries have reached that point.
The United States is not there yet. However, it is slowly and surely approaching that day if nothing changes. Politics as usual is not working. It produces inane bills like the one described above. Every piece of the bill just passed points to a government that has run out of any self control.
Somehow it is easier to keep spending…and Congress acts like no one will ever figure it out. It links Social Security tax cuts to mortgage fees, it ignores rules that it previously agreed to and promised to follow through on, it stimulates an economy that does not need to be stimulated. It continues programs that don’t work. And the entire time it is doing this it keeps telling us that without government everything would fall apart.
It’s a broken system and the only common theme that runs through it is a considerable effort to get re-elected. It is becoming more clear by the day, that all the Emperors are naked…there are no more clothes.
The good news is that the electorate is waking up, the European Welfare State is failing and history suggests the US will find a way to correct its course before it’s too late.
Click here for a printable PDF.
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It has been two and a half years since the recession ended, but the economy finally had a modestly bullish jobs report on Friday. The private economy created 212,000 net new jobs in December, taking the unemployment rate down a tick to 8.5%. That is hardly a figure to celebrate, but it beats the 9% rate that prevailed as recently as September.
Enlarge Image
Close...Most private occupational areas gained jobs, even manufacturing (23,000) and construction (17,000), and the ranks of the long-term unemployed fell to a still too high 42.5% from 43.1% in November. Government lost jobs (12,000) overall, but that is good news because it means state and local governments are continuing to adjust their employee levels to actual revenues. No more artificially inflated payrolls due to deficit-financed federal "stimulus."
After two years of paltry wage gains, the hourly wage rose by 0.2% in December. The work week also expanded by 0.1 hours, a sign of increased business demand for workers.
Columnist Mary Anastasia O'Grady explains the latest unemployment stats.
.One continuing sign of employment weakness is the still-low labor force participation rate, which remained unchanged at 64%. That is down from 64.3% a year ago. Another 50,000 workers left the labor force in December, suggesting that many Americans have simply stopped looking for work. As the nearby chart shows, in 2007 when jobs were plentiful the labor force participation rate was 66%. The two percentage point decline is the equivalent of about three million fewer Americans working or looking for work.
President Obama naturally trumpeted December's report as a sign that his economic policies are working, but if that's true it's sure taken a long time. The most important jobs number may be 5.8 million, which is the number of jobs the economy still hasn't recovered from peak employment in 2007. This is still the slowest jobs rebound since the Great Depression.
One issue to watch going forward is the durability of both GDP and the jobs recovery. A year from now, if no policies change, Mr. Obama's tax bombs will explode at once, with the expiration of the Bush tax rates, the expiration of his payroll tax holiday (assuming it is extended next month to a full year), and the rollout of ObamaCare's levies.
As the year progresses, we need to see if businesses will expand or hire new workers into that trillion-dollar tax headwind. If Mr. Obama wants more positive job reports like yesterday's, he should announce that he is calling the tax hike off.
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Good to see Wesbury to get his attention back on the political side of the economic mess, even if it is to criticize Republicans, because that is the only place where it can be solved. Great to see him explaining the importance of marginal rates over the concept of just money changing hands or not.
Crafty noted previously how weak Speaker Boehner looked on the so-called payroll tax cut issue, amazingly leaving Dems to look like the party of tax cutting. True. He caved without ever saying why it was bad policy, why they were apprehensive about allowing the defunding of S.S. to become long term or permanent. To do so he would have had to become the great defender of the of our largest entitlement, instead of hopefully its reformer.
The Dems think they pulled a clever one here. Wesbury nailed it. With half the taxpayers paying nothing in income tax, this is all their side has left to play with on the tax side. They turned it into the new minimum wage issue of politics, where all economists know it is bad policy and no one will say so politically.
But that the short term non-gain for Dems has great potential IMO for a long term loss. They 'succeeded' in defunding Social Security in exchange for a non-existent stimulus and a trivial political gain. Like Wesbury says, it passed the Republican House unanimously so what did Democrats really gain in bragging rights? Nothing, just the appearance of being out front on that. To avoid another showdown, the Republicans have already decided to cave again in 2 months. The question becomes, what then? In my view that removes the most powerful argument in defense of S.S. as we know it - that it is paid for and it is your money. This actually helps open the door for serious future reforms IMO.
There will never be a good time to "raise taxes" on social security so they will never again be able to say that it pays for itself. If you are tucking 2% less of your income away for retirement in this public fund, at some point you had better think about tucking some away privately for your retirement - a novel idea. The left will try to raise or eliminate the income ceiling, but at some point that removes the original premise, we were pretending it is your money stored securely by great bureaucrats in a lock box to return back to you in your old age.
If they 'succeed' in raising the tax on the rich by the same 15.3% at the margin, they a) can't grow the economy, and b) they can't argue that what they turned into a giant redistributive plan is your money stored for you in a lockbox anymore.
It seems to me that sometime in the future only the poor from among America's wealthiest demographic group will be collecting the entitlement formerly known as Social Security. Defund it and shrink it - that's fine with me. I don't think Democrats of the 1960s (or 1930s) would think it was Republicans who blinked on this one.
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Doc Fix and a number of similar tricks in CBO scoring:
Wesbury continued: "...the Congressional Budget Office (CBO) assumes that Congress will follow through on its 1997 agreement when it scores the budget. So, the deficit forecast for the next decade assumes a cut in doctor reimbursements that everyone knows won’t happen."
Let's see, everyone knows CBO numbers are complete BS yet are quoted and relied on constantly. When Republicans are done fighting Republicans maybe they can address structural problems that confront us. Baseline budgeting (often attacked here and hardly anywhere else), static scoring and now this excellent point of Wesbury's - that CBO is scoring the letter of the law instead of what everyone knows is true. These are things a real leader will need to address, attack and win on, if and when a leader emerges.
Gingrich already promised a fix 18 years ago: "On the first day of their majority in the House, the Republicans promise to pass eight major reforms...8. guarantee an honest accounting of the Federal Budget by implementing zero base-line budgeting." They either never got it done or the fix did not last. At least we know he is aware of the problem. If Romney plans to take a CEO mentality to the job, a real CEO does not put up with basing important decisions on know to be bad numbers. He certainly has a strong enough economic team to address that.
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Wesbury on the pipeline: "From an economic point of view the pipeline is a no-brainer, making this the only economically sane part of this bill."
Hey, give Speaker Boehner some credit here! :-)
The pipeline, like drilling, like fracking and just legalizing clean energy production in general is more than symbolic in sending a message to the country and to the world that America will be to pursuing economic strength and prosperity going forward.
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http://www.usnews.com/opinion/mzuckerman/articles/2012/01/06/mort-zuckerman-we-must-reignite-americas-can-do-spirit
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What country is the leader in correcting inequality unfairness??
Greece.
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http://www.washingtonpost.com/opinions/angry-about-inequality-dont-blame-the-rich/2012/01/03/gIQA9S2fTQ_story.html?hpid=z2
Angry about inequality? Don’t blame the rich.
By James Q. Wilson, Published: January 26
There is no doubt that incomes are unequal in the United States — far more so than in most European nations. This fact is part of the impulse behind the Occupy Wall Street movement, whose members claim to represent the 99 percent of us against the wealthiest 1 percent. It has also sparked a major debate in the Republican presidential race, where former Massachusetts governor Mitt Romney has come under fire for his tax rates and his career as the head of a private-equity firm.
And economic disparity was the recurring theme of President Obama’s State of the Union address on Tuesday. “We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” the president warned, “or we can restore an economy where everyone gets a fair shot and everyone does their fair share.”
But the mere existence of income inequality tells us little about what, if anything, should be done about it. First, we must answer some key questions. Who constitutes the prosperous and the poor? Why has inequality increased? Does an unequal income distribution deny poor people the chance to buy what they want? And perhaps most important: How do Americans feel about inequality?
To answer these questions, it is not enough to take a snapshot of our incomes; we must instead have a motion picture of them and of how people move in and out of various income groups over time.
The “rich” in America are not a monolithic, unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half of people in the top 1 percent in 1996 were still there in 2005. Such mobility is hardly surprising: A business school student, for instance, may have little money and high debts, but nine years later he or she could be earning a big Wall Street salary and bonus.
Mobility is not limited to the top-earning households. A study by economists at the Federal Reserve Bank of Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years. Over the same period, more than a third of those in the highest fifth of income-earners had moved down. Certainly, there are people such as Warren Buffett and Bill Gates who are ensconced in the top tier, but far more common are people who are rich for short periods.
And who are the rich? Affluent people, compared with poor ones, tend to have greater education and spouses who work full time. The past three decades have seen significant increases in real earnings for people with advanced degrees. The Bureau of Labor Statistics found that between 1979 and 2010, hourly wages for men and women with at least a college degree rose by 33 percent and 20 percent, respectively, while they fell for all people with less than a high school diploma — by 9 percent for women and 31 percent for men.
Also, households with two earners have seen their incomes rise. This trend is driven in part by women’s increasing workforce participation, which doubled from 1950 to 2005 and which began to place women in well-paid jobs by the early 1980s.
We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce — but who would want to do that?
The real income problem in this country is not a question of who is rich, but rather of who is poor. Among the bottom fifth of income earners, many people, especially men, stay there their whole lives. Low education and unwed motherhood only exacerbate poverty, which is particularly acute among racial minorities. Brookings Institution economist Scott Winshiphas argued that two-thirds of black children in America experience a level of poverty that only 6 percent of white children will ever see, calling it a “national tragedy.”
Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.
Income inequality has increased in this country and in practically every European nation in recent decades. The best measure of that change is the Gini index, named after the Italian statistician Corrado Gini, who designed it in 1912. The index values vary between zero, when everyone has exactly the same income, and 1, when one person has all of the income and everybody else has none. In mid-1970s America, the index was 0.316, but it had reached 0.378 by the late 2000s. One of the few nations to see its Gini value fall was Greece, which went from 0.413 in the 1970s to 0.307 in the late 2000s. So Greece seems to be reducing income inequality — but with little to buy, riots in the streets and economic opportunity largely limited to those partaking in corruption, the nation is hardly a model for anyone’s economy.
Poverty in America is certainly a serious problem, but the plight of the poor has been moderated by advances in the economy. Between 1970 and 2010, the net worth of American households more than doubled, as did the number of television sets and air-conditioning units per home. In his book “The Poverty of the Poverty Rate,” Nicholas Eberstadt shows that over the past 30 or so years, the percentage of low-income children in the United States who are underweight has gone down, the share of low-income households lacking complete plumbing facilities has declined, and the area of their homes adequately heated has gone up. The fraction of poor households with a telephone, a television set and a clothes dryer has risen sharply.
In other words, the country has become more prosperous, as measured not by income but by consumption: In constant dollars, consumption by people in the lowest quintile rose by more than 40 percent over the past four decades.
Income as measured by the federal government is not a reliable indicator of well-being, but consumption is. Though poverty is a problem, it has become less of one.
Historically, Americans have had an unusual attitude toward income inequality. In 1985, political scientists Sidney Verba and Gary Orren published a book that compared how liberals in Sweden and in the United States viewed such inequality. By four or five to one, the Swedish liberals were more likely than the American ones to believe that it was important to give workers equal pay. The Swedes were three times more likely than the Americans to favor putting a top limit on incomes. (The Swedes get a lot of what they want: Their Gini index is 0.259, much lower than America’s.)
Sweden has maintained a low Gini index in part by having more progressive tax rates. If Americans wanted to follow the Swedish example, they could. But what is the morally fair way to determine tax rates — other than taxing everyone at the same rate? The case for progressive tax rates is far from settled; just read Kip Hagopian’s recent essay in Policy Review, which makes a powerful argument against progressive taxation because it fails to take into account aptitude and work effort.
American views about inequality have not changed much in the past quarter-century. In their 2009 book “Class War? What Americans Really Think About Economic Inequality,” political scientists Benjamin Page and Lawrence Jacobs report that big majorities, including poor people, agree that “it is ‘still possible’ to start out poor in this country, work hard, and become rich,” and reject the view that it is the government’s job to narrow the income gap. More recently, a December Gallup poll showed that 52 percent of Americans say inequality is “an acceptable part” of the nation’s economic system, compared with 45 percent who deemed it a “problem that needs to be fixed.” Similarly, 82 percent said economic growth is “extremely important” or “very important,” compared with 46 percent saying that reducing the gap between rich and poor is extremely or very important.
Suppose we tax the rich more heavily — who would get the money, and for what goals?
Reducing poverty, rather than inequality, is also a difficult task, but at least the end is clearer. One new strategy for helping the poor improve their condition is known as the “social impact bond,” which is being tested in Britain and has been endorsed by the Obama administration. Under this approach, private investors, including foundations, put up money to pay for a program or initiative to help low-income people get jobs, stay out of prison or remain in school, for example. A government agency evaluates the results. If the program is succeeding, the agency reimburses the investors; if not, they get no government money.
As Harvard economist Jeffrey Liebman has pointed out, for this system to work there must be careful measures of success and a reasonable chance for investors to make a profit. Massachusetts is ready to try such an effort. It may not be easy for the social impact bond model to work consistently, but it offers one big benefit: Instead of carping about who is rich, we would be trying to help people who are poor.
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James Q. Wilson, a former professor at Harvard University and UCLA, is the Ronald Reagan professor of public policy at Pepperdine University.
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http://www.zerohedge.com/news/implied-unemployment-rate-rises-115-spread-propaganda-number-surges-30-year-high
Implied Unemployment Rate Rises To 11.5%, Spread To Propaganda Number Surges To 30 Year High
Submitted by Tyler Durden on 02/03/2012 09:35 -0500
BLS Bureau of Labor Statistics Real Unemployment Rate Unemployment
Sick of the BLS propaganda? Then do the following calculation with us: using BLS data, the US civilian non-institutional population was 242,269 in January, an increase of 1.7 million month over month: apply the long-term average labor force participation rate of 65.8% to this number (because as chart 2 below shows, people are not retiring as the popular propaganda goes: in fact labor participation in those aged 55 and over has been soaring as more and more old people have to work overtime, forget retiring), and you get 159.4 million: that is what the real labor force should be. The BLS reported one? 154.4 million: a tiny 5 million difference. Then add these people who the BLS is purposefully ignoring yet who most certainly are in dire need of labor and/or a job to the 12.758 million reported unemployed by the BLS and you get 17.776 million in real unemployed workers. What does this mean? That using just the BLS denominator in calculating the unemployed rate of 154.4 million, the real unemployment rate actually rose in January to 11.5%. Compare that with the BLS reported decline from 8.5% to 8.3%. It also means that the spread between the reported and implied unemployment rate just soared to a fresh 30 year high of 3.2%. And that is how with a calculator and just one minute of math, one strips away countless hours of BLS propaganda.
Difference between Reported and Implied Unemployment Rate
Click on the link to see the charts
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Well it seems the financial markets are impressed. If this keeps up, I guess we will have Obama for 4 more years :-o
Stocks were pushed up Friday by new signs that the U.S. economy -- and the employment situation -- are on the mend. The day began with one of the most promising employment reports in a long time, showing that the economy added 243,000 jobs, or 100,000 more than economists were expecting. That was enough to bring the unemployment rate down to 8.3% from 8.5%.
A short while later, news hit that the service sector was growing faster than expected, according to a closely watched index from the Institute for Supply Management.
Dow finishes at highest since 2008, Nasdaq at highest since 2000
http://www.latimes.com/business/money/la-fi-mo-good-markets-20120203,0,6751385.story
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"Implied Unemployment Rate Rises To 11.5%, Spread To Propaganda Number Surges To 30 Year High"
That number I think matches more closely with what people are experiencing. Remember that when no one seems to be hiring, even many of the fully employed have lost the economic freedom to quit work that is unpleasant or unchallenging/unfulfilling and make a good career move to something more rewarding.
If you are willing and able and not holding a job or earning a full time income, then you are unemployed at some level no matter where you have applied or how long that has been the case. It is very difficult to measure accurately. Passing around resumes or turning in applications to companies either not hiring or not hiring you as an exercise to get unemployment compensation is not the only measure or best measure of economic health or sickness.
If Republicans wanted to run up the bad statistics (with this same real economy) on Pres. Obama they should have opened up and extended unemployment benefits for all at least through Nov 6 2012. Then you would not see the exodus from the labor force.
Economic growth is a better indicator IMO of economic health than unemployment. (Growth less than 3.1% is considered moving backwards and we are.) People also leave the employed and unemployed rolls to become entrepreneurs. How much you earn is more important than whether you are securely working for someone else. Our entrepreneurial-based economy has the PAUSE button stuck on.
If you are unemployed right now, remember that the new tax on the so-called wealthy (someone other than you) is causing your next potential employer to re-consider whether to expand his or her business. Just having the idea seriously on the table causes uncertainty, inaction and delays with business expansions. The us vs. them game is really just us trying to work in a fully integrated economy. You can't take the profits or take the incentives out of business and still grow jobs and grow worker paychecks. Employers will pay you more when the economy is loaded with opportunities for you to leave and be more valuable elsewhere. Insanity is to not learn that after all we've been through.
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"Well it seems the financial markets are impressed."
Nothing boosts productivity and profits in a stalled economy like existing companies (DOW, S&P etc) employing fewer workers.
If the LA Times is reporting actual job lasses as adjusted job gains because of BLS scoring, that sounds more like a media issue (deplorable lack of curiosity to go deeper than a flawed government report) and a problem with another government agency program.
In better economic news, fewer people are buying that line - the revenues and subscription base of the LA Times is still declining http://articles.latimes.com/2011/nov/02/business/la-fi-newspaper-circulation-20111102 while the WSJ is now number one in the nation. :-)
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"Well it seems the financial markets are impressed."
Yes, Obozo is going to Solyndra his way to re-election. How's California's green economy going these days?
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Doug, why criticize the LA Times? Nothing changed; the WSJ was also number one in the nation 10 years ago! Your point? :?
Of course the WSJ is number one; it has a national/international circulation.....
But my point had nothing to do with the LA Times.
Most would consider the stock market to be a leading indicator....
Notwithstanding or ignoring your own personal analysis :-) the market today is made up of mostly very sophisticated large analytical investors.
I'm sure they do not have a "deplorable lack of curiosity to go deeper than a flawed government report" :-o
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JDN raises an interesting theoretical question of import here. In that we are talking about the behavior of the stock market, lets take it to the Stock Market thread.
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This could go also in Presidential 2012 because Thomas Sowell launches into this as a rip on candidate Romney for an escalating minimum wage statement he made. Republicans gave up this fight because fighting against minimum wage laws doesn't poll well. Butur economy and our society suffers and indeing it to inflation makes the damage permanent. The question should not be how much to pay someone before they develop any skills or positive work habits. The question should be: who should decide? The answer is employees and employers negotiating in a free markets, not government, state or federal.
http://www.realclearpolitics.com/articles/2012/02/07/a_defining_moment_113044.html
February 7, 2012
A Defining Moment
By Thomas Sowell
Governor Mitt Romney's statement about not worrying about the poor has been treated as a gaffe in much of the media, and those in the Republican establishment who have been rushing toward endorsing his coronation as the GOP's nominee for president -- with 90 percent of the delegates still not yet chosen -- have been trying to sweep his statement under the rug.
But Romney's statement about not worrying about the poor -- because they "have a very ample safety net" -- was followed by a statement that was not just a slip of the tongue, and should be a defining moment in telling us about this man's qualifications as a conservative and, more important, as a potential President of the United States.
Mitt Romney has come out in support of indexing the minimum wage law, to have it rise automatically to keep pace with inflation. To many people, that would seem like a small thing that can be left for economists or statisticians to deal with.
But to people who call themselves conservatives, and aspire to public office, there is no excuse for not being aware of what a major social disaster the minimum wage law has been for the young, the poor and especially for young and poor blacks.
It is not written in the stars that young black males must have astronomical rates of unemployment. It is written implicitly in the minimum wage laws.
We have gotten so used to seeing unemployment rates of 30 or 40 percent for black teenage males that it might come as a shock to many people to learn that the unemployment rate for sixteen- and seventeen-year-old black males was just under 10 percent back in 1948. Moreover, it was slightly lower than the unemployment rate for white males of the same age.
How could this be?
The economic reason is quite plain. The inflation of the 1940s had pushed money wages for even unskilled, entry-level labor above the level specified in the minimum wage law passed ten years earlier. In other words, there was in practical effect no national minimum wage law in the late 1940s.
My first full-time job, as a black teenage high-school dropout in 1946, was as a lowly messenger delivering telegrams. But my starting pay was more than 50 percent above the level specified in the Fair Labor Standards Act of 1938.
Liberals were of course appalled that the federal minimum wage law had lagged so far behind inflation -- and, in 1950, they began a series of escalations of the minimum wage level over the years.
It was in the wake of these escalations that black teenage unemployment rose to levels that were three or four times the level in 1948. Even in the most prosperous years of later times, the unemployment rate for black teenage males was some multiple of what it was even in the recession year of 1949. And now it was often double the unemployment rate for white males of the same ages.
This was not the first or the last time that liberals did something that made them feel good about themselves, while leaving havoc in their wake, especially among the poor whom they were supposedly helping.
For those for whom "racism" is the explanation of all racial differences, let me assure them, from personal experience, that there was not less racism in the 1940s.
For those who want to check out the statistics -- and I hope that would include Mitt Romney -- they can be found detailed on pages 42 to 45 of "Race and Economics" by Walter Williams.
Nor are such consequences of minimum wage laws peculiar to blacks or to the United States. In Western European countries whose social policies liberals consider more "advanced" than our own, including more generous minimum wage laws and other employer-mandated benefits, it has been common in even prosperous years for unemployment rates among young people to be 20 percent or higher.
The economic reason is not complicated. When you set minimum wage levels higher than many inexperienced young people are worth, they don't get hired. It is not rocket science.
Milton Friedman explained all this, half a century ago, in his popular little book for non-economists, "Capitalism and Freedom." So have many other people. If a presidential candidate who calls himself "conservative" has still not heard of these facts, that simply shows that you can call yourself anything you want to.
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My first time putting Krugman in Political Economics instead of Cognitive Dissonance because he doesn't in this column get to the part of what he would do about it. (More of the same - much more.)
http://www.nytimes.com/2012/02/06/opinion/krugman-things-are-not-ok.html?_r=1
Op-Ed Columnist
Things Are Not O.K.
By PAUL KRUGMAN
Published: February 5, 2012
In a better world — specifically, a world with a better policy elite — a good jobs report would be cause for unalloyed celebration. In the world we actually inhabit, however, every silver lining comes with a cloud. Friday’s report was, in fact, much better than expected, and has made many people, myself included, more optimistic. But there’s a real danger that this optimism will be self-defeating, because it will encourage and empower the purge-and-liquidate crowd.
So, about that jobs report: it was genuinely good, certainly compared with the dreariness that has become the norm. Notably, for once falling unemployment was the real thing, reflecting growing availability of jobs rather than workers dropping out of the labor force, and hence out of the unemployment measure.
Furthermore, it’s not hard to see how this recovery could become self-sustaining. In particular, at this point America is seriously under-housed by historical standards, because we’ve built very few houses in the six years since the housing bubble popped. The main thing standing in the way of a housing bounce-back is a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can’t afford to move out. Let enough Americans find jobs and get homes of their own, and housing, which got us into this slump, could start to power us out.
That said, our economy remains deeply depressed. As the Economic Policy Institute points out, we started 2012 with fewer workers employed than in January 2001 — zero growth after 11 years, even as the population, and therefore the number of jobs we needed, grew steadily. The institute estimates that even at January’s pace of job creation it would take us until 2019 to return to full employment.
And we should never forget that the persistence of high unemployment inflicts enormous, continuing damage on our economy and our society, even if the unemployment rate is gradually declining. Bear in mind, in particular, the fact that long-term unemployment — the percentage of workers who have been out of work for six months or more — remains at levels not seen since the Great Depression. And each month that this goes on means more Americans permanently alienated from the work force, more families exhausting their savings, and, not least, more of our fellow citizens losing hope.
So this encouraging employment report shouldn’t lead to any slackening in efforts to promote recovery. Full employment is still a distant dream — and that’s unacceptable. Policy makers should be doing everything they can to get us back to full employment as soon as possible.
Unfortunately, that’s not the way many people with influence on policy see it.
Very early in this slump — basically, as soon as the threat of complete financial collapse began to recede — a significant number of people within the policy community began demanding an early end to efforts to support the economy. Some of their demands focused on the fiscal side, with calls for immediate austerity despite low borrowing costs and high unemployment. But there have also been repeated demands that the Fed and its counterparts abroad tighten money and raise interest rates.
What’s the reasoning behind those demands? Well, it keeps changing. Sometimes it’s about the alleged risk of inflation: every uptick in consumer prices has been met with calls for tighter money now now now. And the inflation hawks at the Fed and elsewhere seem undeterred either by the way the predicted explosion of inflation keeps not happening, or by the disastrous results last April when the European Central Bank actually did raise rates, helping to set off the current European crisis.
But there’s also a sort of freestanding opposition to low interest rates, a sense that there’s something wrong with cheap money and easy credit even in a desperately weak economy. I think of this as the urge to purge, after Andrew Mellon, Herbert Hoover’s Treasury secretary, who urged him to let liquidation run its course, to “purge the rottenness” that he believed afflicted America.
And every time we get a bit of good news, the purge-and-liquidate types pop up, saying that it’s time to stop focusing on job creation.
Sure enough, no sooner were the new numbers out than James Bullard, the president of the St. Louis Fed, declared that the new numbers make further Fed action to promote growth unnecessary. And the sad truth is that the good jobs numbers have definitely made it less likely that the Fed will take the expansionary action it should.
So here’s what needs to be said about the latest numbers: yes, we’re doing a bit better, but no, things are not O.K. — not remotely O.K. This is still a terrible economy, and policy makers should be doing much more than they are to make it better.
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http://www.nationalreview.com/exchequer/290140/armageddon-strip-mall
Armageddon at the Strip Mall
By Kevin D. Williamson
February 4, 2012 4:00 A.M.
Remember 2007? Glory days, right? Everything was booming, and nothing was booming quite as much as real estate — especially commercial real estate. Malls, hotels, warehouses, industrial parks: Everything was being built, and everything was being financed on ridiculously generous terms. Remember interest-only loans? Good times.
But commercial real estate is different from residential in one important way: Your standard residential mortgage goes 20 to 30 years. Your standard commercial loan goes for five years, at the end of which you either make a big balloon payment (what it is that balloons remind me of?) or you refinance, the idea being that five years is long enough to get your project built or developed, to secure tenants and leases, get your cash flow flowing, etc. Five years: Seems like it was only yesterday. By my always-suspect English-major math, that means that a whole bunch of commercial mortgages written at that poisonous sweet spot when prices were highest but lending standards were lowest are coming due . . . oh, any minute now.
In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP. That’s going to be a little awkward: The value of U.S. commercial properties has declined by an average of 45.7 percent since their all-time high in 2007, according to Real Capital Analytics. Those 2007 vintage loans weren’t exactly bulletproof: Typical terms included a 20 percent down payment and a five-year payment schedule that required little more than interest payments. An $80 million mortgage on a $100 million property is not so bad, but an $80 million mortgage on what is now a $60 million property is a problem. More than half of the 2007-vintage loans are expected to have trouble refinancing, and maybe well more than half.
This is true even for borrowers who have never missed a payment. Banks are required to take into account a number of factors when rating commercial mortgages. One of the most important is the loan-to-value ratio, which has a lot of borrowers over a particularly uncomfortable barrel: They may have the cash to make their payments, and they may have the cash flow to continue making payments on a refinanced loan, but their properties still are worth less than their mortgages, so nobody wants to refinance. And those are the lucky ones: Just as those loans were mostly for five years, most commercial leases are for about the same length of time. With retail and office-space rentals down, lots of commercial borrowers are sitting on largely vacant properties that are not producing much in the way of cash flow. Among the more high-profile cases, the WTC 3 tower at the World Trade Center still has not located an anchor tenant, which could put the much of the project on ice. Thousands of strip malls across the fruited plains have empty storefronts, and thousands of office buildings have floor upon vacant floor.
Standard & Poor’s advises: “One-third of maturing loans are for office properties, for which five-year lease terms are fairly common — and if tenants don’t renew these leases, securing new, long-term lease commitments may be more difficult in the current environment. Those leases [were] signed in 2007, at peak rents will likely reset to lower levels as five-year leases roll.” S&P’s bottom line: “50%-60% of the 2007 vintage five-year-term loans maturing next year may fail to refinance, and retail loans are at the greatest risk.”
Translation: Armageddon at the strip mall.
And it’s not just a problem for New York City and other big, coastal cities. Richmond, Va., has it worse than Manhattan, Washington, or Los Angeles, according to the local Times-Dispatch, which reports that a dozen large commercial properties have gone into foreclosure recently and that 12 percent of the commercial properties in the Richmond-Norfolk market are “distressed.” In Bergen County, N.J., commercial foreclosures are up 7 percent this year over last year. In the first year of the recession, there were 373 foreclosure actions filed in Bergen County, while in 2011 there were 1,586. Commercial foreclosures are up 10 percent for the state as a whole.
In hard-hit Phoenix, about half of the commercial mortgages backing securities are at risk of default, and a couple of hundred, mostly strip malls and other retail, office buildings, and apartments, already are in default.
Taking a look at the commercial MBS (CMBS) market, Standard & Poor’s issued this advice: “Buckle Up.”
Trepp, a CMBS-analysis firm, in its most recent report (data as of October 2011) finds that the delinquency rate for multifamily-property mortgages is 16.73 percent; for hotels, 14.12 percent and rising; for offices, 8.95 percent and rising; for industrial properties, 11.59 percent and rising; and for retail, a steady 7.61 percent. Trepp managing director Matt Anderson does not sound like a ray of sunshine: “Overall, we do not expect 2012 to be a repeat of 2008, but there will be more disappointments than pleasant surprises in the New Year. The banking sector has not yet returned to ‘normal’ despite two years of earnings growth. With increased regulation and the temptation for banks to take additional risks in order to preserve margins, 2012 should be a very interesting year.”
Not as bad as 2008 — is there a better example of damning with faint praise?
Trepp gets to the real concern here, which is that these mortgages and mortgage-backed securities are sitting on the balance sheets of a bunch of still-wobbly banks. How wobbly? About 100 banks went under last year, and about 250 are expected to go under this year. Trepp finds that, of the banks that went toes-up in 2011, bad commercial real estate accounted for two-thirds of their failing loans.
This is a textbook case for the Austrian business-cycle theory: Artificially low interest rates and loose money produce overinvestment, by both bankers and builders, in a bubble — this time, offices, apartment buildings, and retail space — that can’t be sustained once the artificial stimulation comes to an end, as it must. In this case, that malinvestment has to be worked out at two levels: At the financial level, among the lenders and borrowers, but also at the physical level: There’s going to be a lot of dark storefronts out there, with serious long-term consequences for nearby neighbors and for local real-estate markets: Foreclosures will put more property onto the market, driving down rents and subsequently making existing loans less tenable as the cashflow of commercial properties is diminished. They called the Depression-era tent cities “Hoovervilles.” The next time you see a mile of half-abandoned strip malls, think “Obamaville.”
Not as bad as 2008? Probably not — and let’s hope it is not even close. But there’s a $3 trillion commercial-mortgage market lurking out there, and a lot of CMBS investors — banks and insurance companies in particular — that Washington thinks are “too big to fail,” a problem we persistently refuse to address.
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Good thing he scuttled the Keystone pipeline!
http://hotair.com/archives/2012/02/07/great-news-another-green-tech-stimulus-recipient-job-flop/
Great news: Another green-tech stimulus recipient job flop
posted at 11:35 am on February 7, 2012 by Ed Morrissey
Last we heard from the Fisker Karma, the electric vehicle in which US taxpayers sunk $193 million so far, the loans were paying off by creating jobs … in Finland. As it turns out, even that report was too optimistic. With Fisker having burned through about 40% of the stimulus funds guaranteed by the Obama administration, they have suddenly run out of money — and will start ending jobs in the US rather than create them:
Fisker Automotive, the electric car company that received a half-billion dollars in Energy Department loan guarantees, announced layoffs at its Delaware production facility Monday.
The Energy Department agreed to loans totaling $528 million for two Fisker electric car projects: a luxury model — the$103,000 Karma which is on sale now — and a more affordable sedan, the Nina. …
“We have temporarily delayed work at the plant based on ongoing discussions with the DOE regarding funding for the Project Nina program. As a result, we have laid-off 26 people,” the company said in a statement Monday.
It’s never a good sign when a firm has to plead for more time by explaining that it’s searching for more private equity investment to get production rolling:
Fisker said it continues to pursue alternative funding sources. “We have successfully raised an additional $260 million of equity in late 2011, bringing the total amount of private equity financing to more than $850 million,” the company said.
The $193 million Fisker has received was for the production of its Karma line. That’s the model whose production got moved to Finland rather than the US, where the money was supposed to create jobs. The Karma is available for purchase, but it’s a model only affordable to the so-called 1%, unless one of the 99% plan to live in it instead of a house or condominium. Even the supposedly “more affordable” Nina would be out of range for most working Americans. Last October, Autoblog pegged the MSRP for the Nina at $45,000, more than the Chevy Volt, which isn’t exactly selling like hotcakes at the subsidized MSRP of $32,000. For the same money, a buyer could drive off the lot in a BMW 3 series car, one that won’t require several thousand dollars in new batteries in its first five to eight years on top of the purchase price.
Let’s assume that the Nina sells as well as the Volt, if Fisker ever starts production on it. Their first year would have 7700 units sold for which Fisker would have received approximately $336 million in loans (the original $529 million less the $193 million for the Karma). That comes to $43,636 in subsidies per car, or almost the entire estimated MSRP of the Nina, making the actual cost closer to $90,000. It’s just that the taxpayer would have bought half of the car.
When Joe Biden visited the Delaware plant to promote the stimulus grant, he promised union workers about 2,000 jobs on the basis of the half-billion-dollar commitment to Fisker for the Karma and the Nina. Right now the total from $193 million is -26 jobs, and another green-tech firm talking about the need to find new capital after missing its targets for the green-tech loans.
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http://chronicle.com/article/Bankruptcy-Lawyers-Warn-of/130696/
February 7, 2012
Bankruptcy Lawyers Warn of Student-Loan 'Debt Bomb' as Client Caseloads Rise
By Kelly Field
More struggling borrowers are seeking relief from their student loans, according to a survey by the National Association of Consumer Bankruptcy Attorneys.
In the survey of 860 bankruptcy lawyers, four out of five respondents reported a "significant" or "somewhat significant" increase in potential clients with student-loan debt; nearly two out of five said they had seen their potential student-loan-client caseloads jump by 25 to 50 percent in the past three or four years, and about a quarter had seen caseloads jump by more than 50 percent.
Most of those borrowers won't have their student-loan debt forgiven. Under federal law, it is almost impossible to discharge student loans through bankruptcy.
The president of the association, William E. Brewer, Jr., said the results of the survey suggest that student loans "could very well be the next debt bomb for the U.S. economy."
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I guess teeming hordes of unemployed Americans have a smaller carbon footprint.
http://hotair.com/archives/2012/02/09/fantastic-china-canada-reach-quick-deals-on-oil-uranium/
Fantastic. China, Canada reach quick deals on oil, uranium
posted at 11:35 am on February 9, 2012 by Jazz Shaw
Last month we discussed the rather alarming news that Canadian Prime Minister Stephen Harper was planning a trip to China to discuss possible natural resources deals with the economic superpower. It seemed no coincidence that the trip was announced close on the heels of Barack Obama’s decision to kick the can down the road on the Keystone XL pipeline yet again. But at that time, I retained some hope that perhaps this was just a warning siren to Obama which would remind him that Canada had plenty of other options should we decide not to do business with them.
Apparently Harper hasn’t cared much for what he’s been hearing out of Washington and found a very willing ear across the Pacific because it seems that some deals have been struck already.
China and Canada declared Thursday that bilateral relations have reached “a new level” following a series of multibillion-dollar trade and business agreements to ship additional Canadian petroleum, uranium and other products to the Asian superpower.
Prime Minister Stephen Harper and the Chinese leadership said Thursday the economic co-operation agreements — and billions of dollars in new private-sector deals — signed by the two countries over the past few days are unprecedented and will open the door to additional trade and investment.
Harper announced Thursday, following meetings with Chinese President Hu Jintao and Vice-Premier Li Keqiang, that the countries have struck an agreement that will allow Canadian uranium companies to “substantially increase exports to China.”
“We expect to see similar success stories in Canadian energy exports to China, once infrastructure is in place.”
Harper has said building pipelines to the West Coast — such as the proposed Northern Gateway oilsands pipeline and a separate one for liquefied natural gas — is a national priority as Canada looks to ship its vast resources to Asia.
This just gets better and better, doesn’t it? Not only do we have to keep an eye on the Canadians building a shorter pipeline to their western coast to ship all of their oil overseas, but now they’re going to aggressively up the ante on delivering uranium to the Chinese. Oh, I know… you probably think I’m being an old worry wort, right? I mean, China would only use the fuel for peaceful, energy production purposes and would never “lose track” of any of it, right?
Yet again we see that elections matter, and decisions coming from 1600 Pennsylvania Ave. can have both immediate and long term effects not only here at home, but across the oceans as well. Harper’s deals wont be finalized until the Canadian legislature approves them, but they would be foolish indeed to turn it down with no assurances of a market in the U.S. There was never any doubt that Canada would pursue their own best economic and national interests and find a buyer for their resources. It was only a question of who would strike the right deal. And – again – I do not place any blame on Harper for this. He has to look out for Canada’s interests first, not ours. The fault here lies with the White House for playing politics with such a critical issue.
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Would you please post this in the energy thread?
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http://formerspook.blogspot.com/2012/02/incredible-shrinking-workforce.html
Friday, February 03, 2012
The Incredible, Shrinking Workforce
It's a historical fact: since World War II, no American President has ever been re-elected with an unemployment rate above eight percent.
So, how does Barack Obama (and his bureaucratic helpers) plan to push that number down to an "electable" range?
Easy, just shrink the work force.
If you don't believe us, look at today's unemployment numbers from the Bureau of Labor Statistics. The gang over at Zerohedge.com was the first to warn us; earlier this week, they predicted there would be something fishy about today's figures. And sure enough, they were right--sort of. Zerohedge predicted the BLS would sneak in a much higher total for the number of jobs lost last year. Instead, the feds went one better--they "down-sized" the work force by a staggering number:
A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by anunprecedented record 1.2 million. No, that's not a typo: 1.2 million people dropped out of the labor force in one month! So as the labor force increased from 153.9 million to 154.4 million, the non institutional population increased by 242.3 million meaning, those not in the labor force surged from 86.7 million to 87.9 million. Which means that the civilian labor force tumbled to a fresh 30 year low of 63.7% as the BLS is seriously planning on eliminating nearly half of the available labor pool from the unemployment calculation. As for the quality of jobs, as withholding taxes roll over Year over year, it can only mean that the US is replacing high paying FIRE jobs with low paying construction and manufacturing. So much for the improvement.
Of course, the stat grabbing most of the headlines is the monthly unemployment rate, which dropped to 8.3%, the lowest level in more than three years. But it wasn't all champagne and roses; there are signs the recovery is slowing in places in Germany and France (where unemployment surged last month); the Euro debt crisis is far from resolved (ditto for the U.S.) and there are concerns about a potential conflict with Iran. And did we mention that $4 a gallon gasoline is just around the corner--even if there isn't a conflict in the Gulf? Any--or all--of those factors could deflate whatever "recovery" is underway in the U.S.
But give the Obama team credit. When you need to lower the unemployment rate, just crush the labor force participation rate, even if the numbers make no sense. After all, this is an election year.
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[youtube]http://www.youtube.com/watch?v=HlTxGHn4sH4[/youtube]
http://www.youtube.com/watch?v=HlTxGHn4sH4
5.00 gas! Thanks Obozo!
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5.00 gas! Thanks Obozo!
A better comment would be "Thanks Iran". But if we backed off and didn't oppose Iran, ignored Israel's need, maybe we could have $3.00 gas.... Is that what you are suggesting? :-)
Oh yeah, stocks being up is bad for oil prices too; then again, those of us who own some stocks or others among us whose union pension fund owns some stock are ecstatic. The market keeps hitting new highs.
http://money.cnn.com/2012/02/20/markets/oil_gas_iran/index.htm?hpt=hp_c1
I think you would blame Obama for Sun Spots if you could....
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Iran? Yeah, we could buy oil from Canada, but Obozo killed the Keystone pipeline. We could drill our own oil, but Obozo doesn't want that either.
Glad you could try to sate your anti-semetic streak by blaming Israel though.
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Bob Janjuah: ‘Markets are so rigged by policymakers that I have no meaningful insights to offer’
Published: 8:42 AM 02/20/2012 | Updated: 9:21 AM 02/20/2012
In this Oct. 4, 2011 photo, traders Stephen Guilfoyle, left, and Richard Deviccaro, work on the floor of the New York Stock Exchange. Stocks in Europe recouped some recent losses on Wednesday, Oct. 5, 2011, on hopes that European policymakers were thrashing out a plan to shore up the banking sector, which has been damaged by fears of a Greek debt default. (AP Photo/Richard Drew)
A note from Nomura’s Bob Janjuah via Zerohedge.
The notorious bear says we’re in a bubble, but the markets are too insane to recommend anything other than gold, non-financial high quality corporate credit and blue-chip big cap non-financial global equities.
Bob’s World: Monetary Anarchy
Since my last note from early January I have spent the last few weeks assessing data and price action, as well as spending a lot of time talking to clients and trying to analyse the words and deeds of policymakers. In no particular order, my takeaways are as follows:
1 – Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focused on protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other “peripherals? are being forced to live with. However, it seems that eurozone leaders may be about to pour even more taxpayer money down into the black hole that is Greece, primarily to help the banks in Europe, at the expense of perhaps a decade of suffering by the Greek populace. For my part, I am now consigning the Greece/Peripherals/Eurozone story to the box marked “self-serving political debacle? and from here on in I will simplify Europe as follows: Until, and unless, Germany signs up to full fiscal union, a eurozone breakup is likely. And depending on how long we can continue to “kick the can? down the road in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decreasing debt sustainability. Ultimately this means that the end game will simply be more devastating for us all the longer we are forced to wait. Investors should be fully aware that “home? bias amongst real money investors is now “off the charts?. This is not a good development for the eurozone, unless of course our leaders are preparing for break up, or at least considering it as a viable option.
2 – I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of “insider? technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are the banks so powerful that we are all beholden to them and the biggest nonsense of all – that defaults should never happen (unless said defaults are trivial or largely meaningless)?
3 – More broadly, with Mr Draghi now in situ, it is clear that I misread and misunderstood two things. First, I am simply stunned that our policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being “told? to double up on these same policy decisions. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people. Well now, if you listen to the latest from Bernanke and Draghi, it seems that the only solution they can offer up is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again “greedy? enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now “richer?. When – as they do by definition – these bubbles burst, those who have been suckered in will realise that their “wealth? is instead an illusion, which in turn will be replaced by default risk.
Secondly, I have clearly underestimated the ‘market’s’ willingness, nay desperation, to go along with this ultimately ruinous policy path. Personally, I think this is extremely worrying – the number of clients who tell me that they know they are being forced into playing a game that will end in disaster, but who feel they have to play along and who hope they will get out before it turns, is a depressingly familiar old tale. Some such folks hang onto the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more money/more liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply side reform and the search for true competiveness and sustainable growth will be further cast aside, as the focus will be on the “easy gains? to be made in markets.
4 – Assuming that we are in yet another liquidity fuelled rally courtesy of Bernanke and Draghi, then there are some key things to remember. First, such rallies can last days, weeks, months, perhaps we could even extend into 2013. And – to give a proxy guide – the S&P could end up in the high 1500s again if this current binge lasts into 2013. The problem with such liquidity fuelled set-ups is that they can last longer and get bigger than any reasonable logic would dictate. The issue here is not what central bankers say – it now seems clear that Bernanke and Draghi will say whatever it takes to keep the market supplied with ample liquidity – but what they can do. In this respect one either believes that central bankers can do whatever they like whenever they like, or one believes there are limits. I think there are limits to what Bernanke and Draghi can do, and once we hit those limits these bubbles will burst, with increasingly greater consequences the longer we are forced to wait. Do I know when we may hit these limits? I hope that it is sooner rather than later, but I have no real conviction.
Secondly, when looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market.
Third, when this bubble bursts, I don’t think there is an easy way out. Who will be the bail-out provider? We already have extraordinarily weak and fragile government balance sheets, ditto banking balance sheets and consumer balance sheets. The big cap corporate balance sheet is sound, but it already worries about how bad the real economy hit will be when the next bubble bursts. As such, the corporate sector – which has a huge degree of “control? over the political classes – will keeps its powder dry until asset prices fall to clearing levels. When this happens they will be the biggest buyer of truly cheap assets in town, but not before then. The really dangerous thing about this next bubble is that it will likely ruin current central bank credibility, as their balance sheet expansion, accumulating ever more “toxic? assets, is at the centre of the current cycle. As a result, the central bank decision-making function is now (increasingly) deeply compromised, if not utterly at odds with its own raison d’être. This of course means that if/when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems, rather than being able to act as credible lenders of last resort. A resulting consequence is that we will, at that point, usher in a new era of central banking and policy settings, where the key will be to regain a semblance of credibility and independence. This will be good news. But we will likely have to go through the “bust? first.
5 – I am not well equipped to navigate bubbles where tactical views and secular views are all thrown into the melting pot together, where there is no visibility, where – as one client put it to me recently – we have Monetary Anarchy running riot, where the elastic band between the ‘real’ economy and the current liquidity-fuelled markets is stretched further and further beyond credulity, and where history tells us that policymakers will happily stand by whilst bubbles are being pumped up, and hope that they are onto their next job before it all comes tumbling down. It seems that the 07/08/09 part of this crisis has resulted in zero lessons learned. In fact it is much worse than that as we are instead being asked to double up on a strategy which I fear will end in failure. As such, clearly my outlook in my last note needs to be re-assessed in terms of the latest developments. Whilst equity market levels are still within the tolerance limits set out in this previous note, my timing is clearly being “stretched?. Unfortunately for me, and as warned in the prior note, if my outlook set out therein is proven to be wrong, it is because I am overly cautious. I say “unfortunately? because the longer we have to wait for the “final? resolution to the global financial crisis, the bigger and more devastating the final leg lower will be. I have an extremely high level of conviction on this point.
6 – So, in terms of markets, be warned. My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears. Real assets are relatively attractive. But I am going to wait for this current central bank bubble to burst before going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters. It all depends on when and how our central bank leaders are exposed as lacking credibility and/or lacking the mandates to keep pumping liquidity into the system. The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping “mandates?). The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, “bonds are toast? in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis.
My colleague Kevin Gaynor has a more nuanced view and he feels that we may well avoid the bubble outcome, as political hurdles, political changes, growth and earnings data will all very quickly undermine central bankers and their bubble vision. For all our (long term) sakes, I hope I am wrong when it comes to fearing another round of liquidity-fuelled bubbles, and that he is right that “good sense? will prevail soon.
I will continue to use the Dow/Gold charts to continue to guide me going forward. The USD price of an ounce of gold and the Dow will, I believe, converge at/around 1, at some point over the next 2 years or so. I have extremely high conviction on this. What I am not sure on is whether we converge at 7000+/-, or at 14000+/-. Because I do believe that even Bernanke and Draghi cannot do as they wish and that there are some limits to the recklessness of policymakers, I still lean towards a deflationary resolution at/about 7000 in the next year or two. Pretty vague, I know, buts it?s the best I can do right now, and what is clear is that, in the world I fear ahead, gold is a winner either way – remember, gold is a great (monetary) inflation hedge, and in a deflationary credit collapse gold works as a store of value/wealth as it carries zero credit risk.
As a “credit? guy at heart I see more likelihood in a deflationary credit (i.e., a “real?) collapse rather than a real economy inflationary (nominal) collapse. Either way however, what is clear is that if Bernanke and Draghi are allowed to continue on their current policy path for much longer, then whatever the final outcome will be, it will likely leave a deep scar on us for decades. Which on a ten-year timeframe may not be such a bad thing as it should kill off monetarism and usher in a new era of monetary and fiscal prudence? In the near term, LTRO2 at month-end is the next clear focus for markets, more so than Greece. If LTRO2 is USD1trn or more, the market will take that as a signal to load on more leverage, more risk and more ‘carry’. If LTRO2 is in the order of USD250bn to USD500bn, Risk Off will be the order of the day as markets will start to fear that central bankers are having to reign back-in their current policies, and that as a result we face another period where central bankers and policymakers fall back behind the curve. LTRO1 clearly took policymakers from behind to ahead of the curve, but this is an extremely fluid situation, where doing nothing is, in reality, the same as going backwards. As the skew of expectations is to a large LTRO2, a LTRO2 take-up in between these ranges is likely to be viewed with neutrality/mild disappointment.
Read more: http://dailycaller.com/2012/02/20/bob-janjuah-markets-are-so-rigged-by-policymakers-that-i-have-no-meaningful-insights-to-offer/
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Glad you could try to sate your anti-semetic streak by blaming Israel though.
Any chance you can stick to the facts, rather than as usual when you don't have any, you post snide bs emotional retorts? Or is that asking too much from you?
As for the market, anyone can have an opinion (Bob Janjuah). Throw enough %^&*( against the wall.... Bullshit talks, but the market, at a recent high walks.....
In spite of Iran, in spite of Europe's problems, the market has risen; the market likes our economy (Obama)....
Be grateful GM, your union police pension plan is up!
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Any chance you can stick to the facts, rather than as usual when you don't have any, you post snide bs emotional retorts? Or is that asking too much from you?
Anyone who pays attention can see your motivations.
Be grateful GM, your union police pension plan is up!
No. Like most all public pensions in the US, it's deep underwater and will be broke in five years or so.
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Be grateful GM, your union police pension plan is up!
No. Like most all public pensions in the US, it's deep underwater and will be broke in five years or so.
Actually, most public pensions plans like yours are paid for by the public. And, like most police pension plans, unlike private plans
you can retire after 20 years and immediately begin collecting benefits. If you start at age 20, you can retire at age 40 with a substantial
pension benefit starting at age 40 for the rest of your life. Nice deal if you can get it. No wonder we are going broke.
As for it going broke; don't worry. Private plans fold, but public pension plans usually just stick it to the public. So your ok.
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Be grateful GM, your union police pension plan is up!
No. Like most all public pensions in the US, it's deep underwater and will be broke in five years or so.
Actually, most public pensions plans like yours are paid for by the public. And, like most police pension plans, unlike private plans
you can retire after 20 years and immediately begin collecting benefits. If you start at age 20, you can retire at age 40 with a substantial
pension benefit starting at age 40 for the rest of your life. Nice deal if you can get it. No wonder we are going broke.
As for it going broke; don't worry. Private plans fold, but public pension plans usually just stick it to the public. So your ok.
I'm not sure what pension plan you are talking bout, but that's not mine. The pension is broke, as is the public. Big haircuts for everyone. The idea of retirement is dead.
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Actually no, the pension plan for the public is never broke. If a private plan goes belly up, well everyone i.e. the retirees suffer. It's broke. At a public plan, the retirees don't suffer; only the public who get's stiffed suffer. They just raise taxes to pay.
"Pension obligations are a form of off-balance-sheet debt. As funds approach exhaustion, states will be forced to borrow to replenish them. Some have already done so. Thus, pension obligations will be converted into explicit liabilities."
Bottom line, my taxes will go up to pay exorbitant and accelerated police and fire pension plans. Money for schools and other programs will suffer. The ONLY ones who suffer are the public. The ONLY ones who "win" are the public employees, i.e. police and fire etc.
As I said, you should say your prayers at night; "and thank you Lord for my union...."
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http://blogs.the-american-interest.com/wrm/2011/11/23/staggering-markets-crash-state-pension-funds/
November 23, 2011
Staggering Markets Crash State Pension Funds
State and local governments around the country have long underfunded their pension funds, covering the gap between what they have and what they have obliged themselves to pay by making unrealistic assumptions about the rate of return they expect from their investments.
Now that the wave of Boomer retirement is starting to hit, the gaps are beginning to hurt. Cities and states all over the country are having to choose between paying for desperately needed services or making up the deficits in their pension plans.
The latest news from the New York State pension funds points to the next dimension of this unfolding crisis. Given the financial market turbulence of recent years, pension funds aren’t even growing at modest rates. In many cases, they are shrinking due to losses on investments. In the third quarter of 2011, New York pension funds lost more than 7 percent of their value.
States have over promised, under invested, overestimated rates of return and are now losing money in generally weak market conditions. Worse is going to come; after years of pandering, denial, evasion and distortion, some ugly truths can no longer be ignored. The Boomers will not get all the pension payments they expect; other generations will pay more toward those reduced Boomer pensions than they want to pay or think is fair. None of this will be pretty, and there are no easy solutions to be found.
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I'm confused; I could have posted that article. I agree, pension funds are underfunded. All the areas you put bold are true.
Perhaps I wasn't clear. I thought you were implying that you wouldn't get your full pension/retirement plan because of these reasons?
Unlike private plans, who if they are severely unfunded, simply go broke, public plans just cut desperately needed services or raise taxes; they must do whatever it takes to provide
the money to pay for exorbitant public retirement plans that begin benefits after 20 years of service. You have a gold plated contract. Sleep well.
Future negotiations may affect future retirees, but that which has been promised to date must be paid.
So don't worry GM, YOUR pension plan is fully guaranteed by the taxpayer. Whatever it takes, cutting teachers and other jobs, cutting basic services, raising taxes, you name it,
it will be done to insure your outrageous retirement plan.
I'm not blaming or faulting you; you just reap the rewards of your Union fighting for you and nearly every generous City giving freely giving away the taxpayer's money. It's time to
settle up.
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1. I don't have a union.
2. My state is preparing to gut retirement to prevent the collapse of the state budget. Unlike California or other blue states, they believe in fiscal sanity here in flyover land.
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Wow; you are right; I thought all police/fire had a union. Maybe it's time you form a union too? :-)
Police collectively going on strike/sick day leave can be very persuasive.
Actually, police are one of the most powerful unions in America.
I don't know what state you live in, but....
In general, the state can gut retirement for future benefits, i.e. new hires can have a totally different plan (they should; I never understood this absurd 20 year and out deal or the excess of a rich defined benefit plan that nearly no one in private business has anymore), henceforth, states may be able (conflicting rulings) to adjust future retirement benefits for current employees i.e. their benefit henceforth can be accrued at a different lower rate (new contract). BUT money promised as of today, be you a retiree (they are fully protected) or a current employee, whether the plan is fully funded or not (not your problem); that money is yours. The state can huff and puff, cry poverty, but if you play hardball, you have a gold plated contract backed up by the state; wrong or right, the state needs to cut services, raises taxes, do whatever it takes to pay that contractual obligation.
That's why being a public employee is so great.
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Police collectively going on strike/sick day leave can be very persuasive.
Police strikes are illegal and "blue flu" job actions don't fly out here.
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illegal? Yes I know; sorry I wasn't clear; working slower, doing basically nothing, gaining support from other unions, are all tactics used; "job actions" are the key. What's wrong with the "blue flu"? Albeit rare, police wildcat strikes have happened; what are they going to do, fire you all like the traffic controllers? Legal to fire you, I agree, however..... a few days of no police on the beat might change the public's mind.
I'm of the opinion (we don't agree) that police and fire as well as most public employees are overpaid; primarily I am referring to benefits. That said, a deal is a deal; a contract is a contract;
like in private business or anywhere else, if you make a deal, keep it. And when it's up for renewal, change it henceforward. That's fair. But you don't go back and change a contract.
In what state do you work? I mean I'm in LA (yes I admit we have numerous problems; but depending upon your perspective, the LAPD's union is VERY powerful and successful).
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What applies to "big city" departments, like LAPD or NYPD doesn't apply across the board. Keep in mind most police agencies across the country have on average 20 officers or less and no collective barganing/job protections like you see in the big departments.
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As you have pointed out, :-) I will often give opinions on areas beyond my expertise. I don't really know anyone on a small police force; it seems
they are either part of a larger force or sheriffs (LA County) or affiliated in some way with a larger police force.
I am however quite knowledgeable about Pensions having been, quite some years ago, an Employee Benefit Consultant to large corporations and unions for many years, including I might point out, the LAPD Health and Welfare Plan.
Contract law is contract law. While I abhor many aspects of public employees, the waste and abuse is absolutely terrible, a contract is a contract.
It sounds like your police force is not in agreement. Without knowing the facts, I can't give an opinion, but collectively they are strong; individually they are weak.
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We are on the right track politically is bullsh*t.
Unadjusted unemployment back up to 9%. The adjusted number is zero or any other number that you want. "Underemployment" is back up to 19%!
http://www.gallup.com/poll/152753/Unemployment-Increases-Mid-February.aspx
February 17, 2012
U.S. Unemployment Increases in Mid-February
Underemployment also up, to 19.0%
by Dennis Jacobe, Chief Economist
PRINCETON, NJ -- The U.S. unemployment rate, as measured by Gallup without seasonal adjustment, is 9.0% in mid-February, up from 8.6% for January. The mid-month reading normally reflects what the U.S. government reports for the entire month, and is up from 8.3% in mid-January.
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[youtube]http://www.youtube.com/watch?v=HlTxGHn4sH4[/youtube]
http://www.youtube.com/watch?v=HlTxGHn4sH4
5.00 gas! Thanks Obozo!
[youtube]http://www.youtube.com/watch?feature=player_embedded&v=Ka_tjPLJwVI[/youtube]
http://www.youtube.com/watch?feature=player_embedded&v=Ka_tjPLJwVI
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[youtube]http://www.youtube.com/watch?v=HlTxGHn4sH4[/youtube]
http://www.youtube.com/watch?v=HlTxGHn4sH4
5.00 gas! Thanks Obozo!
[youtube]http://www.youtube.com/watch?feature=player_embedded&v=Ka_tjPLJwVI[/youtube]
http://www.youtube.com/watch?feature=player_embedded&v=Ka_tjPLJwVI
http://www.jammiewf.com/2012/pelosi-2008-bush-to-blame-for-high-gas-prices-pelosi-2012-wall-street-to-blame-for-high-gas-prices/
Pelosi 2008: Bush to Blame for High Gas Prices; Pelosi 2012: Wall Street to Blame for High Gas Prices
Posted by Jammie on Feb 24, 2012 at 8:54 am
Obviously the Democrats are worried their golden boy will be taking heat for skyrocketing gas prices so this week they’ve gone on the offensive. Their diversionary tactics will probably work since the media will dutifully carry their water. But it’s interesting to see the double talk from idiots like Nancy Pelosi. Back in 2008, it was the evil Bush to blame for soaring prices at the pump.
“This is a scam of the greatest magnitude,” says Speaker Pelosi.
Rising gas prices affect groups like the Boys and Girls Club that is cutting programs to save costs, a small businessman who finds himself being priced out of competition or a caregiver who can’t afford gas to get to clients.
And for other Meals on Wheels programs around the bay, hikes in fuel costs have meant fewer deliveries. They can’t find volunteers who can afford to fill their tanks.
Prices at the pump are a pain for all of us, but Speaker Pelosi is accusing President Bush of policies that have driven up the prices, and says she has a solution to bring prices down immediately,
“Mr. President, do not fill the strategic petroleum reserve with oil at record highs. Instead, take out the oil that we brought at a lower price to bring down the price of oil, to reduce the price at the pump,” says Speaker Pelosi.
So, whose fault is it now? Obviously not Obama’s.
“Wall Street profiteering, not oil shortages, is the cause of the price spike,” Pelosi said in a statement. “Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws.”
Expect hearings on Capitol Hill any day now. The Democrats will do anything to distract you from Obama’s failed policies and will just blame “Big Oil” and now Wall Street. Good thing for them they have willing accomplices in the media to play along.
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http://online.wsj.com/article/SB122904040307499791.html
"Somehow we have to figure out how to boost the price of gasoline to the levels in Europe," Mr. Chu, who directs the Lawrence Berkeley National Laboratory in California, said in an interview with The Wall Street Journal in September.
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Sunspots made the gas go up, right JDN?
http://hotair.com/archives/2012/02/29/chu-to-congress-were-not-interested-in-lowering-gas-prices/
Chu to Congress: We’re not interested in lowering gas prices
posted at 11:00 am on February 29, 2012 by Ed Morrissey
Hey, at least Energy Secretary Stephen Chu gave an honest answer. When asked by Rep. Alan Nunnelee whether the Obama administration wants to work to get gas prices to come back down, Chu replied that they’re not focusing on that — and that higher gas prices mean more of a push for the alternative energy sources the administration wants to push:
“We agree there is great suffering when the price of gasoline increases in the United States, and so we are very concerned about this,” said Chu, speaking to the House Appropriations energy and water subcommittee. “As I have repeatedly said, in the Department of Energy, what we’re trying to do is diversify our energy supply for transportation so that we have cost-effective means.”
Chu specifically cited a reported breakthrough announced Monday by Envia Systems, which received funding from DOE’s ARPA-E, that could help slash the price of electric vehicle batteries.
He also touted natural gas as “great” and said DOE is researching how to reduce the cost of compressed natural gas tanks for vehicles.
High gasoline prices will make research into such alternatives more urgent, Chu said.
“But is the overall goal to get our price” of gasoline down, asked Nunnelee.
“No, the overall goal is to decrease our dependency on oil, to build and strengthen our economy,” Chu replied. “We think that if you consider all these energy policies, including energy efficiency, we think that we can go a long way to becoming less dependent on oil and [diversifying] our supply and we’ll help the American economy and the American consumers.”
The Heritage Foundation jumped all over Chu’s comments:
As shocking as his remarks are, they shouldn’t come as a surprise. Chu has a long record of advocating for higher gas prices. In 2008, he stated, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” Last March, he reiterated his point in an interview with Fox News’ Chris Wallace, noting that his focus is to ease the pain felt by his energy policies by forcing automakers to make more fuel-efficient automobiles. “What I’m doing since I became Secretary of Energy has been quite clear. What I have been doing is developing methods to take the pain out of high gas prices.”
One of those methods is dumping taxpayer dollars into alternative energy projects like the Solyndra solar plant. Another is subsidizing the purchase of high-cost electric cars like the Chevy Volt to the tune of $7,500 per car (which the White House wants to increase to $10,000). In both cases, those methods aren’t working. Solyndra went bankrupt because its product couldn’t bear the weight of market pressures, and Chevy Volts aren’t selling, even with taxpayer-funded rebates. What’s the president’s next plan? Harvesting “a bunch of algae” as a replacement for oil.
Meanwhile, the Obama Administration is seemingly doing everything it can to make paying for energy even more painful by refusing to open access to the country’s oil and gas reserves and blocking new projects that would lead to the development of more energy in America. Case in point: the president’s decision to say “no” to the Keystone XL pipeline, a project that would have delivered hundreds of thousands of barrels of oil from Canada to Texas refineries, while bringing thousands of jobs along with it.
And while Chu gave an honest answer that actually matches the actions taken by this administration, Heritage notes that Obama has offered nothing but double-talk on gas prices:
Sensing impending political fallout from the high cost of gas, President Obama last week spoke on the subject and attempted to deflect blame for the pain. He said that there is no quick fix to high gas prices and the nation cannot drill its way out of the problem, but as Heritage’s Nicolas Loris writes, the president ignored reality and dished out a series of half-truths. Among them, the president claimed oil production is its highest in eight years, that increasing oil production takes too long, and that oil is not enough. Loris writes that while production is up on private lands, unrealized production on federal lands and offshore could have yielded even more output, increasing supply and driving down costs. If the president had said “yes” to Keystone, oil could have reach the market quickly. And as for the president’s push for alternative energy, those sources simply cannot stand the test of the market.
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GM: Please post on the Energy policy thread as well. TIA
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I don't know much about sun spots or climate change (that's why I stay off that thread) but Chu in the long run is not wrong IMHO.
Indirectly the price of oil is elastic. Raise the price and people will seek alternative ideas and/or cut back. In the long run, America is better off.
Further, we don't set the price of oil; the world market sets the price. That's why I get a big laugh out of domestic drilling supposedly lowering the price of oil; it won't, they
will just ship it to the highest bidder.
Also, the price of gas is not only the price of oil. Taxes etc. all play a part.
Frankly, higher oil prices IMHO is not all bad.
"Fuel is a drug the U.S. has long since needed weaning off. Admittedly Americans have to cover greater distances than Europeans. But you don't need a glorified double bed powered by a throbbing great V8 to do that. A sensibly-sized car with a two-liter turbo will do the job just as comfortably."
http://edition.cnn.com/2012/02/28/opinion/opinion-european-gas-prices/index.html?iref=allsearch
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"That's why I get a big laugh out of domestic drilling supposedly lowering the price of oil; it won't, they
will just ship it to the highest bidder."
a) Transportation costs will tend towards our oil/gas staying here, but yes at some point we will make money by selling it elsewhere.
b) Not subject to vagaries of Middle East or other foreign politics
c) Law of Supply and Demand: More supply=lower prices. Just like the law of gravity, the law of supply and demand is not up for negotiation.
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"That's why I get a big laugh out of domestic drilling supposedly lowering the price of oil; it won't, they
will just ship it to the highest bidder."
a) Transportation costs will tend towards our oil/gas staying here, but yes at some point we will make money by selling it elsewhere.
b) Not subject to vagaries of Middle East or other foreign politics
c) Law of Supply and Demand: More supply=lower prices. Just like the law of gravity, the law of supply and demand is not up for negotiation.
a)Transportation costs in the overall scheme of things is not a deciding factor.
b)Not being subject to the vagaries of the Middle East begs my point, prices will rise in case of turmoil and oil producers will sell to the highest bidder. Or do you suggest
legislation that they must sell to America first? As of now, much, most of our oil is sold internationally.
I agree with the Law of Supply and Demand, but given the world's thirst for oil, our supply will not affect prices that much. Combine that with the response of
other oil producing nations to keep prices stable, but high, I doubt if it will have much impact on world prices. Better to seek alternatives.
What's the martial art expression? Short term pain, long term gain....
Do you really need a giant Suburban? If the answer is yes, expect to pay.....
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Brain Wesbury has an outstanding track record as an economist. His predictions have an unusually high degree of accuracy.
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The Economy Is Fine (Really)
By BRIAN WESBURY
January 28, 2008; Page A15
WSJ
It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.
True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.
It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.
A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year -- real GDP expanded 4.4% at an annual rate between April and September.
With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.
Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications.
Some large companies outside of finance and home building are reporting lower profits, but the over-reaction to very spotty negative news is astounding. For example, Intel's earnings disappointed, creating a great deal of fear about technology. Lost in the pessimism is the fact that 20 out of 24 S&P 500 technology companies that have reported earnings so far have beaten Wall Street estimates.
Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%. This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.
Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire "house of cards," otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.
For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire.
This outlook is both perplexing and worrisome. Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets.
Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.
In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.
But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.
These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.
Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.
Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.
The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it's the development that investors should really worry about. It reads just like the 1970s.
The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.
Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It's a wonderful buying opportunity.
Mr. Wesbury is chief economist for First Trust Portfolios, L.P.
Good thing that was a false alarm!
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"That's why I get a big laugh out of domestic drilling supposedly lowering the price of oil; it won't, they
will just ship it to the highest bidder."
a) Transportation costs will tend towards our oil/gas staying here, but yes at some point we will make money by selling it elsewhere.
b) Not subject to vagaries of Middle East or other foreign politics
c) Law of Supply and Demand: More supply=lower prices. Just like the law of gravity, the law of supply and demand is not up for negotiation.
a)Transportation costs in the overall scheme of things is not a deciding factor.
b)Not being subject to the vagaries of the Middle East begs my point, prices will rise in case of turmoil and oil producers will sell to the highest bidder. Or do you suggest
legislation that they must sell to America first? As of now, much, most of our oil is sold internationally.
I agree with the Law of Supply and Demand, but given the world's thirst for oil, our supply will not affect prices that much. Combine that with the response of
other oil producing nations to keep prices stable, but high, I doubt if it will have much impact on world prices. Better to seek alternatives.
What's the martial art expression? Short term pain, long term gain....
Do you really need a giant Suburban? If the answer is yes, expect to pay.....
So, vote for Obozo, he'll continue to raise gas prices? Sounds like a winner! You should suggest this to the DNC, JDN.
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GM: Hat tip on the 2008 Wesbury!
JDN: Random numbers to illustrate the point concerning the transpost costs variable: If the cost in the world is $100 and the cost of shipping from the US for a given country is $5 greater than some other source and the cost in the US is $98, then the US oil would cost the other country more than the market cost and will not be purchased by that country.
More importantly, the idea that the massive energy capabilities of the US would not have a significant effect on the marginal cost of oil on the world market seems to me rather , , , silly. Look at the efffect on oil prices when Libya, a mere million or two barrels a day, went off-line.
And there is the matter that our supplies would be secure to us.
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http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/03/07/bloomberg_articlesM09ST16K50XS01-M0HXL.DTL&ao=all
March 7 (Bloomberg) -- The near-failure by U.S. states to fund rising retiree health-care costs for millions of government workers threatens to produce budget crises similar to the one that pushed Stockton, California, to take a step toward bankruptcy last week.
States haven't financed almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010, according to Bloomberg Rankings data. The estimated deficit grew from about 95 percent in 2009 as governors coped with lower general-fund revenue and rising demand for services following the longest recession since the Great Depression.
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/03/07/bloomberg_articlesM09ST16K50XS01-M0HXL.DTL&ao=all
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*States haven't financed almost 96 percent of the $627.4 billion they were projected to owe for future retiree benefits in 2010*
And states simply print money like the Federal gov. flooding the financial system with green paper.
And that is one difference between Greece and the US. Greece uses the Euro and so they can't simply print monopoly money like we do and try to con our way out.
How dare me suggest this is a ponzi scheme.
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As best as I can tell, the Fed's essentially zero-negative interest rate policies (after taking into account inflation and taxes on the interest rates) are a major player here by changing the actuarial assumptions upon which funding must be made.
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Crafty,
What does that mean with regards to the interest rates and changing the assumptions on funding?
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If I understand correctly, "fully funded" is defined in part by the reasonably expected rate of return on what is put into the fund. Much of the current problem comes from assuming rates of return of something like 9% per annum, a number which arguably was supported by the actual rates of return during the 90s. Now with rates of return much lower, both in equity and in interest rate denominated vehicles (bonds, t-bills etc) actuarial assumptions now require larger amounts of money be deposited to properly prepare to meet future promises.
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makes sense
thanks
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Gov't figures showed job growth up last month, adjusted for climate model type adjustments. Of course the denominator of the equation has dropped by 6 million jobs gone.
Gallup has unemployment up last month http://www.gallup.com/poll/153161/Unemployment-February.aspx and real unemployment, the percentage of people looking for full time work and cannot find it is up to 19%.
Unemployment in North Dakota where energy production is legal is 3%. Nothing to be learned from that.
Unemployment in the Twin Cities metro is 5%. California 11%. Nevada 13%.
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http://blogs.the-american-interest.com/wrm/2012/03/12/blue-blights-empire-state/
March 12, 2012
Blue Blights Empire State
Weekend readers of the New York Times got an eyeful yesterday; the Grey Lady took a long look at New York state, and the result is an article that could almost have appeared in the Weekly Standard or the National Review. While the Times carefully avoided drawing any indelicate conclusions that might upset its liberal readership, the review of government finance at the state and local level reveals an appalling picture of blue model thinking at its worst. New York state and local politicians, egged on by public sector unions, have dug the state into such a deep hole that it will be hard to emerge.
And the unions — along with the pro-bankruptcy wing of the Democratic Party — want to keep digging.
The reality is that from Long Island to Buffalo, New York cities and counties face severe and growing fiscal woes. The chief drivers of the crisis: blue sweetheart programs that are out of control: state pensions, Medicaid, and retiree health costs.
Example: New York City’s annual out of pocket pension costs have ballooned from $1.5 billion a year ten years ago to $8 billion today. This is the cost of the lies New York politicians have told their sheep like constituents for many years, promising fat pensions to workers while refusing to raise taxes to put enough money away for when the bills come due. According to the eye popping numbers in the Times, 3 percent of New York city property tax revenues went to pay pension costs in 2001; 35 percent of those revenues will go to pensions by 2015.
Meanwhile, the ratings agencies have been downgrading the debt of New York cities and counties as if we were on the Mediterranean: last month alone Rockland County and the city of Utica got downgrades, with Long Beach and Yonkers getting hit last year. Suffolk and Nassau counties are having to borrow to pay their pension fund contributions for this year; worse is likely to come even as the general economy slowly improves.
Read the whole piece to see both how a whole state can go down the tubes, and how a newspaper can report facts while tip toeing carefully around any implications that might make its readers unhappy.
The root problem is that New York elected officials lost sight years ago of the need to run the state and its cities on a businesslike basis. They made “investments” in social policy and educational spending that manifestly did not pay off in terms of enhanced productivity or economic benefits. They made pension promises that they neglected to fund. New York as a state has been committed to the belief that a high regulation, high cost, big government approach to state and municipal management would pay off in the long run: yes, government in New York would cost more than in Texas or Alabama or other benighted hell holes, but New Yorkers would be better educated and more productive. New York’s infrastructure might be expensive, but it would facilitate business growth. New York’s public sector labor force might be expensive, but it would be competent and motivated so that it would deliver more. New York could make a high cost, high regulation governance model work: that was the big bet.
It has failed.
It’s time for the state to take a long hard look at itself. The investments haven’t paid off — at least not enough to justify the costs. The government model is breaking down; the system doesn’t generate enough revenue to cover its cost.
Hopefully an economic recovery will provide a little breathing space, but New York can’t afford to waste any respite it gets. The state is on the wrong road and the outlook is grim.
When blue policy goes wrong, blue pols and their chorus of captive intellectuals sing for bailouts. If the city is broke, the state must pay up. If the state is broke, the feds must pay up.
But the feds can’t — and won’t — pay up. The feds are tapped out, the state is a mess, and there will soon no alternative to deep policy change.
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[youtube]http://www.youtube.com/watch?v=MKCFj_JYb9c&feature=player_embedded[/youtube]
http://www.youtube.com/watch?v=MKCFj_JYb9c&feature=player_embedded
Obama's 3rd book: "How I turned 840 billion dollars in stimulus funds into 5 dollars cash"
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[youtube]http://www.youtube.com/watch?v=5bJ0YfUknfE&feature=player_embedded[/youtube]
http://www.youtube.com/watch?v=5bJ0YfUknfE&feature=player_embedded
Gas is expensive, but poverty is free!
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Former chief economic adviser Christina Romer says what we need to get different results is more of the same:
http://finance.yahoo.com/blogs/daily-ticker/u-economy-needs-more-fiscal-stimulus-not-less-120516082.html;_ylt=ArC3bUsdYUwVwF.MUUT2fFGiuYdG;_ylu=X3oDMTQ0a3NjZGI2BG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDNTU5Nzk1NGQtYzBkNS0zMjI1LWJlYmEtZDZiYjc4MWQzNGI
"I absolutely think more fiscal stimulus would be very helpful," she says. "We need faster growth [to bring down unemployment]. Fiscal stimulus could help do that."
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Good grief. $6 trillion wasn't enough, we need more fiscal stimulus. Somebody is trying to get her job back.
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The human damage they are willing to do in their ideological battle against economic freedom is appalling.
(http://blog.american.com/wp-content/uploads/2012/03/030912duration.jpg)
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Former chief economic adviser Christina Romer says what we need to get different results is more of the same:
http://finance.yahoo.com/blogs/daily-ticker/u-economy-needs-more-fiscal-stimulus-not-less-120516082.html;_ylt=ArC3bUsdYUwVwF.MUUT2fFGiuYdG;_ylu=X3oDMTQ0a3NjZGI2BG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDNTU5Nzk1NGQtYzBkNS0zMjI1LWJlYmEtZDZiYjc4MWQzNGI
"I absolutely think more fiscal stimulus would be very helpful," she says. "We need faster growth [to bring down unemployment]. Fiscal stimulus could help do that."
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Good grief. $6 trillion wasn't enough, we need more fiscal stimulus. Somebody is trying to get her job back.
Anyone still think we aren't heading to an economic collapse?
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Scott Grannis doesn't.
http://scottgrannis.blogspot.com/
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Scott Grannis doesn't.
http://scottgrannis.blogspot.com/
All due respect to Mr. Grannis, but hasn't he been telling us about how the economy is improving for the lest few years now?
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"Scott Grannis doesn't [think we aren't heading to an economic collapse]."
Scott has good insight and data. I would like to go back a little through his blog which I haven't read for a while. Like Wesbury, it seems to me that we are hearing positive words that describe a very lethargic non-recovery. I wrote this about housing too, but I'm not going to count any margin of error level 'growth' as any kind of rebound. Maybe we aren't currently headed into collapse, but we also aren't building up enough economic strength to survive the next, major, self-inflicted setback.
I think both Wesbury and Grannis would agree that the 'growth' they are reporting, from the lowest of all lows, is a fraction of what it ought to be and that our policies are desperately in need of change.
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Reading several blog pages back from Scott Grannis, this chart of his shows graphically what I think of the current 'reecovery'. A real recovery would show sharp growth aimed back at the line formerly known as 'growth trend'. The gap under is becoming what in Japan they called the 'lost decade'. You don't have to lose a decade. Decline, slow gfrowth and no growth, these are policy choices.
(http://4.bp.blogspot.com/-sGxZJxDmQEs/T2IP2TMbLQI/AAAAAAAAG20/qDshqBTRvO4/s400/Real+GDP+vs+3%25+trend.jpg)
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Another graphical look from Scott Grannis. Employment is one of the best and most important indicators of how an economy is really doing. Take a look at the recent uptick in employment that Wesbury and others are seeing - in the context of the hole that we dug.
Keep in mind also the budget gap, separate post. Climbing out of this hole is not optional!
(http://3.bp.blogspot.com/-a7jhR5gH3Hg/T1ouZsoC0qI/AAAAAAAAGz8/RsYe6dcW03I/s400/Labor+Force.jpg)
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By ALAN S. BLINDER
At some point, the spectacle America is now calling a presidential campaign will turn away from comedy and start focusing on things that really matter—such as the "fiscal cliff" our federal government is rapidly approaching.
The what? A cliff is something from which you don't want to fall. But as I'll explain shortly, a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013—unless Congress takes action to avoid it.
Well, that gives Congress plenty of time, right? Yes. But if you're like me, the phrase "unless Congress takes action" sends a chill down your spine—especially since the cliff came about because of Congress's past inability to agree.
Remember the political donnybrook we had last month over extending the Bush tax cuts, the two-point reduction in the payroll tax, and long-term unemployment benefits? That debate was an echo of the even bigger donnybrook our elected representatives had just two months earlier—and which they "solved" at the last moment by kicking the can two months down the road. And that one, you may recall, came about because they were unable to reach agreement on these matters in December 2010. At that time, President Obama and the Republicans kicked one can down the road 12 months (the payroll tax) and another 24 months (the Bush tax cuts).
The result of all this can kicking is that Congress must make all those decisions by January 2013—or defer them yet again. If the House and Senate don't act in time, a list of things will happen that are anathema either to Republicans or Democrats or both. The Bush tax cuts will expire. The temporary payroll tax cut will end. Unemployment benefits will be severely curtailed. And all on Jan. 1, 2013. Happy New Year!
Enlarge Image
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.There's more. As part of the deal ending the acrimonious debate over raising the national debt ceiling last August, the president and Congress created the bipartisan Joint Select Committee on Deficit Reduction, commonly known as the "super committee." It was charged with finding ways to trim at least $1.5 trillion from projected deficits over 10 years. Mindful that the committee might not prove to be that super, Congress stipulated that formulaic spending cuts of $1.2 trillion would kick in automatically if the committee failed.
Sure enough, it failed. So those automatic cuts are headed our way starting Jan. 15, 2013. To make this would-be sword of Damocles more frightening, the formula Congress adopted aimed half the cuts straight at the Pentagon.
Now, you don't really believe the defense budget will be cut that much, do you? Probably the rest won't happen, either. But if it all did, the resulting fiscal contraction—consisting of both tax increases and spending cuts—would be in the neighborhood of 3.5% of gross domestic product, depending on exactly how you count certain items, all at once. That's a big fiscal hit, roughly as big as what a number of European countries are trying to do right now, though with limited success and with notable collateral damage to their economies. An abrupt fiscal contraction of 3.5% of GDP would be a disaster for the United States, highly likely to stifle the recovery.
At this point, you are probably thinking: Well, of course Congress will find ways to wriggle out of its self-imposed budgetary corset. I agree. But the invisible hand won't do it; someone needs to figure out how.
It is next to certain that nothing will be done about the fiscal cliff during the election season. In fact, some Republicans are now threatening to renege on the spending cap for fiscal year 2013 that they agreed to last summer. In the absence of progress between now and Election Day, Congress will have about eight weeks left—including Sundays, Thanksgiving, Christmas and New Year's Eve—to either (a) find a solution to the long-running fiscal battle or (b) kick the can down the road again.
Bet on (b). Also bet that the agreement will come just before the bubbly flows on New Year's Eve. An outcome like that is far more likely than falling off the fiscal cliff. But my point is that finding a clever way to kick the can down the road again is becoming a bigger and bigger challenge. And Congress has barely coped with previous such challenges.
Fast forward to December 2012. The lame duck Congress will have on its plate all the issues it had to deal with in the December 2010, August 2011, December 2011, and February 2012 budget battles, plus the automatic cuts mandated by the failure of the super committee, plus the legacy of whatever claims and promises are made during the campaign. We may also be bumping up against the national debt ceiling again. And who will have to sort it all out? A Congress whose days are numbered and whose complexion may have been altered dramatically by the election.
The current betting odds say that President Obama will be re-elected in November, with Republicans controlling both the House and the Senate. Does anyone think a mix like that will be less contentious than the one we have now? And does anyone think that Republicans, seeing control of both houses of Congress on the horizon, will be more compromising in the lame duck than they have been in the recent past?
In sum, while we probably will not fall off the fiscal cliff in January 2013, there are ample opportunities for stumbles and slips between now and then. So wouldn't it be nice if the two parties engaged on this issue prior to Election Day?
Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.
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Scott G. and I are emailing back and forth a bit this morning. With his permission, here are his comments on the Blinder piece:
"I have a dim view of Blinder. He is less partisan and somewhat more objective than Krugman, but is still more of a partisan hack than a serious economist. He's also a Keynesian who never met a spending-fueled budget deficit he didn't like. I actually look forward to more gridlock in Washington. Already it has helped spending decline from 25% to 23% GDP. Less spending means a stronger economy in my book. Bring on the "austerity!" "
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This is important, was it economic freedom running wild or was it botched government programs and regulations that caused the financial collapse? Forbes contributor Charles Kadlec answers the political spin of our Treasury Secretary.
http://www.forbes.com/sites/charleskadlec/2012/03/05/tim-geithner-covers-for-corruption-on-pennsylvania-avenue/?utm_source=alertsnewpost&utm_medium=email&utm_campaign=20120305 (read it at the link)
Tim Geithner Covers for Corruption On Pennsylvania Avenue
Last Friday, Treasury Secretary Timothy Geithner charged in a Wall Street Journal op-ed (http://online.wsj.com/article/SB10001424052970203986604577253272042239982.html) that those who oppose the Obama Administration’s regulatory regime for the financial services industry “seem to be suffering from amnesia about how close America came to complete financial collapse under the outdated regulatory system we had before Wall Street reform.” Au contraire, Secretary Geithner, it is you who choose to ignore and misrepresent the lessons of the financial crisis by perpetuating the myth that the source of the crisis was a lack of regulation.
First, your essay glosses over the central role the federal government played in creating the crisis. In particular, the government through Fannie Mae and Freddie Mac directed $5.2 trillion (that is trillion with a “t”) of capital to increase the supply of mortgages. In addition, it passed a law that required banks to make billions of dollars in loans to individuals that were unlikely to pay off the loans, in the end with 0% down.
In 1998, Fannie Mae announced it would purchase mortgages with only 3% down. And, in 2001, it offered a program that required no down payment at all. Between 2001 and 2004, subprime mortgages grew from $160 billion to $540 billion. And between 2005 and 2007, Fannie Mae’s acquisition of mortgages with less than 10% down almost tripled. These loans are now known as “subprime” and “alt A” loans. At the time they were made, Fannie Mae and Freddie Mac encouraged their issuance by lowering their standards and buying them up from the now vilified mortgage brokers, S&Ls, banks and Wall Street investment banks.
This activity was not due to a lack of regulation or oversight as you claim. Both companies are under the direct supervision of a federal regulator and Congress. At the time these loans were being purchased by these two Government Sponsored Enterprises, their actions were defended by many in Congress who, led by Senator Chris Dodd and Congressman Barney Frank, saw such reckless lending as a successful government initiative.
At the same time, the easy money policies of the Federal Open Market Committee, of which you were a voting member, were feeding an asset bubble in residential real estate, providing what proved to be an irresistible lure not only for speculators, but also for American families trying desperately to buy a house before inflation robbed them of their chance for home ownership.
Yes, mortgage brokers and banks encouraged reckless borrowing, though many who borrowed, with a little honest reflection, could have known that they would be unable to meet the financial obligation of paying the mortgage that they were using to buy a house that they could not afford. Nor does any of this excuse the poor judgment of those on Wall Street who levered their firms’ balance sheets so that even a 4% loss on their investments would leave them either bankrupt or in need of a bailout.
But, the culpability of those in the private sector should not be used to cover up or excuse the irresponsible behavior of those in the federal government. The self-regulatory check normally provided by markets on activities that are likely to lose money — lenders backing away — was simply blocked by the government’s intervention in the capital markets. As you must know, six top executives of Fannie Mae and Freddie Mac have been charged by the Securities and Exchange Commission with securities fraud for hiding the size of the purchases of low quality mortgages from the market.
In addition, the normal check on excessive leverage provided by unwilling lenders was overwhelmed by the perception, now validated, that Fannie Mae and Freddie Mac debt were backed by the full faith and credit of the federal government. This created a willing buyer backed by the federal government with unlimited access to credit markets and a trillion dollar budget. No wonder S&Ls and Wall Street found ways to satisfy the demand. Blaming a lack of regulation for the subsequent losses is political spin meant to cover up the greed and corruption on Pennsylvania Avenue that led to the crisis.
Second, your claim that increased regulatory oversight would have prevented the crisis requires a credulous belief in the wisdom and courage of those in power. Regulators with all of the necessary powers have failed in their most basic task of preventing fraud including Bernie Maddoff’s Ponzi scheme, and now the still unexplained disappearance of $1.6 billion of customer money at MF Global. Yet, you ask us to believe tens of thousands of pages of new regulations will somehow empower you and other elite public servants to prevent another financial crisis?
As we know now, you and the other members of the Federal Open Market Committee in 2006 did not grasp the implications of the then faltering housing market for the general economy or the health of the banking system. As a consequence, you and your colleagues did not use the powers you had to head off the financial crisis when there was still plenty of time to act. As former Prime Minister Tony Blair writes in his memoir, A Journey of My Political Life, an important contributor to the financial crisis was a failure “of understanding. We didn’t spot it…it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.”
Third, the new regulatory regime for the financial industry created by the Dodd-Frank bill — ironically named after two of the perpetrators of the financial crisis — omits any reform of Fannie Mae and Freddie Mac. Yet, unlike the commercial and investment banks who have repaid the government bailout money, these two state sponsored financial giants have cost taxpayers more than $140 billion and are seeking billions more in bailout funds. At the same time, HUD is moving forward on issuing new rules that would support racial quotas for bank mortgages, which no doubt will again force banks to make loans to individuals who cannot afford them.
In light of this evidence and your own experience, your promise that a new, expansive regulatory regime reduces the risk of financial crisis is not credible. The regulatory maze created by Dodd-Frank not only robs the private sector of real resources that otherwise would be committed to allocating capital to credit worthy borrowers, it also undermines market skepticism essential to preventing systemic risk. In addition, it puts even more power in the hands of a few individuals who, like you, are fallible, rather than dispersing power among market participants.
You conclude your essay by writing: “We cannot afford to forget the lessons of the crisis and the damage it caused to millions of Americans. Amnesia is what causes financial crises.”
With all due respect Mr. Secretary, federal government policies, not amnesia, were at the heart of the financial crisis. The arrogance of power revealed by your selective memory and political spin, and the expansive regulatory regime you support are now the primary source of systemic risk to the U.S. financial system and the economic security of the American people.
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From Instapundit:
HOW’S THAT HOPEY-CHANGEY STUFF WORKIN’ OUT FOR YA?“I was in Australia earlier this month and there, as elsewhere on my recent travels, the consensus among the politicians I met (at least in private) was that Washington lacked the will for meaningful course correction, and that, therefore, the trick was to ensure that, when the behemoth goes over the cliff, you’re not dragged down with it. It is faintly surreal to be sitting in paneled offices lined by formal portraits listening to eminent persons who assume the collapse of the dominant global power is a fait accompli. . . . Greece’s total debt is a few rinky-dink billions, a rounding error in the average Obama budget. Only America is spending trillions. The 2011 budget deficit, for example, is about the size of the entire Russian economy. By 2010, the Obama administration was issuing about a hundred billion dollars of treasury bonds every month — or, to put it another way, Washington is dependent on the bond markets being willing to absorb an increase of U.S. debt equivalent to the GDP of Canada or India — every year. And those numbers don’t take into account the huge levels of personal debt run up by Americans. College-debt alone is over a trillion dollars, or the equivalent of the entire South Korean economy — tied up just in one small boutique niche market of debt which barely exists in most other developed nations.”
No organization can survive corruption and ineptitude at the top forever. And we’ve had the worse political class in American history for a while now, though its rottenness has really accelerated lately.
UPDATE: A longtime reader emails:
I’m a Canadian, and you might be interested to know that the Harper government are working very hard (in the background) along the same lines as the Aussies. They are doing everything possible to diversify Canada’s export markets away from the US as fast as possible, for example the pipeline to move Alberta and Saskatchewan oil to world markets via the sea, not to the US. Ditto aeroplanes, rail cars, fibre-optic electronics, robotics, lumber, and a wide range of other products.
The quiet back-room planning is driven by the alarming extent to which the Obama administration has already deeply damaged the US economy (compared to Canada) with its policies, actions, and insane deficits. The Harper government are now moving to shut down US environmentalist activity in Canada — “We’re not going to be your National Park.” says the PM — and are already developping scenarios for maximum-possible disconnect from the States in the event Obama and his crew are returned to power in the coming elections. [no name please if published ... in spite of my present location I continue to follow Canadian politics very closely and have children living there. If it weren't for Canada's lack of truly free speech, draconian gun laws, and miserable health system, I'd be moving back.]
Ugh.
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Scott's answer to you GM 8-) 8-) 8-)
Interest rates will only go up if the economy does better. Meanwhile, look at Japan where their debt burden and their deficit are both much bigger than ours relative to GDP and yet interest rates are even lower than ours
If the economy strengthens then the tax base expands and tax revenues go up. Meanwhile the average maturity of federal debt is very short. The yield curve is positively sloped so that means that higher interest rates are already factored in to some degree, so higher rates are not a death sentence by any stretch. Moreover, a stronger economy would likely happen if policies improved, so even as interest rates rose the deficit could shrink as a percent of GDP.
The way out of the current predicament is growth. The election this year has a good chance to deliver that.
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Scott's answer to you GM 8-) 8-) 8-)
Interest rates will only go up if the economy does better. Meanwhile, look at Japan where their debt burden and their deficit are both much bigger than ours relative to GDP and yet interest rates are even lower than ours
If the economy strengthens then the tax base expands and tax revenues go up. Meanwhile the average maturity of federal debt is very short. The yield curve is positively sloped so that means that higher interest rates are already factored in to some degree, so higher rates are not a death sentence by any stretch. Moreover, a stronger economy would likely happen if policies improved, so even as interest rates rose the deficit could shrink as a percent of GDP.
The way out of the current predicament is growth. The election this year has a good chance to deliver that.
I hope he is correct.
I appreciate his response.
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"Interest rates will only go up if the economy does better. Meanwhile, look at Japan where their debt burden and their deficit are both much bigger than ours relative to GDP and yet interest rates are even lower than ours."
Scott is right on this, but it is unfortunate to need to look at stagnation elsewhere for guidance.
3 things come to mind (and more) that will keep economy from seriously entering a period of robust, uninhibited growth:
a) Interest rates as GM and Scott say. Interest rates will go up when some economic activity gets going again, but that will further hurt the cost of buying homes, automobiles, business expansion etc. We have seen this cycle before.
b) Energy costs will go up. The price increases proved the inelasticity of oil demand, consumption was down only 3% while prices at the pump skyrocketed. But in fact and in light of the barriers still in place to new production, gas prices are artificially low compared to what they would be if 6 or 10 million more people were soon commuting to work and a hundred million or more were better able to afford weekend and vacation travel. Just as likely as a new lease from the administration offshore is a crackdown on fracking or closure of coal or nuclear etc.
c) We still have unindexed, progressive tax brackets with more tax rate increases coming. The more that nominal incomes go up either through economic growth or inflation, the larger of a share that is taken and the greater the disincentive is to either produce or report that additional income.
d) Over-regulation and botched and convoluted regulation. Nothing in the Stimulus 1, 2, 3 or QE to the nth power plans address that. Even a Supreme Court decision striking down all of Obamacare only gets us back to where we were before implosion.
We build into our economy all these man-made forces that ensure the better things go, the worse things will get.
Scott G makes clear the importance to the economy of changing political course. Many economists do not come out and say that, and there are many economists of course who hold a different or opposite political policy view. (Romer and Krugman say government spending stimulus is still too small.) I don't see how anyone can project the future direction of our economy without knowing the policy outcomes this election, house, senate and Presidential, will bring. Will we have national healthcare? Will have 20% across the board tax rate cuts? We will the rate increases plus the Buffet surcharge plus a near doubling of capital gains rates? Will we have corporate rates cut to around the OECD average or the highest in the world? Will interest rates be near zero or double digit? Will we have gas at the pump - or algae?
Like the uncertainty of investing in a third world country, nobody knows.
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http://pjmedia.com/richardfernandez/2012/03/30/the-house-that-jack-built/?singlepage=true
The House that Jack Built
March 30, 2012 - 10:42 pm - by Richard Fernandez
What is at least partly driving Al Sharpton’s call for civil disobedience if the city of Sanford doesn’t arrest George Zimmerman for the death of Trayvon Martin? What is at the heart of Keith Olbermann’s dispute with Al Gore? Why are Rosie O’donnell and Oprah Winfrey no longer best friends? What has made the Huffington Post bloggers sue Arianna Huffington?
A subject as old as the ages; a matter discussed in the Bible which has gone by many names down through time. A matter so solid some have called it the foundation of society — even a memorial to dead presidents on which their likenesses are emblazoned. Found in large quantities it is called grand. The central pole of the Big Tent is made of it. Yes, we’re talking about money.
The chief problem with money, as Walter Russell Mead observes, is that the Blue Model is running out of it. Once upon a time the money was just out there. The dollars were mooing and lowing like the buffalo on the Great Plains. The only problem was divvying it up. But now that it’s getting harder to come by, a whole host of professions based on the dollar hunting and skinning business is becoming endangered. Mead describes the situation in his vivid prose:
The dream machines of the blue social engineers don’t sail serenely across the azure sky anymore. Think of the various carbon exchanges and environmental planetary schemes; think of high speed rail proposals like California’s $100 billion train to bankruptcy; think of Obamacare. These days the experts, “social entrepreneurs” and smart young blue twenty somethings fresh out of the Ivy League whomp up social programs with as much verve and dedication as their New Deal and Great Society predecessors, but the new Dreamliners don’t take off. At most they roll around the runway, emitting clouds of noxious smoke; wings fall off, windows pop out, turbines misfire and the tires go flat.
The Big Tent is the house that jack built. And jack has left town.
So don’t be surprised if the the Big Tent is sagging at the edges. The marketing department has been particularly hard-hit. Al Gore’s Current network was paying Keith Olbermann $50 million to attract viewers they hoped to have. Olbermann was supposed to be its primary liberal voice. But the New York Times explained that Olberman wasn’t attracting anybody, even though he acted like he was:
In his 40 weeks on Current TV, he had an average of 177,000 viewers at 8 p.m., down from the roughly one million that he had each night on MSNBC. Just 57,000 of those viewers on any given night were between the ages of 25 and 54, the coveted advertising demographic for cable news.
Talking Points Memo quoted a source which said “Olbermann failed to show up for work without authorization, missing almost half of his working days in the months of January and February. Olbermann asked for a vacation day on March 5, the night before Super Tuesday, according to the source. He was told it would be a breach if he took the vacation, which Olbermann did.” For his part, Olbermann said he would sue Gore. In the end, perhaps, they both needed and deserved each other.
Olbermann was a reprise of the recent fall of Rosie O’Donnell. Early this March the “Oprah Winfrey Network issued a press release announcing The Rosie Show had been canceled, following six months of humiliating ratings. … What went wrong? Multiple insiders interviewed for this story say that both Ro and O are to blame; the network never fit O’Donnell, and O’Donnell wasn’t able to make the splash she was supposed to.”
Becoming a “liberal voice” was once where the money was. The jack. A lot guys still believed that. And boy were they wrong. Arianna Huffington won the right in court not to pay her bloggers a dime from the money she received from AOL for the sale of the Huffington Post. “U.S. District Judge John Koeltl rejected claims by social activist and commentator Jonathan Tasini and an estimated 9,000 other bloggers that they deserved $105 million, or about one-third, of the purchase price.”
It was, as one Columbia Law professor put it, signing up to engage in “the electronic equivalent of someone writing a letter to the editor.” It is no longer so easy to hitch one’s wagon to the liberal star.
But if these individuals were facing a loss of income, Al Sharpton, by contrast, was trying to climb out of a deep financial hole. “The left-wing National Action Network Inc., headquartered in New York City’s Harlem neighborhood, owes at least $1,556,059 in federal taxes and $108,489 in New York taxes, according to the Nexis tax liens database. Tax agencies typically file tax liens only after taxes have become significantly overdue and other collection methods have failed.”
After Trayvon Martin was killed, the Chicago Tribune found the Reverend raising money for Trayvon’s cause. At a rally he shouted:
“I’m going to start off with $2,500,” Sharpton said, holding up a check. “Who’s next?”
Then Sharpton announced that television personality Judge Greg Mathis donated $10,000.
Several elected Florida officials were present, and each took a turn addressing the crowd before Sharpton was scheduled to speak. U.S. Rep. Corrine Brown was one of the first to address the crowd Thursday night. She rallied the crowd by yelling, “I want an arrest, I want a trial.”
The she asked the crowd: “What do you want?”
And the crowd responded, “We want an arrest!”
Doubtless Sharpton really wants an arrest. But given the parlous state of his finances, it would be understandable if he didn’t mind making a few bucks on the side as well. All across the board the Blue Model is experiencing what parliamentary systems call the loss of “supply.” Supply is a term used to describe money bills, either taxation and government spending, which is the lifeblood of politics.
Karl Rove notes that even President Obama is feeling the pinch. He is raising far less money than he did during his first campaign and is having to work much harder for it.
Last July, President Obama’s campaign announced that it had raised an average of $29 million in each of the previous three months for itself and the Democratic National Committee (DNC). I was only mildly impressed. After all, that was well below the $50 million a month needed to reach the campaign’s goal of a $1 billion war chest for the 2012 race.
Seven months later, I’m even less impressed. Through January, the president has raised an average of $24 million a month for his campaign and the DNC. Next week, the Obama campaign will release its February numbers, but the president is on track to be hundreds of millions of dollars shy of his original goal.
It’s not for lack of trying. Mr. Obama has already attended 103 fund-raisers, roughly one every three days since he kicked off his campaign last April (twice his predecessor’s pace).
The Obama administration fears a Supreme Court finding that its health care law is unconstitutional above all because it is one of the dwindling number of places from which it can source the megabucks needed to feed its army of public sector and activist constituencies. Without Obamacare to fall back on as a milking cow, things could really get tough.
Just how bad things have become was illustrated by the floor defeat of Obama’s budget 414-0. It received not a single vote. “Republicans wrote an amendment that contained Mr. Obama’s budget and offered it on the floor, daring Democrats to back the plan, which calls for major tax increases and yet still adds trillions of dollars to the deficit over the next decade. … But no Democrats accepted the challenge.”
The Achilles’ heel of the Big Tent — and Big Government — is its penchant to spend money faster than it can raise taxes or borrow. Its very bulk works against it. Told that mighty German cruisers were loose in the South Atlantic during the Great War, First Lord of the Admiralty Winston Churchill declared that they were doomed in any case. Without fuel and sustenance, they could not survive — “a cut flower in a vase, fair to see yet bound to die.” He might have been talking about Hope and Change.
The Blue Model has had a good run. But it needs to reform itself. If even celebrities like Keith Olbermann and Al Sharpton are feeling the pinch, how are the Occupy Wall Street dupes going to fare? And who else is going to have to tighten his belt in the house that jack built?
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**It's great for the environment!
http://hotair.com/archives/2012/04/03/harper-thanks-to-obamas-no-on-keystone-the-price-of-canadian-crude-will-go-up-for-the-u-s/
Harper: Thanks to Obama’s “no” on Keystone, the price of Canadian crude will go up for the U.S.
posted at 2:50 pm on April 3, 2012 by Tina Korbe
The damage is done. Even if President Barack Obama decides to approve the Keystone XL pipeline at some point in the future, he already sent a message to Canada that our northern neighbor can’t rely on us as its only energy customer — and Canadian prime minister Stephen Harper heeded it.
In an interview with former U.S. Rep. Jane Harman (D-Calif.) in D.C. yesterday, Harper explained that Canada will now seek to expand its export market to Asia and will also cease to supply oil to the United States at a discounted rate.
“Look, the very fact that a ‘no’ could even be said underscores to our country that we must diversify our energy export markets,” Harper told Harman in front of a live audience of businesspeople, scholars, diplomats, and journalists. …
Harper also told Harman that Canada has been selling its oil to the United States at a discounted price.
So not only will America be able to buy less Canadian oil even if Keystone is eventually approved, the U.S. will also have to pay more for it because the market for oilsands crude will be more competitive.
“We have taken a significant price hit by virtue of the fact that we are a captive supplier and that just does not make sense in terms of the broader interests of the Canadian economy,” Harper said. “We’re still going to be a major supplier of the United States. It will be a long time, if ever, before the United States isn’t our number one export market, but for us the United States cannot be our only export market.
“That is not in our interest, either commercially or in terms of pricing.”
“We cannot be, as a country, in a situation where our one and, in many cases, only energy partner could say no to our energy products. We just cannot be in that position.”
Harper’s comments came the same day that Barack Obama’s Super PAC, Priorities USA, released an ad that sought to tie Mitt Romney to Big Oil. The ad was itself a response to an ad underwritten by the American Energy Alliance that attacked Obama on his energy record and warned that this administration would be content to see gas prices rise as high as $9 a gallon.
This fallout from the president’s decision on Keystone XL underscores the truth that Obama does not make policy decisions in a vacuum. He’ll do what he will — and other countries will respond accordingly. Our famously “cerebral” leader might have preferred to have had more time to “sufficiently review” the project, but he didn’t. In the time frame he was given, he made his priorities perfectly clear: He cares more to retain the support of certain constituencies than to approve a project that would have created thousands of jobs and signaled to Canada that we’re committed to ensure a supply of affordable energy for ourselves. The American Energy Alliance had it right: The president’s energy policies have done nothing to secure America’s energy future. We’ll be ever more at the mercy of the oil-producing countries the president likes to blame so much.
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(http://pjmedia.com/instapundit/wp-content/uploads/2012/04/OBAMAGASPUMP-450x600.jpg)
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**This is why it's all about birth control and hoodies in the DNC-MSM.
http://www.reuters.com/article/2012/04/06/ratings-usa-egan-idUSL2E8F629N20120406
(Reuters) - Egan-Jones Ratings downgraded the credit level of the United States as Washington has struggled to reduce the federal debt burden, which is projected to surpass the size of the country's economy.
The independent rating firm, which issued the downgrade late Thursday, said its senior debt rating on the United States is now AA, its third highest rating, down one notch from AA-plus.
It also maintained a negative watch on the world's biggest economy as the federal debt load could rise to $16.7 trillion at the end of 2012. U.S. gross domestic product, in the meantime, could grow to $15.7 trillion, assuming it would grow at a rate of 2.5 percent, the firm said.
The firm downgraded the United States for second time in less than nine months "because of the lack of any tangible progress on addressing the problems and the continued rise in debt to GDP," said Sean Egan, co-founder of firm, in an e-mail statement.
Egan-Jones's downgrade did not elicit major market responses. U.S. government debt prices jumped on Friday after news of much weaker-than-expected job growth in March renewed bets the U.S. central bank would embark on more bond purchases to foster economic growth.
Back in mid-July, Egan-Jones stripped the United States' of its top AAA-rating amid the debt ceiling fight in Washington that stoked fears of a federal default.
The three larger rating agencies, however, currently have higher ratings on the United States than Egan-Jones.
Moody's Investors Service and Fitch Ratings still rate the United States with their highest credit grade of AAA, although Moody's has said it could strip the country of its top rating.
In August Standard & Poor's stripped the United States of its AAA rating, knocking it by a notch to AA-plus. It warned of a possible further downgrade.
Efforts to contain federal spending and borrowing have been unsuccessful. A congressional "Super Committee" seeking spending cuts of $1.5 trillion over 10 years, equal to $150 billion annually, "was a failure," Egan-Jones said in its report.
"Obviously, the current course is not enhancing credit quality. Without some structural changes soon, restoring credit quality will become increasingly difficult," it said.
While the rock-bottom interest-rate climate, a result of the Federal Reserve's ultra-loose policies, has helped the United States to finance its federal debt, it could run into trouble once its borrowing costs rise and the government does not reduce its debt load, Egan said.
The Fed has clung to a near-zero interest rate policy since December 2008. It has also purchased more than $1 trillion worth of Treasuries securities over the past three years, stemming from its emergency measures to lower mortgage rates and other long-term borrowing costs to stimulate borrowing and investment.
"Monetizing the debt depresses interest rates in the short run but does not address underlying credit quality as manifested by the rapid rise in debt to GDP," Egan said.
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http://www.nytimes.com/2012/04/10/opinion/brooks-the-two-economies.html
"If Cowen’s case is right, the U.S. is not a nation in decline. We may be in the early days of an export boom that will eventually power an economic revival, including a manufacturing revivial. But, as Cohen emphasizes, this does not mean that nirvana is at hand."
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Bigdog, Thanks for that post. I am not much of a Brooks fan but his reporting here is very good.
At the high end of the economy, if you invent, innovate or simply out-hustle the competition today you now have a much larger global market in which to sell your product or service than you had a generation ago. The income that come come from even a very low margin successful global business is nearly limitless. That is a good thing and should not be used as a distraction for what the rest of us may need to do to survive and prosper. There is NOT a fixed size pie that we are splitting up. Wealth creation is just that, new wealth, and it improves potential of everyone around them for new income. An app developer may be able to sell a million off of one home-run. That it doesn't seem fair to someone else is not a productive thought. Still, a plumber can only replace only one tub faucet at a time though the products, methods and tools he uses may have improved. A professor of constitutional law still needs an hour (plus prep time) to deliver a first class lecture. Not every profession benefits from the change of scale though we all can benefit from living in a healthier economy.
One fear is that a few big businesses will take over everything, but everyone who has worked for one of the giants knows that they turn down and pass up plenty of opportunities everyday leaving behind a plethora of new opportunities for new entrepreneurs in their wake.
The question no one but me it seems is asking is why is life getting so expensive? Everything it seems now costs way more than it should. It take so much money to just get by.
Something like 40 cents of every dollar of resources goes to public sector overhead. I don't know what that burden ought to be but for my money I would say quite a bit lower. Worse I think is the regulatory burden mostly hidden from view but perhaps one of every family's biggest expenses. Again, I can't say what that burden ought to be, we certainly need one, but it needs to be a whole lot lower.
The 3rd economy unmentioned is the large number of people who live outside of our productive economy, not in the economy one or economy two. In many areas, that is the majority.
Back to the first tier, it is quite a tragedy for the rest of the globe that America at the moment with its public sector brakes on is failing to lead in a forward direction.
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An interesting reply Doug, especially the note about the third economy.
A new article:
http://thehill.com/blogs/on-the-money/domestic-taxes/221557-racing-hand-in-hand-toward-a-fiscal-cliff
Republicans and Democrats are hurtling toward a fiscal cliff, and neither side wants to take the plunge.
In less than nine months, Bush-era tax rates are scheduled to expire, hiking rates for the middle class as well as top income earners. At the same time, automatic spending cuts will kick in. The combination, coupled with the expiration of the payroll tax cut and other factors, would constitute a blow that analysts say could imperil the economic recovery and send America crashing back into recession.
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"In less than nine months, Bush-era tax rates are scheduled to expire, hiking rates for the middle class as well as top income earners."
The message to investors that higher rates are coming does as much damage as the higher rates and the uncertainty makes it even worse. If we avert this disaster at the last minute it means we caused all of the economic damage but (again) collected no new revenues at the higher rates. We couldn't be more stupid (MHO).
All economists agree you don't raise taxes in a recession because of the damage that it will cause and you can't raise taxes in this vulnerable super slow growth economy on the brink of disaster because of the damage it will cause. Instead we keep promising to raise taxes at some other time when things are going much better only to again screw up what was once almost working.
The Bush tax cuts were made temporary with the belief that if they were successful in growing the economy they would later be made permanent. But after 52 consecutive months of job growth people instead took that growth for granted, without its foundation, and elected a promise to end those policies and those results. We had moved on to higher needs like ending unequal outcomes, changing the content of the troposphere and living a free birth control dream of unlimited sex without consequences, then whine about the stall that we caused.
Even if pro-growth Republicans were to win it all, the supreme court case, the House, the Senate narrowly and the Presidency, they still lack the votes to implement major reform. In the meantime investors and employers face uncertainty worse than you find in most third world countries: a new "top rate of 25 percent"... "or as high as 40 percent or more" and these rates don't count the other layers of taxation while states and local governmentss face bankruptcy.
Uncertainty causes inaction which means factories not built and investment capital free to leave the country or rot on the sidelines. According to one of Scott Grannis' charts we lost 12% of our economy perhaps permanently off of our long term growth curve in the current crisis. Now we might try to grow a smaller economy with a lower participation rate at a slower growth rate, pulling a larger anchor. And we made emergency spending increases permanent. That formula doesn't pay the bills, meaning more debt, more devaluation and more pressure for additional 'revenue enhancers'.
Quite ironic is the inverse correlation that the need for public spending in a sick economy actually goes up while the means to pay is going down. The spenders instead should love having the pro-growth side build up available revenues.
From the article: "Despite the gamesmanship, House Ways and Means Committee Chairman Dave Camp (R-Mich.) hopes upcoming meetings with Republican members on taxes can pave the way for the first broad overhaul of the tax code since 1986. “Our goal is to not only block massive, job-killing tax increases,” said Sage Eastman, a spokesman for Camp, “but also to enact comprehensive tax reform.” Camp and Senate Finance Committee Chairman Max Baucus (D-Mont.) are among those laying the ground work for tax reform, an effort that many expect to bleed into the next Congress."
The timing of these reforms really needs to be now, not to wait for the next divided government. The message from the people though is split and polarized making bold action impossible. Further stagnation is a best case scenario IMHO.
Instead of arguing either side of the budget fight, Pres. Obama is taking the fight to another level of job killing and 'fairness'. Too bad people in his own party don't tell him to straighten up and get this done.
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Too bad Romney is leading from behind on this , , ,
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"economists go to great lengths to obscure simple truths..." Instead, read this!
April 23, 2012
Supply-Side Critics Offer Only Trickle-Down Inflation
By Bill Frezza Excerpt only - Read it all at the link!
http://www.realclearmarkets.com/articles/2012/04/23/supply-side_critics_offer_only_trickle-down_inflation_99632.html
"...here are 10 common sense propositions I challenge political economists to refute. (forum contributors too!)
1) Money is not wealth, but merely a claim on wealth. Printing more money does not create more wealth.
2) Counterfeiting money steals wealth from others. The theft is no less when a government does it.
3) Moving money from one pocket to another does not create wealth. This is true even when small amounts of money are quietly siphoned from the pockets of the many and loudly deposited into the pockets of the few.
4) Before wealth can be consumed, invested, or redistributed, it has to be created. Consuming existing wealth does not create more of it, nor does borrowing against future wealth.
5) Wealth is created when consumption is deferred in favor of profitable production. Profits generally require selling something for more than it costs to make.
6) Profits are rarely a sure thing. Every decision to forgo consumption and invest in production seeking future returns is a gamble.
7) Private investors investing their own money generally seek to maximize after-tax profits balanced against a chosen degree of acceptable risk. Investment decisions are sensitive to policies that affect this equation.
8 ) Private investors that consistently make bad decisions, thereby squandering their wealth, eventually lose the ability to make more investments.
9) Politicians often "invest" other people's money seeking to maximize the number of votes they can garner. Whether or not these "investments" generate a future return, or are just thinly veiled redistributions, is secondary because a politician's time horizon extends only until the next election.
10) Politicians acting as public investors who consistently make bad decisions can remain in office and continue making more "investments" as long as they convince enough voters to shift the blame for their failures onto others.
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Very pithy! I like it!
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Monday Morning Outlook
The Plow Horse Economy To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 4/23/2012
Like a plow horse, the US economy just puts one hoof after the other. It ain’t
gonna win any races, but it ain’t gonna keel over and die either.
After slogging through the mud last year, and slowing down to just 1.2% annualized
growth in the first three quarters of 2011, things have improved. In the fourth
quarter last year, real GDP grew a solid, work-horse-like, 3%. We expect that
continued in the first quarter of 2012.
If anything, other indicators suggest real GDP growth might be even stronger.
Nonfarm payrolls rose 635,000 in Q1, the largest gain since 2006. Total hours worked
in the private sector climbed at a 3.7% annual rate. In other words, to get 3% real
GDP growth assumes some weakness in productivity.
This is clearly not the recovery heaven of 1983-84, when real GDP grew at a 6.6%
annual rate for two years and the jobless rate fell 3.5 percentage points in only 21
months. It’s not a double-dip, either, and after six consecutive months of 3%
growth, it’s not all about nice weather.
Consumption: Auto sales were up at a 35% annual rate in Q1 while “real”
(inflation-adjusted) retail sales ex-autos were up at a 5.8% rate. Services, a major
part of consumption, are not up as much, but it looks like real personal consumption
– goods and services combined – probably climbed at a 2.2% annual rate
in Q1, contributing 1.6 points to the real GDP growth rate. (2.2 times the
consumption share of GDP, which is 71%, equals 1.6.)
Business Investment: Business investment in equipment and software as well as
commercial construction appear to have grown at an annualized 6% rate in Q1. This
should add 0.6 points to the real GDP growth rate. (6 times the business investment
share of GDP, which is 10%, equals 0.6.)
Home Building: Led by apartment buildings – and assisted by unusually mild
winter weather – residential construction appears to have grown at about a 17%
annual rate in Q1. This translates into 0.4 points for the real GDP growth rate. (17
times the home building share of GDP, which is 2.3%, equals 0.4.)
Government: Military spending continued to decline in Q1, but state and local
government construction looks like it rose. On net, real government purchases shrank
at about a 1% rate in Q1, which should subtract about 0.2 percentage points from
real GDP growth. (-1 times the government purchase share of GDP, which is 20%,
equals -0.2).
Trade: At this point, the government has only reported trade data through February.
But, on average, the “real” trade deficit in goods has declined compared
to the Q4 average. This shrinkage resembles what happened in the first quarter of
2006, when the trade sector added 0.4 points to the real GDP growth rate.
We’re forecasting the same for this year’s first quarter.
Inventories: As always, inventories are the wild card. We only have
“real” inventory figures through January, when they rose sharply.
Nominal inventories were up at a moderate pace in February and we’re assuming
another moderate gain in March. This should generate a very small addition of 0.2
points to the real GDP growth rate in Q1.
Add-em-up and you get another 3% real GDP growth for Q1 – another “plow
horse” report.
The pessimists will likely subtract inventories and trade, and bash the economy, but
this game of trashing every piece of data for political purposes is getting really
old.
After piling massive government spending, new regulation, the threat of major tax
hikes, European uncertainty, higher energy prices, and a host of other things on its
back, the US economy keeps plodding along. It’s a testament to the resilience
of the entrepreneurial spirit, determination and new technology. It’s worth
celebrating, not tearing down.
Don’t get us wrong. We think the economy could grow faster if government were
smaller and tax hikes were off the table, but we are a long way from recession and
that’s good news for investors.
-
I guess the "firing on all cylinders" metaphore ain't what it used to be.
Monday Morning Outlook
The Plow Horse Economy To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 4/23/2012
Like a plow horse, the US economy just puts one hoof after the other. It ain’t
gonna win any races, but it ain’t gonna keel over and die either.
After slogging through the mud last year, and slowing down to just 1.2% annualized
growth in the first three quarters of 2011, things have improved. In the fourth
quarter last year, real GDP grew a solid, work-horse-like, 3%. We expect that
continued in the first quarter of 2012.
If anything, other indicators suggest real GDP growth might be even stronger.
Nonfarm payrolls rose 635,000 in Q1, the largest gain since 2006. Total hours worked
in the private sector climbed at a 3.7% annual rate. In other words, to get 3% real
GDP growth assumes some weakness in productivity.
This is clearly not the recovery heaven of 1983-84, when real GDP grew at a 6.6%
annual rate for two years and the jobless rate fell 3.5 percentage points in only 21
months. It’s not a double-dip, either, and after six consecutive months of 3%
growth, it’s not all about nice weather.
Consumption: Auto sales were up at a 35% annual rate in Q1 while “real”
(inflation-adjusted) retail sales ex-autos were up at a 5.8% rate. Services, a major
part of consumption, are not up as much, but it looks like real personal consumption
– goods and services combined – probably climbed at a 2.2% annual rate
in Q1, contributing 1.6 points to the real GDP growth rate. (2.2 times the
consumption share of GDP, which is 71%, equals 1.6.)
Business Investment: Business investment in equipment and software as well as
commercial construction appear to have grown at an annualized 6% rate in Q1. This
should add 0.6 points to the real GDP growth rate. (6 times the business investment
share of GDP, which is 10%, equals 0.6.)
Home Building: Led by apartment buildings – and assisted by unusually mild
winter weather – residential construction appears to have grown at about a 17%
annual rate in Q1. This translates into 0.4 points for the real GDP growth rate. (17
times the home building share of GDP, which is 2.3%, equals 0.4.)
Government: Military spending continued to decline in Q1, but state and local
government construction looks like it rose. On net, real government purchases shrank
at about a 1% rate in Q1, which should subtract about 0.2 percentage points from
real GDP growth. (-1 times the government purchase share of GDP, which is 20%,
equals -0.2).
Trade: At this point, the government has only reported trade data through February.
But, on average, the “real” trade deficit in goods has declined compared
to the Q4 average. This shrinkage resembles what happened in the first quarter of
2006, when the trade sector added 0.4 points to the real GDP growth rate.
We’re forecasting the same for this year’s first quarter.
Inventories: As always, inventories are the wild card. We only have
“real” inventory figures through January, when they rose sharply.
Nominal inventories were up at a moderate pace in February and we’re assuming
another moderate gain in March. This should generate a very small addition of 0.2
points to the real GDP growth rate in Q1.
Add-em-up and you get another 3% real GDP growth for Q1 – another “plow
horse” report.
The pessimists will likely subtract inventories and trade, and bash the economy, but
this game of trashing every piece of data for political purposes is getting really
old.
After piling massive government spending, new regulation, the threat of major tax
hikes, European uncertainty, higher energy prices, and a host of other things on its
back, the US economy keeps plodding along. It’s a testament to the resilience
of the entrepreneurial spirit, determination and new technology. It’s worth
celebrating, not tearing down.
Don’t get us wrong. We think the economy could grow faster if government were
smaller and tax hikes were off the table, but we are a long way from recession and
that’s good news for investors.
-
Not sure whether it has been celebrated yet, but I notice that this thread has recently joined the ever-growing list of threads on this forum with over 100,000 reads.
A pleasure working with you gentlemen.
-
I love Wesbury but yes it seems to be coming down to a reach for new metaphors. GM, can you predict the next one? A 3-legged plowhorse pulling as hard as he can, or: blind squirrel finds an acorn?
"slowing down to just 1.2% annualized growth in the first three quarters of 2011"
Breakeven growth used to be called 3.1%. Just 2 points below breakeven and 23 million out of full time work but luckily no recession.
"1983-84, when real GDP grew at a 6.6% annual rate for two years and the jobless rate fell 3.5 percentage points in only 21 months."
Yes, that is what real growth with pro-growth policies coming out of a deep recession looks like. This isn't it.
3% growth peak in one quarter along with 1% last year makes about 2% on a 2 year average, rounding up.
"not a double-dip" ... "we are a long way from recession"
Depends on what the meaning of the word is is. A recession involves negative growth for at least 2 quarters while this is just moving backwards slowly beneath the rate of breakeven growth or stuck in neutral for 3-4 years or at least until we change course. We are a long way from a recession? About one external shock away. More importantly, we are about 500 to 1000 years away from growing out of our current malaise and budget problems at our current rate of growth - best case.
----
"...this thread has recently joined the ever-growing list of threads on this forum with over 100,000 reads. A pleasure working with you gentlemen."
And thank you for hosting. When you hear that we changed one vote, we will celebrate!
-
GM, can you predict the next one?
The "Walking Dead"?
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"GM, can you predict the next one?" The "Walking Dead"?
I knew you could do it! Now we wait for the next 1% growth quarterly report and check the Wesbury July outlook (pre-written below) and see if you got it right.
'The Walking Dead'
Growth in the Obama economy for the second quarter of 2012 was reported at 0.00% by the US Dept of stagflation, coincidentally the same as John Belushi's 7 year GPA in Animal House. I am Brian Wesbury looking out for your investments. We are nowhere near recession or double dip, much less a triple axel with an ACL tear on the landing. The outlook we see is for nothing but more smooth sailing ahead. Some encouraging news in housing starts which tripled last month from 0.1 to 0.3 starts. See you next month with more good news. :wink:
-
Bwahahahahaha!
-
You guys are funny. Still, I think it important to keep in mind that when the DOW was at 6500 GM and I were predicting 6000. We have missed on that one by over 100%. That is a rather big miss!!!
We need to hear what guys like Wesbury and Scott Grannis (any snarky wit directed at Scott?) are saying.
"When you hear that we changed one vote, we will celebrate!"
Look at the Read-to-Post ratio on our threads. 40-1 is quite common and some are quite a bit more. SOMEONE out there is paying attention!
-
[youtube]http://www.youtube.com/watch?v=q63yE4dhiPU&feature=player_embedded[/youtube]
http://www.youtube.com/watch?v=q63yE4dhiPU&feature=player_embedded
Ah, the good old days.....
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"...keep in mind that when the DOW was at 6500 GM and I were predicting 6000. We have missed on that one by over 100%. That is a rather big miss!!!"
Good points. Also keep in mind that the DOW consists of 30 named companies who operate globally and can improve profitability by closing a store in your neighborhood, open one in Brazil and build it all in China. The exchange Crafty and JDN had a couple of days ago over NASDAQ was telling. Using the exuberance of it hitting an eleven year high is mathematically the same as saying that every dollar invested those entire 11 years returned a 0% return. We added 30 million people and our technology sector grew by zero? Did we make it all up in factory jobs?
While GM and Wesbury were arguing over the optimism in the US economy last year, Wesbury is now conceding that growth was 1.1%. That is not lethargic, that is pathetic. The DOW companies are up globally but in the US we are starting 600,000 fewer new companies a year than what is needed for vigorous growth (a statistic not shown in the DOW or S&P listings of existing companies) while budding entrepreneurs look at this business climate and new regulations coming and say: why bother.
Wesbury posts great data and analysis (no, let's not start snarking Scott who is more likely to read or post here) but Wesbury is read best here on the forum with the accompanying snark and criticisms for context and perspective.
I judge economists by how well they are able to explain what has already happened, not for their fortune telling capabilities and Wesbury is very good. PP ripped him the worst one time over housing data but that is a good reminder that all these economic measures have flaws.
Wesbury has put (IMO) some nice lipstick on a pig at times and I am regretful to say that GM in his pessimism has been at least partly right - 1.1% growth through most of last year?? For example, if we point out a 3% increase in housing starts for single family homes that needs to be in the context that they were recently almost at zero with the entire homebuilding industry shut down. They are growing nowhere near fast enough to employ back hardly any of the former construction workers, electricians and plumbers that used to build those homes. If the new starts are now apartments being constructed it means that many of the existing foreclosed or vacant homes will never come back. There are banking, budget and housing value consequences that come with that.
In Detroit, formerly America's 5th largest city larger than Chicago now smaller than San Jose, I imagine there are more homes gone than remaining and a city in bankruptcy. Other neighborhoods in other American inner cities have similar problems. McDonalds and Coca Cola are selling well in China, that does not mask the fact that not one significant product is manufactured in the population centers of North Minneapolis, the Southside of Chicago or East LA.
In an election year I am not inclined to accept sugar coating over what is currently not getting fixed with our man made economic problems. We have growth but it is below breakeven levels and at least close to the worst case in our lifetime for not growing our way back out of the mess that we made. One reason this badly managed economy doesn't fall off the cliff right now is because we are still sitting at the bottom of the cliff. Just my two cents.
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Washington Post's Dana Milbank did a hard hitting piece recently echoed by NBC's Rachel Maddow about Romney lying. The core accusation was that he is saying this is the worst recovery since... who knows when.. while their fact checkers tell them 1982 was worse when Tip Oneills congress delayed Reagan's tax cuts before policies kicked in 6+% robust at this point in Reagan's first term. But we are not in recession or in double dip or triple axel, we are growing, hahaha, it's just less than breakeven growth and no one without a magnifying glass can see it.
83% of Americans say we are still in a Recession (Fox poll, not Fox viewers). Included in the sample are the usual 45% or so who say they approve of President Obama.
I say either the economic numbers will improve (durable good orders down in March) or those approval numbers have peaked. This economy is barking like a duck no matter what the experts say.
http://www.foxnews.com/politics/2012/04/25/fox-news-poll-45-percent-approve-obama-as-83-percent-say-country-still-in/
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The nominal GDP is tweaked with the man made GDP deflator to calculate 'real' growth, if any. Some are saying that deflator that was lowered to 1.1% now, if corrected, would put real growth in Q1 2012 at 0.0%.
http://finance.townhall.com/columnists/mikeshedlock/2012/04/28/gdp_miss_far_bigger_than_announced_real_gdp_is_0_using_more_reasonable_deflator
We're not in a recession. 83% of Americans are wrong.
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http://pjmedia.com/vodkapundit/2012/04/27/your-friday-morning-dose-of-doom-gloom-5/?singlepage=true
Your Friday Morning Dose of Doom & Gloom
April 27, 2012 - 8:02 am - by Stephen Green
You’ve seen the headlines already, but let’s look a little deeper:
U.S. economic growth cooled in the first quarter as businesses cut back on investment and restocked shelves at a moderate pace, but stronger demand for automobiles softened the blow.
Advertisement
Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday in its advance estimate, moderating from the fourth quarter’s 3 percent rate.
2.2% is not a disaster. It’s about what you’d expect a hot economy to do as it cooled off. It’s been the same with jobs growth. 120,000, 140,000 — not bad, if we’d just enjoyed a year or two of 200,000+ growth each month. Of course, we never got that hot economy. We never got the jobs growth. We never got the big GDP numbers.
As Zero Hedge reminded everyone this morning, “It now takes $2.52 in new debt to raise GDP by $1.00.” That’s unsustainable. And everyone knows it. It’s just that in Washington, they can pretend not to know it, so long as Bernanke keeps doing the ZIRP and the Twist.
Want to hear the really scary part? You probably don’t, but I’m going to tell you anyway. Last quarter’s anemic growth might have been borrowed from the current quarter, thanks to the unseasonably warm weather. I’d look for sub-2% growth perhaps as early as this quarter, but certainly in the second half of the year. That stinks.
Which brings us to the argument Mitt Romney needs to start making. Romney has taken some heat from the right, for talking up the economy, for seeing the silver lining. But he really had no business going negative while the jobs numbers looked OK — you don’t win by talking down a growing economy. Those days are probably over, although we won’t know for sure until next Friday’s jobs report. If it’s another lame one, then Romney needs to switch gears again, and explain to people why Obamanomics has failed. And it’s a simple case to make.
I’ll leave it to the speechwriters to pretty it up, but here’s the bullet-point version.
• The economy bottomed out in Q2 of 2009, before a single Obama policy had taken hold. Not one stimulus dollar had been spent, ObamaCare was still just talk, Dodd-Frank did not exist. Obama did not “save” us from Depression. The recession found its natural bottom without him.
• The economy has been sputtering along that natural bottom ever since. Perky job creation went catatonic with the passage of ObamaCare. Dodd-Frank has enshrined Too Big to Fail while freezing consumer credit. ZIRP is impoverishing the elderly. Stimulus was partisan theft. Quantitative easing has resulted in food & gas inflation which is killing consumers.
• As a result of these policies, we’re on the verge of a double dip recession, which will start with 15% underemployment and 28% of all mortgages underwater. Where’s the natural bottom for that? And with an extra $5,000,000,000,000 in new debt, and interest rates already at zero — what tools does Washington have left to fix it? None.
The image of Obamanomics which Romney needs to sell is this: You take an economy on its back, then stomp the boot of the regulatory state firmly on its throat. You then beat it on the head with a big sack of money. When that fails, get a bigger sack. We’ve tried this for three years now, and yet the economy is still on its back. It’s time to let it breath once more.
That’s a case Romney can make gently, in line with his “He’s a nice guy, but we can’t afford him” approach.
Much will depend on the jobs report next week, but 2.2% growth just can’t generate enough jobs to do Obama any good. Let’s see if Team Romney is up to making the case.
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From GM's post:
The economy bottomed out in Q2 of 2009, before a single Obama policy had taken hold.
The economy has been sputtering along that natural bottom ever since.
It now takes $2.52 in new debt to raise GDP by $1.00
-----------------
Obama still has a goal of tying Romney to Bush, but the only thing missing above is that it was Obama not Romney who along with his Sec of State were the de facto leaders of the United States Senate during the exact period when the wheels fell off. He did not inherit a bad economy in Jan 2009; he had a hand in causing it.
-----------------
Wall Street Journal today:
The Growth Deficit
The slowest recovery plods along.
The weakest recovery on record continued in 2012's first quarter, with the Commerce Department's Friday report of 2.2% growth.
- Whoops! Slowest recovery, weakest recovery, worst recovery - That claim was the lead example of both Dana Milbank of the Washington Post and Rachel Maddow of NBC as to why Mitt Romney is such a LIAR; they were saying (a month ago) that was not true - yet. Either we have more data now or else Mitt has a pretty big co-conspirator in this lie.
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Economist Alan Reynolds is always worth the read IMO, challenging politicians, and economists who ignore elasticity. It reminds me of the arguments made to raise minimum wage a dollar. It there is no ill effect, why not raise it $20 or $50. If 50% or 70% tax rates have no ill effect, why not go to 100%? Those who project no revenue loss are using the wrong elasticity multiplier, Reynolds argues.
http://online.wsj.com/article/SB10001424052702303916904577376041258476020.html?mod=WSJ_Opinion_LEFTTopOpinion
Of Course 70% Tax Rates Are Counterproductive
Some scholars argue that top rates can be raised drastically with no loss of revenue. Their arguments are flawed.
By ALAN REYNOLDS
President Obama and others are demanding that we raise taxes on the "rich," and two recent academic papers that have gotten a lot of attention claim to show that there will be no ill effects if we do.
The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later. Both suggested that federal tax revenues would not decline even if the rate on the top 1% of earners were raised to 73%-83%.
Can the apex of the Laffer Curve—which shows that the revenue-maximizing tax rate is not the highest possible tax rate—really be that high?
The authors arrive at their conclusion through an unusual calculation of the "elasticity" (responsiveness) of taxable income to changes in marginal tax rates. According to a formula devised by Mr. Saez, if the elasticity is 1.0, the revenue-maximizing top tax rate would be 40% including state and Medicare taxes. That means the elasticity of taxable income (ETI) would have to be an unbelievably low 0.2 to 0.25 if the revenue-maximizing top tax rates were 73%-83% for the top 1%. The authors of both papers reach this conclusion with creative, if wholly unpersuasive, statistical arguments.
Most of the older elasticity estimates are for all taxpayers, regardless of income. Thus a recent survey of 30 studies by the Canadian Department of Finance found that "The central ETI estimate in the international empirical literature is about 0.40."
But the ETI for all taxpayers is going to be lower than for higher-income earners, simply because people with modest incomes and modest taxes are not willing or able to vary their income much in response to small tax changes. So the real question is the ETI of the top 1%.
Harvard's Raj Chetty observed in 2009 that "The empirical literature on the taxable income elasticity has generally found that elasticities are large (0.5 to 1.5) for individuals in the top percentile of the income distribution." In that same year, Treasury Department economist Bradley Heim estimated that the ETI is 1.2 for incomes above $500,000 (the top 1% today starts around $350,000).
A 2010 study by Anthony Atkinson (Oxford) and Andrew Leigh (Australian National University) about changes in tax rates on the top 1% in five Anglo-Saxon countries came up with an ETI of 1.2 to 1.6. In a 2000 book edited by University of Michigan economist Joel Slemrod ("Does Atlas Shrug?"), Robert A. Moffitt (Johns Hopkins) and Mark Wilhelm (Indiana) estimated an elasticity of 1.76 to 1.99 for gross income. And at the bottom of the range, Mr. Saez in 2004 estimated an elasticity of 0.62 for gross income for the top 1%.
A midpoint between the estimates would be an elasticity for gross income of 1.3 for the top 1%, and presumably an even higher elasticity for taxable income (since taxpayers can claim larger deductions if tax rates go up.)
But let's stick with an ETI of 1.3 for the top 1%. This implies that the revenue-maximizing top marginal rate would be 33.9% for all taxes, and below 27% for the federal income tax.
To avoid reaching that conclusion, Messrs. Diamond and Saez's 2011 paper ignores all studies of elasticity among the top 1%, and instead chooses a midpoint of 0.25 between one uniquely low estimate of 0.12 for gross income among all taxpayers (from a 2004 study by Mr. Saez and Jonathan Gruber of MIT) and the 0.40 ETI norm from 30 other studies.
That made-up estimate of 0.25 is the sole basis for the claim by Messrs. Diamond and Saez in their 2011 paper that tax rates could reach 73% without losing revenue.
The Saez-Piketty-Stantcheva paper does not confound a lowball estimate for all taxpayers with a midpoint estimate for the top 1%. On the contrary, the authors say that "the long-run total elasticity of top incomes with respect to the net-of-tax rate is large."
Nevertheless, to cut this "large" elasticity down, the authors begin by combining the U.S. with 17 other affluent economies, telling us that elasticity estimates for top incomes are lower for Europe and Japan. The resulting mélange—an 18-country "overall elasticity of around 0.5"—has zero relevance to U.S. tax policy.
Still, it is twice as large as the ETI of Messrs. Diamond and Saez, so the three authors appear compelled to further pare their 0.5 estimate down to 0.2 in order to predict a "socially optimal" top tax rate of 83%. Using "admittedly only suggestive" evidence, they assert that only 0.2 of their 0.5 ETI can be attributed to real supply-side responses to changes in tax rates.
The other three-fifths of ETI can just be ignored, according to Messrs. Saez and Piketty, and Ms. Stantcheva, because it is the result of, among other factors, easily-plugged tax loopholes resulting from lower rates on corporations and capital gains.
Plugging these so-called loopholes, they say, requires "aligning the tax rates on realized capital gains with those on ordinary income" and enacting "neutrality in the effective tax rates across organizational forms." In plain English: Tax rates on U.S. corporate profits, dividends and capital gains must also be 83%.
This raises another question: At that level, would there be any profits, capital gains or top incomes left to tax?
"The optimal top tax," the three authors also say, "actually goes to 100% if the real supply-side elasticity is very small." If anyone still imagines the proposed "socially optimal" tax rates of 73%-83% on the top 1% would raise revenues and have no effect on economic growth, what about that 100% rate?
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
-
As usual, nice work from Reynolds. Lets put this on the Tax thread please.
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Doug, since you are in MN, what is your take on this? Although the same questions could be asked in a lot of cities.
http://sportsillustrated.cnn.com/2012/football/nfl/05/10/minnesota-vikings-stadium.ap/index.html?sct=hp_t2_a8&eref=sihp
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"Doug, since you are in MN, what is your take on this?"
Thanks JDN. Yes the issue is perhaps the same everywhere at different times.
Your opinion from LA is relevant too because that their threat - to move the Vikings to LA. Does anyone even know what lakes your Lakers are named for?
I hate public private partnerships as a violation of about a dozen principles, equal protection comes to mind, extortion being illegal is another. It should either be a public asset that they rent to a team or a private football business investment. The road and highway changes and other infrastructure expenses should be enough for the taxpayer portion. This is subsidy to help billionaires hire more millionaires - (so that largely white people can watch black people hurt each other). What they forget is that it is zero-sum because they take from all other businesses to subsidize one.
Locally they call it the "cold Omaha" argument, meaning that one of the world's greatest cities and region's population and cultural center will be as irrelevant as Omaha (quite insulting!), and colder (farther north), if not for pro sports. Missing in that argument is that except that good teams like the Packers come visit, we already lost the pro-level quality of all our teams a few years back.
Also missing in the local argument is that this really was a two stadium question, Twins and Vikings, and really more stadiums than that over the last few years. Former Governor Tim Pawlenty got the Twins stadium done by allowing Hennepin County to foot the taxpayer portion. Henn Co got the tax approved with rule by 4 commissioners and never put it on the ballot. Hennepin County not even counting the Minneapolis part has an economy larger than about 8 states. The Vikings deal then should have been put on all counties except Hennepin for MN to retain the last vulnerable pro franchise. Not so. We get to double pay. Ironically those of us in the outskirts of Hennepin live further from t he stadiums than all of Ramsey County(St. Paul) and parts of 4 other counties, but get the double tax.
Also missed in the SI story is that we also built a new football stadium on the Univ. of MN campus, one of the nation's 5 largest public university campuses, in the same city, in the same time frame, for the same sport, for 6 home games/yr, but there is "no way" that pro football could be played in that stadium, for 'economic' reasons. Building two stadiums at the same time for the same sport in the same is economical? Only with government approval of taxpayer money.
(http://upload.wikimedia.org/wikipedia/commons/thumb/f/f2/TCF_Bank_Stadium_2.JPG/400px-TCF_Bank_Stadium_2.JPG)
U of M also broke ground on a new baseball Stadium this week. Don't tell me we don't have enough money.
Like Sweden, the Minnesota blue state economic plan only worked back when people had a Scandinavian (and German) work ethic that didn't allow anyone to quit work unnecessarily and soak up public resources. Those ethics are long gone while the spending programs keep growing.
What did Milton Friedman say about public subsidies... Investments that don't pay for themselves - aren't worth making.
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Well said Doug.
=========
Email Print Save ↓ More .
.smaller Larger By KARL ROVE
President Barack Obama's re-election organization is spending a lot of time attacking Mitt Romney over his careers in venture capital (investing in start-ups) and private equity (investing in troubled or failing businesses).
To reporters at Bloomberg Businessweek, Obama senior campaign adviser David Axelrod recently ripped Mr. Romney for "leveraging companies with debt, bankrupting companies and making money off of those bankruptcies . . . [that] cost jobs and certainly wages and benefits."
And an Obama campaign briefing paper says "Romney closed over a thousand plants, stores and offices . . . cut employee wages, benefits and pensions . . . laid off American workers and outsourced their jobs to other countries."
The president is guilty of the same alleged sins.
The Obama administration, after all, forced General Motors and Chrysler into Chapter 11 bankruptcy in 2009 and then capriciously ordered thousands of local dealerships closed.
Karl Rove talks about what President Obama's campaign team might be thinking heading into the next election and Joe Trippi discusses the importance of voter turnout and networking.
.The auto industry bailout cost lots of Americans their jobs. GM employed roughly 252,000 workers in 2008. Now it has 207,000, with 131,000 of them working in foreign plants. The Detroit Free Press recently noted that fewer Americans work at Chrysler than did before the bankruptcy. Based on data from the National Automobile Dealers Association, I estimate that as many as 100,000 Americans lost jobs at the companies' dealerships.
Mr. Obama's auto industry bailout plan imposed cuts in wages and benefits for current and future workers at both GM and Chrysler. And he loaded up both companies with debt they can never repay. The bailouts cost $80 billion; $51 billion is still outstanding and $24 billion may never be recovered, according to the Treasury Department's latest report. As GM's profits stall, its stock languishes at a level less than half that necessary to recoup Mr. Obama's investment of taxpayer dollars in the company.
The president's actions have produced big bucks for a foreign business. Last month, Fiat reported that, powered by its U.S. Chrysler subsidiary, profits were up tenfold the past year. Without Chrysler's earnings, Fiat would have lost money.
Fiat is likely to deploy those profits in expanding its world-wide operations, even as it's still unclear if it will deliver on its promise of billions in technologies for fuel-efficient vehicles in the U.S.
Mr. Obama also shifted production—and jobs—overseas. As part of the administration's restructuring, GM will increase production in China, Mexico South Korea and Japan—almost doubling the number of vehicles it makes in those countries, according to a confidential report by the company to Congress in May 2009 (obtained by the Detroit News). Many of those cars will be imported into the U.S.
About Karl Rove
Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy-making process.
Before Karl became known as "The Architect" of President Bush's 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.
Karl writes a weekly op-ed for the Wall Street Journal, is a Fox News Contributor and is the author of the book "Courage and Consequence" (Threshold Editions).
Email the author atKarl@Rove.comor visit him on the web atRove.com. Or, you can send a Tweet to @karlrove.
Click here to order his new book,Courage and Consequence.
.There are differences between Mr. Romney and Mr. Obama. Mr. Romney rescued companies with private money collected from investors including union pension funds, college endowments and private individuals. He had to go through the normal process of laws and courts. His principal focus was on long-term growth for companies in which he invested his company's reputation and money. And he had to make a profit to be successful.
Mr. Obama's story is very different. The auto industry was bailed out with taxpayer money. The president restructured GM and Chrysler by fiat and then forced them into bankruptcy, presenting the courts with a fait accompli.
The president wanted the auto industry to survive, but he also wanted to reward political allies—so he gave 20% of General Motors and 55% of Chrysler to the United Auto Workers union. He stood by as the UAW forced the closure of a plant in Moraine, Ohio, where workers had joined a rival union.
The secured crditors of GM and Chrysler—including retirees, pension funds and endowments—had their investments virtually wiped out by the president's plan. Though taxpayers will never get all their money back, the president still calls it all a big success.
If the auto industry bailout is the best Mr. Obama can do, Republicans should take heart. Because matched against his overall record of presiding over high unemployment, trillion-dollar annual deficits, and a growing number of Americans in poverty and on food stamps, the bailout is not the political game changer Team Obama believes it is.
Mr. Rove, the former senior adviser and deputy chief of staff to President George W. Bush, is the author of "Courage and Consequence" (Threshold Editions, 2010).
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Doug, I must admit I don't know what lakes the Lakers are named for other than MN has lots of Lakes. Although I would argue WI might have more. :-)
Well it looks like you got your stadium.
http://www.latimes.com/sports/sportsnow/la-sp-sn-minnesota-senate-new-stadium-vikings-20120510,0,650500.story
To try to answer your question after a long day, my first inclination is to say I basically agree with you. Why use public money? As for college stadiums,
well I'm happy to go watch my alma mater USC play in the Coliseum. One could argue, why couldn't a pro team play there? Seriously.
That said, being in a big market, we have choices and money. Small cities, like Green Bay, although that's a unique situation, somehow have to compete.
How are they going to do it?
Further, although I don't necessarily buy it, supposedly pro teams bring in revenue to the city. I love LA, and I like football (USC), but I really don't miss
not having a pro team. We have so many choices here in LA for entertainment. Green Bay, well, they have the Packers.
I'm rambling, but in general, to answer your question, except for a parade for a championship down main street, I too am not sure why a city/state, or any governmental agency provides money or guarantees to a private enterprise like a sports team where players are making millions and the team is owned by billionaires (Packers excepted).
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JDN, Don't worry, in Purple Rain, Prince didn't know his Minneapolis lakes either. Just the point that Minneapolis has sent good teams to LA for the larger market before. The economic tenet is that these athletes (and owners) deserve the large fruits of their labor (and investment risk taking) IF those dollars flow based on a free economic exchange. If you can bring entertainment and enjoyment to millions of people based on talent and hard work then you are entitled to your share of the money rightfully generated. Unfortunately pro sports has a false model with a hole in it where the already humungous money is inflated by the taxpayers in the communities. Their money comes partly from a threat of taking my home or imprisoning me if I don't pay. Nice.
"although I don't necessarily buy it, supposedly pro teams bring in revenue to the city."
Of course they do and that is more visible and measurable than the money taken from all the other businesses to artificially support them. Meanwhile, they build homes a lot like Mitt Romney's. http://blogs.citypages.com/blotter/2010/06/kevin_garnetts.php (Click where it says 'view larger map' to see what a Minneapolis metro lake look like.)
Taxpayer support of pro sports is from the same argument as special treatment for auto makers or anyone else. Of course we don't want to lose them, but not at the cost of undermining the principles that make the whole system work. Like paying ransom for hostages, we'll do it just this once thinking big pay with no risk won't encourage more hostage situations. Too-big-to-fail thinking ironically makes the too-big get bigger and bigger, literally at the expense of the small. That is what we want?
It is hard to articulate, but the possibility of failure in capitalism is part of the dynamism and constant rejuvenation of freely flowing assets, resources and innovation that all centrally run, state directed economies by definition lack.
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It is hard to articulate, but the possibility of failure in capitalism is part of the dynamism and constant rejuvenation of freely flowing assets, resources and innovation that all centrally run, state directed economies by definition lack.
Frankly, IMHO that is what makes America great. The willingness to try and fail, and fail, and try again. The entrepreneurial spirit.
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Wesbury at his best! Cut spending first. But also cut through excessive regulations and inefficient tax rates.
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A recent piece from Bloomberg worthy of consideration as we copy their economic plan:
Why France Has So Many 49-Employee Companies
http://www.businessweek.com/articles/2012-05-03/why-france-has-so-many-49-employee-companies
French labor code: Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.
French businesspeople often skirt these restraints by creating new companies rather than expanding existing ones. “I can’t tell you how many times when I was Minister I’d meet an entrepreneur who would tell me about his companies,” Thierry Breton, chief executive officer of consulting firm Atos and Minister of Finance from 2005 to 2007, said at a Paris conference on April 4. “I’d ask, ‘Why companies?’ He’d say, ‘Oh, I have several so that I can keep [the workforce] under 50.’ We have to review our labor code.”
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They also 'skirt' regulations by not starting businesses in the first place.
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Mr. Obama, YOU are the "serous headwind" the US economy is heading into. http://www.washingtonpost.com/politics/obama-warns-of-serious-headwinds-to-economic-recovery-following-disappointing-jobs-report/2012/06/01/gJQARbXN7U_story.html
Unemployment up. New jobs down. Previous months new jobs revised down. The number of long term unemployed up. Worker participation rate down. Average work week down.
Who could have seen this coming?
Wesbury has 2 days to put together his Monday morning outlook: 'After Fridays market collapse we see even greater buy opportunities?', 'we feel good about the worst recovery ever'
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"The U.S. economy has “slipped back under the Mendoza line,” JPMorgan Chase (JPM) Chief U.S. Economist Michael Feroli said Thursday, before the jobs report came out but after another discouraging report—the news that the U.S. economy grew at an annual rate of just 1.9 percent in the first quarter. The Mendoza line is baseball lingo that has made the jump into business. It’s a reference to Mario Mendoza, a shortstop for Pittsburgh, Seattle, and Texas in the 1970s and 1980s whose batting average (below .200 in five of his nine seasons) has come to stand for the dividing line between mediocrity and badness."
http://www.businessweek.com/articles/2012-06-01/the-u-dot-s-dot-economy-slips-below-the-mendoza-line
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"The economy bottomed out in Q2 of 2009, before a single Obama policy had taken hold.
The economy has been sputtering along that natural bottom ever since.
It now takes $2.52 in new debt to raise GDP by $1.00
- from GM's post Apr 28 2012
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A billion dollars of political ads doesn't make this look any different.
Economic decline was a political choice.
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An excellent and thought provoking book review:
http://www.nybooks.com/articles/archives/2012/jun/07/what-makes-countries-rich-or-poor/
There is no doubt that good institutions are important in determining a country’s wealth. But why have some countries ended up with good institutions, while others haven’t? The most important factor behind their emergence is the historical duration of centralized government. Until the rise of the world’s first states, beginning around 3400 BC, all human societies were bands or tribes or chiefdoms, without any of the complex economic institutions of governments. A long history of government doesn’t guarantee good institutions but at least permits them; a short history makes them very unlikely. One can’t just suddenly introduce government institutions and expect people to adopt them and to unlearn their long history of tribal organization.
That cruel reality underlies the tragedy of modern nations, such as Papua New Guinea, whose societies were until recently tribal. Oil and mining companies there pay royalties intended for local landowners through village leaders, but the leaders often keep the royalties for themselves. That’s because they have internalized their society’s practice by which clan leaders pursue their personal interests and their own clan’s interests, rather than representing everyone’s interests.
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Responding to BD's previous post in the thread, that is a very important question and sounds like a great book suggestion. I find the points made in the review extremely valid.
Within the question of rich or poor countries I think are two questions, why do great nations fall and how come most places never develop any wealth in the first place.
Two other books of note on this topic:
"Conquests And Cultures: An International History" by Thomas Sowell
Detailed studies and wisdom from across the globe and throughout history.
Also a 14th century Arabic book by Ibn Khaldun that I searched out after Arthur Laffer called him the first supply side economist. 'The Muqaddimah' (introduction to history) covers timeless economic principles from 1377, now published at books.google.com
This is an excerpt in translation that I picked out his economic observations:
"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."
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Posted in Obama Phenomenon is an IBD rebuttal to any positive spin on the Obama record. I was wondering what Wesbury might have said in his Monday morning response to Friday's dismal economic news. First some positive spin "acceleration in the household number suggests the job market is not as bad as it was made out to be", then a clarification on his "Plowhorse Economy" designation:
[The reasons we have a plowhorse economy are the] "the same reasons Europe had slow growth and a high unemployment rate for the past three decades: government spending, taxes, and regulation have been a huge burden."
"Government is a burden which slows growth and reduces job opportunities. The only way to get a permanent acceleration – in real GDP, incomes, and job growth – is to lighten the load. The good news for the US is that there is a four step plan to make this happen and we’re going to face all of them this year.
First is the recall election on Tuesday for Scott Walker as Governor of Wisconsin. Democrats in Massachusetts and Rhode Island – even Rahm Emanuel in Chicago – have also carried out reforms for government workers, but Walker’s efforts created a massive political backlash. A Walker victory would set the stage for more reforms in other states.
Second is the late June Supreme Court ruling on Obamacare. Health insurance is an important issue and many reasonable people disagree about inequities in that market, but a government takeover would signal further growth in government spending and regulation, which would dampen the entrepreneurial spirit and increase uncertainty.
Third is the November 7th presidential election, when voters across the country get the chance to signal a desire to roll back the size and scope of government. “Core” government spending – outside of defense, TARP, interest and entitlements – has hit a record high in recent years. A change in leadership would mean a chance to greatly reduce the share of GDP controlled by Washington. Finally, the scheduled tax hike on income, capital gains, and dividends in 2013 has become a wall of uncertainty for business to overcome. If the first three steps happen, this one will too.
These steps will decide whether the US heads toward a European-like future or remains a bastion of free market capitalism. As each step unfolds, the momentum of the decisions will also become more visible. We remain confident America is a “center-right” country that respects its Constitution. If so, look out. The Plow Horse may turn into a thoroughbred."
http://www.ftportfolios.com/Commentary/EconomicResearch/2012/6/4/speeding-up-the-plow-horse
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Also note my quotes of Scott Grannis in the Economics thread on the SCH forum a couple of days ago.
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Important to read this with the charts. I will come back later and try to post it all:
By Daniel Mitchell, Cato Institute
http://finance.townhall.com/columnists/danieljmitchell/2012/06/08/estonia_and_austerity_another_exploding_cigar_for_paul_krugman/page/full/
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If I recollect it was Doug who pointed out the outstanding job that Knudsen did on behalf of FDR and America.
Here is a nice article and reference to a recent book on the subject.
http://www.thedailybeast.com/articles/2012/06/16/bill-knudsen-s-business-skills-saved-the-u-s-at-the-dawn-of-world-war-ii.html
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"Failure is the oppprtunity to begin again more intelligently."
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Others follow up on a point I attempted to make yesterday. I was writing about 'breakeven' real GDP growth. This writer says the US economy must create 125,000 new jobs per month to break even. Article below I(fox News) says that 191,000 new workers come here every month. Roughly 92% of them need to find new jobs to keep our 8% unemployment rate at 'breakeven' levels. 80,000 jobs in a country of 310 million people does not do that!
Friday, July 6, 2012
U.S. Jobs Deficit Grows by 47,000 in June
Going Around in Circles
~ “If you're lost in the woods and you feel like you're walking in circles, you probably are.” ~ Discovery News
- By: Larry Walker, Jr. -
According to the Economic Policy Institute (EPI), the U.S. economy needs to create a minimum of 127,000 each month in order to keep pace with population growth. And based on today’s Employment Situation Report, the economy created just 80,000 jobs in June. That means the jobs deficit increased by another 47,000 last month. Yet, according to Barack Obama, "That's a step in the right direction.” However, according to economic common sense, it’s another step towards stagnation, then decay and dissolution.
He added, “We can't be satisfied because our goal was never to just keep on working to get back to where we were back in 2007.” So according to Obama, his goal was never to just keep working to get back to where we were in 2007, a day when we had 4,805,000 jobs more than we have currently. “I want to get back to a time when middle-class families and those working to get into the middle class have some basic security,” he said. We are left to wonder what time that was – the 1920’s, 50’s, 60’s, 80’s, 90’s, or the 2000’s. But based on the latest jobs report, that time could have been any year prior to Obama’s term.
http://larrymwalkerjr.blogspot.com/2012/07/us-jobs-deficit-grows-by-47000-in-june.html
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http://www.foxnews.com/opinion/2012/07/06/disappointing-jobs-picture-and-no-were-not-doing-better-than-europe/
Americans faced another disappointing jobs picture today. Of course, we could go through the numbers again. With the working age population growing by 191,000 last month, 80,000 more jobs doesn’t even come close to absorbing all these new workers, let alone employing those who have long been out of work. And then there’s the most important number of all: for 41 months, the unemployment rate has been above 8 percent.
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(http://www.investors.com/image/Web2cJobs0709-(2)_345.gif.cms)
Disability Ranks Outpace New Jobs In Obama Recovery
By JOHN MERLINE, INVESTOR'S BUSINESS DAILY
More workers joined the federal government's disability program in June than got new jobs, according to two new government reports, a clear indicator of how bleak the nation's jobs picture is after three full years of economic recovery.
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Wow. That is a fascinating datum.
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I found this exceptionally interesting.
http://spectrum.ieee.org/at-work/innovation/a-brief-history-of-money/0
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First, excellent previous post by BD. I continually impressed with his range of reading materials. IEEE Spectrum is one of my old favorites.
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A recent post of VDH on NRO The Corner:
"If one wanted to ensure permanent 8 percent to 9 percent unemployment, one might try the following:
1. Run up serial $1 trillion deficits
2. Add $5 trillion to the national debt in three and a half years
3. Impose a 2,400-page, trillion-dollar new federal takeover of health care, with layers of new taxation, much of it falling on the middle class and employers, even as favored concerns are given mass exemptions.
4. Scare employers with constant us/them class warfare rhetoric about a demonized one-percenter class and its undeserved profits; constantly talk about raising new taxes and imposing regulations, ensuring uncertainty and convincing employers of unpredictability in regulation and taxes. You cannot convince a country to go into permanent near-recession, but President Obama is doing his best to try."
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More famous people reading the forum, Thomas Sowell helps me today to answer Bigdog's tough question posed recently: "You don't recognize the connection to building cars in the US and US jobs?"
Sowell: "Creating (saving in this case) particular jobs does not mean a net increase in jobs.
Jobs Versus Net Jobs
By Thomas Sowell - July 10, 2012
One of the reasons for the popularity of political rhetoric is that everybody can be right, in terms of their own rhetoric, no matter how much the rhetoric of one side contradicts the rhetoric of the other side.
President Obama constantly repeats how many millions of jobs have been created during his administration, while his critics constantly repeat how many millions of jobs have been lost during his administration. How can both of them be right -- or, at least, how can they both get away with what they are saying?
There are jobs and there are net jobs. This is true not only today but has been true in years past.
Back during the 1980s, when there were huge losses of jobs in the steel industry, the government restricted the importation of foreign steel. It has been estimated that this saved 5,000 jobs in the American steel industry.
But of course restriction of competition from lower-priced imported steel made steel more expensive to American producers of products containing steel. Therefore the price of these products rose, making them less in demand at these higher prices, causing losses of sales at home and in the world market.
The bottom line is that, while 5,000 jobs were saved in the American steel industry, 26,000 jobs were lost in American industries that produced products made of steel. On net balance, the country lost jobs by restricting the importation of steel.
None of this was peculiar to the steel industry. Restrictions on the importation of sugar are estimated to have cost three times as many jobs in the confection industry as they saved in the sugar industry. The artificially high price of sugar in the United States led some American producers of confections to relocate to Mexico and Canada, where the price of sugar is lower.
There is no free lunch in the job market, any more than there is anywhere else. The government can always create particular jobs or save particular jobs, but that does not mean that it is a net creation of jobs or a net saving of jobs.
The government can create a million jobs tomorrow, just by hiring that many people. But where does the government get the money to pay those people? From the private economy -- which loses the money that the government gains.
With less money in the private sector, the loss of jobs there can easily exceed the million jobs created in the government or in industries subsidized by the government. The Obama administration's creation of "green jobs" has turned out to cost far more money per job than the cost of creating a job in the private sector.
In addition to reducing jobs in the private sector by taking money out of the private sector to pay for government-subsidized jobs, the Obama administration has made businesses reluctant to hire because of the huge uncertainties it has created for businesses as regards the cost of adding employees. With thousands of regulations still being written to implement ObamaCare, no one knows how much this will add to the cost of hiring new employees.
In the face of this economic uncertainty, even businesses that have an increased demand for their products can meet that demand by working their existing employees overtime, instead of adding new employees. Many employers hire temporary workers, who are not legally entitled to benefits such as health insurance, and who will therefore not be affected by the cost of ObamaCare.
When President Obama boasts of the number of jobs created during his administration, the numbers he cites may be correct, but he doesn't count the other jobs that were lost during his administration. His critics cite the latter. Both can claim to be right because they are talking about different things.
What has been the net effect? During this administration, the proportion of the working age population that has a job has fallen to the lowest level in decades. The official unemployment rate does not count the millions of people who have simply given up looking for a job.
If everybody gave up looking for a job, the official unemployment rate would fall to zero. But that would hardly mean that the problem was solved or that the "stimulus" worked. Creating particular jobs does not mean a net increase in jobs.
http://www.realclearpolitics.com/articles/2012/07/10/jobs_versus_net_jobs_114746.html
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It is a good thing 5,000 jobs were saved. Otherwise there would have been a net loss of 31,000 jobs.
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BD: "It is a good thing 5,000 jobs were saved. Otherwise there would have been a net loss of 31,000 jobs."
I think you either missed or disagree with his point.
Sowell: "5,000 jobs were saved in the American steel industry, 26,000 jobs were lost in American industries that produced products made of steel."
His point is that these companies had to pay more than foreign competitors did for steel. Saving steel by making US manufacturers pay more for it a) puts them at a competitive disadvantage and b) gives them reason to move their own manufacturing out. These job losses under Sowell's logic are not additive, they are offsetting.
Saving auto jobs by changing the rules of capitalism assumes that the resource shifts and the unpredictability that causes has no other effect, negative effect, on the other participants, investors, lenders, job creators for example. The auto industry bailout began in Dec 2008. Net jobs saved on this BLS employment chart during the period following the auto rescue do not look very impressive, of course it is never the case that all other factors are held constant.
(http://data.bls.gov/generated_files/graphics/latest_numbers_LNS11300000_2002_2012_all_period_M04_data.gif)
Economic freedom with a fairly level, predictable playing field, more than auto manufacturing, made the American economy great. There is no reason we can't have both IMHO.
Looking forward to examples of where central governments picking winners and losers outperform economic freedom.
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DMG: "I think you either missed or disagree with his point." You are quite right.
DMG: "of course it is never the case that all other factors are held constant." True, but there is correlation and causation, and for Sowell to seem to understand that is problematic.
Moreover, Sowell in an effort to blame Obama (it is an election year, after all), ignores Congress. Why? Convenience, but that convenience is sloppy. Obama, or any other president, can't "meddle" (or "rescue" depending on the point of view) in economic policy without explicit and implicit assistance from Congress.
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Ummm , , , Obama has led the efforts for massive deficit spending so it seems fair to me that he get credit for it-- especially in that it originated in a Congress where both houses were Democrat controlled. Yes?
I remember BO claiming "creating or saving" (a wondrously impossible to measure metric this new category of "saved" jobs) 3 million jobs with $600,000,000,000 TARP/Stimulus 1 or 2 or whatever money. A simple mathematical calculation reveals that even if we accept the President utterly disingenuous numbers this comes out to $200,000 per job claimed!!! It seems quite obvious to me that the $600B taken from the private economy must have heavy costs
Concerning the auto industry: Both MR and the Pravdas seem to be letting BO get away with this meme that if the car companies went bankrupt, the jobs in question would have disappeared and that he, BO, "saved the auto industry". This simply isn't true. The owners would have been wiped out (a correct result) the burdensome contracts with the unions eliminated or renegotiated, debts reduced or eliminated, and the NEW BUYERS would have a fresh start. There is no mystery to this. I forget which chapter of the bankruptcy law (7? 11?) covers it, but it happens all the time.
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Ummm , , , Obama has led the efforts for massive deficit spending so it seems fair to me that he get credit for it-- especially in that it originated in a Congress where both houses were Democrat controlled. Yes?
I remember BO claiming "creating or saving" (a wondrously impossible to measure metric this new category of "saved" jobs) 3 million jobs with $600,000,000,000 TARP/Stimulus 1 or 2 or whatever money. A simple mathematical calculation reveals that even if we accept the President utterly disingenuous numbers this comes out to $200,000 per job claimed!!! It seems quite obvious to me that the $600B taken from the private economy must have heavy costs
It is not as if the party is a single unit. And, by constitutional design, the president, senators and representatives have different interests. So, "maybe" or "on occassion" but not always, necessarily "yes."
And, as Sowell (correctly) notes, just because Obama (or another president or politican) claims credit, it does not make it so, whether or not the policy in question "worked."
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"...but there is correlation and causation, and for Sowell to seem to understand that is problematic."
Not sure if I followed you correctly and speaking for me not Sowell. Changing the rules and moving the goal posts to save specific union Dem constituency jobs, that may well have come back redefined, coincided with a loss of about 2 million jobs generally in the economy. If there is correlation/causation, it is that 'saving' those jobs from renegotiation coincided for sure and maybe caused net jobs lost. The curve is clearly downward at that time, and those were the policies.
Sowell takes President Obama to task for job gain claims that are not net jobs and he also takes critics of Obama to task for jobs lost claims that are not net jobs numbers. I think you underestimate Sowell to see him as partisan more than principled. As one who has read his books that I HIGHLY RECOMMEND 'Basic Economics' and 'Applied Economics', I think he is using this rhetoric of the moment as a take off point to point out underlying principles he believes are crucial to successful operation of the economy.
http://www.amazon.com/Basic-Economics-Common-Sense-Economy/dp/0465022529
http://www.amazon.com/Applied-Economics-Thinking-Beyond-Stage/dp/0465003451
I think it was me more than Sowell forcing the auto industry example. It just seems like a perfect example of the difference in views. Sure the government can always create or save particular jobs, but at the the expense of not having the kind of system where scarce resources like manufacturing capacity and labor allowed to move freely to their most productive use. We can move goal posts around during a soccer game to favor certain shooters or certain shots at certain times, but then what is left of the game? Cronyism, like most third world and ash heap economies. Crafty is right on auto jobs IMO. Preventing a needed reorganization is not the same as saving jobs. United Airlines and others were still flying passengers in the days, months and years after their bankruptcies.
If you prop up every dead tree in a forest does that maximize its vitality or spur robust new growth underneath? I think not.
Sowell continued, regarding Obamacare: "the Obama administration has made businesses reluctant to hire because of the huge uncertainties it has created for businesses as regards the cost of adding employees."
This is without a doubt true and of no fault whatsoever of the Republican House who provided zero votes to this anti-employment legislation and already voted to repeal.
A good supporting piece to that I think is a post slightly up the page called:
"Why France Has So Many 49-Employee Companies"
http://www.businessweek.com/articles/2012-05-03/why-france-has-so-many-49-employee-companies
You can force 50 person companies do this and do that, whether it is healthcare, family leave, daycare, layoff notices, minimum benefits, maximum hours, excess profits taxes, you name it, but you can't (yet) force people to form 50 person companies.
Those legislators and regulators are blind I think to the point of Feldstein in the Morris tax piece that people change their behavior to policy changes. In that example it was to the tune of misjudging revenues by a factor of two thirds!
Obama's policies are job creation killing. Why shouldn't he be singled out for a two million or so net loss of American jobs? What are the policies that Republican kept President Obama from implementing during the Obamacare passage debacle? Passing that massive tax increase during a recession was job one while he had the House and 60 Senators. On the other side of the coin the Pelosi-Obama congress of '07-'08 most certainly neglected to force Fannie Mae and CRA reform and prevented the Bush administration from making temporary tax cuts permanent.
Fairness over growth has brought us neither.
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GM’s Government Fleet Sales and Truck Inventory Rise
Submitted by Mark Modica on Thu, 07/05/2012
It looks like General Motors will be throwing everything in but the kitchen sink to help fluff its second quarter earnings numbers. Taxpayers continue to help with the cause as President Obama campaigns on the "success" of GM following the manipulated bankruptcy process that cost taxpayers $50 billion and another $45 billion of tax credits gifted to GM to help protect powerful UAW interests. We now learn that government purchases of GM vehicles rose a whopping 79% in June.
The discovery of the pick-up in government fleet purchases at the taxpayers' expense comes just weeks before GM announces its second quarter earnings. Overall fleet sales (which are typically less profitable than retail sales) at Government Motors rose a full 36% for the month, helping to drive decent sales improvements year over year.
GM claimed that sales increases did not rely on incentive spending, which appeared to remain in check, but one analyst during GM's sales conference call questioned whether the company's "stair step" incentive spending was accurately depicted. This incentive spending kicks in after dealerships report final sales figures for the month and may be yet another deceptive way for GM to fudge its numbers. Not mentioned was GM card rewards programs that do not get counted as incentive spending.
The government's increased spending on GM vehicle purchases presents yet another conflict of interest as Treasury refuses to sell taxpayers' stake in GM and Obama campaigns on the auto bailouts. It does not appear that any members of Congress (from either party) are questioning the increased spending. Also ignored was the Department of Energy's gifting of $2.7 million of taxpayer money to GM to reduce energy consumption in its door manufacturing process by 50%. The DOE seems to be one of the main conduits to funnel taxpayer funds to cronies of the Administration. The $2.7 million contribution to GM comes after additional millions of dollars were spent by the DOE on advisory fees paid to legal firms that helped smooth the way for the GM bankruptcy process (as reported here); another move that went unquestioned.
The upcoming earnings announcement by GM is, politically, the most important to date. The pressure is on Government Motors to appear financially strong as this may be the last earnings report before November elections and sets the stage for how "successful" GM is. One of GM's past tricks to help fudge earnings numbers has been to stuff truck inventory channels. Old habits die hard at GM. According to a Bloomberg report, "GM said inventory of its full-size pickups, which will be refreshed next year, climbed to 238,194 at the end of June, a 135 days supply, up from 116 days at the end of May." 135 days supply is huge, the accepted norm is a 60 day supply. The trick here is that GM records revenue when vehicles go into dealership inventories, not when actually sold to consumers.
The article goes on to quote Kelley Blue Book's Alec Gutierrez who stated "They're (GM) likely going to have a relatively high days supply of trucks moving forward and they're already placing some pretty aggressive cash incentives on the hood. It's going to eat into their profit margins..."
GM's earnings announcement comes on August 2nd. The main headwinds will be weak European operations and growing pension liabilities. The headline number for earnings should be viewed skeptically and an eye kept on the share price reaction after the conference call. Expect Government Motors to put a positive spin on its financial health as the stakes are now at their highest. The long-term health of GM remains in question and the true financial picture may not surface until well after voters decide who will be running our country. Eventually we will see just how successful GM really is.
Mark Modica is an NLPC Associate Fellow.
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The Incredible Bain Jobs Machine
By ANDY KESSLER
Did Mitt Romney and Bain Capital help office-supply retailer Staples create 88,000 jobs? 43,000? 252? Actually, Staples probably destroyed 100,000 jobs while creating millions of new ones.
Since 1986, Staples has opened 2,000 stores, eliminating the jobs of distributors and brokers who charged nasty markups for paper and office supplies. But it enabled hundreds of thousands of small (and not so small) businesses to stock themselves cheaply and conveniently and expand their operations.
It's the same story elsewhere. Apple employs just 47,000 people, and Google under 25,000. Like Staples, they have destroyed many old jobs, like making paper maps and pink "While You Were Out" notepads. But by lowering the cost of doing business they've enabled innumerable entrepreneurs to start new businesses and employ hundreds of thousands, even millions, of workers world-wide—all while capital gets redeployed more effectively.
This process happens during every business cycle and always, always creates jobs. Yet is ignored by policy mavens.
It is now four years after the wheels fell off our financial system. The government has tried every gimmick to revive the economy: fiscal stimulus, monetary easing, loan write-downs, foreclosure modifications—all duds. It seems like no one remembers how an economy creates jobs anymore. The right answer, in fact the only answer, for jobs and better living standards, is productivity.
Economists define productivity as output per worker hour. But ramping up the output of trolleys or 8-track tapes won't increase living standards. It is not just technical efficiency that matters, it is also effectiveness—that is, producing what the economy really needs and consumers will pay for.
And so, in a broader sense, productivity is really about doing the right things the right way. Using modern construction equipment, we could build a pyramid on the National Mall in Washington with amazing efficiency, but it would not be effective.
So how does productivity result in more employment?
Three ways. First, some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane's aisle seat, ads next to Google search results.
The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don't hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.
This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Adobe software killed typesetters, but allowed millions cheaply to get into the publishing business. Millions of individuals and micro-size businesses now reach a national, not just local, retail market thanks to eBay. Amazon allows thousands upon thousands of new vendors to thrive and hire.
Consider Uber, a 20-month-old start-up, whose smartphone app knows where you are and with a simple click arranges a private car pickup to take you where you want. It doesn't exist without iPhones or Androids. Taxi and limousine dispatchers lose. Customers win. We'll all be surprised by new tablet applications being dreamed up in garages and basements everywhere.
The third way productivity results in more employment is by attracting capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services: $5,000 computers become $500 tablets. Consumers get to spend the difference elsewhere in the economy, and entrepreneurs will be happy to sell them what they want or create new things they never heard of, but will want. And those with capital will be eager to fund these entrepreneurs. Win, win.
The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy's most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as "investments."
The productive use of capital is not an automatic process, of course. It is all about constant experimentation. And it is never permanent: Railroads were once tremendously productive, so were steamships and even Kodachrome. It takes work, year in and year out—update, test, tweak, kill off. Staples is under fire from Amazon and other productive online retailers. Its stock has halved since its 2010 peak and is almost at a 10-year low. So be it.
With all the iPads and Facebook and cloud-computing growth, why is unemployment still 8.2% and job creation stalled? My theory is that productivity is always happening but swims upstream against those that fight it. Unions, regulations and a bizarre tax code that locks in the status quo.
In good times, no one notices. But in slow-growth economies, especially in the last 10 years, regulations and hiring rules and employer mandates and environmental anchors have had a cumulative dampening effect on productivity.
How can government do the right thing to help productivity and the employment it fosters? Get out of the way. Every government-mandated low-flow toilet, phosphorous-free dishwasher detergent, CFL light bulb, and carbon-emission regulation is another obstacle on the way to a productive, job-creating economy that produces things consumers really want.
http://online.wsj.com/article/SB10001424052702303740704577527200796292034.html?mod=WSJ_Opinion_LEADTop
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Romney needs to answer the leftist income inequality obsession with the inspiration and reality of income mobility optimism. The latest study from Pew actually shows all kinds of progress even though they continue to exclude the primary sources of income for lower incomes, "does not include the value of Medicare, Medicaid, the EITC, Section 8 housing vouchers nor SNAP (food stamps)" which exaggerates inequality. Making dollar errors in the multi-trillions for the poorest and then publishing results as if you covered it all. Buyer beware!
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Movement across class lines has been reasonably robust. 60 percent of children born to the richest fifth of Americans in the late 1960s fell out of that category, with 8 percent landing in the bottom fifth. 57 percent of children born into the bottom fifth moved up, and more than half of them moved into the middle fifth or higher. Overall, 70 percent of children didn’t end up in their parents’ quintile.
The rise in incomes holds across the economic spectrum. Among the poorest fifth, inflation-adjusted income grew by 74 percent, from $11,064 to $19,202. It grew even more substantially in the highest quintile but the Pew study may well understate growth in the real income of the poor.
Even with the exclusions that cause incomes of the poor to be understated, these incomes have risen considerably, as have incomes across the economic board.
Pew: http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pursuing_American_Dream.pdf
Powerline: http://www.powerlineblog.com/archives/2012/07/the-rising-tide-has-lifted-most-boats.php
Forbes: http://www.forbes.com/sites/timworstall/2012/07/11/sad-ignorance-in-the-pew-economic-mobility-project-their-data-is-worthless/
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We are most equal when we are most poor. New CBO data support what I have trying to argue on these pages.
"...the incomes of the top one percent fell 18 times more than the incomes for the middle class at the start of the recession."
The point of the policy arrow change in Nov 2006 / Jan 2007 was to shift from growth to fairness. At first it succeeded. The asset / investment selloff mostly hit the rich - at first. And anyone who owned anything but disproportionately that hits the rich. But labor requires capital to be fully employed and productive. Now the rich have recovered and the employment is way down and stuck.
What most analyses miss is that the rich pay the most taxes in dollars when they are making money, when the economy is growing, not when tax rates are the highest or threatened to be raised and raised. Government services are paid for in dollars, not in percentages. Inequality is greatest in times of high growth - because the rich are the most invested in that growth, more so than a poor or middle income person by definition. That is unfortunate but not reversible.
Please see CNBC from last Friday:
http://www.cnbc.com/id/48257611
The Falling Fortunes of the One Percent
Published: Friday, 20 Jul 2012 | 10:59 AM ET
By: Robert Frank
CNBC Reporter & Editor
The presidential election has given us two myths about the rich. First, that their incomes, and income inequality, are at all-time highs. Second, that the wealthy pay less in taxes than ever, and lower taxes than the rest of us.
A recent report from the Congressional Budget Office, however, suggests that both may be false.
Let’s consider income first. Between 2007 and 2009, after-tax earnings by Americans in the top one percent for income fell 37 percent. On a pre-tax basis they fell 36 percent in the same period.
That may sound like a minor haircut for One Percenters compared to people who lost their jobs. But when you take into account federal transfers, assistance and taxes paid, the incomes of the bottom 20 percent grew by 3 percent, while it fell a modest 2 percent for the middle 20 percent.
In other words, the incomes of the top one percent fell 18 times more than the incomes for the middle class at the start of the recession.
(http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/__Story_Inserts/graphics/__CHARTS_SPECIAL/HIGH_NET_WORTH/change-in-after-income-tax.gif)
The result of this big drop at the top was that their share of the country's total income also fell. In 2007, the top one percent earned 16.7 percent of all after-tax income. In 2009, that portion fell to 11.5 percent.
Inequality, in other words, fell during those years. We are now in an age of High-Beta Wealth, where the incomes of the One Percent have become far more manic and prone to wild drops than the rest of the country.
And taxes paid? Despite the oft-repeated fact that tax rates for the wealthy are at an all-time low (which is true), it’s also true that the actual amount paid in taxes by the wealthy is higher than before the recession.
(http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/__Story_Inserts/graphics/__CHARTS_SPECIAL/HIGH_NET_WORTH/share-of-income.gif)
The One Percent paid an average effective tax rate of 28.9 percent on their income — far more than any other group, and more than twice the average effective rate of the middle class, who paid 11 percent on average.
So the rich lost more income and paid more of their money in taxes than the rest of the population.
This is not an argument against taxing the wealthy. And the incomes and tax rates of the wealthy may have jumped back since 2009, with the rebound in financial markets.
But when politicians and pundits talk about the rich just getting richer and paying less taxes, they need to pay closer attention to the actual numbers.
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Famous people reading the forum, this is George Will taking a stab at a point I have been trying to make. I was saying we are below the 'baseline' for 'breakeven' growth. It is really negative growth or a growth deficit.
George Will said today: "We're in a growth recession. That sounds like an oxymoron. It isn't. We're now in the 4th year of a recovery and we're growing but receding at the same time because we're not growing fast enough to create enough jobs to even take account of the natural growth of the workforce."
Go to about 12:20 of the This Week video: http://www.realclearpolitics.com/video/2012/07/29/this_week_roundtable_on_romney_100_days_to_go.html
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Leaving aside the fact that George Will is a member of the Washington, D.C. elite and is NOT in my opinion a true conservative (his chief desire seems to be accepted within the cocktail party circuit inside the beltway), this comment vividly illustrates the complete IDIOCY and deliberate obfuscation of government-speak. In short - THERE IS NO RECOVERY IF WE ARE NOT CREATING JOBS FAST ENOUGH EVEN TO KEEP UP WITH THE GROWTH OF THE WORKFORCE. This is not rocket science - and it is not lost on the average American who can't find a job, or if they can, only a part-time job which doesn't utilize their education or skills. These people who live their lives mainly inside the D.C. beltway (and I happen to personally know a few of them) really do not have any idea of what the great majority of this nation's citizens think, or how they view events. They exist in an almost hermetically-sealed bubble or alternate universe where all they hear is each others' perspectives and only imagine what it's like in the heartland. They never actually travel there and ASK anyone what they think. It's a very serious problem, not just with bureaucrats, but many of our representatives, who get to D.C. and then completely lose touch with their constituents. IMHO all Congress people ought to be REQUIRED to spend x number of days IN THEIR OWN DISTRICTS, interacting with those they represent.
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I did my second summer of law school in DC (working for the Antitrust Division of the FTC) and also my first year out of law school as well while I took and waited for the results of the bar. I passed, and left :-D
DC is a company town and is as Obj. describes.
On the subject of the unemployment rate, I would love to see the collective brain trust here :-D some up with the following:
Unemployment + those who have given up trying (this takes us to 12% if I understand correctly) + the increase in disability (which has roughly doubled under Baraq) = the true unemployment rate
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Obj, I also consider George Will an independent. His views are his own; they come out mostly conservative but not aligned with anyone or any movement. In the context of this thread, we have been reading a lot of analysis from Brian Wesbury for one, who is a great economist but works for an investment house and I think has been trying to put lipstick on a pig in terms of this economy. He says we are plowing forward but we really are standing still while multiplying our debt burden which means we are really moving backwards at an alarming rate.
By great economist I still mean that he is a economist who writes with the same conventions as the other economists, using misleading measures for things like growth rate, poverty rate, unemployment rate, among others, because that is the language they speak.
I tried to make a different point recently by questioning why they don't use a baseline growth rate where anything below that breakeven line would be considered a cut. With a more honest measurement IMO it might be easier to see or admit that we are in about the 5th year of man made recession. If we are not recovering it isn't a slow recovery or any other kind of recovery. I think GW is making that same point in his own way.
Crafty, I don't know if I understand your question correctly but I think I would try to answer in a more simple manner:
There are how many adults in the USA? Of that number, how many work at least full time? How many don't.
Not in the numbers below, but more descriptive economically might be to measure how many adults work full time in the private sector, pulling the wagon, and how many do not. The answer I believe is that less than 30% work full time or more in the private sector pulling the load and more than 70% do not.
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Less than half of working age Americans work full time, here is a source: http://articles.businessinsider.com/2011-01-24/markets/29974517_1_part-time-unemployment-labor-force
These numbers are about a year old:
Only 47% Of Working Age Americans Have Full Time Jobs
The total non institutional civilian labor force (Americans 16 years and older who are not in a institution -criminal, mental, or other types of facilities- or an active military duty) is reported as 238.889 million. Of these, we see:
Employed: 139.206 million people (58.3% of labor force)
Unemployed: 14.485 million people (6.1% of labor force)
Obviously, that can't be the total picture, we're only at 64.4%. This is why:
Part time employed for economic reasons: 8.931 million people. This concerns people who want a full-time job but can't get one.
Part time employed for non-economic reasons: 18.184 million people. Non-economic reasons include school or training, retirement or Social Security limits on earnings, but also childcare problems and family or personal obligations.
But the by far largest category "missing" from both the Employed and Unemployed statistics is the "Not In Labor Force": 85.2 Million people.
The BLS definition states: "Not in the labor force (NILF). A person who did not work last week, was not temporarily absent from a job, did not actively look for work in the previous 4 weeks, or looked but was unavailable for work during the reference week; in other words, a person who was neither employed nor unemployed." (Clearly, this does include lot of unemployed people).
To summarize: 108.616 million people in America are either unemployed, underemployed or "Not in the labor force". This represents 45.5% of working age Americans.
If you count the "Part time employed for non-economic reasons", you get 126.8 million Americans who are unemployed, underemployed, working part time or "Not in the labor force". That represents 53% of working age Americans.
So only 47% of working age Americans have full time jobs. While the official unemployment rate is 9.4%. Something's missing somewhere.
A few more factoids on the topic:
Today, the long term unemployed make up 42% of total unemployed. That is to say, of course, those who are actually counted as unemployed instead of "Not in the labor force".
43.2 million Americans receive foodstamps. That's 18.1% of all working age Americans. If they all have on average 1.5 dependents, which is probably a reasonable estimate, a full one third of the US population receives at least part of their food through this system.
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Doug:
You raise good conceptual questions and provide worthy data in your answer-- a rare combination!
That said, I'm looking for something a bit conceptually ambitious. :-D
I'm looking for something for scoring political points :-D
Instead of saying unemployment is currently 8.2%, I want someone (Romney comes to mind :lol: ) to add the number of Americans who have left the workforce to the number of those currently counted as unemployed to calculate the unemployment rate. My understanding is that measured this way, the unemployment rate is 12+%.
Then I want to add to the number the surge in disability numbers (a doubling if I have it right) on the notion that this surge is not do to a sudden increase in people being disabled but to a lowering of eligibility standards and these people too are people who are unemployed (in addition to being leeches :x )-- and again to recalculate the unemployment rate.
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Bringing this GM post forward in the process of gathering info to answer Crafty's question. "The real unemployment rate actually rose in January to 11.5%". To this we might add the disability increase. Posting disability numbers separately. I will look deeper into it later.
http://dogbrothers.com/phpBB2/index.php?topic=1467.msg59617#msg59617
http://www.zerohedge.com/news/implied-unemployment-rate-rises-115-spread-propaganda-number-surges-30-year-high
Implied Unemployment Rate Rises To 11.5%, Spread To Propaganda Number Surges To 30 Year High
Submitted by Tyler Durden on 02/03/2012 09:35 -0500
Sick of the BLS propaganda? Then do the following calculation with us: using BLS data, the US civilian non-institutional population was 242,269 in January, an increase of 1.7 million month over month: apply the long-term average labor force participation rate of 65.8% to this number (because as chart 2 below shows, people are not retiring as the popular propaganda goes: in fact labor participation in those aged 55 and over has been soaring as more and more old people have to work overtime, forget retiring), and you get 159.4 million: that is what the real labor force should be. The BLS reported one? 154.4 million: a tiny 5 million difference. Then add these people who the BLS is purposefully ignoring yet who most certainly are in dire need of labor and/or a job to the 12.758 million reported unemployed by the BLS and you get 17.776 million in real unemployed workers. What does this mean? That using just the BLS denominator in calculating the unemployed rate of 154.4 million, the real unemployment rate actually rose in January to 11.5%. Compare that with the BLS reported decline from 8.5% to 8.3%. It also means that the spread between the reported and implied unemployment rate just soared to a fresh 30 year high of 3.2%.
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Bringing this info forward also:
http://dogbrothers.com/phpBB2/index.php?topic=1467.msg64202#msg64202
"since June 2009, fully 3.1 million workers signed up for disability benefits."
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Doug:
Thank you for the work you are doing to develop this point.
May I nominate you to be our man for this?
Remember, lots of famous people lurk here in search of more good ideas to use :wink: :-D so you could do some real good 8-)
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I think it's vitally important to point out here that Obama is clearly a Marxist/Communist ideologically, and as such, HIS PLAN FOR AMERICA IS UNFOLDING BEFORE OUR EYES. As Rush Limbaugh famously said (and was viciously attacked for saying) shortly after Obama's election, "I hope he fails." Limbaugh knew as many of us who had paid attention to Obama's history and writings that he WANTED to fundamentally transform our economy into a socialist/Marxist model, which would mandate the destruction of the existing system. Obama is not some hapless misguided fool who wants to lower unemployment and government dependence, but simply can't figure out how. The destruction of this economy and ever-increasing government dependence is DELIBERATE and INTENTIONAL. It amazes me that so many fail to realize this even now.
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Obj, your points on Obama and his background and disdain for all that made America great are well-founded. More important though is to capture a significan number of the hearts and minds of the 69,456,897 people who voted for Barack Obama in 2008. These people I think are more victims of a sort were experiencing disincentive denial. They believed for the moment you can attack the rich, stomp out wealth, handcuff employers and strangle businesses without hurting the economy overall or hurting working people. It's just not so and the evidence is all around us. Saying that the destruction of the republic and our economy was intentional is probably not the most attractive argument for bringing them back. There is no need to prove it was intentional, even if it was at the top, we only have to show it didn't work.
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DMG: I'm not suggesting that we use this as our sole or even primary argument. What I am saying is that without acknowledging the philosophical underpinnings of capitalism vs. statism, and being able to identify an individual's adherence to one or the other, in the long run we are doomed. As Ayn Rand so aptly put it: "The men who are not interested in philosophy need it most urgently: they are most helplessly in its power." Nothing could be more true. Citizens absorb the philosophy by which they live and accept/reject ideas from the culture around them. To the extent that we fail to identify philosophical systems and call them by their right names, we allow the enemy to continue its slow but steady subterfuge and destruction of the Framers' vision. Mark Levin's recent book "Ameritopia" does a superb job of explaining these competing philosophical systems.
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Crafty, I'll do my best to answer that.
When you adjust the BLS (Bureau of Labor Statistics) reported unemployment to the unemployment rate if we were to hold the workforce participation rate constant, the 9 million that left the workforce during the Obama years already includes the 3.1 million workers that left for disability pay.
Here is the combined chart showing 20% unemployment for U6 assuming a constant workforce participation rate for the Obama years.
(http://danielamerman.com/Images/2012/Workforce/WorkB.jpg)
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Definitions for U-1, U-3, U-6 and all other BLS unemployment measures can be found here: http://bls.gov/news.release/empsit.t15.htm
The following chart shows around 9 million leaving the workforce during the Obama years:
(http://i603.photobucket.com/albums/tt114/dougmacg/zero1-1.jpg)
Maybe more clear at this link: http://2.bp.blogspot.com/-DHhQMR8EhYY/T6aJDnHXF4I/AAAAAAAARdU/C0Nok_UgsGk/s1600/zero1.jpg
It should be noted that the declining labor force participation rate is not unique to Obama. The rate for males has been declining over a long period and the workforce participation rate for females peaked in 2000. The important point is that we cannot continue straight line decline unless we also lighten the public sector spending load at the same rate, sharing that burden with fewer and fewer workers - which simply is not going to happen. Instead it is logically and empirically the opposite; the higher the number of adults who don't work, the more that will receiver increasing benefits from our ever-expanding plethora of programs.
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Link to explanation of calculations made in the previous post:
http://danielamerman.com/articles/2012/WorkCalc.html
Includes this chart:
(http://danielamerman.com/Images/2012/Workforce/WorkG.jpg)
By this measure, 'real' unemployment has doubled in the 6 years since Pelosi-Reid-Obama took control of congress and then the executive branch.
Whatever it is we are doing, ostensibly trying to help the middle class by attacking investors and businesses, it isn't working!
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You might recall, a claim similar to this was the centerpiece of Washington Post Dana Milbank's tirade that Mitt Romney was a liar http://journalstar.com/news/opinion/editorial/columnists/article_6c1810a0-71f7-5614-9cbb-8d0a63bd0a3f.html, repeated ad nauseum by MSNBC's Rachel Maddow and the like. The number one 'lie' in his "The Facts vs. Mitt Romney" column was this: "He blamed President Barack Obama for the "weakest economic recovery since the Great Depression."..."That Romney resorts to such gratuitous falsehoods discredits his leadership more than his opponent's."
Turns out it was true??
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Forbes Magazine: "Obama Wins The Gold For Worst Economic Recovery Ever"
http://www.forbes.com/sites/louiswoodhill/2012/08/01/obama-wins-the-gold-for-worst-economic-recovery-ever/
If mismanaging an economic recovery were an Olympic event, President Obama would be standing on the middle platform right now, accepting the gold medal.
Deep recessions are supposed to be followed by strong recoveries, but, under Obama, the worst recession since the 1930s has been followed by the slowest economic recovery in the history of the republic. In a very real sense, there has been no recovery at all—things are still getting worse.
To win the gold for economic mismanagement, Obama had to beat out some very tough competitors, including the previous Olympic record holder, George W. Bush. Let’s look at how Obama pulled it off.
For those not familiar with the sport, the Olympic “Worst First Three Years of Economic Recovery” event is a pentathlon—it’s composed of five individual trials.
The trials making up this pentathlon are as follows: 1) total employment growth; 2) unemployment rate reduction; 3) per capita GDP growth; 4) change in the Real Dow; and 5) change in real produced assets.
Because the goal is economic mismanagement, in the total employment growth event, the lowest number wins.
Obama was victorious in this trial by producing an increase in jobs during the first 36 months of his economic recovery of only 1.72%. This handily beat out Bush 43, who turned in a jobs gain of 2.93% during his recovery, and the team of Bush 41 and Bill Clinton, who delivered 3.64% more jobs during theirs. And, Obama absolutely creamed Ronald Reagan, who produced an increase in total jobs of 8.97% during the first three years of the economic recovery that he oversaw.
Obama struggled in the “reducing the unemployment rate” event. It was easy for Obama to do worse than Reagan, who had reduced the “headline” (U-3) unemployment rate by a massive 3.8 percentage points during the first three years of his recovery. However, in terms of turning in a bad unemployment performance, both the Bush 41 – Clinton team and Bush 43 had started with an unfair advantage.
Obama’s recovery came out of the blocks with an unemployment rate of 9.5%, which was far higher than where either the Bush 41 – Clinton team started (6.8%) or where Bush 43 began (5.5%). Accordingly, it was much harder for Obama to do worse than those two, because he would have to produce a smaller reduction in the unemployment rate than they did.
When the scores were first totaled, Obama (at 1.3 percentage points of reduction in the unemployment rate) was far behind both the Bush 41 – Clinton team (at 0.3 percentage points), and Bush 43 (at 0.1 percentage points).
However, Obama appealed to the judges, pointing out that, when measured by the more comprehensive “SGS Alternate Unemployment Rate” published by Shadow Government Statistics, he had actually managed to increase unemployment by 2.0 percentage points during his economic recovery. Meanwhile, the other three competitors had reduced their jobless rates, no matter how you measured them. The judges agreed, and they awarded first place in this event to Obama.
The officials then studied the replay tapes, and gave Obama extra credit for managing to push the U.S. 2.5 million jobs farther away from full employment during his economic recovery. The other three contestants could not match that.
Next up was the “real per capita GDP growth” event. Obama won this one decisively.
The total increase in real GDP per capita during the first three years of Obama’s recovery was only 4.34%. This was worse than Bush 43 (5.98%) and the Bush 41 – Clinton team (5.61%). Once again, Ronald Reagan brought up the rear in this important area of economic mismanagement. He produced a stunning 15.36% gain in real per capita GDP during the first three years of his economic recovery.
The last two trials in the Olympic “Worst First Three Years of Economic Recovery” pentathlon relate to building a prosperous future for the U.S. economy.
The Real Dow is the Dow Jones Industrial Average divided by the price of gold. It is a proxy for the driving force to invest in economic growth, rather than to park capital in “safe” investments like gold and government bonds.
In the Real Dow event, Obama had to settle for second place. Bush 43 beat him soundly by managing to depress the Real Dow by a massive 35.6% during the first three years of the economic recovery that he oversaw. However, in terms of economic destruction, Obama turned in a creditable performance, pushing the Real Dow down by 11.6% during his first three years of economic recovery.
In this event, the Bush 41 – Clinton team did not seem to be clear on the concept. The Real Dow rose by 13.5% during their watch. And, once again, Ronald Reagan came in dead last, producing a massive 89.9% increase in the Real Dow during the first three years of his powerful economic recovery.
Obama finished strong by blowing away the competition in the “change in real produced assets” trial. Produced assets comprise the physical infrastructure of our economy, and economic progress depends upon building up our stock of produced assets.
During the first full year of Obama’s economic recovery (2010), real produced assets actually fell by 1.41%. This is the biggest drop during the 60 years for which data is available. It is also the only decline ever observed during an economic recovery.
Ronald Reagan finished second in this trial with a 0.16% increase in fixed assets during 1983. The Bush 41 – Clinton team and Bush 43 tied in this event. They both produced a 3.42% gain in real produced assets, in 1992 and 2002, respectively.
We should all be proud that Barack Obama has won the Olympic gold medal in the “Worst First Three Years of Economic Recovery” event, and reward him accordingly in November.
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Following up on Doug's work:
MarketBeat
WSJ.com's inside look at the markets
Search MarketBeat1
. August 3, 2012, 2:50 PM.Participation Rate Reveals Real State of the Jobs Market.Article Comments MarketBeat HOME PAGE ».smaller Larger .
smaller Larger facebooktwittergoogle pluslinked ininShare.0EmailPrintBy John Shipman
Associated Press
Not enough of this.This morning’s nonfarm payrolls report included one piece of data most people skip, the participate rate. This is the percentage of people who are able to work who actually are part of the labor force (working or not). The lower the number, the more people who have dropped out of the labor force.
With a 63.7% labor force participation, “conditions in the labor market are considerably worse than indicated” in July’s report, writes economist Joshua Shapiro at MFR.
“Indeed, if the participation rate were at 66%, which is around where it hovered for many years ahead of the recession, the headline unemployment rate would be a little more than 3pp higher than currently reported,” he writes.
Meanwhile, drop in the participation rate “has been centered in younger workers, who are increasingly giving up hope of finding a decent job,” and instead staying in school “and racking up enormous amounts of student debt, which has contributed to the recent surge in consumer credit outstanding.”
You can see the participation rate data on the Bureau of Labor Statistics site here.
The participation rate isn’t something that gets plugged into the algos on jobs day, but the number illustrates the true state of the work force even better than the headline numbers, the jobs added and the unemployment rate.
The bottom line, and it hasn’t changed, is that there aren’t enough people working in the U.S. to contribute to growth, to contribute to the tax rolls, to help the nation grow its way out of its problems. So the headline number of 163,000 this morning was nice, but it didn’t change the real dynamics of the work force or the economy.
– Paul Vigna contributed to this post.
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"Following up on Doug's work:" - I appreciate knowing they (the WSJ) read and follow up on our posts here, and occasionally give credit.
“Indeed, if the participation rate were at 66%, which is around where it hovered for many years ahead of the recession, the headline unemployment rate would be a little more than 3pp higher than currently reported,”
Missing in the projections is that if we put an aggressive pro-growth mandate put in place, a turnaround that includes abundant opportunity and potential for real prosperity and economic freedom that counts entrepreneurs in the mix, a workforce participation rate higher than the past is possible.
There is some math to do, but if you put in place an array of positive incentives (Romney's 59 point plan comes to mind), a return of productive investment and enterprise could grow the workforce a couple of points above historic averages instead of a couple of points below historic averages. By the time we return the unemployment rate to near a pre-Dem-rule rates of 4.6% and elevate business start rates to new record highs, amazing amounts of income and wealth are possible if we quit fighting against it. This budget would be in balance in my estimation at that point and the world recession would be over.
Is that worth changing horses in mid-drowning.
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Very significant piece today in the WSJ. Please read, learn and vote.
Arthur Laffer: The Real 'Stimulus' Record
In country after country, increased government spending acted more like a depressant than a stimulant.
"The macro economy is the sum total of all of its micro parts... stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers)."
"government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment."
http://online.wsj.com/article/SB10000872396390444873204577537244225685010.html
By ARTHUR B. LAFFER
Policy makers in Washington and other capitals around the world are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.
It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.
(http://si.wsj.net/public/resources/images/ED-AP581_artlaf_G_20120805170005.jpg)
The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).
Still, the debate rages between those who espouse stimulus spending as a remedy for our weak economy and those who argue it is the cause of our current malaise. The numbers at stake aren't small. Federal government spending as a share of GDP rose to a high of 27.3% in 2009 from 21.4% in late 2007. This increase is virtually all stimulus spending, including add-ons to the agricultural and housing bills in 2007, the $600 per capita tax rebate in 2008, the TARP and Fannie Mae and Freddie Mac bailouts, "cash for clunkers," additional mortgage relief subsidies and, of course, President Obama's $860 billion stimulus plan that promised to deliver unemployment rates below 6% by now. Stimulus spending over the past five years totaled more than $4 trillion.
If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).
Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.
Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.
Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.
Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.
But all of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments. Today, even stimulus spending advocates have their Ph.D. defenders. But there's no arguing with the data in the nearby table, and the fact that greater stimulus spending was followed by lower growth rates. Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.
Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers. In other words, the spending was more like a valium for lethargic economies than a stimulant.
In many countries, an economic downturn, no matter how it's caused or the degree of change in the rate of growth, will trigger increases in public spending and therefore the appearance of a negative relationship between stimulus spending and economic growth. That is why the table focuses on changes in the rate of GDP growth, which helps isolate the effects of additional spending.
The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.
Mr. Laffer, chairman of Laffer Associates and the Laffer Center for Supply-Side Economics, is co-author, with Stephen Moore, of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).
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http://www.cato-at-liberty.org/a-comprehensive-list-of-hyperinflations-in-history/
Note that there is a link to the paper in the brief discussion.
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'A stimulus program should be timely, targeted and temporary."
—Lawrence Summers, January 29, 2008
Well, well. So the folks who have run U.S. economic policy since 2008 are alarmed about the peril of the 2013 "fiscal cliff." Too bad they didn't worry about that when they were creating the very ledge they now lament.
The latest warning comes from the Congressional Budget Office, which estimated in its mid-year budget outlook Wednesday that the economy will return to recession in 2013 if taxes rise and spending falls on schedule in January. "Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession," say the CBO sachems, "with real GDP declining by 0.5 percent" from this year's fourth quarter to the final quarter of next year and unemployment rising to about 9% from 8.3%.
Yes, a year of falling output would "probably be considered" a recession, especially if you are one of the 9% jobless.
Related Video
Editorial board member Steve Moore on whether the fiscal cliff could cause the U.S. to fall into recession. Photos: Getty Images
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One point to keep in mind is that CBO's economists are as true-blue Keynesians as exist on the planet. Like the Obama White House and Treasury, they believe in the "multiplier" that $1 of federal spending somehow creates $1.50 in greater GDP. Thus they plug large spending cuts into their economic models, and, presto, they find a recession.
One remarkable (and highly dubious) note in the CBO report is that the budget gnomes predict a big surge in tax revenues in 2013—to 18.4% from 15.7% of GDP—despite the recession they also predict. CBO simply doesn't think taxes matter much to taxpayer behavior, so it applies the higher rates to its current predictions of income and pretends revenues will roll in like the tides. But this will be a fantasy if enough Americans find ways to hide their income or work less, or if they simply earn that much less thanks to the recession.
The larger policy point is that this is the fiscal cliff the Keynesians built. The 2008 quote above from Larry Summers, the Harvard economist who later became President Obama's chief economic adviser, sums up the mindset that has dominated policy for most of the last decade and especially since 2008.
Rather than provide predictable, consistent policy for the long term, the Summers-Obama-Geithner-Krugman theory goes that government should jolt the economy with spending and tax cuts that are targeted and temporary. The jolt will drive the economy out of recession, rapid growth will resume, and the wizards of Harvard Yard can then tell us the precise moment when the stimulus can be withdrawn and taxes should rise again.
Or, if the jolt doesn't work, then order up another jolt, which makes the tax cliff even steeper.
The last decade has provided as clear a market test of this proposition as one can get. First, the Bush Administration had to accept a temporary window for its 2001 and 2003 tax cuts to pass the Senate's crazy budget rules. Its tax rebate of 2001 was such an economic bust that without the more ambitious and better designed 2003 tax cut Mr. Bush might not have been re-elected. But even the 2003 cut had to be temporary to pass Congress.
Then came the Summers-George Bush-Nancy Pelosi $168 billion tax rebate and spending stimulus of February 2008. That goosed GDP for a quarter as temporary consumer and government spending showed up in the national accounts, but growth quickly sputtered even before the autumn 2008 financial panic.
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President Obama with Treasury Secretary Tim Geithner, left, NEC Director Larry Summers, right, and Budget Director Peter Orszag, far right.
.Then came the $830 billion stimulus of February 2009, followed by other "targeted and temporary" measures like cash for clunkers and the first-time homebuyer's tax credit. GDP rose modestly as the economy recovered, albeit at a historically slow pace considering the depth of the recession. The rate of growth has since sputtered in each of the last three years.
That didn't stop Mr. Obama, who tried still another temporary tax fix after Republicans captured Congress in 2010. He agreed to extend the Bush tax rates for another two years, but only in return for an additional temporary payroll tax cut for one year. When that didn't spur faster growth in 2011, the President demanded and won another one-year payroll-tax extension for 2012. First half GDP growth this year fell again to 1.7%.
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So here we are now facing the expiration of all of these temporary measures at the same time. And that's not all. You have to add the higher tax rates that Mr. Obama has proposed in his budget, such as the 30% "Buffett rule" tax rate on capital gains. And don't forget the new 3.8% surcharge on investment income that is part of ObamaCare and also starts in January.
The nearby table compares current tax rates with those that arrive next year with the tax cliff, as well as Mr. Obama's budget proposals and Mitt Romney's tax reform plans. Mr. Romney is proposing an across-the-board rate cut, while Mr. Obama would keep rates the same only for those earning less than $250,000. Everyone else would see a huge tax increase, one of the largest in history.
Republicans are pointing to the CBO report as proof of Mr. Obama's policy failure, and it is. But rather than gawking at the potential for another recession, they ought to explain the folly of "temporary, targeted" tax and spending stimulus. The fleeting tax elixir does little to change incentives to work or invest because everyone knows its impact is temporary. It also creates tremendous uncertainty as expiration nears, which can also harm incentives and growth.
The problem is political, but more important it is intellectual. The Keynesians and their allies who have dominated tax policy for most of the last decade (the 2003 bill excepted) need to be exiled back to Harvard, Princeton and Wall Street. And the Romney-Ryan Republicans need to understand and not repeat the Bush mistakes of 2001 and 2008.
Instead of "timely, targeted and temporary," tax policy should include lower rates (and fewer loopholes) that are applied as broadly as possible and are permanent. These were the principles that guided the Reagan policy of the 1980s, and they need to be revived.
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By PHIL GRAMM
Only twice since World War II has the U.S. unemployment rate reached 10%: It was 10.8% in 1982 and 10% in 2009. The different responses of Presidents Ronald Reagan and Barack Obama—Reagan lowering taxes and lifting regulatory and other barriers to economic growth, Mr. Obama increasing the size and reach of the government—represent polar extremes in policy. And in results.
Fifty-five months after the recession started in July 1981, the Reagan recovery had created 7.8 million more jobs than when the recession started, and real per capita gross domestic product was up by $3,091. Fifty-five months after the recession that began in December 2007, there were four million fewer Americans working than when the recession started, and real per capita GDP was down $803.
The trajectory of household income is even more telling. According to Sentier Research analysis of monthly U.S. Census data, during the current recovery American households have lost more income than they lost during the recession. In December 2007, real median household income was $54,916. It had fallen to $53,508 when the recession ended 18 months later. But by June 2012, real median family income had fallen to $50,964.
During the Reagan recovery from 1981 to 1986, real median household income on an annualized basis rose by $3,380 or 7.7%.
There are other, deeply troubling differences between the Reagan and Obama recoveries.
In July, most Americans were shocked to discover that 246,000 new people had qualified for disability benefits during the previous three months, while only 225,000 people had found new jobs. A total of 471,000 Americans left the unemployment rolls—but the difference between qualifying for disability benefits and getting a job is profound for the economy and for the people involved. Fifty-five months after the 1981 recession began, the number of Americans drawing disability benefits had actually dropped by 655,000—or 14.3%.
The explosion of disability payments is only the tip of the iceberg. Fifty-five months after the 1981 recession began, the number of people on food stamps had fallen by three million, or 13.4%. The number of food-stamp recipients since the recession that began in December 2007 has grown to more than 46 million, from 26 million—a mind-boggling 71% increase.
While part of this growth is attributable to the failed recovery, a significant amount has been created by the administration's effort to expand the food-stamp rolls. In a pamphlet on its website, the U.S. Department of Agriculture recommends that its employees provide "games, food and entertainment. . . . [P]utting SNAP [food stamp] information in a game format like bingo, crossword puzzles, or even a 'true/false' quiz . . . helps get your message across." The department is now trying to turn food stamps into an economic development program, asserting on its website that $1.00 in new food stamps generates $1.92 in "new economic activity."
The number of beneficiaries of the Aid to Families With Dependent Children program had declined by 1%, or 42,000 people, 55 months after the Reagan recession began. During the Obama recovery, the number of beneficiaries in AFDC's successor program, the Temporary Assistance to Needy Families program, has increased by 467,000, or 12%. This number can be expected to grow dramatically as a result of the administration's recent decision to waive work requirements for these welfare recipients.
Fifty-five months into the Reagan recovery, the number of Americans drawing unemployment insurance had dropped by 357,000, or 11.9%. Today there are 500,000 more Americans drawing unemployment insurance than when the 2007 recession started, an increase of 19.2%. Historical data and Congressional Budget Office projections for 2012 also indicate that in the Reagan recovery, Medicaid enrollment grew by 535,000, or 2.4%. In the Obama recovery, Medicaid enrollment has grown by more than 11 million, or 19.7%.
In summary, the Obama administration not only has failed to bring back the American economy, it has ushered in a frightening growth in dependence. A review of the data from the 126 programs that today make up America's $1 trillion welfare system shows the same basic pattern over and over again. Expenditures on means-tested welfare programs have grown 2.5 times faster during the Obama administration than in any similar time period in American history. In those welfare programs that existed during the Reagan era, the recovery resulted in either a decline in beneficiaries or a slower rate of growth. These same programs have ballooned during this administration.
When Americans voted for Barack Obama in 2008, they knew or should have known that they were choosing a bigger federal government, higher taxes and an expansion in the role that government would play in their lives and businesses. They voted for it and they got it.
But Americans were not voting for economic stagnation, an explosion of entitlements and a doubling of the national debt. Unfortunately these things go hand-in-hand. As the European experience demonstrates, the cost of big government is not just higher taxes; it's lower growth, greater dependency and fiscal crisis.
Mr. Gramm, a former Republican senator from Texas, is senior partner of US Policy Metrics.
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Real Unemployment Rate Is 11.4%
By DICK MORRIS
Published on DickMorris.com on September 8, 2012
Printer-Friendly Version
Economist James Fitzgibbon of the Highlander Group says that "If we impute the data samplings of non-working citizens at the labor force rate of January 2009 (when this Obama term began) we would have a Household U-3 Unemployment rate currently of 11.4%."
Fitzgibbon notes that the unemployment rate is being held down by 368,000 new people who have dropped out of the labor force. He says "Labor Force Participation rate, which has fallen sharply to 63.5%, a new 31 year low reading."
Summarizing the data, he writes that the higher unemployment rate "which is much closer to seeming accurate and indicates this economic malaise and decline is worse than the contraction of 1980 - 81." Grimly, he adds "I remember 1981, it was awful!"
So now we see Obama's real program for coping with unemployment: Discourage people from even looking for work. Encourage them to leave the labor force and rely on government handouts instead.
With almost 90 million working age adults not participating in the labor force, we are close to become a nation that does not work (less than two-thirds of us do), gets entitlements (50% of us do - compared to 30% in 1980), and pays no taxes (50% of us don't pay federal income taxes).
A new America -- the America that will emerge if we re-elect Obama.
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Monday Morning Outlook
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Better Policy, Better Recovery To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 9/10/2012
Politicians always shift the blame. So, hearing them say that “no one” could have cleaned up the so-called mess and fixed the economy in just a few years is not surprising.
What else do you say when after three years of recovery the unemployment rate is still at 8.1% -- down only 1.9 points since the peak almost three years ago – and real economic growth has averaged a tepid 2.2% for three years of economic recovery?
Surely, the last recession was a brutal one, which included a nasty financial crisis and a huge decline in housing prices. But the economy has been in the same or worse shape in the past and still rebounded sharply.
The bank crisis of the early 1980s was arguably more severe than in 2008 – the entire S&L industry had negative capital, oil and farm loan losses were massive and default by Latin American countries impaired large bank capital more than during the subprime crisis. Luckily, we did not have strict mark-to-market accounting back then, so multitudes of banks that were technically insolvent did not have to fail all at once.
Unemployment peaked at 10.8%. The US had double-digit inflation and interest rates. Oil prices spiked and energy was a larger share of family budgets. “Real” household income was lower in 1983 than 1969. Adjusted for inflation, the S&P 500 fell back to where it was in the early 1950s. Pension funds were in deep trouble. In other words, it’s not true that everything about the current financial and economic troubles is the “worst ever.”
What is true is that policy-makers in the 1980s acted differently. In the 1980s, the US responded to a nasty recession by trimming non-military spending, cutting marginal tax rates, holding the line on the minimum wage, de-regulating energy markets, and creating no new entitlements. In the past few years, we have gone in the exact opposite direction. Federal spending has been increased, regulations have multiplied, and government has grown. So far, tax rates have not been hiked, but everyone knows that if entitlements aren’t trimmed, higher tax rates are eventually on the way.
The differences between the two policy responses are clear. And, so are the results. Three decades ago, the economy skyrocketed into recovery. Real GDP grew at a 6.6% annual rate in 1983-84 and the jobless rate fell 3.5 points in only 21 months. This time…well…family incomes are still falling and the recovery has been tepid.
Not long ago, we would have argued that the US had learned its lesson – that the problems of the 1970s were caused by too much government – and it wouldn’t happen again. But, today, voters stand at the same fork in the road all over again. They must decide what they think of the claim that “no one” could have fixed the economy in the past few years and whether it’s appropriate for politicians to diminish our expectations. Which path will they choose? It is hugely important for the economy and financial markets.
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The Foundation
"Dependence begets subservience and venality, suffocates the germ of virtue, and prepares fit tools for the designs of ambition." --Thomas Jefferson
For the Record
'When somebody does not do the job, we gotta let 'em go.'
"The nation has now endured 43 months of unemployment officially above 8 percent. The details paint an even bleaker picture. No doubt many of the media outlets determined to get this president re-elected will tout the fact that the unemployment rate dropped from 8.3 percent to 8.1 percent, even as they bury the reason why: 368,000 Americans simply gave up looking for work. That exodus dropped the labor force participation rate to 63.5 percent, a 31-year low. For perspective's sake, if the number of people in labor force had remained the same as last month, the unemployment rate would be 8.4 percent. If the labor force were as large as it was when Obama took office in 2009, the unemployment rate would be a staggering 11.2 percent. Yet it gets even worse. The previous two month's jobs totals were 'revised.' 41,000 jobs were lopped off the totals for June and July, as reality caught up with the Bureau of Labor Statistics' (BLS) overly optimistic 'guesstimates.' ... And when one gets past the 'official' unemployment rate and examines the BLS's U-6 number -- representing Americans who have been out of work for six months, along with those who are involuntarily part-time workers, due to cutbacks in their days or hours -- the under-employment rate has held steady for months at around 15 percent of the workforce. Add those who have given up looking for work and that number jumps to 19 percent." --columnist Arnold Ahlert
Government
"[Friday's jobs numbers] was not the employment report either American workers or the Obama campaign were hoping for. ... Nonfarm payrolls increased by only 96,000 in August, the Labor Department said, versus expectations of 125,000 jobs or more. The manufacturing sector, much touted by the president in his convention speech, lost 15,000 jobs. Since the start of the year, job growth has averaged 139,000 per month vs. an average monthly gain of 153,000 in 2011. ... While the unemployment rate dropped to 8.1% from 8.3% in July, it was due to a big drop in the labor force participation rate (the share of Americans with a job or looking for one). ... The employment-population ratio is perhaps the broadest measure of the health of the labor market. It just shows how many Americans -- not in the military or in prison -- as a share of the population actually have some sort of a job. That number fell last month to 58.3%, just off its Great Recession lows. ... Again, a terribly anemic report that shows a stagnant economy -- not one ready to boom." --American Enterprise Institute's James Pethokoukis
What do you think?
Re: The Left
"Now to that 46.7 million number. That's the number of Americans who are now depending on food stamps to feed their families. Bloomberg.com quotes Agriculture Secretary Tom Vilsack as saying: 'Too many middle-class families who have fallen on hard times are still struggling. Our goal is to get these families the temporary assistance they need so they are able to get through these tough times and back on their feet as soon as possible.' Whoa! Check Please! Too many middle-class families have fallen on hard times? The same middle class families Obama has been focused on for each and every one of the past 1,325 days since his Inaugural (not counting fund-raisers and golf outings)? No one -- with the possible exception of graduate students -- thinks that qualifying for Food Stamps is a good thing. ... The failure to help middle class families lies directly at the feet of Barack Obama. This astonishing 46.7 million number has nothing to do with Republicans wanting to change the tax code. The tax code has been exactly the same during Obama's entire term. Under Obama's guidance about 1.5 million additional middle class families' incomes have slipped to the point that they need Food Stamp assistance. And that's not since January 2009. That's just in the past year. ... Fewer Americans working. More Americans on food stamps. Is it why Obama thinks he deserves to be re-elected?" --columnist Rich Galen
Culture
"One in seven Americans is on food stamps. According to the left, this high rate of participation is part of what makes America exceptional. So boasts liberal political commentator Alan Colmes in [last] Monday's Wall Street Journal op-ed 'How Democrats Made America Exceptional.' Since the food stamps program began in the 1960s, the participation rate has soared from roughly one in 20 Americans to where it is today. Apparently, this is the liberal idea of progress. And so anxious are they to make even greater strides that the Department of Agriculture was busily working to recruit more participants. ... Removing work requirements from the few welfare programs that contain them seems to be the Obama Administration's method of operation. President Obama's 2009 stimulus suspended the food stamps work requirement through September 2010, and his next two budgets attempted to maintain the suspension. Then, on July 12 his Administration announced it would begin waiving the work requirements that were the heart of the successful 1996 welfare reform law. Personal responsibility and work are key American principles. Food stamps and other welfare programs should promote these principles by requiring all able-bodied recipients to work, prepare for work, or at least look for a job in order to receive assistance." --Heritage Foundation's Rachel Sheffield
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"Three decades ago (under Reagan), the economy skyrocketed into recovery. Real GDP grew at a 6.6% annual rate in 1983-84 and the jobless rate fell 3.5 points in only 21 months.
If Wesbury was able to find optimism to write about over the last 4 years, he is going to LOVE 24 years of the Romney, Ryan and Rubio administrations.
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The government's sale of about $18 billion shares of stock in rescued insurance giant American International Group locks in a minimum $12.4-billion profit for taxpayers on one of the most controversial bailouts of the financial crisis, the Treasury Department said late Monday.
http://www.latimes.com/business/money/la-fi-mo-aig-bailout-treasury-profit-20120910,0,6421410.story?track=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+latimes%2Fmostviewed+%28L.A.+Times+-+Most+Viewed+Stories%29
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The government's sale of about $18 billion shares of stock in rescued insurance giant American International Group locks in a minimum $12.4-billion profit for taxpayers on one of the most controversial bailouts of the financial crisis, the Treasury Department said late Monday.
President Obama was quick to point out (?) that the credit for this responsible use of artificially manufactured public funds most certainly goes to then Pres. George W Bush for stopping the financial meltdown and making his one-term proposition recovery possible.
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Getting back to CCP on a great post over on Media Issues: http://dogbrothers.com/phpBB2/index.php?topic=1066.msg65512#msg65512
The questions posed partly apply to a number of threads, Pres 2012, but I thought I would take it up here.
Excerpt from CCP:
"... Today Art Laffer was on FOX and was asked specifically and directly an important question that goes to the heart of today's neo civil war.
He was asked why is should people believe that "trickle down" economics is better for the majority of people? Do not the rich keep getting richer and the rest of the people stagnate? Why not increase tax rates on higher earners, Clinton did it and the economy boomed. Laffer was a complete failure at articulating a logical rational simple response that most people would agree to.
I guarantee Doug McG would do a far better job at answering these questions ina way the average could understand and immediately agree to.
I do not understand why these core questions are not being answered by the MR team. All they do is talk "jobs", the "debt", and other buzz words that DO NOT specify why history proves them/us right and the socialists wrong.
If they can learn to answer these types of questions then the game is won. ..."
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First off, it warms the heart to receive a nice compliment like that, but I am an armchair commenter compared to a legend like Prof. Laffer.
Explaining freedom is quite a challenge and quite a skill is required. I struggle to write the posts here but the act of trying helps me to have thought these questions through when the issues come up in real conversations and debates. Every once in a while someone lays out the freedom argument so plain and simple that it all makes sense. Reagan had that gift. Gilder in Wealth and Poverty. Having government do less is not sexy and easy to sell. I remember Jack Kemp saying what we need is not a war against the rich, we need more people to become rich.
Speaking to the opposite, the crony government state case I think is much easier to make. I remember Pres. Bill Clinton's state of the unions always went like this for about 100 minutes: we can do more for police (not a federal function), we can do more for teachers (not a federal function), we can do more for infrastructure (largely not a federal function), we can do more for struggling parents (some targeted program you have no shot at ever seeing) and so on. How about cure diseases, how can anyone oppose any of that?
Bill Clinton in Charlotte said that a potential Romney administration would be a "double down on trickle down".
Trickle down is a lie in itself and a straw argument. Trickle down is a term only used by people who oppose growth economics and want wealth creation slowed and punished.
There is no tax proposal on the table now or ever to give something to rich people in the hopes that it will trickle down to working people.
The rich do not pay less, that is a fallacy. The top 20% of earners make 50% of the income and pay 70% of the taxes.
Extending tax cuts or creating new ones "gives" nothing to anyone. A tax rate only defines what portion you can keep out of what you earn. "Gifts" are on the spending, entitlements and welfare side of the ledger with no legitimacy on the tax side. The deception is intentional.
We live and operate in a interconnected and interdependent economy. Labor depends on capital just as capital depends on labor. These are not different people. As it turned out in the gulf oil spill, the number one class of share holders of British Petroleum turned out to be the pensioners of Britain. A store or a service company relies on customers, and suppliers. Anyone can start a company, buy a share of stock or apply for a job in a free economy. We do not have classes of people, middle or otherwise. In fact, 70% of children did not end up in their parent's quintile of income.
We just lived through one of the greatest attacks on capital possible and we learned that when you handcuff investors and threaten them with greater and greater penalties for accomplishment, labor is hurt the worst. An investor who pulls back his money still has most of his money, but the people who would have worked there do not have those jobs or any other if the problems is all across the economy. A downside to federal control of industry and economy. Today the stock market is glowing in value, barriers to entry block out potential competition for the listed and entrenched companies, while the labor market is in the tank. Unemployment is at roughly 20% if you count people working part time that can't find full time and count the increase of people leaving the workforce among the unemployed.
What is the Obama administration doing wrong? 50,000 new regulations in 42 months and threatening to raise all relevant tax rates. Uncertainty in all regards is at third world levels.
Example: The new federal definition of a full time employee is eighteen pages long. http://washingtonexaminer.com/feds-need-18-pages-to-define-full-time-for-obamacare/article/2507528 Why is that important? Number of full time employees is a key criteria in the plethora of federal strangulations. Please search the article posted on 'why there are so many 49 employee companies in France' for a clue.
It is not "trickle down" to take an already progressive tax code and lower and simplify the rates for everyone across the board. It is pro-growth or supply side economics.
Marco Rubio for one has been consistently clear on this. Romney and Ryan, sometimes.
You cannot balance the budget or solve the unemployment crisis without encouraging robust job creation in the private sector. For every government idea or piece of legislation you need to ask one question: what does this do to grow jobs in the private sector? A surcharge on millionaires, does that grow jobs? No. Does increasing progressivity in the tax code grow jobs? No. An Obamacare excise tax on all medical device sales, does this grow jobs? No. Blocking the drilling in ANWR and blocking a pipeline from Canada, does this grow jobs? No. QE4 and another round of not exactly shovel ready crony expenditures, does this grow jobs across the board? No. 50,000 new regulations, does this grow jobs? No. Taking over an entire industry to bureaucratic control, stifling innovation, does this grow jobs? No. Regulations for public leave, plant closing notices, mandatory health coverages, does this kind of well intentioned do-gooding grow jobs? No.
Does a better policy toward allowing energy production help employment in that industries and nearly all other industries? Yes. Do lower, simpler and more predicable marginal rates on income help job creation? Yes. Would getting our corporate down from worst in the world help job creation in America? Yes. Would eliminating all unnecessary regulations at the federal level increase job creation? Yes.
Is there anything in the past, present or future Obama agenda that across the board falls on the side of growing jobs? No.
Is the entire original Romney 59 point economic plan all about increasing job creation? Yes.
You can't stomp out capital formation and economic freedom and put the focus on government controlled equality of outcomes without hurting employment and job creation. I don't know how to say that in a way that persuades anyone not inclined to believe it, but it is empirically true.
Going back to the original quotation: "Why not increase tax rates on higher earners, Clinton did it and the economy boomed."
This is not true. Clinton raised taxes in his first action and the economy only sputtered ahead, a very weak recovery. When he switched to the Dick Morris triangulate tact, he lowered capital gains tax rates, ended welfare as we knew it and deregulated industries. Also he passed hemisphere-wide free trade with majority R support and majority D opposition. It is quite a clever buffoon in Clinton to now tell us that job growth then, in the tens of millions, was a victory of Democratic policies over Republican policies in the context of the 2012 election choices.
As it was said of the Clintons at the time, they lie with such ease.
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How Quantitative Easing Helps the Rich and Soaks the Rest of Us
And why the Occupy movement should be up in arms.
Anthony Randazzo | September 13, 2012
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The decision is in: Unlimited quantitative easing. That was the announcement from the Federal Open Market Committee this afternoon, launching a third round of purchases of securities in a bid to boost the economy and reduce unemployment. This time, Federal Reserve Chairman Ben Bernanke and crew are pledging to buy $40 billion per month until the economy improves. The Fed's policy committee also extended its zero-interest rate policy until“at least mid-2015.” If QE3 lasts that long, the Feds will be printing at least another $800 billion to buy mortgage-backed securities.
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It won’t be a surprise to read conservatives lambasting this as unconventional monetary policy meant to help re-elect President Obama. And inflation hawks have already started screeching. But the loudest cry of “for shame” should be coming from the Occupy Wall Street movement.
Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally aregressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.
How is the Federal Reserve contributing to regressive redistribution, income inequality, and manipulated markets? Let’s flesh this out a bit.
Last month, Bernanke said that quantitative easing had contributed to the rebound in stock prices over the past few years, and suggested this was a positive outcome. “This effect is potentially important, because stock values affect both consumption and investment decisions,” he argued, apparently under the belief that the Fed has a third mandate to support rising stock prices.
This is ironically a trickle down monetary policy theory, where rising stock prices mean more wealth and more consumption that trickles down the economic ladder. One problem with this idea is that there is a gigantic mountain of household debt—about $12 trillion worth—that is diverting away any trickle down. An even worse assumption is that the stock market really reflects what is going on in the real economy.
Where the Occupy movement should really be teed off is when you consider that most equity shares in America are owned by the wealthiest 10 percent. That is not inherently a problem—wealthier individuals with more disposable income will have more ability take ownership stakes in companies than those in lower income brackets. And it is not a call for class warfare. However, it does mean that when the Fed engages in quantitative easing it is providing a benefit to a very narrow segment of society at the expense of others (either through future inflation or through the cost of raising taxes to pay for increased federal debts). That is the definition of crony capitalism.
At the same time, all Americans have seen the prices of basic goods increase over the past few years in large part due to rising commodities prices. The whole idea of QE is to drive investors out of lower risk investments like mortgage backed securities and government debt and get them to put that money in “more productive”use—lend it, build skyscrapers, invest in technology, etc. Since there is little confidence about the future of the economy, many investors have crowded into the stock market with their money, and still others have invested in commodities.
The problem is that investing in commodities can push up prices on things like gas, meat (because of feed corn prices), bread (because of wheat prices), and even orange juice. There certainly have been other contributors to commodities prices going up, but if the Fed has boosted stocks, they've boosted commodities too. So not only are the cronies gaining from quantitative easing, there is a negative wealth effect too.
The cronyism doesn’t end there. In a Dallas Fed paper released in August, OPEC chief economist William White points out that easy monetary policy favors “senior management of banks in particular.” And even Bernanke himself suggested (as if it was a good thing) that quantitative easing purchases “have been found to be associated with significant declines in the yields on both corporate bonds and MBS.” Translation: the Federal Reserve has made it artificially cheaper for corporations to borrow money and has pushed up the prices of houses (benefiting homeowners but hurting homebuyers).
Correct me if I’m wrong, but I thought cheap loans allowing businesses to leverage up and juiced housing prices were key parts of what got us into this mess?
All of this might be acceptable to some if quantitative easing was helping the American economy recover. The reality is that quantitative easing has made it cheaper for the government to borrow, has artificially propped up the housing market (making it take longer to recover), and has dramatically manipulated the distribution of capital in financial markets. And the economy has not been in recovery.
The plans announced today will exacerbate pre-existing malinvestment and income inequality. What is this continuous round of purchases going to do? It won’t get banks lending any more than they already are. And even if it did, households and small business still have a lot of debt that will keep them in a deleveraging state for a while. It won’t help the housing market bottom out, clear away toxic debt, and end the wave of foreclosures that need to process. It is not going to push up incomes, create new jobs, or change the technological revolution that is altering the face of employment in America.
To put it simply: More quantitative easing is not going to move the dial much on the growth meter.
Taken together, the crony capitalism and negative wealth effects of quantitative easing should clearly give pause. The fact that QE promotes activities that led to the housing bubble should have stopped its progression as an idea a long time ago, especially since these problems are greater than any gain that would come from this now perpetual pace of money creation.
If there is a time to head down to Zuccotti Park and raise some cardboard in opposition to the continuation of such a devastatingly failed policy, it is now.
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It was Bush, then the headwinds from Europe, unfair trade practices in China, ATM machines, Republican obstructionism. Now they say it was the drought.
It was not 50,000 new regulations in 42 months or two dozen new taxes coming online with Obamacare or any other attack on employers, investors or businesses.
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U.S. 2Q GDP Growth Revised Down to 1.3%
http://www.foxbusiness.com/economy/2012/09/27/us-2q-gdp-growth-revised-down-to-13/#ixzz27jiHJsHe
"U.S. economic growth was much weaker than previously estimated in the second quarter as a drought cut into inventories, setting the platform for an even more sluggish performance in the current quarter against the backdrop of slowing factory activity.
Gross domestic product expanded at a 1.3 percent annual rate, the slowest pace since the third quarter of 2011 and down from last month's 1.7 percent estimate, the Commerce Department said in its final estimate on Thursday.
Output was also revised down to reflect weaker rates of consumer and business spending than previously estimated. Outlays on residential construction export growth were also not as robust as had been previously estimated."
Who knew?
For recovery comparison purposes, the 2nd qtr of 1984 growth under Reagan growing out of the Carter malaise was 9.3% (http://online.wsj.com/article/SB10001424052702303962304577510691430926320.html), more than 7 times greater. They probably had more rain. Reagan went on to win 49 states. Obama and his puppet pollsters I think blew a ten point lead with the decline by design strategy.
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Responding to NY Times Article: In Romney-Obama ‘Redistribution’ Debate, a Gray Area, Eduardo Porter
http://www.nytimes.com/2012/09/26/business/obama-and-romneys-redistribution-debate-has-a-gray-area.html?adxnnl=1&adxnnlx=1348981253-bNvIBz3pN86dxBuUuzvppw
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Redistribution or Growth, Choose One
Redistribution analysis provides answers to the wrong question in the income debate. The Gini index Eduardo Porter (NY Time) references tells us only how your income compares with others, not how well anyone is doing. The question should be - which of the alternatives on the table will result in more income to more families going forward, no matter where you sit today in the income spectrum.
The Obama economy has worked the fixed-pie economic model to death, proving its underlying assumptions false. Central to redistribution is that disincentives don't matter and growth will rebound no matter the policies. President Obama assumes that capital gains tax rates, already scheduled to go up at the end of this year by more than 50% on higher income investors, will have no detrimental effect on the job situations of middle income workers. It will actually help them, he argues. But we know that isn't true. He admits knowing the contradiction when he accuses his opponent of moving jobs overseas in response to the same employment disincentives.
Employment requires capital and capital requires after tax return on investment. When we were approaching the last fiscal cliff in 2008 with tax rate hikes imminent, the selloff became epidemic. Those rate increases never happened but the damage was done. Millions of jobs were lost and trillions in wealth was destroyed. Worse for investment decisions than high marginal tax rates is uncertainty about future, high marginal tax rates. That uncertainty has been a continuous feature of the Obama economy from the day that the Pelosi-Reid-Obama took majority in congress with unemployment at 4.6%.
The question is not how much do you make compared to your neighbor but simply how much will you make. Paying the full array of your household bills, gas in the car, college and saving for retirement has nothing to do with what your neighbor or what any rich guy across town is making.
Mr. Porter quite accurately points out the irony that inequality increased more under Clinton than it did under the first Pres. Bush, but that is because the economy, at least in the last 6 years of Clinton, was growing much faster. Pres. Clinton had 2 years of slow growth, then changed course after the midterm election and the change of congress. Pres. Clinton cut capital gains rates and backed away from national healthcare while Pres. Obama clings to his redistributive, anti-growth agenda. The pro-growth policies that Pres. Clinton adopted brought prosperity, growth and at least a temporarily balanced budget. But growth means inequality because it is tied to the freedoms and choices of working, saving, investing and participating in the economy to create that growth. Conversely, the George W Bush presidency featured 51 months of job growth but according to Porter's own chart, the time when inequality fell was when the economy was plunging disastrously.
The key measure is upward income mobility, not income inequality. How likely are you to grow your income, over the next 4 years or over your lifetime. In a class-based, redistributive economy, the answer to your growth potential is not much. It is expanding economic freedom that offers the best opportunity to improve your economic situation. Don't grow the burden of government. Ease its excessive burdens.
After 4 years on the current path we know that penalties on investment do not translate into rewards for workers. Investment will pull back, sit on the sidelines or move overseas. Not just taxes, but with 50,000 new regulations the climate for startup companies, the engine of future growth, has never been worse. This helps no one.
Under Pres. Obama we have had more months above 8% unemployment than in all presidential terms combined since Truman, when the Bureau of Labor Statistics started tracking monthly unemployment. The real unemployment rate counting underemployment and workers lost from the workforce is close to 20%. For college grads today, the percentage failing to get a job in their field is worse than that.
Robbing Peter to pay Paul has proven to be no way to grow the economy, to improve opportunities or to be in a stronger position to help the truly needy. Printing money and running deficits in the trillions only worsens the future burden.
The 25 freest economies in the world earn per capita income 7 times greater than the 25 least free economies. Freer economies provides more income for more people. Inequality is a fact, but it is freedom that leads to national prosperity. - Doug
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"Americans must be wondering how much more of this 'recovery' they can afford. New figures from the Census Bureau's Current Population Survey, compiled by Sentier Research, show that the typical American household's real (inflation-adjusted) income has actually dropped 5.7 percent during the Obama 'recovery.' Using constant 2012 dollars (to adjust for inflation), the median annual income of American households was $53,718 as of June 2009, the last month of the recession. Now, after 38 months of this 'recovery,' it has fallen to $50,678 -- a drop of $3,040 per household. Yet it gets worse. Amazingly, incomes have dropped even more during the 'recovery' than they did during the recession. In fact, they've dropped more than twice as much as they did during the recession. From the start to the end of the recession, the real median income of American households fell $1,413, or 2.6 percent. From the end of the recession to the present day, it has dropped $3,040, or 5.7 percent. This begs the question: What kind of 'recovery' compares unfavorably with the recession from which it's ostensibly recovering?" --The Weekly Standard's Jeffrey H. Anderson
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Around the Nation: Obama's America
Barack Obama's Labor Department came to his rescue after Wednesday's debate debacle, announcing this morning that 114,000 jobs were added in September, and revising upward by 86,000 the numbers for July and August. The headline unemployment rate fell from 8.1 percent in August to 7.8 percent, a 44-month low.
October surprise!
A little digging, however, tells a far different story. For example, in order for the rate to drop 0.3 percentage points 31 days before a presidential election, 456,000 people would have had to either find work -- or drop out of the labor force. So what happened to 342,000 people?
Also, buried in this Associated Press dispatch is a notable caveat: "Still, many of the jobs added last month were part time. The number of people with part-time jobs who wanted full-time work rose 7.5 percent to 8.6 million." Indeed, the U-6 unemployment rate -- a better measure because it includes the underemployed and those who have given up -- remained unchanged at 14.7 percent. Though on the "bright" side, government unemployment is down from 5.7 percent in July to just 4.3 percent in September.
As James Pethokoukis of the American Enterprise Institute put it, "If the labor force participation rate was the same as when President Obama took office, the unemployment rate would be 10.7%. If the participation rate had just stayed steady since the start of the year, the unemployment rate would be 8.4% vs. 8.3%. Where's the progress?"
While millions upon millions remain unemployed or underemployed, Obama and his campaign are trying to claim progress with a new number: five million jobs "created" by his administration. In Wednesday's debate, the president also made the claim, "Over the last 30 months, we've seen 5 million jobs in the private sector created."
That's interesting because in August, the campaign was bragging about creating 4.5 million jobs. We know math is hard, but September's job numbers weren't enough to raise it from 4.5 million to 5.1 million. Besides, the administration is cherry-picking data. As the AP notes, there are only 325,000 more jobs than when Obama took office. The White House doesn't begin counting until halfway through Obama's first year.
Against that backdrop, we remind voters of that "stimulus" spending binge, which the White House promised would keep headline unemployment, at worst, below 8 percent, and by September 2012 it would be just 5.6 percent. When Democrats took control of Congress in 2007, unemployment was just 4.6 percent.
What else do we have to show for all that spending? Well, the official numbers for FY2012 are in and the deficit reached $1,275,901,078,828, easily topping $1 trillion for the fourth straight year. While that's lower than the high-flying days of Democrat hegemony in Washington in 2009 and 2010, it's higher than 2011. Total U.S. debt at the end of September reached $16,066,241,407,385, or roughly $136,690 per household.
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http://www.aei-ideas.org/2012/10/the-sickly-stagnant-september-jobs-report/
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http://scottgrannis.blogspot.com/2012/10/the-drop-in-unemployment-rate.html
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The sudden drop in unemployment was caused by a YouTube video or something......
http://scottgrannis.blogspot.com/2012/10/t :wink: :wink: :wink:he-drop-in-unemployment-rate.html
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(http://i603.photobucket.com/albums/tt114/dougmacg/PopulationandJobs014-1.jpg)
Last 2 years, left to right:
0.88% Job Growth, 4.58% Not in Labor Force growth, 2.2% Population Growth
Data source BLS
Job growth less than population growth equals economic decline. Right?
http://www.powerlineblog.com/admin/ed-assets/2012/10/PopulationandJobs014.png
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Sept. 2012 civilian labor force 155.063 million
Sept. 2012 – people who want a job but not looking 6.727 million
Adjusted labor force 161.79 million
Employed in Sept (household survey) 142.974 million
Employed as % of adjusted labor force: (142.974 / 161.79) = 88.37%
Unemployed as % of adjusted labor force (100.00 – 89.27) = 11.63%
http://www.foxbusiness.com/government/2012/10/05/real-unemployment-rate/
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Why isn't this brought up by Romney?
Sept. 2012 civilian labor force 155.063 million
Sept. 2012 – people who want a job but not looking 6.727 million
Adjusted labor force 161.79 million
Employed in Sept (household survey) 142.974 millionp
Employed as % of adjusted labor force: (142.974 / 161.79) = 88.37%
Unemployed as % of adjusted labor force (100.00 – 89.27) = 11.63%
http://www.foxbusiness.com/government/2012/10/05/real-unemployment-rate/
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BTW, I claim a minor call here: I have said more than once that Romney should be using the "adjusted labor force" number all along for precisely what has happened here-- now that the official number has gone done below 8%, the fleshing out of the number runs the risk as being seen as carping by those who don't follow these things closely.
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If anyone else was president......
http://articles.chicagotribune.com/2012-10-07/news/ct-met-black-middle-class-austerity-20121007_1_black-middle-class-black-households-national-rate
In August, the National Urban League's State of Black America 2012 report found that nearly all the economic gains that the black middle class made during the last 30 years have been wiped out by the economic downturn.
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(http://pjmedia.com/instapundit/wp-content/uploads/2012/10/OBAMAFAILDEFICITSCBO-600x389.jpg)
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Intriguing chart. Would you please also post that in the Budget thread?
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By JACK WELCH
Imagine a country where challenging the ruling authorities—questioning, say, a piece of data released by central headquarters—would result in mobs of administration sympathizers claiming you should feel "embarrassed" and labeling you a fool, or worse.
Soviet Russia perhaps? Communist China? Nope, that would be the United States right now, when a person (like me, for instance) suggests that a certain government datum (like the September unemployment rate of 7.8%) doesn't make sense.
Unfortunately for those who would like me to pipe down, the 7.8% unemployment figure released by the Bureau of Labor Statistics (BLS) last week is downright implausible. And that's why I made a stink about it.
Before I explain why the number is questionable, though, a few words about where I'm coming from. Contrary to some of the sound-and-fury last week, I do not work for the Mitt Romney campaign. I am definitely not a surrogate. My wife, Suzy, is not associated with the campaign, either. She worked at Bain Consulting (not Bain Capital) right after business school, in 1988 and 1989, and had no contact with Mr. Romney.
The Obama campaign and its supporters, including bigwigs like David Axelrod and Robert Gibbs, along with several cable TV anchors, would like you to believe that BLS data are handled like the gold in Fort Knox, with gun-carrying guards watching their every move, and highly trained, white-gloved super-agents counting and recounting hourly.
Let's get real. The unemployment data reported each month are gathered over a one-week period by census workers, by phone in 70% of the cases, and the rest through home visits. In sum, they try to contact 60,000 households, asking a list of questions and recording the responses.
Some questions allow for unambiguous answers, but others less so. For instance, the range for part-time work falls between one hour and 34 hours a week. So, if an out-of-work accountant tells a census worker, "I got one baby-sitting job this week just to cover my kid's bus fare, but I haven't been able to find anything else," that could be recorded as being employed part-time.
The possibility of subjectivity creeping into the process is so pervasive that the BLS's own "Handbook of Methods" has a full page explaining the limitations of its data, including how non-sampling errors get made, from "misinterpretation of the questions" to "errors made in the estimations of missing data."
Bottom line: To suggest that the input to the BLS data-collection system is precise and bias-free is—well, let's just say, overstated.
Even if the BLS had a perfect process, the context surrounding the 7.8% figure still bears serious skepticism. Consider the following:
In August, the labor-force participation rate in the U.S. dropped to 63.5%, the lowest since September 1981. By definition, fewer people in the workforce leads to better unemployment numbers. That's why the unemployment rate dropped to 8.1% in August from 8.3% in July.
Meanwhile, we're told in the BLS report that in the months of August and September, federal, state and local governments added 602,000 workers to their payrolls, the largest two-month increase in more than 20 years. And the BLS tells us that, overall, 873,000 workers were added in September, the largest one-month increase since 1983, during the booming Reagan recovery.
These three statistics—the labor-force participation rate, the growth in government workers, and overall job growth, all multidecade records achieved over the past two months—have to raise some eyebrows. There were no economists, liberal or conservative, predicting that unemployment in September would drop below 8%.
I know I'm not the only person hearing these numbers and saying, "Really? If all that's true, why are so many people I know still having such a hard time finding work? Why do I keep hearing about local, state and federal cutbacks?"
Enlarge Image
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Corbis
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I sat through business reviews of a dozen companies last week as part of my work in the private sector, and not one reported better results in the third quarter compared with the second quarter. Several stayed about the same, the rest were down slightly.
The economy is not in a free-fall. Oil and gas are strong, automotive is doing well and we seem to be seeing the beginning of a housing comeback. But I doubt many of us know any businessperson who believes the economy is growing at breakneck speed, as it would have to be for unemployment to drop to 7.8% from 8.3% over the course of two months.
The reality is the economy is experiencing a weak recovery. Everything points to that, particularly the overall employment level, which is 143 million people today, compared with 146 million people in 2007.
Now, I realize my tweets about this matter have been somewhat incendiary. In my first tweet, sent the night before the unemployment figure was released, I wrote: "Tomorrow unemployment numbers for Sept. with all the assumptions Labor Department can make..wonder about participation assumption??" The response was a big yawn.
My next tweet, on Oct. 5, the one that got the attention of the Obama campaign and its supporters, read: "Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers."
As I said that same evening in an interview on CNN, if I could write that tweet again, I would have added a few question marks at the end, as with my earlier tweet, to make it clear I was raising a question.
But I'm not sorry for the heated debate that ensued. I'm not the first person to question government numbers, and hopefully I won't be the last. Take, for example, one of my chief critics in this go-round, Austan Goolsbee, former chairman of the Obama administration's Council of Economic Advisers. Back in 2003, Mr. Goolsbee himself, commenting on a Bush-era unemployment figure, wrote in a New York Times op-ed: "the government has cooked the books."
The good news is that the current debate has resulted in people giving the whole issue of unemployment data more thought. Moreover, it led to some of the campaign's biggest supporters admitting that the number merited a closer look—and even expressing skepticism. The New York Times in a Sunday editorial, for instance, acknowledged the 7.8% figure is "partly due to a statistical fluke."
The coming election is too important to be decided on a number. Especially when that number seems so wrong.
Mr. Welch was the CEO of General Electric for 21 years and is the founder of the Jack Welch Management Institute at Strayer University.
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http://www.cbo.gov/publication/43663?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=855024&utm_campaign=0
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"CBO's Latest Estimate of the Cost of the TARP: $24 Billion"
George Bush is vindicated. )
People get the terms confused as we go through the recovery from hell, with Tarp, Stimulus1, Stimulus 2... QE1, QE2, QE ongoing, etc.
TARP was the late 2008 program that stabilized banks and non-banks in the heat of the crisis, a joint policy of the Bush administration, the Fed, Bernamke, Geithner at the NY Fed, and signed on by a Dem House and Senate and both the McCain and Obama campaigns.
The complaint of the right wing was more the over-reach of government than the dollar amount. Bachmann later asked Bernanke and geithner in Congressional suncommittee, where can you point to in the constitution does it give the authority to bail out non-banks like AIG?
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http://hotair.com/archives/2012/10/15/were-in-the-midst-of-a-huge-recovery-says-flotus-who-knew/
We’re “in the midst of a huge recovery,” says FLOTUS. Who knew?
posted at 2:41 pm on October 15, 2012 by Erika Johnsen
Is this the campaign meme that Team Obama is going to aggressively start pushing at us with three weeks to go? Of course they often iterate that things are going better than they are, that these things take time, and that there were always going to be “bumps in the road” on the way to recovery, but are they now offensively trying to get us all to deny the signs of reality staring us in the face and just lure us into the attractive self-deception that we’re actually in the middle of a glorious economic rebound? That seems to be the story that Michelle Obama was shooting for during a radio interview on Friday, but, call me crazy… somehow I’m just not seeing it. Via CNSNews:
Mrs. Obama said, “I mean, we are seeing right now that we are in the midst of a huge recovery. Right? Because of what this president has done.” …
Obama: “Pulled this economy from the brink of collapse when we were losing 800,000 jobs a month. Now were gaining every — throughout most of his presidency, we’ve been adding jobs to this economy because of what he’s been doing. The stock market has doubled. Housing prices are rising. Foreclosure rates are lowering. But in the face of that, you still have people trying to convince us that things aren’t better.” …
Obama: “And that just doesn’t make sense. Now, Barack of all people knows that we still have a long way to go to completely rebuild the economy. But we’re headed in the right direction. And when you see all of that truth, it’s hard to understand why are people blocking this?
The Obama campaign struck much the same tone in a brand new ad out today in which various Main-Streeters attest to the ways in which their businesses have improved because of the president’s policies since the official recession:
Well, if we can all just force ourselves to forget the pesky facts of Barack Obama’s tenure, like the fact that median household incomes have shrunk; that our high unemployment rate has remained near-stagnant and only dropped slightly because of so many people dropping out of the labor force; that economists are predicting the unemployment rate isn’t likely to get better anytime soon; that our current economic growth, practically isn’t; and etcetera… then sure, I suppose we can all suddenly delude ourselves into embracing Team Obama’s newfound pride over the president’s economic record. My brain could use a rest anyways.
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http://www.powerlineblog.com/archives/2012/10/our-awful-economy-in-one-chart.php
Our Awful Economy, In One Chart
Michelle Obama says we are “in the midst of a huge recovery.” That claim is laughable to anyone who has lived through the last four years; this simple chart from the Senate Budget Committee highlights one of the central failings of Obamanomics: people are leaving the labor force faster than they are entering it. Since Obama became president ten times as many people have been added to the roster of those not in the labor force, than have been added to the labor force:
(http://4-ps.googleusercontent.com/h/www.powerlineblog.com/admin/ed-assets/2012/10/705x512ximage006.png.pagespeed.ic.eTO1uanGYv.png)
That record of futility can never have been approached in American history.
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Memo To Michelle: What A 'Huge Recovery' Looks Like
Read More At IBD: http://news.investors.com/ibd-editorials/101612-629544-michelle-obama-wrong-on-huge-recovery-.htm
(http://www.investors.com/image/ISS23c_121017_345.png.cms)
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Dinesh D'Souza's movie looking even more accurate.
http://www.washingtonpost.com/business/economy/officials-obama-ready-to-veto-a-bill-blocking-fiscal-cliff-without-tax-hike-for-rich/2012/10/17/64400224-1870-11e2-9855-71f2b202721b_story.html
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Chronic Fatigue Economy
We borrowed $5 trillion and all we got was this lousy 1.7% growth. .
The economy plowed ahead at a 2% growth rate in the third quarter, which thrilled more than a few of our liberal friends who think it's enough to re-elect President Obama. We'll soon find out if they're right, but there's no doubt their prosperity standards are slipping. In the third quarter of 1992, growth came in at 4.2% (3.4% for the year) and Democrats called it a catastrophe.
The third-quarter figure means that growth for the first nine months of 2012 has been a paltry 1.7%. That's slower than last year (1.8%), which was slower than the year before (2.4%). The current recovery has had only two quarters, but not a single year, with growth above 3%.
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Oh, and BTW , , , http://www.youngresearch.com/researchandanalysis/economy-researchandanalysis/government-boosts-economy-just-before-election/?awt_l=PWy8k&awt_m=3bHQqrmAJuzlu1V
As problematic is where the growth came from and where it has gone missing. Consumer spending provided the most lift, perhaps helped by the asset burst inspired by the Federal Reserve's money printing. If Mr. Obama is re-elected, he should buy dinner for Ben Bernanke and the Fed Governors for their in-kind political contributions. The problem is that consumers can't continue to spend if the overall economy doesn't grow fast enough to raise incomes faster than it is.
The other big third-quarter growth driver was federal government spending, which rose 9.6%. Overall government outlays rose 3.7% and accounted for about 0.7 percentage points of the 2% overall GDP increase. Economist David Malpass calculates that growth in private output was closer to 1.3%. So much for the private economy "doing fine" and the government slumming for dollars.
An even bigger worry is that private investment tanked in the quarter. Non-housing related investment contracted by 1.3%. Housing did rally thanks to new home construction. But the decline in business investment at this stage of a recovery signals a capital strike and a return to pessimism. Business investment is a leading indicator of future job and wage growth.
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Traders on the floor of the NYSE on Friday
.Comparing this recovery from the bottom in June 2009 with previous rebounds continues to be very unflattering to Mr. Obama. Republicans on the Joint Economic Committee report that the typical growth rate at this stage of the previous nine recoveries (13 quarters) averaged 16.8%, and 19.6% in the Reagan expansion. The figure for this recovery is a meager 7.2%. That's about $1.2 trillion in foregone output. The budget deficit would be half as large today if this were a normal expansion.
The question is whether there is a reason to expect better in 2013. It's hard to see the investment outlook brightening when Democrats want to raise taxes on investment (capital gains and dividends). Higher tax rates (to 41% from 35%) on small businesses and subchapter S firms won't help hiring. The National Association of Manufacturers says its members will shed factory jobs next year if Washington jumps off the tax cliff, and until recent months manufacturing has been one of the economy's few bright spots.
So this is the dreary tale of Obamanomics: Keep borrowing more than $1 trillion a year and keep the Fed printing money at historic levels, in return for mediocre growth and stagnant incomes. The alternative is to stop punishing the employers, investors and workers who are the real source of growth. The Romney plan to cut tax rates, reform the tax code, restrain spending and repeal ObamaCare would be a good start.
Mr. Obama will spend the next 10 days trying to persuade voters that 1.7% growth is the best we can do. If he's re-elected, he's probably right.
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Department of Cronyism
from Reason Magazine by David Harsanyi
You know what could really help the economy? A huge new bureaucratic department in Washington, that’s what.
President Barack Obama, a man who recently asserted that the “free enterprise system is the greatest engine of prosperity the world’s ever known,” intimated that once he secures a second term in office, he would appoint a Secretary of Business to manage a newly-merged, but still unnamed, agency that would offer Americans that top-down guidance they never asked for—a homeland security for cronyism, if you will.
“We should have one Secretary of Business, instead of nine different departments that are dealing with things like giving loans to SBA or helping companies with exports,” Obama explained in an interview with MSNBC’s “Morning Joe.” “There should be a one-stop shop.”
The Department of Business promises to do to business what the Department of Education has done for education. It’s the sort of idea that sounds like it adds efficiency but actually offers the opposite. The larger context of the idea comports well with the president’s belief that a healthy private sector is healthiest when relying on the dedicated technocrats.
But as a political matter, it promises results. If Mitt Romney, for instance, loses the election over Ohio and the president’s auto bailouts, a handout that allegedly saved one in eight jobs in the Buckeye State, politicians will surely have re-learned an invaluable lesson: the more taxpayer money you spend, the more votes you earn.
And if winning elections means funding busy work at a union-run money pit or keeping a pleasing sunflower-logoed company afloat via a stimulus package, imagine what an entire agency giving out favors could accomplish? On the surface, a consolidation of a bunch of agencies sounds like a bright idea, but there is, as you know, plenty of room for mission creep in the pretending-to-do-good business. With 54 former lobbyists (according to Timothy Carney of the Washington Examiner) in the Obama Administration, it, no doubt, has a keen sense of what the business world is looking for — handouts.
But the most obvious pitfall of a Council for Mutual Economic Assistance, or whatever it’ll be called, is that it would further institutionalize the absurd notion that government can foresee what consumers desire and then “invest” accordingly. When Obama talks about “jobs of the future” he means jobs the government will subsidize because people who vote for him like the sound of it. The more they fail, the more it will have to “invest.” It’s not about what you want, it’s about you need.
If the Obama Administration was an investment house, it would have tanked long ago. Its record on green energy is horrid. It has heaped federal loans and subsidies onto coal-powered electric cars—an “investment” that “will not only reduce our dependence on foreign oil,”Obama said in 2009, but “put Americans back to work.” Hardly. The Chevy Volt’s been a tepid seller, at best, and without taxpayer subsidizes few could afford a $100,000 compact car. Toyota, the world’s largest carmaker, has stopped mass production of a new sub-compact iQ plug-in. Toyota executive Takeshi Uchiyamada recently explained that, “current capabilities of electric vehicles do not meet society’s needs, whether it may be the distance the cars run, or the costs or how it takes a long time to charge.”
Does government care if ethanol or a windmill meets society’s needs? Does it care about cost? Uchiyamada risks stockholder investments—real investments—while politicians’ decision-making rests on political and ideological pressures. So how could a Department of Business be a good idea?
http://reason.com/archives/2012/11/01/department-of-cronyism
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http://www.politico.com/news/stories/1112/83602.html
CBO: Fiscal cliff will mean recession, rise in unemployment
"If Congress and the Obama administration allow scheduled tax increases and spending cuts to occur, the economy will shrink by 0.5 percent in 2013. The unemployment rate would soar to 9.1 percent — up from 7.9 percent today."
Where do they come up with this stuff? (More famous people caught reading the forum.)
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6000 by July.
(http://i.l.cnn.net/money/2009/02/23/markets/markets_newyork/marketwrap.gif)
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I bow to your search function fu!
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http://www.fas.org/sgp/crs/row/RL34314.pdf
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http://www.rawstory.com/rs/2012/12/06/democrats-watch-in-awe-as-mcconnell-filibusters-himself/#.UMHqM5iz5bN.twitter
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http://www.fas.org/sgp/crs/row/RL34314.pdf
Great post! I agree with this point: "The likelihood that China would suddenly reduce its holdings of U.S. securities is questionable because doing so could have a significant negative impact on the Chinese economy."
I believe anything they could do to harm the US economy would harm them far worse, economically and politically. Still the artificial nature of the imbalance is unhealthy. We can't control their policies but on our side should make US businesses and US manufacturing more competitive would slow the outflow of dollars invested back. Balancing our budget and end federal borrowing. And end the dual mission of the Fed and allow interest rates to reach normal levels at a balance between savings and borrowing. Right now savers earn zero and people are learning not to save.
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And, if I am informed correctly, the US backed England, France, and Israel off from retaking the Suez Canal in 1956 by threatening to dump British war bonds , , ,.
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Check this out, especially the video: http://www.vesseltracker.com/en/Home.html
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And, if I am informed correctly, the US backed England, France, and Israel off from retaking the Suez Canal in 1956 by threatening to dump British war bonds , , ,.
Good point if true. The difference in my opinion is the level of dependency. Their sputtering economic engine is dependent upon continued exports to the US - at these levels. A huge move in the currency would be disruptive to exports, to their economy and perhaps to the regime. A disruption or cost increase in imports from China to the US would hurt consumers but could lead to production, manufacturing and jobs increases at home. A jump in interest rates here would have a mixed effect as well, cause some pain but force some corrections and increase our savings rate.
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Perhaps we should take this to the US-China thread, but for the moment I would note that the fascist system of China, facing the issues that it does (including an excess of young males) with the savings rate that it has and the pent up internal demand that it has, and having an economy with the bubble-like characteristics that it does, could well be tempted to embark on aggressive courses of action.
In contrast the US is in the process of , , , well you already know.
Weakness tempts.
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Guilty as charged on morphing the conversation - with seamless transitions. :-)
With another morph I take off from a good point Bigdog made on the tax policy discussion: "the effectiveness of the positions you extol [tax rate cuts determine prosperity] is not as cut and dry as you believe". True! Tax rate cutting alone is not supply side economics and does not in itself equal a positive, productive climate.
Mentioned in a previous discussion, I think it was George Will who said:
"George Bush gave Supply Side Economics a bad name - without ever trying it."
Looking at why tax policy isn't the whole answer requires a look at the other factors. George Bush implemented two rounds of tax rate cuts that inspired enormous growth in the economy. That growth included 52 consecutive months of job growth and almost balanced the budget, but it did not sustain itself beyond that. Why not? Bush got everything else wrong:
1) Government spending is in itself a tax on the economy. To the extent that it is excessive, it is taking resources including people away from their most productive use. Spending went way up under Bush. The need for government spending should have been going down in an environment where almost anyone who wants a private sector job could get one. That opportunity was squandered.
2) Programs that last forever and keep growing. Bush made a try at major reform of social security. For better or worse he failed. He also failed to seek or win any minor reforms. Meanwhile he started another major new entitlement and other big programs without ending or curtailing any existing ones. His predecessor said "the era of big government is over." Not so, not even with a Republican President, House and Senate. Programs have value but again the excesses are a load acting to slow the economy.
3) Regulatory climate: Democrats primarily were the builders of the vastly exploding regulatory climate in this country. Republicans were the willing co-conspirators, repealed essentially none of it when given the chance, then kept adding regulations at roughly the same pace. (Obama has been even worse.) Regulations today are perhaps a bigger 'tax' on the economy than all taxes combined.
4) Energy policy, overlaps regulatory climate. Bush Directed Cheney to come up with a comprehensive plan. Criticism of the secretive nature of his hearings probably destroyed all the possible positive perceptions of the plans but essentially none of it got done. We can update the details on the energy threads, but no new nuclear plants, no new refineries, federal lands and offshore not really opened, never won the case for ANWR and no big improvements to the grid (to my knowledge). Energy became a bigger cost and uncertainty holding back growth.
5) Healthcare. Not bringing back any economic freedom or market sense into healthcare set the table for the argument that government should takeover.
6) Housing! There were some Republicans sounding the alarm, but Republicans in congress and Bush in the White House in particular let a runaway train wreck keep rolling with no awareness that what they were doing was fundamentally wrong and dangerous. Allowing federal control to reach 90% is a violation of common sense and all free market, conservative, and supply side principles. Not everyone was financially ready to own a house and subsidized is the opposite of affordable. Screwing up private markets and resource allocation is the opposite of what a growth policy should be.
7) Monetary policy. It was a tightening of money, not easing that accompanied the Reagan years. The easing that grew out of the 2001 recession and the 9/11/2001 aftermath had no business continuing into a multi-decade blunder where we don't even pretend to hold up our currency or allow interest rates to reach equilibrium levels. Not all Bush's fault but they got their way with the Fed and it backfired.
8 ) State and local taxes. Not Bush's fault but as the states and locals ate up the difference on taxes, the tax rate cut advantage slipped away. For one thing, states tax capital gains as ordinary income so the low federal rate is not low in total if you live most of America.
9) Corporate tax rate becoming highest in the world. These embedded taxes don't show in the individual rates and they still have not been reformed.
10) mis-Communications. For the things that Bush was able to do right economically he was always unable or unwilling to communicate them to the people. Since he didn't understand what he was doing right, he was not likely to notice that what he was saying was wrong. Of tax rates cuts, all he could say was that you get to keep more, missing the whole supply side point of improving the incentives to produce and improved competitiveness will increase national income and revenues to the Treasury. Just keeping more money out of a fixed paycheck is what a demand side tax cut will do. A Keynesian stimulus like dropping dollars from the sky does not stimulate production here if the goods are made in China.
Between all these factors, easy money mortgages with equity lines up to zero equity ownership at bubble level housing prices with financial institutions at risk and taxpayers holding the tab, while becoming a nation of zero savings, unable to withstand a downturn, and never having a sense of purpose communicated of how economic freedom makes us more innovative and competitive in a dynamic world and tax incre3ases coming led to bubble and collapse. All these factors except for tax rate cuts were anti-supply-side policies. Failure on the Republican side led to us voting in the policies of decline, setting the stage for the collapse and stagnation that erased of the gains.
After all that failure, we get to hear forever that we tried the Bush tax cuts (the only thing we did right) and look where it got us.
If our proposals and our record included real progress on all of the above, then I would disagree with the point, "the effectiveness of the positions you extol is not as cut and dry as you believe."
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Wesbury warned a year or so ago that although we are badly mis-managing our economy, the American economy has enough resilient and strength that growth will recover enough that Republicans will have to more in the campaign than just rely on failed results.
http://www.powerlineblog.com/archives/2012/12/the-economic-uptick-that-may-have-saved-obama.php
The economic uptick that may have saved Obama
The Commerce Department has upwardly revised third-quarter real GDP to 3.1 percent. Previously, third-quarter growth was reported as 2.7 percent. With this revision, the third quarter of 2012 becomes the strongest quarter of the year and the third strongest since the economy began picking up in the summer of 2009.
As James Pethokoukis suggests, the increasing strength of the economy during this summer likely played a significant role in President Obama’s reelection.
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Growth is half of what it should be, but it turns out thought that we didn't want a better economy than this. It would screw up 'fairness'.
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I would repeat my previous comments that the impending tax cliff may well have added to that as some activity was taken earlier than it might otherwise have been in order to be taxed at current rates instead of future higher tax rates.
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Monday Morning Outlook
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Greedy Innkeeper or Generous Capitalist? To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 12/21/2012
This is the Monday Morning Outlook for the week of Dec 24th, 2012. Because Monday is Christmas Eve, we are sending it on Friday afternoon. Merry Christmas from the First Trust economics department!
The Bible story of the virgin birth is at the center of much of the holiday cheer at this time of the year. The book of Luke tells us Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was “no room for them in the inn.”
Over the centuries, people have come to believe that because Jesus was born in a stable, and not in a hotel room, Mary and Joseph must have been mistreated by a greedy innkeeper. This innkeeper only cared about profits and decided the young couple was not “worth” his best accommodations. We have heard this narrative of the Christmas story repeated many times in plays, skits and sermons.
This narrative persists even though the Bible records no complaints at the time and there was apparently no charge for the use of the stable. It may be that the stable was the only place available. Bethlehem, like other small towns, was overflowing with people who were forced to return to their ancestral homes for the census - ordered by the Romans for the purpose of levying a tax.
If there was a problem, it was caused by the unintended consequences of this government policy. But this source of the problem has been ignored in favor of a more palatable complaint, that capitalism and capitalists are greedy, uncaring, and maybe even evil.
But a different narrative makes even more sense. The innkeeper was generous to a fault – a hero even. He was over-booked, but he charitably offered his stable, a facility he built with unknowing foresight. A facility he was able to offer, while the government officials who ordered the census slept in their own beds with little care for the well-being of those who had to travel regardless of their difficult life circumstances.
If you must find “evil” in either one of these narratives, remember that evil is ultimately perpetrated by individuals, not the institutions in which they operate.
And this is why it’s important to favor economic and political systems that limit the use and abuse of power over others. In the story of baby Jesus, a government law that requires innkeepers to always have extra rooms, or to take in anyone who asks, would “fix” the problem.
But this new law would also have unintended consequences. Fewer investors would back hotels because the cost of complying with the regulation would reduce the return to that investment. A hotel big enough to handle the rare census, would be way too big in normal times. Even a bed and breakfast would face the potential of being sued. There would be fewer hotel rooms, prices would rise, and innkeepers would once again be called greedy. Government would then try to regulate prices.
This does not mean free markets are perfect or create utopia, they aren’t and they don’t. But, business can’t force you to buy a service or product. You have a choice – even if it’s not exactly what you want. And good business people try to make you happy in creative and industrious ways.
Government doesn’t always care. In fact, if you happen to live in North Korea or Cuba, and are not happy about the way things are going, you can’t leave. And just in case you try, armed guards will help you think things through.
This is why the framers of the US Constitution made sure there were “checks and balances” in the system of government authority. In all the budget negotiations we have witnessed lately, and all the negotiations still to come, we are seeing that system operate. So, too, with continued legal and political challenges to the health reform bill passed back in 2010.
Neither free market capitalism, or the checks and balances of the Constitution are like having a true Savior. But they should give us all reason to hope for a better world in the years ahead.
(If you think you’ve read this before, you’re right! This week’s Outlook is very similar to what we have written the same week during the past three years.)
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I won't post all at once, but at least mark this good link from The Blaze:
http://www.theblaze.com/stories/these-are-the-7-most-telling-economic-charts-of-2012/
7 Most Telling Economic Charts of 2012
1. (Exploding) Debt under Obama's 2013 Budget.
2. Collapse of the Labor Force participation Rate
3. (Major decline in) Workers as a Share of the Population
4. The Jobs Gap
5. Growth Gap - below
6. Median Household Income
7. The Obama Administration's (False) Unemployment Forecast (vs. actual)
The Growth gap:
(http://i603.photobucket.com/albums/tt114/dougmacg/122012growthgap-1-1.jpg)
This chart illustrates our current situation. It shows how there is growth without recovery. It shows the cost over time in the trillion of accepting this anemic, new economic normal. The gap shows that investment moved away from production and stayed away. Jobs were lost, paychecks lost, output, consumption, personal savings and wealth all lost, and of course - lost revenues to the Treasury.
The area between the lines is the boat anchor effect of our misguided economic policies.
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http://www.nytimes.com/2013/01/02/world/europe/used-to-hardship-latvia-accepts-austerity-and-its-pain-eases.html?nl=todaysheadlines&emc=edit_th_20130102
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Unfortunately, considering the spineless/clueless nature of the Republican "leadership" in Congress, I have ZERO confidence that what must be done will in fact be fought for by the Republicans. I think a financial collapse is inevitable before the American people wake up and demand better than what we are getting from our pathetic representatives. See below:
Taking Up the Debt Ceiling War
Posted By Arnold Ahlert On January 3, 2013 @ www.frontpagemag.com
The tax battle is over. Democrats, President Obama and their media cheerleaders succeeded in getting a nervous and divided Republican Party to acquiesce to a bitter bargain. They allowed taxes to rise, while getting almost nothing in return in terms of spending cuts, other than vague promises to be fulfilled sometime in the future. Given the tenor of the times — with entitlement mentality run amok, our spendthrift president’s reelection in November, and the certainty that anything short of capitulation would have been framed by the media as a Republican-created debacle — perhaps it was the only reasonable course of action Republicans could take right now. In the upcoming and far more serious battle over the debt ceiling, Republicans must unify for the simplest of reasons: either they extract serious spending cuts from Democrats and the Obama administration in exchange for raising the debt ceiling — or the nation is headed for fiscal collapse.
Republicans desperately need to educate Americans about our current trajectory. In the last four years, the national debt has increased by more than $5 trillion, including $2.1 trillion of additional debt accumulated since August 2011, when the debt ceiling was raised from $14.3 trillion to $16.4 trillion. Thus, a mere seventeen months later, America technically went bankrupt again on New Year’s Eve. This means that until further credit is authorized by the House in the form of raising the debt ceiling – again – Treasury Secretary Tim Geithner will have to move money around in federal accounts, a process he claims will buy us about two more months before technical bankruptcy becomes genuine bankruptcy.
Now one might think that our runaway freight train of deficit spending would have chastened our elected representatives. One would be completely and utterly wrong. Despite the great fiscal cliff “victory” being touted by Democrats and their media enablers, the Congressional Budget Office (CBO) revealed that the heart of that victory, raising taxes on wealthy Americans, is little more than emotional boob bait for the masses: as a result of the deal, $3.9 trillion will be added to the national debt over the next ten years, bringing us up to more than $20 trillion.
Unfortunately and incredibly, this is small potatoes compared to America’s unfunded obligations. Christopher Cox, former chairman of the House Republican Policy Committee and the Securities and Exchange Commission, and Bill Archer, former chairman of the House Ways & Means Committee, reveal the true scope of America’s problem in a Wall Street Journal article. “The actual liabilities of the federal government–including Social Security, Medicare, and federal employees’ future retirement benefits–already exceed $86.8 trillion, or 550% of GDP,” they write.
Yet the most important part of the article addresses the reality of taxation. “When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually…Some public officials and pundits claim we can dig our way out through tax increases on upper-income earners, or even all taxpayers. In reality, that would amount to bailing out the Pacific Ocean with a teaspoon,” they warn (italics added).
In response to this reality, our intrepid president and his party have brought their teaspoons to the battle. Even as the fiscal cliff deal was on the cusp of being made, Obama insisted that the one atom of relative sanity, the spending cuts mandated by sequestration, conveniently kicked down the road for another two months, were a bridge too far. “We’re using an axe instead of a scalpel,” he contended. For perspective’s sake, it should be noted that the total amount of spending scheduled to be “axed,” absent the further whittling that will more than likely occur when the political class inevitably reprises its lament regarding “draconian cuts,” comes to $1 trillion over ten years.
Such unseriousness, courtesy of reckless Democrats and, in some respects, spineless Republicans, is precisely what brought the nation to the brink of insolvency. If one compares the minuscule level of cuts deemed “draconian,” with the gargantuan and growing level of spending that is somehow “manageable,” as long as the “rich” pay their “fair share,” only one logical, if painful, conclusion can be reached:
Despite their past culpability, either Republicans stand firm, take control of the federal spending debate immediately and endure the coordinated and massive attacks that are sure to accompany any effort to bring the nation’s spending addiction under control, or the country will face dire consequences.
Such attacks have already begun. Huffington Post columnist Jason Linkins refers to debt ceiling “hostage takers” who are “dangerous psychopaths, full stop.” House Democrat Whip Steny Hoyer (D-MD), who must have missed the memo regarding over-the-top language, referred to Republicans seeking to leverage the debt ceiling as “somewhat like taking your child hostage and saying to somebody else, ‘I’m going to shoot my child if you don’t do what I want done.’” Sen. Max Baucus (D-MT) chairman of the Finance Committee, was less incendiary, but equally unrealistic. ”It’s anachronistic,” he said. “We’ve already voted on spending and revenue, and so the debt ceiling is just a confirmation of what we voted on.”
Baucus is disingenuous at best, and an outright liar at worst. Over the course of the last three and a half years, House Republicans have sent budget proposal after budget proposal to the Democratically-controlled Senate. Every one of them has died without a vote. Despite being required by law to do so, the Senate has not only failed to pass a budget in those same three and a half years, they failed to even draft one in 2011 or 2012. The House also passed a bill in October to avoid the fiscal cliff, and Democrats not only tabled it, but sent out Chuck Schumer to warn Republicans that any attempt to reform the tax code in 2013 would be completely resisted, because the idea is “obsolete.” Democrats have been so irresponsible, even MSNBC’s Joe Scarborough noticed. Senate Democrats are “negligent” and “cynical” because “they don’t want the American people to know what their priorities are,” he contended.
Democrat priorities are painfully obvious. They wish to grow the size and scope of government, and the costs of doing so are irrelevant.
As far as the president is concerned, the Constitution may be irrelevant as well. On New Year’s day, Obama warned Republicans that he intends to raise the debt ceiling unilaterally. “I will negotiate over many things, I will not have another debate with this Congress over whether or not they should pay the bills, they have already racked up through the laws they have passed,” he said.
He continued. “Let me repeat, you can’t not pay bills that we have already incurred,” he said. “If Congress refuses to the United States government the ability to pay these bills on-time, the consequences for the entire global economy would be catastrophic–far worse than the impact of a fiscal cliff. People will remember back in 2011, the last time this course of action was threatened, our entire recovery was put at risk. We can’t go down that path again.”
U.S. News and World Report editor-in-chief Mort Zuckerman illuminates the president’s preferred path. “If you constantly live beyond your means by increasing your credit card balance and bank borrowing, eventually your debt rises to a level where all you are doing is paying the interest on your credit cards and loans…This is what is facing the United States. Unless we make changes, by 2055 interest costs will be the only thing that the United States will be able to pay for with available revenues and resources,” he writes.
And that’s assuming we make it that far. Any remaining daylight between now and the ultimate day of reckoning is predicated on the reality that the rest of the world still believes American is not a deadbeat nation. Americans have virtually no clue how fast things can change once investors lose confidence in our ability to get our fiscal act together. In 2012, the interest alone on the current level of debt was almost $360 billion — financed at record-low interest rates. If rates return to their historic norms, those payments could double in a New York minute. Adding more debt would raise them still higher. In other words, America could be facing a future where more than a trillion dollars is spent — on absolutely nothing other than interest. Yet somehow any attempt by Republicans to draw a line in the sand amounts to hostage-taking of children by dangerous psychopaths engaged in anachronistic and obsolete endeavors.
That’s the kind of rhetoric to which Republicans will be subjected in the coming two months. If they have an ounce of integrity left, they will come to realize that taking a rhetorical beating may be difficult to endure. But that is far better than acting as willing accomplices in bankrupting the nation.
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Famous economists caught reading the forum.
Like the inequality drivel, the contention that the middle class has stagnated for 3 decades is false in 3 ways. Yet Pres. Obama and his mentors want to bet the economy on the failure of economic growth to reach the middle class.
1) CPI calculations are false, static, don't account for people making different choices in different scenarios. "CPI overestimates inflation by underestimating the value of improvements in product quality and variety."
2) Income data doesn't include all income, such as untaxed benefits. "...this wage figure ignores the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits. This is no small matter—health benefits, pensions, paid leave and the rest now amount to an average of almost 31% of total compensation for all civilian workers according to the BLS."
3) the average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades.
On that third point in particular I have tried to explain, when you add one job at the bottom in times of prosperity and growth, all other things equal, Median income just declined. But no one is worse off. More likely everyone is better off.
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http://online.wsj.com/article/SB10001424127887323468604578249723138161566.html?mod=WSJ_Opinion_LEADTop
Donald Boudreaux and Mark Perry: The Myth of a Stagnant Middle Class
Household spending on food, housing, utilities, etc. has fallen from 53% of disposable income in 1950 to 32% today.
By DONALD J. BOUDREAUX
AND MARK J. PERRY
A favorite "progressive" trope is that America's middle class has stagnated economically since the 1970s. One version of this claim, made by Robert Reich, President Clinton's labor secretary, is typical: "After three decades of flat wages during which almost all the gains of growth have gone to the very top," he wrote in 2010, "the middle class no longer has the buying power to keep the economy going."
This trope is spectacularly wrong.
It is true enough that, when adjusted for inflation using the Consumer Price Index, the average hourly wage of nonsupervisory workers in America has remained about the same. But not just for three decades. The average hourly wage in real dollars has remained largely unchanged from at least 1964—when the Bureau of Labor Statistics (BLS) started reporting it.
Moreover, there are several problems with this measurement of wages. First, the CPI overestimates inflation by underestimating the value of improvements in product quality and variety. Would you prefer 1980 medical care at 1980 prices, or 2013 care at 2013 prices? Most of us wouldn't hesitate to choose the latter.
Second, this wage figure ignores the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits. This is no small matter—health benefits, pensions, paid leave and the rest now amount to an average of almost 31% of total compensation for all civilian workers according to the BLS.
Third and most important, the average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades. Precisely because the U.S. economy was flexible and strong, it created millions of jobs for the influx of many often lesser-skilled workers who sought employment during these years.
Since almost all lesser-skilled workers entering the workforce in any given year are paid wages lower than the average, the measured statistic, "average hourly wage," remained stagnant over the years—even while the real wages of actual flesh-and-blood workers employed in any given year rose over time as they gained more experience and skills.
These three factors tell us that flat average wages over time don't necessarily support a narrative of middle-class stagnation. Still, pessimists reject these arguments. Rather than debate esoteric matters such as how to properly adjust for inflation, however, let's examine some other measures of middle-class living standards.
No single measure of well-being is more informative or important than life expectancy. Happily, an American born today can expect to live approximately 79 years—a full five years longer than in 1980 and more than a decade longer than in 1950. These longer life spans aren't just enjoyed by "privileged" Americans. As the New York Times reported this past June 7, "The gap in life expectancy between whites and blacks in America has narrowed, reaching the lowest point ever recorded." This necessarily means that life expectancy for blacks has risen even more impressively than it has for whites.
Americans are also much better able to enjoy their longer lives. According to the Bureau of Economic Analysis, spending by households on many of modern life's "basics"—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.
One underappreciated result of the dramatic fall in the cost (and rise in the quality) of modern "basics" is that, while income inequality might be rising when measured in dollars, it is falling when reckoned in what's most important—our ability to consume. Before airlines were deregulated, for example, commercial jet travel was a luxury that ordinary Americans seldom enjoyed. Today, air travel for many Americans is as routine as bus travel was during the disco era, thanks to a 50% decline in the real price of airfares since 1980.
Bill Gates in his private jet flies with more personal space than does Joe Six-Pack when making a similar trip on a commercial jetliner. But unlike his 1970s counterpart, Joe routinely travels the same great distances in roughly the same time as do the world's wealthiest tycoons.
What's true for long-distance travel is also true for food, cars, entertainment, electronics, communications and many other aspects of "consumability." Today, the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren't much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.
Even though the inflation-adjusted hourly wage hasn't changed much in 50 years, it is unlikely that an average American would trade his wages and benefits in 2013—along with access to the most affordable food, appliances, clothing and cars in history, plus today's cornucopia of modern electronic goods—for the same real wages but with much lower fringe benefits in the 1950s or 1970s, along with those era's higher prices, more limited selection, and inferior products.
Despite assertions by progressives who complain about stagnant wages, inequality and the (always) disappearing middle class, middle-class Americans have more buying power than ever before. They live longer lives and have much greater access to the services and consumer products bought by billionaires.
Mr. Boudreaux is professor of economics at George Mason University and chair for the study of free market capitalism at the Mercatus Center. Mr. Perry is a professor of economics at the University of Michigan-Flint and a resident scholar at the American Enterprise Institute.
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Christina Romer, Timothy Giethner and President Barack Obama told us that if we "invested" these hundreds of billions in "recovery" unemployment would be about 5% by now.
They didn't know the consequences of their own policies, as they broke new leftist, anti-employment ground.
Unemployment ticked up to 7.9% nominal. That translates into 10.8% at the old workforce participation rate. That is the key number to judge the policies, implied by the fact that we were never told these policies would chase 8.5 million out of the workforce altogether.
When things are this bad, you need to look to U6 for a better reading which has been holding steady at 14.4% and includes the underemployed. Translating that for the workforce participation disappearance under Obama, this economy is under-employing this workforce by 19.7%, on a glide path to NEVER recover.
Plowhorse THAT, Brian Wesbury et al.
http://www.aei-ideas.org/2013/02/january-jobs-report-shows-why-obama-doesnt-want-to-talk-about-jobs-anymore/
http://www.frbatlanta.org/chcs/calculator/
http://www.bls.gov/news.release/empsit.nr0.htm
http://www.hamiltonproject.org/jobs_gap/
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Maybe we have no Krugman types on the Board to engage, but can someone please explain or point to a link to a coherent economic theory that purporting to explain how our current policy and path leads to prosperity.
Trillion a year deficits combined with a no-growth projections forever. Unfunded future liabilities that dwarf the the first 17 trillion of debt. Increases in spending that never end (without total collapse). A commitment from both parties to increase spending and guarantee that the lower 98% will never have to pay for spending they support, including basic life expenses like healthcare for people who make up to 70k. Zero percent interest on savings. Highest corporate taxes on the planet. All encompassing regulations up to the point of requiring a permit to exhale. Investment taxes approaching 100%. Birth rates below replacement levels. An aging population. Men marrying men, women marrying their government for security, families obsolete. Work unnecessary. Disability rates doubling. Food stamp recipients inflating into an obesity epidemic. Pension/retirement funds empty, backed by a bankrupt federal government, which is backed by the QE printing press, backed by nothing but a house of cards. Extreme fiscal stimulus has became status quo, not stimulating anymore, if it ever did. Long term real un/underemployment stuck at 20%. All new policies anti-employment. Lowest business start up rate in history.
The law of holes in 2012-2013 went from 'stop digging' to 'four more years'.
What kind of a load can a plowhorse pull, 200% of its weight? 400% of its weight? Uphill? Into "headwinds"?
"Plow Horse Enters Quicksand" was a Zerohedge headline in June 2012
(http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/07-2/horse%20sand.jpg)
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I am reminded of David Gordon's word play about "Profiting or being a Prophet".
The simple fact of the matter is that most of us have missed a move of well over 100% in the DOW and Wesbury did not. Indeed, Wesbury pretty much called it and we did not.
We, e.g. Doug's post preceding this one of mine here, have tended more to prophesizing and certainly we are not without ample material in making our case, but IMHO we would be a lot stronger in making our case if we could explain how the hell it is that negative interest rates for years on end are possible. We would be stronger in making our case on taxes if we regularly addressed the substantial decline in fed revenues as a % of GDP as part of the explanation of massive deficits. We would be stronger in making our case if we regularly addressed the extremely positive effects of the natural gas and shale revolutions.
Don't get me wrong, I am clear that we are on a trajectory to disaster-- though I can't tell if it comes slowly or quickly-- but I think in our search for Truth there are ways in which we can do better than we are.
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"The simple fact of the matter is that most of us have missed a move of well over 100% in the DOW and Wesbury did not. Indeed, Wesbury pretty much called it and we did not."
As with oil, there is also a dollar inflation component of these increases as well. These indices went up in nominal dollar levels in the context of trillions of dollars injected. Reminds me of housing in 2006. Those who predicted a shoarp correction in that case, saying this couldn't keep going up forever, were wrong for a long time before they were right.
The DOW is not a US index. The stocks of McDonalds, Coca-cola, 3M, Qualcomm, GE, Ford, Dow Chemical, Intel, HP, Merck, T.I., Colgate, Apple all get majority of revenues and revenue growth from overseas. Measure that index with US operations and tell me about the increase. :-( For the wider S&P measure, the foreign component is around 40%. Still these are existing company indices, not showing the failure of this economy to produce new startups. Investing globally has been better than sitting on a declining dollar with zero percent interest at home. To take from that the US is fine (I know you didn't say that) is wrong. That Wesbury (or the gold guys) can show you how to invest around a US stagnation/collapse does not mean US political economy is not faltering badly.
Your freedom to invest in companies from here that can get around US taxes and regulations by freely moving operations overseas is also under assault.
I wish the optimists the best of luck. We are still allowed to keep and reinvest some of the fruits of our labor, about 33% in some cases. The plowhorse will live and plow a little longer eating 33-50%% of its food requirement, but not at full speed and not long without more food coming.
No one knows the future but I say that shifting the car from neutral to reverse means we are likely to move backwards.
Related links: http://www.huffingtonpost.com/2010/12/28/job-market-booming-overseas_n_801839.html
http://stocks.about.com/od/investingstrategies/a/042507foreign.htm
http://money.usnews.com/money/blogs/flowchart/2011/06/30/why-us-companies-arent-so-american-anymore
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[youtube]http://www.youtube.com/watch?v=AFUWkfCo2-A[/youtube]
http://www.youtube.com/watch?v=AFUWkfCo2-A
"The simple fact of the matter is that most of us have missed a move of well over 100% in the DOW and Wesbury did not. Indeed, Wesbury pretty much called it and we did not."
As with oil, there is also a dollar inflation component of these increases as well. These indices went up in nominal dollar levels in the context of trillions of dollars injected. Reminds me of housing in 2006. Those who predicted a shoarp correction in that case, saying this couldn't keep going up forever, were wrong for a long time before they were right.
The DOW is not a US index. The stocks of McDonalds, Coca-cola, 3M, Qualcomm, GE, Ford, Dow Chemical, Intel, HP, Merck, T.I., Colgate, Apple all get majority of revenues and revenue growth from overseas. Measure that index with US operations and tell me about the increase. :-( For the wider S&P measure, the foreign component is around 40%. Still these are existing company indices, not showing the failure of this economy to produce new startups. Investing globally has been better than sitting on a declining dollar with zero percent interest at home. To take from that the US is fine (I know you didn't say that) is wrong. That Wesbury (or the gold guys) can show you how to invest around a US stagnation/collapse does not mean US political economy is not faltering badly.
Your freedom to invest in companies from here that can get around US taxes and regulations by freely moving operations overseas is also under assault.
I wish the optimists the best of luck. We are still allowed to keep and reinvest some of the fruits of our labor, about 33% in some cases. The plowhorse will live and plow a little longer eating 33-50%% of its food requirement, but not at full speed and not long without more food coming.
No one knows the future but I say that shifting the car from neutral to reverse means we are likely to move backwards.
Related links: http://www.huffingtonpost.com/2010/12/28/job-market-booming-overseas_n_801839.html
http://stocks.about.com/od/investingstrategies/a/042507foreign.htm
http://money.usnews.com/money/blogs/flowchart/2011/06/30/why-us-companies-arent-so-american-anymore
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Great clip GM. What is Schiff predicting now?
Data Watch
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The Trade Deficit in Goods and Services came in at $38.5 Billion in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 2/8/2013
The trade deficit in goods and services came in at $38.5 billion in December, much smaller than the consensus expected $46.0 billion.
Exports rose $3.9 billion in December, while imports fell $6.2 billion. The rise in exports was led by nonmonetary gold, petroleum products and civilian aircraft. The decline in imports was led by crude oil, pharmaceuticals, autos, and computers.
In the last year, exports are up 4.9% while imports are down 2.0%.
The monthly trade deficit is $13.2 billion smaller than a year ago. Adjusted for inflation, the trade deficit in goods is $4.5 billion smaller than a year ago. This is the trade measure that is most important for measuring real GDP.
Implications: The trade deficit came in substantially smaller than the consensus expected in December. Record exports of petroleum products coupled with the lowest crude oil imports in almost sixteen years led to the lowest trade balance since January 2010. As a result, we are now tracking a noticeable upward revision to real GDP growth in the fourth quarter. Last week, the government’s first estimate showed a slight contraction, at a 0.1% annual rate. Based on today’s trade data as well as recent figures on construction and inventories, we now project an upward revision to a +0.7% annual rate. Still, the total volume of US international trade appears to have leveled off over the past several months. A year ago, exports were up 7.4% from the prior year (December 2010 to December 2011); in the past 12 months, exports are up a slower 4.9%. Financial and economic problems in Europe may be playing a role. Exports to the Euro-area are down 2.5% in the past year. Long-term, beneath the headlines, higher energy production in the US due to new technologies is having large effects on trade with other countries. Since 2005, real (inflation-adjusted) oil exports have tripled and reached a new all-time record high, while real oil imports are down 22%. We expect the trade sector will be a small negative for real GDP growth in 2013. This is a normal pattern when the US economy is expanding.
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Great clip GM. ...
Yes, these shows invite him on as a contrary opinion and shout him down, right while it was going on. I was trying to ask what economic theory supports the idea that what we are doing now leads to anything but collapse. Stomp out savings, stomp out investment, stop out employment, stomp out work. Dilute the dollar, limit revenues, explode expenses and liabilities, then ask: what could possibly go wrong?
I don't think Shiff is an optimist now (understatement). But also he is no expert on the timing and magnitudes of collapses. No one is.
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We share profoundly Cassandrian prophecies over the current trajectory. The point I continue to raise however in the context of the stock market thread is about all the profits we have missed.
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Crafty, Your point is valid. Looking backward is necessary in the search for lessons to learn. But the rear view mirror is not the best consideration moving forward. Those who are in stocks right now, in the face of so many negative factors, should have a strategy to get out quickly as well.
I recall laughing in Jan 2000 and showing charts around of the phenomenal returns from 1999, wondering why I didn't have more in Qualcomm that went up 2400% and JDSU that went up over 1000% and had a billion in the bank. This was real and nothing could stop it - we thought - even without real earnings. Looking backward did not tell you what was in front of you. Harsh, unbiased analysis might have. NASDAQ crashed in March 2000. The best companies in the best technologies crashed, not just dot-coms. America's most widely held stock Lucent lost 99% of its value. The total loss in that crash was about $5 trillion.
I don't know what today's stocks are worth or what to do with information that doesn't make sense to me, except to warn that it doesn't make sense to me.
Not many good investment options available that I know of for the very few who have money. Sitting on money is a sure loss. Gold is already sky-high. I would only say invest in funds that have good defensive strategies for the next correction.
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The Real State of the Union
Posted By Tom Blumer On February 19, 2013 - www.frontpagemag.com
In his State of the Union speech on February 12, President Barack Obama failed to note that this nation’s 16th President, Abraham Lincoln, was born on the same date 204 years earlier. Perhaps that’s because it was Lincoln who said: “Better to remain silent and be thought a fool than to speak out and remove all doubt.”
Obama removed all doubt about his foolishness — at least in his public statements, though possibly not in regards to his and fellow progressives’ larger agenda — when he told the assembled senators and congressmen that, concerning the state of the economy, “[W]e have cleared away the rubble of crisis, and can say with renewed confidence that the state of our union is stronger.”
No it’s not, and all of the insufferable media cheerleading describing jobs reports as “mostly encouraging” even when the official unemployment rate goes up, and about “A U.S. Economy That’s Strengthened Over [the] Past 4 Years,” won’t change that.
The evidence could take up a book. I’ll limit mine to three areas: employment, student loans, and housing.
A February 1 Investor’s Business Daily editorial, which appeared shortly after the government released its January jobs report, laid out the primary truth about the current job market:
It took an average of just 24 months to regain all the jobs lost in the previous nine recessions. But at the current Obama job-creation pace, it will take about 80 months to regain those lost jobs.
Mort Zuckerman, the liberal editor-in-chief at U.S. News who voted for Obama in 2008, recently wrote the following in a Wall Street Journal column:
After four years America remains in a jobs depression as great as the Great Depression. But the crisis isn’t seen in that light because the country isn’t confronted daily by scenes of despair like the 1930s photographs of bread lines and soup kitchens …
… The jobless today are much less visible than they were in the 1930s because relief is organized differently.
Zuckerman’s subheadline succinctly detailed the point just made: “Twelve million out of work, 48 million on food stamps, 11 million on disability.”
Even those glum statistics don’t adequately capture the entire problem. Per Zuckerman, “The only work that has increased (since the November 2007 peak in nationwide employment) is part-time, and that is because it allows employers to reduce costs through a diminished benefit package or none at all.” Many employers are also clearly doing all they can to keep all but a few key employees from toiling more than 30 hours per week, because ObamaCare will compel them to treat employees who work 30 or more hours as “full-time,” forcing them to either provide mandatory health insurance coverage or pay a fine if they don’t.
Additionally, the jobs that are being obtained are going overwhelmingly to workers who are 55 and older, where employment (again, largely part-time) has grown by 4 million during the past four years. Employment for everyone else during that same period has decreased by almost 3 million. The overall labor force participation rate is back to where it was during the early 1980s, an era when a much higher percentage of spouses voluntarily stayed home to raise their children.
The growing crisis in the government’s student loan programs may be the least publicized trillion-dollar mess in world history. Outstanding balances have grown by $400 billion during just the past four years. During that time, the percentage of loans which is 90 or more days delinquent has skyrocketed from an already awful 8 percent to 11 percent, with most of that increase occurring during just the past few reported quarters.
Why is this happening — and why will the situation probably get much worse? High school grads are going on to college at a record high percentage, but an unprecedented percentage of those who do are ill equipped to succeed in their studies. When they fail, their student loans don’t go away, not even in bankruptcy. If they can get jobs, they probably won’t pay very well. Their student loan payments act as an effective millstone hindering their ability to otherwise advance in life.
The alleged recovery in the housing industry is one of the most heavily publicized economic myths going. We’re supposed to be excited that new home sales are achieving three-years highs, even though today’s level is barely back to where it was during the early-1980s recession, when the U.S. population was 25 percent lower. Today’s level of homebuilding activity is about half of what it should be in a truly healthy economy. Though it’s clear that the housing bubble engineered by government frauds by design Fannie Mae and Freddie Mac and assisted by previous Federal Reserve Chairman Alan Greenspan caused home prices to increase beyond reason during the previous decade, the fact remains that inflation-adjusted home prices are right back where they were in 1990. So much for a home being a great long-term investment.
Uncanny in its inability to learn from past mistakes, risky lending policies and decisions have taken yet another government housing entity, this time the Federal Housing Authority, to the brink of insolvency. Last week, the Government Accountability Office “released a report stating … (that it) is a ‘high risk’ entity.”
Lincoln said something else about foolishness which ties directly into Obama’s State of the Union address: “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” As the nation’s Obama-induced economic malaise continues, the roster of those who are being fooled will continue to shrink.
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http://reason.com/blog/2013/02/20/what-causes-government-spending-to-go-do
From the article:
Who knew Nixon was such a tightwad (he managed generally flat spending by cutting defense heavily), that Reagan was so egregiously an overspender, and that H.W. Bush really gave back what used to be called "the peace dividend"?
The biggest surprise of all, of course, is that real, per-capita spending has not just flattened under Barack Obama but has actually declined.
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Bush had two wars, including a really large one. Iraq is done, and Afpakia is winding down. Furthermore, the Stimulus 1, 2, 3, of Bush's final year and thoroughly supported by Baraq and the rest ofthe Dems, etc were supposed to be temporary measures and Baraq is fighting tooth and nail to make this "desperate emergency" spending permanent. Then there is the matter of Obama care, which has collected taxes for the last few years but begins only this year. Just wait until this clusterfcuk begins hitting the books! Originally projected at costs of less than $1T my understanding is projected expenditures have already triped to $2.7T
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http://reason.com/blog/2013/02/20/what-causes-government-spending-to-go-do
From the article:
...
The biggest surprise of all, of course, is that real, per-capita spending has not just flattened under Barack Obama but has actually declined.
[Crafty already nailed this but I post my thoughts as they were written.]
Surprising because it is both false and misleading.
Covered somewhere in the threads here, these discredited studies put the first 8+ months of Obama's Presidency in the Bush budgets. The federal fiscal year is Oct 1-to the following Sept 30. That kind of budget tracking makes sense in ordinary times, runners left on base, but in this case it included amazing amounts of "emergency spending" before and after inauguration.
The emergency spending between the election and the inauguration was on Bush's watch but in consultation and agreement with President-elect Obama, and also with direct approval of Obama as a de facto leader of the Senat majority that approved the spending. The lie in Washington was that these emergency disbursements were temporary.
What is most dishonest is to put the American Recovery and Reinvestment Act of 2009, the economic stimulus package enacted by the 111th United States Congress with all Democrat majorities in February 2009 and signed into law on February 17, 2009 by President Barack Obama onto George Bush's budget year.
What the flawed accounting accomplishes is to move the increases to Bush and then when President Obama breaks the temporary spending promise in the legislation and makes nearly a trillion a year of emergency spending permanent and then steps up and says he slowed or ended the increases in spending.
Besides screwed up budget years, the red-blue designations for President ignore the makeup of congress - where spending bills originate. The 2008 surge is under a Dem congress. The Clinton spending restraint 1995-2001 was under a Republican congress. The people at Reason should know better but libertarians opposing Republicans and vice versa is part of the problem.
I prefer to tie policies more than people or party or calendar dates to economic results. For tax revenues, it is not what year did Reagan or Bush get elected, but what date did their policies take effect.
The effect of the Nov 2006 election that elevated Pelosi-Reid-Obama-Hillary-Biden-Ellison et al to the majorities in congress was that tax rate cuts could not and would not get renewed, meaning to investors faced higher tax rates going forward. Investment is forward looking on tax rates. A 50+ month employment expansion that began with the full implementation of the Bush tax rate cuts ended at that time and unemployment hit its bottom at 4.7% and headed up. http://www.shadowstats.com/alternate_data/unemployment-charts Unemployment rising means structurally higher spending. In 2008 facing apparent certainty of tax rate increases at year end the financial markets crashed. Whether one buys my economic theory or not, to put a red bar on spending for 2008 and then characterize the budget fights of Obama, Boehner and McConnell as Democratic spending restraint is not just simplistic, but flagrantly deceptive.
Other than that, I like Nick Gillespie, Reason magazine and economist Veronica de Rugy.
[another good point from Crafty is that Obamacare which had zero Republican votes and no dollars to speak of on that congress' record or this President so far, is supposedly unrepealable in divided government, yet will count against the spending record of the next President - trillions over budget. Very unfair. Again, tie the policies, not calendars or names on the door, to the results when you are serious about policy analysis.
The war point is also very good. The 'Bush' wars were arguably a result - partly - of Clinton's intelligence defunding and Clinton not really addressing either of those known threats in his Presidency. From the same chart, was Truman a wild spender in 1945 or did he wrap up a Hitler/FDR/Imperial Japan war?]
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I have referenced the phenomenon in France several times: Why France has so many 49 person companies. Of course it is because so many regulations kick in when you hit 50 that new or further employment is thwarted. Now it is the trend in America brought on by Obama and the Dems who preceded him and supported his policies ending exactly what they were trying to cause more of, companies paying full time benefits to more employees:
ObamaCare and the '29ers'
How the new mandates are already reducing full-time employment.
http://online.wsj.com/article/SB10001424127887324616604578304072420873666.html?mod=WSJ_Opinion_LEADTop
Here's a trend you'll be reading more about: part-time "job sharing," not only within firms but across different businesses.
It's already happening across the country at fast-food restaurants, as employers try to avoid being punished by the Affordable Care Act. In some cases we've heard about, a local McDonalds has hired employees to operate the cash register or flip burgers for 20 hours a week and then the workers head to the nearby Burger King BKW +2.39% or Wendy's to log another 20 hours. Other employees take the opposite shifts.
Welcome to the strange new world of small-business hiring under ObamaCare. The law requires firms with 50 or more "full-time equivalent workers" to offer health plans to employees who work more than 30 hours a week. (The law says "equivalent" because two 15 hour a week workers equal one full-time worker.) Employers that pass the 50-employee threshold and don't offer insurance face a $2,000 penalty for each uncovered worker beyond 30 employees. So by hiring the 50th worker, the firm pays a penalty on the previous 20 as well.
These employment cliffs are especially perverse economic incentives. Thousands of employers will face a $40,000 penalty if they dare expand and hire a 50th worker. The law is effectively a $2,000 tax on each additional hire after that, so to move to 60 workers costs $60,000. ... ( more at the link)
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What could possibly go wrong with these kinds of policies?
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http://www.csmonitor.com/Business/2013/0222/Why-is-Wal-Mart-worried-Payroll-tax-could-cut-consumer-spending.-video?nav=87-frontpage-entryLeadStory
In a survey released Thursday, the National Retail Federation (NRF) said some 46 percent of consumers plan to spend less as a result of the payroll tax increase. One-third said they will reduce dining out and one-quarter will spend less on “little luxuries,” like manicures and trips to coffee shops.
“A smaller paycheck due to the fiscal cliff deal early last month, higher gas prices, low consumer confidence and ongoing uncertainty about our nation’s fiscal health is negatively impacting consumers and businesses across the country,” Matthew Shay, president and CEO of the NRF, said in a statement.
Originally enacted in December 2010 to help taxpayers weather the recession and to spur economic activity, the payroll tax cut expired Jan. 1 of this year. The restoration of the tax effectively raised the rate from 4.2 percent in 2012 to 6.2 percent in 2013, shaving 2 percent from consumers’ take-home pay.
That means Americans making $50,000 a year will pay $83 more in taxes each month, almost $1,000 more each year. Those making $75,000 will pay $125 more each month, or $1,500 more each year. As retailers see it, that’s $1,500 less a consumer has to spend on groceries, household goods, and dining out.
Multiply that by 153.6 million people in the labor force and retailers start to panic. According to an estimate by Citigroup, the expiration of the payroll tax cut will move $110 billion out of consumers’ pockets.
For high-end consumers, the payroll tax may not change a thing, and for many middle-income consumers, it will likely result in only a subtle shift. But the impact is most likely to be felt among low-income consumers and the businesses they tend to frequent, like Wal-Mart.
“It’s a big deal,” says Morgan Housley, a macroeconomic analyst with Motley Fool, an online financial education website. “The biggest impact is on lower-income households since the payroll tax is regressive, only applying to the first $113,000 of income. Wealthier households don't feel the same pinch because the tax doesn't hit all of their income. Lower-income households also spend a larger share of their income than wealthier consumers.… Low-income families are in one of the toughest spots they’ve been in since 2009.”
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The Wal-Mart Indicator: We’re Heading for a Stagflationary Disaster
February 21st, 2013
18 9 0 2 95
by Phoenix Capital Research
In the second half of 2012, the media, Federal Reserve, and various Governmental economic bean counters engaged in what we call Great Global Rigging of 2012 in an effort to make the US economy look better to help the Obama campaign re-election bid.
Now that the election is over, the ugly economic realities have begun to creep out from where they were swept under the rug. And while the official economic data is bad (a negative GDP in the fourth quarter of 2012), it’s nothing compared to what real-time indicators are showing:
Wal-Mart Stores Inc. (WMT) had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.
“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.”
Wal-Mart and discounters such as Family Dollar Stores Inc (FDO). are bracing for a rise in the payroll tax to take a bigger bite from the paychecks of shoppers already dealing with elevated unemployment. The world’s largest retailer’s struggles come after executives expected a strong start to February because of the Super Bowl, milder weather and paycheck cycles, according to the minutes of a Feb. 1 officers meeting Bloomberg obtained.
http://www.businessweek.com/news/2013-02-15/wal-mart-executives-sweat-slow-february-start-in-e-mails
Here’s Wal-Mart, the single largest retailer in the US, reporting that it just had the single worst start to any month in over seven years. Indeed, the company missed just revenues expectations as families adjust to a “reduced paycheck and increased gas prices.
The increased gas prices is most important. Inflation is already seeping into the system in a big way. Indeed, if you account for real inflation (not the Fed’s phony CPI measure), the US economy contracted by over 1% last quarter.
Make no mistake, we are heading into a stagflationary collapse. The time to prepare is NOW before stocks“get it.”
So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from the economy taking a massive downturn, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into financial system right now trying to stop this from happening.
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Read more at http://investmentwatchblog.com/the-wal-mart-indicator-were-heading-for-a-stagflationary-disaster/
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"Let the president have the authority." - CK
Said in regard to the president being able to pass money from one government entity to another, basically overriding any congressional oversight that existed in regards to budgets that had been passed, all in an effort to grant Obama the ability to funnel funds to keep whatever agencies that Obama deems "important," up and operating.
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Going back in the thread:
"Let the president have the authority." - CK
Said in regard to the president being able to pass money from one government entity to another, basically overriding any congressional oversight that existed in regards to budgets that had been passed, all in an effort to grant Obama the ability to funnel funds to keep whatever agencies that Obama deems "important," up and operating.
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I think, in that proposal, the idea is that the administration can move money within a department to its greatest need, not say move defense money to food stamps etc. It wouldn't end oversight; they would haul in the cabinet secretaries to testify as to where money is being spent and why. It would weaken the argument that the appropriating branch was starving the elderly, when it turns out the administration was spending the money on bureaucrats.
Allotting money and then holding people accountable sounds like private sector management. I share the concern that they should not be giving up their constitutional responsibility.
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Economists, media and politicians often dwell on quintiles and percentiles of earners without noting that the people who make up these groups changes everyday, every year and every decade. We hear that the rich this... and the top 1% that... but bogus stats lead to wrong conclusions because they do not adjust or account for the movement of the people between the groups. If you follow the people, the conclusion is the opposite of just following the brackets.
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http://www.realclearpolitics.com/articles/2013/03/05/economic_mobility_117269.html
Economic Mobility
By Thomas Sowell - March 5, 2013
Excerpt:
"Most working Americans who were initially in the bottom 20 percent of income-earners, rise out of that bottom 20 percent. More of them end up in the top 20 percent than remain in the bottom 20 percent.
People who were initially in the bottom 20 percent in income have had the highest rate of increase in their incomes, while those who were initially in the top 20 percent have had the lowest. This is the direct opposite of the pattern found when following income brackets over time, rather than following individual people.
Most of the media publicize what is happening to the statistical brackets -- especially that "top one percent" -- rather than what is happening to individual people.
Read more: http://www.realclearpolitics.com/articles/2013/03/05/economic_mobility_117269.html#ixzz2MyklvA6r
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I have tried hard to describe how the principles of supply side economics center around all the things we can logically do to grow a healthy economy. To that, people yawn and move on. Perhaps more persuasive is the opposite - identify all the things you could do to weaken a healthy economy, then look at the anti-growth and prosperity agenda being implemented here in the U.S.
http://pjmedia.com/victordavishanson/how-to-weaken-an-economy/?singlepage=true
How to Weaken an Economy by Victor Davis Hanson
...there are plenty of ways to slow down even an inherently strong economy. History offers plenty of examples. But as more contemporary models, take your pick of successfully ruined economies — the Venezuelan, the Cuban, the North Korean, the Greek, the Italian, the Portuguese, or pretty much any from Mediterranean Africa to the Cape of Good Hope. There are certain commonalities about why and how they fail. Let’s review some of them.
Government
The state can never be too big. Ensure that it is unaccountable and intrusive, in constant need of more money and more targets to regulate. The more government, the more people are shielded from the capital-creating, free-market system. Think the DMV or TSA, not Apple. The point is for an employee to spend each labor hour with less oversight, while regulating or hampering profit-making, rather than competing with like kind to create material wealth. Regulatory bodies are a two-fer: the more federal, union employees, the more regulations to hamper the private sector. The more federal mandates, like new health-care requirements and financial reporting, the less employers profit and the fewer employees they can hire. Washington should be a growth city, absolutely immune from the downturn elsewhere, a sort of huge and growing octopus head with decaying tentacles. State jobs should be redefined as something partisan — whose expansion is noble and helps the helpless, and whose contraction is evil and the design of a bitter and aging white private-sector class.
On the other end of the equation, ensuring 50 million on food stamps, putting over 80,000 a month on Social Security disability insurance, and extending unemployment insurance to tens of millions all remind the jobless that life is not too bad (thanks to the government), and certainly a lot better than working at a “low-paid” job that equates to giving up federal support. To paraphrase Paul Krugman, the more and the longer the jobless receive, the less likely they are to take chances looking for a job. That too might be again a good thing if you wish to slow down the economy. In general, even Arnold Toynbee, a man of the Left, acknowledged that the greedy drive of the scrambling private sector was not as pernicious to civilizations as the collective ennui produced by vast cadres of lethargic and unaccountable public “servants” doing supposedly noble work.
The Law
To ensure capriciousness and unpredictability for both suspect employers and investors, make the law malleable, even unpredictable from day to day, in the style of an Argentina or Venezuela. Redefine the law as what is deemed socially useful. For federally subsidized bankrupt auto companies, creditors should be paid back on the basis not of contractual law, but of nobility — why borrow to give a rich man a return on his superfluous investment, when a retired auto worker might have to pay a higher health care premium? Boeing wants to open a non-union plant in South Carolina? Have the NLRB try to stop it (and illegally staff the NLRB with recess appointments). Illegal aliens? They are neither illegal nor aliens, as federal immigration law is itself a capricious construct. Does the Senate really have to present a budget? Do presidents need to meet budget deadlines? Who said there is a Defense of Marriage Act?
What law says that gays cannot serve overtly in the military or women cannot fight at the front — some reactionary construct? The point is to restore a simulacrum of popular sovereignty: the law is what 51% of the people are perceived by technocrats to want on any given day. I would hammer away at legal fictions like the very idea of borrowing and paying back loans and debts. Soon the popular culture would respond in kind, and run ads constantly on radio, TV, and the Internet in a way rare just a generation ago: how to renegotiate IRS debt, how to renegotiate mortgages, how to renegotiate credit card debt, and how to renegotiate student loan debt.
The man who owes $50,000 has been taken advantage of; the man who is owed $50,000 already has enough without being paid back. The aim is to create a general climate where when one borrows, one does not necessarily have to the pay back the full sum for a variety of legitimate considerations. The more bubbles — housing, student loan, credit card — the more avenues for government intervention and relief. Do all that and perhaps lending itself might slow down, again not a bad thing for our purposes. The debtor, not the lender, is the true American success, as our collective debt underscores.
Cynicism
Don’t forget the value of cynicism in weakening an economy. It is a critical tool in sowing distrust and fatalism, as in “Why try, when it doesn’t matter anyway?” or “Why should I follow the rules, when they don’t?” Greece, for example, is a cynical country to the core and one can see where such endemic distrust got them: a successfully ruined economy.
I would lecture about the evils of federal bailouts to Wall Street fat cats who then take million-dollar bonuses for mediocre performance — and then appoint a Treasury secretary who did just that. I would trash offshore accounts as something amoral and unpatriotic — and then appoint a Treasury secretary who did just that. I would lecture about paying your fair share and hiking taxes — and then appoint a Treasury secretary who avoided paying the income taxes he owed. I would sermonize on the evils of the revolving door — and then appoint as my top financial officials those who for a lifetime have gone into the White House, out to Wall Street, and back into the White House. Again, if “they” do that, why then do “we” need to pay our taxes or follow ethical behavior? The cynical mindset is a valuable tool in recreating a Greece or Italy. Indeed, almost any cynicism is a good thing: so why not praise federal financing of campaigns and then be the first to refuse it, or campaign on the evils of the Bush anti-terrorism protocol and then embrace or expand almost all of it?
Top Down, Not Bottom Up
Leveling must go in one direction, not two. To ensure equality, the public schools should lower standards so that all are the same. The more who need remediation upon entering college, the more likely the curriculum will have to adjust to level the playing field, and the less skilled will emerge the average graduate. The more that those with “Cadillac” insurance plans can have procedures rationed, the more others will see their own options expanded.
The world is a finite system, a pie with only so many slices. There is no middle class, just rich and poor. For each F student, an A student stole the former’s resources. I would invest not in honor students, but in remedial ones. Grades and test scores should count little for college admission; life “experiences” and community service far better would ensure the presence of mediocre students. The aim again is not to turn out graduates with expertise or knowledge who build a strong economy, but to graduate students, brand them with degrees, and ensure they are invested in a similar ideology of redistribution. If California — of Caltech and Stanford repute — can dumb down its public schools to rank 48th or 49th in the nation in math or English testing, then there is hope for the country at large.
The War of Words
Prosperity is always relative, never absolute. A car, a house, or a job is not to be judged on its own merits, but in comparison to someone else who has one better. If today’s Kias are better than a Mercedes of 20 years ago, it matters little: they are not as nice as someone else’s Mercedes of today. Britain in the postwar 1940s discovered the power of envy and what it can do to slow down ill-won prosperity.
From Plato to Marx to Tocqueville, philosophical minds, for both good and bad reasons, have always appreciated that human nature is attracted to the idea of enforced equality, to such a degree that most would rather be poor and the same, than better off with some far better off. Let’s give them that chance!
I would try to redefine the entire capitalist notion of profit, getting ahead, and being rich or successful as something arbitrary. Better yet, it should be analogous to cheating, proof of unfairness, or incurring general shame. The point is to make profit-making synonymous with failure; and poverty something inherently noble. Compensation should be seen as capricious, never based on logical requisites like education, knowledge, experience, level of responsibility, hard work, personal comportment, or even the less predictable such as health, luck, fate, and chance. Redefine rich and poor to emphasize the fact that one making $20,000 a year and another $200,000 is unfair, period — and to be corrected by a fair, all-knowing, and compassionate government. I would talk always of poverty and hunger, never of the epidemic of obesity or the nation’s collective youth glued to iPhones.
Sometimes, sloppy language is critical: jumble together “millionaires” with those worth 1,000 times more, and you earn the force-multiplying evil “millionaires and billionaires.” The word “fair” is critical: as in “pay your fair share.” But “patriotic” is even better, as in “unpatriotic” past presidents who run up debt, and “patriotic” present egalitarians who borrow in four years what used to take eight.
I would also redefine entire professions in negative terms: bankers are “fat cats”; the rich “junket” to Las Vegas; CEOs are “corporate jet owners”; doctors lop off limbs and yank out tonsils to pile up profits. Material wealth alone defines us. Mitt Romney is a man with lots of money, a big house with an elevator, a wife with horses. Who cares what he did with the Olympics or as governor?
I could continue, but you get the picture: the point is to slow down the capitalists by making them look over their shoulders, to hamper the grasping small businesses by prepping a psychological battlefield in which the rich deserve higher taxes and regulations to atone for their sins. If lots of those who once made $400,000 a year no longer do, is that not progress? Did they not at last realize that they had made enough money and that it was no longer the time to profit? My goal would be to convince the pizza-parlor owner that after 12 hours on the job, he was taking away money from his noble customers and had a duty to pay more in taxes and cut his profits for those more noble who could not afford his crust. But there would be one exception: fat cats can buy exemption by loudly supporting the president, serving on his jobs council, or investing in green energy. In other words, send the message that getting rich building a Solyndra is noble in a way Exxon is not. A Warren Buffett or George Soros is not a “billionaire” but a “philanthropist,” whose profits are channeled in the right direction. That’s an important message to send if one wants to warp an economy — suggesting that the rich can pay proper homage and thereby win exemption from being culpably rich.
Everywhere a War
The rich/poor dichotomy is valuable, but perhaps not enough in itself to harm the economy. Political stasis is also critical. Think the blues and greens in the hippodrome, fighting over everything from religion and civil service to class, ethnicity, and sports. And what better way to seed acrimony and to ensure constant bickering than unleashing a series of domestic wars? The camouflaged assault-weapon killers who hide behind the 2nd Amendment are at war with millions of innocent children. Even female celebrities and lawyers are under attack by misogynists and chauvinists, who won’t pay for their birth control. Latinos are targeted by nativists. The latter even hunt them down at ice-cream parlors. Blacks are back to near slavery as racist conservatives want to put them back in chains. Greens battle nobly against the polluters, gays against the homophobes. Muslims are demonized as terrorists by racists and bigots.
The point would be to introduce so many divisive fault lines that no one can much agree on anything — other than a common enemy. Worry over unemployment, slow or nonexistent growth, and massive debt gives way to more pressing issues like gay marriage and banning semi-automatic assault weapons. Distraction is valuable: who cares that the real unemployment rate is way over 10% if the Keystone pipeline will destroy the Nebraska aquifer or Jim Crow is back on election day? A “jobless recovery” and the “misery index” can become artifacts of a distant era.
Deficits
I would borrow as much money as possible, to the point of making the word “trillion” synonymous with the old “billion,” and “billion” now not more than a mere “million.” On its coins, a fading Rome pressed bronze over a thin silver core; we have done better with the Fed. Think of all the ways in which deficits are good: they spread the wealth through greater entitlements; they eventually require higher taxes from the wealthy; they usually lead to inflation that erodes wrongly accumulated wealth. For every trillion borrowed, there is a greater likelihood that the deserving will receive more federal largess and the undeserving will have to pay for it — and the country itself will slow down and smell the roses. Is it not far preferable for the government to print money than the cumbersome private sector to create it?
Interest
Zero interest is as important as sky-high interest. Thus, 1% on passbook accounts can be as valuable in stalling the economy as 15%. If there is no gain in stored wealth, why seek to store it? If owing is better than being owed, why work to create capital? A good way to ensure inflation is to ensure zero interest. The many who have no money deserve the use of free money and the few who have it have no need to profit from it. Again, if the state employee’s pension pays out more in annual revenue than the multi-millionaire’s passbook account, is not that a distortion worth institutionalizing? The point would be to guide the retiree into real estate, precious metals, or the stock market, anywhere with real risk to beat his .5% passbook return. Or better yet, do away with the idea of the retiree altogether, as the poor fool keeps working to earn what his savings won’t — thereby providing an added benefit of keeping his would-be younger replacements jobless.
Energy
I would try to find a way to discourage private gas and oil production through more regulation and cancellation of projects like the Keystone pipeline: keep the country paying steep import fees and keep it vulnerable to Persian Gulf oil. New technologies like fracking and horizontal drilling are to be declared de facto synonymous with pollution and destroying the environment. How can energy “skyrocket” or gas reach “European levels” — that alone will ensure a cooler planet or government- and union-run mass transit — if freelancers can find hoards of natural gas on land the government can’t touch? I would also borrow billions to subsidize wind and solar power. The more costly the kilowatt, the more expensive energy might slow down human activity and finally stop the rat race.
Success is Failure
Finally, I would double down. The more higher taxes, class warfare, bigger government, borrowing, zero interest, and political stasis began to slow down the economy, the more I would demand more of them all, and declare that the economy is expanding and growing. Again, the key to fine tuning a properly moribund economy is to stay the course — and learn to redefine failure as success.
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Voters, and elected officials especially: Please read this. It isn't that complicated, with our policies we can move in either direction.
"What are the weakest economies doing wrong? What are the strongest doing right?"
Hint: Lower tax rates, lower spending.
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The Truth About Taxes and Spending
By Alan Reynolds - April 5, 2013.
Published at Investors Business Daily, Cato Institute, Real Clear Politics, and DBMA Public Forum.
Several European countries, including Cyprus, have been mired in economic stagnation or decline for five years or more.
Yet other countries in Asia and Latin America have flourished. What are the weakest economies doing wrong? What are the strongest doing right?
Economist Jim O’Neill coined the acronym BRIC in 2001 to refer to four economies which showed great potential then and now — Brazil, Russia, India and China. More recently, he added four more promising MIST economies — Mexico, Indonesia, South Korea and Turkey.
In mid-2008, The Economist magazine drew a sharp contrast between the booming BRIC economies and four feeble PIGS — Portugal, Italy, Greece and Spain. By 2010, after Ireland and Great Britain bailed out their banks, that unkind acronym was stretched to PIIGGS.
All PIIGGS have two things in common. First of all, government spending grew dramatically — from an average of 43.2% of GDP in 2007 to 52.6% by 2010.
Spending was modestly trimmed by 2012 in a few cases, yet the ratio of spending to GDP still remained 3 to 6 percentage points higher than it had been in 2007.
This sad story was repeated in Cyprus, where government spending soared from less than 34% of the economy in 1995 to 47% in 2010.
Despite this explosive growth of government spending among the PIIGGS, economist Paul Krugman’s End the Depression Now! somehow attributes southern Europe’s slump to “frantic, savage attempts to slash spending.”
In a recent New York Times column, Krugman suggested that Ireland suffers from grossly insufficient government spending, and contrasted Ireland’s alleged penny-pinching with “the true economic miracle that is Iceland … (which) thanks to its embrace of unorthodox policies, has almost fully recovered.”
What actually happened is that government spending in Ireland soared to 66.1% of GDP in 2010 — up from 36.8% in 2007 — when the government shocked the markets by bailing out the banks in September 2010. The budget deficit suddenly spiked to 30.9% of GDP. Irish bonds collapsed.
In Iceland, which didn’t throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011.
Iceland’s economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects.
When Krugman and others describe the recent European spending spree as “austerity,” that begs the key question: Austerity for whom? The PIIGGS imposed no austerity at all on the public sector in the past five years.
Government spending on bailouts, subsidies, grants, salaries and entitlements commands a much larger share of these economies than it did just a few years ago. European austerity has been focused on the private sector — namely, taxpayers with high incomes.
That is the second thing the PIIGGS have in common. The highest income tax rate was recently increased in every one of the troubled PIIGGS except Italy (where it was already too high at 43%). The top tax rate was hiked from 40 to 46.5% in Portugal, from 41 to 48% in Ireland, from 40 to 45% in Greece, from 40 to 50% in Great Britain, and from 48 to 52% in Spain.
Apparently envious of the PIIGGS, France even flirted with a 75% tax.
It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey).
Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group.
Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey.
In China, statutory income tax rates can still reach 45% on paper, but that is only for high salaries and is widely evaded. Investment income is subject to a flat tax of 20%, the corporate tax is 15-25%, and China’s extremely low payroll tax adds almost nothing to labor costs.
Lower tax rates and faster economic growth in these countries didn’t mean bigger budget deficits. On the contrary, only one of of the eight MIST and BRIC countries (India) has a significant budget deficit.
In short, the world economy has become divided into two groups: (1) sickly PIIGGS with chronic fiscal crises and (2) booming BRIC and MIST economies with modest government spending, lower tax rates and vigorous growth of both the economy and tax receipts.
Unfortunately, the U.S. has lately been drifting nearer the PIIGGS camp. The highest tax rates were just increased and federal spending is nearly 23% of GDP — way up from the 19.2% average of 1997-2007.
If U.S. legislators hope for better results—for both the economy and the budget—they must shun the failed policies of the PIIGGS and instead embrace the proven policies of the rapidly-growing BRIC and MIST economies.
What works, these successful economies discovered, is (1) to prevent government spending from growing faster than the private economy that supports it, and (2) to reduce rather than increase the highest, most damaging tax rates.
Alan Reynolds, a Cato Institute senior fellow, is the author of "Income and Wealth."
This article appeared in Investor’s Business Daily on April 3, 2013. It is reprinted with permission from the Cato Institute.
http://www.realclearpolitics.com/articles/2013/04/05/the_truth_about_taxes_and_spending_in_europe.html#ixzz2PatSArGO
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You may have to open the link to see his charts.
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The Global Failure of Keynesianism
Posted By David P. Goldman On April 5, 2013
The world’s central banks are playing leapfrog, each trying to ease faster than the other. Since 2008, the world’s central banks have expanded their balance sheets by a staggering $4.7 trillion. The Federal Reserve’s quantitative easing forced the hand of the Bank of Japan, which earlier this week announced that it would double its rate of securities buying, pushing the 10-year Japanese government bond yield down to an all-time low of 0.43%. The Fed’s easing reduced the U.S. dollar’s exchange rate and boosted U.S. exports, largely at the expense of Japan and Europe. With some of Japan’s top export names at risk of bankruptcy, Japan responded with aggressive easing to reduce the value of the yen. Europe is the big loser, and the European Central Bank this week indicated that it might follow suit.
The central banks have been working straight from the playbook that John Maynard Keynes devised in the 1930s, and it has been a dismal failure. They are competing for a stagnant volume of world trade. Quantitative easing has shifted the pain around the world, but it hasn’t restored growth. Once again, the world has to learn the hard way that Keynesian economics fails. It’s disheartening that no major political party anywhere in the world has articulated a clear alternative.
Many conservatives bought into the market consensus, namely that Fed easing would boost asset prices, asset prices would boost consumption, and higher consumption would drive the overall economy. There was an element of self-consolation in this credulity: if the U.S. economy was indeed recovering, it “explains” the Obama victory last November and takes the Republican leadership off the hook for a devastating defeat. The alternative view — that Obama crushed Romney despite a very weak economy — puts the blame on Republican leaders. The fact is that Obama wasn’t lucky. We did a bad job.
Today’s reports from the Labor Department showed the smallest increase in employment in 10 months at just 88,000 and, more importantly, the lowest labor force participation rate since 1979 at just 63.9%. Americans are dropping out of the labor force because they can’t find work. The Shadow Government Statistics website puts the true unemployment rate (the proportion of Americans who could be working but aren’t) at 23%.
Conservatives (along with the market consensus) gave too much credibility to the supposed recuperative powers of the U.S. economy, and put too much faith in the Federal Reserve’s Keynesian machinations. The Fed has bought nearly $3 trillion of Treasury and mortgage-backed securities since the 2008 crisis, accelerating its purchases in recent months, in order to suppress long-term yields and (especially) the yield on risky securities.
That’s boosted the stock market, but–as we have seen from a week of disappointing economic data–not economic growth. As I wrote in Barron’s March 13, the Fed’s largesse has encouraged investors to lever up existing assets with cheap credit, but not to invest in new plant and equipment:
Optimism about U.S. consumers drove employment gains in February. Evidently the wealth effect from rising equity and home prices has spilled over into employment. About two-thirds of the employment growth came in construction and consumer-related services. This is good for stocks. But you don’t need a growth story to explain the improvement in equities. Leverage is driving stocks. The Fed is persuading businesses to re-lever balance sheets but not to break ground on new plants. Cheap leverage favors existing assets. The recovery remains lopsided with investment lagging badly.
Usually the stock market anticipates economic growth, but under the extraordinary regime of quantitative easing, equity prices reflect the cheapness of leverage more than expected earnings growth. That’s why low-volatility sectors with bond-like cash flows (consumer durables, consumer discretionary, utilities) have led the market while capital-goods producers like Cisco and Caterpillar have lagged.
Even the very modest growth the U.S. has managed to sustain during the past two years depends to a great extent on export growth. That might be the biggest contribution the Fed has made to growth; quantitative easing has helped keep the dollar cheap and that has been helpful to exports. The Fed did not target the dollar — Ben Bernanke simply does not think that way. The Fed, rather, targeted the risk composition of investor portfolios (negative short-term rates and long rates depressed by Fed purchases of longer Treasuries are supposed to force investors to invest in brick and mortar). It didn’t work out that way, to be sure; investors are buying existing brick and mortar with cheap leverage rather than investing in new plant and equipment.
Japan, meanwhile, has gotten the other end of the stick. As the yen rose, Japan’s exports collapsed. Top Japanese names like Sony and Panasonic saw their stock price crater and their cost of credit soar. This forced the Bank of Japan to act aggressively and force down the yen exchange rate.
Should we fear a catastrophic outcome, as former OMB director David Stockman claims? That is extremely unlikely. There is one great source of strength in the U.S. economy, namely the energy sector. With the United States poised to overtake Saudi Arabia as the world’s largest oil producer by 2020, the U.S. current account deficit is likely to settle in the 2% range, down from the 6% range during the mid-2000s. That will enhance America’s capacity to borrow overseas by reducing the risk of future dollar depreciation. The prospective improvement in America’s current account gives the Federal Reserve and the Obama administration a great deal more slack.
But it is fanciful to expect that energy alone will drive a U.S. economic boom. It’s great for North Dakota and a few other states, and it’s good for the current account balance and the U.S. dollar. We’ve already had a massive decline in natural gas prices and a massive increase in the proportion of our energy coming from natural gas, and the effect on overall economic output is small.
No magic bullet — not the Fed, not the energy boom, not the modest improvement in home prices- — is going to get the U.S. economy out of what Nobel Prize laureate Edmund Phelps calls a “structural slump.” This isn’t a new depression. It’s not even a double-dip recession. It’s just a permanent headache.
The economy is stagnating, not recovering, and Americans are hurting. Republican leaders are playing small ball against the administration over budgetary issues. Getting out of the structural slump will require radical changes. It will probably take a drastic reduction on taxes on capital income, including corporate profits, capital gains, interest, and dividends to get investment going again. Slashing the defense budget, which has been the great driver of technological advances since the Second World War, is devastatingly wrong-headed by economic as well as national security criteria. Obamacare is killing small business. The National Federation of Independent Business’ Optimism Index remains at recession lows. The biggest negatives cited by small business owners are taxes and government regulation.
The Republican Party needs to articulate the kind of broad vision for prosperity founded on free markets and American strength that we had under Reagan. Waiting for the pendulum to swing back in our direction just isn’t good enough.
Article printed from Spengler: http://pjmedia.com/spengler
URL to article: http://pjmedia.com/spengler/2013/04/05/the-global-failure-of-keynesianism/
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http://www.zerohedge.com/news/2013-04-06/be-careful-what-you-wish-why-re-industrialization-america-bad-stocks
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First, one chart and one quote from Crafty's post yesterday in this thread, "Global Failure of Keynesianism':
(http://research.stlouisfed.org/fred2/data/WSECOUT_Max_630_378.png)
"the Fed’s largesse has encouraged investors to lever up existing assets with cheap credit, but not to invest in new plant and equipment"
Yes, that is exactly right, quite an honest assessment of both the economy and the market.
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Washington Post: Vanishing workforce weighs on growth
http://www.washingtonpost.com/business/economy/vanishing-workforce-weighs-on-growth/2013/04/06/2bc46116-9e20-11e2-9a79-eb5280c81c63_story.html
From the piece:
"Prime-aged people are working less, and we don’t know why,” said Betsey Stevenson, a labor economist and associate professor at the University of Michigan.
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My wish would be for the people who don't know why our economy is tanking to stop voting and for Labor Economist Professors at our greatest institutions of higher learning that don't know what ails the economy to seriously consider other work.
Helpful information for the clueless: Capital employs labor. Return on investment, after tax, motivates capital to build new enterprises that employ people. Roadblocks and penalties cause capital to go elsewhere or sit idle. Printing money does not produce additional capital any more than funny house mirrors make you fatter or thinner. No new investment capital is generated with a zero savings rate. Compounding interest is one of the most powerful forces in the universe, also unemployed. A rational person tucking away savings to compound at zero interest is either frustrated or extinct. The reason interests rates are perniciously set at zero is because the Fed is trying to fix a non-monetary problem with a monetary 'solution'. Trying to loosen a screw by hitting it with a hammer.
Reuters: U.S. business startups rate at record low
http://www.reuters.com/article/2012/05/02/us-usa-economy-businesses-idUSBRE84113G20120502
The entrepreneurs' share of job creation also has fallen...
...entrepreneurial companies accounted for only 12 percent of U.S. employment in 2010, compared with 20 percent in the 1980s.
While you were reading this post, the Fed just created about 15 million dollars that didn't exist before and our debt burden went up by a similar amount, while real output increased 0.0000%.
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Victor Davis Hanson offered a good list of current policies that is causing stagnation and undermining growth. We should be doing the opposite:
a) Have the government absorb health care, one-sixth of the economy.
b) Ensure that a correct Federal Reserve establishes near-zero interest rates.
c) Vastly expand the numbers on food stamps, unemployment, and disability insurance.
d) Raise taxes on the upper incomes, so that in many states the suspect pay 55% of their incomes in federal income, payroll, Medicare, Obamacare, and state income taxes.
e) Exempt half the U.S. households from federal income tax, so that for many April 15 is a day of credit reimbursement.
f) In matters of bankruptcy, seek to elevate pension holders over creditors and contractors.
g) Promote programs that seek to offer redress payouts to supposedly discriminated constituents and seek to excuse mortgage and credit card debt.
h) Vastly grow the number of federal employees.
i) Run chronic budget deficits to ensure redistributive growth.
j) Plan to double the national debt in eight years.
l) Cut the defense budget.
m) Keep entitlement payouts sacrosanct.
n) Conduct psychological warfare against the job-hiring classes (pay your fair share, you didn’t build that, no time to profit, fat cat, etc.).
o) Establish crony capitalism so that particular capitalists (e.g., Solyndra, GE, Chrysler, etc.) understand that anti-capitalist mandates do not apply to politically correct policies.
p) Discourage new gas and oil production that might undercut green energy and prevent gas from going “to European levels” or electricity to “skyrocket.”
http://dogbrothers.com/phpBB2/index.php?topic=58.msg71436#msg71436
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The Foundation
"Would it not be better to simplify the system of taxation rather than to spread it over such a variety of subjects and pass through so many new hands." --Thomas Jefferson
Government
Income Redistribution Day
"It's Tax Day. Most Americans dread Tax Day, and for good reasons. Beyond the huge tab Americans pay to the government, the tax code is so complex that it's difficult to figure out what we owe to the IRS. This is a pain for taxpayers and a huge drain on the economy. According to the federal Taxpayer Advocate in its 2012 report, Americans' cost of complying with today's complex tax code totaled $168 billion in 2010. That's almost as large as the impact of the Obama tax hikes in fiscal year 2013, and twice the size of sequestration this year. It takes taxpayers 6.1 billion hours -- or 51 hours per household -- to complete all the required filings. That's more than six full eight-hour working days per household! The compliance burden comes on top of the direct financial cost of $3.5 trillion in federal spending. In 2012, Washington collected $20,000 in taxes for every household in America. But Washington spent nearly $30,000 per household. ... 45 percent or almost half of all spending went toward paying for Social Security and health care entitlements. ... Growing government spending threatens current and future taxpayers with higher taxes. Congress should reduce spending and prevent any more tax increases. Congress also needs to reform the tax code so it is less of a burden on the American people. Tax day is a real drag, but it doesn't have to be this bad." --Heritage Foundation's Romina Boccia and Curtis Dubay
Post Your Opinion
Re: The Left
"Maybe it's a measure of progressives' refusal to look back, to always move 'forward.' Otherwise, they should be celebrating right now. In fact, President Obama and fellow modern progressives/liberals should be ecstatic all this year, rejoicing over the centenary of something so fundamental to their ideology, to their core goals of government, to their sense of economic and social justice -- to what Obama once called 'redistributive change.' And what is this celebratory thing to the progressive mind? It is the progressive income tax. This year it turns 100. ... For ... Obama and allies, a federal income tax based on graduated or progressive rates embodies and enables government's primary 'job' and 'purpose.' They embrace a progressive tax for the chief intention of wealth redistribution, which, in turn, allows for income leveling, income 'equality,' and for government to do the myriad things that progressives ever-increasingly want government to do. ... Here in 2013, 100 years henceforth, the wealthiest Americans ... will be paying more in taxes this year than any time in the last 30 years. For progressives, this is justice. But it is also bittersweet: As progressives know deep inside, it still isn't enough. For them, it's never enough. ... For progressives, getting it implemented was a huge triumph. Their success in making it a permanent part of the American landscape is a more stunning achievement still." --professor Paul Kengor
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For the Record
"[T]he BLS says that in 2012, on average, only 114,809,000 Americans worked in full-time ... jobs. Of those 114,809,000 full-time workers, 17,629,000 worked full-time for government. That means there were only 97,180,000 people working full-time in the private sector. If you add the 71,700,000 who enrolled in Medicaid last year to the 17,629,000 who worked full-time for the government, that gives you a combined 82,329,000 who were enrolled in Medicaid or who worked full-time for government. That means that for every person who either enrolled in Medicaid or worked full-time for the government, there were only about 1.2 full-time workers in the private sector. And those 1.2 full-time private-sector workers who were supporting the Americans on Medicaid or the government's full-time payroll included however many full-time private-sector workers occupied the approximately 14.5 million private-sector health care jobs. We have not gotten there yet, but we are fast approaching the point where the combination of people who work full-time in health care, and who work full-time for the government, and who are enrolled in Medicaid outnumber the people who work full-time in the private sector in non-health-care jobs. When Obamacare falters from the great costs it is about to impose on this nation, some will declare that the answer is to fully nationalize the health care system. Had that been done in March 2013, 26.9 percent of American jobs would have been government jobs." --columnist Terence Jeffrey
Opinion in Brief
"Here's the number to keep in mind: $763 billion. If enacted, Barack Obama's latest budget would mean that in just ten years, interest payments alone on the national debt would begin pushing the trillion-dollar mark: $763 billion a year by 2023. That may be a rosy estimate: It assumes that interest rates, currently near historic lows, do not rise a great deal over the next ten years as the Treasury continues to pile up new debt. If interest rates do climb a bit higher ... then those interest payments easily could be more than $1 trillion a year. But let's stay with that $763 billion a year for now. How much money is that? It is more money than the federal government spent on anything in 2011: The largest single spending item in 2011, Social Security, amounted to only $725 billion. ... If you believe the welfare state is too expensive now, or that we spend too much money on the military, consider that President Obama proposes to spend more than that merely making interest payments on all the debt his budget would help pile up. How much debt? How about $8.5 trillion in new debt over the next decade, for a total of more than $25 trillion in national debt. At 6 percent interest, it would cost us $1.5 trillion a year to service that debt: about the size of President Clinton's entire proposed budget for 1995." --National Review's Kevin D. Williamson
Insight
"Socialist governments traditionally do make a financial mess. They always run out of other people's money. It's quite a characteristic of them. They then start to nationalize everything, and people just do not like more and more nationalization, and they're now trying to control everything by other means." --British Prime Minister Margaret Thatcher (1925-2013)
Essential Liberty
"[Margaret] Thatcher believed in capitalism and freedom, in rewarding risk-takers and encouraging entrepreneurs, in low taxes and private ownership. She loved her country, she cherished Anglo-American civilization, and she despised appeasement. She had a visceral abhorrence of communism, and rejected the accommodationists who saw Soviet ascendancy -- and the West's slow decline -- as a permanent fact of life. 'The essence of Thatcherism was to oppose the status quo and bet on freedom,' The Economist noted in its obituary this week. 'She thought nations could become great only if individuals were set free. Her struggles had a theme: the right of individuals to run their own lives, as free as possible from the micromanagement of the state.' That was the essence of Reaganism too. ... It can be perversely tempting at times to imagine that our problems are too ingrained to fix, that the erosion is too far gone to reverse, that our enemies are too strong to defeat. But history is not predetermined. 'Malaise' can give way to 'morning in America.' The 'sick man of Europe' can be restored to health. Besides everything else they accomplished, Thatcher and Reagan remind us that things can change for the better, and great leaders can change them. It wasn't foreordained that Britain and America would revive from the despondency of the 1970s. But voters in both countries elected leaders of conviction, not consensus. That made an extraordinary difference, and achieved a world of good." --columnist Jeff Jacoby
The Gipper
"I know too that many of you seriously believe that a nuclear freeze would further the cause of peace. But a freeze now would make us less, not more, secure and would raise, not reduce, the risks of war. It would be largely unverifiable and would seriously undercut our negotiations on arms reduction. It would reward the Soviets for their massive military buildup while preventing us from modernizing our aging and increasingly vulnerable forces. With their present margin of superiority, why should they agree to arms reductions knowing that we were prohibited from catching up?" --Ronald Reagan
Culture
"A basketball coach who shoves and curses at his players merits constant coverage by a media also transfixed by Newtown. But a Philadelphia doctor on trial for murdering a woman and seven babies? It's ignored. Those who get their news from the three major networks have probably not heard of Dr. Kermit Gosnell, now on trial in Philadelphia, charged with seven counts of first-degree murder and one count of third-degree murder for killing seven babies who survived abortions and a woman who died after a botched pain-killer injection. Everybody has heard of Mike Rice, the disgraced former Rutgers basketball coach who was fired after video surfaced of him shoving, kicking and yelling at his players, throwing basketballs at them and -- most damning -- using 'homophobic slurs.' According to the Media Research Center, in one week Rice received 41 minutes, 26 seconds of air time on ABC, CBS and NBC in 36 separate news stories. Gosnell received zero coverage. So much for the media adage that 'if it bleeds, it leads.' ... If Dr. Gosnell had walked into a nursery and shot seven infants with an AR-15, it would be national news and the subject of presidential hand-wringing." --Investor's Business Daily
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From Thomas Sowell's "Basic Economics" (2000):
James Cash Penney did not start with a lot of money. He was in fact raised in poverty and began his retail career as just a one-third partner in a store in a little town in Wyoming, at a time when Sears and Montgomery Ward were unchallenged giants of nationwide retailing. Yet his insights into the changing conditions of retailing eventually forced these giants into doing things his way, on pain of extinction. . . . In a later era, a clerk in a J.C. Penney store named Sam Walton would learn retailing from the ground up and then put his knowledge and insights to work in his own store, which would eventually expand to become the Wal-Mart chain, with sales larger than those of Sears and J.C. Penney combined.
One of the great handicaps of economies run by political authorities, whether under medieval mercantilism or modern communism, is that insights which arise among the masses have no such powerful leverage as to force those in authority to change the way they do things.
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http://www.rollcall.com/news/sequester_flight_delays_breed_confusion-224324-1.html?ET=rollcall:e15540:105450a:&st=email&pos=eam
From the article:
At a House Appropriations subcommittee hearing on Wednesday morning, Chairman Harold Rogers blasted the FAA for not providing sufficient information about the looming cuts.
“Not a word, not a breath. You didn’t forewarn us that this was coming,” the Kentucky Republican said. “You didn’t ask advice about how we should handle it. You didn’t inform the Congress of this sequester impact and what you plan to do about it. In fact, the entire administration has done the same thing.”
However, Congress did receive formal warning from Transportation Secretary Ray LaHood as early as February. From the White House briefing room, LaHood said he was trying to “wake up” Republicans to the fact that more than 100 regional airport towers would close and passengers would see delays at major airports once furloughs took effect.
Earlier that month, LaHood also wrote a letter to Senate Appropriations Chairwoman Barbara A. Mikulski, D-Md., noting that significant furloughs would be applied to safety workers and air traffic controllers. Some lawmakers actually criticized administration officials for fear-mongering about the potential consequences of the budget sequester at the time warnings such as LaHood’s were made.
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With a 4% agency "cut" due to the sequester, Team Obama is cutting aircontrollers 10%; this on top of refusing authorization to have the cuts focused on non-essential employees.
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With a 4% agency "cut" due to the sequester, Team Obama is cutting aircontrollers 10%; this on top of refusing authorization to have the cuts focused on non-essential employees.
Oddly, Washington DC airports will be spared from the cuts.
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The meme continues , , ,
http://www.politico.com/story/2013/04/obamacare-exemption-lawmakers-aides-90610.html
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As tempting as the scandals may be to dwell on, if we do not spend 51+% of our time focused on solutions, our problems associated with history's worst recovery will never get solved. Here is Rich Karlgaard at Forbes with a dose of economic common sense. I don't think economist Brian Wesbury would disagree with a word of this; he just currently makes a living helping people make money in a low growth / no growth economy.
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Forbes (Excerpt) http://www.forbes.com/sites/richkarlgaard/2013/05/22/sure-thing-growth-is-not-an-option/
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5/22/2013 @ 11:50AM |3,325 views
Sure Thing: Growth Is Not An Option
...growth is a moral requirement, for no other reason than that the opposite of growth is stagnation–a death of sorts.
Now to the economy: In round numbers the U.S. is a $16 trillion economy, which has been expanding at an annual 2% real (i.e., noninflationary) rate since June 2009. Each year we add $320 billion in real economic activity, which translates into 2 million to 3 million jobs and about $60 billion in federal tax receipts. We could use more jobs, and most of us want to cut the federal deficit and debt; therefore, growth is a good thing.
But the U.S. should be growing at 4% right now. Each year we should be adding $640 billion in new activity, creating 4 million to 6 million new jobs and adding $120 billion in federal tax receipts. Why 4% growth? America has averaged 3% growth since World War II, but during those 68 years we have suffered 11 recessions, including the 2007-09 whopper. When the country isn’t in recession, 4% annual growth is quite normal.
Too many economists and pundits have thrown in the towel, saying that 4% growth is no longer possible. This argument is based on two factors: the law of large numbers (i.e., 4% growth off of a $16 trillion base is much harder to reach than 4% growth off of a $5 trillion base) and the generational problems we face (a growing part of the U.S. population is either too young or too old to work to add to our statistical productivity).
We face challenges, of course, but getting back to 4% nonrecessionary growth is a moral requirement, and we must find ways to do this. If we care at all about jobs and deficits, choosing the right policy levers to lift economic growth should be the country’s highest priority.
So what kind of policy would get us from 2% growth to 4% (aiming for a long-term 3% to cover the inevitable downturns)? Lower, flatter and simpler taxes. Sensible regulation. Stable currency. Entitlement reform. A true health care revolution hitched to technological progress, entrepreneurial energy and market pricing. That should do it. (more at the link above)
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Krugman could go always go under under cognitive dissonance of the left (but I'll put it here) and this thread could be closed after the Obama years because is there really any debate left about how to or how not to run an economy?
This caught my attention because really he is refuting Wesbury:
He calls the economy "depressed". "We really should be adding more than 300,000 jobs a month, not fewer than 200,000. As the Economic Policy Institute points out, we would need more than five years of job growth at this rate to get back to the level of unemployment that prevailed before the Great Recession. Full recovery still looks a very long way off. And I’m beginning to worry that it may never happen."
"Ask yourself the hard question: What, exactly, will bring us back to full employment?"
He then goes on with the same drivel. We won't recover because people don't want large enough fiscal or monetary stimuli.
"After six years during which hardly any new homes were built in America, housing is trying to stage a comeback. So yes, the economy is showing some signs of healing itself. But that healing process won’t go very far if policy makers stomp on it, in particular by raising interest rates."
Dr. Krugman, If this economy cannot withstand interest rates greater than zero, after 6 years of artificial stimulus-based 'recovery', MAYBE SOMETHING ELSE IS WRONG.
http://www.nytimes.com/2013/07/08/opinion/krugman-defining-prosperity-down.html?_r=0
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The WSJ gets back into stride after a short, illegal immigration diversion. First my question and answer key to reading their chart:
(http://si.wsj.net/public/resources/images/ED-AR043_1econs_NS_20130724181803.jpg)
What changed in America triggering the economy nosedive in employment and income? The end of 2006 and the beginning of 2007 marked the election and swearing in of the Pelosi-Reid-Obama-Hillary-Biden majorities in congress, signaling the end of what few pro-growth policies this nation had left. The main economic impetus was to end the unfair inequities of a growth economy. How is that working out?
"If only Mr. Obama (and his voters!) understood that before a government can redistribute wealth, the private economy has to create it."
http://online.wsj.com/article/SB10001424127887323610704578626142861572144.html?mod=WSJ_Opinion_LEADTop
The Inequality President
The rich have done fine under Obamanomics, not so the middle class.
President Obama made his fourth or fifth, or maybe it's the seventh or eighth, pivot to the economy on Wednesday, and a revealing speech it was. We counted four mentions of "growth" but "inequality" got five. This goes a long way to explaining why Mr. Obama is still bemoaning thestate of the economy five years into his Presidency.
The President summed up his economic priorities close to the top of his hour-long address. "This growing inequality isn't just morally wrong; it's bad economics," he told his Galesburg, Illinois audience. "When middle-class families have less to spend, businesses have fewer customers. When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy. When the rungs on the ladder of opportunity grow farther apart, it undermines the very essence of this country."
Then the heart of the matter: "That's why reversing these trends must be Washington's highest priority. It's certainly my highest priority."
Which is the problem. For four and a half years, Mr. Obama has focused his policies on reducing inequality rather than increasing growth. The predictable result has been more inequality and less growth. As even Mr. Obama conceded in his speech, the rich have done well in the last few years thanks to a rising stock market, but the middle class and poor have not. The President called his speech "A Better Bargain for the Middle Class," but no President has done worse by the middle class in modern times.
By now the lackluster growth figures are well known. The recovery that began four years ago has been one of the weakest on record, averaging a little more than 2%. And it has not gained speed. Growth in the fourth quarter of 2012 was 0.4%. It rose to a still anemic 1.8% in the first quarter but most economists are predicting even slower growth in the second quarter.
We hope the predictions of a faster growth in the second half will be right, but the Obama Treasury and Federal Reserve have been predicting for four years that takeoff was just around the corner. Stocks are doing great, and housing prices are rising, but job growth remains lackluster. What has never arrived is the 3%-4% growth spurt during typical expansions.
The official excuse is that recoveries coming out of recessions caused by financial crises are always slow. But then why have we been told every few months for five years that faster growth would soon be coming? Perhaps readers recall former Treasury Secretary Tim Geithner's famous 2010 op-ed, "Welcome to the Recovery." Mr. Obama wants it both ways: Take credit for recovering from recession, but blame that recession ad infinitum for the slow pace of the recovery.
What about the middle class that is the focus of Mr. Obama's rhetoric? Each month the consultants at Sentier Research crunch the numbers from the Census Bureau's Current Population Survey and estimate the trend in median annual household income adjusted for inflation. In its May 2013 report, Sentier put the figure at $51,500, essentially unchanged from $51,671 a year earlier.
And that's the good news. The bad news is that median real household income is $2,718, or 5%, lower than the $54,218 median in June 2009 when the recession officially ended. Median incomes typically fall during recessions. But the striking fact of the Obama economy is that median real household income has fallen even during the recovery.
While the declines have stabilized over the last two years, incomes are still far below the previous peak located by Sentier of $56,280 in January 2008. No wonder Mr. Obama is now turning once again to his familiar political narrative assailing inequality and blaming everyone else for it. He wants to change the subject from the results on his watch.
The core problem has been Mr. Obama's focus on spreading the wealth rather than creating it. ObamaCare will soon hook more Americans on government subsidies, but its mandates and taxes have hurt job creation, especially at small businesses. Mr. Obama's record tax increases have grabbed a bigger chunk of affluent incomes, but they created uncertainty for business throughout 2012 and have dampened growth so far this year.
The food stamp and disability rolls have exploded, which reduces inequality but also reduces the incentive to work and rise on the economic ladder. This has contributed to a plunge in the share of Americans who are working—the labor participation rate—to 63.5% in June from 65.7% in June 2009. And don't forget the Fed's extraordinary monetary policy, which has done well by the rich who have assets but left the thrifty middle class and retirees earning pennies on their savings.
Mr. Obama would have done far better by the poor, the middle class and the wealthy if he had focused on growing the economy first. The difference between the Obama 2% recovery and the Reagan-Clinton 3%-4% growth rates is rising incomes for nearly everybody.
House Republicans have put a check on Mr. Obama's most destructive economic policies, but the President could do more to help growth if he crossed party lines to pass tax reform the way Reagan did in his second term, or to work out a budget deal as Bill Clinton did in his fifth year.
Mr. Obama's only pro-growth proposal is immigration reform, and we're not sure he wants even that to pass. Judging by the partisan tenor of his Wednesday speech, he may be setting it up to use as a campaign wedge in 2014. If only Mr. Obama understood that before a government can redistribute wealth, the private economy has to create it.
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I can't figure out why these economic questions aren't obvious to everyone at this point in the experiment!
http://news.investors.com/ibd-editorials-viewpoint/072913-665536-detroit-bankruptcy-part-of-weak-us-economy-high-taxes.htm
According to Larry Gatlin of the legendary country group the Gatlin Brothers, the definition of bankruptcy is: "When your outgo exceeds your income, your upkeep will be your downfall." And boy, does Detroit fit that definition.
But the origins of Detroit's bankruptcy are far from unique or exclusively Detroit's fault.
And while Detroit's corruption-ridden city government and unfunded pension-fund liabilities are the proximate cause of the Michigan city's bankruptcy, the root causes are far deeper. Detroit is the first of a number of triple witching events.
First of all, Motown is part of the American economy, which is experiencing the slowest recovery from the second worst recession/depression in the past century. The prolonged downturn and its depth are consequences of the massive expansion of stimulus spending during Bush's second term and Obama's first term.
Milton Friedman was quick to remind people that government stimulus spending is taxation and a prosperity killer. Governments don't create resources; they redistribute resources. While tax rates were raised during the Great Recession, they were raised a lot more during the Great Depression, which explains the difference in severity between the Great Depression of the 1930s and the modern Great Recession. To push this point home, the highest marginal income-tax rate in 1931 was 25% and by 1938 it was 83%. Whoever heard of an economy being taxed into prosperity?
Obama Tax Hikes
President Obama raised the highest personal income-tax rate to 42%, raised the federal estate tax, upped the payroll tax — and now we have the prospects of greatly increased taxes as a result of ObamaCare. The U.S. has the highest corporate tax rate in the OECD at 35%, which is the only corporate tax levied on global income, meaning that profits earned abroad by U.S. corporations have to pay the full U.S. tax upon repatriation after a credit for foreign taxes paid. As a consequence, total employment as a share of the U.S. population has hovered in the 58.5% range for four years now with no sign of improvement, down from well over 63% in 2006. Real GDP growth over the past four years since the economy troughed has averaged only 1.8%, well below the 2.5% rate needed for the economy to show improvement.
Steering The Motor City Wrong
The U.S. corporate tax structure is especially important for Detroit because the auto industry is global. German, Japanese, Korean, Italian and French autos sold in countries other than the U.S. pay at most the highest corporate tax in those countries, while U.S. companies are always liable for their U.S. 35% corporate tax rate plus city and state corporate taxes, which in Detroit are serious.
No real solution for Detroit's bankruptcy is possible without a solution to our nation's stagnation.
Secondly, Detroit is part of Michigan, which over the past decade (2001 through 2011) has had the lowest growth, bar none, in population of all the 50 states: -1.2% vs. the U.S. average of 9.5%. Michigan's labor force growth, employment growth, productivity growth, gross state product growth, state and local tax revenue growth and income per capita growth are all the very lowest in the nation. Yikes!
In 1967, under Gov. George Romney's leadership, Michigan initiated a state income tax, initially setting the highest rate at 2.6% using federal adjusted gross income (AGI) as its tax base. The state's income tax rate peaked in 1983 at 6.35% and is now down to 4.25%. Even though a 4.25% maximum tax rate is a lot better than a 6.35% tax rate, those towering tax rates have surely damaged today's Michigan economy. The state's corporate tax rate stands at 6%. These unwarranted burdensome taxes on business surely have added to Detroit and Michigan's decline. Again, there's no real solution for Detroit that doesn't include tax reform in Michigan.
High Labor Cost, Little Labor
If all of this weren't enough to doom Detroit, add to it that Michigan and Detroit are highly unionized and have a minimum wage above the federal minimum wage. Gov. Rick Snyder and the state's legislature recently passed right-to-work legislation, so there is progress.
Worst of all, hear this: Using full-time equivalent employees per 10,000 of population in state and local governments as a way to measure such public services as education, police protection, fire protection, public welfare, hospitals, corrections and highways, Michigan — and thereby Detroit — ranks third lowest in the nation and 12% below the national average. In police protection personnel per 10,000 population alone, Michigan is dead last in the nation. Is it any wonder that Detroit is No. 1 for violent crime among any U.S. city with over 200,000 people? In spite of being right at the bottom of the public service ladder, Michigan pays its state and local government employees 5% above the U.S. pay average and has enormously generous retirement and health benefits. It's another double whammy: overpaid public servants and too few of them. In order to pay for poor service, by the end of 2013 Detroit will have closed 260, or over 80%, of its parks.
SOS For Positive Legislation
The high cost and lack of benefits of being located in Michigan, and especially in Detroit, incentivize people and businesses to locate elsewhere. Again, no Detroit cure is possible without total reform in state and local government spending.
Then we come to Detroit itself. In 1962, Motown adopted a 1% net income tax for residents and 0.5% for nonresident income earners. In 1964, the city initiated a 1% corporate tax as well. Detroit's income tax stands at 2.4% today, and the corporate tax is 2%. Businesses that can locate outside Detroit do. In 1950, 1.85 million people lived in Detroit. Today the population of Detroit would be lucky to top 700,000. You can't balance a budget on people who leave or are unemployed.
Imagine a boiler's heat is turned way up, its safety valves are shut off and you tap the boiler every five minutes with a little brass tap hammer. By turning the boiler's heat way up and shutting off the safety valves, you have guaranteed the boiler will explode. By tapping the boiler every five minutes with a little brass tap hammer, you're guaranteed you'll be there when the explosion occurs. Such is the case with Detroit. But let us assure you: While Detroit is the worst and the first, it won't be the last or the biggest.
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I quoted from this piece earlier, now posting it here in its entirety. We all know the economy is under-performing. The question is why. Hopefully, at this point, we all know that too.
"What will it take for them to say they were wrong?"
http://www.realclearpolitics.com/articles/2013/08/08/when_will_they_see_that_this_is_one_bad_recovery__119543.html
Obama's Economic Failure
By Larry Elder - August 8, 2013
How's the left-wing, ivory-tower, we-know-best elitist Obamanomics working for you? Here's the news.
First-quarter gross domestic product numbers for 2013 were recently revised -- downward from 1.8 percent to 1.1 percent. For perspective, four years into the recovery from the last deep recession in '81-'82, the economy grew at 4.1 percent.
What about the declining "labor force participation rate"?
This counts the percentage of civilians 16 years and older working or actively looking for work. When President Barack Obama took office, the labor force participation rate was 65.7. Today it is 63.4, up 0.1 from April's 34-year low. Frustrated, many able-bodied and able-minded would-be workers have simply given up looking for jobs.
The number of people receiving federally subsidized food assistance today exceeds the number of full-time, private-sector working Americans. The number of Americans receiving foods stamps (now called SNAP) has reached 47.5 million, increasing an average of 13 percent a year from 2008 to 2012. Almost 9 million disabled American workers currently collect federal Social Security benefits -- double the number of disabled in the late '90s -- many admitting that they could work, but choose not to look.
Just to break even -- to keep pace with new entrants into the market -- the economy must produce 150,000 jobs per month. To date, Obama's four years of recovery have produced 4,657,000 jobs -- an average of 97,020 per month. At this juncture in the '80s, following the last big recession, the economy had produced 11.2 million new jobs, or 233,333 per month.
Even left-wing media outlets like ABC and The Washington Post cannot pretend that this is normal. About the advance estimate of the most recent quarter's dismal 1.7 percent growth, a Post business writer said: "It isn't even mediocre. It's terrible. It's a sign of the diminished economic expectations ... that it's anything to crow about at all. ABC called this latest report "disappointing." Of course, neither ABC nor The Washington Post attributed the disappointing results to anything President Obama has done.
But President Ronald Reagan took an entirely different course than has Obama. Reagan dramatically lowered taxes, reduced the speed of domestic spending and continued deregulation policies of Jimmy Carter. The economy took off, and three years into recovery, had produced an 8.9 percent increase in civilian employment -- almost 9 million jobs, with a post-recovery GDP that averaged over 5 percent.
The Reagan recovery was no aberration. Spending and tax cuts between 1922 and 1929 gave us the so-called "roaring '20s," when unemployment fell from 6.7 percent to 3.2 percent, and real gross national product grew at an annual average rate of 4.7 percent. Similarly, when President George W. Bush lowered taxes, the economy took off, and the unemployment rate went down to a low of 4.4 in 2006.
Democrats brag about the robust Clinton economy. But President Bill Clinton inherited an economy in its 22nd month of recovery. And Democrat historians ignore the economy-damaging measures that Clinton attempted -- most notably HillaryCare -- but could not pull off because Republicans stopped him.
Seventy-four percent of small-business owners say they plan to reduce hours, put off hiring or fire people to minimize the impact of ObamaCare. ObamaCare kicks in at 50 employees and applies to full-time workers.
So employers keep the number of workers under 50 and-or reduce hours to less than full-time (30 hours or more), and they get around ObamaCare. What this does to the economy and job creation is another story.
In 2009, Obama's economic team outlined the path of the economy "if we do nothing" versus the path of the economy with Obama's plans for stimulus and ObamaCare. Team Obama predicted an unemployment rate, at this point in the recovery, of 5 percent -- with his "stimulus." If Obama did nothing, they predicted, unemployment would reach 5 percent by the beginning of 2014. Today unemployment is at 7.4 percent, artificially low considering the number of people who have given up.
What will it take for them to say they were wrong? How many more Americans must remain unemployed or underemployed before the left stops blaming G.W. Bush, the GOP-led House or global warming?
Historically, the deeper the recession, the higher the bounce back. Since World War II, this recovery has been by far the weakest. The question is why.
Our history shows that burdening the productive through higher taxes, especially during sluggishness, hurts the economy. Imposing billions of dollars in new federal regulations, as this administration has done, hurts the economy. Placing nearly one-seventh of the nation's economy -- via ObamaCare -- under the control of the federal government hurts the economy.
This is an arrogant administration led by a man distrustful of the private sector and devoid of experience in it. Obama is cheered and emboldened by a compliant media that would "report" relentlessly on the "jobless recovery of President X" were these the economic numbers of a Republican president. Stacked with power-assuming administrative "czars," the Obama administration fancies itself enlightened and noble, in complete possession of the wisdom needed to know from whom to take and to whom to give.
Therefore, to paraphrase former Secretary of State Hillary Clinton, "What difference do these bad numbers make?"
Read more: http://www.realclearpolitics.com/articles/2013/08/08/when_will_they_see_that_this_is_one_bad_recovery__119543.html#ixzz2bUIC5eJC
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A great blog post about the value of democracy and capitalism.
Why democracy still wins: A critique of Eric X. Li’s “A tale of two political systems”
Posted by: Tedblogguest
July 1, 2013 at 12:12 pm EDT
More
By Yasheng Huang
http://blog.ted.com/2013/07/01/why-democracy-still-wins-a-critique-of-eric-x-lis-a-tale-of-two-political-systems/
Earlier this year, economist Yasheng Huang (watch his 2011 TED Talk) sparred with Eric X. Li in the pages of Foreign Affairs on a similar topic to today’s TED Talk. The TED Blog asked Huang to expand on his argument in his ongoing conversation with Li.
Imagine confusing the following two statements from a cancer doctor: 1) “You may die from cancer” and 2) “I want you to die from cancer.” It is not hard to see a rudimentary difference between these two statements. The first statement is a prediction — it is saying that something may happen given certain conditions (in this case death conditional upon having cancer). The second statement is a preference, a desire, or a wish for a world to one’s particular liking.
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Good article, I like the author. From what I know, most mainland Chinese are very jaded and cynical about government corruption there, no matter what they might say formally.
A great blog post about the value of democracy and capitalism.
Why democracy still wins: A critique of Eric X. Li’s “A tale of two political systems”
Posted by: Tedblogguest
July 1, 2013 at 12:12 pm EDT
More
By Yasheng Huang
http://blog.ted.com/2013/07/01/why-democracy-still-wins-a-critique-of-eric-x-lis-a-tale-of-two-political-systems/
Earlier this year, economist Yasheng Huang (watch his 2011 TED Talk) sparred with Eric X. Li in the pages of Foreign Affairs on a similar topic to today’s TED Talk. The TED Blog asked Huang to expand on his argument in his ongoing conversation with Li.
Imagine confusing the following two statements from a cancer doctor: 1) “You may die from cancer” and 2) “I want you to die from cancer.” It is not hard to see a rudimentary difference between these two statements. The first statement is a prediction — it is saying that something may happen given certain conditions (in this case death conditional upon having cancer). The second statement is a preference, a desire, or a wish for a world to one’s particular liking.
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Income inequality only got worse by attacking income inequality. Who could have seen that coming? (http://dogbrothers.com/phpBB2/index.php?topic=1023.msg45989#msg45989)
Or the opposite view, the NY Times pre-crisis/cause-crisis view that ending the Bush tax cuts would most certainly ease inequality: (http://dogbrothers.com/phpBB2/index.php?topic=1023.msg14634#msg14634)
Labor requires capital (and vice versa). Employees need employers (and vice versa). You attack them without hitting us in an interconnected economy.
Can you imagine the uproar if Republican policies hit these groups in America this harshly!
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Obama's Economy Hits His Voters Hardest
Young people, single women and minorities have fared the worst during the past four years.
By STEPHEN MOORE
For better or worse, a truism of American politics is that voters vote their pocketbooks. Yet according to a new report on median household incomes by Sentier Research, in 2012 millions of American voters apparently cast ballots contrary to their economic self-interest.
Each month the consultants at Sentier analyze the numbers from the Census Bureau's Current Population Survey and estimate the trend in median annual household income adjusted for inflation. On Aug. 21, Sentier released "Household Income on the Fourth Anniversary of the Economic Recovery: June 2009 to June 2013." The finding that grabbed headlines was that real median household income "has fallen by 4.4 percent since the 'economic recovery' began in June 2009." In dollar terms, median household income fell to $52,098 from $54,478, a loss of $2,380.
What was largely overlooked, however, is that those who were most likely to vote for Barack Obama in 2012 were members of demographic groups most likely to have suffered the steepest income declines. Mr. Obama was re-elected with 51% of the vote. Five demographic groups were crucial to his victory: young voters, single women, those with only a high-school diploma or less, blacks and Hispanics. He cleaned up with 60% of the youth vote, 67% of single women, 93% of blacks, 71% of Hispanics, and 64% of those without a high-school diploma, according to exit polls.
According to the Sentier research, households headed by single women, with and without children present, saw their incomes fall by roughly 7%. Those under age 25 experienced an income decline of 9.6%. Black heads of households saw their income tumble by 10.9%, while Hispanic heads-of-households' income fell 4.5%, slightly more than the national average. The incomes of workers with a high-school diploma or less fell by about 8% (-6.9% for those with less than a high-school diploma and -9.3% for those with only a high-school diploma).
This is a stunning reversal of the progress for these groups during the expansions of the 1980s and 1990s, and even through the start of the 2008 recession. Census data reveal that from 1981-2008 the biggest income gains were for black women, 81%; followed by white women, 67%; followed by black men, 31%; and white males at 8%.
In other words, the gender and racial income gaps shrank by more than in any period in American history during the Reagan boom of the 1980s and the Clinton boom of the 1990s. Women and blacks continued to make economic progress during the mini-Bush expansion from 2002-07. "Income inequality" has been exacerbated during the Obama era.
Mr. Obama has often contemptuously, and wrongly, branded the quarter-century period of prosperity beginning with the presidency of Ronald Reagan as a "trickle down" era. For many in the groups that Mr. Obama set out to help, a return to the prosperity of that era would be a vast improvement.
The Census Bureau data on incomes include cash government benefits, such as unemployment insurance, disability payments and the earned-income tax credit (but excludes Medicaid and food stamps). Most of the cash programs have surged in cost during the Obama presidency, yet incomes have still declined for the lowest-income eligible groups. This suggests that wages and salaries from employment have shrunk at an even faster pace than the Census data show. The shrinking paychecks of the past four years are consistent with two unwelcome anomalies of the recovery: a swift decline in labor-force participation to 63.4% from 65.5% during that period and a rise in part-time employment.
What all of this means is that the stimulus-led economic revival that began officially in June 2009—Vice President Joe Biden's famous "summer of recovery"—has only resulted in lower incomes for at least half of Americans, the very ones who were instrumental in electing Mr. Obama twice.
The president's announced economic policy goal, as well as that of progressives generally, is to spread the wealth. The left seems to have forgotten that when fewer American businesses and workers are creating wealth in the first place, something else is spread instead: misery.
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It is good to see that prominent WSJ contributors, including my current favorite economist, reading the forum.
"The policies favored by those with a middle-out view—higher tax rates, more intrusive regulations, more targeted fiscal policies—will not revive the economy. More likely they will perpetuate the weak economy we have and cause real incomes—including for those in the middle—to continue to stagnate."
http://online.wsj.com/article/SB10001424127887324094704579064712302845646.html?mod=WSJ_Opinion_LEADTop
(More at the link, read it all)
The Weak Recovery Explains Rising Inequality, Not Vice Versa
Obama blames tax cuts that began under Reagan for today's slow growth. The data don't back him up.
By JOHN B. TAYLOR, professor of economics at Stanford University and a senior fellow at the Hoover Institution.
Last year at this time a debate raged about whether economic growth and job creation has been abnormally slow compared with previous recoveries from recessions in the United States. Now that the growth rate has declined to 1.6% over the past year from 2.8%, the debate is no longer about whether. It's about why.
The poor economic policies of the past few years is a reasonable explanation for today's weak economy. Fiscal policy has at best provided temporary stimulus before fading away with no sustainable impact on growth. More costly and confusing regulations—including the many mandates in the Affordable Care Act and the Dodd-Frank Act—have reduced the willingness of firms to invest and hire. The Federal Reserve has employed a variety of unconventional and unpredictable monetary policies with not very successful results.
The administration and its supporters are not about to blame the slow recovery on its own policies, or those of the Fed. Instead, President Obama and his supporters have been talking about "an economy that grows from the middle out," as he put it in Galesburg, Ill., in July. The fashionable middle-out view blames today's troubles on policies that took root in Ronald Reagan's administration.
The 1980s and '90s experienced a declining trend in unemployment rates, milder and less frequent recessions, and a lower inflation rate—all of which disproportionately benefited people with middle and lower incomes, especially compared with the 1970s. These decades were also characterized by widening inequality. The reason? "Washington," as Mr. Obama asserted in Galesburg, "doled out bigger tax cuts to the very wealthy and smaller minimum wage increases for the working poor."
Weak economic growth today, according to the middle-out view, is the consequence of a wider distribution, or dispersion, of income (more at the upper end). This growth in inequality, the argument goes, is the consequence of tax cuts since the 1980s, a trend toward deregulation (that actually began under the Carter administration), and fewer targeted federal programs.
The key causal factor of the middle-out view is that a wider income distribution slows economic growth by lowering consumption demand. Saving rates rise and consumption falls if the share of income shifts toward the top, according to middle-out reasoning, because people with higher incomes tend to save more than those with lower incomes.
The data for the recovery since mid-2009 do not support this view. The 5.4% overall savings rate during this recovery is not high compared with the 8.4% average since 1960. It is relatively low compared to past recoveries, such as the 9.3% savings rate during a comparable period during the recovery in the early 1980s.
Moreover, data do not support the view that tax cuts in the past 30 years are responsible for the widening income distribution. According to the Congressional Budget Office, the distribution of market income before taxes widened in the 1980s and '90s by about as much as the distribution of income after taxes.
The middle-out view fails to explain the weak economy and high unemployment today. It also fails to explain the strong economy and low unemployment in the 1980s and '90s.
Widening income distribution can be a concern, however, especially if it signals reduced income mobility and a growing inequality of opportunity. Consider data collected by Berkeley economist Emmanuel Saez for the upper 10% and the lower 90% of the income scale. From the end of World War II until the mid-1960s, real income growth was strong for both groups and there was relatively little change in the distribution of income.
In the late 1960s and 1970s the growth of real income slowed dramatically for both groups, coinciding with the terrible economic policy of that period. Income growth sped up in the 1980s and '90s but was faster in the upper-income group than in the lower-income group. This is the period of the widening of the distribution. According to the latest data collected by Mr. Saez, real income of both groups has recently stagnated.
What caused the differential income growth in the 1980s and 1990s? Research shows that the returns to education started increasing in the 1980s. For example, the wage premium for going to college compared to high school increased. But the supply of educated students did not respond to the increase in returns. High-school graduation rates were declining in the 1980s and '90s and have moved very little since then. Test scores of American students fell in international rankings. With little supply response, the returns to those with the education rose more quickly, causing the income distribution to widen.
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Apparently many people just don't buy the "trickle down" theory as an answer to this as it is now. If they did Republicans would be way out in front. How does the right address this vs. big gov paychecks? Again ccp's commandment: Whoever can address this can win any election:
*****Richest 1 percent earn biggest share since '20s
Sep 10, 3:33 PM (ET)
By PAUL WISEMAN
(AP) In this 1928 file photo, Actress Joan Crawford is seen dancing the Charleston in "Our...
WASHINGTON (AP) - The gulf between the richest 1 percent and the rest of America is the widest it's been since the Roaring '20s.
The very wealthiest Americans earned more than 19 percent of the country's household income last year - their biggest share since 1928, the year before the stock market crash. And the top 10 percent captured a record 48.2 percent of total earnings last year.
U.S. income inequality has been growing for almost three decades. And it grew again last year, according to an analysis of Internal Revenue Service figures dating to 1913 by economists at the University of California, Berkeley, the Paris School of Economics and Oxford University.
One of them, Berkeley's Emmanuel Saez, said the incomes of the richest Americans surged last year in part because they cashed in stock holdings to avoid higher capital gains taxes that took effect in January.
(AP) Graphic shows the top 1 percent’s share of total U.S. earnings over the last century; 2c x 3...
Full Image
In 2012, the incomes of the top 1 percent rose nearly 20 percent compared with a 1 percent increase for the remaining 99 percent.
The richest Americans were hit hard by the financial crisis. Their incomes fell more than 36 percent in the Great Recession of 2007-09 as stock prices plummeted. Incomes for the bottom 99 percent fell just 11.6 percent, according to the analysis.
But since the recession officially ended in June 2009, the top 1 percent have enjoyed the benefits of rising corporate profits and stock prices: 95 percent of the income gains reported since 2009 have gone to the top 1 percent.
That compares with a 45 percent share for the top 1 percent in the economic expansion of the 1990s and a 65 percent share from the expansion that followed the 2001 recession.
The top 1 percent of American households had pretax income above $394,000 last year. The top 10 percent had income exceeding $114,000.
The income figures include wages, pension payments, dividends and capital gains from the sale of stocks and other assets. They do not include so-called transfer payments from government programs such as unemployment benefits and Social Security.
The gap between rich and poor narrowed after World War II as unions negotiated better pay and benefits and as the government enacted a minimum wage and other policies to help the poor and middle class.
The top 1 percent's share of income bottomed out at 7.7 percent in 1973 and has risen steadily since the early 1980s, according to the analysis.
Economists point to several reasons for widening income inequality. In some industries, U.S. workers now compete with low-wage labor in China and other developing countries. Clerical and call-center jobs have been outsourced to countries such as India and the Philippines.
Increasingly, technology is replacing workers in performing routine tasks. And union power has dwindled. The percentage of American workers represented by unions has dropped from 23.3 percent in 1983 to 12.5 percent last year, according to the Labor Department.
The changes have reduced costs for many employers. That is one reason corporate profits hit a record this year as a share of U.S. economic output, even though economic growth is sluggish and unemployment remains at a high 7.2 percent.
America's top earners tend to be highly paid executives or entrepreneurs - the "working rich" - instead of elites who enjoy lives of leisure on inherited wealth, Saez wrote in a report that accompanied the new analysis.
Still, he added: "We need to decide as a society whether this increase in income inequality is efficient and acceptable." *****
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Robert Reich.
Chancellor's Professor of Public Policy, University of California at Berkeley; Author, 'Beyond Outrage'
Forbes magazine likes to call itself a "capitalist tool," and routinely offers tool-like justifications for whatever it is that profit-seeking corporations want to do. Recently it has deployed its small army of corporate defenders and apologists in the multi-billion dollar fight to keep the effective tax rates of global corporations low.
One of its contributors, Tim Worstall, recently took me to task for suggesting that a way for citizens to gain some countervailing power over large global corporations is for governments to threaten denial of market access unless corporations act responsibly.
He argues that the benefits to consumers of global corporations are so large that denial of market access would hurt citizens more than it would help them. The "value to U.S. consumers of Apple is they can buy Apple products," Worstall writes. "Why would you want to punish U.S. consumers, by banning them from buying Apple products, just because Apple obeys the current tax laws?"
Wortstall thereby begs the central question. If global corporations obeyed all national laws -- the spirit of the laws as well as the letter of them -- and didn't use their inordinate power to dictate the laws in the first place by otherwise threatening to take their jobs and investments elsewhere, there'd be no issue.
It's the fact of their power to manipulate laws by playing nations off against one another -- determining how much they pay in taxes, as well as how much they get in corporate welfare subsidies, how much regulation they're subject to, and so on -- that raises the question of how citizens can countermand this power.
Consumer benefits may sometimes exceed such costs. But, as we've painfully learned over the years (the Wall Street meltdown, the BP oil spill in the Gulf, consumer injuries and deaths from unsafe products, worker injuries and deaths from unsafe working conditions, climate change brought on by carbon dioxide emissions, and, yes, manipulation of the tax laws -- need I go on?), the social costs may also exceed consumer benefits.
Why would an economics writer for a seemingly sophisticated national publication such as Forbes deny the existence of corporate power to circumvent or create favorable laws, or dismiss the social costs that corporations bent solely on maximizing profits routinely disregard? I'll get back to this in a moment.
Worstall then goes on to criticize me for suggesting that governments also condition market access on receiving some of the social benefits that corporations now wield to play countries off against one another, such as good jobs or investments in research and development. In his eyes, I'm committing the mortal sin of denying the economics of comparative advantage.
On what planet have Forbes' capitalist tools been living? Many of the world's most successful economies -- among them, China and Singapore -- owe their successes in part to their conditioning market access on certain kinds of jobs and investments, including research and development. That's the way they have come to use global corporations, rather than be used by them. It's the same approach Alexander Hamilton advocated more than two centuries ago in proposing how the United States develop its manufacturing industries.
Comparative advantage is nice in theory, but in a world where powerful global corporations are using every strategy imaginable to maximize their profits and powerful governments are strategically employing market access to develop their economies, it's just theory.
Economics writers like those affiliated with Forbes magazine surely are sophisticated enough to know this as well. So why are they so eager to trot out such economic nonsense?
Perhaps because so much profit is at stake that those who pay their salaries -- and who have also put many academic economists on retainers -- prefer that they mislead the public with simplistic economic theory that appears to justify these profits rather than to tell the truth.
My modest suggestion that governments become the agents of their citizens in bargaining with global capital should hardly raise an eyebrow. But the capitalist tools at Forbes, and elsewhere, must be worried that average citizens may be starting to see what's really going on, and might therefore take such a suggestion seriously.
ROBERT B. REICH, Chancellor's Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers "Aftershock" and "The Work of Nations." His latest is an e-book, "Beyond Outrage," now available in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.
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before those in the 75% of the country who reportedly live from pay check to pay check hear a concise coherent response from Republicans that addresses how they languish while 1% keep getting wealthier. And no it is not just the rich are stealing, though many do, but the economy, the "system" is not working for the bulk of America. It is not simply a lack of good education in my view which is the standard come back.
If Republicans want to gain any real share of minorities, Asians, Latinos who are on the low rung of the economic ladder or who come from counties with more socialistic government, or who are for whatever reason obsessed with race, or who keep having babies they cannot afford, they better do a Freaking better job at addressing this. No one has yet. Including the talking bean bags on talk radio.
I will keep hammering this point the only way I know how. On this board. What is the best thing to tell children to do today. The best job is lobbyist or run for political office. You want to get rich go to DC! The revolving door between Wall Street the media and what used to be public service.... Only a part of the problem though. But a good display at the advantages those with influence, money have that the majority don't. I grew up in a house hold that was not really one party or the other but where my parents voted for who they thought was the best candidate for America and probably for them. I have always trended to the Republican party and still do. I am even further to the right. Yet I am baffled and annoyed how Republicans cannot or will not address the underlying challenge before them. Perhaps they can't.
*****Poll: Obama holds lead in fight for middle class vote
By Rose Gordon Sala via Lean Forward
Thu Aug 23, 2012 10:13 AM EDT.
A little more than half of the middle class believe President Obama's policies will improve their situation, according to a new Pew Research Center report. Fifty-two percent prefer Obama's policies to the 42% who said Republican candidate Mitt Romney would aid the middle class.
Figures from an NBC-Wall Street Journal poll last month showed a similar lead by the president in winning the middle class. It found that 49% of voters believe Obama's policies look out for the middle class, compared to 33% that believe Romney does—a 16-point advantage. A whopping 80% of those respondents said they would vote for the candidate they believe will strength the middle class. Interesting, because a new Obama campaign ad released Thursday has the popular former President Clinton promising that Obama's economic plan will do just that.
This doesn't mean the president's path to re-election is a simple skip down the yellow-brick road. Indeed, only 44% of voters in the NBC/WSJ poll approve of his handling of the economy (though up 2% from the prior month).
While both campaigns profess their dedication to strengthening and improving the middle class, the number of those who possess a middle class income are dwindling as more people join the ranks of the poor and the wealthy, increasing America's income disparity, Pew found. In 2011, 51% of adults were considered middle class, a 10-percentage point drop from 1971 when 61% were middle class.
While upper-incomers wealth held steady over the last decade, the middle class' median net worth fell by $36,432 (see chart).
--------------------------------------------------------------------------------
And they aren't happy. Eighty-five percent of those who identify as middle class say it is more difficult for them to maintain their standard of living today than it was a decade ago. Who do they blame for this? Politicians and a few other culprits.
•62% blame Congress
•54% blame banks and financial institutions
•47% blame corporations
•44% blame the Bush administration
•39% foreign competition
•34% blame the Obama administration
In discussing the Pew report this morning, conservative Morning Joe host Joe Scarborough blamed both parties for the "depressing" news. "It's all B.S.," he said. The rich are getting richer and the poor are getting poorer because for 40 years our economy has been changing...We had an IT revolution that displaced a lot of people."
"The political parties are just stupid in their simple-minded solutions," Scarborough continued while pointing to tax reform suggested by each candidate for president.*****
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1) Fracking
2) A better health care approach than Obamacare. See our Health Care thread. Know that as if fks up, the Dems are going to propagandize for single payer.
3) Radical change to the tax code. This needs to be thought out, but what occurs to me is to shatter the paradigm and tax pollution and abolish all taxes of jobs, savings, income, investment, etc.
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Good ideas.
But they don't address the central point of one of the central differences between liberal/socialist and republican/conservative policy.
At least not directly.
One of my patient recently returned from a trip to "sin city". I thought he meant Washington DC. He meant Vegas.
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"Richest 1 percent earn biggest share since '20s"
Isn't is interesting that this trend was unstoppable even by gaining control of first congress, then all three bodies, a Supreme Court backing them up and a then second term to prevent any of the new myriad of laws and taxes passed to to address this from being repealed.
What happened under their policies is exactly what they warned would happen to the middle class if George Bush was elected to a third or fourth term (McCain, Romney, etc.), only without any economic growth. And who holds them accountable? No one.
Bigdog made an important point on the constitutional thread that that I will paraphrase here. Commerce has changed whether we like it or not. It has changed since the 1791, it has changed since I entered the export business 25 years ago and it is changing even more rapidly now. There is more upside and payoff for real innovations now than ever before, even if the economy is stalled, because the market for your innovation is now virtually the whole world. Meanwhile, more than at any time since women widely began working, a record number and proportion of the adult population completely out of the productive economy. People who are standing still aren't going to keep up with people who are either creating or following these changes. In a stagnant, rigid economy most people are standing still.
ccp: How does the right address this vs. big gov paychecks? Again ccp's commandment: Whoever can address this can win any election:
You have identified the two playing fields that the right will never win on. If the race is to see who will pay people the most to not work, or be accused of starving children and taking meds from Grannie, Republicans and free marketers won't win. If it is a contest to see who is perceived as best at tying the hands of new wealth with new laws, taxes and redistribution methods, Republicans have no chance in that contest either, except for a few R-in-name-only Senators.
To win with prosperity and economic freedom, you have to change the framing of the questions. For starters, trickle down is only a misnomer/caricature/pejorative of opponents' beliefs that the left puts on what they see as unrestrained freedom, not something that came out of the principles of economic freedom or supply side economics.
There is no answer to stopping income disparity while improving everyone else's outcome, and there is no valid reason to stop income disparity. If there was no disparity in what you see in other people's income, then there would be no hope in improving your own future.
I don't know how to explain a dynamic economy but if there is enough economic freedom, resources can flow to their best use which maximizes the opportunities for everyone. When you try to lock resources in place or direct them with central planners, the tyrants of our time, opportunities recede. Where is there an example on the planet or in history where the central planners out-performed economic freedom? Certainly not the US since the Pelosi-Reid-Obama-Hillary-Biden revolution of Nov 2006 that continues today.
(http://data.bls.gov/generated_files/graphics/latest_numbers_LNS14000000_2003_2013_all_period_M08_data.gif)
BLS Labor force Unemployment rate not counting the 5 million people who left the workforce altogether
Thomas Sowell, 'Basic Economics': The actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. Money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners. In the absence of a profit motive, this activity does not occur.
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Some very good points there Doug.
I forget which thread on which it was I made the point, but I think fracking natural gas is a very good issue for us. We can make the point how it is bringing manufacturing back to the US (job! the American worker CAN compete! etc) but Obama and his command economy minions would rather funnel money to Solyndra.
Also, is there someone here who can take on for us reporting every month the unemployment rate INCLUDING those who have given up and left the economy altogether? Currently it is somewhere in the upper 10s if I am not mistaken.
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I forget which thread on which it was I made the point, but I think fracking natural gas is a very good issue for us. We can make the point how it is bringing manufacturing back to the US (job! the American worker CAN compete! etc) but Obama and his command economy minions would rather funnel money to Solyndra.
It was in this thread. Agree! I would add that fracking is one piece of the economic freedom in energy puzzle. We need clean refineries, safe pipelines, secure grid, state of the art nuclear, and a healthy climate for bringing to market the innovations that come next - instead of trying to stop all these things. On a larger view, without getting wonky we need to articulate, as you suggest with Solyndra, a clearer definition of what is the private sector role, what is the public and federal role and why we should not blur these roles as we do now with the referees being both financier and regulator of selected teams and players.
On fracking, while the government regulators looked away, busy writing other regulations, our air got cleaner, CO2 emissions dropped significantly, dropped our trade imbalance, experienced regional job booms and improved the median standard of living more than TARP, QE, HARP and ACA combined- all without their help.
Who knew we could leap forward with one innovation in all those directions? Certainly not the central planners who pick winners and losers in places like Moscow, Beijing and Washington.
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Doug,
Thanks for taking on my question.
Doug responds,
"You have identified the two playing fields that the right will never win on. If the race is to see who will pay people the most to not work, or be accused of starving children and taking meds from Grannie, Republicans and free marketers won't win. If it is a contest to see who is perceived as best at tying the hands of new wealth with new laws, taxes and redistribution methods, Republicans have no chance in that contest either, except for a few R-in-name-only Senators.
To win with prosperity and economic freedom, you have to change the framing of the questions. For starters, trickle down is only a misnomer/caricature/pejorative of opponents' beliefs that the left puts on what they see as unrestrained freedom, not something that came out of the principles of economic freedom or supply side economics.
There is no answer to stopping income disparity while improving everyone else's outcome, and there is no valid reason to stop income disparity. If there was no disparity in what you see in other people's income, then there would be no hope in improving your own future."
I have come up with some sort of overall thesis that might work for the right though I have not thought through (I don't know if frankly I am smart enough to quite figure it out) the details.
I do believe the concept of freedom, hard work, and equal opportunity for all with *more* reasonable fairness for all can be the answer and acceptable to most Americans bar those who will always look for handouts or refuse to get over the entitlement philosophy.
I do not disparage those 1% who work hard are geniuses, lucky or have come up with honest formulas to be extraordinarily successful. Indeed I am jealous but also admiring of them. The problem as I see it as do so many other is the game is not fair. There is incredible dishonesty, cheating, lying, stealing, bribery and misuse of mail, eavesdropping and rigging the game. We can never stop all of it. My problem is as you have stated, the right *doesn't even acknowledge this* let alone speak of even and semblance of righting or leveling the playing field. That is the biggest mistake on the right and why they will always have to battle the left. The middle class, if you will, is struggling more then ever. To them the American Dream certainly has slipped away. When you have 75 % of the population living from paycheck to paycheck and the right only addresses this with abstract ideology about freedom opportunity and hard work they have far less chance of winning against a party that has sold its soul with buying votes. Just simply disparaging bigger and bigger government (I agree with this) without taking on private crooks and scoundrels is, I believe, a persistent and crucial mistake.
I don't know we need more regulation to level the playing field. Perhaps we simply need to enforce what we have. Not a single wall streeter went to jail. Corzine gets off without any criminal liability. Yet the average joe doesn't pay a small tax bill and he can be in jail.
We cannot keep ignoring this.
As for Chinese, Indians, and Blacks, and Latins who are overwhelmingly Democrat party types I don't know how much is racial (you get the white guy thing) but I think most is the benefits.
I guess we also have to lay the choice on the line. Do we want a country where everyone sits around feeling entitled or one we used to have where hard work and responsibility, without any guarantees, is the best way to go.
I fear the former will win out. Especially if more and more of the population dwindles and struggles. And no, the answer is not simply "education" which is all we hear from the elites.
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CCP, Good stuff, you make valid points especially regarding perception and winning people over.
"The problem as I see it as do so many other is the game is not fair. There is incredible dishonesty, cheating, lying, stealing, bribery and misuse of mail, eavesdropping and rigging the game."
It is not just that government doesn't prosecute what is wrong, but the government causes much of what is wrong. Regulations heavily favor the entrenched players by keeping out competition, and our crony government is loaded with 'public-private' relationships that fail every possible test of equal protection under the law. The examples are endless, Solyndra, Tesla, AIG, Goldman Sachs, earmarks and research grants down to sports stadiums and private takings at the local level. If government only governed, instead of promoting, participating, redistributing, and choosing sides and determining outcomes, this wouldn't happen.
CCP, continued: "The middle class...is struggling more then ever. To them the American Dream certainly has slipped away. When you have 75 % of the population living from paycheck to paycheck and the right only addresses this with abstract ideology about freedom opportunity and hard work they have far less chance of winning against a party that has sold its soul with buying votes. Just simply disparaging bigger and bigger government (I agree with this) without taking on private crooks and scoundrels is, I believe, a persistent and crucial mistake."
You are right. We didn't jail any wall street bankers and we didn't round up any local scheisters across the country from the housing scandal fraud. No one investigated, no one prosecuted and no investigative journalist effectively held their feet to the fire. We have a million laws and oversight committees but we failed to govern. The message of economic freedom did not land and did not win. I might add that it wasn't really attempted!
The question remains - separate from how rich people are doing - how do you improve the economic outlook for the lower 75%? The answer is found in the Heritage Economic Freedom Index. There are many dimensions that make up economic freedom and we can measure and compare them rather easily if we try. It may be a platitude but nothing else has lifted more people out of poverty or economic stagnation and into prosperity throughout history and across the globe better than market capitalism based on basic economic freedom.
The negative human emotional reaction to someone else making more money than us is what is stopping us from leaping forward into prosperity. If one is Judeo-Christian or Muslim, God already warned you about this: http://www.religioustolerance.org/chr10cisl.htm
Frankly, we can stay stuck on stupid or we can choose to unleash growth -it is a simple choice.
What did Democratic Pres. John F. Kennedy say? A rising tide lifts all boats? What was he proposing? Lowering tax rates, individual and corporate, easing the burden and market distortions of government on the private sector? "An economy hampered by restrictive tax rates will never produce enough jobs or enough profits." Remarks to the Economic Club of New York, December 1962 http://www.jfkexperience.com/jfk-resources/favorite-jfk-quotes/
Investor profits are needed to create and grow jobs. Who knew.
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see the Gilder piece I posted earlier on the Economics thread on the SC&H forum.
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http://www.freetheworld.com/2013/EFW2013-complete.pdf
After ranking as the world’s third freest economy behind Hong Kong and Singapore for most of the two decades from 1980-2000, the United States began to lose ground as the new millennium began. The report blames the slippage on “overspending, weakening rule of law, and regulatory overkill on the part of the US government.”
“Once considered a bastion of economic freedom,” the United States now ranks 17th in the world,” says the report, which was compiled using data from 2011. The current US ranking puts it 13 places lower than its 4th-place ranking in 1994, and 15 lower than in 2000, when it ranked second overall.
http://en.ria.ru/business/20130919/183572627/Russia-Moves-Up-US-Falls-in-World-Economic-Freedom-Ranking.html
Meanwhile, Russia ranked 101st out of 151 nations, up 10 places from 1995 and 12 places better than its ranking in 2000, in the “Economic Freedom of the World” report, compiled by Canada’s Fraser Institute.
Russia has climbed up the rankings to be the best-placed of the rising economies known collectively as the BRIC countries (Brazil, India, China and Russia)
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Brian Wesbury sees the report as optimistic for US equities.
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Just before the recession hit in December of 2007 (Year 1 of the Pelosi-Reid, Obama, Biden, HRC majority congress) about 62.7 percent of the working-age population was working. If that same percentage was working today, we would have 154.1 million jobs. But we don’t. We have 144.2 million jobs and only 58.6 percent of the population is working. In short, we’re missing 9.9 million jobs when we compare this economy to the one in 2007.
Who cares about 9.9 million jobs when you are attacking income inequality. Oops, that got worse too.
Se. Jeff Sessions Blasts Obamanomics
I have directed my staff on the Senate Budget Committee to conduct a detailed analysis of the economic conditions facing working Americans: their wages, their employment, their household finances. I will give a series of talks over the coming weeks looking at their financial condition and the state of our nation economically. I will also attempt to look at the causes leading to our current financial difficulties and suggest some steps to restore America’s financial future.
The sad fact is that the state of middle- and lower-income Americans is worsening on nearly every front. The slow growth of the economy (the slowest economic recovery from a recession since World War II) is restraining the normal upward movement in income that previous generations have experienced. And, if you don’t have a job, you’re twice as likely to only find part-time as full-time work—if you can find any work at all. …
Perhaps the single greatest source for economic anxiety for working Americans is the fear of losing their jobs.
It’s not just the unemployment rate, which remains too high at 7.3 percent in August 2013. It’s the number of people we all know who are working well below their potential because nothing is available that uses their job skills. It’s the number of people we know who have given up looking for work, or who are working part-time because nothing full-time is available for them.
Fewer people are working today than in 2007. That’s actual numbers—even though population has increased. Just before the recession hit in December of 2007, about 62.7 percent of the working-age population was working. If that same percentage was working today, we would have 154.1 million jobs. But we don’t. We have 144.2 million jobs and only 58.6 percent of the population is working.
In short, we’re missing 9.9 million jobs when we compare this economy to the one in 2007.
Here’s another way to look at the job problem: in 2007 we had 363,000 “discouraged workers”—people who had given up looking for work but had not yet disappeared from view by the Employment Security offices. Today we have 866,000. That an increase of 140 percent in six years.
Here’s still another barometer of middle class anxiety: we have 1,988,000 fewer full-time jobs today than in December of 2007. However, we have 3,627,000 more part-time jobs. People with part-time jobs are not counted as unemployed. …
Take a look at the median family’s income. The Census Bureau published new estimates of household income on Tuesday, August 17. They reported that the median income of American households, adjusted for inflation, stands at $51,017—lower than last year, lower than the year before, and, in fact, lower than any time since 1995. …
Many are concerned that the Federal Reserve is furthering the national wealth gap. Their “quantitative easing” has boosted wealth in the investor class but has not benefitted the working class. This is not the way our policies should work.
Another thing I would note is that our civil society today has certain weaknesses that we need to discuss. I will talk more about it in a separate speech, but let me share a few thoughts about why this weakness should concern us all.
Few social institutions are more important in helping us through difficult economic times than marriage. Marriage is disappearing in the bottom 50 percent of the income distribution. And, as it does, so does the presence of the father in the home. If you are in the bottom 50 percent and give birth, there is a greater than 50 percent chance that the father will not be living with you when the child comes home from the hospital. Perhaps, as many suggest, our welfare policies are exacerbating these trends.
Also worrying is the decline of charitable giving since 2007. Like the overall economy, this vital part of our social and economic system has failed to recover. Total charitable giving fell in 2008 to $303.8 billion from $326.6 billion in 2007. As of the end of 2012, total giving was only $316.2 billion… still 3 percent below its level of 6 years ago.
The road we are on today leads to the continued erosion of civil society, the continued expansion of the welfare state, and the permanent entrenchment of a political class that profits from the growth of government. It is time that we recognized both the disastrous conditions facing working Americans and the moral obligation we have to replace government dependency with the freedom and dignity that comes from work and independence.
http://www.powerlineblog.com/archives/2013/09/jeff-sessions-blasts-obamanomics.php
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U.S. Textile Plants Return, With Floors Largely Empty of People
By STEPHANIE CLIFFORD
GAFFNEY, S.C. — The old textile mills here are mostly gone now. Gaffney Manufacturing, National Textiles, Cherokee — clangorous, dusty, productive engines of the Carolinas fabric trade — fell one by one to the forces of globalization.
Just as the Carolinas benefited when manufacturing migrated first from the Cottonopolises of England to the mill towns of New England and then to here, where labor was even cheaper, they suffered in the 1990s when the textile industry mostly left the United States.
It headed to China, India, Mexico — wherever people would spool, spin and sew for a few dollars or less a day. Which is why what is happening at the old Wellstone spinning plant is so remarkable.
Drive out to the interstate, with the big peach-shaped water tower just down the highway, and you’ll find the mill up and running again. Parkdale Mills, the country’s largest buyer of raw cotton, reopened it in 2010.
Bayard Winthrop, the founder of the sweatshirt and clothing company American Giant, was at the mill one morning earlier this year to meet with his Parkdale sales representative. Just last year, Mr. Winthrop was buying fabric from a factory in India. Now, he says, it is cheaper to shop in the United States. Mr. Winthrop uses Parkdale yarn from one of its 25 American factories, and has that yarn spun into fabric about four miles from Parkdale’s Gaffney plant, at Carolina Cotton Works.
Mr. Winthrop says American manufacturing has several advantages over outsourcing. Transportation costs are a fraction of what they are overseas. Turnaround time is quicker. Most striking, labor costs — the reason all these companies fled in the first place — aren’t that much higher than overseas because the factories that survived the outsourcing wave have largely turned to automation and are employing far fewer workers.
And while Mr. Winthrop did not run into such problems, monitoring worker safety in places like Bangladesh, where hundreds of textile workers have died in recent years in fires and other disasters, has become a huge challenge in terms of monitoring workers’ safety. “When I framed the business, I wasn’t saying, ‘From the cotton in the ground to the finished product, this is going to be all American-made,’ ” he said. “It wasn’t some patriotic quest.”
Instead, he said, the road to Gaffney was all about protecting his bottom line.
That simple, if counterintuitive, example is changing both Gaffney and the American textile and apparel industries.
In 2012, textile and apparel exports were $22.7 billion, up 37 percent from just three years earlier. While the size of operations remain behind those of overseas powers like China, the fact that these industries are thriving again after almost being left for dead is indicative of a broader reassessment by American companies about manufacturing in the United States.
In 2012, the M.I.T. Forum for Supply Chain Innovation and the publication Supply Chain Digest conducted a joint survey of 340 of their members. The survey found that one-third of American companies with manufacturing overseas said they were considering moving some production to the United States, and about 15 percent of the respondents said they had already decided to do so.
“This is a completely different manufacturing paradigm than what we saw 10 years ago,” said David Simchi-Levi, a professor at M.I.T. who conducted the survey.
Beyond the cost and time benefits, companies often get a boost with consumers by promoting American-made products, according to a survey conducted in January by The New York Times.
The survey found that 68 percent of respondents preferred products made in the United States, even if they cost more, and 63 percent believed they were of higher quality. Retailers from Walmart to Abercrombie & Fitch are starting to respond to those sentiments, creating sections for American-made items and sourcing goods domestically.
But as manufacturers find that American-made products are not only appealing but affordable, they are also finding the business landscape has changed. Two decades of overseas production has decimated factories here. Between 2000 and 2011, on average, 17 manufacturers closed up shop every day across the country, according to research from the Information Technology and Innovation Foundation.
Now, companies that want to make things here often have trouble finding qualified workers for specialized jobs and American-made components for their products. And politicians’ promises that American manufacturing means an abundance of new jobs is complicated — yes, it means jobs, but on nowhere near the scale there was before, because machines have replaced humans at almost every point in the production process.
Take Parkdale: The mill here produces 2.5 million pounds of yarn a week with about 140 workers. In 1980, that production level would have required more than 2,000 people.
Curse of Long Distance
When Bayard Winthrop founded American Giant, he knew precisely what he wanted to make: thick sweatshirts like the one from the Navy that his father used to wear.
They required a dry “hand feel,” so the fabric would not seem greasy to the touch, and a soft, heavily plucked underside. Mr. Winthrop had already produced sportswear overseas, so he looked there for the advanced techniques and affordable pricing he needed.
He wanted to sell his hooded sweatshirt for around $80, between the $10 Walmart version, made in China, and the $125 Polo Ralph Lauren version, made in Peru. He was insistent on cutting and sewing the sweatshirts in the United States — a company called American Giant couldn’t do that part overseas, he felt — but wasn’t picky about where the fabric came from.
With the help of a consultant, he settled on a mill in Haryana, India, that could make the desired fabric. After several months of back-and-forth, Mr. Winthrop was ready to ship his first sweatshirts in February 2012.
But he was frustrated with the quality, and the lengthy process. By October of last year, Mr. Winthrop had moved production to South Carolina. Now it takes just a month or so, start to finish, to get a sweatshirt to a customer.
“We just avoid so many big and small stumbles that invariably happen when you try to do things from far away,” he said. “We would never be where we are today if we were overseas. Nowhere close.”
The problems in India were cultural, bureaucratic and practical.
Time was foremost among them. The Indian mill needed too much time — three to five months — to perfect its designs, send samples, schedule production, ship the fabric to the United States and get it through customs. Mr. Winthrop was hesitant to predict demand that far in advance.
There were also communication issues. Mr. Winthrop would send the Indian factory so-called tech packs that detailed exactly what kind of fabric he wanted and what variations he would allow. But even with photos and drawings, the roll-to-roll variance was big. And he couldn’t afford to fly to India regularly, or hire someone to monitor production there.
He also found that suppliers deferred to his wishes, rather than being frank about some of his choices, which weren’t, he conceded, always good ones.
“I’m a supporter of outsourcing when it makes sense,” he said. But it had stopped making sense.
Now that production has shifted to the United States, Mr. Winthrop says those problems have disappeared. Mr. Winthrop and his team visit Carolina Cotton Works and Parkdale whenever they want, check on quality and toss ideas around with the managers. And, he says, the cost is less than in India.
Where Mr. Winthrop relies on labor — the cutting and sewing of the sweatshirts, which he does in five factories in California and North Carolina — is where the costs jump up. That costs his company around $17 for a given sweatshirt; overseas, he says, it would cost $5.50.
But truth be told, labor is not a big ingredient in the manufacturing uptick in the United States, textiles or otherwise. Indeed, the absence of high-paid American workers in the new factories has made the revival possible.
“Most of our costs are power-related,” said Dan Nation, a senior Parkdale executive.
March of the Machines
Step inside Parkdale Mills, and prepare to be overwhelmed by machines.
The ceilings are high and the machines stretch city block after city block — this one tossing around bits of cotton to clean them, that one taking four-millimeter layers from different bales to blend them.
Only infrequently does a person interrupt the automation, mainly because certain tasks are still cheaper if performed by hand — like moving half-finished yarn between machines on forklifts. Beyond that, there is little that resembles the mills of just a few decades ago.
Tell people about a textile plant and “their image is ‘Norma Rae,’ and everyone’s sick and dirty and coughing and it’s terrible,” said Mike Hubbard, vice president of the National Council of Textile Organizations.
Not here. The air-cleaning room, where air is washed 6.5 times an hour to get contaminants out, could be a modern-art installation, with liquid raining into pools of water. Along the ceiling, moving racks like those at a dry cleaner snake throughout the factory, carrying the finished yarn to a machine for packaging and shipping. That machine has enough lights and outlets on it that it resembles a music studio soundboard.
For Parkdale, the new technology has been its salvation.
Founded in 1916, Parkdale is the largest buyer of raw cotton in the United States. In the 1960s, when its current chairman, Duke Kimbrell, took over, it was a single plant with a couple of hundred workers.
Seeing that other plants in the area were streamlining their businesses and ceasing to make their own yarn, Parkdale supplied yarn to nearby manufacturers like Hanesbrands. Business flourished, and Parkdale acquired competitors and soared until the 1990s.
That’s when its clients started fleeing the United States.
The North American Free Trade Agreement in 1994 was the first blow, erasing import duties on much of the apparel produced in Mexico. The Asian financial crisis in the late 1990s, when currencies collapsed, added a 30 to 40 percent discount to already cheaper overseas products, textile executives said. China joined the World Trade Organization in 2001 and quickly became an apparel powerhouse, and as of 2005, the W.T.O. eliminated textile quotas.
In 1991, American-made apparel accounted for 56.2 percent of all the clothing bought domestically, according to the American Apparel and Footwear Association. By 2012, it accounted for 2.5 percent. Over all, the American manufacturing sector lost 32 percent of its jobs, 5.8 million of them, between 1990 and 2012, according to Bureau of Labor Statistics data. The textile and apparel subsectors were hit even harder, losing 76.5 percent of their jobs, or 1.2 million.
“With all the challenges that we’ve had with cheap imports, we knew in order to survive we’d have to take technology as far as we could,” said Anderson Warlick, Parkdale’s chief executive.
The company began meeting with machine manufacturers, doing trial runs of equipment and offering feedback and debugging, so it got dibs on the newest technology. It looked for business opportunities in the countries where its customers were heading, those in Central America in particular, and now 75 percent of its business is in exports.
Over all, the company employs 4,000 people, its biggest work force ever, but it is technology that has made it competitive.
“We’ve been able to be effective here because we invested in our manufacturing to the point that labor is not as big of an issue as far as total cost as it once was,” Mr. Warlick said. “It’s allowed us to be able to compete more effectively with foreign countries that pay, you know, a fraction of what we pay in wages. We compete with them on technology and productivity.”
Back From the Dead
All that automation has made working in the mill — which once meant mostly dead-end jobs for people with no other options — desirable for many people.
Howard Taggert, 86, got his first mill job in 1948 after high school. “By being a color, yeah, you’ve got the worst jobs there was in textile,” said Mr. Taggert, who is African-American. “It was rough, but it was a living. We made a living.”
He started by opening cotton bales, which involved striking an ax onto a metal tie around the bales — a dangerous job, given that a spark from metal striking metal could ignite a room full of cotton. The dust was so thick that he couldn’t see to the next aisle, he said. He was paid 87 cents an hour.
“I had to. I didn’t have no other choice,” he said of working in the mills.
The work was so bad that Mr. Taggert refused to let his children go into mill work. He might be surprised to hear about Donna McKoy, who went back to work in a mill even after earning an associate degree in criminal justice.
Ms. McKoy, 47, lost her job at Continental Fabrics in North Carolina in the early 2000s, “when everything was downsizing and going over to China.” In 2001 alone, textile plants in the Carolinas eliminated 15,000 jobs. The sense of desperation was palpable, Ms. McKoy said.
“Now what?” she remembers asking herself before she decided to go to college.
After a headhunter contacted her in 2007, she became a supervisor at Parkdale, overseeing a night shift of 11 workers. The work — and the workplace — are barely recognizable compared with her job a decade ago. A couple of things struck her right away. First, the mill was clean. “Most open-end spinning plants that have the older model spinning frames in them are really dirty and dusty and not fun to be around,” she said. Thanks to the new technology, “my plant is always clean.”
Second, Ms. McKoy got training. For her first eight months, Parkdale paid for hotels, food, dry-cleaning and gas for trips home as she rotated around different factories and learned all of the jobs. And there were fewer people. Ms. McKoy now works at a plant in Walnut Cove, N.C., which she described as a smaller version of the Gaffney plant. On a typical 12-hour shift, Ms. McKoy said, two of the 11 people on her team fix the spinning machines about 4,000 times, with robots’ help.
She earns $47,000 a year and says the perks are good, like health care, an in-house nurse and monthly management classes for supervisors. She recently bought a three-bedroom house and owns a car.
“I have a comfortable life,” she said. “With this recession that we just had, I didn’t feel it.”
Still, some Parkdale employees worry about the future. They’ve seen too much hardship in the textile industry to be overly hopeful about a real turnaround.
Scott Symmonds, 40, of Galax, Va., works as a technician for two plants in the area. He never planned on manufacturing work, but after time in the National Guard in Iraq, his home went into foreclosure and he had trouble getting work because of his low credit score and lack of a college degree. As a teenager in rural Iowa, he knew people who worked in manufacturing and watched two plants go out of business.
“I saw how they would come home dirty, smelly and often injured,” he said. “I didn’t want that.”
But he needed a job, and Parkdale was hiring. Mr. Symmonds started as a spinner, then got a job on the packing line, and then snagged a technician’s job after a technical-aptitude test. He earns $15 an hour, which he says is better than what competitors pay. He fears, though, that his higher pay could become a liability.
“We are making far more money than our counterparts in China or other nations,” he said. “We can’t afford to take a big enough cut in pay to be on an even level with those places.” ■
PUBLISHED SEPTEMBER 19, 2013
http://www.nytimes.com/2013/09/20/business/us-textile-factories-return.html
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http://klsouth.wordpress.com/2013/08/20/the-obama-economy-in-pictures/
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The sluggish performance of the economy since the Great Recession is likely to persist in the coming years. The foundations of growth are all simultaneously getting weaker.
To understand the basis for this conclusion, let’s break down measured economic growth—typically expressed as the annual rate of increase in real, or inflation-adjusted, gross domestic product (GDP) per capita—into the constituent elements tracked by conventional growth accounting: (1) growth in labor participation, or annual hours worked per capita; (2) growth in labor quality, or the skill level of the workforce; (3) growth in capital deepening, or the amount of physical capital invested per worker; and (4) growth in so-called total factor productivity, or output per unit of quality-adjusted labor and capital.
...
If conditions for growth really have deteriorated, then the public policies that delivered a certain rate of growth in the past will no longer suffice to maintain that growth rate in the future. In other words, policies that are more friendly to long-term growth will be needed
if more robust growth is to be revived. In the quest to improve the U.S. economy’s growth
prospects, the lowest-hanging fruit now appears to be policy change.
...
24 page pdf: http://object.cato.org/sites/cato.org/files/pubs/pdf/pa737_web_1.pdf
Brink Lindsey is a senior fellow at the Cato Institute and the author, most recently, of Human Capitalism: How Economic Growth Has Made Us Smarter—and More Unequal
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(http://pgpf.org/sites/default/files/chart/F7AC3D0383584021BD31DDBD9514E109.gif)
From savings comes investment. From investment come jobs, growth, opportunity, prosperity.
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Please post that chart on the Economics thread on the SCH forum as well. TIA.
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I have tried (about a dozen times on the forum) to make the point that the income inequality measures widely published and cited are a farce, not including income of the poor and greatly exaggerating income the rich. Income that belongs to the IRS and others is not their income. In the category of famous people reading the forum, economists and columnists for research institutions such as AEI are jumping in to back me up on this. I thank them.
http://www.aei-ideas.org/2013/10/pethokoukis-podcast-scott-winship-on-income-inequality/
This is important stuff. It is the foundation for the liberal argument of why the free market and Republican policies are so unfair.
Income inequality is the existence of an economic ladder, available for all to climb, not evidence of unfairness. Perfectly equal outcomes is the worst possible outcome and could happen only if effort, talent, investment, incentive, disincentive, risk and reward have no meaning. Equality could exist only with everyone at the bottom in poverty. Do liberals ever consider what the opposite of income equality would mean.
From the article (with occasional comment):
"The official measure...doesn’t include (the main income of lower income people) non-cash benefits, like food stamps or Medicaid and Medicare and it doesn’t take into account taxes (the multi-trillion dollar equalizer against the rich). (One example:) So when part of the federal response to the recession was to reduce taxes, particularly the payroll tax, that isn’t incorporated into the official measure. When you do take into account those things, you find that disposable income for the middle class was back to its 2007 level in 2011. We’ve actually fully recovered. If you look at the bottom, that too looks like it’s recovered to its 2007 level. It depends on how you value Medicaid and Medicare..."
"If you think that government ought to be redistributing money or providing a safety net during downturns, that’s exactly what it did"
...
"Burkhauser and his colleagues start with those numbers, which include the capital gains that people realize when they sell assets like stocks. That’s a big part of the story because the stock market has done well over these past few decades. When the stock market is at a peak, people sell and realize these big gains that have been accumulating over time. Instead of showing gradual increases in income over time, they show up as these spikes when the market peaks and people sell. It will also show up as spikes when tax policy changes affect the returns to come of these investments.
Rich and his colleagues said, “Let’s take into account year by year capital gains that are accruing to people, many of which are behind the scenes because people are not actually selling these assets.” By the way, in some years, there are capital losses that we don’t see because of the 2008 financial crisis where there are these huge losses at the top. When they attempted to account for the accrued gains and losses behind the scenes, they found that inequality has not risen from 1989 to 2007."
...
"The income growth for the middle class has been stronger than people realize. Since about 1979 it’s gone up about 40 percent."
Unmentioned in the piece is that the slowdown in income mobility up for the lower incomes was caused by the safety hammock of the programs. Extravagant programs require limits on other income and many people in them face effective marginal tax rates way over 100% for additional dollars of income. Great incentive to climb.
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Patriot Post
More Redistributed Than Earned
According to the latest census data, more Americans now depend on government support than earned income. As of 2012, 151 million Americans receive government support, while 125 million earn a paycheck. Of course, there are some 50 million who receive earned support in the form of Social Security, Medicare and Veteran benefits. So as it stands now, 100 million Americans depend on the government for subsistence. Some 82 million receive Medicaid welfare (and that number is going up as a result of O'Care), 35 million receive food and shelter subsidies, and 5 million receive unemployment checks.
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From another thread, this fact begs the questions that follow...
'The unemployment rate in Florida fell to 7.0% from 10.9% since Republican Governor Rick Scott entered office.'
What would be Obama's no growth record (0.019 growth) nationally without the pro-growth efforts of 30 Republican governors, majorities of Republican legislatures, Republican House, etc.? What if Obama and Detroit-style policies governed everywhere across the fruited plain, what would be his economic record?
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http://www.washingtontimes.com/news/2013/may/23/red-states-hold-the-edge-in-growth/
Red states hold the edge in growth
Job, investment potential greater (May 23, 2013)
"... The bad news for blue states: Not one ranks in the top 10 based on overall economic outlook as gauged by 15 economic indicators, including tax rates, regulatory burden and labor policies. Eight of the top 10 slots are held by GOP-dominated red states, led by Utah, while two are politically mixed “purple” states, Florida and Virginia [Who both have Republican Governors].
On the other hand, the list of the bottom 10 is dominated by blue states. Vermont, a solidly blue state, ranks last in terms of economic outlook, and only one red state — Montana — makes the bottom 10. [Montana has a Democrat Governor.]
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The reason I keep harping on income inequality is because the false analysis of it is used as the foundation for all leftist economic policies, including the ones that are holding us back today.
http://www.nationalreview.com/article/363701/truth-about-1-percent-alan-reynolds
The Truth about the 1 Percent
The rich’s incomes aren’t surging, and inequality measures ignore growing government transfers.
By Alan Reynolds November 11, 2013
Every year, new estimates of the incomes of the “top 1 percent” are reported with the requisite fanfare from Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California, Berkeley. And every year the press gets the numbers all wrong.
“Worry Over Inequality Occupies Wall Street,” writes Justin Lahart of the Wall Street Journal. An odd worry, when stocks keep hitting record highs. In reality, top income shares always rise and fall with the stock market because of capital gains, stock options, and bonuses and fees tied to stocks.
“Messrs. Piketty and Saez,” says Lahart, “show the top 1 percent captured 19.3% of U.S. income in 2012. The only year in the past century when their share was bigger was 1928, at 19.6%.” That comparison is incredibly misleading. Piketty and Saez don’t include $2.3 trillion of transfer payments in “U.S. income,” even though transfers accounted for over 16 percent of personal income in 2009 and almost zero in 1928.
Extolling Piketty and Saez as “everyone’s favorite inequality-tracking researchers,” Dylan Matthews of the Washington Post writes, “Shockingly — shockingly — what [Piketty and Saez] found is that while only 49 percent of the decline in incomes during the recession was born [sic] by the top 1 percent (whose income share fell to 18.1 percent due to the recession), 95 percent of income gains since the recovery started have gone to them.”
There is an interesting story in these numbers, but it is not a story journalists choose to report. It turns out that the same table Matthews reprinted from Piketty and Saez shows the top 1 percent’s real income fell by 36.3 percent from 2007 to 2009, then rose by only 31.4 percent from 2009 to 2012. The 36.3 percent decline, of course, was calculated from a much larger base than the subsequent 31.4 percent recovery.
Since top incomes fell more than they rose, you might expect the Post’s Mr. Matthews to note that over the whole period, the net change was a decline in top incomes rather than an increase. Down is not up, even in economic journalism. Yet every major media outlet, even The Economist and the Wall Street Journal, gullibly reported the data — adding up to a five-year decline — as evidence the rich are continually getting richer.
The table shown here — which uses Piketty and Saez’s data — shows the top 1 percent’s average real income fell by 16.3 percent from 2007 to 2012, and ended up 6.4 percent lower than it was back in 2000:
Average Real Income of the Top 1 Percent (2012 dollars)
2000 $1,350,006
2001 1,063,706
2002 933,878
2003 964,989
2004 1,143,104
2005 1,323,935
2006 1,414,985
2007 1,510,932
2008 1,213,199
2009 961,785
2010 1,076,379
2011 1,056,640
2012 1,264,065
What about the “other 99 percent,” whose income supposedly rose by only 0.4 percent from 2009 to 2012? Piketty and Saez compare real incomes at different income levels without including Social Security, unemployment and disability benefits, food stamps, Medicaid, etc. Government transfers totaled $2.3 trillion in 2012, up 24.6 percent in real terms from 2007 and up 68 percent since 2000. Because Piketty and Saez estimate only pre-tax, pre-transfer income, they also ignore $149 billion in Treasury checks to lower-income families from refundable tax credits. They’ll also ignore huge Obamacare subsidies next year.
Once transfers and taxes are properly taken into account, my own research for the Cato Institute shows no clear trend toward greater inequality after 1989, aside from the tech-stock boom of 1998–2000. Instead of any predictable trend, data on income shares are dominated by cyclical variations in which rich and poor rise or fall together: When the top 1 percent’s share rises, the poverty rate falls, and when the top 1 percent’s share falls, the poverty rate rises.
There are numerous conceptual and measurement problems with attempting to judge the relative living standards of the rich, middle-class, and poor by relying on income reported on individual tax returns (ignoring, for a start, income that’s unreported or reported on corporate returns).
Saez himself has hinted that the seemingly strong surge in top-percentile incomes in 2012, for example, was largely a matter of strategic tax timing — reporting bonuses and capital gains in 2012 to avoid higher tax rates in 2013. The same thing happened in late 1992, when professionals and executives arranged to cash in bonuses and stock options in December rather than in January 1993, when income-tax rates went up. It also happened in 1986, when investors rushed to cash in capital gains before the capital-gains tax went up, briefly inflating reported real income of the top 1 percent by 34.6 percent in a single year.
Because reported capital gains and bonuses were similarly shifted forward from 2013 to 2012, we can expect a sizable drop in the top 1 percent’s reported income when the 2013 estimates come out a year from now. The befuddled media will doubtless figure out some way to depict that drop as an increase.
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IMHO Alan Reynolds is a very good and very credible economist.
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Everyone including our unaware President knows that small business is the driver of jobs and job growth. Yet...
"When those [businesses] with between 40 and 70 employees were asked about the 50 full-time-equivalent cutoff between having to offer those working at least 30 hours per week health insurance and not having to offer those employees health insurance, a majority plan to ensure they either remain below or drop below that threshold by 2015."
Who knew this would happen??!!
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The U.S. Chamber of Commerce and the International Franchise Association commissioned Public Opinion Strategies to conduct a poll of decision-makers at businesses, both franchise-owned and non-franchise-owned with 40 to 500 employees. The 414 surveyed, representative of the employers of over 25% of the populace and the group of employers most affected by the provisions of ObamaCare, give lie to the administration’s claim that ObamaCare will not negatively affect, and is not already negatively affecting, the job market:
- Many businesses are already seeing their health care costs increasing because of the law. To cope, 31% of franchise and 12% of non-franchise businesses have already reduced worker hours, a full year before the employer mandate goes into effect.
- Additionally, 27% of franchise and 12% of non-franchise businesses have already replaced full-time workers with part-time employees. Other cost control methods cited by survey participants included hiring only temporary help and cutting benefits and bonuses.
When those with between 40 and 70 employees were asked about the 50 full-time-equivalent cutoff between having to offer those working at least 30 hours per week health insurance and not having to offer those employees health insurance, a majority plan to ensure they either remain below or drop below that threshhold by 2015.
http://www.uschamber.com/reports/findings-national-research-conducted-among-business-decisionmakers
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(http://3.bp.blogspot.com/-2NVIr11EOxU/UoN4vnIPqMI/AAAAAAAAByc/Qpine6qC0mI/s1600/cbo+table.png)
Source: CBO / http://gregmankiw.blogspot.com/
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On a cold October morning, just after the federal government shutdown came to an end, Jenner Barrington-Ward headed into court in Boston to declare bankruptcy.
It took weeks to put the paperwork together, given that her papers and belongings were scattered across the country — there was a broken-down car and boxes of paperwork in Virginia Beach, clothes in Colorado and personal possessions at a friend’s house in Somerville, Mass. She managed to estimate her income — maybe $5,000 last year, but maybe half that this year — from odd jobs. Soon, she would officially have nothing.
It has been a painful slide. A five-year spell of unemployment has slowly scrubbed away nearly every vestige of Ms. Barrington-Ward’s middle-class life. She is a 53-year-old college graduate who worked steadily for three decades. She is now broke and homeless.
Ms. Barrington-Ward describes it as “my journey through hell.” She was laid off from an administrative position at the Massachusetts Institute of Technology in 2008; she had earned about $50,000 that year. With the recession spurring employers to dump hundreds of thousands of workers a month and the unemployment rate climbing to the double digits, she found that no matter the number of résumés she sent out — she stopped counting in the thousands — she could not find work.
“I’ve been turned down from McDonald’s because I was told I was too articulate,” she says. “I got denied a job scrubbing toilets because I didn’t speak Spanish and turned away from a laundromat because I was ‘too pretty.’ I’ve also been told point-blank to my face, ‘We don’t hire the unemployed.’ And the two times I got real interest from a prospective employer, the credit check ended it immediately.”
For Ms. Barrington-Ward, joblessness itself has become a trap, an impediment to finding a job. Economists see it the same way, concerned that joblessness lasting more than six months is a major factor preventing people from getting rehired, with potentially grave consequences for tens of millions of Americans.
The long-term jobless, after all, tend to be in poorer health, and to have higher rates of suicide and strained family relations. Even the children of the long-term unemployed see lower earnings down the road.
The consequences are grave for the country, too: lost production, increased social spending, decreased tax revenue and slower growth. Policy makers and academics are now asking whether an improving economy might absorb those workers in time to prevent long-term economic damage.
“I don’t think we know the answer,” said Jesse Rothstein, an economist at the University of California, Berkeley. “But right now, I think everybody’s worst fears are coming true, as far as we can tell.”
Soon after we first talked in October, Ms. Barrington-Ward left her sister’s house in Ohio, where she had crashed for six weeks, and went back to Boston and filed her bankruptcy paperwork. She contacted a headhunter. “I’ve got to get a job,” she said. “I just have to.” She had two job interviews lined up and her fingers crossed.
Long-term joblessness — the kind that Ms. Barrington-Ward and about four million others are experiencing — is now one of the defining realities of the American work force.
The unemployment rate has fallen to 7.3 percent, down from 10 percent four years ago. Private businesses have added about 7.6 million positions over the same period. But while recent numbers show that there are about as many people unemployed for short periods as in 2007 — before the crisis hit — they also show that long-term joblessness is up 213 percent.
In part, that’s because people don’t return to work in an orderly, first-fired, first-hired fashion. In any given month, a newly jobless worker has about a 20 to 30 percent chance of finding a new job. By the time he or she has been out of work for six months, though, the chance drops to one in 10, according to research by the Federal Reserve Bank of San Francisco.
Facing those kinds of odds, some of the long-term jobless have simply given up and dropped out of the labor force. So while official figures show that the number of long-term jobless has fallen steeply from its recessionary high of 6.7 million, many researchers fear that this number could mean as much bad news as good. Workers over 50 may be biding their time until they can start receiving Social Security. Younger workers may be going to school to avoid a tough job market. Others may be going on disability, helping to explain that program’s surging rolls.
Stan Hampton, 59, a veteran of the Iraq war, is now earning his associate degree. But he has not had a job since returning from active duty in 2007, and is now living in an apartment complex for veterans near Las Vegas.
“I’m just trying to hang on until my retirement kicks in,” he said, though he stressed that he would still look for a job. “I have not been in jail or prison, nor am I an alcoholic, drug addict or gambling addict. I am simply old, unemployed and out of money.”
Page 2 of 3)
To answer the question of whether the improving economy might help people like Mr. Hampton and Ms. Barrington-Ward, economists often phrase the question as “Is it structural or cyclical?” Cyclical unemployment is temporary, caused by a slack economy. Structural unemployment stems from a mismatch between what businesses want and what workers offer. You are a car mechanic, for example, but the economy needs programmers.
If long-term joblessness is cyclical, a growing economy should bring people back into the job market. But if structural factors are at play, the concern is dire for the whole economy, with a normal unemployment rate “significantly higher than what has been achieved in the past,” said Janet L. Yellen, the presumptive new Federal Reserve chairwoman, in a speech this year.
Right now, most economists argue that unemployment remains primarily cyclical. Ben S. Bernanke, the departing Fed chairman, made this point last summer, adding that an unemployment rate in the 5 percent range — an indication of a healthy economy — was still obtainable. Growth simply hasn’t proved strong enough to spur businesses to hire all the people who want jobs.
Economists come to this conclusion in part because there is no evidence that the long-term jobless are accumulating in any one industry, which would be a signal that the economy needs to move workers from, say, manufacturing into nursing. Long-term unemployment has hit workers young and old, of all industries, races and backgrounds. But the long-term jobless actually tend to be more educated. And long spells of joblessness have hit black workers especially hard, as well as single parents, the disabled and older workers.
With time, however, even people with desired skills can become “structurally” unemployed. Longer spells of unemployment become harder to explain away. Jobless workers’ skills can atrophy. Job seekers find it harder to appear eager. Wounds become scars.
After she lost her job, Ms. Barrington-Ward lived off her 99 weeks of unemployment benefits. Two years ago, she had to give up the house she shared with friends outside Boston. She cannot get Medicaid because she does not have a fixed address. She has no car to get around. She does freelance “intuitive” readings, similar to psychic readings, and web production work. A jobless friend committed suicide.
She tries not to let those strains show, but she describes the experience as wearying. “After working since I was 15, I have nothing to show for it,” she said.
“She’s brilliant,” said Allyson Hartzell, a longtime friend with whom Ms. Barrington-Ward is currently staying. “She gets up in the morning. She has her tasks. She’s always working on her personal projects, trying to generate money. She goes to job interviews. She keeps herself in shape.”
Ms. Hartzell continued: “I think it’s emotionally difficult to handle so much rejection, and I think others sometimes feel she needs to justify why she’s in the position she’s in.”
Economists have long thought that the strain of unemployment, plus the erosion of skills and loss of contacts that naturally occur, helps explain the “structural” unemployed in a nation’s work force. But new evidence shows that bias plays a much larger role than previously thought. Some of the long-term unemployed might never find work because businesses simply refuse to hire them.
In a recent study, Rand Ghayad a Ph.D. candidate at Northeastern University, sent out 4,800 dummy résumés to job postings. Those résumés that were supposedly from recently unemployed applicants with no relevant experience were more likely to elicit a call for an interview than those supposedly from experienced workers out of a job for more than six months. Indeed, the callback rate for the long-term jobless ranged from just 1 to 3 percent, versus 9 to 16 percent for newly unemployed workers.
Unemployment becomes a “sorting criterion,” in the words of a separate study with similar findings. It found that being out of a job for more than nine months decreased interview requests by 20 percent among people applying to low- or medium-skilled jobs.
In dozens of interviews, the long-term unemployed described discrimination as being foremost in their minds, though at the same time they said the experience of joblessness had changed them.
Robin Hastey, 53, who lives in Cornwall, N.Y., lost her job in 2009 and has not found steady work since. Her husband went through a spell of unemployment, but eventually found a job that paid half of what he made in the 1990s. They are deeply in debt, she said, estimating that they have about $100 in their bank account.
We look older,” she said. “I’m not as cute. People aren’t as forgiving. When I was young, you could ask stupid questions and people would hire you anyhow. Now, you’re just a crazy old lady. There’s a lot less forgiveness in the marketplace.”
Still, the slack economy remains the primary culprit behind all the pain in the labor market, economists say. “We’ve got to be doing everything we can,” said Professor Rothstein at Berkeley. “That means direct hiring”— with the government providing jobs — “employment tax credits, just about anything you could think of.”
But the government is now doing the opposite. The mandatory federal budget cuts known as sequestration took as much as 60 percent out of unemployment checks this summer and fall. And, as of this winter, the federal emergency program that extends the maximum number of weeks of jobless payments will end, though the White House is pushing to extend it again.
Some fear that it may already be too late to prevent long-term joblessness from permanently scarring the American work force and broader economy. International Monetary Fund researchers estimate that the level of structural unemployment has increased significantly since the recession. And striking new Federal Reserve research shows that the scars from the recession have knocked the economy off its long-term growth trend.
For the long-term jobless, there is little to do but hope and wait. When I visited Ms. Barrington-Ward in November, she was planning to produce a show for Somerville Community Access Television. Unemployment itself consumes a lot of time. “I’ve been in seven states over the last five years, living with friends and family,” she said. “I usually stay somewhere for three weeks maximum. People want me to leave but don’t want to ask me to leave.”
She never got a second interview for one of the two positions for which she applied. She wrote a detailed plan for and had phone conversations about the other job, this one at a web start-up. She offered to work on a consulting basis. The company told her that it would go with a temp.
On a cold evening in Somerville, she sipped a mocha she had bought with a coupon. She had not given up — not quite. But she was disappointed that jobs hadn’t panned out. Again.
“I just know I’m not going to get another full-time job again,” she said. “It’s just so hard.” She had to leave her friend’s house soon. She did not know where she would go.
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She just needs to read Wesbury until she understands just how plowhorsey-awesome the economy is!
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:lol: :lol: :lol:
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"staying put and doubling up with roommates or living with Mom and dad"
Hey young liberals, how is Hope and Change workin' out for you-all?
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Economic woes for young people means less mobility
By The Associated Press
November 14, 2013
http://www.wjla.com/articles/2013/11/economic-woes-for-young-people-means-less-mobility-96847.html#ixzz2kv8inrvC
WASHINGTON (AP) - U.S. mobility for young adults has fallen to the lowest level in more than 50 years as cash-strapped 20-somethings shun home-buying and refrain from major moves in a weak job market.
The new 2013 figures from the Census Bureau, which reversed earlier signs of recovery, underscore the impact of the sluggish economy on young people, many of them college graduates, whom demographers sometimes refer to as "Generation Wait."
Burdened with college debt or toiling in low-wage jobs, they are delaying careers, marriage and having children. Waiting anxiously for their lucky break, they are staying put and doubling up with roommates or living with Mom and dad, unable to make long-term plans or commit to buying a home - let alone pay a mortgage.
Many understood after the 2007-2009 recession that times would be tough. But few say they expected to be in economic limbo more than four years later.
Among adults ages 25-29, just 4.9 million, or 23.3 percent, moved in the 12 months ending March 2013. That's down from 24.6 percent in the same period the year before. It was the lowest level since at least 1963. The peak of 36.7 percent came in 1965, during the nation's youth counterculture movement.
The past year's decline in migration came after a modest increase from 2011 to 2012, a sign that young adults remain tentative about testing the job market in other cities.
By metropolitan area, Portland, Ore., Austin, Texas, and Houston were among the top gainers in young adults, reflecting stronger local economies. Among college graduates 25 and older, Denver and Washington, D.C., topped the list of destinations.
Demographers say the delays in traditional markers of adulthood - full-time careers and homeownership - may prove to be longer-lasting.
Roughly 1 in 5 young adults ages 25 to 34 is now disconnected from work and school.
"Young adulthood has grown much more complex and protracted, with a huge number struggling to reach financial independence," said Mark Mather, an associate vice president at the private Population Reference Bureau. "Many will get there, but at much later ages than we've seen in the past. More and more we're seeing many young adults routinely wait until their 30s to leave the parental nest."
The overall decline in migration among young adults is being driven largely by a drop in local moves within a county, which fell to the lowest level on record. Out-of-state moves also fell, from 3.8 percent in 2012 to 3.4 percent, but remained higher than a 2010 low of 3.2 percent.
Young adults typically make long-distance moves to seek a new career, while those who make local moves often do so when buying a home.
While homeownership across all age groups fell by 3 percentage points to 65 percent from 2007 to 2012, the drop-off among adults 25-29 was much larger - more than 6 percentage points, from 40.6 percent to 34.3 percent. That reflects in part tighter lines of credit after the 2006 housing bust. Declines in homeownership for those ages 40 and older over in that five-year period were more modest.
William H. Frey, a demographer at the Brookings Institution analyzed the figures:
"Many young adults, especially those without college degrees, are still stuck in place."
"For them, low mobility might be more than a temporary lull and could turn into the 'new normal.'"
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Every twenty-something with a crippled future that voted for Obama is getting exactly what they deserve.
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Every twenty-something with a crippled future that voted for Obama is getting exactly what they deserve.
Like smoking to former smokers, maybe (formerly) young people will become the most anti-liberal of all future voters.
Note to other demographic groups, women, blacks, Hispanics, you were duped too!
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I dunno. Leftism is more of a mental illness than an ideology when you boil it down to it's essence. Detroit never wavered from being hardcore dem. NYC is diving headfirst into becoming a background for a Snake Plisken movie. Chicago is only a few steps behind Detoilet and California is chasing away their last few businesses, including porn.
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GM, you do have a way with words! :lol:
FWIW, someday I will sidebar you about what my politics were forty years ago :-o :-o :-o But that was before I studied economics!
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A Permanent Slump?
By PAUL KRUGMAN
Published: November 17, 2013 190 Comments
Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” Most though not all such officials accept that now is no time to be tightfisted, that for the time being credit must be easy and interest rates low. Still, the men in dark suits look forward eagerly to the day when they can go back to their usual job, snatching away the punch bowl whenever the party gets going.
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province of a radical fringe. And they are indeed radical; but fringe, not so much. A number of economists have been flirting with such thoughts for a while. And now they’ve moved into the mainstream. In fact, the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully recently at the most ultrarespectable of venues, the I.M.F.’s big annual research conference. And the person making that case was none other than Larry Summers. Yes, that Larry Summers.
And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.
Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed.
He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.
Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
I’d weigh in with some further evidence. Look at household debt relative to income. That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply. Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?
Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.
Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster, as women moved into the labor market. That’s now all behind us. And you can see the effects: Even at the height of the housing bubble, we weren’t building nearly as many houses as in the 1970s.
Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”
More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.
But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.
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If liberalism is a mental disorder (cf. G M), then Paul Krugman is a case study.
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So Krugtron finally clues into the depression, but his cure is more debt.
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"The no-decision on the Keystone XL pipeline and its union jobs; the 2,000-page regulatory law draped in 2010 across the entire financial sector; the shutdown in 2010 and then the slow-walking of offshore oil drilling; siccing the EPA on the utilities industry and the National Labor Relations Board on all industry; a 2010 FCC decision to regulate Internet growth; a significant tax increase this year; support this month for jacking up the federal minimum wage to over $10, certain to smother new jobs; the Justice Department's $13 billion looting of J.P. Morgan JPM -0.47% bank; and of course Hurricane ObamaCare."
Daniel Henninger: Worse Than ObamaCare
Obama's biggest failure is that he hobbled the U.S. economy. More at the link:
http://online.wsj.com/news/articles/SB10001424052702303653004579210172838389630
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"The reason I keep harping on income inequality is because the false analysis of it is used as the foundation for all leftist economic policies, including the ones that are holding us back today." - yours truly, 11/13/2013
http://dogbrothers.com/phpBB2/index.php?topic=1467.msg76990#msg76990
" No clear trend toward greater income inequality since 1989"
Among the famous people reading the forum is President Obama:
Obama shifts to rising income inequality
President Obama gave a major policy address on the economy today, calling for an increased minimum wage and saying the income gap is a threat to the American dream.
http://www.msnbc.com/the-last-word/watch/obama-shifts-to-rising-income-inequality-80752195696
Obama turns attention to income inequality
http://www.latimes.com/nation/la-na-obama-economy-20131205,0,826560.story#axzz2mui3myOe
Obama: Income inequality a defining challenge
http://news.yahoo.com/obama-income-inequality-defining-challenge-164422702--finance.html
And from the echo chamber, Enron adviser Paul Krugman:
http://www.nytimes.com/2013/12/06/opinion/krugman-obama-gets-real.html
Don't bother read, bumbling idiosy based on a false premise.
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Good work Doug.
In a similar vein, here Dick Morris fleshes things out:
http://www.dickmorris.com/obama-causes-income-inequality-dick-morris-tv-lunch-alert/?utm_source=dmreports&utm_medium=dmreports&utm_campaign=dmreports
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Pope Francis is an expert on poverty; he has lived within and around it all his life. The President is an expert on demagoguing wealth; he rose to great heights doing that. The Pope does not know how to solve the condition of poverty and the President does not know how to solve the false problem of income inequality.
As George Gilder and others have pointed out, poverty is not something in itself to study or know. Poverty is the lack of something - the lack of wealth. You don't learn about poverty by studying poverty. You learn about it by studying wealth and wealth creation. Then go back to poverty to see what elements of wealth creation are missing.
Income inequality isn't the study of any one phenomenon. It is the study of two unrelated phenomena and meaninglessly comparing them.
How much do people who do not participate or fully participate in our economic system make? Don't count all the assistance we already give them in trying to alleviate the condition. How much do other people make who have fully committed, invested and succeeded? Don't count what we take from them that they don't get to keep or reinvest. Income Inequality is the stunning revelation that the people who make more money, make more money than the people who make less money.
Removal of income inequality is the removal of a ladder up. What you earn now is all you will ever aspire to earn. Education, saving, investing, hard work, commitment, innovation, surrounding yourself with the best people you can find, persistence, perseverance - all would make no difference.
The top 40% already pay106% of the taxes in this country, (how much more should they pay?):
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44604-AverageTaxRates.pdf
You do not and cannot fight poverty or economic under-performance by taking down wealth. What you do is lock in that success, find what is working for the top 40% and make it available to the rest.
A war on income inequality is a war on wealth. A successful war on wealth means that poverty will be even more widespread. Instead of celebrating and wealth creation and spreading it to others, we punish it, demonize it, and instead reward the opposite - in all its manifestations.
http://www.dailyherald.com/article/20110804/news/708049975/
Food stamp use nearly doubles in suburbs
The Sharp Rise in Disability Claims
http://www.richmondfed.org/publications/research/region_focus/2012/q2-3/pdf/feature3.pdf
http://cnsnews.com/news/article/terence-p-jeffrey/90609000-americans-not-labor-force-climbs-another-record
90,609,000: Americans Not in Labor Force Climbs to Another Record - See more at: http://cnsnews.com/news/article/terence-p-jeffrey/90609000-americans-not-labor-force-climbs-another-record#sthash.jTKlYqis.dpuf
Women leaving the U.S. workforce in record numbers
http://www.catholic.org/business/story.php?id=46145
Unemployed women hit an all-time historical high of 53,321,000, according to the Bureau of Labor Statistics.
http://www.nbcnews.com/id/11098797/#.Uqc8ZH8v1hs
U.S. savings rate hits lowest level since 1933
http://www.zerohedge.com/news/2013-03-29/us-savings-rate-near-record-low-capita-disposable-income-below-december-2006-level
http://dailycaller.com/2012/06/07/sessions-food-stamp-spending-up-100-percent-since-obama-took-office/
(http://dailycaller.com/wp-content/uploads/2012/06/Food-stamp-spending.jpg)
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More good work Doug!
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Should crosspost that under the latest Webury drivel.
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Obama's Phony Populism
By DICK MORRIS
Published on TheHill.com on December 10, 2013
As he has done before, whenever President Obama is in political trouble, he seeks to rally his base with a particular brand of populism designed to appeal to those who have an impaired memory of his previous diatribes.
But as he rails against income inequality, seeks a raise in the minimum wage and tries to lower the cost of college, we should all remember the policies of this administration that are causing income inequality.
Since Obama took office, 85 percent of all income growth has been concentrated in the top 1 percent of the population. (Under George W. Bush it was 65 percent, and under Bill Clinton it was 45 percent).
The bottom 99 percent have stagnated during the Obama years, but the rich have gotten immensely richer.
This trend is a direct result of his quantitative easing program, in which the Federal Reserve purchases $85 billion of bonds each month, giving banks a windfall of cash to use as they wish.
In theory, they are supposed to lend the money out. However, the banks have asked the Fed to pay them 3 percent interest on funds they keep on deposit. So, without doing anything, banks get free money from the Fed vaults. (Why would a bank lend money to a risky borrower at 6 percent when it can get 3 percent from the Feds?)
This monthly infusion permits bankers to buy back stocks to add them to their stock option compensation, distribute Christmas bonuses or engage in risky trading in derivatives or other speculative investments. Despite having paid nothing to get the money, they have broad latitude in investing it.
Obama's zero interest policy has blocked savings and limited investment, which is the only way to spur productivity. If productivity doesn't grow, incomes don't either, except through inflation.
This policy also makes a mockery of the elderly who have been thrifty and saved during their entire working lives in the hopes that their nest egg would provide them modest funds on which to retire. Not with zero percent interest, it won't, unless they invest in risky stocks, where it could all be wiped out.
Obama's refusal to crack down on Chinese currency manipulation also stagnates incomes in this country. Despite China's undervalued currency leading to the largest trade surplus in five years, the Obama administration is refusing to designate China as a currency manipulator, or to bring actions against the policy before the World Trade Organization (WTO). It is worth noting that China had no appreciable surplus with the U.S. until it was admitted to the WTO in the first place.
Finally, ObamaCare has blighted full-time employment in the U.S. Since January, 152,000 fewer people are working full time, and 400,000 are part-time workers, as employers juggle their payrolls to keep the number of full-time workers under the threshold of 50 that would trigger mandatory compliance under the Affordable Care Act. Anxious to avoid the requirement that they provide health insurance or face a fine of $2,000 per worker, employers are obliterating the 40-hour week, according to no less a source than the AFL-CIO.
Obama's populist rhetoric ignores a key fact: While the top fifth and the bottom fifth of the country at any moment have a vast and widening disparity in income, there is great individual upward -- and downward -- mobility. A 20-year study by Pew showed that 60 percent of the bottom fifth moved up over two decades, with 4 percent making it into the top fifth. It also showed that 60 percent of the top fifth fell out over the period.
The important downward mobility shows in Obama's polling, which triggers his divisive rhetoric in the first place.
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Yes, isn't it odd that Obama's policies actually cause income inequality to get worse - as we stagnant. It only proves that, as he tries to teach uswhat he knows, he really knows nothing about the subject.
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Tax rate progressivity for the last 34 years - below. (That the executive ever paid less in taxes than his secretary in any real sense is bullsh*t.)
(http://2.bp.blogspot.com/-CaGNyK6-XlA/UqNbWyLjSBI/AAAAAAAABy8/RXjYr6zE1lY/s1600/tax+progressivity.png)
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The case made here is not without eloquence: How do we respond?
The Appalling Stance of Rand Paul
By CHARLES M. BLOW
Published: December 11, 2013 502 Comments
I don’t put much past politicians. I stay prepared for the worst. But occasionally someone says something so insensitive that it catches me flat-footed.
Senator Rand Paul, Republican of Kentucky, said Sunday on Fox News: “I do support unemployment benefits for the 26 weeks that they’re paid for. If you extend it beyond that, you do a disservice to these workers.”
This statement strikes at the heart — were a heart to exist — of the divide between conservatives and liberals about whether the social safety net provides temporary help for those who hit hard times or functions as a kind of glue to keep them stuck there.
Whereas I am sure that some people will abuse any form of help, I’m by no means convinced that this is the exclusive domain of the poor and put-upon. Businesses and the wealthy regularly take advantage of subsidies and tax loopholes without blinking an eye. But somehow, when some poor people, or those who unexpectedly fall on hard times, take advantage of benefits for which they are eligible it’s an indictment of the morality and character of the poor as a whole.
The poor are easy to pick on. They are the great boogeymen and women, dragging us down, costing us money, gobbling up resources. That seems to be the conservative sentiment.
We have gone from a war on poverty in this country to a war on the poor, in which poor people are routinely demonized and scapegoated and attacked, and conservatives have led the charge.
They paint the poor as takers, work averse, in need of motivation and incentive.
Well, that is simply not my experience with poverty. I have been poor, and both my parents worked. I grew up among poor people, and almost all of them worked. The problem wasn’t lack of effort, but low pay. Folks simply couldn’t make enough to shake the specter of need.
In fact, the poor folks I knew growing up were some of the hardest working people I have ever known — rising before dawn to pack lunches and sip coffee, trying to get the mind right for a day of toil and sweat that breaks the body but not the spirit.
They were people who wanted what most folks want — to earn an honest wage for an honest day’s work; to live a happy, meaningful life that leaves a mark on the world when they are gone from it; to raise bright, healthy children who go further in life than they did; to be surrounded by family and friends and neighbors — a village — where people support and cared for one another.
That is why I have such a hard time with the conservative argument that helping those in need diminishes their desire to do for themselves, that it suckles them to passivity on a government teat. Hogwash.
To buy into this destructive lie about the character of the poor means you’ve either had no experience being poor, or have no capacity to empathize with their plight.
Being poor is a job unto itself. The daily juggle of supplying the most basic needs — food, shelter, medicine — and the stress of knowing that you are always just one twist of fate away from calamity.
James Baldwin put it best: “Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.”
Most people want to work. But sometimes, bad luck comes calling. Sometimes you have a job, but you lose it. Sometimes, no matter how hard you try, a new one proves elusive.
And following the Great Recession, that is a particular problem. Maybe you are older and employers are less willing to take a chance. Maybe your industry is shrinking and becoming more efficient, getting by with fewer employees. Maybe the jobs you can find are farther from your house than you can travel and you can’t afford to move. The problems are plenty.
But what we shouldn’t do is to tell people who had jobs and lost them, people who want work and can’t find it, that to help them does them a “disservice.”
That is the height of arrogance and callousness. And it’s disrespectful.
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"The case made here is not without eloquence: How do we respond?"
In messaging, the more compassionate voice wins, hence Obama elected twice, a Dem Senate, etc. in practice, the Charles Blow view loses; it makes things worse for the people they purport to help. Easily proven in the data, see yesterday's posts.
So Rand Paul is right on policy and wrong on messaging. Unemployment compensation prolongs unemployment. It is a provable fact. Food stamps create dependence. Minimum wage hurts low end employment. SSI requires a contract with poverty for people on the edge of the workforce. Pointing out any of these truths inspires columns by well-publicized, liberal Blow-hards.
No one here, especially not me, has messaging figured out. But the answer has something to do with focusing our time and message on positively painting the picture of a prosperous, opportunity society, how we can do that, and not arguing against the details of social spending programs with leftists. When you suggest cutting food stamps, unemployment, disability you are losing votes. Instead, move prosperity forward and move these programs down in importance.
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"Incomes among the bottom half of earners are not stagnating because of increasing inequality; inequality is increasing because incomes among the bottom half of earners is stagnating. "
http://www.nationalreview.com/article/366599/inequality-does-not-matter-kevin-d-williamson
(read it all)
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"in practice, the Charles Blow view loses"
Remember the movie "Do the right thing" where three black guys are sitting playing cards watching the Korean across the street wondering why they don't have a business like him.
My Indian colleague who came to the US with nothing pointing out how Indians have achieved in a single generation what Blacks have not been able to do.
My Filipino colleague who arrived to the US with exactly 50 cents in his pocket which was just enough to call for a ride to the army office to volunteer to serve. He is now a successful specialist in medicine.
And don't waste my time getting us white people keeping everyone else down schpiel (sp?). The Indians were not loved. I have heard many stories of discrimination from them.
Yet they persevered. Kept their heads down and their focus on their dreams.
Ever see the movie "slum dog millionaire". NOW THOSE people are disadvantaged. They don't live in the United States.
I am tired of Blow and those like him who think they think.
As far as I am concerned he is callous and disrespectful of those in this country who are carrying the weight for the rest.
So he can just shut up and leave the rest of us alone.
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Good to see the WSJ pick up on our discussion here. Presidential sidenote, the author writingi with impressive economic clarity is a Chris Christie adviser.
http://online.wsj.com/news/articles/SB10001424052702303773704579269990020773098?mod=WSJ_Opinion_LEADTop
Obama's Misguided Obsession With Inequality
He uses statistics that ignore taxes and transfer payments. Faster growth is what the poor really need.
By Robert E. Grady
Dec. 22, 2013 6:07 p.m. ET
In his widely noted speech, President Obama said that "a dangerous and growing inequality and lack of upward mobility" is "the defining challenge of our time." This belief makes Mr. Obama unique: Unlike the other presidents since World War II, he places inequality above economic growth as the organizing principle of U.S. economic policy. The president's Dec. 4 speech, at an event hosted by the Center for American Progress, also stressed that increasing inequality is a "decades-long trend"—which carries with it the strong implication that the country needs to reverse the direction it has taken for the last three decades. But like so many of his other pronouncements, the assumptions behind his defining challenge are misleading.
Enlarge Image
President Obama at an event hosted by the Center for American Progress, Dec. 4. Reuters
Virtually all of the data cited by the left to decry the supposed explosion of income inequality, as Lee Ohanian and Kip Hagopian point out in their seminal paper, "The Mismeasure of Inequality" (Policy Review, 2011), use a Census Bureau definition of "money income" that excludes taxes, transfer payments like Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and even costly employee benefits such as health insurance.
Thus the data that is conventionally used to calculate the so-called Gini coefficient—the most commonly used measure of income inequality—ignore America's highly progressive income tax system and the panoply of benefits and transfer payments. According to Messrs. Ohanian and Hagopian, once the effect of taxes and transfer payments is taken into account, "inequality actually declined 1.8% during the 16-year period between 1993 and 2009, when the Gini coefficient dropped from .395 to .388."
In his speech, Mr. Obama cited a recent study from economists at Columbia University that found that already enacted benefits and tax programs have reduced America's effective poverty rate by 40% since 1967—to 16% from 26%. But he ignores all this when he claims that inequality is increasing.
The Columbia study shows that Messrs. Ohanian and Hagopian's research is hardly an outlier. The Congressional Budget Office released a study that came to a similar conclusion in October 2011. The CBO study picked an artificial starting point of 1979, amid a crushing period of stagflation. Yet it still showed that family income, including benefits, on average experienced a 62% gain above inflation from 1979 to 2007. It also showed that all five quintiles of the income distribution spectrum experienced real gains in family income.
The CBO study contradicts Mr. Obama's claims in the 2008 presidential campaign and early in his first term that the middle class was "falling behind." The real concern is that some people were getting too far ahead.
With respect to upward mobility, longitudinal studies conducted by the U.S. Treasury have found that there was "considerable income mobility" in the decades 1987-1996 and 1996-2005. For example, roughly half of those in the bottom income quintile in 1996 had moved to a higher quintile by 2005. The "median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups" in that decade, while the real incomes of two-thirds of all taxpayers experienced an increase.
Here is the bottom line: In periods of high economic growth, such as the 1980s and 1990s, the vast majority of Americans gain, and have the opportunity to gain. In periods of slow growth, such as the past four and a half years since the recession officially ended, poor people and the middle class are hurt the most, and opportunity is curbed.
Consider the Census Bureau data, which measure only money income. The data show that median family income adjusted for inflation has not been on a steady or stagnating path since the 1970s. It fell, in real terms, by 5.7% from 1974-1982, when slow growth and high inflation ravaged the average family. Tellingly, in this period, real income fell for the bottom four quintiles, but held steady for the top 20%.
From 1983 to 2007, however, median family income grew substantially—by 21.6% above inflation—and real income grew for all five quintiles. Then, beginning in 2008, real income plunged again, both for the median family and for all quintiles.
The point is this: If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth—not income inequality or the redistribution of wealth—is the defining challenge of our time.
Regarding growth, Mr. Obama claimed in his speech that we should use some money "to create good jobs rebuilding our roads and our bridges and our airports, and all the infrastructure our businesses need." Yet a recent analysis by BCA Research shows a sharp drop in real spending by the government on nondefense infrastructure since the president took office. When a Democratic Congress passed the president's massive $800 billion stimulus bill, seven-eighths of the total went to transfer payments like Medicaid, food stamps and sending a check to millions of Americans who do not pay income taxes.
The president claims to be concerned about spurring private investment. But investors at home and abroad can readily see that his steadfast refusal to reform the country's entitlement programs threatens spending on physical infrastructure, education, university research and other items that will contribute to the future productivity of the United States. That same unrestrained entitlement growth, and the debt that comes with it, will ultimately compromise the value of dollar-denominated assets. Public companies have trillions of dollars of cash to invest sitting on their balance sheets, but the Obama economy's growth record is weak, and insufficient to attract capital investment.
Straining credulity, Mr. Obama also pointed in his income inequality speech to the Affordable Care Act as one of his initiatives to improve the economy, despite clear evidence that the law's employer mandate is discouraging full-time employment. For most of this year, the overwhelming majority of jobs added to the U.S. economy have been part-time, not full-time. Gallup's payroll-to-population ratio, the proportion of the American population working full time, has dropped almost two full percentage points in the last year, to 43.8%.
Mr. Obama said in his speech that "making sure our economy works for every working American" is what "drives everything I do in this office." Accomplishing this worthy goal requires growth, not redistribution.
Mr. Grady, a managing director at the private-equity firm Cheyenne Capital Fund, is the chief economic adviser to New Jersey Gov. Chris Christie and chairman of the New Jersey State Investment Council.
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Prospective trials of and not only retrospective collection of after the fact "big Data" will prove the Columbia know it all's wrong.
**** The common conclusion from such trials is that the poor’s own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by “Big Push” economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefits—like irrigation, roads and hospitals—that spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PAL’s trials show not only that the poor’s decisions are important but that they are sometimes bad****
Another article from the Economist:
Random harvest
Once treated with scorn, randomised control trials are coming of age
Dec 14th 2013 | From the print edition
IT ALL began with a white envelope. Inside, a letter from the provost of the Massachusetts Institute of Technology offered three young economists at MIT $100,000 to spend as they wanted (those were the days). Two of them, Esther Duflo and Abhijit Banerjee, used the money to set up an organisation to run “randomised control trials” (RCTs), an experimental technique a bit like drugs trials, but for economics. To test if, say, boosting teachers’ pay improved educational outcomes, an RCT would take a collection of comparable schools, randomly assign higher wages to some teachers but not others, and see what happens. The organisation, called J-PAL (to give it its full title, the Abdul Latif Jameel Poverty Action Lab), has just celebrated its tenth anniversary. Its methods have transformed development economics.
When J-PAL started in 2003, RCTs were regarded as wacky. Critics said that doing a trial was like putting people in a cage and experimenting on them. They pointed out that you cannot conduct randomised trials for big macroeconomic questions (“What happens if we devalue the currency by 50%?”) because there can be no control group. They conceded RCTs might generate useful nuggets of evidence (raising teachers’ wages in India, for example, did surprisingly little to improve learning). But they argued that evidence from such trials would always remain small-scale, tied to a specific context and not be useful beyond it.
Massachusetts Institute of Technology
Organisation for Economic Cooperation and Development
Ten years on, few of those criticisms have stood up to scrutiny. RCTs have entered the mainstream. J-PAL has conducted 440 of them (it started with five). The World Bank runs RCTs. So do regional bodies like the Inter-American Development Bank. Even governments deploy them: Indonesia used one to test whether identity cards would improve the delivery of subsidised rice to the poor, the largest anti-poverty programme in the country (they did). Techniques for designing and doing trials have improved, with more accurate measurements and more reliable ways of ensuring that samples are random and not merely arbitrary. Trials are bigger. A recent one took place throughout the Indian state of Andhra Pradesh, which has a larger population than Germany. Trials are now investigating questions previously thought off-limits to RCTs, such as labour-market policies or policing. J-PAL did a trial in half the cities in France to determine whether job-training encouraged employment growth overall or just boosted the prospects of trainees at the expense of the untrained. (Answer: before 2007, it helped everyone; afterwards, it redistributed jobs rather than creating them.)
As the number and scope of trials have grown, the accumulation of detail has started to generate broader insights. Take education. J-PAL ran trials on many questions, from the effect of remedial classes in India and Ghana (enormous) to what happens if you double the number of teachers in Kenya (not much). One conclusion kept cropping up: the biggest improvements to educational outcomes occur when you teach children things they are capable of learning. That sounds like a statement of the obvious. But it is quite different from the view of (say) the OECD, a club mainly of rich countries, which runs influential studies on mathematics and literacy among its members. The OECD thinks the quality of teachers matters most. J-PAL’s finding also goes against the grain of what many parents believe: that the focus should be on the quality of the curriculum.
In other areas, RCTs have revealed as much about what is not known as what is known. Microfinance, for example, does not turn the poor into entrepreneurs, as was hoped, but does make them better off: many use the tiny loans to buy television sets. It is not clear why. Poor people also buy too little preventive health care for themselves, even though the benefits are huge. RCTs show that if you charge a pittance for simple products such as bednets treated to combat malaria or water purification tablets, people do not buy them; the products have to be free.
Development economics on trial
The common conclusion from such trials is that the poor’s own decisions matter much more than was once thought. Even the poorest of the poor have tiny amounts of discretionary cash and their decisions about what to spend it on (bednets, for example) make a huge difference to development. This view of the poor is at odds with the one espoused by “Big Push” economists, such as Jeffrey Sachs of Columbia University, who argue that people are stuck in poverty, can do little for themselves and that development should therefore consist of providing the poor with benefits—like irrigation, roads and hospitals—that spring the poverty trap. But it is also at odds with critics of Big Push thinking. J-PAL’s trials show not only that the poor’s decisions are important but that they are sometimes bad (for example, their underinvestment in health). Critics of the Big Push, such as William Easterly of New York University, say the best way to help the poor is to stand back and stop messing up their lives. In contrast, J-PAL’s trials imply that there is a role for outsiders to improve the decision-making of the poor by, say, improving information or incentives.
Over the past ten years, randomised trials have changed hugely. They began as ways to provide hard evidence about what was actually happening. Now they have become techniques for testing ideas that cannot be investigated in any other way. (Are teachers or trained volunteers better at providing simple remedial lessons? Do a trial.) Over the next ten years they will change again. They are likely to get more ambitious still, use “big data”, engage even more with governments and probably measure things that cannot now be tested (RCTs are already measuring cortisol levels as a way of judging how policies affect people’s happiness). Who knows, their proponents might even find a way to apply them to the sweeping assertions of macroeconomists.
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Very interesting. May I ask you to please post it on the Economics thread on the SCH forum as well?
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Important and thoughtful piece IMHO by Kevin Williamson at National Review:
Government Isn’t Santa
Capitalism is the precondition of generosity.
By Kevin D. Williamson December 24, 2013 4:00 AM
http://www.nationalreview.com/article/367018/government-isnt-santa-kevin-d-williamson
(http://c5.nrostatic.com/sites/default/files/uploaded/pic_giant_122413_SM_Government-Isnt-Santa-Grinch.jpg)
There were three wise men, bearing gifts: gold, frankincense, and myrrh. Much has been written about the mystical connotations of those gifts, but it is rarely, if ever, asked: Where did they get them?
Presumably, Balthazar, Melchior, and Caspar were not engaged in gold mining, frankincense farming, or myrrh cultivation. They had other things to do, other stars to follow. For Christians, and for men of goodwill categorically, this is an important question: Feed my sheep, saith the Lord — okay: Feed ’em what? Some of the Apostles were said to have the gift of healing through the laying on of hands; those without such gifts still have an obligation to heal the sick (if the ACLU will allow it), which means building hospitals and clinics, equipping doctors and nurses, etc. With what?
If ye had but faith in the measure of a mustard seed . . . and if the mustard-seed approach does not work, and the mountains we command to be uprooted remain stubbornly in place, then we are back to the old-fashioned problems of human existence: scarcity and production. That is what is so maddening about Pope Francis’s recent apostolic exhortation — which is, as much as my fellow Catholics try to explain it away, a problematic document in many ways. The pope’s argument, fundamentally, is that we can have capitalism on the condition that we feed the poor. This is exactly backward: We can feed the poor if we have capitalism. To give away wealth presumes the existence of that wealth, whether it is an annual tithe or Jesus’ more radical stance of giving away all that one owns. Giving away all that you own does not do the poor an iota of good if you don’t have anything. You can’t spread the wealth without wealth.
Conservatives sometimes protest that the Left presents government as though it were Santa Claus, but Santa Claus, bless him, is a producer. He has a factory up there at the North Pole, full of highly skilled (and possibly undercompensated) labor. He has logistics problems — serious ones. He has production deadlines. The entire point of the Santa Claus myth — at least the animated Christmas-special God Bless America version of that myth — is that those toys aren’t going to make themselves, and they aren’t going to deliver themselves. Government cannot do the work of a captain of industry such as Santa Claus, because government creates nothing. More to the point, government cannot satisfy Jesus’ command that we feed the poor — it produces no food. It has no wealth of its own.
Government isn’t Santa. It’s the Grinch.
Think about it: The redistributionist impulse is driven by envy and bitterness. It is an economic position held, not accidentally, most strongly by people who cringe at the sight of a manger scene — by people who resent and suspect the very word “Christmas.” The redistributors are the people culturally inclined to abolishing Christmas from the public sphere, who will spend the solstice wailing in angst if a public-school choir should so much as hum “Away in a Manger,” never mind singing the verboten words “Little Lord Jesus.” And, in the Grinchiest fashion, they want to take your stuff.
Does anybody really need that many Christmas presents? Is it not the case that, at a certain point, you have enough in your stocking? And who among them has the honesty of Hillary Clinton, who once proclaims that it’s necessary to take things away from us in order to achieve her vision of a better world. If you strap reindeer antlers to your dog while sharing those sentiments, you’re a Seussian villain. Strap donkey ears to yourself while endorsing the same view and you’re the president of these United States.
There is little, if any, virtue in giving gifts to the people we love. Giving gifts to those we love is like giving gifts to ourselves. There is still less virtue in taking what’s under somebody else’s Christmas tree and distributing it to your friends and allies while congratulating yourself on your compassion. To do so is unseemly. Pope Francis is quite right to argue that economic growth alone does not ensure the humane treatment of the poor and the vulnerable — where he is mistaken is that he assumes that there is another side in that argument. Nowhere in the classical liberal tradition, and certainly not in the Anglo-American liberal tradition, has the idea taken root that capitalism is a substitute for generosity. Capitalism is the precondition of generosity. If you want to feed the Lord’s sheep, you must begin by planting the fields.
— Kevin D. Williamson is roving correspondent for National Review.
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is there someone here who can take on for us reporting every month the unemployment rate INCLUDING those who have given up and left the economy altogether? Currently it is somewhere in the upper 10s if I am not mistaken.
I was hoping Brain Wesbury or Scott Grannis would do it, but they are too busy being bullish...
In October, there were almost 5.7 million "missing workers" -- people who had dropped out of the labor force but, under trends prevailing before the Great Recession, would have had jobs or been looking for work. Counting them would have raised October's unemployment rate to about 10 percent, instead of the reported 7 percent (the Economic Policy Institute).
http://www.realclearpolitics.com/articles/2013/12/27/stats_of_the_year_2013_121066.html
http://www.epi.org/publication/missing-workers/
In a complex economy, conventional measures sometimes fall short.
In today’s labor market, the unemployment rate drastically understates the weakness of job opportunities. This is due to the existence of a large pool of “missing workers”—potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who would be either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted as unemployed if they are actively seeking work, these “missing workers” are not reflected in the unemployment rate.
As part of its ongoing effort to create the metrics needed to assess how well the economy is working for America’s broad middle class, EPI is introducing its “missing worker” estimates, which will be updated on this page on the first Friday of every month immediately after the Bureau of Labor Statistics releases its jobs numbers. The “missing worker” estimates provide policymakers with a key gauge of the health of the labor market.
Current “missing worker” estimates at a glance
Updated December 06, 2013, based on most current data available
Total missing workers, October 2013: 5,660,000
Unemployment rate if missing workers were looking for work: 10.3%
Official unemployment rate: 7.0%
http://www.epi.org/publication/missing-workers/#chart-total
http://www.epi.org/publication/missing-workers/#chart-unemployment-rate
http://www.epi.org/publication/missing-workers/#chart-age-gender
http://www.epi.org/publication/missing-workers/#methodology
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Excellent Doug, thank you very much.
Some interesting charts at http://blog.heritage.org/2013/12/27/money-pictures-top-5-charts-2013/
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About Those Income Inequality Statistics
An answer to Paul Krugman.
By Bret Stephens
Jan. 3, 2014 3:15 p.m. ET
Let me do something New York Times NYT -0.13% columnist Paul Krugman isn't exactly famous for doing, at least not graciously: acknowledge a mistake.
In my Dec. 31 column on income inequality, I used a data set from the U.S. Census Bureau to make the case that incomes in the U.S. have been growing across the board, even if the incomes of the wealthy have grown faster than those of others further down the income scale. But I wrote those lines looking at a set of numbers that had not been adjusted for inflation.
Professor Krugman, in a post on his New York Times blog, takes me to task for this. Had I done so looking at the inflation-adjusted table, it would have shown the incomes of the bottom 20% essentially stagnating since 1979 (and long before then, too), though it also would have shown incomes for the top 20% rising far less dramatically.
That was an error, roughly of the kind the Nobel Laureate economist made last August when he confused an x for a 1/x. As is his charming wont, Mr. Krugman accuses me not of making an honest mistake, but of "pulling a fast one."
My mistake is all the more unfortunate because the basic point I was making is right: Americans are getting richer across the entire income spectrum, even if they are getting richer at very different rates. That much is confirmed by data from the Congressional Budget Office. The CBO finds that between 1979 and 2007 income for poor households grew by 18%, for the middle classes by nearly 40%, and for the top 81-99% by 65%. It's the top 1% who have made out very handsomely, with a jump of 275% over nearly three decades.
The difference between the Census Bureau and CBO data comes down to the complicated (and ultimately subjective) way in which "income" is defined. The Census Bureau data relies on a definition of income that is pre-tax but post-transfer cash income. But it also excludes the non-cash benefits that go to many of the poor, such as food stamps, Medicaid, CHIP (children's Medicaid) and housing subsidies.
By contrast, the CBO numbers measure after-tax, after-transfer income. It also includes non-cash transfers. Those benefits may not be fungible, but they do have value. And they vindicate my core point: "The richer have outpaced the poorer in growing their incomes, just as runners will outpace joggers who will, in turn, outpace walkers." What mattered, I said, was that "the walking man walks."
My column also noted that President Obama erred when he said the top 10% take half of aggregate income; in fact, it's the top 20% who take half the income, according to Census Bureau data. Mr. Krugman takes issue with this, too, saying the Census Bureau figures are pretty much worthless when it comes to quantifying the aggregate incomes of the very rich. Much better, he says, is data from a controversial study by two left-wing French economists, Emmanuel Saez and Thomas Piketty, which is in line with President Obama's contention.
Talk about a fast one. As Greg Mankiw, chairman of the Harvard Economics department, notes, Saez-Piketty has its own set of very large problems: "The data are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance."
Ultimately, debates about income inequality are never going to be settled because both "income" and "inequality" are very hard to measure. Is the best measure of inequality wage inequality, income inequality, or consumption inequality? If a poor family today can now afford a car, an air conditioner, a computer and other goods unaffordable or unavailable to the poor of 35 years ago, can they really be said to have stagnated economically? How do changes in the tax code affect the ways in which income can be reported, sheltered and measured? What is the true money value of health insurance?
And so on and on. The argument I made in my column is that inequality should only matter to Americans if, Russia-like, the rich are getting richer at the expense of the poor. Neither the Census Bureau nor the CBO figures show that.
None of this is to excuse the fact that I goofed in my use of data. My apologies. As for Mr. Krugman, he should bear in mind something the public editor of the New York Times once said about him: "Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion to please his acolytes but leaves him open to substantive assaults."
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I am a bit busy right now, so I thank Sen. Ted Cruz for expressing my exact reaction to the President's new political economic proposals.
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http://washingtonexaminer.com/ted-cruz-blames-economic-inequality-on-president-obama/article/2541934
Sen. Ted Cruz, R-Texas, mocked President Obama's new "Promise Zones" initiative on Thursday...
"It's altogether fitting that President Obama is today talking about income inequality, because income inequality has increased dramatically as a direct result of his economic policies," he said.
Cruz criticized Obama for proposing more government spending and debt without addressing taxes and regulations that were choking job growth, suggesting that he was running out of new ideas to stimulate the economy.
"All of America needs to be a real 'Promise Zone' — with reduced barriers to small businesses creating private-sector jobs — and we should start by repealing every word of Obamacare, building the Keystone pipeline, abolishing the IRS and rolling back abusive regulations,” Cruz said.
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WSJ
By
Ari Fleischer
connect
Jan. 12, 2014 6:07 p.m. ET
If President Obama wants to reduce income inequality, he should focus less on redistributing income and more on fighting a major cause of modern poverty: the breakdown of the family. A man mostly raised by a single mother and his grandparents who defied the odds to become president of the United States is just the person to take up the cause.
"Marriage inequality" should be at the center of any discussion of why some Americans prosper and others don't. According to Census Bureau information analyzed by the Beverly LaHaye Institute, among families headed by two married parents in 2012, just 7.5% lived in poverty. By contrast, when families are headed by a single mother the poverty level jumps to 33.9%.
And the number of children raised in female-headed families is growing throughout America. A 2012 study by the Heritage Foundation found that 28.6% of children born to a white mother were out of wedlock. For Hispanics, the figure was 52.5% and for African-Americans 72.3%. In 1964, when the war on poverty began, almost everyone was born in a family with two married parents: only 7% were not.
Attitudes toward marriage and having children have changed in America over the past 50 years, and low-income children and their mothers are the ones who are paying the price. The statistics make clear what common sense tells us: Children who grow up in a home with married parents have an easier time becoming educated, wealthy and successful than children reared by one parent. As the Heritage study states: "The U.S. is steadily separating into a two-caste system with marriage and education as the dividing line. In the high-income third of the population, children are raised by married parents with a college education; in the bottom-income third, children are raised by single parents with a high-school diploma or less."
One of the differences between the haves and the have-nots is that the haves tend to marry and give birth, in that order. The have-nots tend to have babies and remain unmarried. Marriage makes a difference. Heritage reports that among white married couples, the poverty rate in 2009 was just 3.2%; for white nonmarried families, the rate was 22%. Among black married couples, the poverty rate was only 7%, but the rate for non-married black families was 35.6%.
Marriage inequality is a substantial reason why income inequality exists. For children, the problem begins the day they are born, and no government can redistribute enough money to fix it. If redistributing money could solve the problem, the $20.7 trillion in 2011 dollars the government has spent on welfare programs since 1964—when President Johnson declared the "war on poverty"—would have eliminated income inequality a long time ago.
The matter is influenced strongly by decisions and values. The majority of women who have children outside of marriage today are adult women in their 20s. (Teenagers under 18 represent less than 8% of out-of-wedlock births.)
Rather than focusing on initiatives that might address this issue, President Obama, as well as Massachusetts Sen. Elizabeth Warren and New York City's new mayor, Bill de Blasio, believe that the income gap can be closed by increasing taxes on the better-off and transferring the money to the poor.
Good luck with that. The tax code is already extremely progressive, as a December study by the Congressional Budget Office makes clear, yet poverty remains a significant problem. According to CBO, the top 40% of wage earners, those who make more than $51,100 a year, paid 86.4% of all federal taxes in 2010, the most recent data available. The bottom 40% of earners paid just 4.2% of all taxes. The top 40% paid virtually all of the income tax collected, while the bottom 40% paid a negative 9.1% of all income taxes. Paying "negative" taxes is possible because of the earned-income tax credit and other public-assistance measures that give the bottom 40% refunds for taxes they didn't pay.
Given how deep the problem of poverty is, taking even more money from one citizen and handing it to another will only diminish one while doing very little to help the other. A better and more compassionate policy to fight income inequality would be helping the poor realize that the most important decision they can make is to stay in school, get married and have children—in that order.
Mr. Fleischer, a former press secretary for President George W. Bush, is president of Ari Fleischer Communications.
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It's not about helping the poor. It's about gathering permanent underclass voting blocs.
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"Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor."
http://econlog.econlib.org/archives/2014/01/minimum_wage_no.html
Economists Joseph J. Sabia (San Diego State) and Richard V. Burkhauser (Cornell) examined the effects of state minimum wage increases between 2003 and 2007 and reported that they found no evidence the increases lowered state poverty rates.
Further, they calculated the effects of a proposed increase in the federal minimum wage to $9.50 on workers then earning $5.70 (or 15 cents less than the minimum in March 2008) to $9.49. They found that if the federal minimum wage were increased to $9.50 per hour:
. Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.
. A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.
. Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.
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No half measures. 100 dollar an hour minimum wage!
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No half measures. 100 dollar an hour minimum wage!
Why screw up only the most crucial markets like labor, healthcare, food, energy, transportation. Let's have a really high federal minimum price on everything - and see if that makes us richer!
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http://www.nber.org/papers/w18681 Neumark (University of California at Irvine), Wascher (Federal Reserve Board)
We conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.
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Regarding the minimum wage, here is some data for Western Europe:
There are nine countries (in Western Europe) with a minimum wage (Belgium, Netherlands, Britain, Ireland, France, Spain, Portugal, Greece, Luxembourg). Their unemployment rates range from 5.9% in Luxembourg to 27.6% in Greece.
The median country is France with 11.1% unemployment.
There are nine countries with no minimum wage (Iceland, Norway, Sweden, Finland, Denmark, Austria, Germany, Italy, Switzerland.) Five of the nine have a lower unemployment rate than Luxembourg, the best of the other group.
The median country is Iceland, with a 5.5% unemployment rate.
Still want to raise our minimum wage to $10? The biggest country in Europe is Germany. No minimum wage and 5.2% unemployment. Germany used to have really high unemployment. Then they did labor reforms to allow more low wage jobs, combined with subsidies for low wage workers. Now they don’t have high unemployment.
Still want to raise our minimum wage to $10?
http://www.themoneyillusion.com/?p=24759&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Themoneyillusion+%28TheMoneyIllusion%29
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If you have an increase in unemployment, just tweak the labor participation rate.
Problem solved.
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http://hotair.com/archives/2014/01/22/usda-record-20-percent-of-american-households-used-food-stamps-in-2013/
USDA: Record 20 percent of American households used food stamps in 2013
posted at 2:01 pm on January 22, 2014 by Erika Johnsen
The Obama administration has an unfortunately deliberate penchant for talking out of both sides of its mouth when it comes to touting the slow-going economic “recovery” through which they have been leading the country for the past five years; on the one hand, they insist, the private sector is creating jobs, we’re making steady economic gains, and things are definitely improving. On the other, however, there’s “still more work to be done,” and despite the manifold economic improvements, they assert that the further expansion of entitlement programs like unemployment benefits and food stamps are an absolute necessity to keeping their “recovery” going — and on the latter especially, the Obama administration has been particularly aggressive. CNS News reports that, even in the first year of President Obama’s second term, the federal food-stamp program continued to grow, with a record 20 percent of American households and a record number of individuals participated in the Supplemental Nutrition Assistance Program — and that the program itself reached its record-high budget.
The USDA says that there were 23,052,388 households on food stamps in the average month of fiscal 2013, an increase of 722,675 from fiscal year 2012, when there were 22,329,713 households on food stamps in the average month. …
In 2013, the monthly average for individuals on food stamps hit an all-time-high of 47,636,084, according to the USDA, an increase of 1,027,012 over the 46,609,072 individuals who were participating in the program in 2012. …
For fiscal year 2013, the SNAP program cost $79,641,880,000, which is a 164% increase over the past decade. When adjusted for inflation, the cost of the SNAP program was $30,153,090,000 in fiscal year 2003.
(http://cnsnews.com/sites/default/files/imagecache/large/images/Individual%20Food%20Stamps-CHART-2.jpg)
Why, exactly, is it a victory of our economic “recovery” to vastly grow a program designed to temporarily help Americans in need of economic assistance, and why exactly is the program failing to add all the “economic stimulus” the administration promised it would? The version of the farm bill on which lawmakers are currently conferring has sought out a compromise-cut to the almost $80 billion annual program in the form of $9 billion over ten years, but no doubt Democrats will object to even that relatively small budgetary reduction by clobbering Republicans over the head with “draconian”-style demagoguery — rather than asking themselves why it is the continual expansion of the program seems to be so necessary in the midst of the Obama “recovery.”
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http://washingtonexaminer.com/wall-street-advisor-actual-unemployment-is-37.2-misery-index-worst-in-40-years/article/2542604
Wall Street adviser: Actual unemployment is 37.2%, 'misery index' worst in 40 years
I'm sure Wesbury would say this means it's a great time to invest!
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The Inequality Boogeyman
Posted By Thomas Sowell On January 29, 2014
During a recent lunch in a restaurant, someone complimented my wife on the perfume she was wearing. But I was wholly unaware that she was wearing perfume, even though we had been in a car together for about half an hour, driving to the restaurant.
My sense of smell is very poor. But there is one thing I can smell far better than most people — gas escaping. During my years of living on the Stanford University campus, and walking back and forth to work at my office, I more than once passed a faculty house and smelled gas escaping. When there was nobody home, I would leave a note, warning them.
When walking past the same house again a few days later, I could see where the utility company had been digging in the yard — and, after that, there was no more smell of gas escaping. But apparently the people who lived in these homes had not smelled anything.
These little episodes have much wider implications. Most of us are much better at some things than at others, and what we are good at can vary enormously from one person to another. Despite the preoccupation — if not obsession — of intellectuals with equality, we are all very unequal in what we do well and what we do badly.
It may not be innate, like a sense of smell, but differences in capabilities are inescapable, and they make a big difference in what and how much we can contribute to each other’s economic and other well-being. If we all had the same capabilities and the same limitations, one individual’s limitations would be the same as the limitations of the entire human species.
We are lucky that we are so different, so that the capabilities of many other people can cover our limitations.
One of the problems with so many discussions of income and wealth is that the intelligentsia are so obsessed with the money that people receive that they give little or no attention to what causes money to be paid to them, in the first place.
The money itself is not wealth. Otherwise the government could make us all rich just by printing more of it. From the standpoint of a society as a whole, money is just an artificial device to give us incentives to produce real things — goods and services.
Those goods and services are the real “wealth of nations,” as Adam Smith titled his treatise on economics in the 18th century.
Yet when the intelligentsia discuss such things as the historic fortunes of people like John D.Rockefeller, they usually pay little — if any — attention to what it was that caused so many millions of people to voluntarily turn their individually modest sums of money over to Rockefeller, adding up to his vast fortune.
What Rockefeller did first to earn their money was find ways to bring down the cost of producing and distributing kerosene to a fraction of what it had been before his innovations. This profoundly changed the lives of millions of working people.
Before Rockefeller came along in the 19th century, the ancient saying, “The night cometh when no man can work” still applied. There were not yet electric lights, and burning kerosene for hours every night was not something that ordinary working people could afford. For many millions of people, there was little to do after dark, except go to bed.
Too many discussions of large fortunes attribute them to “greed” — as if wanting a lot of money is enough to cause other people to hand it over to you. It is a childish idea, when you stop and think about it — but who stops and thinks these days?
The transfer of money was a zero-sum process. What increased the wealth of society was Rockefeller’s cheap kerosene that added hundreds of hours of light to people’s lives annually.
Edison, Ford, the Wright brothers, and innumerable others also created unprecedented expansions of the lives of ordinary people. The individual fortunes represented a fraction of the wealth created.
Even those of us who create goods and services in more mundane ways receive income that may be very important to us, but it is what we create for others, with our widely varying capabilities, that is the real wealth of nations.
Intellectuals’ obsession with income statistics — calling envy “social justice” — ignores vast differences in productivity that are far more fundamental to everyone’s well-being. Killing the goose that lays the golden egg has ruined many economies.
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"Intellectuals’ obsession with income statistics — calling envy “social justice” — ignores vast differences in productivity that are far more fundamental to everyone’s well-being. Killing the goose that lays the golden egg has ruined many economies."
And last night we just had a President who will force this upon us whether we like it or not.
Someone should tell him, "hey we won" [Congress]. 8-)
Why so many in the media insist he is a "nice" guy I do not know.
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00.03% of the workforce consist of workers who live in a household below the poverty line and work full time earning minimum wage. Raising the minimum wage will worsen the employment situation, especially for the newest workers in the workforce, but is polls well. So Democrats (always) say, let's make raising it further the centerpiece of the political agenda. http://www.huffingtonpost.com/rep-debbie-wasserman-schultz/federal-minimum-wage-increase_b_4689747.html Meanwhile we have the highest corporate taxes on the planet, the worst business regulatory climate in our nation's history, and a workforce participation rate in free fall.
http://thefederalist.com/2014/01/28/11-facts-about-the-minimum-wage-that-president-obama-forgot-to-mention-during-the-state-of-the-union/
11 Facts About The Minimum Wage That President Obama Forgot To Mention
1) Only 1 Percent Of The U.S. Labor Force Earns The Minimum Wage
2) Teenagers Comprise The Single Largest Age Group Of Minimum Wage Workers
3) Most Minimum Wage Workers Are Under The Age Of 25
4) A Majority Of Those Who Earn The Minimum Wage Work In Food Preparation Or Sales
5) Less Than 5 Percent Of People Who Earn The Minimum Wage Work In Construction Or Manufacturing
6) A Majority Of Them Also Worked Less Than 30 Hours Per Week
7) Less Than One-Third Worked Full-Time
8.) A Full-Time Minimum Wage Worker In 2014 Will Make 24 Percent More Than The Federal Poverty Limit
9) One-Third Of Minimum Wage Workers Either Dropped Out Of Or Never Attended High School
10) There Are Nearly Six Times More Minimum Wage Workers Today Than In 2007
11) A Change In The Minimum Wage Often Triggers Union Wage Hikes And Benefit Renegotiations
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obs.rc.fas.harvard.edu/chetty/mobility_trends.pdf
NBER WORKING PAPER SERIES
IS THE UNITED STATES STILL A LAND OF OPPORTUNITY? RECENT TRENDS
IN INTERGENERATIONAL MOBILITY
Raj Chetty, Bloomberg Professor of Economics at Harvard University
Nathaniel Hendren, Harvard University economist
Patrick Kline, Professor of Economics, UC Berkeley
Emmanuel Saez, Professor of Economics at the University of California, Berkeley
Nicholas Turner, Economist, Office of Tax Analysis, U.S. Department of the Treasury
http://www.nber.org/papers/w19844
NATIONAL BUREAU OF ECONOMIC RESEARCH
Cambridge, MA
January 2014
"We present new evidence on trends in intergenerational mobility in the U.S. using administrative earnings records. We find that percentile rank-based measures of intergenerational mobility have remained extremely stable for the 1971-1993 birth cohorts....[C]hildren entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s."
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Income inequality, a bogus, manufactured issue, measured by the Gini Coefficient with Census Bureau data, is far worse under Obama and Clinton than under George Bush. Who knew?
http://www.huffingtonpost.com/2012/04/11/income-inequality-obama-bush_n_1419008.html
http://www.huffingtonpost.com/2013/09/01/income-inequality-obama_n_3853183.html
http://www.ijreview.com/2014/01/110968-can-guess-president-worst-record-income-inequality/
(http://d1ovi2g6vebctw.cloudfront.net/wp-content/uploads/2014/01/income-gap-obama.jpg)
(The only income growth under Obama is the Fed inflated stock market, owned disproportionately by rich people.)
http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/01/28/if-we-want-more-income-equality-should-we-return-to-the-economy-of-george-w-bush/
If we want more income equality, we should return to the economy of George W. Bush.
George W. Bush was the most successful of our recent past presidents in achieving very substantial increases in incomes for the poorest quintile (+18.4%).
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http://online.wsj.com/news/articles/SB10001424052702303448204579342422527561620?mod=trending_now_1
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Is U.S. Unemployment Really Much Better Than the Euro Zone’s?
By Ben Leubsdorf
The U.S. labor market looks like it’s recovering faster than its European counterpart, but maybe not as much as it appears, according to a new analysis from the Federal Reserve Bank of New York.
Unemployment in both the euro area and the U.S. peaked around 10% in 2010. Since then, the rate has risen to 12% in Europe but fallen to 6.7% in the U.S., wrote researchers Thomas Klitgaard and Richard Peck on the New York Fed’s Liberty Street Economics blog Wednesday. By that measure, the U.S. looks like it’s doing much better.
But the broader employment-to-population ratio—the share of the working-age, civilian non-institutional population that is employed– showed little change in the U.S. and some decline in Europe over that same period. “This measure of the labor markets does not exhibit any of the gains suggested by the U.S. unemployment rate, with employment only growing in line with the population,” wrote Mr. Klitgaard and Mr. Peck.
The big difference? Labor force participation.
The unemployment rate measures the number of people without jobs as a share of the labor force. But a person has to be actively searching for a job to be counted as unemployed. People who have stopped looking aren’t considered unemployed or part of the labor force, even if they would like a job. As jobless people leave the labor force for whatever reason(such as retirement, going back to school, going on disability or caring for family), fewer people are counted as unemployed.
People have been leaving the workforce in the U.S., but in Europe, the participation rate hasn’t changed much. The rate for European women is actually up about 2%, largely because women over the age of 45 joined the workforce.
“The drop in labor force participation in the United States has accentuated the fall in the U.S. unemployment rate and widened the gap between the unemployment rates of the two economies,” Mr. Klitgaard and Mr. Peck wrote. “If the euro area had seen a drop in the labor force participation rate proportional to the decline experienced by the United States, its unemployment rate would be about 9.5 percent, below where it was at the beginning of the sovereign debt crisis.”
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Marginal tax rates for Heads of Households and spouses with median earnings potential including forgone subsidies.
Note that the beginning of 2007 was when unemployment was at its low point (and when Democrats took control of Congress).
(http://si.wsj.net/public/resources/images/ED-AR823_winter_G_20140207170008.jpg)
Tax something more, work in this case, and you will get less of it.
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3rd post regarding economist Casey Mulligan, someone getting it right. Buy his book:
http://www.amazon.com/The-Redistribution-Recession-Distortions-Contracted/dp/0199942218
The Redistribution Recession: How Labor Market Distortions Contracted the Economy Hardcover
by Casey B. Mulligan
Redistribution, or subsidies and regulations intended to help the poor, unemployed, and financially distressed, have changed in many ways since the onset of the recent financial crisis. The unemployed, for instance, can collect benefits longer and can receive bonuses, health subsidies, and tax deductions, and millions more people have became eligible for food stamps.
Economist Casey B. Mulligan argues that while many of these changes were intended to help people endure economic events and boost the economy, they had the unintended consequence of deepening-if not causing-the recession. By dulling incentives for people to maintain their own living standards, redistribution created employment losses according to age, skill, and family composition. Mulligan explains how elevated tax rates and binding minimum-wage laws reduced labor usage, consumption, and investment, and how they increased labor productivity. He points to entire industries that slashed payrolls while experiencing little or no decline in production or revenue, documenting the disconnect between employment and production that occurred during the recession. The book provides an authoritative, comprehensive economic analysis of the marginal tax rates implicit in public and private sector subsidy programs, and uses quantitative measures of incentives to work and their changes over time since 2007 to illustrate production and employment patterns. It reveals the startling amount of work incentives eroded by the labyrinth of new and existing social safety net program rules, and, using prior results from labor economics and public finance, estimates that the labor market contracted two to three times more than it would have if redistribution policies had remained constant.
In The Redistribution Recession, Casey B. Mulligan offers hard evidence to contradict the notion that work incentives suddenly stop mattering during a recession or when interest rates approach zero, and offers groundbreaking interpretations and precise explanations of the interplay between unemployment and financial markets.
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Doug:
Both of those seem to me of lasting value. May I ask you to post both of them on the Economics thread on SCH forum as well?
Thank you,
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"The category “poorest fifth” may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood."
Most of us think the poor stay poor and inequality is exploding. Wrong. The evidence is that these are times of plenty
The Swedish data impresario Hans Rosling recently asked some British people to estimate the average number of births per woman in Bangladesh and gave them four possible answers. Just 12 per cent got the right answer (2.5), whereas 25 per cent of chimpanzees would have got it right if the answers had been written on four bananas from which they could choose one at random. Remarkably, university-educated Britons did worse, not better, than non-graduates. It is not so much what you don’t know as what you know that isn’t so.
Hold that thought while I introduce you to Tom Perkins, the Silicon Valley venture capitalist and former husband of the crime writer Danielle Steel, who stirred up fury in America when he wrote to The Wall Street Journal last month complaining about a rising tide of hatred against the very rich, and indirectly but crassly comparing it to Kristallnacht. A few days later President Obama used his State of the Union speech to take aim at inequality. In this country, too, inequality is one thing that much rankles with most people, as the 50 per cent tax rate row reveals.
The puzzling thing about this is that by any conceivable measure, absolute poverty has fallen dramatically over the past few decades, so why should it matter if the rich get richer? Today’s British poor spend half as much of their income on food and clothing as in the 1950s, while working many fewer hours, living about eight years longer and having access to phones, cars, medicines and budget airlines that would have amazed even the rich in the 1950s.
Moreover, here’s a question I’m willing to bet that chimpanzees would do better than people at: given that inequality has been rising recently in China, India, America and many other countries, is global inequality rising or falling?
The answer: it’s falling and has been for several decades, however you measure it. The reason is that people in poor countries are getting richer more quickly than people in rich countries are getting better off.
That fall in global inequality has accelerated since the start of the financial crisis. As Africa now experiences record rates of growth, the number of people trying to live on $1.25 a day is plummeting fast. Mr Rosling likes to show two charts in his talks: the graph of global income was once a two-humped camel; now it’s a one-humped dromedary, with the vast majority of the world’s people in the middle.
Here’s another question that I fancy the chimps would beat the people at: did poverty and inequality in Britain increase or decrease as a result of the recession? The answer is that both fell. Inequality has fallen to levels not seen since the mid 1990s, as it usually does during recessions, though it is still higher than it was in the 1970s. Meanwhile the Left’s favourite measure of poverty — those earning less than 60 per cent of the median income — has by definition gone down, because median income has gone down. Redefining poverty in this relative (and very inadequate) way has therefore rather backfired.
If you measure consumption inequality, it is far lower than pre-tax income inequality, because the top 40 per cent of earners pay more in than they get out, while the bottom 60 per cent get more out than they pay in. Indeed, in Britain the top 1 per cent generate about 30 per cent of the total income-tax haul. After such redistribution, the richest fifth of the population has only four times as much money to play with as the poorest fifth.
With big increases in housing benefit and other redistributions, consumption inequality may be as low as it has ever been. Add in the value of pensions (including the state pension), free healthcare, the fall in the price of food and clothing relative to wages, plus the dramatic fall in the cost of much technology and it is clear that for most basic needs, the country has never been less poor or less unequal. A smartphone’s search engine may be about as capable as a plutocrat’s full-time secretary was in 1960.
Imagine being told that one of the people in a meeting is a genuine billionaire (I owe this idea to Professor Don Boudreaux). How would you tell which one? His bodyguards, private jets and grouse moors are outside the room; his shirt and jeans are unlikely to give him away (as they would in 1900); his Rolex could be a cheap imitation; his teeth, girth and height are probably unremarkable (unlike in 1800); even his Diet Coke is the same as everybody else’s. Much more than in the past, most inequality in this country these days — though by no means all — is in luxuries, rather than necessities.
Here’s another question where my money is on the chimps: does income generally grow faster for people in the lowest fifth of the population or people in the highest? It’s the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category “poorest fifth” may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood.
(More at: http://www.thetimes.co.uk/tto/opinion/article3993472.ece)
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Matt Ridley writing in the Times of London, Feb. 6:
[D]oes income generally grow faster for people in the lowest fifth of the population or people in the highest? It's the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category "poorest fifth" may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood.
None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?
The short answer is that surely we always have and always will care more about relative than absolute differences. This is no surprise to evolutionary biologists. The reproductive rewards went not to the peacock with a good enough tail, but to the one with the best tail. A few thousand years ago, the bloke with one more cow than the other bloke got the girl, and it would have cut little ice to try to reassure the loser by pointing out that he had more cows than his grandfather, that they were better cows, or that he had more than enough cows to feed himself anyway. What mattered was that he had fewer cows.
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http://capoliticalnews.com/2014/02/16/taco-bell-to-use-technology-not-workers-for-orders-gets-around-ca-democrats-minimum-wage-fiasco/
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Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers....The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.
http://www.cbo.gov/publication/44995
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(http://www.investors.com/image/WEBa1hrs0210_345.gif.cms)
http://news.investors.com/politics-obamacare/020714-689319-low-wage-workweek-hits-new-low-with-obamacare.htm
Liberal policies are having the opposite effect of their marketed intention.
Asked to comment, frontrunner Hillary Clinton said: "AT THIS POINT WHAT DIFFERENCE DOES IT MAKE?!"
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I put the title of this in US economics. Here is the entirety. Unsurprisingly, these anti-growth policies are not growing us out of these doldrums.
http://www.realclearmarkets.com/articles/2014/03/10/at_this_rate_it_will_take_28_years_to_get_everyone_back_to_work_100944.html
March 10, 2014
At This Rate, It Will Take 28 Years To Get Everyone Back To Work
By Louis Woodhill (Forbes contributor)
From a jobs perspective, the economy treaded water in February. We didn't drown in unemployment, but nor did we manage to swim closer to the prosperity shore. It was a "blah" month, in the midst of the worst economic recovery in American history.
Full-time-equivalent* (FTE) jobs increased by 147,000, thanks mostly to a large decline in the number of part-time workers. This was enough to move the nation 45,000 FTE jobs closer to full employment. While this was better than average for a month in President Obama's so-called "economic recovery" (America is 2.2 million FTE jobs farther away from full employment now than it was in June 2009), it's not great. At this rate, it would take us almost 28 years to get everyone back to work.
It was extremely significant that labor force participation continued to move up during February, after its big surge in January. This confirmed that allowing extended unemployment benefits to expire in late December was the right thing to do.
Progressives predicted that limiting unemployment benefits would cause people to drop out of the labor force, but the exact opposite occurred. It turns out that people respond to incentives. Who knew?
February's employment numbers also lent support to the theory that the Federal Reserve's quantitative easing produces the opposite effect of what the Fed intends and expects. The Fed increased the size of the monetary base by eight times as much in February as it did in January ($102.3 billion vs. $12.7 billion), and the rise in FTE jobs slowed from 678,000 to 147,000.
The financial markets appear to have figured out that quantitative easing has been a bad thing for the economy. The stock market has continued to make new highs in spite of (really, because of) the Fed's determination to "taper."
OK, so as of February 2014, America had 2.0 million fewer FTE jobs than it did in November 2007. Meanwhile, our working age population has grown by 13.9 million. During these 75 months, Labor force participation has plunged by three full percentage points. This amounts to 7.4 million Americans giving up on being self-supporting. What are our two great political parties offering to get our economy moving again?
President Obama delivered his plan, in the form of his FY2015 budget. Here is a quote from Obama's "Budget Message" that summarizes his approach:
"But there is clearly much more we can and should do to invest in areas like infrastructure, innovation, and education that will create jobs, economic growth, and opportunity."
When Obama (or any other progressive) uses the word "we," he is not referring to "We, the People," he is referring to "We the federal government." The essence of the progressive approach is to transfer more and more money to unelected, unaccountable "experts" in the federal bureaucracy. The presumption is that these experts will deploy this capital to produce economic returns superior to those that the private markets could manage if people were allowed to keep and invest their own money.
In short, the Obama approach is, "More Amtracks! More Solyndras!"
As George Gilder explained in his brilliant and important 2013 book, Knowledge and Power, the progressive approach cannot work. Progressive programs take power (money is a form of power) away from the people with the knowledge required to make effective use of it. Governments invariably deploy resources to serve political ends, not the interests of ordinary citizens.
The progressive road leads to Venezuela (which may be why progressives are so sympathetic to socialist dictators).
OK, progressivism won't work. So, what are conservatives offering? Thus far, mostly clueless confusion.
Congressman Dave Camp, the Chairman of the House Ways and Means committee, unveiled his tax reform plan. The idea that our Byzantine tax code could be "simplified" by a plan that runs 979 pages is questionable. However, the Camp plan's fatal flaw is that it is not strongly "pro-growth" (and may not, on balance, be pro-growth at all).
If we look at the Camp plan through the lens of Knowledge and Power, we see that it would do little to help foster the next generation of Apples and Googles. Entrepreneurs need a simple, stable tax code, and one that allows them to reinvest all of their profits in growth. This would provide the fastest route to full employment, because most incremental high-paying jobs come from new companies that are growing fast.
The Camp tax plan looks like the result of a three-year battle among big-company lobbyists, which is basically what it is. It is apparently "dead on arrival," and it should be.
When and if Republicans are ready to stop being "the Stupid Party," they will get behind the FairTax (which is a national sales tax). Because it does not tax savings and investment at all, the FairTax would produce the best alignment of knowledge (which resides in the minds of entrepreneurs scattered throughout the country) and power (capital).
The FairTax (coupled with a stable dollar) would deliver eye-popping rates of real economic growth. This combination would get America to full employment much faster than most people would believe possible.
For their part, FairTax advocates must realize that pro-growth tax reform cannot and should not be "revenue neutral," as scored by the CBO. Their proposed 23% FairTax rate is much too high. On a present value basis, a 15% tax rate would provide the federal government with more than enough revenue for any constitutional purpose.
There were some positive vibes from conservatives this week. In his speech to CPAC, Senator Ted Cruz laid out a ten-point plan for national revival. Most of it was on target, both economically and politically.
Crucially, Cruz devoted one of his ten points to the dollar. He said:
"We need to audit the Federal Reserve. Unaccountable power in Washington, debasing our currency, driving up the cost of food and gas and the basic stuff of life, is hurting Americans who are struggling across this country. I'll tell you what else it's doing, it's fueling the abuse of power of Petro-Tyrants like Putin."
Unfortunately, auditing the Fed is not enough. Under Janet Yellen, the Fed is operating with no rules at all. From a Knowledge and Power perspective, this produces so much "noise" in the communication channel (our system of market prices) that vital economic signals are being distorted and corrupted. This leads to, well, exactly what we have seen for the past 13 years-the slowest real economic growth in American history.
If we are going to have fast economic growth and full employment, we need what Gilder calls "a low entropy channel." This will require that Fed monetary operations be based upon rules. Accordingly, Republican candidates must not only criticize the Federal Reserve, and support "auditing the Fed", but also back Congressman Kevin Brady's "Centennial Monetary Commission Act." America needs fundamental monetary reform, and the Fed is not likely to reform itself.
The one place that Senator Cruz went off the rails of sound economic policy was in his call for "...a strong balanced budget amendment." As George Gilder points out in Knowledge and Power, whether you are a company or a nation, assets matter much more than liabilities.
Ronald Reagan did not pull America out of stagnation and despair in the 1980s by balancing the budget. He did it by getting the economy growing rapidly. This produced a massive increase in the value of the federal government's principle asset-its share of the present value of future GDP. This, in turn, made Reagan's deficits irrelevant. Interest rates fell during Reagan's presidency, despite "record" budget shortfalls.
While calls for a balanced budget amendment might play well in Republican primaries, they will be political poison in general elections. In the general election, candidates calling for a balanced federal budget will be cornered into explaining how they propose to perform surgery (spending cuts) without anesthesia (strong economic growth, which will require cutting taxes).
Surgery without anesthesia has never been popular with patients. Nor would be large cuts in the federal safety net, until fast economic growth is providing most people with the opportunity to earn wage income to replace the withdrawn federal support.
The economy has now been so bad for so long that our elites have accepted quasi-depression as the "new normal." The Democrats are now offering ideas that amount to "economic hospice care."
For example, Democrat Senator Elizabeth Warren has introduced a bill that would bar employers from conducting credit checks on job applicants. All this use of government coercion could possibly accomplish is to reallocate jobs from people with good credit to people with bad credit. And, of course, there is President Obama's strident call for a $10.10/hour minimum wage, which would give some workers a raise, but would cost others their jobs.
Meanwhile, in general, are Republicans continuing to validate their label, "the Stupid Party," by focusing on deficits, rather than upon economic growth.
America is tired of treading water on the jobs front. It needs Republican candidates that will step forward with big, pro-growth ideas. Memo to Republican candidates: read Knowledge and Power. Then come out for a stable dollar, the FairTax, and a return to regulatory sanity.
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*FTE jobs = full-time jobs + 0.5 part-time jobs
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http://online.wsj.com/news/articles/SB10001424052702304360704579419720180610260?mod=WSJ_Opinion_LEADTop&mg=reno64-wsj
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http://www.theblaze.com/stories/2014/03/13/bill-gates-says-neither-people-nor-governments-are-prepared-for-the-huge-changes-coming-to-the-labor-market/
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The point about the number of hours worked being the north star seems sound to me:
============================================
By
Edward P. Lazear
March 16, 2014 6:29 p.m. ET
Most commentators viewed the February jobs report released on March 7 as good news, indicating that the labor market is on a favorable growth path. A more careful reading shows that employment actually fell—as it has in four out of the past six months and in more than one-third of the months during the past two years.
Although it is often overlooked, a key statistic for understanding the labor market is the length of the average workweek. Small changes in the average workweek imply large changes in total hours worked. The average workweek in the U.S. has fallen to 34.2 hours in February from 34.5 hours in September 2013, according to the Bureau of Labor Statistics. That decline, coupled with mediocre job creation, implies that the total hours of employment have decreased over the period.
Job creation rose from an initial 113,000 in January (later revised to 129,000) to 175,000 in February. The January number frightened many, while the February number was cheered—even though it was below the prior 12-month average of 189,000.
The labor market's strength and economic activity are better measured by the number of total hours worked than by the number of people employed. An employer who replaces 100 40-hour-per-week workers with 120 20-hour-per-week workers is contracting, not expanding operations. The same is true at the national level.
The total hours worked per week is obtained by multiplying the reported average workweek hours by the number of workers employed. The decline in the average workweek for all employees on private nonfarm payrolls by 3/10ths of an hour—offset partially by the increase in the number of people working—means that real labor usage on net, taking into account hours worked, fell by the equivalent of 100,000 jobs since September.
Here's a fuller explanation. The job-equivalence number is computed simply by taking the total decline in hours and dividing by the average workweek. For example, if the average worker was employed for 34.4 hours and total hours worked declined by 344 hours, the 344 hours would be the equivalent of losing 10 workers' worth of labor. Thus, although the U.S. economy added about 900,000 jobs since September, the shortened workweek is equivalent to losing about one million jobs during this same period. The difference between the loss of the equivalent of one million jobs and the gain of 900,000 new jobs yields a net effect of the equivalent of 100,000 lost jobs.
The decline of 1/10th of an hour in the average workweek—say, to 34.2 from 34.3, as occurred between January and February—is like losing about 340,000 private nonfarm jobs, which is approximately 80% greater than the average monthly job gain during the past year. The reverse is also true. In months when the average workweek rises, the jobs numbers understate the amount of labor growth. That did occur earlier in the recovery, with a general upward trend in the average workweek between October 2009 and February 2012.
What accounts for the declining average workweek? In some instances—but not this one—a minor drop could be the result of a statistical fluke caused by rounding. Because the Bureau of Labor Statistics only reports hours to the nearest 1/10th, a small movement, say, to 34.449 hours from 34.450 hours, would be reported as a reduction in hours worked to 34.4 from 34.5, vastly overstating the loss in worked time. But the six-month decline in the workweek, to 34.2 from 34.5 hours, cannot be the consequence of a rounding error.
Was it the harsh winter in much of the United States? One problem with that explanation is that the numbers are already seasonally adjusted.
Imperfections in the adjustment method can result in weather effects, but the magnitude is far from clear, especially given that parts of the West, Midwest and South experienced milder-than-normal weather, with fewer business-reducing storms. Also, the shortening of the workweek began before the winter set in, with declines in hours from September to October.
Another possibility for the declining average workweek is the Affordable Care Act. That law induces businesses with fewer than 50 full-time employees—full-time defined as 30 hours per week—to keep the number of hours low to avoid having to provide health insurance. The jury is still out on this explanation, but research by Luis Garicano, Claire LeLarge and John Van Reenen (National Bureau of Economic Research, February 2013) has shown that laws that can be evaded by keeping firms small or hours low can have significant effects on employment.
The improvement in average weekly hours worked was reason for celebration after the recovery began. The recent decline is cause for concern. It gives us a more accurate but dismal picture of the past two quarters.
Mr. Lazear, who was chairman of the president's Council of Economic Advisers from 2006-09, is a professor at Stanford University's Graduate School of Business and a fellow at the Hoover Institution.
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(http://johnbtaylorsblog.files.wordpress.com/2014/03/emp-pop-feb-2014.jpg)
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(http://johnbtaylorsblog.files.wordpress.com/2014/03/emp-pop-feb-2014.jpg)
Weird, almost like the alleged recovery is just a product of massive QE infusions. Nah, couldn't be... Wesbury says QE doesn't matter.
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By this measure we are still worse than the bottom of the Obama recession.
Source: Econ Prof. John Taylor, Stanford.
Reagan cheated by using pro-growth policies. Anyone can grow the economy that way!
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All the Americans reporting their loss of middle class status are obviously unaware of Wesbury's predictive skills.
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Once again, the distinction between profit and prophet.
Wesbury profits while we prophet-ize.
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The Tech Industry’s Immigration Lies
Posted By Arnold Ahlert On April 3, 2014 @ frontpagemag.com
One of the primary narratives associated with comprehensive immigration reform has nothing to do with the millions of low-skill workers that would be granted an opportunity to compete against Americans for jobs. As a letter sent to the president and Congressional leaders signed by more than 100 chief executives of major tech companies and trade associations indicates, there is a shortage of highly-skilled American labor that drives reform as well. Yet as The Atlantic’s Michael S. Teitelbaum reveals, that narrative is a lie.
“A compelling body of research is now available, from many leading academic researchers and from respected research organizations such as the National Bureau of Economic Research, the RAND Corporation, and the Urban Institute,” Teitelbaum explains. ”No one has been able to find any evidence indicating current widespread labor market shortages or hiring difficulties in science and engineering occupations that require bachelors degrees or higher…All have concluded that U.S. higher education produces far more science and engineering graduates annually than there are S&E job openings—the only disagreement is whether it is 100 percent or 200 percent more.”
He then introduces the 800-pound gorilla of Economics 101, as in the reality that a genuine shortage of high-skill workers would pressure those seeking an ostensible scarcity of talent to offer higher levels of compensation to potential workers. Unfortunately, exactly the opposite is occurring. “Most studies report that real wages in many—but not all—science and engineering occupations have been flat or slow-growing, and unemployment as high or higher than in many comparably-skilled occupations.”
How does this reconcile with the claims of people like Facebook CEO Mark Zuckerberg and Yahoo CEO Marissa Mayer? “Because labor markets in science and engineering differ greatly across fields, industries, and time periods, it is easy to cherry-pick specific specialties that really are in short supply, at least in specific years and locations,” Teitelbaum explains. And while he concedes that high-skill occupations have unemployment rates lower than those of the workforce in general, “surprisingly high unemployment rates prevail for recent graduates even in fields with alleged serious ‘shortages’ such as engineering (7.0 percent), computer science (7.8 percent) and information systems (11.7 percent).”
The Economic Policy Institute (ECI) also hammers home reality about the so-called shortage of foreign workers, revealing that in 2011, the number of college-educated “guest workers” under the age of 30, comprised 66 percent of the 166,000 new college-educated Information Technology (IT) job holders under the age of 30. They further note that this reality is discouraging many Americans students in the science, technology, engineering and math (STEM) fields from entering IT.
With good reason. Americans colleges already graduate 50 percent more computer science majors than are finding jobs in IT. The ECI further notes that if comprehensive immigration reform and/or the Skill Visa Act promoted by Republicans Darryl Issa (R-CA) and Bob Goodlatte (R-VA) become reality, the conservative estimate of 180,000, “new IT guestworkers and STEM green card beneficiaries will be greater than the number of new hires of young IT college graduates in 2011.”
At the heart of this sellout is is the H-1B visa program. The Government Accountability Office (GAO) does its best to obscure reality, stating that most of those visas are used to fill “entry level” positions. Yet EPI confirms Teitelman’s assessment of flat or slow-growing wages, revealing that such workers are not only competing with recent U.S. graduates, but providing a supply of lower-wage guest workers that can take jobs from older workers as well.
Computerworld, which on April 1 received the latest data regarding H-1B visas from the U.S. Citizenship and Immigration Services (USCIS), explains there is such heavy demand anticipated, all of them will be claimed by the end of this week. They further note that the majority claimants will be firms “that use visa holders to displace U.S. workers.” ”The offshore outsourcing firms are once again getting the majority of the visas,” said Ron Hira, a public policy professor at the Rochester Institute of Technology in New York. “The program continues to promote the offshoring of high-wage American jobs.”
The top three companies on the list of visa approval in 2013 were Infosys, Tata Consultancy Services (TCS) and Cognizant. Other players include IBM, Microsoft, Amazon, Intel, Google and Oracle. Many of these firms hire IT workers for offshore outsourcing contracts. Domestic workers who are replaced as a result often have to train their replacements as a condition of their severance package. Companies such as Cognizant insist they maintain a robust effort to hire American workers, but they do not disclose data to support that contention. Moreover, in 2013, Infosys agreed to pay $34 million to resolve a claim by the federal government: they had accused the firm of running an unlawful visa scheme. Infosys also refused to release data on its U.S. workforce.
Food and agricultural producer Cargill is another company outsourcing its IT jobs, sending them to TCS. Cargill’s home base is in Minnesota, and Sen. Amy Klobuchar (D-MN), along with Marco Rubio (R-FL), Chris Coons (D-DE), and Orrin Hatch (R-UT) were developing the Immigration Innovation Act of 2013. The bill aims to initially raise the current H-1B cap of 85,000 visas, comprised of 65,000 H-1Bs, plus an additional 20,000 set aside for advanced degree gradates of American universities, to 115,000. It also includes an increase in the cap based on demand, until it reached 300,000 visas every year thereafter., even as it exempts advance degree STEM students from the total. In addition, the bill won’t apply employment-based green card quotas to foreign students earning a master’s or doctorate in STEM fields at a U.S. university, or their spouses and minor children.
The bill passed in the Republican-controlled House on Dec. 5, 2013. It has yet to be taken up by the Democratically-controlled Senate.
Even as this amounts to dream legislation for high-tech companies, they are keeping up the pressure on lawmakers. In March, Goodlatte, who is the House Judiciary Committee Chairman, held a high-dollar fundraiser in Silicon Valley with pro-amnesty forces who ponied between $10,000 and $40,000 apiece for the privilege. Ron Conway, a prolific angel investor and venture capitalist, expressed the kind of arrogance one expects from those who seemingly believe government should be particularly responsive to high rollers. “In this case, because there’s been mixed messages from the Republicans, before I write my check, I wanted some assurances that Bob Goodlatte would be prepared to discuss immigration reform and what the timetable is for immigration reform, because we’re coming down the wire here with the [2014] elections and we need accountability,” he declared.
If genuine accountability is wanted–as opposed to the fulfillment of an agenda–getting the facts right would be a good place to start.
Both Teitelbaum and Michael Anft, senior writer for John Hopkins magazine, reveal that stores about a shortage of STEM workers are nothing new. Teitelbaum refers to five “alarm/boom/bust” cycles, each lasting about 10 to 15 years. From just after WWII through 2003, each cycle was initiated by alarms about a worker shortage, followed by policies to increase the supply of STEM workers, followed by the inevitable busts characterized by “mass layoffs, hiring freezes, and funding cuts that inflicted severe damage to careers of both mature professionals and the booming numbers of emerging graduates, while also discouraging new entrants to these fields.”
Anft speaks to the same phenomenon, noting that prior to Americans worrying about the current emergence of China and India as the primary challengers to our status as the world’s preeminent innovator, “there were ruckuses caused by an increase in foreign auto and electronics imports (Japan) in the 1970s and 80s, a fear that someone else (the U.S.S.R.) would win the space race in the 50s and 60s, and the wartime emergency (Nazi Germany) that led to the Manhattan Project in the 40s.”
Hira, who has testified before Congress regarding the issue, notes the hypocrisy of high-tech firms like Microsoft who advocate for more IT visas, even as they lay off thousands of Americans with comparable skills. Norman S. Matloff, a professor of computer science at the University of
California at Davis, is far more direct. “This is all about industry wanting to lower wages,” he contends.
Toward that end, high-tech companies are making contingency plans, in case their current push for comprehensive immigration reform proves unsuccessful. As Silicon Valley attorney John Bautista reveals, some companies with solely domestic operations are exploring the idea of opening offices overseas so they can hire people and bring them back to America on visas that allow for internal transfers of existing employees. ”Before [corporate boards said], ‘We’ve got someone we want to hire, what’s the best way to bring him over?’” he explained. “Now it’s, ‘We have a hiring problem, let’s use the immigration laws to come up with an overall strategy to bring teams of people on board.’”
Part of that overall strategy includes the oldest strategies of all: pumping loads of cash into political campaigns and lobbying efforts. According to the Center for Responsive Politics, the computer and Internet industries showered Democrat and Republican candidates for federal office, as well as political committees, with $62 million during the 2012 election cycle. That same year tech companies spent a record-setting $132.5 million on Washington lobbying efforts, running their ten-year total in that regard to over $1 billion.
In 2013, the tech sector combined forces with the agricultural sector. They were joined by the Chamber of Commerce, which added another $52.7 million to reform lobbyists’ coffers. ”We’re determined to make 2014 the year that immigration reform is finally enacted,” said Chamber President and CEO Tom Donohue in January.
By any means necessary it seems. Whether they get across the finish line remains to be seen. Likely 2016 GOP presidential candidate Rand Paul (R-KY) is the latest Republican to drink the comprehensive Kool-aid, insisting that his party has to get ”beyond deportation to the rest of the issues,” if they want to compete for Hispanic votes. Those would be the same Hispanic votes that have never accrued to Republicans in more than three decades of elections. Furthermore, alienating both low-skill and high-skill American workers as a tradeoff is a fool’s errand.
Unfortunately, for un- or under-employed Americans, the outright lie that there’s a shortage of high-tech workers apparently take precedence over their well-being. For Democrats, virtually anything the expands the dependency of Americans has become, rather than a badge of shame, an integral part of their party platform. For Republicans, it the sop of accommodating their business allies, and siren song of possibly newfound Hispanic fealty that drives their ambitions. In a better world, the efforts by both parties would be seen as the contempt for the rule of law and the utter lack of concern for Americans they truly represent. In this one, the narrative, no matter how duplicitous and despicable, rules the roost.
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Millionaires Need Your Help
Posted By Ann Coulter On April 3, 2014
Last Sunday, The New York Times published a front-page article about the heartfelt need of California farmers for more illegal aliens.
The first tip-off that heinous public policy ideas were coming was that the Times introduced farmer Chuck Herrin, owner of a farm-labor contracting company, as a “lifelong Republican.” That’s Times-speak for “liberal.”
Herrin admitted that he employs a lot of illegal aliens and bitterly complained that they lived in fear of “Border Patrol and deportations.” (But, apparently, he doesn’t live in fear of admitting he’s violating our immigration laws.)
Sorry that running a country inconveniences you, Chuck.
He said his illegal alien employees deserved amnesty because if “we keep them here and not do anything for them once they get old, that’s really extortion.”
As the punch line goes, “What’s this ‘we,’ paleface?”
Taxpayers have been subsidizing Chuck Herrin’s underpayment of his illegal labor force for decades, with skyrocketing taxes to pay for schools, roads, bridges, food stamps, health care and so on. Now Herrin thinks “we” are supposed to support his illegal employees in their old age, too.
Here’s another idea: How about a federal law mandating that employers of illegal aliens take responsibility for the people they hire? Why is the taxpayer on the hook for illegal aliens’ food, housing and medical care, when Chuck Herrin got 100 percent of the profit from their cheap labor?
We don’t allow chemical companies to dump pollutants in rivers, walk away and then say, “If we dump chemicals in rivers and we don’t clean them once the plant is gone, that’s really criminal.”
No, you dumped the chemicals — not “we.” And you, Chuck Herrin, got the cheap labor — not “we.”
“We” got hospital emergency rooms jammed with illegal aliens when we came in with heart attacks. “We” got the crime, drunk-driving and drug trafficking associated with illegal aliens. “We” got the overcrowded schools filled with kids whose illegal alien parents don’t pay property taxes. “We” got to press “one” for English.
This is even worse than the Wall Street bailouts — another example of fat cats pocketing 100 percent of the profits when business is good, but demanding a taxpayer handout when their investments go south. At least the Wall Street bailouts didn’t alter the country forever by giving the Democrats 30 million new voters.
According to the California Hospital Association, health care for illegal aliens is costing state taxpayers well over $1 billion a year.. Eighty-four hospitals across California have already been forced to close because of unpaid bills by illegal aliens.
Last year alone, California taxpayers paid $32 million for indigents’ health care at hospitals located in Fresno County– which happens to be where Chuck Herrin’s company is based. How about submitting a portion of that cost to Herrin?
Here’s your bill for $13 million.
What’s this for?
The county hospital. You’ve been paying your employees $20 an hour, and that’s just not enough to pay for their measles and tuberculosis treatments, not to mention delivery of their premature babies. No one’s saying it’s your fault, but it’s not the county hospital’s fault either.
Luckily, you’ve got deep pockets, Chuck – several hundred million dollars a year, we understand – thanks in part to how little you pay your workers, who are burdening our local services.
Not only should employers of illegal aliens be responsible for their employees’ becoming public charges, but they ought to be legally responsible for any crimes their illegal workers commit, just as parents can be for the crimes of their minor children, and bars can be for the behavior of their over-served customers.
Why should employers of illegal aliens be allowed to externalize their costs, while keeping 100 percent of the profits?
The very fact that the American taxpayer is required to subsidize illegal alien farm labor — to say nothing of anti-competitive marketing orders, tariffs and subsidies given to farmers — proves that we’re propping up an industry the country doesn’t need.
If Mexican farm labor is so much cheaper, maybe we should be growing our fruits and vegetables in Mexico. There’s absolutely no reason to import Mexicans to do something they could do at home and then sell to us. I believe this is what economists call “competitive advantage.”
The Times quotes a report by two pro-amnesty farmers groups, Partnership for a New American Economy and the Agriculture Coalition for Immigration Reform, complaining that American consumption of foreign-grown produce has increased by 80 percent since the late 1990s.
I see why rich farmers are alarmed by that, but why should Americans care? If food can be grown cheaper in other countries, isn’t it the very essence of libertarian free trade principles to buy it from them?
No. Apparently, we’re required to wreck the country by bringing in millions upon millions more poor people so we can save the buggy whip industry.
We didn’t do that with oil. We didn’t do it with steel. We must be “Fortress America” only when it comes to asparagus!
Hey! Where’s the Cato Institute on this? Busy drafting another philippic against our drug laws?
I care more about my fellow Americans who can’t get well-paying jobs than I do about multimillionaire farmers, demanding that the rest of us pay to support an industry that claims it can’t compete without taxpayer-subsidized illegal alien labor.
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Two interesting articles Obj, each with merit.
Am I correct in sensing a cognitive dissonance between them?
One is mad we bring in foreign IT folks, the second suggests outsourcing. How would the IT engineers feel if the proffered solution for their industry were to outsource to China and India?
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Crafty,
Not exactly. The two articles are somewhat in accord, in the sense that Coulter is suggesting we buy the END PRODUCT (food) from other countries, if that's where it can be most efficiently produced, and the other is arguing that if a company is going to EMPLOY workers in this country - they need to be citizens, and not imported foreign nationals.
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Mmm , , , , dunno about that. Ultimately either way the logic leads to paying the cheap labor in its country of origin-- which will happen at least some of the time with IT if the labor is blocked from coming here. I'm not taking sides here, I am assessing the logic.
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http://www.mainstreet.com/article/moneyinvesting/savings/net-worth-young-families-today-falls-below-1989-levels-0?cm_ven=msearthlinkcf
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(http://i603.photobucket.com/albums/tt114/dougmacg/839c2fc7-a1ae-442d-bdc6-ff1ef182bde8_zpse8857799.jpg)
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The left's new rock star economist
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Thomas Piketty: A new favorite of Obama and his economic council, Jack Lew Treasury Secretary and the rest of the globalist progressive crowd.
*********Economist Receives Rock Star Treatment
By JENNIFER SCHUESSLERAPRIL 18, 2014
French economists who boldly question the dominance of capital over labor — and call for a progressive global tax on wealth — visit the American halls of power about as often as French rock stars headline Madison Square Garden.
But those halls of power are where Thomas Piketty, a 42-year-old professor at the Paris School of Economics, has been singing his song of late.
Since touching down in Washington this week to promote his new book, “Capital in the 21st Century,” Mr. Piketty has met with Treasury Secretary Jacob Lew, given a talk to President Obama’s Council of Economic Advisers and lectured at the International Monetary Fund, before flying to New York for an appearance at the United Nations, a sold-out public discussion with the Nobel laureates Joseph Stiglitz and Paul Krugman, and meetings with media outlets ranging from The Harvard Business Review to New York Magazine to The Nation.
The response from fellow economists, so far mainly from the liberal side of the spectrum, has verged on the rapturous. Mr. Krugman, a columnist for The New York Times, predicted in The New York Review of Books that Mr. Piketty’s book would “change both the way we think about society and the way we do economics.”
Thomas Piketty at one of his New York talks this week. Credit Karsten Moran for The New York Times
But through all the accolades, Mr. Piketty seems to be maintaining a most un-rock-star-like modesty, brushing away comparisons to Tocqueville and Marx with an embarrassed grimace and a Gallic puff of the lips.
“It makes very little sense: How can you compare?” he said on Thursday between gulps of yogurt during a break in his packed schedule — before going on to list the 19th-century data sets that Marx neglected to draw on in “Das Kapital,” his 1867 magnum opus.
“If Marx had looked at them, it would have made him think a bit more,” he said. “When I started collecting data, I had no idea where it would go.”
Mr. Piketty’s dedication to data has long made him a star among economists, who credit his work on income inequality (with Emmanuel Saez and others) for diving deep into seemingly dull tax archives to bring an unprecedented historical perspective to the subject.
But “Capital in the 21st Century,” which analyzes more than two centuries of data on the even murkier topic of accumulated wealth, has elicited a response of an entirely different order. Months before its originally scheduled April publication, it was generating intense discussion on blogs, prompting Harvard University Press to push the release forward to mid-February.
Since then, it has hit the New York Times best-seller list, and sold some 46,000 copies (hardback and e-book) — a stratospheric number for a nearly 700-page scholarly tome dotted with charts and graphs (as well as references to Balzac, Jane Austen and “Titanic”).
And not all those readers are economists. Six years after the financial crisis, “people are looking for a bible of sorts,” said Julia Ott, an assistant professor of the history of capitalism at the New School, who appeared on a panel with Mr. Piketty at New York University on Thursday. “He’s speaking to a real feeling out there that things haven’t been fixed, that we need to take stock, that we need big ideas, big proposals, big global solutions.”
Photo
Mr. Piketty's book on sale after he spoke Wednesday at the Graduate Center at the City University of New York. Credit Karsten Moran for The New York Times
Those big ideas, and the hunger for them, were on ample display at N.Y.U., where the standing-room crowd was treated to Mr. Piketty’s apology for having written such a long book, followed by a breakneck PowerPoint presentation of its main arguments, illustrated with striking charts.
At the book’s center is Mr. Piketty’s contention — contrary to the influential theory developed by Simon Kuznets in the 1950s and ’60s — that mature capitalist economies do not inevitably evolve toward greater economic equality. Instead, Mr. Piketty contends, the data reveals a deeper historical tendency for the rate of return on capital to outstrip the overall rate of economic growth, leading to greater and greater concentrations of wealth at the very top.
Despite this inevitable-seeming drift toward “patrimonial capitalism” that his charts seemed to show, Mr. Piketty rejected any economic determinism. “It all depends on what the political system decides,” he said.
Such statements, along with Mr. Piketty’s proposal for a progressive wealth tax and income tax rates up to 80 percent, have aroused strong interest among those eager to recapture the momentum of the Occupy movement. The Nation ran a nearly 10,000-word cover article placing his book within a rising tide of neo-Marxist thought, while National Review Online dismissed it as confirmation of the left’s “dearest ‘Das Kapital’ fantasies.”
But Mr. Piketty, who writes in the book that the collapse of Communism in 1989 left him “vaccinated for life” against the “lazy rhetoric of anticapitalism,” is no Marxian revolutionary. “I believe in private property,” he said in the interview. “But capitalism and markets should be the slave of democracy and not the opposite.”
Even if he doesn’t expect his policy proposals to find favor in Washington anytime soon, Mr. Piketty called his meetings there gratifying. Mr. Lew, he said, seemed to have read parts of the book carefully. A member of the Council on Economic Advisers corrected a small error concerning Balzac’s novel “Le Père Goriot,” which includes a discussion of getting ahead through advantageous marriage rather than hard work. “I was impressed,” Mr. Piketty said.
His book, however, ends not with an appeal to policy makers, but with a call for all citizens to “take a serious interest in money, its measurement, the facts surrounding it and its history.”
“It’s too easy for ordinary people to just say, ‘I don’t know anything about economics,’ ” he said, before rushing to his next appearance. “But economics is not just for economists.”
A version of this article appears in print on April 19, 2014, on page C1 of the New York edition with the headline: Economist Receives Rock Star Treatment.********
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http://www.nytimes.com/2014/04/21/us/50-years-into-the-war-on-poverty-hardship-hits-back.html?emc=edit_th_20140421&nl=todaysheadlines&nlid=49641193&_r=0
http://online.wsj.com/news/articles/SB10001424052702303603904579493612156024266?mod=trending_now_3
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http://www.cnbc.com/id/101588336?__source=yahoo|finance|inline|story|story&par=yahoo&doc=101590215|Is%20America%20giving%20up?:%20Wh
While a college degree might help get a job, it doesn't necessarily mean a good salary. According to a report released last month by the Bureau of Labor Statistics, some 260,000 workers with bachelor's degrees and 200,000 workers with associate's degrees are making the minimum wage.
The federal minimum wage is $7.25 an hour, and the minimum wage for tipped workers is $2.13 an hour. Some cities and states have recently raised their minimum wage, but the BLS report defines only those making $7.25 an hour or less as "minimum wage workers."
Plowhorse!
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(http://www.bestmswprograms.com/wp-content/uploads/2014/03/middle-class.jpg)
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Income inequality is a fact, not an issue. But candidate Obama worked the guilt and envy for all he was worth. He gained power personally but his policies made income inequality worse.
They thrive on it, they live in it and they depend on it. The party of Income Inequality is the Democrats. Interestingly, the congressional district with the lowest level of income inequality is Michele Bachmann's district, the most conservative district in MN. The highest income inequality in the nation is found in Dem strongholds like NYC and LA.
http://thefederalist.com/2014/04/21/why-democrats-are-the-party-of-inequality/
...So no wonder Democrats are enamored with all of that rhetoric about inequality and class warfare. Their constituents, the audience they are addressing, are far more likely to live in the American equivalent of Rio de Janeiro, a class society starkly divided between squalid, hopeless, crime-ridden favelas and safe, beautiful downtown playgrounds for the rich.
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The Democratic Party is the party of inequality. They are the political faction that has a vested interest in inequality, because they depend on appeals to guilt and envy. To upper-middle-class elites, they promise to alleviate any spiritual discomfort caused by contemplating their relative good fortune, by the easy expedient of voting to spend a little extra money on welfare handouts—preferably the money of somebody just a little bit richer than them—rather than doing anything that would actually help the city’s poor find jobs and housing and transportation. For the poor, they promise to take the rich down a notch and distribute some of the loot.
...
this does call into question the political wisdom of the Democratic Party’s effort to make income inequality the centerpiece of its national economic agenda, because this fall’s election will be decided by voters in suburban and rural districts, where inequality tends to be lower. And control of the Senate will be decided largely in states with low levels of inequality relative to the national average.
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It is high taxation and transfer of wealth that built America. Folks I can't believe we are still debating this. Socialism is relentless:
Elizabeth Warren Simplifies Thomas Piketty: 'Trickle Down Doesn't Work. Never Did'
Posted: 04/25/2014 2:52 pm EDT Updated: 04/25/2014 3:59 pm EDT
The No. 2 author on Amazon's best-seller list, Sen. Elizabeth Warren, weighed in Thursday night on the No. 1 book, identifying overlapping themes.
At a reading at the Harvard Book Store, the Massachusetts Democrat, author of A Fighting Chance, was asked about Thomas Piketty's new book, Capital in the Twenty-First Century, and specifically about its contention that trickle-down economics "definitively do not work."
Warren cut in. "Can we say that part again? 'Definitely do not work,'" she repeated. "Not as in that's somebody else's opinion or this comes out of a long-held political opinion. The data don't lie on this. He's got good historical data, and boy, what it shows is trickle down doesn't work. Never did, doesn't work. Just so we're all clear on the baseline. I just saved you 1,100 pages of reading." (The book is shorter than that; Warren may have assumed the audience would also read the online technical index.)
Warren, whose own book was going to be titled Rigged but ultimately went out with a more hopeful title, said that while Piketty's book could elicit despair, she found a hopeful note in it, too.
"You can read his book and you just wanna say, 'Ugh.' Because it says over and over -- look, I'll tell you the basic theme: The rich get richer," Warren said.
Piketty argues that the 200-plus years of income and wealth data complied by him and a team of researchers demonstrates that returns on capital (r) significantly outstrip growth in the real economy (g), which relentlessly drives up inequality. His basic equation -- r>g -- has upended the way economists understand wealth and income distribution.
"Here's the hopeful part in Piketty's book: Piketty makes the point that although the data keep documenting this happening, it's not like an act of nature. It's not like gravity and you can't fix it," Warren said. "Piketty's book makes the point that how much equality there is ... is a matter of the policies you choose to follow and that, for example, progressive taxation and investment in everyone's education helps to level the playing field."
Warren pointed to the period from the Great Depression up through the deregulatory era that began in the 1980s as reason for hope -- a period that she noted Piketty found to be an aberration in many ways.
"It is a time when we made those investments that built America's great middle class and we made those decisions -- not we in this room, but our parents, our grandparents, they made those decisions. They said, 'You put a cop on the beat so nobody steals your pension, you do that on Wall Street.' But they also said, 'You tax progressively and then you make those investments.' For those who made it big, God bless 'em, that's great, but they've gotta pay a piece of that forward so the next kid has a chance to make it big and the kid after that and the kid after that. That's what defines America."
Piketty indeed credits high marginal tax rates on wealth in the middle of the 20th century as a driver of flattening U.S. inequality during that period, although he also cites the destruction of capital from the world wars and the anomalously high economic growth rates that carried into the late 1960s and, in some countries, into the 1970s. He describes that high growth as "catch up" and suggests it will be difficult to repeat such a phenomenon in the 21st century.
Piketty proposes a steeply progressive wealth tax, which Warren referenced favorably on Thursday. The suggestion was widely panned by the political class, but it is already earning dividends. On Friday, New York Times columnist David Brooks suggested that conservatives respond by embracing a "beefed up inheritance tax" and "progressive consumption taxes."
Warren also joked with the audience that they may find her book a bit more digestible. "Have you seen Piketty's new book?" she asked. "His book has tables and graphs; this book doesn't. It's one of my first books with no graphs in it, just pictures."
Watch HuffPost's interview with Piketty below.
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I watched Warren on the Stewart (or was it Colbert?) show recently, and she is not stupid. Indeed, she may well be a formidable opponent of American freedom for many years to come. In her appearance, she used the fact that the Feds are profiteering mightily on student loans very effectively. (Yes, she left out the fact that this came into being via, of all things, Obamacare).
Quick: Give a talking point summary of why the notions for which the Piketty book is being cited are wrong , , ,
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Who cares what Fauxcohantus has to say about anything?
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http://www.foreignaffairs.com/articles/141218/tyler-cowen/capital-punishment
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The reason to care about Elizabeth "Forked Tongue" Warren is precisely is because she is creating/spreading memes in the minds of the American people which are to the detriment of America.
So GM, you have wonderful abilities to pithily deflate the opposition-- I invite you to bring them to bear here.
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I would first refer to Doug's well constructed arguments on the topic of economic disparity rather than clumsily attempt to rephrase them here.
Secondarily, I note that repackaged quasi-marxism sucks just like the original and Pisketty appears to shave off the sharp edges of facts to justify his leftist just-so stories.
He is seized upon by the usual suspect to justify their vote buying, centrally run economy ideals. Of course, they are attracted to the power that such economic systems grant the political class and give only lip service to the poor while they jet-set to exotic vacations.
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Warren lives in a nice, middle class 1.7 million dollar mansion.
But she really cares about the little people....
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"Just so stories" -- not bad, this has promise , , , keep working with it. The ad hominems , , , less so.
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"Just so stories" -- not bad, this has promise , , , keep working with it. The ad hominems , , , less so.
Much like global warming, if inequality is such a serious problem, why don't the political figures act like it is. Imagine how many impoverished people Warren could help if she liquidated her assets and donated it to charity...
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Adding to what is already posted, one might look at George Gilder's latest theory - wealth is knowledge. Many ramifications come out of this theory. With experience, trial and error and occasional successes over time we gain in our knowledge of how to build our product, deliver our service, know our customers and their needs, know our market, know how to compete and keep up with or ahead of our competition, keep our promises, and all the other building blocks of innovation, successful production and useful productivity. We hopefully don't carry only the same amount of knowledge that we had a year ago, nor hopefully are we equal to an entry level beginner or someone who doesn't try his or her hardest, etc. The only possible point where we could all be equal is at the zero point.
Critics of inequality don't say no inequality is optimal, but they infer that by arguing that all inequality is bad and greater inequality is necessarily worse.
The fact that some people get rich in a free society is not a bad thing for them or for anyone else. We need much more of that. Much more.
It's not trickle down economics, but we do live in an interconnected economy. Success around you amplifies your own opportunities.
What the rich make in income is none of our business, except to measure and tax it, same as for everyone else. What the poor make is only our business because we want to help. What we should be doing, in terms of public policy, is to assess all programs that address poverty (lack of earning power) and stop doing the things that are making things worse.
To enact a global wealth tax is to renounce the Declaration of Independence. We aren't subjects of the King anymore and we most certainly aren't subjects of the UN today. Things like the electoral college, the structure of the Senate and framework of the constitution are all designed to slow down the stupid ideas and help keep us from giving away our freedom and autonomy to the passing whims of the majority. Americans through their representatives can decide how much to tax Americans and how much and where to help others around the globe.
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This could go under Glibness but by causing zero growth in the economy and pointing to income inequality as if it were a new and unnatural phenomenon, President Obama and the Democrats have brought back the illusion that political economics is a zero-sum game. They think like Putin, you can only get what you take from someone else. It is not so.
The worse they do with the economy the more we need them, so they say.
As Scott G pointed out, the liberals and leftist point to the industries with the very most government intrusion, like energy, transportation, housing, healthcare and education, and conclude the the free market left to itself simply does not work. When mortgages became 90% federal, CRAp was instituted, the Fed dropped real interest rates to free money for an extended period, they told us the market just can't be trusted!
No one wants a market with no regulation. What we want from government is to enforce a level playing field for the private sector to flourish.
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http://freebeacon.com/politics/security-tight-at-secretive-democracy-alliance-meeting/
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"Would voters prefer a candidate focused on “more economic growth” or “less income inequality”? No contest. Growth beat inequality, 80 percent to 16 percent."
Then how 'bout we focus on GROWTH!
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http://blogs.reuters.com/great-debate/2014/05/05/elites-talk-inequality-public-talks-growth/
Elites focus on inequality; real people just want growth
The economic debate is now sharply focused on the issue of income inequality. That may not be the debate Democrats want to have, however. It’s negative and divisive. Democrats would be better off talking about growth — a hopeful and unifying agenda.
Democrats believe income inequality is a populist cause. But it may be less of a populist issue than an issue promoted by the cultural elite: well-educated professionals who are economically comfortable but not rich. There’s new evidence that ordinary voters care more about growth.
Growth and inequality are not separate issues. Nobel Prize-winning economist Joseph E. Stiglitz wrote, “Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena when they are in fact intertwined. Inequality restrains and holds back our economic growth
The question is whether Democrats want to talk about punitive and confiscatory policies aimed at curbing the power of the wealthy and special interests or an agenda aimed at growing the economy for everyone.
Policies aimed at reducing inequality gain more traction with voters when they are pitched as pro-growth policies. Issues like raising the minimum wage, extending unemployment benefits, pay equity for women, student-loan debt relief, increasing the earned income tax credit and closing tax loopholes for the rich.
The argument is straightforward: More fairness means more growth. When the incomes of the poor and the middle class are growing, consumption — the principal driver of economic growth — goes up. So do tax revenues and investment in business and education.
Former President Bill Clinton, in a speech at Georgetown University last week, called inequality “a severe constraint on growth.” He defended his administration’s pro-growth agenda. “My commitment was to restore broad-based prosperity to the economy,” Clinton declared, “and to give Americans a chance.” He noted that 7.7 million Americans were lifted out of poverty during his eight years in office.
During the last four years of Clinton’s presidency, the nation’s economic growth rate averaged 4.5 percent a year — three times as high as last year. Plus we had a budget surplus. Yes, incomes grew for the richest 20 percent of Americans during the 1990s. But, as Clinton noted, they grew faster for the poorest 20 percent. “It worked out pretty well,” he said. Even though the left criticized his policies of financial deregulation, welfare reform, free trade and balancing the budget. We now have evidence from the GlobalStrategyGroup, a Democratic consulting firm, that the growth agenda is more popular than the inequality agenda. Asked how much of a priority it should be for Congress to “promote an agenda of economic growth that will benefit all Americans,” 78 percent called it extremely or very important. Growth topped the list. At the bottom: addressing income inequality (50 percent) and spreading wealth more evenly (43 percent).
Would voters prefer a candidate focused on “more economic growth” or “less income inequality”? No contest. Growth beat inequality, 80 percent to 16 percent. Growth also came out ahead of “increasing wages,” “expanding the middle class,” “economic justice to level the playing field for middle- and low-income Americans” and even “more economic fairness.”
That doesn’t mean Democrats have to choose between growth and inequality. The GSG poll showed that Democratic policies aimed at reducing inequality are seen as promoting growth. Solid majorities (ranging from 54 percent to 74 percent) said that providing more income opportunity for all, increasing spending on education and infrastructure, making seniors’ retirement more secure, increasing the minimum wage and asking the wealthy to pay more taxes would lead to more economic growth rather than less.
Democrats already have credibility on the inequality issue. Asked which party can be trusted “to enact policies that will lead to more income opportunity for all,” Democrats lead Republicans 46 percent to 34 percent.
What Democrats lack, however, is credibility on the growth issue. Asked which party can be trusted “to enact policies that will lead to more economic growth,” it’s a dead heat: Democrats 39 percent, Republicans 39 percent. After George W. Bush and Barack Obama, voters aren’t sure which party can deliver prosperity.
What’s driving the inequality frenzy? New York Times columnist David Brooks wrote, “If you are a young professional in a major city, you experience inequality firsthand. But the inequality you experience most acutely is not inequality down, toward the poor; it’s inequality up, toward the rich.” They’re the people who are buying Thomas Piketty’s book advocating redistribution of wealth.
These days, a lot of American politics is a war between two elites. For years, polls have revealed that the wealthier you are, the more likely you are to vote Republican. But the better educated you are, the more likely you are to vote Democratic. So in 2012, we got a race between Republican nominee Mitt Romney, who represented the elite of wealth, and Obama, who represented the elite of education.
The debate over inequality is a debate between these two bitterly antagonistic elites. An army of country-club conservatives doing battle with an army of NPR liberals. The fabulously wealthy Koch brothers, for example, versus the fabulously well-educated Senator Elizabeth Warren (D-Mass.), a former Harvard professor.
What do ordinary voters want? They want an economic boom.
Ronald Reagan got elected in a recession and delivered a boom in his second term. Clinton got elected in a recession and delivered a boom in his second term. Voters’ deep dissatisfaction with Obama right now is due mostly to his failure to deliver on the economy. (more at the link)
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Like the foundation of a home, America’s economy must be built on something real, something solid, and something firmly planted. Neither federal stimulus in the form of easy money, nor fiscal stimulus in the form of government borrowing, can produce real, lasting prosperity or a sound financial future. …
No government regulator, no matter how intelligent, can see into the future or micromanage the economy. Let us consider the testimony of former Chairman Alan Greenspan, before this very committee, in January of 2001. Chairman Greenspan came to alert Congress about an urgent policy decision it would have to make. And what was that decision? Whether to raise interest rates? Reduce subprime lending? Reform entitlements? No, Chairman Greenspan came to warn us that we would have to decide how to spend all of the surplus money after we soon paid off the entire federal debt of the United States. He predicted budget surpluses “well past 2030 despite the budgetary pressures from the aging baby boom generation,” and said that “the highly desirable goal of paying off the federal debt is in reach before the end of the decade.” But, Greenspan warned that after “continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt,” we would need to “eschew private asset accumulation.” He added for emphasis that “the emerging key fiscal policy need is to address the implications of maintaining surpluses beyond the point at which publicly held debt is effectively eliminated.”
The Federal Reserve is not infallible. Our responsibility as legislators is to provide oversight. We are one small voice for the people in this process. In 2011, the Fed forecasted growth of between 3.5 and 4.3 percent in 2013. Actual growth was an anemic 1.9 percent—roughly half. This is a drastic over-estimation, not a small miss. And, the Fed overestimated 2013 growth in every formal quarterly prediction for each year since 2011. …
Let us consider whether the stimulus policies of the last five years have produced the results predicted by the Fed. Since 2007, interest rates have been near zero and the federal government has added $8.3 trillion to the debt. But where do we stand?
* The population has grown by 15 million since 2007, yet there are still 500,000 fewer people working than in 2007.
* The workforce participation rate has fallen to 63 percent of the civilian population, which is the lowest level in 36 years.
* Median household income has fallen an average of $2,268 per household. The low income cohort has grown while the middle income group has shrunk. The middle class is getting smaller in America.
While the stimulus mindset in Washington has at least, so far, been better for the investor class and the political class, it has not been good for the working class. Not only has this stimulus failed American workers, but it has left us with record debt and an economy dependent on unprecedented policies that cannot continue. …
The time has come to return to first principles: spend what you have, plan for the future carefully, lay out policies that are prudent and can be maintained long-term, don’t borrow what you cannot pay back. Here are ways we can improve the economy and economic stability—without government stimulus:
* Produce more American energy
* Eliminate all costly and wasteful regulations
* Make the tax code more globally competitive
* Ensure fair trade so our workers can compete on a level playing field
* Adopt an immigration policy that serves American workers
* Turn the welfare office into a job training center
* Streamline the government to make it more productive, and
* Balance the federal budget to restore economic confidence
These are all concrete steps that will work. We need to return to those principles and move this country forward.
http://www.powerlineblog.com/archives/2014/05/on-the-economy-lets-get-back-to-basics.php
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Global Growth Worries Climb
Policy Makers in Europe, U.S. and China Grapple With What Steps to Take Next
By Brian Blackstone, Jon Hilsenrath and Marcus Walker
Updated May 15, 2014 7:52 p.m. ET
Five years after the financial crisis ended, soft growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have policy makers groping for what to do next.
A spate of worrying economic data Thursday shook stock and bond markets. Economic activity in the 18-country euro zone expanded at a weak annual rate of 0.8% during the first quarter, data released Thursday showed. Excluding Germany, which grew at a robust 3.3% pace, the rest of the euro-area economy contracted slightly during the quarter.
European Central Bank officials are now moving toward enacting additional low interest-rate policies to prevent the region from sliding into a lengthy period of economic stagnation, while the U.S. Federal Reserve guardedly tries to wind down a bond-buying program meant to revitalize economic growth.
Meantime, Chinese authorities are trying to prod banks to lend more to first-time home buyers shut out of their real-estate market. U.S. officials privately say they expect Chinese officials to act to boost their economy and support banks if growth slows severely, though Chinese officials say they will avoid major stimulus if it undermines economic overhauls or deepens credit woes.
Underscoring the sense of angst, stock prices dropped sharply Thursday in Europe and the U.S. The Dow Jones Industrial Average fell 167.16 points, or 1.01%, to 16446.81.
Yields on bonds issued in big developed markets continued to fall Thursday. Yields on German bunds with 10-year maturities sank to 1.307%, their lowest level in a year, while yields on 10-year U.S. Treasury notes fell to 2.498%, the lowest level in six months.
"It will take a long time before we see a real recovery," said Andrea Illy, Chairman and chief executive of Italian coffee maker Illy Caffè. "I'm really skeptical on how and if we can grow, and I hear the same feelings among entrepreneurs and consumers in Italy."
New U.S. data released Thursday showed the mixed economic backdrop that Fed officials confront as they scale back a bond-buying program aimed at lowering long-term interest rates, and consider how much longer to keep short-term rates near zero.
U.S. industrial output slumped in April, according to a Fed report, and a survey showed sentiment of U.S. home builders slipped. Many Fed officials believe U.S. growth is rebounding in the second quarter after slumping in the first period largely because of bad weather. Hiring has been robust of late. Still, some officials see the first half of the year shaping up as a disappointment.
"My guess is that we will see some pickup as we get into the second half of the year, but the longer we go without getting the 3% growth that many people had in their forecasts, the more concerned you have to be that there are other things going on that we hadn't fully appreciated," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview Thursday. Mr. Rosengren is in the camp of Fed officials who have supported aggressive responses to slow growth and low inflation.
Complicating matters for the Fed are signs that inflation is heading back toward the Fed's 2% goal after running below that for nearly two years. The U.S. consumer-price index rose 2% in April from a year earlier, a notable pickup from a 1.5% pace in March and a 1.1% pace recorded in February.
Mr. Rosengren said it was "too soon to know" whether the latest figures indicate the economy is heating up enough to push consumer prices much higher. The Fed's preferred measure of inflation, called the personal consumption expenditures price index, is "still pretty low," he said.
Fed Chairwoman Janet Yellen told lawmakers last week she expected the central bank to finish winding down its bond-buying program by the fall.
If inflation picks up, it could hasten a Fed discussion about when to start raising interest rates, but such a debate still looks premature. A sharp drop in long-term U.S. interest rates in recent days suggests investors—along with most Fed officials—don't see rate boosts until well into next year at the earliest.
In one step to support a languishing housing sector, the Obama administration and federal regulators are directing Fannie Mae and Freddie Mac, the government-owned housing-finance giants, to direct their focus toward making more credit available to homeowners, rather than pulling back from the mortgage market.
China, the world's second-largest economy, is another major factor shaping the global economic outlook. A report out earlier this week showed 9.9% declines in home sales during the first four months of the year in China, compared with a year earlier. Retail sales and industrial production also slowed.
Authorities have already rolled out what they call "mini-stimulus" measures. And in one recent sign of concern about China's sluggish property market, People's Bank of China officials earlier this week pushed the nation's major lenders to give priority in mortgage lending to first-time home buyers, according to a statement posted on the central bank's website Tuesday. The central bank also pushed the commercial banks to set mortgage rates at "reasonable" levels.
For now, though, the most aggressive government efforts to boost growth are taking shape in Europe.
ECB President Mario Draghi put financial markets on notice last week that the bank will probably announce new measures in June to try to lift inflation, which was 0.7% in April, well below the ECB's target of just under 2%.
More officials emerged Thursday in support of Mr. Draghi's comments. "We are determined to act swiftly, if required, and don't rule out further monetary-policy easing," ECB Vice President Vitor Constancio said in a speech in Berlin.
At the ECB, as at the Fed, officials have their doubts about how much more they can be expected to do to boost an economy facing a wide range of headwinds, many of which are beyond their control or mandate to confront.
Legacies of the crisis—including debt overhangs, impaired banks, high borrowing costs for small businesses and a general shortage of demand—are combining with Europe's longer-term structural problems, such as rigid labor markets and high taxes on employment, to slow growth.
Although it isn't yet clear how ambitious or effective the ECB's next steps will be, interest-rate cuts and some measures to encourage more bank lending look increasingly likely.
"We're seeing a cyclical pickup in activity, but it's anemic, given the depth of the slump," said Simon Tilford, deputy director of the Center for European Reform, a nonpartisan think tank in London. "Typically, you'd expect faster growth in the aftermath of such a recession," he said.
—Manuela Mesco and Christopher Bjork contributed to this article.
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Required reading for Brian Wesbury, and for all so-called 'millennials'.
Ignoring the path to recovery
Wednesday - May 28, 2014
By George F. Will
Published: Wednesday, May 28, 2014, 9:00 p.m.
It is said that the problem with the younger generation — any younger generation — is that it has not read the minutes of the last meeting. Barack Obama, forever young, has convenient memory loss: It serves his ideology. His amnesia concerning the policies that produced the robust recovery from the more severe recession of 1981-82 has produced policies that have resulted in 0.1 percent economic growth in 2014's first quarter.
June begins the sixth year of the anemic recovery from an 18-month recession. Even if what Obama's administration calls “historically severe” weather — aka, winter — reduced GDP growth by up to 1.4 percentage points, growth of 1.5 percent would still be grotesque.
The reason unemployment fell by four-tenths of a point (to 6.3 percent) in April while growth stalled is that 806,000 people left the labor force. There are about 14.5 million more Americans than before the recession but nearly 300,000 fewer jobs, and household income remains below the pre-recession peak.
Paul Volcker, whose nomination to be chairman of the Federal Reserve Board was Jimmy Carter's best presidential decision, raised interest rates to put the nation through a recession to extinguish the inflation that, combined with stagnant growth, ruined Carter's presidency. Then came the 1983-88 expansion, when growth averaged 4.6 percent, including five quarters over 7 percent.
Ronald Reagan lightened the weight of government as measured by taxation and regulation. Obama has done the opposite. According to Clyde Wayne Crews Jr. of the Competitive Enterprise Institute, four of the five largest yearly totals of pages in the Federal Register — the record of regulations — have occurred during the Obama administration. The CEI's “unconstitutionality index,” measuring Congress' delegation of its lawmaking policy, was 51 in 2013. This means Congress passed 72 laws but unelected bureaucrats issued 3,659 regulations.
The more than $1.1 trillion of student loan debt is restraining consumption, as is the retirement of baby boomers. More than 40 percent of recent college graduates are either unemployed or in jobs that do not require a college degree. This is understandable, given that 44 percent of the job growth since the recession ended has been in food services, retail clerking or other low-wage jobs.
In April, the number of persons under 25 in the workforce declined by 484,000. Unsurprisingly, almost one in three (31 percent) persons 18 to 34 are living with their parents, including 25 percent who have jobs.
So, the rate of household formation has, Neil Irwin reports in The New York Times, slowed from a yearly average of 1.35 million in 2001-06 to 569,000 in 2007-13. However, a Wall Street Journal headline announces that Washington has a plan: “U.S. Backs Off Tight Mortgage Rules.” It really is true: Life is not one damn thing after another; it is the same damn thing over and over.
There is, however, something new under the sun. The Pew Research Center reports that Americans 25 to 32 — “millennials” — constitute the first age cohort since World War II with higher unemployment or a greater portion living in poverty than their parents at this age. But today's millennials have the consolation of having the president they wanted.
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http://scottgrannis.blogspot.com/2014/05/one-negative-quarter-does-not-make.html
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http://www.redstate.com/2014/06/02/will-last-person-leaving-seattle-turn-lights/
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http://online.wsj.com/articles/u-s-adds-217-000-jobs-unemployment-rate-steady-at-6-3-1402058042?mod=U.S._newsreel_7
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http://dailysignal.com/2014/06/08/blue-state-path-inequality/
Stephen Moore, Heritage
For those in Washington obsessed with reducing income inequality, the standard prescription involves raising taxes on the well-to-do, increasing the minimum wage, and generally expanding government benefits—the policies characterizing liberal, blue-state governance. If only America took a more “progressive” approach, the thinking goes, leaving behind conservative, red-state priorities like keeping taxes low and encouraging business, fairness would sprout across the land.
Among the problems with that view, one is particularly surprising: The income gap between rich and poor tends to be wider in blue states than in red states. Our state-by-state analysis finds that the more liberal states whose policies are supposed to promote fairness have a bigger gap between higher and lower incomes than do states that have more conservative, pro-growth policies.
The Gini coefficient, a standard measure of income inequality, calculates the ratio of income at the top of the income scale relative to the income of those at the bottom. The higher the ratio, the more inequality. A Gini coefficient of zero means perfect equality of income and a Gini coefficient of one represents perfect inequality, such as if one person has all the income.
The measure has some obvious flaws: If everyone is doing better but some get richer at a faster pace, the Gini coefficient will increase, and so rising prosperity and economic progress will look like retrogression. Still we used it in our analysis, since it is the favorite measure among advocates of greater equality and the stick used to beat free markets. Conveniently, the U.S. Census Bureau annually calculates the Gini coefficient for the 50 states and the District of Columbia.
According to 2012 Census Bureau data (the latest available figures), the District of Columbia, New York, Connecticut, Mississippi and Louisiana have the highest measure of income inequality of all the states; Wyoming, Alaska, Utah, Hawaii and New Hampshire have the lowest Gini coefficients. The three places that are most unequal—Washington, D.C., New York and Connecticut—are dominated by liberal policies and politicians. Four of the five states with the lowest Gini coefficients—Wyoming, Alaska, Utah and New Hampshire—are generally red states.
In the Northeast, the state with the lowest Gini coefficient is New Hampshire (.430), which has no income tax and a lower overall state tax burden than that of its much more liberal neighbors Massachusetts (Gini coefficient .480) and Vermont (.439). Texas is often regarded as an unregulated Wild West of winner-take-all-capitalism, while California is held up as the model of progressive government. Yet Texas has a lower Gini coefficient (.477) and a lower poverty rate (20.5%) than California (Gini coefficient .482, poverty rate 25.8%).
Do the 19 states with minimum wages above the $7.25 federal minimum have lower income inequality? Sorry, no. States with a super minimum wage like Connecticut ($8.70), California ($8), New York ($8) and Vermont ($8.73) have significantly wider gaps between rich and poor than those states that don’t.
What about welfare benefits? A Cato Institute report, “The Work Versus Welfare Trade-Off: 2013,” measured the value of all welfare benefits by state in 2012. In general, the higher the benefit package, the higher the Gini coefficient. States with high income-tax rates aren’t any more equal than states with no income tax. The Gini coefficient measures pretax, not after-tax income, and it does not count most sources of noncash welfare benefits. Still, there is little evidence over time that progressive policies reduce income inequality.
To be clear, our findings do not show that state redistributionist policies cause more income inequality. But they do suggest that raising tax rates or the minimum wage fail to achieve greater equality and may make income gaps wider.
Here is why we believe these income redistribution policies fail. The two of us have spent more than 25 years examining why some states grow much faster than others. The conclusion is nearly inescapable that liberal policy prescriptions—especially high income-tax rates and the lack of a right-to-work law—make states less prosperous because they chase away workers, businesses and capital.
Northeastern states and now California are being economically bled to death by their pro-growth rivals, especially in the South. Toyota didn’t leave California for Texas for the weather. The latest IRS report on interstate migration provides further confirmation: The states that lost the most taxpayers (as a percent of their population) were Illinois, New York, Rhode Island and New Jersey.
When politicians get fixated on closing income gaps rather than creating an overall climate conducive to prosperity, middle- and lower-income groups suffer most and income inequality rises. The past five years are a case in point. Though a raft of President Obama’s policies—such as expanding the earned-income tax credit and food stamps, and extending unemployment benefits—have been designed to more fairly distribute wealth, inequality has unambiguously risen on his watch. Those at the top have seen gains, especially from the booming stock market, while middle-class real incomes have fallen by about $1,800 since the recovery started in June 2009.
This is a reversal from the 1980s and ’90s when almost all income groups enjoyed gains. The Gini coefficient for the United States has risen in each of the last three years and was higher in 2012 (.476) than when George W. Bush left office (.469 in 2008), though Mr. Bush was denounced for economic policies, especially on taxes, that allegedly favored “the rich.”
Our view is that John F. Kennedy had it right that a rising tide lifts all boats. It would be better for low- and middle-income Americans if growth and not equality became the driving policy goal in the states and in Washington, D.C.
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It's not a bug, it's a feature.
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It's not a bug, it's a feature.
Yes.
a. Elect us because of income inequality.
b. Dems win, Inequality gets worse.
c. Elect/re-elect us because of income inequality.
d. Inequality gets worse yet.
e. repeat
f. repeat.
g. repeat
...
z. people finally catch on?
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It is a familiar formula:
Elect us because of poverty.
We win and our policies cause poverty to worsen and become permanent.
Repeat.
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Worst case scenario for Democratic strategist:
Republicans are the party of the wealthy.
Republicans win and open economic freedom to everyone.
Everyone who wants to - succeeds. Fewer and fewer people need the party of bloated government.
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http://m.weeklystandard.com/blogs/1-8-american-men-between-ages-25-54-are-not-working_793938.html
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Downturn caused by weather, and restocking??! From ccp's post (Media Issues):
"Another drag on growth last quarter was probably also temporary: Companies sharply cut back on their restocking of goods. That wasn't unexpected. It occurred after companies had aggressively ramped up restocking in the second half of last year. The slowdown in the January-March quarter reduced annual growth by 1.6 percentage points, the government said. With growth strengthening since spring began, businesses are restocking at a faster rate again. Inventories grew 0.6 percent in April, the most in six months."
Downturn not caused by, as others including yours truly allege:
a) largest new entitlement
b) largest new taxes
c) largest new regulations - in the history of the republic.
To miss 3% shrinkage is colossal error. To miss 3% shrinkage when you are an economist forecasting 3% growth is quit-the-profession level error. To miss it AFTER IT HAPPENED is a jump-out-the-window danger alert. I hope our own Brian Wesbury works on the first floor of the First Trust Towers!
Plowhorse growth means slow and lousy growth, but steady and predictable. They couldn't 'predict' this downturn in the first 2 3/4 months AFTER IT HAPPENED! Did we really not know the first quarter weather by the end of first quarter?! Other than amateurs like us and the 'pros' who always predict doom, who saw this coming? It turns the term Professional Economist into an oxymoron, not one notch above professional journalist.
The greatest irony is that the number one threat that our economy faces, in the view of the current ruling class who just levied the above entitlements, taxes and regulations, is WARMING. The greatest security threat we face in the world is WARMING. Not a little fluctuation here and there, but worsening, spiraling, out of control, human caused and life as we know it ending WARMING. Yet the reason our economy is tanking is UNEXPECTEDLY COLD WEATHER. Go figure!
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I'll post the text and you can view the charts at the link:
http://www.ijreview.com/2014/07/152666-obamas-one-time-supporters-8-graphs-prove-economy-just-working/
Remember the President’s repeated assurances that his bailouts and Obamacare would revive the economy? Those claims probably sound pretty hollow to the President’s one-time supporters, young adults.
These eight graphs, which examine adults under the age of 25 who have moved out of their parents’ home, via PolicyMic, show that this group is suffering the worst from dwindling incomes and long-term unemployment.
1. Annual household income is at shockingly low levels for families headed by someone under the age of 25. Forty percent of these households get by on only $10,000 a year.
2. Compared with older households, under-25 poverty rates are extremely high.
3. Young unemployment is over double the national average. It peaked in spring 2010 at 19.5%, but still remains higher than it was at the onset of the recession.
4. Despite an increase in the national minimum wage in 2009, and several states across the country raising their minimum wages, median hourly wages for people under 25 are lower than they were 10 years ago. Some economists argue that the minimum wage increase actually contributed to these lowered hourly wages and higher unemployment.
5. Almost 90% of under-25 households rent, as oppose to own their living space. This lowers their equity and oftentimes their credit scores.
6. For over 50% of under-25s who rent, the monthly rent eats up over 35% of their already small incomes. This provides little income for this group to set aside money for savings or retirement.
7. On top of their rent, high cost of living and low incomes, 43% of this population is hit with paying off student debt.
8. Recent college graduates have record-breaking debt… and it looks like it’ll go even higher.
Young people are looking for another way – because the economy they’ve experienced for the past 5 years just hasn’t been working.
A change is necessary in Washington; let’s just hope that the detrimental effects of this economy won’t have long-lasting implications.
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http://www.capoliticalreview.com/capoliticalnewsandviews/real-june-employment-numbers-800000-part-times-jobs-newlost-523000-full-time-jobs/
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http://www.capoliticalreview.com/capoliticalnewsandviews/real-june-employment-numbers-800000-part-times-jobs-newlost-523000-full-time-jobs/
Yes. Historic increases in taxes and regulations levied against the hiring of full time employees leads to... less hiring of full time employees.
Who could have seen this coming?
http://dogbrothers.com/phpBB2/index.php?topic=2112.msg66637#msg66637
Obama Care in particular, which we know mandates additional employer health care costs for new full-time employees, freezes the motivation of employers to hire new full-time employees.
http://dogbrothers.com/phpBB2/index.php?topic=985.msg81381#msg81381
Obamacare has a myriad of disincentives to dissuade employment, full time employment, or employment beyond 50 employees.
http://dogbrothers.com/phpBB2/index.php?topic=2390.msg69979#msg69979
The challenges of Obamacare for business – particularly those small businesses with employees near the magic “50 employee” threshold for Obamacare regulations – will be extraordinary.
http://dogbrothers.com/phpBB2/index.php?topic=1791.msg68932#msg68932
"Why France Has So Many 49-Employee Companies
http://www.nydailynews.com/news/national/obamacare-cost-2-3-million-jobs-article-1.1602363
Nonpartisan group finds Obamacare will shrink workforce by 2.3 million full-time jobs
It was a joke I heard in Steamboat Colorado years ago in a ski-bum comedy skit:. To the roommates, "Hey guys, I got the job!" "Great!" "Now I just need 4 more part time jobs to pay rent!"
Now it is the story of the US Economy:
http://www.mcclatchydc.com/2013/08/02/198432/most-2013-job-growth-is-in-part.html
Most 2013 job growth is in part-time work, survey suggests
http://www.reuters.com/article/2013/08/21/us-usa-economy-jobs-analysis-idUSBRE97K05K20130821?feedType=RSS&feedName=topNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=992637
Reuters: Obamacare Is Creating Nation of Part-Time Workers
http://www.zerohedge.com/news/2014-07-03/june-full-time-jobs-plunge-over-half-million-part-time-jobs-surge-800k-most-1993
June Full-Time Jobs Plunge By Over Half A Million, Part-Time Jobs Surge
Is that really what we wanted??
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It's OK, I'm told amnesty will create millions of jobs and contribute to the tax base.
Plowhorse!
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It's OK, I'm told amnesty will create millions of jobs and contribute to the tax base.
Plowhorse!
After all these years and all these mistakes, liberal politicians and liberal voters just don't seem to get that all these well-intended programs come with serious unintended consequences. Serious enough to take down our economy, our culture and our country.
Same goes for the amnesty and immigration ideas.
The followers who believe them scare me more than the leaders who lie to them.
As Rush L has long said, we don't want to persuade or change them, we want to defeat them.
Handcuffing investors, businesses and employers is not how you help middle class employees.
I notice that Obama is pivoting away from abstract talk about income inequality to "the more politically palatable theme of lifting the middle class". http://www.washingtonpost.com/politics/with-democrats-split-on-inequality-issues-obama-shifts-talk-away-from-income-gap/2014/07/04/102f1f32-02be-11e4-b8ff-89afd3fad6bd_story.html
Unfortunately there is no accompanying pivot to economic policies that work.
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Monday Morning Outlook
________________________________________
New Career: Trashing Jobs #'s To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/7/2014
There must have been thousands of new jobs created in the past few years just to comb through the minutiae of the employment data looking for negative nuggets. All someone needs is access to the Bureau of Labor Statistics website and a calculator. Then, you go through the jobs data and find some stuff to spin negatively.
The job doesn’t pay that well, unless you have a radio or TV show or website with advertising. But, it’s politically rewarding on both the right and the left to prove how bad the economy is, even when the jobs data are improving month after month. The right gets to badmouth the President; the left gets to argue for more government spending.
This past month was no different. Payroll jobs rose 288,000 in June. Private sector jobs were up 262,000 – the 52nd consecutive monthly gain. From January through June this year, private sector jobs rose 1.33 million, the most job growth in the first six months of any year since 1998.
The unemployment rate fell to 6.1% in June – down from 7.5% a year ago. The median duration of unemployment fell to 13.1 weeks in June – it was 17.1 weeks in December 2013. Average hourly earnings rose 0.2%, and are up 2.0% from a year ago – this is not rapid wage growth, but average hourly numbers do not include benefits, tips, bonuses or sales commissions – in other words, this wage data is not the final word on income.
Finally, one of Janet Yellen’s favorite gauges of labor market strength, the quit rate – those voluntarily leaving jobs – rose to 9.0% of all unemployed last month. This is the highest quit rate since September 2008 and a sign of rising confidence in the jobs market.
Those who are negative about the economy have focused on four areas. 1- labor force growth 2 – part-time jobs 3 – wages 4- productivity.
The labor force has contracted by 128,000 in the past year. This does not erase, eradicate, or make irrelevant the positive job growth, but it’s clearly helped pull down the unemployment rate. Some note the number of adults “not in the labor force” is up 2.39 million in the past year. But this is largely due to aging Baby Boomers. And, even without aging Boomers, as the population grows it’s normal for the non-labor force population to grow, too. With only one exception (2006), the number not in the labor force has grown in every year since 1997.
Part-time jobs rose sharply last month, but total part-time employment was 27.4 million in June, which is down from 27.6 million for the full-year 2009. In other words, despite month-to-month volatility, job growth in the past five years has been full-time jobs.
We already mentioned wages, but even the flawed measure of average hourly earnings does not paint a picture of anything close to recession. Average hourly earnings
are up 2.0% in the past year, while total hours of work are up 2.1%. In other words, total earnings (hours times earnings) are up 4.1%, which is enough to keep spending on an upward trend.
Some fret about a slowdown in productivity growth during Q1 (declining GDP with rising jobs), but this is a one-off issue. We forecast real GDP likely grew at a 3% annual rate in Q2. In addition, measures of productivity are woefully flawed.
What we find most interesting is that a vast majority of those who work so hard to be negative about employment data support Republican politicians. They have been relentless in using any negative economic news in an attempt to gain political advantage over the past five years.
But, they ought to start taking credit for policies that have helped accelerate job growth and cut the unemployment rate. The improvement so far in 2014 is directly related to the end of extended unemployment benefits. By ending the 99-week payment of unemployment benefits, many were encouraged to find jobs, while others, who only said they were looking for jobs in order to get benefits, dropped out of the labor force. (KRAUTHAMMER MAKES THE SAME POINT)
Five years into an economic recovery was past time to end those benefits, and the improvement in the job market this year was predicted by free market economic models. By trashing the improved data on jobs, those on the political right are dismissing the benefits of their own policies. We don’t understand this, but then again we are just economists, not brilliant political strategists.
The bottom line is that our constituents are investors, not Republicans or Democrats. As a result, we look at the data and assess its impact on markets. The June employment report was a very positive and optimistic one. Stay cool, stay long, and stay optimistic. The Plow Horse Economy is trotting just a little bit, and should continue to do so.
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http://pjmedia.com/blog/your-monday-morning-doom-gloom/?singlepage=true
http://finance.yahoo.com/news/startling-number-millennials-overqualified-jobs-014158619.html
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Friday, June 6, 2014 by Casey Mulligan, Economist, University of Chicago
http://caseymulligan.blogspot.com/2014/06/employment-just-went-down.html
Employment just went down
Please don't forget that the establishment survey excludes agricultural workers and many of the self-employed. The establishment survey has a lot going for it, but only for the part of the economy it covers. For anyone interested in the national economy, I recommend using the establishment survey plus unincorporated self-employed (from the household survey, seasonally adjusted) plus agricultural workers (also from the household survey, seasonally adjusted). See also the BLS on this matter.
One of the critiques of the household survey is that it is noisy month-to-month -- I agree. But my proposed augmentation of the establishment survey is not particularly noisy because the vast majority of its employment is from the establishment survey.
Changes from April 2014 to May 2014 (100s of workers):
+217 establishment survey
-213 unincorporated self-employed
-109 agricultural workers (excluding self-employed)
----------------------------------
-105 National employment change
[The average monthly change since December 2013 has been +152: just keeping up with population growth. The avg monthly change in 2013 was +171. This employment measure has increased 36 out of the past 40 months (going back to 2010, not counting this month). This month's change is 1.9 standard deviations below the average change since 2010.]
[2010 was the labor-market's low point by most employment measures. But unincorp self-employment has fallen another 567,000 since then. If you use the establishment survey, you miss that.]
Posted by Casey B. Mulligan, Univ. of Chicago
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http://poorrichardsnews.com/post/91772020223/obamas-economic-recovery-fewer-than-half-of-us
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I recently read an article in Foreign Affairs magazine (it is out in my truck so I do not have the exact name handy) but it spoke of a number of trends. IIRC it spoke of
a) ideas plus cheap labor e.g. Apple's strategy of "Conceived in America, assembled in China".
b) With globalization, this undermines Americans who work in sectors of the economy where they have to compete with foreign labor
c) Capital/automation-- a trend which threatens cheap labor, especially when labor seeks more money.
d) digitization of capital: a trend which threatens the returns on capital-- the marginal cost of an additional unit of software is essentially zero.
So, who wins? Those who come up with the ideas, the first movers. The article called the dynamic a Pareto Power Rule or something like that and said that the dynamic definitely led to increasing income inequality.
My point here is that on top of the hideous costs of the fascist economic model currently being applied, there are ALSO deep underlying trends which which present deep questions that must be answered.
The first step is to identify them.
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Nothing that can't be solved by flooding America with illegal aliens!
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The Lingering, Hidden Costs of the Bank Bailout
Why is growth so anemic? New economic activity has been discouraged. Here are some ways to change that.
By Vernon L. Smith
July 23, 2014 8:01 p.m. ET
The rescue of incumbent investors in the government bailout of the largest U.S. banks in the autumn of 2008 has been widely viewed as unfair, as indeed it was in applying different rules to different players. The bailout through the Troubled Asset Relief Program has been justified by the Federal Reserve and Treasury as preventing a financial collapse of the economy.
The rescue, however, had a hidden cost for the economy that is difficult to quantify but can be crippling. New economic activity is hobbled if it is not freed from the burden of sharing its return with investors who bore risks that failed. The demand for new economic activity is enlarged when its return does not have to be shared with former claimants protected from the consequences of their risk-taking. This is the function of bankruptcy in an economic system organized on loss as well as profit principles of motivation.
Financial failure and the restructuring of assets and liabilities motivates new capital to flow directly into new enterprise activity at the cutting edge of technology—the source of new products, output and employment which in turn provide new growth and recovery. Requiring new investment to share its return with failed predecessors is tantamount to having required Henry Ford to share the return from investment in his new horseless carriage with the carriage makers, livery stables and horse-breeding farms that his innovation would render obsolete.
This burden on new investment helps explain the historically weak recovery since the "Great Recession" officially ended in June 2009, and the recent downturn in gross-domestic-product growth. The GDP growth rate for all of 2013 was just 1.9%, and in the first quarter of 2014 it declined at a seasonally adjusted annual rate of 2.9%.
Enlarge Image
Getty Images
With only two balance-sheet crises in the U.S. in the past 80 years, 1929-33 and 2007-09, we have little experience against which to test alternative policies and economic responses. Japan and Sweden are examples of economies that followed distinct pathways after crises in the early 1990s. In Japan the economy floundered in slow growth for over two decades; Sweden recovered much more quickly. The difference can be attributed to following different policies in the treatment of severe bank distress.
Japan's real-estate market suffered a major decline in the early 1990s. Home prices peaked in the fall of 1990 and fell by 25% in two years. By 2004 they had fallen 65%. Meanwhile, nonperforming loans continued to escalate throughout this 14-year period.
Japanese policy permitted banks to carry mortgage loans at book value regardless of their accumulating loss. Loans were expanded to existing borrowers to enable them to continue to meet their mortgage payments. This response could be rationalized as "smoothing out the bump." Bank investors were protected from failure by stretching out any ultimate return on their investment, relying on a presumed recovery from new growth that never materialized. This accounting cover-up was coupled with government deficit spending—tax revenues declined and expenditures rose—as a means of stimulating economic growth that was delayed into the future.
From the beginning Japan was caught in the black hole of too much negative equity. The banks, burdened with large inventories of bad loans, geared down into debt reduction mode, reluctant to incur more debt, much as their household mortgage customers were mired in underwater mortgages and reluctant to spend. The result was a decade of lost growth that stretched into and absorbed a second decade of dismal performance. The policy cure—save the banks and their incumbent investors—created the sink that exceeded the pull of recovery forces.
Sweden's response to deep recession in the early 1990s was the opposite of Japan's: Bank shareholders were required to absorb loan losses, although the government financed enough of the bank losses on bad assets to protect bank bondholders from default. This was a mistake: Bondholders assumed the risk of default, and a bank's failure should have required bondholder "haircuts" if needed. Nevertheless, the result was recovery from a severe downturn. By 1994 Sweden's loan losses had bottomed out and lending began a slow recovery that accelerated after 1999.
The political process will always favor prominent incumbent investors. They are visible; they contribute to election campaigns; they assist in the choice of secretaries of Treasury and advisers and they suffer badly from balance-sheet crises like the Great Recession and the Great Depression. Invisible are the investors whose capital will flow into the new economic activity that constitutes the recovery.
Growth in both employment and output depends vitally on new and young companies. Unfortunately, U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment. Now the Obama administration is going after firms that reincorporate overseas for tax purposes. Last week Treasury Secretary Jack Lew wrote a letter to the chairman of the House Ways and Means Committee urging Congress to "enact legislation immediately . . . to shut down this abuse of our tax system."
This is precisely the opposite of what U.S. policy makers should be doing. To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate. Ideally, since young firms generally reinvest their profits in production and jobs, such taxes should fall only on business income after it is paid out to individuals. As long as business income is being reinvested it is growing new income for all.
There are no quick fixes. What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.
Mr. Smith, a recipient of the 2002 Nobel Prize in economics, is a professor at Chapman University and the author, along with Steven D. Gjerstad, of the new book "Rethinking Housing Bubbles" (Cambridge University Press).
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Famous people caught reading the forum...
I have been alleging repeatedly on these pages that the rate of real new business startups is at a record low. I have been alleging but not backing it up with anything. I say it is hard to measure because people file LLCs to protect assets with no intention to ever hire any employees.
I also have been alleging that the stock market going up (until recently) while the economy is stagnant happens because the DOW, S&P, etc. measure only the performance of entrenched players in each industry, who benefiting unfairly from the fact that over-bearing over-regulations are locking out start ups, innovation and the normal process of dynamic, creative destruction.
Now enter Robert Samuelson of Newsweek/Washington Post fame, writing today to fill in the missing details. He poses the question so delicately, interviewing economists: What happened to all the entrepreneurs? Good question. We do not have an explanation, ... One theory is that the cumulative effect of regulations, he says, discriminates against new businesses and favors “established firms that have the experience and resources to deal with it.” What allegedly deters and hampers startups is not any one regulation but the cost and time of complying with a blizzard of them.
Yes, that's right!
http://www.washingtonpost.com/opinions/robert-samuelson-where-have-all-the-entrepreneurs-gone/2014/08/06/e01e7246-1d7c-11e4-82f9-2cd6fa8da5c4_story.html
Where have all the entrepreneurs gone?
By Robert J. Samuelson August 6
We may have a “senile economy,” says economist Robert Litan of the Brookings Institution. That’s senile as in old, rigid and undynamic.
We are taught otherwise. Americans are reared on the notion that we’re the most entrepreneurial of peoples — and many success stories seem to prove it. There’s a long legacy from Thomas Edison to Mark Zuckerberg. Our economy is constantly kept young by the “next new thing.”
Litan dissents. What’s happening now, he says, is that the economy is increasingly dominated by older firms tied to proven products and familiar business methods. Litan is not just blowing smoke. In a new study, he and Ian Hathaway measured the age of U.S. businesses. They were astonished by what they found: From 1992 to 2011, the share of U.S. firms that were 16 and older jumped from 23 percent to 34 percent.
“Like the population, the business sector of the U.S. economy is aging,” they write. The trend “has occurred in every state and metropolitan area, every firm size category, and in each broad industrial sector.”
Even more startling, they argue, is the main source of this aging: a sharp drop in entrepreneurial activity. They define entrepreneurship as the number of startups — new firms ranging from plumbing to biotechnology. From 1978 to 2011, startups fell from about 15 percent of all firms to 8 percent; the slide was gradual until the 2008-09 financial crisis, when it accelerated. By these numbers, the economy’s rejuvenation from below is weakening; though conspicuous, the Internet’s influence is exaggerated.
Other studies reach similar conclusions. Shrinking entrepreneurship is hurting job creation and productivity, write economists Ryan Decker and John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau in the Journal of Economic Perspectives.
Start with jobs. From 1980 to 2010, U.S. employment increased by an average of 1.4 million jobs annually, report the economists. Over the same period, employment gains by startups averaged 2.9 million annually. By this math, startups accounted for more than the total gain in U.S. employment.
That is probably not true, because many of those jobs later disappeared. Most new firms fail within five years. Still, many surviving startups grew rapidly and generated much of the gain in total employment. Companies five years and older don’t much increase overall employment, note the economists. Some older firms add jobs, others subtract them; on balance, gains seem modest. The economy needs the employment boosts of startups.
Something similar is happening to labor productivity. (Productivity is economists’ jargon for efficiency and is measured as output per hour worked.) Higher productivity supports higher living standards. Competition among firms, write the economists, raises productivity. More efficient firms drive out the less efficient. One study attributes 35 percent of productivity gains to this “churning” of firms; the fall in startups dampens these improvements.
All this is consistent with an economic recovery characterized by weak investment, low productivity gains and mediocre employment growth. Older firms serving mature markets have limited opportunities for increased investment and hiring. With some market power, they may also cling to outdated and costly practices. Just recently, Procter & Gamble — the consumer brand giant that makes Tide, Pampers and Crest — said it might eliminate dozens of poorly performing brands and concentrate on big winners.
What happened to all the entrepreneurs? Good question.
“We do not have an explanation,” write the University of Maryland and the Census Bureau economists. Neither does Litan. “One theory is that the cumulative effect of regulations,” he says, discriminates against new businesses and favors “established firms that have the experience and resources to deal with it.” What allegedly deters and hampers startups is not any one regulation but the cost and time of complying with a blizzard of them.
Economist Haltiwanger says the falloff in entrepreneurship changed character after 2000. Before, it was “concentrated in sectors like retail trade and services” and, in part, reflected “mom and pop retail firms being displaced by large . . . firms like Wal-Mart” — a productivity-enhancing shift. Since then, the decline has spread to high-tech sectors and even successful startups create fewer jobs than before.
None of this is reassuring. It challenges the conventional wisdom that the Internet’s relentless advance attests to the economy’s underlying vitality. Old-line companies will change or be replaced by new tech-savvy companies. This may be wishful thinking that conceals deeper forces holding the economy back. We need to discover what they are and what, if anything, might be done about them.
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Anything positive uttered on Supply Side Economics from a Democrat and former Obama adviser should go on our Cognitive Dissonance of the Left thread, but we will take a little political economic honesty anywhere we can find it. We need to increase supply in the economy. How would you do that? One idea is to allow in tens of millions more unskilled workers and non workers and the other ideas include "development of energy resources and improvements to the business tax system". Unmentioned is that, to the rest of the Dem party, development of energy is to leave fossil fuels in the ground while cronying up the uneconomic sources, and improvement of the business tax system means to raise the world's highest rates even higher!
http://www.washingtonpost.com/opinions/lawrence-summers-supply-issues-could-hamper-the-us-economy/2014/09/07/274ce00c-352f-11e4-9e92-0899b306bbea_story.html
Supply issues could hamper the U.S. economy
The U.S. economy continues to operate way below estimates of its potential that were made prior to the onset of financial crisis in 2007, with a shortfall of gross domestic product now in excess of $1.5 trillion — or $20,000 per family of four. Just as disturbing, an average economic growth rate of less than 2 percent since that time has caused output to fall further and further below those estimates of potential. Almost a year ago, I invoked the concept of “secular stagnation” in response to the observation that, five years after the financial hemorrhaging had been stanched, the business cycle was not returning to what had been previously thought of as normal levels of output. http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf
Secular stagnation, in my version, has emphasized the difficulty in maintaining sufficient economic demand to permit normal levels of output. Given a high propensity to save, a low propensity to invest and low inflation, it has been impossible for real interest rates to fall far enough to spur the economy to its full potential, since nominal interest rates cannot fall below zero.
Given the various factors — rising inequality, the lower capital costs needed to enter dynamic businesses, slowing population growth, increasing foreign reserves and greater spreads between borrowing and lending cost — operating to reduce natural interest rates, it continues to seem unlikely to me that, as currently structured, the U.S. economy is capable of demanding 10 percent more output with interest rates that are consistent with financial stability. So demand-side secular stagnation remains an important economic problem.
But as the work of Northwestern University economist Robert J. Gordon in particular points up, it may well be that now supply-side barriers threaten to hold back the economy before constraints on the ability to create demand start to bind. Two ways of looking at the situation point up the difficulty.
First, while I have emphasized that U.S. GDP is still far short of what pre-crisis trends predicted, the unemployment rate, now at 6.1 percent, has reverted most of the way back to even relatively optimistic estimates of its normal level. In other words, even as growth has been poor, it appears that demand has been advancing rapidly enough to substantially reduce slack in the labor market. As Gordon rightly emphasizes, weak growth along with significant decreases in labor slack suggest a major slowing of the growth of potential output.
To be fair, one can quarrel with the use of the headline unemployment rate as a measure of slack in the labor market. But the degree to which the labor market appears to be normalizing is even greater if one looks at measures of job openings and vacancies, new unemployment insurance claims or short-term unemployment.
Second, even with Friday’s relatively weak employment figures, monthly job growth has averaged more than 225,000 since February. If this trend continued, what would happen to unemployment? This, of course, depends on what happens to labor force participation, which has been trending down in recent years because of the aging of the population and long-term structural trends. Assume, for simplicity’s sake, that participation rates remain constant (an optimistic assumption) and that the economy keeps on creating 200,000 jobs a month. A simple calculation reveals that the unemployment rate would fall to the 4 percent range by the end of 2016.
While such a low unemployment rate is conceivable, it seems more likely that employment growth will slow at some point, either because of employers having difficulty finding workers, rising wages or government policy decisions. In any of these cases, the economy would be held back not by a lack of demand but a lack of supply potential.
Why has supply potential declined so much? This will be hotly debated for years to come. Part of the answer lies in the effect of past economic weakness. Part of it is the brutal demographic realities of an aging population, the end of the trend toward increased women’s labor force participation and the exhaustion of the gains that could be won from an increasingly educated workforce. And part is the apparent slowing of productivity growth.
To achieve growth of even 2 percent a year over the next decade, active support for demand will be necessary but not sufficient. In the United States, as in Europe and Japan, structural reform — to both increase the productivity of workers and capital and to increase the number of people able and willing to work productively — is essential. Infrastructure investment, immigration reform, policies to promote family-friendly workplaces, development of energy resources and improvements to the business tax system will become ever more important.
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Gaining part time jobs. Losing full time jobs. Forcing and enticing people out of the workforce. Worst recovery in history.
Obama Labor Secretary Thomas Perez: "there are still 3 million long-term unemployed Americans, and we can do more to help those who are still struggling to recover".
"We can do more to help" - bring this country down even further. Sounds like a threat.
Please stop doing everything you are doing to cause this.
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http://money.cnn.com/2014/09/05/investing/august-jobs-report-142000-added/
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Wesbury is perfectly coherent when he writes about policy choices.
http://m.wsj.com/articles/brian-wesbury-behind-the-global-growth-slowdown-1413327652?mobile=y
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This is an important piece IMHO. Sorry I can't cut and paste well from my phone.
http://m.startribune.com/opinion/commentaries/278857171.html?section=opinion
Related: https://danieljmitchell.wordpress.com/2011/07/15/two-pictures-that-perfectly-capture-the-rise-and-fall-of-the-welfare-state/
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I really have to question if it has made health care any better since I am in that field. So far it is no more than a game of numbers and I honestly don't believe much of what I read anymore. Too many agendas.
This could go under technology but I thought this thread might be the most fitting place:
http://www.economist.com/news/special-report/21621237-digital-revolution-has-yet-fulfil-its-promise-higher-productivity-and-better
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One more political economic lesson from the cartoon front:
(https://danieljmitchell.files.wordpress.com/2011/04/wizard-of-id-parody.jpg?w=500&h=395)
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Famous people caught reading the forum? This has already been widely reported here. No one is saying which direction the cause and effect arrow is pointing...
http://news.investors.com/ibd-editorials/120414-729164-income-inequality-is-greatest-in-the-most-liberal-states.htm
Income Inequality Is Greatest In the Most Liberal States
(http://www.investors.com/image/ISSuneq_141205.png.cms)
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Refuting liberals is hard work - because their lips just keep moving.
Here is "Forward Progressives" pushing the idea that 5 charts demonstrate what a great economic success the Obama administration has been:
http://www.forwardprogressives.com/5-charts-proving-how-successful-president-obama-been/
(Read progressives as always in quotes.)
Unsurprisingly, there are flies in their ointment.
1. Progressives compare minor upward results with the depths of the crash (that they caused), not with previously successful periods.
2. They judge job growth as positive even when most of it was below the level required to break even.
3. They call it unemployment falling when the real change is a rapidly declining workforce participation rate. There are more people not working now than ever before. Even with funny math, the stated unemployment rate is worse than when they took majority power in Washington.
4. Progressives claim stock gains with the blatant hypocrisy that they would most certainly be criticizing these gains if it was someone else's policies sent the financial gains only to the wealthiest among us. The rich and powerful gained while the middle declined. Startup under Obama were like a Neal Young song; they "start off real slow and then fizzle out altogether".
5. Progressives chart the highest debt added in history to look like a trend line down when in fact their own budgets and forecasts have it going right back up.
6. Lastly, how do you say Chutzpah? From the author of Audacity, they claim oil production in the US is way up under Obama! Yes it is! Is there one person smart enough to vote that doesn't know that Obama fought against oil production at every turn?
Take a close look at a liberal viewpoint and most often you will find a lie or deception in the first substantive point. And here is no exception.
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Friday, December 19, 2014
Jaguar Inflation -- A Layman's Explanation of Government Intervention
By Robert Prechter, CMT
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let's try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyon'’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy.
Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn.
Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don't care if they're free. They can't find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can't afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.
The same thing can happen with credit.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone's delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit.
Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit. They don't care if it's free. They can't find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can't afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.
See how it works?
Is the analogy perfect? No. The idea of pushing credit on people is far more dangerous than the idea of pushing Jaguars on them. In the credit scenario, debtors and even most creditors lose everything in the end. In the Jaguar scenario, at least everyone ends up with a garage full of cars. Of course, the Jaguar scenario is impossible, because the government can't produce value. It can, however, reduce values. A government that imposes a central bank monopoly, for example, can reduce the incremental value of credit. A monopoly credit system also allows for fraud and theft on a far bigger scale. Instead of government appropriating citizens' labor openly by having them produce cars, a monopoly banking system does so clandestinely by stealing stored labor from citizens' bank accounts by inflating the supply of credit, thereby reducing the value of their savings.
I hate to challenge mainstream 20th century macroeconomic theory, but the idea that a growing economy needs easy credit is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers. Would lower levels of credit availability mean that fewer people would own a house or a car? Quite the opposite. Only the timeline would be different.
Initially it would take a few years longer for the same number of people to own houses and cars -- actually own them, not rent them from banks. Because banks would not be appropriating so much of everyone's labor and wealth, the economy would grow much faster. Eventually, the extent of home and car ownership -- actualownership -- would eclipse that in an easy-credit society. Moreover, people would keep their homes and cars because banks would not be foreclosing on them. As a bonus, there would be no devastating across-the-board collapse of the banking system, which, as history has repeatedly demonstrated, is inevitable under a central bank's fiat-credit monopoly.
Jaguars, anyone?
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http://www.realclearpolitics.com/video/2015/01/23/dem_sen_bernie_sanders_the_reality_is_that_real_unemployment_is_not_55_percent.html
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http://www.addictinginfo.org/2014/09/14/15-now-seatac/
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http://www.addictinginfo.org/2014/09/14/15-now-seatac/
In Seattle, the adoption of a $15 per hour minimum wage begins April 1, 2015. The legislation will phase-in a $15 per hour minimum wage annually over 3 to 7 years, depending on employer size.
http://www.seattle.gov/council/issues/MinimumWage/default.html
(You were duped, and so was I most of the way through writing a reply!)
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The question on minimum wage is not how much to pay, but who should decide.
The journalism here is quite misleading. This policy is for a little municipality called SeaTac, population 26k located in the overpriced airport area of Seattle Tacoma. It affects a .007 proportion of the (3.6 million) Seattle metropolitan area. Airport areas are notoriously over-priced because of a captive audience. That means the nation should do this?? (Seattle itself is only 18% of the "Seattle" metro area.)
Alternatives to paying minimum wage workers include installing more labor saving innovations and setting up shop elsewhere. Neither happens instantly. From automated gas pumps to automated teller machines to automated french fry cookers, the effects are seen in the longer term.
Even if you believe in having our all-knowing government meddle in minimum wage law, the correct number for each industry and each location is different. Note that this experiment is in one city, not a metropolitan area, a whole state, much less a nation.
You've got to love the thought process of the liberal commentary: "They forgot the words of wisdom from President Franklin D. Roosevelt, in an address given in Cleveland, Ohio on October 16, 1936 "It is to the real advantage of every producer, every manufacturer and every merchant to cooperate in the improvement of working conditions, because the best customer of American industry is the well-paid worker."
That of course has absolutely NOTHING to do with the minimum wage situation around the airport. Maids don't rent rooms at The Ritz or buy many Boeing products! What they do is end up on public support when jobs disappear.
"The biggest sign that the higher wage did not impact Seatac however comes with the news that the Seatac airport will be undergoing a half-billion dollar renovation and expansion."
Huh? The public sector expanding means what?? Good grief! Are these liberal sources coming from Crafty's facebook friends? )
The minimum wage is entry pay for mostly unskilled work - the bottom wrung of the economic ladder. The worker is supposed to gain skills and experience and move up the ladder. But not if the government forces entry level work to be ever more lucrative, or if it causes the elimination of the first step on the ladder for more and more people.
What percent of American households live off of minimum wage with no other support? Almost none. The average family income of a minimum wage worker is $53,000.
http://www.heritage.org/research/reports/2013/02/who-earns-the-minimum-wage-suburban-teenagers-not-single-parents
http://www.bls.gov/cps/minwage2011.htm
False reporting of a false issue, IMHO.
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Jobs Boom Thanks to Ending Unemployment Benefits Extension
Jan. 26, 2015
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“After a breakthrough year for America, our economy is growing and creating jobs at the fastest pace since 1999,” Barack Obama boasted in his State of the Union address. Indeed, he mentioned “jobs” some 19 times. The trouble is, it’s not his policies that are growing the job market – it’s the end of his policies. Democrats have long claimed that paying people not to work creates jobs, but as Ronald Reagan once quipped, “Our liberal friends … know so much that isn’t so.” According to a new study from the National Bureau of Economic Research, roughly 60% of 2014’s job growth came because Democrats' lavish unemployment benefits were not extended again. The study is by no means the last word on the subject, as there are innumerable factors that go into something so complex as the job market. But as National Review’s Patrick Brennan summarizes: “The general economic consensus has always been that unemployment insurance slightly boosts the unemployment rate. … [W]e still have unemployment insurance, of course, because we want a safety net for people in the event of job loss. That just has to be balanced against the costs that the program imposes on the labor market.” More…
Oh, and by the way, look to Texas for all the jobs. According to American Enterprise Institute’s Mark J. Perry, “It’s a pretty impressive story of how job creation in just one state – Texas – is solely responsible for the 1.169 million net increase in total US employment (+1,444,290 Texas jobs minus the 275,290 non-Texas job loss) in the seven year period between the start of the Great Recession in December 2007 and December 2014. The other 49 states and the District of Columbia together employ about 275,000 fewer Americans than at the start of the recession seven years ago, while the Lone Star State has added more than 1.25 million payroll jobs and more than 190,000 non-payroll jobs (primarily self-employed and farm workers).”
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http://www.nytimes.com/2015/01/26/business/economy/middle-class-shrinks-further-as-more-fall-out-instead-of-climbing-up.html?emc=edit_th_20150126&nl=todaysheadlines&nlid=49641193
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How Student Debt Harms the Economy
In 2010-13, the percentage of younger people owning part of a new business dropped to 3.6% from 6.1%.
Mitchell E. Daniels
Jan. 27, 2015 6:34 p.m. ET
WSJ
To the growing catalog of damage caused by the decades-long run-up in the cost of higher education, we may have to add another casualty. On top of the harm high tuition and other charges are inflicting on young people, and the way their struggles are holding back today’s economy, we must add the worry that tomorrow’s economy will suffer, too.
Ever-escalating tuitions, especially in the past dozen years, have produced an explosion of associated debt, as students and their families resorted to borrowing to cover college prices that are the only major expense item in the economy that is growing faster than health care. According to the Federal Reserve, educational debt has shot past every other category—credit cards, auto loans, refinancings—except home mortgages, reaching some $1.3 trillion this year. Analyses in The Wall Street Journal and by Experian in 2014 show that 40 million people, roughly 70% of recent graduates, are now borrowers. In the class of 2014, the average borrower left with an average load of $33,000.
Even though the debt balloon is a fairly young phenomenon, several damaging results are already evident. Research from the Pew Research Center and Rutgers shows that today’s 20- and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint. Between 25% and 40% of borrowers report postponing homes, cars and other major purchases. Half say that their student loans are increasing their risk of defaulting on other bills. Strikingly, 45% of graduates age 24 and under are living back at home or with a family member of some kind.
Now comes evidence that it’s not just consumer spending that these debts are denting, but also economic dynamism. A variety of indicators suggest that the debt burden is weighing on the engine that has always characterized American economic leadership—and the factor that many have assumed will overcome many structural and self-imposed challenges: our propensity to innovate and to invent new vehicles of wealth creation.
For instance, the U.S., despite its proud protestations about how creative and risk-taking it is, has fallen in multiple world-wide measures of entrepreneurship. A drop in such activity by the young is playing a part. From 2010 to 2013, the Journal reported on Jan. 2, the percentage of younger people who reported owning a part of a new business dropped to 3.6% from 6.1%. Over the past 10 years, the percentage of businesses started by someone under 34 fell to 22.7% from 26.4%. Common sense says that the seven in 10 graduates who enter the working world owing money may be part of this shift.
New data strengthens this hypothesis. Working with the Gallup Research organization, Purdue scholars devised last year’s Gallup-Purdue Index, the largest survey ever of U.S. college graduates. Among its findings: 26% of those who left school debt-free have started at least one business. Among those with debt of $40,000 or more, only 16% had done so.
Controlling the cost of higher education, and expanding access to its undeniable benefits, is first of all a social and moral obligation of those in a position to affect it. Purdue is midway through what is so far a three-year tuition freeze. Coupled with reductions in the costs of room and board and textbooks, these actions have brought down our total cost of attendance for each of the last two years, for the first time on record.
Aggressive counseling of students about the dangers of too much borrowing, and the alternatives available to them, has also helped, as total Purdue student borrowings have dropped by 18% since 2012. That represents some $40 million these superbly talented young engineers, computer scientists and other new workers will have to spend, or perhaps invest in their own dreams of enterprise. At Purdue, where we give students the ownership of any intellectual property they create, and support their attempts to give birth to new products and companies, a significant number of such dreams are likely to become real.
Today’s young Americans have a very legitimate beef with previous generations. A pathetically weak recovery has left millions of them unemployed, underemployed and with falling incomes, not the rising ones their predecessors could expect. And, never forget, they are already saddled with a lifetime per capita debt of some $700,000 (to date) to pay not for debts they incurred, but for those run up in entitlement programs such as Social Security, Social Security Disability and Medicare, explicitly designed to tax the young to subsidize their elders.
For future generations to enjoy the higher living standards America has always promised, nothing matters more than that the U.S. remains a land where miracles of innovation and entrepreneurship happen consistently. As a matter of generational fairness, and as an essential element of national economic success, the burden of high tuitions and student debt must be alleviated, and soon.
Mr. Daniels, the former governor of Indiana (2005-13), is the president of Purdue University.
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Not sure how they can say "has ever been" but the gist of this seems right to me.
http://www.thegatewaypundit.com/2015/02/gallup-ceo-number-of-full-time-jobs-as-percent-of-population-is-lowest-its-ever-been-video/
U6 rate:
http://portalseven.com/employment/unemployment_rate_u6.jsp
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"People often form strong opinions on the basis of weak statistics." Great followup here to our Elizabeth Warren discussion. (Did I mention a fact check was needed?) $20 trillion of income missed in just one category. The income measure Warren quotes (from Piketty) excludes 40% of income and then she is disturbed by the lack of income.
http://www.wsj.com/articles/alan-reynolds-the-mumbo-jumbo-of-middle-class-economics-1425340903
The Mumbo-Jumbo of ‘Middle-Class Economics’
The statistics used to claim that average incomes have stagnated since 1980 also show stagnation since 1968.
By ALAN REYNOLDS
March 2, 2015 7:01 p.m. ET
In the “Economic Report of the President” released on Feb. 19, the White House’s Council of Economic Advisers defines “middle class economics” primarily by the average income of the bottom 90%. “Average income for the bottom 90 percent of households,” according to the ERP, “functions as a decent proxy for the median household’s income growth.”
This is absurd: The average income for the bottom 90% is not a decent proxy for the median nor even a decent measure of household income. It is instead a roughly fabricated estimate of pretax “market income” reported on tax returns that falls below some threshold for the top 10% ($114,290 in 2013). But this dodgy number does serve as the basis for CEA Chairman Jason Furman ’s assertion a day later on the Vox blog that the U.S. has suffered a “40-year stagnation in incomes for the middle class and those working to get into the middle class.”
The measure has become popular on the left. Sen. Elizabeth Warren (D., Mass.) recently asked an AFL-CIO conference, “Since 1980, guess how much of the growth in income the [bottom] 90% got? Nothing. None. Zero.” NPR displayed the same bottom 90% data and stretched it even further, claiming that “after 1980, only the top 1% saw their incomes rise.”
The source cited in the ERP for the claims about stagnating average incomes is the World Top Incomes Database. The U.S. data come from economists Thomas Piketty and Emmanuel Saez, the same source cited by Sen. Warren and NPR.
Amazingly, these same statistics also show there has been no increase for the “bottom” 90% since 1968. Measured in 2013 dollars, average income of the bottom 90% was supposedly $32,730 in 1968, $32,887 in 1980, $35,326 in 2007 and $32,341 in 2013.
ENLARGE
PHOTO: GETTY IMAGES
This is totally inconsistent with the data the Bureau of Economic Analysis uses to calculate GDP. For example, real personal consumption per person has tripled since 1968 and doubled since 1980, according to the BEA. Are all those shopping malls, big box stores, car dealers and restaurants catering to only the top 10%? The question answers itself.
Instead of the White House concoction, consider the Congressional Budget Office estimates of actual median household income. Measured in 2013 dollars, after-tax median income rose briskly from $46,998 in 1983 to $70,393 in 2008 but remained below that 2008 peak in 2011. The sizable increase before 2008 is partly because the average of all federal taxes paid by the middle fifth has almost been cut in half since 1981—from 19.2% that year to 17.7% in 1989, 16.5% in 2000, 13.6% in 2003 and 11.2% in 2011.
Census Bureau estimates of median “money income,” on the other hand, do not account for taxes, so they miss a major source of improved living standards. They also exclude realized capital gains, public and private health insurance, food stamps and other in-kind benefits. Even so, the Census Bureau’s flawed estimate of median income rose 13.7% from 1984 to 2007 before falling 8% from 2007 to 2013.
Both CBO and Census estimates show only six years of middle-class stagnation, not 40.
The Piketty and Saez data are crucially flawed. The total income reported on individual tax returns, which is the basis of their estimates, is substantially less than any official measure of total income, and the difference keeps getting wider. In their original 2003 study, Messrs. Piketty and Saez mentioned one rapidly expanding source of missing income—disappearing dividends in tax-return data. These were “due mostly to the growth of funded pension plans and retirement savings accounts through which individuals receive dividends that are never reported as dividends on income tax returns.”
The same is true of interest and capital gains accumulating inside such tax-free savings accounts. These have grown to nearly $20 trillion, according to a 2014 report by Tax Foundation economist Alan Cole.
Messrs. Piketty and Saez shrink the total income numbers further by subtracting all transfer payments, such as Social Security and unemployment benefits, and excluding all health and retirement benefits provided by private employers or government agencies. The result, as Brookings Institution’s Gary Burtless noted, is that, “The Piketty-Saez measure [of total income] excluded 24% of NIPA [National Income and Product Accounts] ‘personal income’ in 1970, but it excluded 37% of ‘personal income’ in 2008.” It excluded 40% of personal income by 2011.
Because of their increasingly understated estimates of total income, Messrs. Piketty and Saez estimate that in 2013 the “other 90 percent”—meaning all incomes smaller than $114,290—had an average income of only $32,341. That number is not remotely credible.
According to the CBO, that $32,341 would have been below the $34,000 needed to escape from the poorest fifth of two-person households in 2011, when half of all households earned more than $75,200 before taxes. Even using the Census Bureau’s narrow definition of money income, average income for the middle fifth was $72,641 in 2013, and half of us earned more than $51,939.
In short, the Piketty-Saez average of all incomes below the top 10% is far lower than any official estimate of incomes among the middle fifth of the income distribution. This means their comparisons of cyclical shares of income growth among the top 10% and bottom 90% during booms and busts are invalid. And so too are their estimates of the shares of mismeasured “total income” supposedly received by the top 1%-10%.
People often form strong opinions on the basis of weak statistics, but this “bottom 90%” fable may be the worst example yet. The Economic Report of the President’s description of “middle-class economics” rests on a far-fetched claim that middle incomes have stagnated for four decades rather than from 2008-13—most of these years during the Obama presidency.
Mr. Reynolds, a senior fellow with the Cato Institute, is author of a 2012 Cato paper, “The Misuse of Top 1 Percent Income Shares as a Measure of Inequality.”
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WASHINGTON — With the economy adding nearly 300,000 jobs in February, it’s clear that the labor market is on a roll. And, perhaps surprisingly, there is no group for whom that is truer than Hispanics.
Employment among Hispanics has increased 5 percent over the last 12 months, according to the Labor Department, compared with 3.8 percent for blacks and 1.4 percent for whites. (The last figure partly reflects the rising number of retirements among the aging white population.)
Of all the country’s major racial and ethnic groups, only Hispanics, as of late last year, had returned to their unemployment levels before the recession, according to the recent Economic Report of the President.
Given that roughly half of Hispanic workers are foreign born, that development might seem destined to aggravate nativist tensions in Congress, where Republicans have tried to roll back the president’s executive action on undocumented immigrants.
But, on closer inspection, the trends driving the improving job market for Hispanics are trends most skeptics of immigration would cheer.
The first is a rebound in the construction industry, which is good news for the American economy as a whole, because construction jobs pay above-average wages to low-skill workers.
Just before the recession, about 14 percent of Hispanics, or nearly three million people, were employed in construction. That group then lost about 700,000 jobs, of which only a trickle had returned through 2013.
But 2014 was a bonanza compared with recent years. The construction industry as a whole gained over half a million jobs, about 20 percent of all the jobs created in the United States economy. Of those, 315,000 went to Hispanics. Not surprisingly, the new construction jobs are concentrated in four states — California, Florida, Illinois and Texas — where the Latino population is among the highest in the country.
“Construction was pretty down two, three years ago, but last year was a lot better,” said Oscar Mondragon, the director of the Malibu Community Labor Exchange, which connects laborers with employers throughout the Los Angeles area. “People are feeling better. It’s a more positive mood.”
More broadly, the surge in Hispanic employment reflects an increasingly robust recovery. Economists generally say that the job prospects of lower-skill workers are more sensitive to the economy’s tidal movements than those with better skills, and Hispanics, as a group, tend to be less educated than blacks and whites.
In 2012, according to the Pew Research Center, 49 percent of foreign-born Hispanics age 25 and older, and 19.6 percent of Hispanics in that age group who were born in the United States, lacked a high school diploma. The corresponding number for blacks was 16.6 percent, and 8.5 percent for whites. If Hispanic employment is surging, it’s a decent indication that the recovery has taken hold.
The second reason behind lower Hispanic unemployment is a sharp decline in illegal immigration in recent years, which has reduced the number of workers who might otherwise have turned up in government unemployment statistics.
Continue reading the main story Continue reading the main story
Continue reading the main story
At the recent peak in the mid-2000s, federal agents were apprehending just over one million undocumented migrants a year along the southern border. That number fell by roughly half during the recession, then dribbled to 340,000 in 2011. The collapse in apprehensions of immigrants from Mexico, by far the largest source of undocumented labor, was even sharper.
The reason for the drop was twofold, said Madeline Zavodny, an economist at Agnes Scott College in Decatur, Ga. First, economic conditions in Mexico were improving even as growth in the United States remained sluggish, reducing a crucial incentive to emigrate.
On top of that was a development that should warm the hearts of Tea Party supporters: enforcement. Thanks to the rapid militarization of the border — the number of border patrol agents has increased by two-thirds since 2006 — crossing into the United States is now a far more daunting proposition than before the recession.
“It’s more costly in terms of what you have to pay a coyote, how remote you have to go,” Ms. Zavodny said.
The more aggressive enforcement of immigration laws extends far beyond the border. More than half a million employers now use E-Verify, an Internet-based government service that determines in seconds whether a recent hire is eligible for work in this country. That has effectively reduced the universe of jobs available to undocumented immigrants.
“When a company makes it clear they’re using E-Verify, the whole work force knows,” said Pia Orrenius, an economist who studies immigration at the Federal Reserve Bank of Dallas. “That news spreads like you would not believe.”
Meanwhile, the Secure Communities program that began in 2008 made it easier for the Homeland Security Department to identify and remove undocumented workers, whose fingerprints it received whenever local authorities took an immigrant into custody. The federal government deported hundreds of thousands of people through the program before the Obama administration halted it in late 2014.
Taken together, the story of the last 10 years looks something like the following: A construction boom from 2004 to 2007 led to a corresponding boom in Hispanic employment, with immigrants gaining 1.6 million jobs and native-born Hispanics gaining 800,000, according to Pew. Unemployment then spiked for both groups during the recession, and contributed to a drop in illegal immigration. And because immigration has never really recovered, the recent rebound in construction is primarily benefiting American-born workers.
Sooner or later, of course, the recovery will begin attracting more workers from Latin America, notwithstanding the beefed-up enforcement. Although illegal immigration is still far below its peak, it has begun to tick up again. Excluding unaccompanied minors, apprehensions at the southern border are up 25 percent since they bottomed out in 2011.
But even this is not necessarily a bad thing for American workers, at least not in the long run. Recent research suggests that, over time, an influx of low-skill immigrants allows many native-born workers to perform more sophisticated tasks for better pay. “More construction workers generates the need for more supervisors, more managers to coordinate them, more contractors to give them work,” said Giovanni Peri, an economics professor at the University of California, Davis.
Showdowns between Congress and the president may be zero-sum, in which one side wins only at the other’s expense. But immigration, it turns out, is not.
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Also file under cognitive dissonance of the left. Somehow, cutting deficit spending from over a trillion every year to mere hundreds of billions per year is defined as "austerity" in this argument, but liberal economic icon Paul Krugman was wrong nonetheless. Two charts make his point. (Ramesh Ponnuru, National Review) Please read the rest at the link:
(http://c3.nrostatic.com/sites/default/files/Pic_article_rameshNRODT2_03122015.jpg)
(https://www.nationalreview.com/sites/default/files/pic_nrd_030915_chart-ponnuru_0.jpg)
http://www.nationalreview.com/article/415394/krugmans-fatal-conceit-ramesh-ponnuru
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Evidence suggests that entrepreneurship is in decline and that U.S. firms are becoming older, more entrenched and less dynamic.
In several studies, economists Robert Litan and Ian Hathaway of the Brookings Institution found that start-ups (firms less than a year old) had fallen from 15 percent of all businesses in 1978 to 8 percent in 2011. Meanwhile, older firms (16 years or more) had jumped from 23 percent of businesses in 1992 to 34 percent in 2011. Their share of jobs was even higher, almost three-quarters of all workers.
What emerges is a portrait of business that, though strikingly at odds with conventional wisdom, is consistent with poor productivity growth. American capitalism is middle-aged. Older firms, conditioned by success, are more rigid. They’re invested, financially and psychologically, in existing markets and production patterns.
We don’t know what explains their slide, though the sheer mass of government regulations is one candidate. Older firms have the lawyers and administrators to cope with the red-tape deluge; many small new firms drown. ... If the economy discriminates against young firms, we will all be paying the price for many years.
http://www.washingtonpost.com/opinions/middle-aged-capitalism/2015/04/12/31263982-dfdb-11e4-a500-1c5bb1d8ff6a_story.html
http://www.brookings.edu/~/media/research/files/papers/2014/05/declining%20business%20dynamism%20litan/declining_business_dynamism_hathaway_litan.pdf
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http://poq.oxfordjournals.org/content/early/2013/09/11/poq.nft025.abstract
http://falcon.arts.cornell.edu/pe52/Ineq_PubOp_ajps_2010.pdf
http://www.nytimes.com/2015/04/15/opinion/has-obamacare-turned-voters-against-sharing-the-wealth.html?_r=0
http://www.newyorker.com/news/john-cassidy/is-support-for-income-redistribution-really-falling
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In a separate matter, Mayor deBlahzio (sp) from the city with the greatest inequality, NYC,traveled to Iowa, the state with the least inequality, to lecture them on what they need to do about this problem, lol.
It is not what other people make that matters. It is what YOU make, relative to the cost of the things you buy, that matters.
Skewing inequality is the fact that the millions and millions of people entering the country tend to be at the low end of the income spectrum. That brings down the median even if no one else took a cut in pay or left the workforce.
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We were addressing this phony issue here, income inequality, long before Hillary announced she is pretending to make it the centerpiece for her non-existent campaign.
Income inequality is the economic ladder, it is the freedom to climb, it is the existence of the American economic dream. A workable ladder requires a first rung, a second, third rung and so on, all in working order and all rungs going up placed within a reasonable and accessible reach from the one beneath it. All leftist economic policies, one way or another, weaken or remove steps from the ladder. Their stated goal is to destroy it altogether, and make us all equally poor.
Income inequality in a dynamic economy is a fact, not an issue. The political question is how badly do we want to hurt the people at the top in order to also hurt the people further down, wanting to climb up.
When you chop off the top of the ladder and knock people down, you also knock out economic activity (GDP and GDP growth) and make it harder for everyone else to rise up.
When you raise minimum wage law, you are sawing off or weakening the bottom rung of the ladder. Some will jump and make it up anyway, but many won't and get stuck at the bottom. Note the sudden spikes in SNAP and SSI, proof that leftist policies of making basic things free and/or subsidized do not help people to lift themselves up.
Imagine the opposite of the income inequality - income equality. Everyone makes exactly the same whether they work hard, train, grow, gain experience or improve their skills. The batboy makes the same as the greatest home run hitter, in this Utopian world. The incentive to achieve, excel or improve is gone. What a sad existence that would be. Innovation ends, startups end, GDP growth ends. Entrenched powers with the best lobbyists and lawyers might still maneuver through the myriad of taxes and regulations and prosper, but everyone else suffers. Welcome to the path of Obama's America where the chosen successor promises to do more of the same.
Income inequality, the political issue, grew out of the fact that liberals and leftists could not find any other way to attack the rapid economic growth that came out of past tax rate cuts. They came up with phony measures that completely ignore income mobility - the fact that people improve their job skills, experience and income throughout their working lives and then retire, work less and live off of savings. The politics of income inequality alarmism worked quite well around 2006 and the leftists took power in America. (Relly they won because of an unpopular war, but still they won running on this economic platform.) They took the House and the Senate, then the Presidency. Then they took a 60 seat control of the Senate. They ended tax rate cuts. They passed Obamacare and anything else that they wanted until the economic and political wheels fell off. They passed a stimulus, shovel ready government jobs, cash for clunkers, took over the auto companies, attacked energy, surrendered from wars and so on.
They ruled without a whisper of conservative constraint, and what happened?
Income inequality got worse! Income mobility got worse. Entrepreneurialism was stopped dead in its tracks. Workforce participation collapsed. Safety net program use exploded. And their answer to it all of this is to do more of the same! Go figure.
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http://www.thegatewaypundit.com/2015/04/obama-vs-reagan-big-government-socialism-proves-to-be-as-disastrous-as-expected/
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http://www.nationalreview.com/article/417763/when-minimum-wage-hikes-hit-san-francisco-comic-book-store-ian-tuttle
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http://www.nationalreview.com/article/417763/when-minimum-wage-hikes-hit-san-francisco-comic-book-store-ian-tuttle
I am sure straight, white males are somehow at fault.
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Coming home isn’t easy.
Ranir LLC learned that lesson all too well. The company, based in Grand Rapids, Mich., has long used factories overseas to make many of the dental-care products it sells to big retailers like Wal-Mart Stores Inc.
Two years ago, though, Ranir executives were frustrated by the shipping costs and communications hassles associated with a plant in Asia that made replacement heads for one of the company’s most popular electric toothbrushes. Ranir was considering bringing production of the replacement heads to Michigan in 2013 when Wal-Mart, one of the company’s biggest customers, announced an initiative pressing its suppliers to make more goods in the U.S.
That helped seal the decision. Ranir Chief Executive Christine Henisee moved production of the replacement heads to Michigan. But the company knew that for the U.S. operation to be profitable, big changes would have to be put in place to bring down costs.
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Ms. Henisee says the company had tried shifting some production to the U.S. before. But, she says, is “this is one of the first times that we actually have been able to bring products back in with a manufacturing concept that allows for total cost to be competitive.”
To lower costs, Ms. Henisee told her engineers to design a system that stripped out most of the manual labor. They worked with a German company to develop a machine that works in five steps, from machining the brush-head bristles to inserting a metal pin in the assembled head. The company has two of the machines and expects to make about seven million to eight million refill heads a year to meet current demand, with the capacity to go higher.
Ranir, which mainly makes items that retailers sell under their labels, also needed to redesign the brush head itself. In the new design, which the company is seeking to patent, the parts are more exactly molded to fit with the machines as opposed to the hands of human workers.
The company spent close to $3 million developing and installing the new largely automated system. The U.S. facility is now ramping up production, and the company says the U.S.-made replacement heads will be available in Wal-Mart stores in the coming months. Fewer than a dozen people have been hired for the new operation at the company’s Grand Rapids facility, according to company officials, who declined to say how many workers there were at the previous plant in Asia.
Ranir is building a similar line in Germany for the European market—a project that entails an additional $3 million. Still on the drawing board, Ranir says, is a way to automate packaging of the replacement brush heads.
Mr. Shukla is a reporter for The Wall Street Journal in Chicago. He can be reached at tarun.shukla@wsj.com.
Popular on WSJ
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The labor cost excuse doesn't work anymore when so much is automated and labor cost differentials are shrinking. There are tons of existing businesses that could come back to America if the business climate was significantly improved, in addition to a revitalization of startups!
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Lame idealism annoys me to no end, particularly as anyone who speaks out against useless gestures or feel good folly is usually cast as a big meanie. As such this piece that discusses empiric means of assessing altruism strikes me as an interesting piece:
http://marginalrevolution.com/marginalrevolution/2015/07/doing-good-better.html
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http://dailycaller.com/2015/08/10/report-seattle-restaurants-suffer-worse-job-loss-since-the-great-recession/
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In tennis, we call that - an unforced error. Who could have seen this coming? (Everyone who reads the forum.)
Minimum wage law does not require an employer to pay an employee more. It bans employers from keeping employees whose worth is less.
To continue this experiment for electorate learning purposes, I hope their reaction is to raise it to $20. See what happens next.
It reminds me of when they passed a surcharge tax on yachts, giving millionaire-billionaire yacht owners an excuse to not buy a new boat and boat makers less demand. As a result they started laying off shipbuilders in Maine, in the then-Senate majority leader's home state. The tax got repealed quickly.
https://news.google.com/newspapers?nid=2457&dat=19910104&id=8LBJAAAAIBAJ&sjid=yw4NAAAAIBAJ&pg=3974,1121388&hl=en
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"Minimum wage law does not require an employer to pay an employee more. It bans employers from keeping employees whose worth is less."
Excellent articulation.
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"Minimum wage law does not require an employer to pay an employee more. It bans employers from keeping employees whose worth is less."
Excellent articulation.
Thanks Crafty. Other than perhaps Thomas Sowell on "Basic Economics", just saying the truth that no one else seems to be saying.
It's almost an oversight by the governmentists that they don't require employers to hire employees. At this point they only put rules on everything after they are hired.
Here's this:
Wendy’s To Switch To Self Ordering And Automation To Avoid $15/hr Wage hike
http://govtslaves.info/wendys-to-switch-to-self-ordering-and-automation-to-avoid-15hr-wage-hike/
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Could also go under Cog Diss of the left. They have no economic argument that is not based on a snipe hunt called fighting income inequality. The question is how best to counter them?
A few other links first, then a current article running in Commentary Magazine:
The Left gets the facts wrong on economic and racial disparities
http://www.nationalreview.com/article/368952/inequality-fallacies-thomas-sowell
Bernie Sanders’ Inequality Fallacies
http://dailycaller.com/2015/07/15/bernie-sanders-inequality-fallacies/
http://www.wsj.com/video/opinion-the-top-three-income-inequality-fallacies/F274CC17-EA73-4FB4-949F-F10FACC090F3.html
Measured Inequality: Fallacies and Overstatements
http://economics21.org/commentary/measured-inequality-fallacies-and-overstatements
http://www.americanthinker.com/articles/2014/01/beating_the_income_inequality_drum_3.html
http://mic.com/articles/12319/6-myths-about-income-inequality-in-america
https://mises.org/library/why-larry-summers-doesn%E2%80%99t-understand-economic-inequality
http://spectator.org/articles/57043/obamas-inequality-fallacies
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The Redistribution Fallacy
https://www.commentarymagazine.com/article/the-redistribution-fallacy/
09.01.15 by James Piereson
Hillary Clinton launched her presidential campaign last spring by venturing from New York to Iowa to rail against income inequality and to propose new spending programs and higher taxes on the wealthy as remedies for it. She again emphasized these dual themes of inequality and redistribution in the “re-launch” of her campaign in June and in the campaign speeches she delivered over the course of the summer. Clinton’s campaign strategy has been interpreted as a concession to influential progressive spokesmen, such as Senators Elizabeth Warren and Bernie Sanders, who have loudly pressed these redistributionist themes for several years in response to the financial meltdown in 2008 and out of a longstanding wish to reverse the Reagan Revolution of the 1980s. In view of Clinton’s embrace of the progressive agenda, there can be little doubt that inequality, higher taxes, and proposals for new spending programs will be central themes in the Democratic presidential campaign in 2016.
The intellectual case for redistribution has been outlined in impressive detail in recent years by a phalanx of progressive economists, including Thomas Piketty, Joseph Stiglitz, and Paul Krugman, who have called for redistributive tax-and-spending policies to address the challenge of growing inequalities in income and wealth. Nobel Laureate Robert Solow, of MIT, put the matter bluntly last year in a debate with Harvard’s Gregory Mankiw, saying that he is in favor of dealing with inequality by “taking a dollar from a random rich person and giving it to a random poor person.”
Public-opinion polls over the years have consistently shown that voters overwhelmingly reject programs of redistribution in favor of policies designed to promote overall economic growth and job creation. More recent polls suggest that while voters are increasingly concerned about inequality and question the high salaries paid to executives and bankers, they nevertheless reject redistributive remedies such as higher taxes on the wealthy. While voters are worried about inequality, they are far more skeptical of the capacity of governments to do anything about it without making matters worse for everyone.
As is often the case, there is more wisdom in the public’s outlook than in the campaign speeches of Democratic presidential candidates and in the books and opinion columns of progressive economists. Leaving aside the morality of redistribution, the progressive case is based upon a significant fallacy. It assumes that the U.S. government is actually capable of redistributing income from the wealthy to the poor. For reasons of policy, tradition, and institutional design, this is not the case. Whatever one may think of inequality, redistributive fiscal policies are unlikely to do much to reduce it, a point that the voters seem instinctively to understand.
One need only look at the effects of federal tax-and-spending programs over the past three and a half decades to see that this is so. The chart opposite this page, based on data compiled by the Congressional Budget Office, displays the national shares of before- and after-tax income for the top 1 and 10 percent of the income distribution from 1979 through 2011, along with the corresponding figures for the bottom 20 percent of the income distribution. For purposes of this study, the Congressional Budget Office defined income as market income plus government transfers, including cash payments and the value of in-kind services such as health care (Medicare and Medicaid) and cash substitutes such as food stamps. The chart thus represents a comprehensive portrait of the degree to which federal tax-and-spending policies redistribute income from the wealthiest to the poorest groups and to households in between.
The chart illustrates two broad points. First, the wealthiest groups gradually increased their share of national income (both in pre- and after-tax and transfer income) over this period of more than three decades. Second, and more notable for our purposes, federal tax and spending policies had little effect on the overall distribution of income.
Across this period, the top 1 percent of the income distribution nearly doubled its share of (pre-tax and transfer) national income, from about 9 percent in 1979 to more than 18 percent in 2007 and 2008, before falling back after the financial crisis to 15 percent in 2010 and 2011 (some studies suggest that by 2014 it was back up to 18 percent). Meanwhile, the top 10 percent increased its share by one-third, from about 30 percent in 1979 to 40 percent in 2007 and 2008, before it fell to 37 percent in 2011. Through all this, the bottom quintile maintained a fairly consistent share of national income.
Many will be surprised to learn that the federal fiscal system—taxes and spending—does not do more to reduce inequalities in income arising from the free-market system. Yet there are perfectly obvious reasons on both the tax and the spending side as to why redistribution does not succeed in the American system—and probably cannot be made to succeed.
The income tax yields revenues to the government through two main sources: progressive taxes on ordinary income (salaries and wages) and taxes on capital gains (with the latter taxed at somewhat lower rates to encourage investment). For most of this period, taxes on capital gains have yielded less than 10 percent of total income taxes and about 4 percent of total federal revenues. In terms of the income tax, most of the action is in taxes on ordinary income.
The highest marginal income-tax rate oscillated up and down throughout the 1979–2011 period. It began in 1979 at 70 percent during the Carter presidency. It fell first to 50 and then to 28 percent in the Reagan and Bush years. It rose to 39.6 percent in the 1990s under the Clinton presidency, and went down again to 35 percent from 2003 to 2010. It is now back up to 39.6 percent. The highest rate on capital gains moved within a narrower band, beginning at 28 percent in 1979 and falling as low as 15 percent from 2005 to 2011. The highest rate is currently 23.8 percent.
Over this period, regardless of the tax rates, the top 1 percent of the income distribution lost between 1 and 2 percent of the income share after taxes were levied. In 1980, that group claimed 9 percent of before-tax income and 8 percent of after-tax income. In 1990, the figures were 12 percent before tax and 11 percent after tax. In 2010, the figures were 15 percent before and 13 percent after.
The top 10 percent of the income distribution generally lost between 2 and 4 percent of its income share after taxes were levied. That is probably because those households take a greater share of their income in salaries rather than capital gains compared with the wealthiest Americans.
At the other end, the poorest quintiles gained almost nothing (about 1 percent on average) in income shares due to cash and in-kind transfers from government. In 2011, for example, the poorest 20 percent of households received 5 percent of (pre-tax) national income, and 6 percent of the after-tax income.
Many in the redistribution camp attribute this pattern to a lack of progressivity in the U.S. income-tax system; a higher rate of taxation on the wealthy should solve it, they think. But the United States is already a highly taxed country with a highly progressive tax rate. Indeed, income taxes in the United States are at least as progressive as those in many other developed countries. The highest marginal rate in the States was 35 percent, from 2003 to 2012; today it is 39.6 percent for top earners—not far out of line with those of America’s chief competitors, including Germany, France, the United Kingdom, and Japan, where the highest marginal rates range between 40 and 46 percent.
A 2008 study published by the Organization for Economic Cooperation and Development found that the United States had the most progressive income-tax system among all 24 OECD countries measured in terms of the share of the tax burden paid by the wealthiest households. According to the Congressional Budget Office, the top 1 percent of earners paid 39 percent of the personal income taxes in 2010 (while earning 15 percent of the country’s overall before-tax income) compared with just 17 percent in 1980 and 24 percent in 1990. The top 20 percent of earners paid 93 percent of the federal income taxes in 2010 even though they claimed 52 percent of before-tax income. Meanwhile, the bottom 40 percent paid zero net income taxes—zero. For all practical purposes, those in the highest brackets already bear the overwhelming burden of federal income tax, while those below the median income have been taken out of the income-tax system altogether.
There is a more basic reason that the tax system does not do more to redistribute income: The income tax is not the primary source of revenue for the national government. In 2010, the federal government raised $2.144 trillion in taxes, with only 42 percent coming from the individual income tax. Forty percent came from payroll taxes, 9 percent from corporate taxes, and the rest from a mix of estate and excise taxes. Since the early 1950s, the national government has consistently relied upon the income tax for between 40 and 50 percent of its revenues, with precise proportions varying from year to year due to economic conditions. For several generations, progressive reformers have looked to the income tax as the instrument through which they aimed to take resources from the rich and deliver them to the poor. But in reality, in the United States at least, the income tax is not a sufficiently large revenue source for the national government to do the job that the redistributionists want it to do
And here’s the rub: Payroll taxes fall more heavily upon working- and middle-class wage and salary income earners than upon the wealthy, whose incomes come disproportionately from capital gains or whose salaries far exceed the maximum earnings subject to those taxes. In 2010, the wealthiest 1 percent paid 39 percent of income taxes but just 4 percent of payroll taxes. The top 20 percent of earners paid 93 percent of the nation’s income taxes but just 45 percent of payroll taxes. Meanwhile, the middle quintile paid 15 percent of all payroll taxes—but just 3 percent of income taxes. In other words, the more widely shared burdens of the payroll tax tend to mitigate the progressive effects of the income tax.
An increase in the top marginal tax rate from 39.6 to, say, 50 percent might have yielded around $100 billion in additional revenue in 2010.(This assumes no corresponding changes in tax and income strategies on the part of wealthy households and no negative effects on investment and economic growth, which are risky assumptions.)
That would have been real money, to be sure, but it would have represented only about one half of 1 percent of GDP (using 2010 figures) or less than 3 percent of total federal spending. This would not have been enough to permit much in the way of redistribution to the roughly 60 million households in the bottom half of the income scale.
Turning to the spending side of fiscal policy, we encounter a murkier situation because of the sheer number and complexity of federal spending programs. The House of Representatives Budget Committee estimated in 2012 that the federal government spent nearly $800 billion on 92 separate anti-poverty programs that provided cash assistance, medical care, housing assistance, food stamps, and tax credits to the poor and near-poor. The number of people drawing benefits from anti-poverty programs has more than doubled since the 1980s, from 42 million in 1983 to 108 million in 2011. The redistributive effects of these programs are limited, however, because most funds are spent on services to assist the poor and only a small fraction of these expenditures are distributed in the form of cash or income.
As it turns out, most of the money goes not to poor or near-poor households but to providers of services. The late Daniel Patrick Moynihan once tartly described this as “feeding the horses to feed the sparrows.” This country pays exorbitant fees to middle-class and upper-middle-class providers to deliver services to the poor.
Why have matters devolved in this way? The American welfare state was built to deliver services rather than incomes in part because the American people have long viewed poverty as a condition to be overcome rather than one to be subsidized with cash. Many also believe that the poor would squander or misspend cash payments and so are better off receiving services and in-kind benefits such as food stamps, health care, and tuition assistance. With regard to aid to the poor, Americans have built a social-service state, not a redistribution state.
Social security is the only substantial federal program that transfers money income from one group to another, in this case from workers and employers to retirees. It is by far the largest of all federal programs, claiming $850 billion—24 percent—of the federal budget in 2014. It is paid for by a payroll tax split equally between employees and employers. As of 2014, about 59 million Americans were collecting benefits under Social Security, with an average benefit of $1,260 per month. Social Security has a progressive benefit formula and contains a feature (Supplemental Security Income) that provides cash benefits to elderly, blind, or disabled persons with incomes below the poverty line. Nevertheless, in spite of these features, it was designed to provide income for retirees, not to redistribute income from the wealthy to the poor, and it continues to function in this way.
The National Bureau of Economic Research has concluded that the program transfers income in various complex ways but does not transfer it from the rich to the poor. As one NBER study bluntly stated: “Social Security does not redistribute from people who are rich over their lifetime to those who are poor. In fact, it may even be slightly regressive.” This is partly because wealthier recipients tend to live longer than others and partly because they are more likely to have non-working spouses also eligible to collect benefits.
Medicare and Medicaid, two other expensive programs that together claim nearly 25 percent of the federal budget, provide important health-care services to the elderly and the poor—but no actual income. The flow of money through these health-care programs, more than $850 billion in federal funds in 2014 (plus another $180 billion in state funds for Medicaid), goes mainly to hospitals, nursing homes, pharmaceutical companies, doctors, insurance companies, and health-maintenance organizations. Both programs have been plagued by fraud and corruption since their origins in 1965 because some doctors, nursing-home entrepreneurs, and other providers have sought to manipulate the system for financial advantage and in many cases have succeeded all too well. No one has ever attempted a study of the redistributive aspects of the flow of funds from Medicare and Medicaid, but one surmises from the nature of these payments that most of the money goes to those in the upper reaches of the income distribution.
The federal government does provide cash assistance to the poor and near-poor through two programs. The first is Temporary Assistance to Needy Families (TANF, popularly known as welfare), which currently provides cash benefits to about 4.5 million households at a cost of $17 billion per year to the federal government and about $14 billion (in 2014) to various state governments. The second is Supplemental Security Income, which provides cash benefits to the disabled poor in 8.5 million households at a cost of about $50 billion per year to the federal government. These numbers work out to about $7,000 (on average) per year per household under TANF and $6,000 per year per household under SSI, in each case around half of the average benefit under Social Security.
Lower-income working families are also eligible to receive rebates on payroll taxes through the Earned Income Tax Credit. The House Budget Committee estimated that 28 million taxpayers took advantage of this program in 2011, at an estimated cost of $60 billion to the federal government in rebated taxes (with the average family with children receiving
$2,900 in tax rebates).
And so, of the $800 billion spent on poverty programs in 2012, less than $150 billion was distributed in cash income, if one includes as cash benefit the tax rebate under the EITC. That is a grand total of 18 percent of the whole. The rest was spent on services and in-kind benefits, with the money paid to providers of various kinds, most of whom have incomes well above the poverty line.
With respect to the recipients of federal transfers, the CBO study reveals a surprising fact: Households in the bottom quintile of the income distribution receive less in federal payments than those in the higher income quintiles. Households in the bottom quintile of the income distribution (below $24,000 in income per year) received on average $8,600 in cash and in-kind transfers. But households in the middle quintile received about $16,000 in such transfers. And households in the highest quintile received about $11,000. Even households in the top 1 percent of the distribution received more in dollar transfers than those in the bottom quintile. The federal transfer system may move income around and through the economy—but it does not redistribute it from the rich to the poor or near-poor.
It is well known in Washington that the people and groups lobbying for federal programs are generally those who receive the salaries and income rather than those who get the services. They, as Senator Moynihan observed decades ago, are the direct beneficiaries of most of these programs, and they have the strongest interest in keeping them in place. The nation’s capital is home to countless trade associations, companies seeking government contracts, hospital and medical associations lobbying for Medicare and Medicaid expenditures, agricultural groups, college and university lobbyists, and advocacy organizations for the environment, the elderly, and the poor, all of them seeking a share of federal grants and contracts or some form of subsidy, tax break, or tariff.
This is one reason that five of the seven wealthiest counties in the nation are on the outskirts of Washington D.C. and that the average income for the
District of Columbia’s top 5 percent of households exceeds $500,000, the highest among major American cities. Washington is among the nation’s most unequal cities as measured by the income gap between the wealthy and everyone else. Those wealthy individuals did not descend upon the nation’s capital in order to redistribute income to the poor but to secure some benefit to their institutions, industries, and, incidentally, to themselves.
They understand a basic principle that has so far eluded progressives: The federal government is an effective engine for dispensing patronage, encouraging rent-seeking, and circulating money to important voting blocs and well-connected constituencies. It is not an effective engine for the redistribution of income.
James Madison wrote in the Federalist Papers that the possession of different degrees and kinds of property is the most durable source of faction under a popularly elected government. Madison especially feared the rise of a redistributive politics under which the poor might seize the reins of government in order to plunder the wealthy by imposing heavy taxes. He and his colleagues introduced various political mechanisms—the intricate system of checks and balances in the Constitution, federalism, and the dispersion of interests across an extended republic—to forestall a division between the rich and poor in America and to deflect political conflict into other channels.
While Madison’s design did not succeed in holding back the tide of “big government” in the 20th century, it nevertheless proved sufficiently robust to frustrate the aims of redistributionists by promoting a national establishment open to a boundless variety of crisscrossing interests.
The ingrained character of the American state is unlikely to change fundamentally any time soon, which is why those worried about inequality should abandon the failed cause of redistribution and turn their attention instead to broad-based economic growth as the only practical remedy for the sagging incomes of too many Americans
James Piereson is a senior fellow at the Manhattan Institute
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Milton Friedman:
"A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."
These are wise words for moving forward in America.
http://mic.com/articles/12319/6-myths-about-income-inequality-in-america
http://www.youtube.com/watch?feature=player_embedded&v=0E-URmNAa5o#!
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Please read. This deserves serious discussion. Productivity gains comes from private investment, absolutely necessary for incomes to increase. Our demand for public services is greater than our willingness to be taxed. More resources to special interests means fewer resources to productive activity, holding down everyone else's income. Breaking this cycle won't be easy.
Historic productivity increases have been 2% per year since the late 1940s. It has dropped to 0.5% last year as Obama's policies get fully implemented. (Did Wesbury report that?) You don't raise median incomes or anything else by choking out investment and productive activity.
http://www.realclearmarkets.com/articles/2015/09/14/special_interests_are_shrinking_your_income_101819.html
September 14, 2015
Special Interests Are Shrinking Your Income
By Robert Samuelson
Amid all the new government programs and tax cuts that have been proposed by the various presidential candidates - or will be as the campaign unfolds - there lurks a nasty statistic that suggests how difficult they will be to achieve.
The statistic is 0.5 percent.
That's how much U.S. productivity increased in 2014, reports the Bureau of Labor Statistics. Greater productivity - reflecting advances in technology, management and worker skills, among other things - is the wellspring of higher incomes. Since the late 1940s, gains in labor productivity (measured as changes in output per hour worked) have averaged 2 percent annually. Last year's gain was a quarter of this average; even so, it was slightly better than in the previous three years.
Worse, most or all of these small increases will probably be siphoned off in government benefits for the expanding elderly population and in higher health costs. Other income improvements will result only from either (1) a rebound in productivity or (2) redistribution of income and wealth from one group to another. As a crude generalization, Republicans emphasize improving productivity and economic growth while Democrats focus on redistributing from the rich to the middle class and poor.
The causes of the productivity collapse are unclear. Some economists say that productivity isn't measured properly - Internet benefits are allegedly undercounted. Other economists contend that U.S. technology and innovation are lagging. Still others argue that weak business investment after the Great Recession explains lackluster growth.
To this list should be added another plausible candidate: the dead weight losses created by special interest groups, as explained by the late Mancur Olson (1932-1998).
Although an economist, Olson revolutionized thinking about the political power of interest groups. Until Olson, conventional wisdom held that large groups were more powerful than small groups in pursuing their self-interest - say, a government subsidy, tax preference or a protective tariff. Bigness conveyed power.
Just the opposite, Olson said in his 1965 book "The Logic of Collective Action." With so many people in the large group, the benefits of collective action were often spread so thinly that no individual had much of an incentive to become politically active. The tendency was to "let George do it," but George had no incentive either. By contrast, the members of smaller groups often could see the benefits of their collective action directly. They were motivated to organize and to pursue their self-interest aggressively.
Here's an example: A company and its workers lobby for import protection, which saves jobs and raises prices and profits. But consumers - who pay the higher prices - don't create a counter-lobby, because it's too much trouble and the higher prices are diluted among many individual consumers. Gains are concentrated, losses dispersed.
This was Olson's great insight, and it had broad implications, he said. In a 1982 book, "The Rise and Decline of Nations," he argued that the proliferation of special-interest concessions could reduce a society's economic growth.
"An increase in the payoffs from lobbying . . . as compared with the payoffs from production, means more resources are devoted to politics and cartel activity and fewer resources are devoted to production," he wrote. "This in turn influences [a society's] attitudes and culture."
The dilemma for democracies is clear. Voters expect governments to cater to their needs and wants - and one person's special interest is another's way of life or moral crusade. But if governments cater too aggressively to interest groups, they may undermine (or have already done so) the gains in productivity and economic growth that voters also expect.
So this is another possible explanation for the productivity slowdown, which afflicts many advanced countries. These societies are riddled with programs and policies promoted by various interest groups that "can increase the income [of the groups' members] while reducing society's." If he were alive today, Olson might well add that higher psychic income - the feeling of "doing good" - also motivates many interest groups.
Regardless, the productivity slump endures. Because there's no agreed-upon cause, there's no simple "fix" - though there are many familiar proposals that might make a long-term difference (better schools, more research, higher infrastructure spending). But assuming productivity doesn't spontaneously revive - which it could - the slowdown will haunt the next president.
It connotes scarcity: too little income growth to satisfy the mass craving for higher private and public spending. Even with a jobless rate of 5.1 percent - getting close to "full employment" - the Congressional Budget Office projects a 2015 federal deficit of $426 billion. That's one measure of overcommitment: Americans desire more government than they're willing to pay for in taxes.
During the Obama years, the White House and Congress sidestepped many unpopular choices. It's doubtful the next president will have the luxury of doing the same.
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The Real Reasons Why The Fed Will Hike Interest Rates
Wednesday, 16 September 2015 Brandon Smith
For the past several months, the chorus of voices crying out over the prospect of a Federal Reserve interest rate hike have all been saying essentially the same thing – either they can’t do it, or they simply won’t do it. This is the same attitude the chorus projected during the initial prospects of a QE taper. Given the trends and evidence at hand I personally will have to take the same position on the rate hike as I did with the taper – they can do it, and they probably will do it before the year is over.
I suppose we may know more after the conclusion of the Fed meeting set for the 16th and 17th of this month. August retail sales data and industrial production numbers have come in, and they are not impressive even with the artificial goosing such stats generally receive. However, I do not expect that they will have any bearing whatsoever on the interest rate theater. The Fed’s decision has already been made, probably months in advance.
The overall market consensus seems to be one of outright bewilderment, so much so that markets have reentered the madness of "bad news is good news" as stocks explode on any negative data that might suggest the Fed will delay. The so-called experts cannot grasp why the Fed would even entertain the notion of a rate hike at this stage in the game. Hilariously, it is Paul Krugman who is saying what I have been saying for the past year when he states:
"I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other."
Yes, why does the Fed seem so eager? Every quarter since the bailouts began no one has been asking for interest rates to increase. No one. Only recently has the Bank for International Settlements warned of market turmoil due to the long term saturation of markets caused by low interest policies, yet it was the BIS that had been championing low rates and easy money for years. The IMF has warned that a U.S. rate increase at this time would cause a market crisis, yet the IMF has also been admonishing low rate policies, policies that they had also been originally supporting for years.
Confused yet? The investment world certainly seems to be. In fact, the overall market attitude towards a rate hike appears to be a heightened sense of terror, and I believe this has been amply reflected in global stock behavior over the past three months in particular. With thousands of points positive and negative spanned in only a couple of trading sessions, stock market indexes around the world are beginning to behave like seizure victims, jerking and convulsing erratically.
This has, of course, all been blamed on China’s supposed economic “contagion.” But you can read why that is utter nonsense in my article “Economic crisis goes mainstream – What happens next?”
The bottom line is, the Federal Reserve has been the primary driver of the massive financial bubbles now in place in most of the world’s markets, and much of this was accomplished through ZIRP (zero interest rate policy). Hopefully many of the readers here can recall the tens of trillions of dollars of overnight lending by the Fed to international banks and corporations that was exposed during the initial TARP (Troubled Asset Relief Program – aka bailout) audit. You know, the trillions in lending that mainstream naysayers claimed was "not" contributing to the overall debt picture of the U.S. Well, reality has shown that ZIRP and overnight lending has indeed directly and indirectly created debt bubbles in numerous areas.
The most vital of areas at this time is perhaps the debts accrued by major banks and companies that have relied on overnight loans to facilitate massive stock buybacks. It has been these buybacks that have artificially supported stocks for years, and whenever ZIRP was not enough, the Fed stepped in with yet another QE program to give particular indicators a boost. The main purpose of this strategy was to ensure that markets would NOT reflect the real underlying instability of our economic system. The Fed has been pumping up banks and markets not only in the U.S., but across the globe. Why? We'll get to that, but keep in mind that it takes time and careful strategy to wear down a population and condition them to accept far lower living standards as the "new normal" (and it takes a sudden crisis event to convince a population to be happy with such low standards given the frightening alternative).
Even with near zero interest, companies have still had to utilize a high percentage of profits in order to continue the stock buyback scam. We have finally arrived at a crossroads in which these companies will be forced to either stop buybacks altogether, or await another even more comprehensive stimulus infusion from the Fed. A rate increase of .25 percent might seem insignificant, until you realize that banks and companies have been cycling tens of trillions of dollars in ZIRP through their coffers and equities. At that level, a minor increase in borrowing costs swiftly accumulates into untenable debts. A rate increase will kill all overnight borrowing, it will kill stock buybacks, and thus, it will kill the fantasy that is today's stock market.
This is why so many analysts simply cannot fathom why the Fed would raise rates, and why many people fully expect the introduction of QE4. But we need to ask some fundamental questions here…
Again, as Krugman ponders (or doesn’t ponder, since I believe he is an elitist insider with full knowledge of what is about to happen), why does the Fed seem so eager to raise rates if the obvious result will be a drawn out market crash? Is it possible, just maybe, that the Fed does not want to prop up markets anymore? Is it possible that the Fed’s job is to destroy the American economy and the dollar, rather than protecting either? Is it possible that the Fed is just a useful tool, an institutionally glorified suicide bomber meant to explode itself in the most populated area it can find to cause maximum damage for effect? Wouldn’t this dynamic go a long way in explaining why the Fed has taken every single action it has taken since its underhanded inception in 1913?
Will the Fed raise rates this week? I still think the Fed may "surprise" with a delay until December in order to give one more short term boost to the markets, but as I read the mainstream economic press I find the newest trend indicates I could be wrong. The trend I am speaking of has only launched in the past couple of days in the mainstream media, as outlets such as the Financial Times and CNN are now publishing arguments which claim a Fed rate hike is a “good thing”. While it may be a "good thing" in the long run as it is vital for everything that is over-inflated in our economy to fall away and leave that which is real behind, a return to true free markets without ZIRP manipulation is NOT what the mainstream media is promoting.
The mainstream pro-rate hike arguments are in most cases predicated on completely fabricated notions of economic recovery. CNN states:
"At a time when the U.S. economy is chugging along at over 2% growth and the unemployment rate reflects almost full employment, there’s not much of a case for the Fed’s key interest rate to remain at historic lows…"
As I outlined in my series written at the beginning of this year titled “One last look at the real economy before it implodes,” any growth in gross domestic product (GDP) is a farce driven primarily by government debt spending and inflation in particular necessities rather than recovery in the core economy and on main street. And, unemployment numbers are the biggest statistical con-game of all, with more than 93 million Americans not counted on the Labor Department’s rolls as unemployed because they no longer qualify for benefits.
For a couple of months, some of the mainstream has pulled its head out of its posterior and actually begun asking the questions alternative analysts have been asking for years about the potential risks of returning market volatility and “recession” (which is really an ongoing program of hyperstagflationary collapse) in the wake of a world without steady and open fiat stimulus. Yet, suddenly this week certain MSM establishment mouthpieces are claiming “mission accomplished” in the battle for fiscal recovery and cheerleading for a rate hike?
What this tells me is that the narrative is being shifted and a rate hike is indeed on the way, perhaps even this week.
It is important to note that this stampede over the edge of the cliff is not only being triggered by the Federal Reserve. Most central banks and China's PBOC in particular is definitely part of the bigger problem, but only because China is working alongside international bankers to further their goal of total economic interdependence and centralization. China’s avid pursuit of SDR (special drawing rights) inclusion and its close relationship to the IMF and the BIS must be taken into account if one is to understand why the current fiscal crisis is developing the way it is.
China has recently announced it will be opening its onshore currency markets to foreign central banks, which essentially guarantees the inclusion of the yuan into the IMF’s SDR global currency basket by the middle of next year. The IMF’s decision to delay China’s inclusion until 2016 was clearly a calculated effort to make sure that they did not receive any blame for the market meltdown they know is coming; a meltdown that will accelerate to even more dangerous proportions as central banks begin to move away from the dollar as the world reserve and petro-currency.
In preparation for the global shift away from the dollar, China has begun dumping dollar denominated assets at historic levels while Chinese companies have begun reducing the amount of dollars they borrow for international transactions. Is this selloff designed to liquidate assets in order to support China’s ailing markets? No, not really.
China has been planning a decoupling from the U.S. dollar since at least 2005 when it introduced yuan denominated “Panda Bonds”, which at the time the media laughed at as some kind of novelty. In only ten years, China has slowly but surely spread yuan denominated instruments around the world in order to make China an alternative economic engine to the U.S. China, working with the BIS and IMF, have set the dollar up for an extreme devaluation and the U.S. Treasury has been set up for inevitable bankruptcy; and guess who will ride to our rescue when all seems lost? That's right - the IMF and the BIS.
Will the Fed’s rate hike make U.S. bonds more desirable? Probably not. After a short term initial boost U.S. debt instruments will return to the path of de-dollarization. In the end, I believe the Fed rate hike will encourage more selling by the largest bond holders who will seek to make as much profit as possible until the bottom begins to fall out of the dollar. As China continues to sell off their treasury and dollar holdings, there will come a time when other global investors will feel forced to sell as well to avoid being the last idiot holding the bag when extreme devaluation takes place.
The Fed rate hike is a kind of openly engineered trigger event; one which will likely occur before the end of the year. The major globalist players within the BIS and IMF are separating themselves from this trigger as much as possible today, while warning of a coming crisis they helped to create.
The Fed seems to be a sacrificial appendage at this point, a martyr for the cause of globalization and centralization. Bringing down the U.S. and the dollar, or at least greatly diminishing the U.S. to third world status, has the potential to greatly benefit the Fabian socialists at the top of the pyramid. Such a crisis makes the idea of centralization and global economic administration a more enticing concept.
With a complex and disaster-prone system of interdependence causing social strife and chaos, why not just simplify everything with a global currency and perhaps even global governance? The elites will squeeze the collapse for all it’s worth if they can, and a Fed rate hike may be exactly what they need to begin the final descent.
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Some very interesting historical info here, nearly all pertinent today. My recommendation, read this in its entirety!
http://www.weeklystandard.com/articles/kemp-era_1039585.html?page=2
Some many tidbits of fact in this piece:
Kemp challenged his economists to replicate the Kennedy tax cuts.
Kemp Roth tax rate cuts were introduced in 1977.
Kemp won reelection in 1978 (blue collar district?) with 95% of the vote.
Reagan was split between supply side and a more conservative approach, didn't propose anything like this in 1976, didn't endorse Kemp Roth until Jan 1980.
Kemp's 1980 convention breakout speech was canceled when Goldwater before him went on and on. The woman at the podium introduced him anyway and Kemp came running back in and delivered it without the teleprompter.
Delays and compromises to get it passed caused an unnecessary, deep recession before the stimulative effects fully took effect.
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Usually we put this under 'famous people caught reading the forum', but in this case the chronology may be backwards...
From an interview in December 1975 with economist Milton Friedman on PBS’s “The Open Mind”:
Friedman: One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know a famous road that is paved with good intentions. The people who go around talking about their soft heart . . . I admire them for the softness of their heart, but unfortunately it very often extends to their head as well. Because the fact is that the programs that are labeled as being for the poor, for the needy, almost always have effects exactly the opposite of those which their well-intentioned sponsors intend them to have. . . .
Take the minimum-wage law. Its well-meaning sponsors—there are always in these cases two groups of sponsors, there are the well-meaning sponsors, and there are the special interests, who are using the well-meaning sponsors as frontmen. You almost always, when you have bad programs, have an unholy coalition of the do-gooders on the one hand, and the special interests. The minimum-wage law is as clear a case as you could want. The special interests are of course the trade unions. The monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than two dollars an hour, or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate—the unemployment rate among teenagers in this country—is over twice as high as the overall unemployment rate.
Hat tip: wsj
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. . . Of well off folks:
http://www.cato.org/blog/governments-subsidize-disaster-wealthy
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Keep this in mind as you watch the inaugural Dem-Socialist debate:
“Nowhere in the world do you find this evenness that people use as a norm. And I find it fascinating that they will hold up as a norm something that has never been seen on this planet, and regard as an anomaly something that is seen in country after country.”
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. . . Of well off folks:
http://www.cato.org/blog/governments-subsidize-disaster-wealthy
We are promoting the movement of people and financial assets into flood, drought and hurricane zones with public subsidy, a very sad and misguided reality.
Along the lines of subsidizing the rich, the buyer of a $100,000 Tesla gets a tax credit of $7,500 for the purchase, mostly from people who can't afford a Tesla. We not only subsidize their prosperity but since it was named safest car, we also subsidize their well-being AT THE EXPENSE OF OTHERS.
http://www.industrytap.com/100000-tesla-model-s-sedan-named-the-safest-car-ever/12169
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http://www.washingtontimes.com/news/2015/oct/11/stephen-moore-fed-white-house-congress-revise-fina/
The Fed, the White House and Congress are setting up the next financial bubble
My 13-year-old son told me at the dinner table the other day that Franklin Roosevelt was one of America’s “greatest presidents” because “he ended the Great Depression.” He’s usually a good student, so I checked where he got this tripe and sure enough the fairy tale was right there in his American history book.
Sure enough his text book tells kids that the New Deal ended the Great Depression and even saved capitalism. Of course the New Deal exacerbated the pain and financial devastation of a stock market crash, and unemployment lingered in double digits for a decade after Roosevelt was elected until the start of World War II.
We get this kind of rampant revisionism because the left writes the history books — which they are doing right now.
Here’s the latest story line: bailouts, trillions of dollars of government spending and debt, easy money, and re-regulation of Wall Street ended the 2008 Great Recession. The myth took on new life last week when Ben Bernanke took a bow in The Wall Street Journal for in his mind saving the economy with his $3 trillion of quantitative easing and zero interest rate policy. No, actually this is what created the crisis. Don’t be surprised if Mr. Bernanke receives a Nobel Peace Prize.
As Peter Wallison of the American Enterprise Institute and other scholars have thoroughly documented, the crash of 2008 was caused by the Federal Reserve’s easy money policies for nearly a decade, government housing policies that led to preposterous mortgage loans being issued, and massive overleverage of government, companies, and households.
Why does any of this history matter? Since Washington doesn’t understand what went wrong in 2007 and 2008, so the Fed, the White House and Congress are recreating the very same conditions for another financial bubble. If it pops, we could replay the same devastating effects as occurred during the first bubble in 1999 and 2000. It is doing so in four ways.
First, the Dodd-Frank regulations are causing one of the greatest consolidations of the banking industry since the Great Depression. Those indispensable small savings and loans that Jimmy Stewart operated in the movie “It’s a Wonderful Life” are disappearing from the American landscape. This is because only really big banks have the size to spread the costs of Dodd-Frank compliance officers and costs. So we have created a competitive advantage that allows the sharks to swallow the minnows. Meanwhile, the “too big to fail” safety net to Bank of America, Citi, and other titans exacerbates this cost advantage of big banks and thus makes bailouts even more likely in the future.
Second, Fannie Mae and Freddie Mac are engaged in the same low interest rate lending mania of 2004-07 and the Obama administration is on a Bush-like home-ownership push. Some Republican House heroes like Jeb Hensarling of Texas wanted to eliminate taxpayer subsidies to Fannie and Freddie but the housing lobby kept them alive. So now the two government enterprises are back issuing taxpayer guarantees on mortgages with as little as 3 percent down payment. Have we learned nothing at all?
Third, the Fed refused to raise interest rates off zero in September, and, hello, that easy money policy is how we got into the mess in 2000 and then in 2008. Wall Street cheered Janet Yellen’s decision to keep the cheap dollars flowing. Isn’t this all starting to sound familiar?
Finally, there is the saturation of debt. When the crisis hit in 2008 the national debt stood at a little under $10 trillion. Now we are at $18 trillion. Government is hopelessly overleveraged. The interest rate exposure is enormous with each one percentage point rise in long term rates causing the servicing costs of the debt to rise by about $1 trillion over 10 years. Meanwhile, on top of that, the Fed owns at least $1 trillion in mortgage debt and so if housing markets fall again, taxpayers get double walloped.
The point is that government and politicians have no learning curve. All of the conditions of financial wreckage are reappearing. This is why congressional Republicans absolutely should put up a fight on the debt ceiling by requiring more budget discipline as a condition of higher debt levels. They should require at least 8-10 percent downpayments on all government insured mortgages. They should repeal all or part of the Dodd-Frank bill that is destroying community banks, while promising voters they will never again bail out a bank or financial institution. Finally, they should be urging the Fed to restore sound money by gradually raising short term interest rates. And the presidential candidates should start warning voters that Washington is rebuilding another financial house of cards.
If they don’t, when the financial crash comes and Americans see their life savings disappear, the media and the history books will again blame Republicans for the destruction from the rampant financial negligence of government
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I have to agree with Stephen Moore on the issue with the banks, mortgage lending and Dodd Frank. But there is just so much more going on in this arena.
Here are some interesting up to date stats on the mortgage loans being funded since 2012. Check out the Risk Shares Page to see how FHA is with risk. This meets the same findings that my team had found in a completely separate action. (Excel File is safe.)
http://www.housingrisk.org/wp-content/uploads/2015/09/09.28.15-NMRI-data-download.xlsx (http://www.housingrisk.org/wp-content/uploads/2015/09/09.28.15-NMRI-data-download.xlsx)
This is the link to the methodology. It is similar to what we used, but the AEI only focused upon the year 2007. We focused upon 2000 to 2002 when lending standards were better and then from 2005 through 2009 to get samples of when the standards were lower, and then higher again.
http://www.housingrisk.org/wp-content/uploads/2015/01/Housing-Risk-NMRI-methodology-1-8-15.pdf (http://www.housingrisk.org/wp-content/uploads/2015/01/Housing-Risk-NMRI-methodology-1-8-15.pdf)
This link is to a breakdown of the loans in 2007 by LTV, Credit Score and Debt to Income. The red is where the highest risk loans are held. The key points are with FHA loans, the DTI can go to 55% though they are trying to keep it between 43% and 50%, LTV to 97.5% and FICO is averaging about 660. Take these loan factors and it is readily apparent that we are setting the stage for another Housing/Financial Crisis.
http://www.housingrisk.org/wp-content/uploads/2014/02/Periodic-Table-of-Housing-Risk-Home-Purchase-Loans.pdf (http://www.housingrisk.org/wp-content/uploads/2014/02/Periodic-Table-of-Housing-Risk-Home-Purchase-Loans.pdf)
The only good news is that Wells Fargo, Chase and other actual big banks are restricting FHA lending. They recognize the failures to come.
In the Mortgage Market, the Fed cannot raise rates, hence the problems occurring. If they raise rates, then the 2.5 million Lines of Equity resetting will have significantly increase rates and payments, leading to more defaults. Additionally, the rate increases will affect 1st mortgages that remain which are adjustable, leading to more defaults. And, as the rates increase, the purchase market is affected, reducing sales. (This does not include other credit line rate increases.)
Next with the rate increases, home prices drop to meet the affordability issue. More homes become underwater. With underwater homes, financially insecure homeowners have far greater defaults. As the defaults and foreclosures occur, home prices are further reduced. (One foreclosure in a neighborhood causes a minimal drop in values. But two or more occur and immediately there is at least a 10% drop due to foreclosure stigma. And the more foreclosures, the greater the drop....20% or more.)
Now, more foreclosures lead to more loss in values, more homes with negative equity. As rates increase and the payments go up, of obamacare increases occur, or inflation, then even more defaults occur.
This was the "death spiral" that we were faced with in 2008. Only the continued decreased in interest rates, programs like HAMP to try and slow foreclosures, and HARP which allowed underwater homeowners to refinance from rates at 6% or greater down to 3.5 or 4%, and the Wall Street Money firms buying foreclosures kept the market propped up enough to avoid the death spiral. (Can't forget QE with this as well.)
Now the Fed is faced with the situation that they cannot increase rates without negatively affecting housing. But they don't have anything left in their gun in the event of a significant housing downturn except another round of QE to put off the death spiral.
We are one major "financial shock" event from the death spiral. Who knows where it will come from, but there are many different scenarios existing for it. It hits, and housing collapses again, with up to 50% drops in values in many areas. Lending and construction stops almost completely. The only good news is that QE has taken most of the Private Label MBS off the market and onto the Fed balance sheet. But this will do nothing for the GSE's. They are screwed.
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http://townhall.com/columnists/terryjeffrey/2015/10/14/why-are-married-couples-with-kids-wealthier-than-other-americans-n2065429
Who knew? Someone care to explain how this happens and what to learn from it?
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http://townhall.com/columnists/terryjeffrey/2015/10/14/why-are-married-couples-with-kids-wealthier-than-other-americans-n2065429
Who knew? Someone care to explain how this happens and what to learn from it?
The left takes the lesson that heteronormative privilege continues to harm the LGBTQP and minority communities and their war on marriage need to double down.
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This is what the Left does. It is constantly pitting factions against one another to create social unrest - race, class, sexual orientation. Whatever works to push the narrative that society is not "fair," and the government needs to step in and "level the playing field," which is code for authoritarian central control over people's lives.
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This is what the Left does. It is constantly pitting factions against one another to create social unrest - race, class, sexual orientation. Whatever works to push the narrative that society is not "fair," and the government needs to step in and "level the playing field," which is code for authoritarian central control over people's lives.
Yes. While the left was pretending that how to settle the gay question had something to do with marriage, they forgot that this cultural institution of commitment and taking responsibility for one's own family is a cornerstone of economic success and wealth creation. Wealth accumulation beyond either dependency or living paycheck to paycheck is how you rise above being dependent on the state for support. Unfortunately, that is no longer a goal, much less a yardstick for measuring success.
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This is a follow up to some information recently posted on Cog. Diss of the Left.
Source = St. Louis Fed
(https://www.stlouisfed.org/~/media/Blog/2015/February/BlogImage_MiddleIncomeTrap_020215.jpg)
My point (Doug): Some countries are growing their incomes. Some are not. What are the differences in policies between those who are growing and those who are not?
Hat Tip: Dan Mitchell, Sr. Fellow at Cato Institute.
The authors analyze this data.
The figure above shows the rapid and persistent relative income growth (convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning in the late 1960s all through the early 2000s to catch up or converge to the higher level of per capita income in the U.S. …In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels… The lack of convergence is even more striking among low-income countries. Countries such as Bangladesh, El Salvador, Mozambique and Niger are stuck in a poverty trap, where their relative per capita income is constant and stagnant at or below 5 percent of the U.S. level.
The article concludes by asking why some nations converge and others don’t.
Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies?
I’ll offer my answer (Dan Mitchell) to this question, though it doesn’t require any special insight.
Simply stated, Solow’s Growth Theory is correct, but needs to be augmented. Yes, nations should converge, but that won’t happen unless they have similar economic policies.
And if relatively poor nations want to converge in the right direction, that means they should liberalize their economies by shrinking government and reducing intervention.
Take a second look at the above chart above and ask whether there’s a commonality for the jurisdictions that are converging with the United States?
Why have Hong Kong, Singapore, Taiwan, and Ireland converged, while nations such as Mexico and Brazil remained flat?
The obvious answer is that the former group of jurisdictions have pursued, at least to some extent, pro-market policies.
https://i0.wp.com/freedomandprosperity.org/wp-content/uploads/2015/03/EFW-Top-20.jpg
Hong Kong and Singapore have been role models for economic liberty for several decades, so it’s no surprise that their living standards have enjoyed the most impressive increase.
But if you dig into the data, you’ll also see that Taiwan’s jump began when it boosted economic freedom beginning in the late 1970s. And Ireland’s golden years began when it increased economic freedom beginning in the late 1980s.
The moral of the story is – or at least should be – very clear. Free markets and small government are the route to convergence.
[youtube]https://www.youtube.com/watch?v=jCaUA5l_bYc[/youtube]
And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.
* Chile vs. Argentina vs. Venezuela
https://danieljmitchell.wordpress.com/2011/03/28/in-one-chart-everything-you-wanted-to-know-about-the-relationship-between-good-policy-and-economic-prosperity/
(https://danieljmitchell.files.wordpress.com/2011/03/chile-argentina-venezuela.jpg?w=771&h=560)
* Hong Kong vs. Cuba
https://danieljmitchell.wordpress.com/2014/11/26/what-can-hong-kong-and-cuba-teach-us-about-economic-policy/
(http://freedomandprosperity.org/wp-content/uploads/2014/11/Hong-Kong-v-Cub.jpg)
* North Korea vs. South Korea
https://danieljmitchell.wordpress.com/2011/12/19/the-brutal-impact-of-north-korean-statism/
* Cuba vs. Chile
https://danieljmitchell.wordpress.com/2010/09/09/now-he-tells-us/
* Ukraine vs. Poland
https://danieljmitchell.wordpress.com/2014/04/30/ukraines-self-imposed-statism-crisis/
* Hong Kong vs. Argentina
https://danieljmitchell.wordpress.com/2011/04/19/greetings-from-argentina-an-obamaesque-land-of-crony-capitalism-and-a-warning-to-america/
* Singapore vs. Jamaica
https://danieljmitchell.wordpress.com/2011/04/19/greetings-from-argentina-an-obamaesque-land-of-crony-capitalism-and-a-warning-to-
(https://danieljmitchell.files.wordpress.com/2014/04/singapore-vs-jamaica.jpg)
it’s almost enough to make you think there’s a relationship between good long-run growth and economic freedom!
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It opens up SO many questions for BS (Bernie Sanders - and his sidekick HRC):
Who did think would win between Singapore and Jamaica? Chile vs Argentina? Which should we emulate, Statism or Freedom?
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Earlier Thomas Sowell compilation video including an affirmative action debate with Charlie Rose and a welfare debate with Prof. Francie Fox Piven.
https://www.youtube.com/watch?v=GC2l24xOJzA&spfreload=10
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I don't know if this is an effective persuasive technique, but I like posing the economic challenge backwards as a way of making the points of economic growth and inclusion:
If you were going to try to trap as many people in poverty as possible, what kinds of policies would you have?
The answer turns out to be exactly the policies and thinking of Barack Obama, Hillary Clinton and Bernie Sanders, to put names on it.
http://townhall.com/columnists/johnhawkins/2015/11/03/the-7-keys-to-trapping-as-many-americans-as-possible-in-poverty-n2074914
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I don't know if this is an effective persuasive technique, but I like posing the economic challenge backwards as a way of making the points of economic growth and inclusion:
If you were going to try to trap as many people in poverty as possible, what kinds of policies would you have?
The answer turns out to be exactly the policies and thinking of Barack Obama, Hillary Clinton and Bernie Sanders, to put names on it.
http://townhall.com/columnists/johnhawkins/2015/11/03/the-7-keys-to-trapping-as-many-americans-as-possible-in-poverty-n2074914
It is not accidental.
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It is not accidental.
It may be his intent - to trap millions in dependency - and there may be a Stockholm Syndrome effect of hostages supporting their captors, but for the most part being trapped in poverty is not the intent of the victims. We need to at least try to reach them.
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http://www.ft.com/cms/s/2/98ce14ee-99a6-11e5-95c7-d47aa298f769.html?kwp_0=80883&ftcamp=traffic%2Fsocial_promo%2FMiddle-class-Meltdown%2Ffacebook_US%2FKeywee%2Fauddev&utm_source=facebook_US&utm_medium=social_promo&utm_term=Middle-class-Meltdown&utm_campaign=Keywee&kwp_4=432408&kwp_1=246564#axzz3vSVDb69K
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It is not accidental.
It may be his intent - to trap millions in dependency - and there may be a Stockholm Syndrome effect of hostages supporting their captors, but for the most part being trapped in poverty is not the intent of the victims. We need to at least try to reach them.
This government has decided to dissolve the American people and create a population more to their liking.
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Cronyism Causes the Worst Kind of Inequality
http://www.bloombergview.com/articles/2015-12-24/cronyism-causes-the-worst-kind-of-inequality
Higher inequality has been associated with lower growth.
Economists Sutirtha Bagchi of the University of Michigan and Jan Svejnar of Columbia recently set out to test the cronyism hypothesis.
only one kind of inequality was associated with low growth -- the kind that came from cronyism
http://www.bloombergview.com/articles/2015-12-24/cronyism-causes-the-worst-kind-of-inequality
http://ftp.iza.org/dp7733.pdf
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First a quick reaction from the left: Who cares, the issue still gets us votes!
Once again, evidence that a free, private market for labor would out-perform socialism and big government tampering.
Who knew?
43% of the sustaining problem in the group we are trying to help most comes from this wrong-headed, counter-productive policy.
No worries, we can just support them for the rest of their lives if they don't successfully join the workforce when they are young.
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http://www.nber.org/papers/w21830.pdf
... baseline estimate is that this period’s full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.
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Anything factual and economic posted here could also go under Cognitive Dissonance of the Left. Did Bernie ever mention this, that the income of the top 1% goes down every year if you hold the members in that group constant and study them. Try this study for an example:
https://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf
The income of the top 1% in 1996 fell 25% within 10 years. 50% of the lower quintile earners moved up out of that category in 10 years and 75% of the top 1% moved down from that designation in just one decade. Who knew? Not one person attending a Dem debate.
For political expedience the Left likes to ignore income mobility> They point to a different group each tax year and calling them the top 1 %, inferring it is the same group as a year ago or a decade ago but it isn't.
In a global economy, the new rich can make more money than the successful people who preceded them because they are able to sell their inventions and innovations into a larger global market. The way to stop that is to ban commerce or to lead the global market into stagnation and decline, both leading ideas of the current administration and the left.
What this country needs is more people getting rich, not fewer. Not for what we see as the outward signs of prosperity, jetting around or spending wildly, but for the economically essential core activities that consistently produce wealth under the conducive conditions, investment, innovation, wise risk taking, profit seeking, addressing market needs with vision, hard work, persistence, adaptability, etc.
In political micro-economics, each voter needs to compare their income this regime and these policies with their own past and their own potential income under better policies, not look to what someone else is making with different talents, different backgrounds and different energy levels. Stopping or limiting the success of others limits your own income, even if you can't or won't see the connection.
Where is the JFK in today's Democratic primary and debate touting that a rising tide lifts all boats. They have recently shifted focus to stopping anyone (except from core left constituencies) from rising, especially the tide that affects all boats.
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Today, JFK's economic ideas would have home condemned as TEAquaeda by huffpo.
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Jan. 26, 2016 7:40 p.m. ET
352 COMMENTS
Here we go again. A major U.S. company merges with a foreign firm in part to avoid America’s punishing corporate tax code, and the politicians who refuse to reform the code denounce the company for trying to stay competitive. The gullible in the media then dutifully play along. Sigh.
Let’s try to explain one more time why it makes perfect business—and moral—sense for Johnson Controls to merge with Tyco, as it announced Monday it would do. Tyco has a U.S. headquarters in New Jersey but is legally domiciled in Cork, Ireland. Johnson Controls will own roughly 56% of the combined company and its legal headquarters will move to Cork from Milwaukee, Wisconsin, where it has been based for more than a century.
To simplify for Democratic presidential candidates: The U.S. federal corporate income tax rate is 35%. The Irish rate is 12.5%. Johnson Controls says the tax savings from its move to Cork will be roughly $150 million a year.
A CEO obliged to act in the best interests of shareholders cannot ignore this competitive reality. The merger means that Johnson Controls will have more money to invest back in the U.S. because the income it earns overseas would not be subject to the U.S. tax rate. Only if Johnson kept its headquarters in the U.S. would its foreign earnings be double-taxed upon repatriation. If Johnson Controls refuses to do such a deal now, a foreign competitor might end up buying Johnson Controls anyway to achieve the same savings.
As with other such tax “inversions,” there are also non-tax strategic reasons for the merger. The new company will have under one roof much of the equipment and services desired by the owners of large commercial buildings, from air conditioning to fire suppression.
But none of this business logic impresses Hillary Clinton or Bernie Sanders, who helped to write the U.S. tax code as Senators but are now competing as presidential candidates to see who can demagogue more ferociously against American employers. Mrs. Clinton called the merger “outrageous” and Mr. Sanders is calling the executives “corporate deserters.”
Neither one wants to reform the tax code to make U.S. tax rates more competitive with the rest of the world. Instead they want to raise the costs of doing business even further. Mrs. Clinton’s solution is to raise taxes on investors with higher capital-gains taxes, block inversion deals, and apply an “exit tax” to businesses that manage to escape.
Mr. Sanders would go further and perform an immediate $620 billion cashectomy on U.S. companies. The Vermonter would tax the money U.S. firms have earned overseas, even though that income has already been taxed in foreign jurisdictions and even if the companies aren’t bringing it into the U.S.
Mr. Sanders’s campaign website says that after the big revenue grab in year one, his change would increase federal revenue by perhaps $90 billion a year thereafter. And he would limit future corporate inversions by taxing many inverting companies as if they never left. His revenue goal is a fantasy, because the practical effect would be to encourage many more companies to flee American shores.
Never mind the lost tax revenue, this kind of punishing tax policy is immoral. Multinational corporations with global customers can always relocate to wherever it makes the most business sense. Their American employees aren’t so lucky because their livelihoods depend on thriving and competitive U.S. companies. If the employees can’t move, or their companies can’t compete, they’re the ones who lose their jobs or don’t get raises. Has the Democratic Party moved so far left that it doesn’t understand even this most basic of business realities?
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Obama's policies are now fully in place and anemic economic growth has slowed to 0.7%. https://www.washingtonpost.com/news/wonk/wp/2016/01/29/u-s-to-release-figures-expecting-to-show-fourth-quarter-growth/ Even Wesbury is bummed. It has been TEN YEARS since the United States of America has seen 3% growth for a year. Coincidentally, it has been 10 years since Nov 2006 when leftists took over Washington. Most odd in all this is that in the pursuit of equality over growth, income inequality have gotten much 'worse'.
Economic growth in 1984 during the Reagan recovery was 6.8%.
http://www.forbes.com/sites/peterferrara/2011/05/05/reaganomics-vs-obamanomics-facts-and-figures/#7d5435c23a1d
"Breakeven growth" is considered to be between about 3.1 and 3.2%.
George Will correctly points out that the difference between 2% growth and 3% growth is not 1%; it is a 50% improvement. This ship is getting harder and harder to turn around because the changes for the worse have been structural, not incidental. Leaving the workforce is not like driving to the store or being between jobs; it is a mostly permanent change / end of productive activity, and 100 million adults are no longer in the workforce, out of 242 million adults. The needing of government assistance is no longer defined as the poverty line; you need healthcare assistance up to incomes 4 times the poverty line.
From our discussion about tax rates, one tweak to Rubio's tax plan I would propose is to make the child tax benefit a deduction, not a credit. In the eyes of some he is engaging in his own social engineering by rewarding one activity, having children, rather than put all the money toward marginal rate reductions. In another sense, median income of 50k is simply less income for a family of 4 than it is for a single or a couple.
I would favor a constitutional amendment capping federal tax rates at about 25%. No one should pay more than a quarter of their income to the Feds. If we had a balanced budget requirement and didn't have the rich to keep raising on, a voter would have to pay more themselves in order to demand more services or goodies from the government. Imagine imposing common sense on public sector choices! The middle class shouldn't pay more than a quarter in Fed, state, local combined, but part of that is out of the Fed's hands and it would only works if/when we define the role of government downward. In the meantime we have greatly defined the role of government upward and that will take some hard work and smart planning to even begin to reverse.
The highest marginal tax rates in fact are faced by people on the edge of losing their program benefits. I made roughly one more dollar of income one year and lost thousands in FAFSA (federal college money). Working welfare folks face that on everything, especially free and subsidized health care that no one on a lower income can afford anymore.
In the 90's when we "ended welfare as we know it" (so much Clintonspeak in that), we saw the double benefit of people moving from programs to work. People not only start to pay in (pull the wagon) and are phased out of receiving some benefits (riding on the wagon). Social security seems to be the most vivid example for people to understand, but all programs work this way, how may workers can support how many beneficiaries? If you have made near the median income, you aren't in need of monetary help, maybe just budget counseling. What part of how expensive our lives have become is the fault of excess government, healthcare being the most recent and prominent example?
Oddly, HRC the felon is running to continue the Obama economy, not to return us to the Clinton-Gingrich years.
Missing in this rambling so far is the number one cause or symptom of our current economic problems, real business startups are happening at the lowest rate ever. That problem is tied more to excess regulations than to excess taxation, as taxation is tied to profits which is the least of your problems if you are contemplating a startup in Obama's America today.
All of these problems are solvable, not easily, not quickly and are barely being discussed in the current debate. Sanders for example wants to come down harder on Wall Street banks, but Wall Street banks are rich because of the government squeezing the business out of all banks that can't afford to have teams of Wall Street lawyers on staff. On the other side of it, Rubio correctly points out how a business started in a spare bedroom can't comply with all these over-regulations while the biggest of businesses can. If you really wanted to squeeze big businesses, make it legal for new businesses and small businesses to compete with them. Instead the main result of these policies has been for the top 30 companies (Dow), the top 500 companies (S&P) and the top 3100 companies (NASDAQ) to prosper while the rest of us suffer.
One more central leftist tenet is for government to raise the private sector wage. While we debate a federal minimum wage increase, many cities and states have been raising theirs. Government wants Walmart in particular to pay its people more. In the meantime, Walmart closed 154 stores and laid off 10,000 employees. Question: Who is helped by that? Certainly not Walmart employees or shoppers considered the heart of the lower middle class that we care the most about.
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"One more central leftist tenet is for government to raise the private sector wage. While we debate a federal minimum wage increase, many cities and states have been raising theirs. Government wants Walmart in particular to pay its people more. In the meantime, Walmart closed 154 stores and laid off 10,000 employees. Question: Who is helped by that? Certainly not Walmart employees or shoppers considered the heart of the lower middle class that we care the most about."
Well wages are like everything else supply and demand. We keep flooding the market form immigrants endlessly wages will never go up because they don't have to.
Great for Zuckerberg. Bad for workers.
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Minimum wage is the opposite of letting supply and demand work. Too many low wage immigrants is another problem. I believe all R candidates are now committed to ending new illegal immigration so the next step is to WIN THIS ELECTION! )
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http://www.disclose.tv/news/iceland_forgives_entire_population_its_debt_total_us_media_blackout/127307
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"The US Rothschild Controlled Media (RCM) has completely BLACKED OUT/CENSORED any news about Iceland’s DEBT FORGIVENESS."
ie: the Jews
"We are allowed to see a tortured, bleeding, dying Gaddafi anywhere, but we are not allowed to know about Debt Forgiveness."
ie: written by Jew hating and likely American hating Muslims most likely Arab Muslims.
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Here is a trick question: What percentage of American households have incomes in the top 10 percent? Answer: 51 percent of American households are in the top 10 percent in income at some point in the course of a lifetime — usually in their older years. Those who want us to envy and resent the top 10 percent are urging half of us to envy and resent ourselves.
https://www.creators.com/read/thomas-sowell/03/16/random-thoughts-b2798
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http://kfor.com/2016/03/17/carls-jr-ceo-wants-to-try-automated-restaurant-where-customers-never-see-a-person/
Fight for 15=Fail.
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Important work, I think, studying inequality over lifetime instead annually and looking more to spending rather than income wealth. Realistic conclusions, policies must take disincentives to work at both ends of the spectrum into account.
https://newrepublic.com/article/131517/weve-measuring-inequality-wrong
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Important work, I think, studying inequality over lifetime instead annually and looking more to spending rather than income wealth. Realistic conclusions, policies must take disincentives to work at both ends of the spectrum into account.
https://newrepublic.com/article/131517/weve-measuring-inequality-wrong
Another look at that:
http://www.investors.com/politics/capital-hill/income-inequality-doesnt-matter-study-finds-heres-what-does/
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Over on the US Economy thread we keep hearing about how great a limited number of large, global companies are doing, as if that is a measure of how the economy is doing. The economy is underperforming - to make a 'Captain F'ing Obvious' Understatement!
Under Obama's Accomplishments, did I already mention the worst startup rate of real businesses in US history? (Filing an LLC to limit liability exposure on an existing building or asset that will employ no one ever is not a business startup.) Others are starting to pay attention to warning signs that are already blindingly obvious to anyone on the forum.
Dearth of Startups: http://www.inc.com/magazine/201505/leigh-buchanan/the-vanishing-startups-in-decline.html
Among other things, "Onerous Regulations"
http://www.stltoday.com/business/columns/david-nicklaus/bullard-concerned-about-dearth-of-startups/article_b9a30d80-6980-581b-a52b-6bc53e861e33.html
Bullard concerned about dearth of startupsBullard concerned about dearth of startups
A long-term decline in U.S. startup activity should be of concern to national policymakers, St. Louis Federal Reserve Bank President James Bullard
Now this: (The Economist actually gets something right!)
Big firms never had it so good, competition persistently lacking.
http://www.economist.com/news/leaders/21695392-big-firms-united-states-have-never-had-it-so-good-time-more-competition-problem?utm_source=pocket&utm_medium=email&utm_campaign=pockethits
The Economist, What's wrong with the highest sustained profits by the biggest companies in US history? Lack of competition. Why the lack of competition? New regulations... keep rivals out.
"Getting bigger is not the only way to squish competitors. As the mesh of regulation has got denser since the 2007-08 financial crisis, the task of navigating bureaucratic waters has become more central to firms’ success. Lobbying spending has risen by a third in the past decade, to $3 billion. A mastery of patent rules has become essential in health care and technology, America’s two most profitable industries. And new regulations do not just fence big banks in: they keep rivals out."
"2/3rds of Americans think the economy is rigged [against them]."
( - How come we're on the side of making that true, instead of making that false? )
The two choices that remain coming out of these primaries are to choose between a crony government felon and a private takings advocating, crony government beneficiary. That's great (with sarcasm), and when do we start to address what's gone wrong in this country?
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From The Economist: ...
Most of the remedies dangled by politicians to solve America’s economic woes would make things worse. Higher taxes would deter investment. Jumps in minimum wages would discourage hiring. Protectionism would give yet more shelter to dominant firms. Better to unleash a wave of competition.
The first step is to take aim at cosseted incumbents. Modernising the antitrust apparatus would help. Mergers that lead to high market share and too much pricing power still need to be policed. But firms can extract rents in many ways. Copyright and patent laws should be loosened to prevent incumbents milking old discoveries. Big tech platforms such as Google and Facebook need to be watched closely: they might not be rent-extracting monopolies yet, but investors value them as if they will be one day. The role of giant fund managers with crossholdings in rival firms needs careful examination, too.
Set them free
The second step is to make life easier for startups and small firms. [Is this rocket science?] Concerns about the expansion of red tape and of the regulatory state must be recognised as a problem, not dismissed as the mad rambling of anti-government Tea Partiers. The burden placed on small firms by laws like Obamacare has been material. The rules shackling banks have led them to cut back on serving less profitable smaller customers. The pernicious spread of occupational licensing has stifled startups. Some 29% of professions, including hairstylists and most medical workers, require permits, up from 5% in the 1950s.
A blast of competition would mean more disruption for some: firms in the S&P 500 employ about one in ten Americans. But it would create new jobs, encourage more investment and help lower prices. Above all, it would bring about a fairer kind of capitalism. That would lift Americans’ spirits as well as their economy.
http://www.economist.com/news/leaders/21695392-big-firms-united-states-have-never-had-it-so-good-time-more-competition-problem?utm_source=pocket&utm_medium=email&utm_campaign=pockethits
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8-)
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Speaking of state taxes Jindal is getting creamed in the news for leaving a budget deficit 3 x bigger then when he came into office. His 60%+ approval rating plummets to under 30%.
He was leading as a supply sider. The real question is supply side economics a bust. Or "voodoo economics". Are our problems we cannot grow our way out of this?
George Will on the subject:
http://www.jewishworldreview.com/cols/will032716.php3 :-o
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http://scottgrannis.blogspot.com/2016/03/chinas-gift-to-us-cheap-goods.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
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http://scottgrannis.blogspot.com/2016/03/chinas-gift-to-us-cheap-goods.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
Grannis is right on this. Except for criminal activity, stealing patents, etc., each transaction of trade is good. It doesn't need to be "balanced" like a fiscal budget (we don't balance anymore either). Imports are good, exports are good, and having both is doubly good. Unlike a leftist world with compulsory purchases and regulated prices, every transaction of free trade is consensual and mutually beneficial. The American consumer is reaping a huge benefit from global sourcing and American companies and producers likewise receive a huge benefit from having a global market in which to sell.
I listened to Trump on the Wisc. talk show. He admits he doesn't want to raise tariffs, he won't raise tariffs, that would cripple our consumers (his voters), he admits. He just wants to threaten to do that. How do you threaten to do what everyone knows you are not willing to do? He had no answer for that - another major issue he hasn't fully thought through. Imagine next year's headline, prices for durable goods up 45% due to President Trump's trade policy. He is too into his own popularity to ever do that even if it was good for us and it isn't. It would be instant global recession with an easily traceable cause.
The WSJ used to say that global trade is beneficial and inevitable. If you don't buy into the former, see the latter. You can't have economic freedom in a global economy while being banned or punished economically for making your best purchases (and sales) around the world. [The exception is when national security interests are at stake.] And when people do have economic freedom, everyone benefits.
As the Chinese economy and consumer prospers, they will grow their demand for what we produce (if we produce what they demand) in a dynamic economy.
Trade protectionism is based on static, rear view mirror thinking. We used to make x , (steel, garments, or whatever), therefore we need to get back to where we made x . But comparative advantage moved on. Now we need to produce y and z to meet new market demand and stay ahead of our competition. And what that our national product mix needs to be is not determined in the White House or a Congressional committee.
Freedom to trade requires the confidence that, given a somewhat level playing field, we can compete with anyone. The government's role in it is to remove the government imposed barriers that keep up from being competitive, not to micro-manage production, consumption or trade.
[We have a trade thread.]
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A few interesting facts in this piece, link below:
90% of new jobs / job growth are part time.
Growth rate since the recession is a dismal 2%.
Hillary promises to punish inversions with a new tax instead of reform the highest business taxes in the world.
US businesses are holding $2 trillion in foreign earnings outside the US, double Obama's stimulus package.
Hillary proposes to raise minimum wage 66% from 7.25 to $12.
1% of US workers make minimum wage.
0.4% of workers 25 or older make federal minimum wage.
More taxes and more regulations hurt economic growth.
Economic growth would help low income people more than more taxes and regulations.
Hillary and the left choose greater government power over increasing economic growth.
http://www.cnbc.com/2016/03/29/what-hillary-gets-wrong-on-wages-commentary.html
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Democrats are routinely accused of taking black support for granted. They push policies without much concern for the potential negative impact on their black constituents, whom liberals reason will either vote Democratic or stay home.
To understand the basis of this criticism, look no further than the current debate over minimum-wage increases. For decades, the political left has argued that higher minimum wages would reduce poverty and income inequality. In reality, wage floors are nothing more than sops to organized labor. Most of the U.S. labor force isn’t organized, so labor unions use minimum-wage laws to limit the job competition from nonunionized workers. And Democrats support Big Labor’s agenda to keep the party’s campaign coffers filled.
This week California and New York, two states run by Democratic governors, announced plans to gradually increase the base wage to $15 per hour. California Gov. Jerry Brown acknowledged that there was no economic rationale for the increase, and the state finance department issued a report last year that said increasing the minimum wage would lead “to slower employment growth.” In the end, however, the progressive Democrat decided, much as New York Gov. Andrew Cuomo must have, that other factors were more important. “Economically, minimum wages may not make sense,” Mr. Brown said recently. “But morally and socially and politically they make every sense.” The governor appears to have struggled with his conscience—and won.
According to the Bureau of Labor Statistics, the U.S. jobless rate in the fourth quarter of last year was 5%, but it was 9.1% for blacks and 10.9% for black residents of California—or more than double the 4.4% for whites in the Golden State. Black job seekers in New York fared better with a 7.7% unemployment rate at the end of last year, but it was still twice as high as the 3.8% rate for white New Yorkers and well above the state’s 4.8% average. A minimum-wage increase does nothing for people out of work other than make it more difficult for them to find a job.
Some workers may be better off under a higher minimum, but not everyone. Younger and less-experienced workers, who are disproportionately black, are especially vulnerable to mandatory wage increases, since their employers are more willing and able to reduce hours, cut benefits or mechanize a task in an effort to save money. The government can mandate that an unskilled worker be paid more money, but that won’t make the worker more productive or ensure that he keeps his job.
These so-called disemployment effects are played down by liberals, but they get to the crux of the problem with the policy. Most minimum-wage workers are neither poor nor the sole breadwinner of the family. Statistically, they are much more likely to be seniors staying busy in retirement, teenagers gaining work experience, or someone with young children working part-time until school lets out. What characterizes most poor households in the U.S. is a lack of workers—any workers—not people already in the labor force who earn too little. Any policy that reduces job prospects for the less-skilled is not reducing poverty and may well be exacerbating it.
Mr. Brown says higher minimum wages are about “economic justice” for the disadvantaged, and politicians going back many decades have similarly claimed to be looking out for the little guy. “The minimum wage laws were passed to help especially the unskilled, the teenagers, and the blacks,” wrote economic journalist Henry Hazlitt in 1979, four decades after the 1938 Fair Labor Standards Act established the first federal minimum wage. “Is this helping the poor? Is it helping the unskilled worker? The results show that it is doing exactly the opposite.” Unfortunately, it still is.
An academic paper on the 2007 federal minimum-wage hike by William Even of Miami University in Ohio and David Macpherson of Trinity University in Texas detailed the effects on young blacks, who were by far hit hardest. The “employment losses for 16-to-24-year-old black males between 2007 and 2010 could have been nearly 50% lower had the federal and state minimum wages remained at the January 2007 level,” wrote the economists, adding that the “consequence of the minimum wage for this subgroup were more harmful than the consequences of the recession.”
None of this history would stop President Obama from praising the actions of New York and California this week and calling for Congress to legislate an even higher federal wage floor. Hillary Clinton, for her part, joined Mr. Cuomo at a rally in Manhattan on Monday to celebrate the new law. The sad irony is that black voters have been Mrs. Clinton’s firewall against an unexpectedly resilient Bernie Sanders. Blacks are looking out for Hillary, while she’s looking out for Big Labor. Mrs. Clinton and her fellow Democrats aren’t just taking black supporters for granted. They’re also taking them for a ride.
Mr. Riley, a Manhattan Institute senior fellow and Journal contributor, is the author of “Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed” (Encounter Books, 2014).
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Here is the graphic Chris Wallace needs to put up as he asks question number one to the President:
(https://johnbtaylorsblog.files.wordpress.com/2016/04/emp-to-pop-2016-3.jpg?w=640)
Reagan recovery above. Obama recovery below.
Besides George Bush's fault (refuted in question number two), how do you explain your PATHETIC economic record, post recession?
Graph source: Stanford Economics Professor John Taylor's blog, http://economicsone.com/
Prof. Taylor uses the terms: "7 years of so-called expansion", "Slow Crawl", "anemic productivity growth, anemic employment growth, anemic income growth", not 'plowhorse' economy. He has been "blaming government economic policy all the way". "People’s exasperation and anger about the economy and Washington policy revealed in this presidential election proves the point better than any abstract statistic ever could. "
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What??? I thought Clinton was always taking credit for reducing welfare rolls (after Republicans started it and the polls were strongly in favor of it) and now they say he should be blamed for it !!
So now it is bad the welfare rolls are down 70% And some, not all of course, who accept welfare are lazy. Like it or not that is FACT. We see it all the time.
But in any case this IS news to me:
http://www.huffingtonpost.com/entry/bill-clinton-welfare-reform_us_5707cbf4e4b0c4e26a227a34
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http://www.cnbc.com/2016/04/08/first-quarter-economy-looks-bleaker-by-the-day.html
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I cannot speak to the veracity of this site:
Debt clock:
http://zfacts.com/p/461.html
Republicans starting with Reagan partially to blame:
http://zfacts.com/p/gross-national-debt.html
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Debt clock:
http://zfacts.com/p/461.html
Republicans starting with Reagan partially to blame:
http://zfacts.com/p/gross-national-debt.html
Reagan presided over big deficits but not for the reasons normally cited.
1. Did tax rates cuts cause debt? Cutting the top marginal rate from 70% to 28%, fully in place in 1/1/83, ended a painful, otherwise endless period of stagnation. It caused enormous economic growth. Revenues to the Treasury doubled in the decade of the 1980. Reagan tax rate cuts did not cause one dollar of deficit or debt.
2. Defense spending? Reagan's defense rebuild was expensive. Not addressing that threat would have been more costly. The result of the real commitment he made to peace through strength directly resulted in the fall of the Soviet Union. The cost of defeating that threat needs to be spread over the 4 decades that threat grew, not over Reagan's 8 years. Call it an unfunded liability. On June 12, 1987, Reagan called out the head of the Soviet Union to tear down this wall after showing 7 years of unflinching resolve. On November 9, 1989, the wall came down. That didn't happen because of detente, parity, or unilateral disarmament. No one honestly believes it could have been done faster or for less.
3. Domestic spending? Reagan allowed domestic spending to increase as his compromise with Democratic Speaker Tip O'Neill in order to accomplish the two points above. Democrats controlled the House during Reagan's entire term. Accomplishing the above required making this compromise. By their own admission, it was the cost of having a Democrat controlled House, not the cost of having Reagan in the White House.
Does anyone believe the Soviet union would have collapsed without a U.S. defense buildup or that America would have ever snapped out of stagflation under the previous policies of economic asphyxiation? I don't.
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Doug I agree with you about Reagan. I am not sure about the motives of the authors of the above post I made.
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Doug I agree with you about Reagan. I am not sure about the motives of the authors of the above post I made.
They like to score economic results by whether the President at the time has an R or a D by their name, if it makes the Dems look same or better. I like to score economic results by the policies that caused those results.
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Also, and this I think to be very important, is the matter of baseline budgeting.
BB uses nominal dollars i.e. includes projected inflation. For simplistic illustration $100 in year one with 10% inflation is $110 in year two and this is calculated as neutral in constant dollars.
Thus the nominal dollar increases of the 5 and 10 year plans (remember when we used to laugh at the Soviet Empire for its central planning with 5 and 10 year plans?) in place when Reagan took office became REAL increases as Volcker's policies aided and abetted by the increase in supply due to the tax rate cuts decreased inflation far more rapidly than anyone except the supply-siders and the monetarists predicted.
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Also, and this I think to be very important, is the matter of baseline budgeting.
BB uses nominal dollars i.e. includes projected inflation. For simplistic illustration $100 in year one with 10% inflation is $110 in year two and this is calculated as neutral in constant dollars.
Thus the nominal dollar increases of the 5 and 10 year plans (remember when we used to laugh at the Soviet Empire for its central planning with 5 and 10 year plans?) in place when Reagan took office became REAL increases as Volcker's policies aided and abetted by the increase in supply due to the tax rate cuts decreased inflation far more rapidly than anyone except the supply-siders and the monetarists predicted.
That's right. They must factor inflation into the budget for every domestic dollar spent on their side but don't account for any inflation when taxing every dollar invested by the people, resulting in real capital gains tax rates of 100%, 1000% and higher. Ironically this over-taxation in the marginal rates leads to asset paralysis where properties and assets cannot be sold because for tax reasons and thus no revenues come in, adding further to the deficit, debt and stagnation. This is even worse at the state level where an inflationary-only gain is taxed at the highest rate of ordinary income, again preventing sales and causing lost revenue.
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http://www.breitbart.com/california/2016/04/17/minimum-wage-california-american-apparel/?utm_source=facebook&utm_medium=social
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(March 28, Dallas Morning News, this story went by without fanfare)
Dumb and Dumber. In the land of the free and the home of the brave, and in the face of all this talk about trade deficits and also global warming, it has been illegal until now to sell abroad the largest growth product of our time, the product that played the biggest role in curbing our CO2 emissions nationwide in the United States of Ameria, natural gas.
http://www.dallasnews.com/opinion/latest-columns/20160325-daniel-gross-the-u.s.-can-finally-sell-natural-gas-abroad-and-that-could-change-everything.ece
The U.S. can finally sell natural gas abroad, and that could change everything. 28 March 2016
(Makes you wonder, where else are we still shooting ourselves in the foot, maybe by having the highest business tax rates in the world?)
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http://www.amazon.com/dp/1621575756/?tag=denprager-20
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http://www.amazon.com/dp/1621575756/?tag=denprager-20
It will be interesting to learn the details his assessment. I assume it is the Federal Reserve and expansionary money.
"The Scandal of Money: Why Wall Street Recovers but the Economy Never Does"
We are so far removed from addressing the things that are wrong I don't see how anyone can feel optimistic.
I see Scott Grannis has another post on what is going right in a no growth economy. What a dismal science. It's like having a fascination with baseball batting statistics when the hitters are striking out half the time, no extra base hits and no one is hitting over .200.
No growth over 2% in the entire Obama era, going back to when Dems took congress in 2006. Compare that with quarterly GDP growth rates during the early part of the Reagan recovery after tax rate cuts were fully enacted: 1983 Q2 3.35%, Q3 5.75%, Q4 7.83%, 1984 Q1 8.55% Q2 7.99%, Q3 6.96%, Q4 5.63%. Imagine today's economy with that kind of growth!
A commenter on Grannis' post: "Ted Cruz, was on CNBC live this morning. He ranted that the Fed has been "printing money" and "artificially propping up the stock market for rich people". Ted said its all a bubble that's getting ready for an enormous crash. Nobody running for President has a clue how the Fed works."
That sounds closer to the truth in layman's terms than the twisted explanation of how QE didn't create money.
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http://www.amazon.com/dp/1621575756/?tag=denprager-20
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I think Grannis' comparison of National debt to personal or family debt is rather dubious. He says the because our national debt is less then family debt we are in ok shape???
What??? What was the number of households living from paycheck to paycheck? What is he nuts?
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If you answer him in my thread for him instead of here maybe I can get him to respond.
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Even the San Francisco Fed knows this policy costs jobs!
It wasn't very long ago, 2007, that the federal minimum wage was raised to $7.25. Funny, isn't that the year we elected Pelosi-Reid-Obama-Clinton, ended economic growth and we headed into collapse. Not all because of minimum wage but because of the bankrupt thinking that took control of Washington. Now we are talking about doubling that (while we deny any inflation exists when we tax capital gains, the long term investments that support those jobs.
Elastic Demand. Every economist will tell you that when you raise the price of something, you will get less of it, even labor, all other factors held constant.
But minimum wage is different. It sounds good and polls well for Democrats, so they keep bringing it up, and because not all other factors are ever held perfectly constant and most min wage increases are small, they can keep producing flawed studies to show no real damage is done even when it is.
When the government mandated minimum wage is below the prevailing wage, no one notices the effect. When you raise it a quarter once in a while, no one notices a reduced employment effect. But when you raise it boldly, bold effects will result. Ask proponents this question, if $15 is good for us, why isn't $20 or $25 better? We all know why. Jobs disappear. But which jobs affecting which people? Always hurt most are the least skilled and most vulnerable among us. The leftist answer: we have programsfor that, pay without work and job training for no jobs available.
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The Effects of Minimum Wages on Employment
State minimum wage hikes may have killed 200,000 jobs
(More delicately put,) "the evidence suggests that it is appropriate to weigh the cost of potential job losses from a higher minimum wage against the benefits of wage increases for other workers."
http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/
http://www.washingtonexaminer.com/fed-state-minimum-wage-hikes-may-have-killed-200000-jobs/article/2578868
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Bump up the pay for those on the second rung of the economic ladder while completely removing the lowest rung so that MANY will NEVER be able to climb up the ladder at all. No worries. Those left behind will still vote Democrat for life while those who had to automate and eliminate low end jobs to keep their businesses make more and pay more taxes to cover it.
What a strange political-economic world we live in. We know better but keep doing worse.
Aside from the job losses and economic costs of this bad policy, there is a moral cost. Is it right or wrong for consenting adults to be BANNED from being able to freely make contracts with each other in any area as basic as labor and making a living, or even PART of a living? What has government done well or done right, healthcare?, that makes us think they are more competent than the people to make our most important decisions for us?
One Size Fits All? Why would the right wage in NYC be right for Topeka or Peoria? Why would the right wage for Palo Alto be right for Selma or Fresno? Why would the wage for manufacturing be right for retail? Why would the base wage for a tipped employee be right for one who gets no tips? It doesn't, it isn't, it isn't, it isn't and it isn't.
One of my earlier proposals applies here. Lawmakers should have to submit and approve an 'Unintended Consequences" statement with new laws and programs like these in the same way that developers are required to have environmental impact studies approved to build new projects.
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Its Robert Reich, so there is plenty of drivel in here, but I do like the idea of allowing more savings.
http://www.salon.com/2016/04/28/robert_reich_wealth_inequality_is_even_more_devastating_than_income_inequality_partner/
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Editor's Note: The Global Affairs column is curated by Stratfor's editorial board, a diverse group of thinkers whose expertise inspires rigorous and innovative thought in our analyses. Though their opinions are their own, they inform and sometimes even challenge our beliefs. We welcome that challenge, and we hope our readers do too.
By David Sikora
The race for the U.S. presidency is on, and with the federal deficit expected to climb to $616 billion in the 2016 fiscal year, it is no surprise that the budget has taken center stage in the debates. Nor is it a surprise that each of the front-runners has his or her own ideas about what needs to be done — often making references to the last time the deficit was actually reduced, during the 1990s term of former President Bill Clinton.
Bernie Sanders, for instance, has called for more broad-based taxes that impact all taxpayers, while Hillary Clinton prefers targeted tax increases on the wealthy. Meanwhile, Donald Trump wants to reduce corporate income taxes and the number of tax brackets, while others aim to eliminate brackets completely by implementing a flat tax. In short, four very different plans for reaching the same goal: balancing the budget.
Broadly speaking, the Democrats' plans are projected to increase revenues at the expense of economic growth, while the Republicans' plans are expected to do just the opposite. As the candidates go head-to-head in the coming months, we, the people, will undoubtedly hear any number of arguments as to why one plan for the economy is better than the next. And as is so often the case when officials seek support for unpopular tax hikes, some of those arguments will almost certainly justify raising taxes by pointing to the budget surplus of the Clinton administration, which is the first to have occurred since 1969 and is often credited to the president's sizable tax increase.
What is Global Affairs?
While domestic politics do not generally fall within Stratfor's purview, the math in this debate is worth some scrutiny. It is certainly true that the United States enjoyed unprecedented wealth creation during Clinton's tenure and, as a result, a government surplus. But was it really Clinton's policies and bipartisan planning that drove the surplus and balanced the budget, or something else entirely?
Reshaping the World of Investment
In reality, the surplus of the Clinton era had less to do with the president's policies and more to do with the profound structural changes taking place in stock, bond and securities trading throughout the 1990s. These changes were driven by the development of the World Wide Web, which democratized U.S. capital markets, causing a one-time reallocation of household assets and a veritable tsunami of funds flowing into government coffers.
To provide some historical context, the first Internet browser — Mosaic — emerged out of the National Center for Supercomputing Applications in 1993. Its genius lay in the simple navigational model that allowed users to intuitively consume vast amounts of formatted and connected data, and in May 1995, Mosaic's exclusive licensor, Spyglass, Inc., went public on the Nasdaq Stock Market. Three months later, so did its direct competitor, Netscape.
Both companies' initial public offerings were based on the core strategy of providing a browser that could transform the way the world exchanges and consumes information. They, and other technology companies of that era, built their success upon the communications technologies that preceded them. Chief among those technologies was the Internet, which got its start in the late 1960s as part of a Defense Department project known as the Advanced Research Projects Agency Network, or ARPANET. The World Wide Web was simply the first software application leveraging the vast communications network to be mass marketed, marking the beginning of a technological revolution the likes of which we may never witness again, at least in our lifetimes.
But how did the creation of World Wide Web translate into a balanced federal budget?
Put simply, it blew capital markets wide open by making instantaneous access to tradable financial information widely available. Anyone with a cheap computer and a decent Internet connection could now explore an array of investment opportunities on their own. Almost overnight, capital markets became a magnet for new money since tens of millions of people around the world could research companies and decide where to put their money, all from the comfort of their own homes. (Previously, anyone interested in reviewing a company's annual report would have had to place a phone call — likely on a landline — to the company's investor relations department and ask for its public filing to be sent via mail, or perhaps subscribe to complicated services like CompuServe or Value Line, which were largely designed for professional investors.)
The new model of information consumption and real-time transactions enabled households to change the composition of their assets. In 1988, savings accounts and certificates of deposit accounted for roughly 46 percent of total household financial assets by value, while equities and mutual funds made up just 32.6 percent. But by 2000, their positions had reversed: Savings accounts and certificates of deposit had fallen to a mere 20 percent, while equities and mutual funds nearly doubled to 62.5 percent.
Stock Markets Surge
At the same time, thousands of young companies were advancing new Internet-based products that would change the world even more. Demand for ownership of these companies, driven in part by fear of missing the boat and in part by unmitigated greed, was insatiable, regardless of whether the companies were actually profitable. In the new information-based economy, companies' value was based on different metrics: private investor pedigree, eyeballs, page views, management experience and yes, "the audacity of hope" that the business could one day become the next General Electric. Firms with as little as $100 million in annual sales surged into $20 billion market capitalizations, and Americans across the country became addicted to CNBC.
The availability of financial information and "new economy" companies created intense upward pressure on stocks from all sectors as the world ushered in a new millennium. Between 1994 and 2000, the Dow Jones industrial average exploded from 3,834 to 10,786, while the Nasdaq jumped from 751 to over 4,000. Over the same period, the value of shares traded on the New York Stock Exchange increased nearly fivefold, from $2.45 trillion to $11.06 trillion, though even it paled in comparison to the value of shares traded on the Nasdaq, which grew ninefold from $1.45 trillion to $20.40 trillion.
The flurry of stock trading that took place over this period created sizable short- and long-term capital gains, delivering the windfall that led to the federal government's budget surplus. These were unusual circumstances that political leaders just happened to be in the right place at the right time to oversee — not the result of a coordinated set of policies implemented by the Clinton administration, or by elected officials from either party for that matter.
As the presidential campaign season heats up, we will undoubtedly hear candidates advocate higher taxes on American citizens, arguing that greater taxation on productivity will not drive behavioral change but will inexorably bring the country back to the golden age of budget surpluses we enjoyed when Clinton was in the White House. But without an innovation as profound as the Internet, higher taxes on Americans — who themselves are often job creators — could be more of a dangerous drag than surefire solution for the U.S. economy.
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http://www.dailymail.co.uk/sciencetech/article-3577192/The-future-fast-food-KFC-opens-restaurant-run-AI-ROBOTS-Shanghai.html
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http://seekingalpha.com/article/3976647-levee-gonna-break-debt-demographics-productivity-financialization?auth_param=evk9c:1bju97b:f15fdcb971747202ae04c6339000ce5b&uprof=46
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Re-posting this with greater detail. I think this is important! Two countries went different directions economically and we have results to compare. Not all other things are equal, Chile has a population 17 million, Venezuela 30 million, but they have conducted a pretty good experiment. Chile started much poorer and socialist, and are now freer, richer and healthier. If the socialist country was outperforming the freer country, you can bet we'd be hearing about it!
5 Ways Capitalist Chile is Much Better Than Socialist Venezuela
http://reason.com/archives/2016/05/24/5-ways-capitalist-chile-is-much-better-t
May 24, 2016
The story of Chile’s success starts in the mid-1970s, when Chile’s military government abandoned socialism and started to implement economic reforms.
In 2013, Chile was the world’s 10th freest economy.
Venezuela declined from being the world’s 10th freest economy in 1975 to being the world’s least free economy in 2013 (other than North Korea).
(https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv1.jpg?h=386&w=624)
1. As economic freedom increased, so did income per capita (adjusted for inflation and purchasing power parity), which rose from being 31 percent of that in Venezuela to being 138 percent of that in Venezuela. Between 1975 and 2015, the Chilean economy grew by 287 percent. Venezuela’s shrunk by 12 percent.
(https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv2.jpg?h=386&w=624)
2. As its economy expanded, so did Chile’s ability to provide good health care for its people. In 1975, Chile’s infant mortality rate was 33 percent higher than Venezuela’s. In 2015, almost twice as many infants died in Venezuela as those who died in Chile.
(https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv3.jpg?h=386&w=624)
3. With declining infant mortality and improving standard of living came a steady increase in life expectancy. In 1975, Venezuelans lived longer than Chileans. In 2014, a typical Chilean lived over 7 years longer than the average citizen of the Bolivarian Republic.
https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv4.jpg?h=386&w=624
4. Moreover, more Chileans of both sexes survive to old age than they do in Venezuela. As they enter their retirement, the people of Chile enjoy a private social security system that was put into place by Cato’s distinguished senior fellow Jose Pinera. The system generates an average return of 10 percent per year (rather than the paltry 2 percent generated by the state-run social security system in the United States).
(https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv5.jpg?h=386&w=624)
(https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv7.jpg?h=386&w=624)
5. Last, but not least, as the people of Chile grew richer, they started demanding more say in the running of their country. Starting in the late 1980s, the military gradually and peacefully handed power over to democratically-elected representatives. In Venezuela, the opposite has happened. As failure of socialism became more apparent, the government had to resort to ever more repressive measures in order to keep itself in power—just as Friedrich Hayek predicted.
https://d1jn4vzj53eli5.cloudfront.net/mc/ekrayewski/2016_05/cv6.jpg?h=386&w=624
Marian L. Tupy is a policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity and editor of www.humanprogress.org
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http://www.glennbeck.com/2016/06/01/best-run-states-are-heavily-republican-study-finds/
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Isn't Florida a red state? It shows it as blue.
I notice Kentucky whose Mitch McConnel who was on Bernard McGuirk this AM radio hawking his book is the only red state in bottom ten.
Funny how he has suddenly decided to jump on the Trump bandwagon of late.
Suddenly he sounds like a strong conservative. Where was he the last 8 yrs?
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Democrats took over Washington 10 years ago with the election of Pelosi-Reid-Obama-Hillary-Biden majorities in the House and Senate. They put the nation on notice with their electoral succes in Nov 2006 that: 1) the Bush tax rate cuts were sure to be repealed, and 2) the policies of income redistribution were coming hard and soon toward you if you hadn't felt them already. So we had two years of Dems running over George Bush's lame duck ending and we had the 8 eight years following that of the leftist dream team running the White House. By now the rich should be gone and the working class elevated. Are they?
Copying over some of my math from Cog Diss of the Left, somewhere in this is a lesson or two...
94.1 million now "out of the workforce".
7.4 million of "the workforce" unemployed.
101.5 million working age and above people don't work in a country of 245 million adults.
The number working age and above people in this country not working exceeds the entire population of our 35 lowest population states.
Some of these should be working. Some should not. How many too many that is - is a matter of opinion. But it is WAY too many. My point in the plowhorse analogy is that at some point the load is too great for the rest to pull or carry.
Left wing fact check from 14 months ago:
http://www.politifact.com/truth-o-meter/statements/2015/feb/10/ted-cruz/ted-cruz-says-92-million-americans-arent-working/
Cruz understated his number, still they called his statement mostly false.
The poor got poorer under Chavez Obama. The rich got richer. They locked in their market share in all the crony industries while the government acted powerfully to prevent new companies to enter those industries, rise up and compete. High taxes don't hurt the rich; just add it to the price that you charge the poor if everyone has to pay it.
We traded economic opportunity away for a snipe called income equality - and got neither.
The increase alone of Food Stamp recipients alone under Obama, 16 million more people on food stamps under Obama, is equal to the population of 13 states: Nebraska, West Virginia, Idaho, New Hampshire, Maine, Rhode Island, Montana, Delaware, South Dakota, North Dakota, Alaska, Vermont, Wyoming.
That's a good thing, right? More and more people can't have dinner without government help! 20% of households need help now. What was that percentage in the 1960s? How far have we come by "helping"?
32 million on food stamps when Obama took office. Peaked at 47 million, roughly a 50% increase - in ONE Presidency!
7.4 million on disability assistance when Obama took office.
11 million today, roughly a 50% increase.
More people in poverty. More people unable to work because of a disability, millions more. More people need assistance to buy health insurance. And more people on food stamps, tens of millions more. This is what we call a "recovery". How would it look differently if the economy sucked?
Did I mention DEBT? What part of This-Is-Leftist-Failure do they not understand? The more he grows the stagnant economy, the more people don't work in it. They can't even eat without help.
Leftists are taking us on the same path as Venezuela; we are just at a different point on the time line.
The total number of people on food stamps, 46 million, is the same number of people that live in 25 states. All the people in half the states! So, what is the poverty rate after we pay all this money? Same as it was before. The Census Bureau does not count in-kind payments as income. So how much more assistance is needed? By their math, the amount needed is infinite.
"Maybe they went too far."
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http://www.forbes.com/sites/markhendrickson/2012/05/31/president-obamas-wealth-destroying-goal-taking-the-curley-effect-nationwide/
President Obama's Wealth Destroying Goal: Taking The 'Curley Effect' Nationwide
Mark Hendrickson , CONTRIBUTOR
I write about economics, politics, and human-interest stories.
Opinions expressed by Forbes Contributors are their own.
Detroit
It’s hard to think of anything more perverse in American politics than the Curley effect. The Curley effect historically has been an urban phenomenon, but President Obama seems bent on taking the entire country down this wretched path.
As defined by Harvard scholars Edward L. Glaeser and Andrei Shleifer in a famous 2002 article, the Curley effect (named after its prototype, James Michael Curley, a four-time mayor of Boston in the first half of the 20th century) is a political strategy of “increasing the relative size of one’s political base through distortionary, wealth-reducing policies.” Translation: A politician or a political party can achieve long-term dominance by tipping the balance of votes in their direction through the implementation of policies that strangle and stifle economic growth. Counterintuitively, making a city poorer leads to political success for the engineers of that impoverishment.
Here’s an example of how the Curley effect works: Let’s say a mayor advocates and adopts policies that redistribute wealth from the prosperous to the not-so-prosperous by bestowing generous tax-financed favors on unions, the public sector in general, and select corporations. These beneficiaries become economically dependent on their political patrons, so they give them their undivided electoral support—e.g., votes, campaign contributions, and get-out-the-vote drives.
Meanwhile, the anti-rich rhetoric of these clever demagogues, combined with higher taxes to fund the political favors, triggers a flight of tax refugees from the cities to the suburbs. This reduces the number of political opponents on the city’s voter registration rolls, thereby consolidating an electoral majority for the anti-wealth party. It also shrinks the tax base of the city, even as the city’s budget swells. The inevitable bankruptcy that results from expanding expenditures while diminishing revenues can be postponed for decades with the help of state and federal subsidies (“stimulus” in the Obama vernacular) and creative financing, but eventually you end up with cities like Detroit—called by Glaeser and Shleifer “the first major Third World city in the United States.”
The Curley effect is extensive. Perhaps you have seen the chain e-mail listing the ten poorest U.S. cities with a population of at least 250,000: Detroit, Buffalo, Cincinnati, Cleveland, Miami, St. Louis, El Paso, Milwaukee, Philadelphia, and Newark. Besides all having poverty rates between 24 percent and 32 percent, these cities share a common political factor: Only two have had a Republican mayor since 1961, and those two (Cincinnati and Cleveland) haven’t had one since the 1980s. Democratic mayors have had a lock on City Hall despite these once-great and prosperous cities stagnating on their watch. This is the Curley effect in action.
Let me comment on the city on that list that I know the best—Detroit. (I grew up a few miles from its city limits.) In the 1920s, Detroit was arguably the richest city in the world. Today it is broke—a shadow of its former self after 51 years of Democratic hegemony and a Curley-like agenda.
I’m going to say something provocative that leftists will surely quote out of context, but it needs to be said: Detroit was a lot better off in the 1950s, when the city funded one of the best zoos in the country but had not yet built today’s gravy train for favored segments of the human population. Detroit’s decline has paralleled a shift toward funding far fewer zoo animals and far more human beings.
Critics may take this to mean that I value animals more than people. On the contrary, it is because I value humans more than animals that I find the policy shift to be morally offensive in addition to being so obviously destructive economically. It is bad enough to see a trapped lion carrying 80 pounds of flab that a lion in the wild would never have, but why would you reduce human beings to a similarly pathetic dependency? The bars that ensnare humans behind the economic and psychological cages of the government dole may not be physical, but it is pathetic to see people reduced to lives of unproductive idleness and despair, all in the name of “compassion” and, of course, for the sake of cementing Democratic mayors in office.
What is most troublesome about the Curley effect is that it is spreading beyond its historical setting of cities. Entire states—most notably our most populous, California—are manifesting all the symptoms of the Curley effect: Democrats enjoying electoral hegemony; businesses and middle-class individuals, more Republican than Democratic, emigrating to states with less oppressive tax regimes; reduced job opportunities; a budget careening toward bankruptcy
The ultimate political prize for the Democrats, of course, would be to control the national government. (Note: Yes, I know that technically we have a “federal” government, but if Big Government Democrats find a way to forge a permanent majority, you can kiss the last vestiges of federalism goodbye.)
Everything Obama has done has been designed to strengthen Democratic constituencies (e.g., stimulus spending steered predominantly toward unions and strategically allied state and municipal entities; waivers from Obamacare for unions; a hefty 23 percent increase in the Index of Dependence on Government during Obama’s first two years) and to weaken Republican constituencies (e.g., making small business formation more difficult by impeding venture capitalists; refusing to amend Sarbanes-Oxley; using Dodd-Frank regulations to discourage loans; fewer waivers from Obamacare; proposing lower tax rates for large corporations, but not on the “S” corporations that are the preferred choice of small business owners; constant efforts to raise taxes on the “rich”—which means, as we’ve seen in Detroit, California, and other Curley effect victims, higher taxes on the middle class).
Obama’s smash-mouth, Curley-like politics is all about choosing winners and losers. Reread his State of the Union address from January, and you see a parade of proposals to take from A to give to B, to encourage businesses to do C and discourage them from doing D. Indeed, Obama seems incapable of suggesting a single economic policy that does not redistribute wealth from his political opponents to his political allies. The message is clear: He wants Americans to be dependent on the government; consequently, he is hostile to the private sector, because a vibrant private sector enhances economic independence and self-reliance.
If Obama and his fellow progressives succeed in applying the Curley strategy on the national level, Americans will no longer be able to move to a new city or state to escape the withering economic impact of Curley-effect policies; their only option would be to leave the country. However, it appears that Obama has anticipated that response. To close the escape hatch from an Obama-Curley America, the president signed the Foreign Account Tax Compliance Act that mandates closer monitoring of Americans’ offshore accounts. apparently approves of policies to impose financial penalties on anyone desiring to give up U.S. citizenship, and periodically calls for “global minimum taxes.”
The Curley effect already has inflicted great economic damage on important American cities and states. It now presents an existential threat to our entire country. That one of our major political parties has based its own success on such a ruthlessly cynical strategy is disgusting, if not diabolical. How we get off this suicidal path is one of the most urgent challenges facing us today.
Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.
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That pithily makes a powerful point, one I will be using.
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I would add the once greatest New Jersey city of Newark to the "Curley" affect. ( akin to 3 stooges?).
It used to be a great city but over my lifetime has degenerated like others, into decay albeit with some attempts at urban "renewal" which is more Republican then Crat in nature.
I mention this town because that is Cory Booker's claim to fame. He is auditioning hard to be Hillary's VP. You remember. They guy who just happens to be driving along and by chance comes by a house on fire and he runs in to save a woman:
http://www.nytimes.com/2012/04/14/nyregion/mayor-cory-booker-says-he-felt-terror-in-fire-rescue.html?_r=0
One Newark police officer described him as a "show boat". Even Bill Clinton didn't even think of this one.
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When did wages grow under Pres. Bill Clinton? Only after passing pro-growth policies.
When will wages grow under Hillary Clinton if she wins and keeps her promises? Never.
The facts of the Clinton economic growth record: Bill Clinton's presidency gets credit for some impressive private sector growth but the lion's share of it came in the last 4 years after he co-opted the Republicans economic agenda. See chart below.
Bill Clinton's economic policy achievements:
1) Passed NAFTA with majority Republican support, majority Democratic dissent. Took effect 1994.
2) Passed Welfare Reform with majority Republican support, lacking majority Democratic dsupport, 1996.
3) Passed Capital Gains Tax Rate cuts with majority Republican support, 1997.
Hillary Clinton -
1) opposes free trade, 2) opposes welfare reform, and 3) wants to raise taxes further than Obama did on investment, and crush our fragile growth.
Bill Clinton's economic results:
Venture capital grew 6 fold over 1995 levels in the years following the capital gains tax rate reductions.
Real wages, however, grew at 6.5 percent rate after the Bill Clinton-Newt Gingrich capital gains tax rate cuts compared with 0.8 percent growth rate after the Bill Clinton tax rate hikes of 1993.
http://www.heritage.org/research/reports/2008/03/tax-cuts-not-the-clinton-tax-hike-produced-the-1990s-boom
Hillary Clinton now opposes the pro growth policies that worked for Bill Clinton.
Bill Clinton -
Not satisfied with growing the private economy and balancing the federal government, returned to big government ways, attacked America's most successful company Microsoft in March 2000 with a DOJ lawsuit that triggered the tech stock crash of 2000 and the 2000-2001 recession. Growth ended, see chart:
(http://i603.photobucket.com/albums/tt114/dougmacg/961316df-b980-4912-ade6-6dadecf3c8d5_zpswbksyfxm.jpg)
Chart source: Washington Post
https://www.washingtonpost.com/news/wonk/wp/2012/09/05/the-clinton-economy-in-charts/
Hillary Clinton opposes all the policies that accelerated economic growth, favors all policies tied to big government growth, is running to continue Obama's slow growth, low growth polices.
Insanity or deception? Candidate Hillary promises the results of the Bill Clinton administration while rejecting the policies responsible for that growth.
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http://www.ftportfolios.com/Commentary/EconomicResearch/2016/8/8/trumps-policies-earn-a-b
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http://www.capoliticalreview.com/capoliticalnewsandviews/new-mcdonalds-in-phoenix-run-entirely-by-robots/
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http://www.capoliticalreview.com/capoliticalnewsandviews/new-mcdonalds-in-phoenix-run-entirely-by-robots/
Yes, as stated previously, minimum wage law does not legislate raises, it bans the hiring of people whose output is worth less than to employ. It also gives the companies cover for accelerating their automation and job elimination plans that might have been coming anyway.
Does the robot get paid leave, union dues, free healthcare for relatives or any other labor mandate?
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Denmark Isn't Magic
New research suggests that the American dream isn’t alive in Scandinavia
Despite liberal arguments that Denmark is so much better than the U.S. at social mobility, its poor kids are no more likely to go to college.
http://www.theatlantic.com/business/archive/2016/08/the-american-dream-isnt-alive-in-denmark/494141/
Danish-Americans have a measured living standard about 55 percent higher than the Danes in Denmark. Swedish-Americans have a living standard 53 percent higher than the Swedes, and Finnish-Americans have a living standard 59 percent higher than those back in Finland.
https://www.bloomberg.com/view/articles/2016-08-16/denmark-s-nice-yes-but-danes-live-better-in-u-s
this Danish Dream is a “Scandinavian Fantasy,” according to a new paper by Rasmus Landersø at the Rockwool Foundation Research Unit in Copenhagen and James J. Heckman at the University of Chicago. Low-income Danish kids are not much more likely to earn a middle-class wage than their American counterparts. What’s more, the children of non-college graduates in Denmark are about as unlikely to attend college as their American counterparts.
http://www.nber.org/papers/w22465
http://www.nber.org/papers/w22465.pdf
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Fed Officials Suggest Rate Hike On The Way In September
Friday, 26 August 2016 Brandon Smith
As predicted here at Alt-Market, despite all other indications of a receding economy the Fed is pushing for yet another rate hike in 2016. This is a CLASSIC move for the Federal Reserve. They almost ALWAYS hike rates into a recession/depression, and this usually accelerates the downturn. Keep in mind the timing of these announcements; only two months before the U.S. presidential elections. I believe the goal here by the elites is to initiate a soft downturn going into the elections which will boost Donald Trump's campaign. I believe that they plan to place Trump into office and then allow the system to crash completely. The point? To place conservatives at the helm and then blame them for an economic collapse that was already engineered to happen by international financiers...
Federal Reserve Chair Janet Yellen said Friday that the case for an interest rate hike “has strengthened in recent months” in light of recent strong job growth, but she gave no signal that Fed policymakers will make a move at a meeting next month.
At the Fed’s annual symposium in Jackson Hole, Wyo., Yellen said the Fed’s policymaking committee “continues to anticipate that gradual increases in the federal funds rate will be appropriate over time” to meet the Fed’s goals for inflation and employment.
The Dow Jones industrial average rose after Yellen’s remarks, but logged a small decline at midday as the market digested the news that met its expectations. Meanwhile, Fed Vice Chairman Stanley Fischer said on CNBC that next Friday's report on August job gains could factor into the Fed's decision at its September 20-21 meeting, a remark that appeared to keep a rate increase on the table. The 10-year Treasury yield was up .03 percentage points in early afternoon trading at 1.6%.
The Fed raised its benchmark interest rate in December for the first time in nine years but has stood pat since then, leaving it at a historically low 0.4%.
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Wages grew 8 times faster with capital gains tax rate cut. Wage and labor productivity growth requires increasing capital investment, not punishing it. Who knew?
"Real wages grew at 6.5 percent rate after the Bill Clinton-Newt Gingrich capital gains tax rate cuts compared with 0.8 percent growth rate after the Bill Clinton tax rate hikes of 1993."
http://www.heritage.org/research/reports/2008/03/tax-cuts-not-the-clinton-tax-hike-produced-the-1990s-boom
The Heritage Foundation
March 4, 2008
Tax Cuts, Not the Clinton Tax Hike, Produced the 1990s Boom
By J.D. Foster, Ph.D.
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
Thomas A. Roe Institute for Economic Policy Studies
When pressed about the harmful effects on the economy, proponents of higher taxes often fall back on what can be called the "Clinton defense." President Bill Clinton pushed a major tax increase through Congress in 1993, and, so the story goes, the economy boomed. How, then, can tax increases be so bad for the economy? The inference is even stronger: that higher taxes actually strengthened the economy.
The Clinton defense is superficially plausible, but it fails under closer scrutiny. Economic growth was solid but hardly spectacular in the years immediately following the 1993 tax increase. The real economic boom occurred in the latter half of the decade, after the 1997 tax cut. Low taxes are still a key to a strong economy.
The Clinton Tax Defense
A growing body of literature and experience indicates that higher taxes are associated with a smaller economy.[1] It is generally axiomatic that the more one taxes something, the less there is of the item taxed.
There is surely no reluctance among proponents to argue that higher taxes on tobacco materially reduce tobacco consumption or that higher taxes on energy would appreciably reduce energy consumption. Yet, somehow, the argument persists that raisingtaxes on labor does not diminish the supply of labor or that raising taxes on capital does not appreciably reduce the amount of capital in the economy. In both cases, tax hikes weaken the economy and reduce the amount of income earned by American families.
The Clinton defense of higher taxes rests largely on a cursory review of the economic history of the 1990s. Whatever the theoretical debates, the proof, as they say, is in the pudding: President Clinton raisedtaxes, yet the economy grew, and grew smartly in the latter half of the 1990s. Economists have occasionally been accused of seeing something work in practice and then proving that it cannot work in theory. However, this is not the case here.
History suggests that the economy performed reasonably well in the years immediately following the tax hike, but history is not causality, and history sometimes needs a more careful examination to tell its story faithfully. Following the tax hike, the economy performed reasonably well, but not as well as one would expect given the conditions at the time. The real economic boom came later in the decade, just when the economy should have slowed as it made the transition from a period of recovery to normal expansion. Further, this acceleration coincided to a remarkable degree with the 1997 tax cut.
Contrasting the period immediately after the tax hike and the period immediately after the tax cut, the evidence strongly suggests that the tax hike likely slowed the economy as traditional theory suggests, and that it was the tax cut that gave the economy renewed vigor--and gave history the real 1990s boom. In other words, the Clinton defense of higher taxes does not hold up.
The Clinton Tax Hike
In 1993, President Clinton ushered through Congress a large package of tax increases, which included the following:[2]
An increase in the individual income tax rate to 36 percent and a 10 percent surcharge for the highest earners, thereby effectively creating a top rate of 39.6 percent.
Repeal of the income cap on Medicare taxes. This provision made the 2.9 percent Medicare payroll tax apply to all wage income. Like the Social Security payroll tax base today, the Medicare tax base was capped at a certain level of wage income prior to 1993.
A 4.3 cent per gallon increase in transportation fuel taxes.
An increase in the taxable portion of Social Security benefits.
A permanent extension of the phase-out of personal exemptions and the phase-down of the deduction for itemized expenses.
Raising the corporate income tax rate to 35 percent.
According to the original Treasury Department estimates, the Clinton tax hike was to raise federal revenues by 0.36 percent of gross domestic product (GDP) in its first year and by 0.83 percent of GDP in its fourth year, when all provisions were in effect and timing differences associated with near-term taxpayer behaviors had sorted themselves out. In 1997, the fourth-year effect would be roughly equivalent to an increase in the federal tax burden of about $114 billion.
Background
The economic environment at the time of the tax hike is important in assessing its consequences. In January 1993, the economy was entering its eighth quarter of expansion after the 1990-1991 recession. The recession had been relatively mild by historical standards, with a net drop in output of 1.3 percent. Yet even at the start of 1993, the economy was operating below capacity. Capacity utilization in the nation's factories, mines, and utilities was running at about 81 percent, whereas it had been around 84 percent through much of 1988 and 1989. The unemployment rate in January 1993 was 7.3 percent but had averaged 5.3 percent as recently as 1989. At the time of the tax hikes, the economy was recovering but still far from healthy.
Tax policy aside, much in the context of the 1990s was conducive to prosperity. The end of the Cold War brought a new sense of hope and greater certainty to the global economy. The price of energy was astoundingly low, with oil prices dropping to about $11 per barrel and averaging under $20 per barrel compared to prices above $90 per barrel today. The Federal Reserve had finally succeeded in establishing a significant degree of price stability, with inflation averaging less than 2 percent during the Clinton Administration. And, of course, a tremendous set of new productivity-enhancing technologies involving information technologies and the World Wide Web burst on the scene.
Absent a major negative shock, one should have expected a period of unusually strong growth from 1993 onward as the economy more fully employed its available capital and labor resources. In the four years following the Clinton tax hike (from 1993 through 1996):
The economy grew at an average annual rate of 3.2 percent in inflation-adjusted terms;
Employment rose by 11.6 million jobs;[3]
Average real hourly wages rose a total of five cents per hour;[4] and
Total market capitalization of the S&P 500 rose 78 percent in inflation-adjusted terms.
These statistics indicate a solid, but not spectacular, performance in the overall economy. Job growth was strong, as one would expect coming out of recession. Real wage growth remained almost non-existent, and the stock market performed well. But the real question is this: Altogether, did the economy perform better, or worse, because of the tax hike? The data from the period do not provide a clear answer.
The year 1997 was a watershed for both tax policy and the economy. By 1997, the economy had entered into a sustained expansion. The unemployment rate was 5.3 percent, a level thought at the time to be roughly consistent with full employment. Similarly, capacity utilization rates hovered around 82.5 percent; again, roughly consistent with full employment of the nation's industrial capacity. With a mature expansion and the economy running at what was believed to be about full capacity, growth would normally be expected to ease back as the economy makes the transition from recovery to normal growth. It was not a moment when one would expect growth to accelerate.
The 1997 Tax Cut: The Economy Unleashed
In 1997, the Republican-led Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton. The 1997 bill:
Lowered the top capital gains tax rate from 28 percent to 20 percent;
Created a new $500 child tax credit;
Established the new Hope and Lifetime Learning tax credits to reduce the after-tax costs of higher education;
Extended the air transportation excise taxes;
Phased in an increase in the estate tax exemption from $600,000 to $1 million;
Established Roth IRAs and increased the income limits for deductible IRAs;
Established education IRAs;
Conformed AMT depreciation lives to regular tax lives; and
Phased in a 15 cent-per-pack increase in the cigarette tax.
According to Treasury's original estimates, the 1997 tax cut was relatively modest, amounting to just 0.11 percent of GDP in its first year and 0.22 percent of GDP by its fourth year. In 1997, the fourth-year effect would be roughly equivalent to a reduction in the overall tax burden of about $30 billion.
Despite its modest size, tax cut advocates had high expectations for the tax cut's effects on the economy because the reduction in the capital gains tax rate was expected to unleash a torrent of entrepreneurial and venture capital activity. They were not disappointed.
In 1995, the first year for which these data are available, just over $8 billion in venture capital was invested.[5] Venture capital is especially critical to a vibrant economy because high-risk/high-return investment permits promising new businesses to blossom, rapidly spreading new technologies and new ideas into the marketplace and across the economy. Such investments, when successful, generate returns to investors that are subject primarily to the tax on capital gains. By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost $28 billion, more than a three-fold increase over 1995 levels, and by 1999, it had doubled yet again.
The explosion in venture capital activity cannot be credited entirely to the cut in capital gains tax rates, as the cut fortuitously coincided with technological developments that gave rise to the Internet-based "New Economy." However, the rapid development and application of these new technologies could not have occurred at such a rapid clip absent the enormous investment flows made possible largely by the reduction in the capital gains tax rate. This experience demonstrated yet again the truth of the axiom: The less you tax of something--in this case, venture capital investment--the more you get of it.
Comparing the Periods
The Clinton years present two consecutive periods as experiments of the effects of tax policy. The first period, from 1993 to 1996, began with a significant tax increase as the economy was accelerating out of recession. The second period, from 1997 to 2000, began with a modest tax cut as the economy should have settled into a normal growth period. The economy was decidedly stronger following the tax cut than it was following the tax increase.
The economy averaged 4.2 percent real growth per year from 1997 to 2000--a full percentage point higher than during the expansion following the 1993 tax hike (illustrated in the graph above). Employment increased by another 11.5 million jobs, which is roughly comparable to the job growth in the preceding four-year period. Real wages, however, grew at 6.5 percent, which is much stronger than the 0.8 percent growth of the preceding period (illustrated in the graph below). Finally, total market capitalization of the S&P 500 rose an astounding 95 percent. The period from 1997 to 2000 forms the memory of the booming 1990s, and it followed the passage of tax relief that was originally opposed by President Clinton.
In summary, coming out of a recession into a period when the economy should grow relatively rapidly, President Clinton signed a major tax increase. The average growth rate over his first term was a solid 3.2 percent. In 1997, at a time when the expansion was well along and economic growth should have slowed, Congress passed a modest net tax cut. The economy grew by a full percentage point-per-year faster over his second term than over Clinton's first term.
The evidence is fairly clear: The tax cuts, especially the reduction in the capital gains tax rate, made a major contribution to a strong economy. Given this observation, it seems likely, though admittedly less certain, that the tax increases in 1993, while not derailing the economy as many had forecast at the time, did indeed slow the recovery compared to what the economy could have achieved.
Conclusion
Proponents of tax increases often reference the Clinton 1993 tax increase and the subsequent period of economic growth as evidence that deficit reduction through tax hikes is a pro-growth policy. What these proponents ignore, however, is that the tax increases occurred at a time when the economy was recovering from recession and strong growth was to be expected. They also ignore that the real acceleration in the economy began in 1997, when economic growth should have cooled. This acceleration in growth coincided with a powerful pro-growth tax cut.
The evidence is persuasive that the tax increase probably slowed the economy compared to the growth it would have achieved and that the subsequent tax cuts of 1997, not the tax increases, were the source of the acceleration in real growth in the latter half of the decade. As taxes are now above their historical average as a share of the economy, and are rising, Congress should look to enact additional tax relief to keep the economy strong.
J.D. Foster, Ph.D., is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
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When did the Soviet Empire collapse? Wouldn't the "peace dividend" be an important variable here as well?
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When did the Soviet Empire collapse? Wouldn't the "peace dividend" be an important variable here as well?
That's right, the Soviet empire collapse was complete by about 1991, the year before Bill Clinton was elected. The peace dividend was the talk of the time and one reason people chose a small state governor over a war president.
The end of the arms race was one factor that made a balanced budget possible.
With government funding stalled, creative talent and technology from the military moved to the private sector, internet protocol, for example, also the silicon valley engineers.
But the military spending void alone would not have spurred that economic surge without the capital gains rate cuts energizing the venture capital industry, IMHO.
Our complacency and neglect of the military and foreign intelligence in that time led to the success of the next wave of attacks against us, embassies, USS Cole, 9/11, more wars and more military spending.
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A miss on the article's point not to have noted this variable and to have discussed its implications , , ,
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A miss on the article's point not to have noted this variable and to have discussed its implications , , ,
Good point on a big omission of the time. If I may defend him, the peace dividend was held constant in that period while tax policy was greatly changed at a specific point. It set up a good opportunity to contrast the effects of a policy, and he draws definitive conclusions not seen in mainstream reporting:
Wage rate growth was 8 times higher after capital gains rate cuts. These are two things we are missing today!
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https://www.youtube.com/watch?v=tCOfP3e9Co8
50 years ago 98% of men in this age group worked.
Now 6 times that proportion sit home, not even looking for work, watch TV.
Disability increases explain only part of this.
Proportion of women working peaked around year 2000.
At the link, Brookings Institution interviews an Obama economist.
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http://www.gallup.com/opinion/chairman/181469/big-lie-unemployment.aspx
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No doubt Obama-Hillary will claim credit, and one suspects that this underpins Obama's perplexing high approval ratings , , ,
http://www.nytimes.com/2016/09/26/business/economy/millions-in-us-climb-out-of-poverty-at-long-last.html?emc=edit_th_20160926&nl=todaysheadlines&nlid=49641193&_r=0
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Deconstructing further the economic nonsense the Democratic nominee made this week to a record setting debate audience. Tax policy too, but the allegation made is trickle down economics, a larger accusation than just tax policy. Hillary Clinton quotes static analysis that defies the science of economics. She blames the financial collapse of 2008, under her watch from the majority in the Senate, on the Bush tax rate cuts of 5 years earlier. She misses that the Bush rate cuts doubled the economic growth rate when they were enacted. Is she saying that economic growth causes collapse and therefore we should avoid growth?
The main Bush rates cuts were passed in 2003. The top rate was cut from 38.6% to 35%. The lowest rate went from 15% to 10%. It was not a give away to the rich with the largest percentage decreases actually going to the lowest end of income. Only in deception can this be called "trickle down", nor do the dates come close to matching the collapse.
https://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reconciliation_Act_of_2003
http://www.moneychimp.com/features/tax_brackets.htm
The rate cuts led to consistent double digit growth in federal revenues, 44% in 4 years from the time they were enacted until the side promising the end of the rate cuts won control of Washington DC at the end of 2006.
http://stats.areppim.com/stats/stats_usxbudget_history.htm
Capital gains revenues DOUBLED by 2005 following the lowering of that rate. That means the rich are paying more, measured in dollars.
Rate cuts caused the rich to pay more, not less as Hillary Clinton alleged falsely to 80 million people. From IRS data, the top 1% of income earners paid $84 billion more in federal income taxes in 2007 than in 2000 before the Bush tax cuts were passed, 23% more. The bottom half of income earners paid $6 billion less in federal income taxes in 2007 than in 2000, a decline of 16%. It wasn't a giveaway to the rich and it wasn't a loss in revenues.
http://www.forbes.com/sites/peterferrara/2012/12/06/why-america-is-going-to-miss-the-bush-tax-cuts/#5b5bfbca5f38
Clinton is repeating a falsehood that Obama ran on twice and won. Here is PolitiFact tapdancing around the same issue and getting it wrong:
http://www.politifact.com/punditfact/statements/2015/jun/17/ron-christie/gop-strategist-christie-tax-revenues-rose-after-bu/
Economic growth didn't cause the collapse. The financial collapse was caused by the certainty that economic growth was coming to an end with the end of the rate cuts and other anti-supply side promises like over-regulation. The end to wage growth meant an end to the rapid rise in the real estate market. Investors saw a changed electorate, a changed political climate, Pelosi-Reid-Obama-Biden-Hillary all switching over to majority control, a certain rise in future tax rates coming, and then the trouble began.
More links on this topic:
http://www.heritage.org/research/reports/2007/01/ten-myths-about-the-bush-tax-cuts
Hillary Clinton's Zany Debate Claim That Tax Cuts Caused The Financial Crisis
http://www.forbes.com/sites/theapothecary/2016/09/27/hillary-clintons-zany-debate-claim-that-tax-cuts-caused-the-financial-crisis/#48a4963019e4
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If this election was about economics (and why isn't it?), wouldn't you want to be able to make the people and the country more prosperous? One set of policies advances that and the other set of polices diminishes it.
Pointed out previously, wage growth was 8 times better under Clinton after tax rate cutting than in the early years when he was raising taxes and working on national healthcare.
Why don't results of policies matter over sounds good ideology?
It is Year 8 for the Obama Administration and productivity is declining. This isn't about Bush; this is either a bug or a feature of their economic design. They put their distorted definition of fairness ahead of growth and got neither. Income inequality widened. Program dependency broadened. Workforce participation continued to decline. Entrepreneurism nearly vanished. And wage growth, for the most part, ended.
You can't launch an attack on capital, essential to labor, without hurting labor. These issues are as old as the hills, and we (at least half the electorate) keep learning nothing. The economy is interconnected, and the rhetoric that some policy like tax hikes will only hurt the top 1 or 2% is always complete BS, whether out of ignorant or intentionally deception.
One article noting the decline in productivity - and the reasons for it:
https://economicsone.com/2016/10/16/take-off-the-muzzle-and-the-economy-will-roar/
http://www.wsj.com/articles/why-the-economy-doesnt-roar-anymore-1476458742
In his Saturday Wall Street Journal essay “Why the Economy Doesn’t Roar Anymore”—illustrated with a big lion with its mouth shut—Marc Levinson offers the answer that the “U.S. economy isn’t behaving badly. It is just being ordinary.” But there is nothing ordinary (or secular) about the current stagnation of barely 2 percent growth. The economy is not roaring because it’s muzzled by government policy, and if we take off that muzzle—like Lucy and Susan did in “The Lion, the Witch and the Wardrobe”—the economy will indeed roar.
It is of course true, as Levinson states, that “faster productivity growth” is “the key to faster economic growth.” But it’s false, as he also states, that it has all been downhill since the “long boom after World War II” and “there is no going back.” The following chart of productivity growth drawn from my article in the American Economic Review shows why Levinson misinterprets recent history. Whether you look at 5 year averages, statistically filtered trends, or simple directional arrows, you can see huge swings in productivity growth in recent years. These movements—the productivity slump of the 1970s, the rebound of the 1980s and 1990s, and the recent slump—are closely related to shifts in economic policy, and economic theory indicates that the relationship is causal, as I explain here and here and in blogs and opeds. You can also see that the recent terrible performance—negative productivity growth for the past year—is anything but ordinary. Productivity Growth
(https://johnbtaylorsblog.files.wordpress.com/2016/08/productivity-growth.jpg?w=702&h=526)
Writing about the 1980’s and 1990s, Levinson claims that “deregulation, privatization, lower tax rates, balanced budgets and rigid rules for monetary policy—proved no more successful at boosting productivity than the statist policies…” The chart shows the contrary: productivity growth was generally picking up in the 1980s and 1990s. It is the stagnation of the late 1960s, the 1970s, and the last decade that is state-sponsored. To turn the economy around we need to take the muzzle off, and that means regulatory reform, tax reform, budget reform, and monetary reform.
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http://bigthink.com/natalie-shoemaker/canada-testing-a-system-where-it-gives-its-poorest-citizens-1320-a-month?utm_campaign=Echobox&utm_medium=Social&utm_source=Facebook#link_time=1479241883
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http://bigthink.com/natalie-shoemaker/canada-testing-a-system-where-it-gives-its-poorest-citizens-1320-a-month?utm_campaign=Echobox&utm_medium=Social&utm_source=Facebook#link_time=1479241883
"What Happens When You Give Basic Income to the Poor? "
Is income the only thing poor people are missing?
As we had with static scoring of massively different tax and spend alternatives here, does anyone believe that providing a comfortable income without working (along with legalization of marijuana) will have no effect on the incentive or disincentive to produce?
75% death tax will not affect the incentive to build wealth.
Highest business taxes in the world is not why companies are leaving.
And punishing capital investment is not related to productivity and wage stagnation, no connection.
Which side again has the deniers of science? Or is economics not a science?
It fits perfectly with the mentality here with minimum wage law is how you raise incomes of 'minimum wage workers'. Why can't Haiti pass a $15 minimum wage law or 1320/mo minimum income decree and vote itself out of poverty? Is it possible something else is missing?
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I think the argument is that this will replace welfare, not add to it.
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I think the argument is that this will replace welfare, not add to it.
In that case, this is an idea that Milton Freidman used to put forward. He was making the point we could give them quite a bit directly in place of all the bureaucratic programs.
I am still skeptical that Ontario will do this in lieu of all other programs, they still get free health care for example. Nor will they be able to keep it at 1320 or measure its success by how many people no longer need it. I am also skeptical that formalizing the idea that all people are entitled to a decent paycheck whether they work or not is not in direct contradiction to crucial incentives to produce.
The current system of receiving a myriad of programs and free money that other people earned is “seriously demeaning”.
How about minimum income with a minimum work requirement, set at a humane limit of what each person is able to do, with a built-in incentive to get off of it.
Our welfare reform under Bill Clinton and Newt Gingrich was mainly a work requirement to receive welfare and that had a tremendous result from my point of view. Since then other programs have grown around that.
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http://www.nationalreview.com/article/442665/trump-carrier-bailout-economically-unsound?utm_source=nr&utm_medium=satemail&utm_content=williamson&utm_campaign=carrier&utm_term=VDHM
Quite a bit off with regard to the Laffer Curve but some interesting points in it as well.
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Trump Rally vs. Bannonomics
President Trump won’t get the mileage out of protectionism that Reagan did.
The presidential adviser at Trump Tower in New York, Oct. 7. ENLARGE
The presidential adviser at Trump Tower in New York, Oct. 7. Photo: Associated Press
By Holman W. Jenkins, Jr.
Updated Dec. 2, 2016 2:32 p.m. ET
259 COMMENTS
A surprise win, with House and Senate in tow, by any Republican presidential candidate would probably have been greeted with the upward repricing of stocks we’ve seen since Donald Trump’s election.
A Republican named Donald Duck, under the circumstances, would have heralded a pleasantly unexpected end to the Obama regulatory war on business, a fresh start on tax reform, a chance for a rational overhaul of ObamaCare.
Recall, the big questions had been how much would Hillary Clinton win by, and would Republicans lose the Senate. These expectations had to be quickly revised.
Then again, any other Republican might have been seen as a shoo-in, so the good news on taxes and regulation would already have been priced in.
Even more bracing to consider, any other Republican besides Mr. Trump (truly a Republican in name only) would have arrived without the uncertainties, unpredictability and baggages of Mr. Trump: His business conflicts. His trade-war threats.
Bob Doll, the equity strategist for Nuveen, says the market will be up only as long as “growth Donald Trump” is seen triumphing over “protectionist Donald Trump.”
Which brings us to Steve Bannon.
In my one encounter with the then-Breitbart propaganda chief, he informed me that I was a global elitist so-and-so. The occasion was a private dinner. I had suggested that tax and regulatory reform would be a better way to re-energize the U.S. economy rather than engaging in Trumpian trade fights. (Admittedly, I may also have mentioned that blaming foreigners has been a favorite tactic of demagogues from time immemorial.)
Now Mr. Bannon is a senior adviser to the Trump administration, and the markets are hoping my advice will prevail.
In lore, Ronald Reagan was anti-union. In fact, he was the best friend auto and steelworkers ever had, imposing “voluntary” import restraints that delayed a brutal industrial downsizing.
Some jobs were preserved for a while. What was mostly preserved was an opportunity for shareholders to extract profits under government protection. And this is the best you can expect from trade policy. It won’t restore small-town America to a landscape of thriving factories and mines. It won’t provide high-paying, reliable employment to high-school graduates.
Mr. Trump may succeed in jawboning Carrier Corp. not to move several hundred jobs to Mexico, but he lacks the opportunity that even Reagan had, with the connivance of a couple of major allies, to put a safety net under two giant, centralized, union-dominated industries and keep a million jobs going awhile longer.
Expansionist autarky, the Bannon world view, is even less plausible now than it was in the 1930s. The U.S. can cut Apple off from its million-man army in China. Those jobs won’t be coming here because nobody would do them at a price Apple would be willing to pay.
Or take health care: We’d have to cut back our prodigal consumption —$3 trillion worth last year, virtually all of it domestically produced—if we also had to produce the $500 billion in net imports we consume each year.
Trade by now is crucial even to sustaining our precious follies. Why does Ford build small cars in Mexico? Partly to offset the cost of Congress’s belovedly zany fuel-mileage rules, partly to offset the oddest dispensation in Christendom: the fact that foreign auto makers in the U.S. enjoy a free labor market while the Big Three are politically obliged to patronize a UAW labor monopoly left over from the Roosevelt era.
Mr. Bannon is right about one thing, though: A country is more than just an economy.
New railroad hires, after two years on the job, are entitled to job security, plus a six-figure salary, plus attractive benefits. And yet half the room empties out, a top executive tells me, when potential recruits hear they would have to submit to regular drug tests and might have to relocate to Bismarck, N.D. Rail companies have been reduced to trying to hire military vets off the plane before they can return to their hometowns and bad habits.
Nearly one-fifth of males between the ages of 21 and 30 who haven’t completed college aren’t working today and aren’t in school—an increase of 125% since 2000. Yet many of these young men are satisfied with their situation because it frees up time to play videogames, according to research by the University of Chicago’s Erik Hurst and colleagues.
There is a problem in post-manufacturing, small-town America, all right, but winding back the clock is not an option. We need other options.
An outbreak of Trumpian optimism might at least boost the morale of this struggling America. Tax and regulatory reform might at least get businesses investing again, giving these workers the tools to raise their productivity and potential wages.
Let’s hope so, because this is the best and only help these Americans are likely to get from their government. And some who are whispering in Mr. Trump’s ear would screw even this up.
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https://imprimis.hillsdale.edu/the-greatest-story-never-told-todays-economy-in-perspective/?hootPostID=e01f9a282be44cc3462678b0e4f85de8
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• The Progressive-State Depression
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Stephen Moore
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Posted: Dec 06, 2016 12:01 AM
The blue states of America are in a depression. I don't mean the collective funk of liberal voters because they lost the election to Donald Trump.
I'm talking about an economic malaise in the blue states that went for Hillary Clinton. Here is an amazing statistic courtesy of the just-released 2016 edition of "Rich States, Poor States," which I co-authored with Reagan economist Arthur Laffer and economist Jonathan Williams: Of the 10 blue states that Democrats won by the largest percentage margins -- California, Massachusetts, Vermont, Hawaii, Maryland, New York, Illinois, Rhode Island, New Jersey and Connecticut -- every single one of them lost domestic migration (excluding immigration) between 2004 and 2014. Nearly 2.75 million more Americans left California and New York than entered these states.
They are the loser states. They are all progressive: high taxes rates; high welfare benefits; heavy regulation; environmental extremism; high minimum wages. Most outlaw energy drilling. The whole left-wing playbook is on display in the Clinton states. And people are leaving in droves. Day after day, they are being bled to death. So much for liberalism creating a worker's paradise.
Now let's look at the 10 states that had the largest percentage vote for Trump. Every one of them -- Wyoming, West Virginia, Oklahoma, North Dakota, Kentucky, Tennessee, South Dakota and Idaho -- was a net population gainer.
This is part and parcel of one of the greatest internal migration waves in American history, as blue states, especially in the Northeast, are getting clobbered by their low-tax, smaller-government rivals in the South and the mountain regions.
By the way, pretty much the same pattern holds true for jobs. The job gains in the red states that Trump carried by the widest margins had about twice the job-creation rate as the bluest states carried by Clinton.
The latest "Rich States, Poor States" report, published by the American Legislative Exchange Council, shows a persistent trend of Americans moving from blue to red states. The best example is that from 2004-2014, the two most populous conservative states -- Florida and Texas -- gained almost 1 million new residents each. The two most populous liberal states -- California and New York -- saw an equal-sized exodus.
It's easy to understand why people might want to leave gray and rusting New York. But California? California has, arguably, the most beautiful weather, mountains and beaches in the country, and yet people keep fleeing the state that is supposed to be a progressive utopia.
What doesn't make California and New York paradise is the high cost of living -- thanks to expensive environmental regulations, forced union policies and income tax rates that are the highest in the nation, at 13 percent or more. Florida and Texas are right-to-work states with no income tax. Is it really a shocker that people would choose zero income tax over 13 percent? New York politicians know that their record-high tax rates are killing growth, which is why the state is spending millions of dollars on TV ads across the country trying to convince people that New York has low taxes. Sure. And Chicago is crime-free.
Even when it comes to income inequality, blue states fare worse than red states. According to a 2016 report by the Economic Policy Institute, three of the states with the largest gaps between rich and poor are those progressive icons New York, Connecticut and Massachusetts. Sure, Boston, Manhattan and Silicon Valley are booming as the rich prosper. But outside these areas are deep pockets of poverty and wage stagnation.
The lesson to be learned from the experimentation of the states is that the "progressive" tax and spend agenda leads to much slower growth and benefits the rich and politically well-connected at the expense of everyone else.
Trump is now promising that on a national scale, he will cut taxes, deregulate and cut wasteful government spending. In the presidential debates, Clinton disparaged this agenda as "trumped up, trickle-down economics," and she said it had never worked.
Yet prospering red states such as Florida, Tennessee, Texas and so many others keep stealing jobs and growth from blue-state America.
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Good to see more experts weigh in on this. Piketty debunked (again). Inequality is the ladder there for everyone to climb. It isn't a bad thing that people in different careers, at different points in their careers, with different effort levels and different talents get different pay. It's how our most scarce resource, our time, gets allocated best. But it gets measured wrong and then hyped for political and economic folly. I suppose this debate has been going on since Adam and Eve but it restarted in the Bush years as a way of saying a good and growing economy was bad. Mis-measure the differences and then sound the alarm. The point of the deception was to foster dissatisfaction with economic growth and gain support for greater redistribution.
John F Kennedy said a rising tide lifts all boats. He didn't say all boats have to be the same size and travel at the same speed, now matter how small or slow or how vulnerable they would have to be to the next wave.
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http://www.the-american-interest.com/2017/01/03/the-inequality-hype/
The Inequality Hype
NEIL GILBERT
The great devil of progressives turns out to be mainly a figment of accounting. Better data gives us a more heartening picture of American well-being.
For most of the 20th century, poverty represented the root of all evil to Americans—sprouting criminality, violence, hunger, disease, stunted achievement, and premature death. With the tremendous growth of both the economy and the welfare state over the past sixty years, the political campaign against poverty has almost vanished from the public square. Today, many see economic inequality as the root cause of most, if not all, of our social ills. President Obama described it as the defining challenge of our time—one that threatens “the very essence of who we are as a people.”
It should go without saying that poverty and inequality are not the same. However, it’s worth repeating, because over time a conflation of the two has taken root in common perceptions. The evils once associated with poverty have been transferred lock, stock, and barrel to inequality, whether justifiably or not.
Although political efforts to reduce income (and wealth) inequality do not carry the moral force of religious edicts (leaving aside those for whom Das Kapital has assumed biblical status), they have an intuitive moral appeal not dramatically different from appeals to reduce true poverty—again, since both are seen as causing the same cluster of social evils. Long before any exposure to ideas of social justice one typically hears young children yelling “that’s unfair!” when a pie is divided unequally among them; the quickest to complain are invariably those handed the smallest slices.
And why shouldn’t they? All else equal, there seems to be little ethical justification for one child to get a bigger slice of the pie. As adults we usually make peace with reality by recognizing that it is rarely if ever the case that all else is equal. Karl Marx got around this problem by arguing that the secret expression of value, namely that all kinds of human labor are equal and equivalent, because in so far as they are human, labor in general cannot be deciphered until the notion of human equality has acquired the fixity of a popular prejudice.
For Marx, in other words, all human labor has the same value because we are all equal in what he deems people’s most important characteristic—their humanity. This tautological formulation skirts the issue of how, or even whether, to adjust for merit (and of course it famously leaves out every other factor of production in an economy, but never mind about that for now).
Since classical antiquity the balance between merit and equality has animated philosophical debate about what constitutes a just distribution of material goods. Aristotle believed that a fair and just distribution could not ignore merit, which, once taken into consideration, made a fair distribution essentially an unequal one. He qualified the idea that “equal” is just by differentiating between numerical and proportional equality. The former dictates that everyone gets exactly the same basket of goods, while latter prescribes that the amount of goods received by different people be relative to the amount of effort each contributed to their production. With this deft distinction, Gregory Vlastos observes, “the meritarian view of justice paid reluctant homage to the equalitarian view by using the vocabulary of equality to assert the justice of inequality.”1
Still, the case for reducing inequality made in the political arena appeals to the intuitive sense that fair means equal. All that is being asked is that millionaires and billionaires pay their fair share. This leaves aside the meritarian question of whether they legitimately deserve to possess such vast wealth in the first place. For the most part, proposals to advance equality by taxing tycoons evoke little public opposition. Whether or not targeting this group is really just, many argue that the millionaires can easily afford it. Others question how lawfully the super-rich came by their wealth in the first place, and still others, law aside, assert that all wealth distribution systems are based ultimately on coercion, made necessary by the original sin of private property. The merely progressive as opposed to radical case for income redistribution gains added support from the prevailing assumption that economic inequality is inherently bad because it causes stress, low self-esteem, and a whole raft of dubiously medicalized effects. This assumption reflects the growing tendency to conflate the equality of material outcomes with the incontestable fair-mindedness of equal opportunity.
Champions of increasing economic equality have an emotionally compelling argument that ensures the moral high ground for those making the case. It is not an argument that any sensible politician (or aspiring academician, as opposed to a professional gadfly like the Princeton philosophy professor Harry Frankfurt) wants to enter on the other side.2 Thus in contemporary Western political discourse equality is so thoroughly vested as an abstract good that questions are rarely raised about exactly how much economic inequality is unacceptable, how much is fair, or even how much really exists. The next time someone lectures you about the need to increase equality, you might try asking: How much should we have? As much as Sweden, is one likely response. But inequality has been on the rise in Sweden as in most other industrialized countries, so is the acceptable level that of Swedish equality in 1995 or 2016? Now there’s a conversation stopper for you.
Income inequality is at once a palpable and amorphous condition. That some people have more money than others is a tangible reality. But most people have no idea about the actual distribution of income and their position in the population. An analysis of several surveys of ordinary citizens in nearly forty countries reveals widespread misperceptions about the degree of inequality, how it is changing and where they fit in their country’s income distribution. For example, in the countries surveyed an average of 7 percent of respondents owned a car and a second home, yet on average 57 percent of this group thought they belonged in the bottom half of the income distribution. Among low-income respondents receiving public assistance, a majority placed themselves above the bottom 20 percent of their income distribution. These findings raise serious doubts about the extent to which the median voter knows how much she might lose or gain from redistribution. More important, it means that discontent with economic trends has a lot less to do with perceptions of material inequality than it does with a whole host of other factors that are, as it happens, a lot harder to quantify and therefore much less well appreciated by elites.
Metrics of Inequality and Material Well-Being
In contrast to the normative moral appeals and vague calibrations of fairness in political discourse, the quantitative metrics of social science lend a certain precision to estimates of income inequality. However, these empirical estimates and especially what they signify rest on loose soil that offers fertile diggings for economists and philosophers less interested in facts than in changing facts. To really grasp the essential meaning of economic inequality requires examining how income is measured in relation to demographic changes, geographic differences, and shifting fortunes over the life course. But if that interferes with the propagation of a certain ideological position, then these requirements go unrequited. Let’s look more closely at the facts before we deign to tamper with them.
Income inequality in the United States is generally perceived to have increased over the past thirty years. However, the degree and implications of this trend remain in dispute. The disagreement reflects, in part, differences in the way economists measure inequality, which are rarely aired outside of technical publications. Even when the different measures are reported, what they signify is difficult to discern beyond whether the numbers are going up or down.
The most common measures of inequality include the Gini index and a comparison of income quintiles. They vary in convenience and transparency. The Gini index provides an expedient summary ranging from 0 to 1; zero denotes perfect equality of income and 1 represents a distribution in which one member possesses all the society’s income. Among the advanced industrialized countries Gini coefficients range from .250 to .500. By summarizing the dispersion of income in one number, Gini coefficients are useful for comparative purposes. They clearly show whether economic inequality is increasing or decreasing over time and is higher or lower among countries.
However, the numerical precision veils the existential reality of inequality, particularly in a country as large as the United States. That is, the numbers convey an empirical impression that those with an annual income of $100,000 have a higher standard of living than those with an income of $85,000. If this were not the case, why be concerned about income inequality in the first place?
But in fact it is often not the case. The U.S. Bureau of Economic Analysis documents strikingly large differences in the cost of living throughout the country.3 Thus, for example, when regional price differences are factored in, a $100,000 income in New York State is worth less than an $85,000 income in Montana. Some might argue that it is worth the difference to live in New York. Having come from New York City, like many of my friends I once believed that civilization ended on the east bank of the Hudson. Yet people have different preferences for cultural amenities and natural beauty—and different levels of tolerance for traffic, noise, smog, and cramped apartments. Montanans typically refer to their state as “the last best place,” which may explain the influx of wealthy people over the past few decades. Cost-of-living differences are even more extreme among metropolitan areas. The San Francisco Bay area is almost 40 percent more expensive than Rome, Georgia, a charming locale nestled in the foothills of the Appalachians. Since the cost of living is usually higher in states and metropolitan areas where the average household income is above the U.S. median, the Gini coefficient tends to exaggerate differences in the levels of material comfort and well-being implied by economic inequality.
Moreover, despite the suitability of Gini coefficients for comparing levels of income inequality over time and among countries, the findings expressed by these comparisons can obscure their implications for economic well-being. For example, the .378 Gini coefficient for the United States represents a much higher degree of income inequality than the .257 computed for the Slovak Republic. As for economic well-being, a look at how much money is actually available reveals that the Slovak Republic’s median disposable household income amounts to 29 percent of that of the United States.4 Its middle-class would be on welfare here.
Finally, the Gini coefficient lends numerical precision to the assumption that increasing economic equality is a social improvement. Yet during a recession economic equality as measured by the Gini index may well increase in a country where everyone is getting poorer. Earnings fall for people in both the upper and lower income brackets, but the decline is steeper for those at the higher end who have more to lose in the first place. By the same token, a country could experience rising inequality according to its Gini index when everyone is becoming better off. The rich are getting richer as the poor are also getting richer, just not as much. Rising inequality, however, can also signal that the rich are getting absolutely more and the poor are getting absolutely less. But the Gini coefficient metric by itself is powerless to tell you which is which.
So, are the rich getting richer and the poor getting poorer? A 2012 Pew Research Center survey found 76 percent of the public answered “yes,” which was about the same as the 74 percent who held this view in 1987.5 In contrast to the Gini coefficient, which cannot answer the question, the analysis of income quintiles entails a direct examination of how money is distributed among the different groups, revealing the extent to which their incomes are rising or falling. Calculating the financial resources of five groups that range from the top to the bottom 20 percent of the income distribution, this approach illuminates the economic well-being of families and how they fare over time. But here, too, the results vary according to the alternative definitions of income.
Thomas Piketty and Emmanuel Saez’s well-known study of income inequality in the United States, for example, was based on the market income of tax filers.6 According to this definition, from 1979 to 2007 there was a 33 percent decline in the mean income of those in the bottom quintile in contrast to a 33 percent increase among those in the top 20 percent of tax units. Thus, left entirely to its own devices, the market allocation of income generated a pattern of increasing inequality wherein the rich got noticeably richer and the poor got poorer—a bleak testimony, supposedly, to the distributional problem of capitalism.
However as Richard Burkhauser pointed out in his presidential address to the Association for Public Policy Analysis and Management, the market income of a tax unit is a poor indicator of how much money families actually have to live on.7 A more inclusive measure of the income that remains in households after subtracting what they must pay in taxes and adding the money they receive through government transfers transmits a different image of the American experience. Applying these criteria, instead of a decline we see a 32 percent increase in the mean income of the poorest fifth between 1979 and 2007. (Table 1) Overall, this broader measure still reveals a rise in inequality during that period as the mean income of those in the top bracket climbs by 54 percent.8 But it, too, is incomplete.
(http://www.the-american-interest.com/wp-content/uploads/2017/01/Table1-768x414.jpg)
Source: * Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income” American Economic Review (May, 2013). ** Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2010” (Government Printing Office, 2013).
Along with taxes and transfers, the most authoritative and extensive measure of income also incorporates capital gains. Along with Burkhauser and his colleagues, the nonpartisan Congressional Budget Office (CBO) agrees that a comprehensive definition involves the sum of market income adjusted for taxes, household size, cash and in-kind transfers, and capital gains.9 However, the consensus unravels over the issue of exactly how to value capital gains. The basic choice is whether to focus on the total taxable gains realized in the year capital assets are sold or the annual change in value of capital assets whether or not they are sold. This is not just a matter of bookkeeping. The choice to include either realized or accrued capital gains in the calculation of annual income has a considerable impact on the rates of inequality.
The CBO favors the use of realized capital gains that are reported on tax returns. After factoring in the impact of taxes, capital gains, and government transfers the CBO data reveal a sharp decline in inequality compared to when it is measured solely by market income. According to these figures, between 1979 and 2010 the household income in the bottom quintile increased by 49 percent, the income in the middle three quintiles increased on average by 40 percent, and those in the highest bracket increased by 71 percent.10 While incomes increased across the board, the largest gains registered on the two ends of the income distribution. These findings temper progressive arguments that focus on the increasing inequality of market incomes to demonstrate the need for greater social welfare spending.
The income measures cited above all indicate a rising level of inequality that varies only in the rate at which it seems to have increased over the past three decades. In contrast, a different picture emerges if accrued capital gains, which include housing, are substituted for realized taxable gains. This approach yields a reversal of income trends between 1989 and 2007, which shows a decline in inequality as the household income in the bottom quintile climbed at a rate considerably higher than the increase experienced in the top quintile, which was hit much harder by the housing market crash in 2007. Needless to say, the choice between these methods of valuing capital gains is highly contested.
Every pertinent measure of income quintiles, especially the widely acknowledged comprehensive assessment by the CBO, dispels the notion that within the United States over the past three decades the rich have been getting richer as the poor have gotten poorer. The CBO measure reveals that from the highest to the lowest quintile, the mean household income of every group was lifted, even amid a rising tide of inequality. Among the bottom fifth the mean income increased by 49 percent. That’s not peanuts, particularly when we recognize what else is happening.
Another Dimension: Looking Within the Groups
Although the analyses of change since 1979 illustrate the extent to which household incomes climbed while the gap between the bottom and top fifths widened, it’s a one-dimensional picture that discounts what was happening within these economic bands. This image conveys a static impression that the same households within each quintile were experiencing these changes over time. In truth, a lot more was going on among the households within these five divisions, the particulars of which lend depth to the one-dimensional story of increasing economic inequality.
To grasp the full implication of rising inequality in household income, it is important to recognize that during the period in question young workers were continually entering the labor force as the older generation retired and died. A 25 year old who began working in 1979 while living on his own with an income in the bottom 20 percent would very likely reach a higher bracket by the time he was 53 years old in 2007. So not only did entry-level income rise between 1979 and 2007, but over the course of time many of those who started out at the bottom climbed toward the top. In just the period from 1996 to 2005, for example, the U.S. Treasury Department estimates that about half of the taxpayers starting in the bottom 20 percent moved into a higher income bracket.11 Of course, we do not know how many members of this upwardly mobile group were young scions spending their first year out of Princeton as shipping clerks in their fathers’ factory, serving Teach for America in a poor rural area or lolling lazily on the Left Bank—a reminder that numbers can impose a surface on patterns that shields us from the underlying reality.
There is even more to this story. As time passed, the 25 year old got married and had two children. Thus, what started in 1979 as a single-person household in the bottom fifth of the income distribution had morphed into a middle-income household with four people by 2007. This change illustrates an important characteristic of the income quintiles. Although they represent five groups with an equal number of households, the average number of persons per household within these groups varies as do other characteristics such as family structure and employment. The top fifth of households contain 82 percent more people than the bottom fifth. The proportion of married couples in each group ranges from 17 percent in the lowest income quintile to 78 percent in the highest. At the same time, single men and women living alone account for 56 percent of the households in the bottom fifth, but only 7 percent among the top group. And no one was employed in more than 60 percent of the households in the bottom quintile; while 75 percent of the households in the top quintile had two or more earners.
Taking account of the household characteristics within each quintile reveals that to some extent the increasing level of income inequality since 1979 coincides with the changing demographics of family life, particularly the smaller number of persons per household, the decreasing rate at which couples form and maintain stable marriages, and the increasing number of two-earner households. On that score, W. Bradford Wilcox and Robert I. Lerman estimate that 32 percent of the growth in family income inequality since 1979 is linked to the retreat from marriage and the decline of stable family life.12 The point, again, is that economic data are not self-interpreting, and that without a relevant sociological filter they can be made to mean almost anything except what they actually mean.
Concentrating on advances within just the top quintile offers a different perspective, which sharpens our understanding of what is behind the rising level of economic inequality in recent years. Two prominent findings based on the CBO’s all-inclusive measure of income tell the story: From 1979 to 2010 the after-tax income of the top 1 percent increased by 201 percent (compared to the 49 percent increase for households in the bottom quintile and the 65 percent increase for those in the 81st to 99th quintile).13 Research focused on the pre-tax market income of the top 1 percent generates an even higher level of inequality than the CBO findings.
Thus, a disproportionate degree of the increasing level of inequality was due to significant financial gains made by those at the apex of the income pyramid. As for the rest, a careful analysis matching data from the U.S. Census Bureau and Internal Revenue Service demonstrates that after 1993 there was no palpable increase of inequality among the bottom 99 percent of the population. Since the pre-tax incomes of the top 1 percent started at $388,905 in 2011, many of these families would not be considered the super-rich. It’s around the top one-tenth of 1 percent, where pre-tax incomes start at $1,717,675, that we begin to cross the line between relatively well-off and truly affluent.
As soon as the conversation on inequality begins to concentrate on the wealthiest households, the question increasingly comes to mind: What do these people do to deserve such immense rewards? A 2013 study commissioned by the New York Times discloses a median executive pay of $13.9 million among the CEOs of 100 major firms, described by one journalist as a “new class of aristocrat.”14 Although not terribly harsh, this description connotes a privileged class renowned more for its leisure pursuits than its productive labor. But it does suggest how easily personalizing the numbers can transform a dispassionate report on the top 1 percent into bitter accounts of debauchery and corporate corruption. The likes of Bernie Madoff, Tyco’s Dennis Kozlowski, and Ken Lay of Enron supply no shortage of infamy on which to justify a denial of merit. But then there are the brilliant hard-working multi-millionaires who created Apple, Google, and Microsoft, not to mention our favorite movie stars and athletes. Even here some might question why grown men should receive immense sums of money to stand around a few afternoons a week waiting for a chance to hit a ball with a big stick. Major League baseball players were paid on average $3.39 million in 2013. In contrast, for the same activity most minor league players earned between $2,500 and $7,000 for a five-month season—talk about inequality!
Like it or not, in a capitalist system the criterion for reward is ultimately associated with what the market will bear. Of course, many people doubt just how well this standard works in practice. They wonder, for example, how difficult it might be to replace a CEO earning $20 million a year with an equally qualified executive who would accept half that salary. Also, market demand is no guarantee of social value or cultural enlightenment. A writer’s worth varies by the number of readers willing to plunk down the price of a book, regardless of how crass or meaningless the content. Alas, Fifty Shades of Gray has earned millions, while my publishers will be fortunate to clear the all-too-modest advance awarded for Never Enough: Capitalism and the Progressive Spirit. What the market will bear is certainly an imperfect calibration, but most people still think it preferable to having the standard set by bureaucratic quotas or political bargains, though both are often in play, as well.
How Has the Middle Class Really Fared?
Politicians on both sides of the aisle contend that the middle class is being crushed by inequality and diminishing income. But with household incomes increasing amid rising inequality, what do the facts tell us about the real material state of the middle class? There are several ways to answer this question, depending on how the middle class is defined and the benchmarks against which its progress and well-being are measured. The historical absence of an aristocracy has bred a fluid sense of social class and a democratic ethos that instills a degree of reluctance in Americans to identify as “upper class.” Thus, the middle class is a well-regarded, if ill-defined, status to which most Americans subscribe. It is typically associated with one’s income, education, and occupation. Numerous polls capture the propensity of Americans to identify themselves as somewhere along the spectrum of lower-middle to upper-middle class.
When policymakers and the media talk about the middle class, however, it is usually defined by economic divisions. Estimates vary regarding the range of income that delineates the middle class, as well as the interpretation of how the economic fortunes of this group have changed over time. Thus, reviewing the same Census Bureau data the New York Times decries, “Middle Class Shrinks Further as More Fall Out Instead of Climbing Up,” while ten days later the Pew Research Center announces, “America’s ‘Middle’ Holds Its Ground After the Great Recession.”15 Both of these captions are correct and neither highlights the larger story in the data, which only underscores how those who write the headlines may parse the numbers to express the points they wish to publicize. The economic definitions of the middle class in these reports differ: $35,000-$100,000 in the New York Times and $40,667-$122,000 in the Pew study. But the findings are very similar. Both show a substantial contraction of about 10 percent in the size of the middle class, which started shrinking around 1970. Though it sounds ominous, this decline is not necessarily a distressing trend. It depends on where those who were squeezed out of the middle class ended up. If they all moved into the upper income brackets, everyone’s better off.
So where did they go? The answer hinges on the years in question. The New York Times headline focused on the period from 2000 to 2013, the decade of the Great Recession during which the middle class declined by around 2 percent, the upper-income group also declined by about 3 percent, and the lower-income group increased. The Pew caption referred to the period from 2010 to 2013, just after the Great Recession. Over this interval the size of the middle class remained stable, and there was even a small uptick in the upper-income group and a slight decline in the lower-income group.
Despite the fluctuation of a few percentage points during the Great Recession, the larger story in the New York Times report is that between 1967 and 2013 both the lower-income and the middle-income groups contracted while the size of the upper-income group expanded by 15 percent. From this perspective the shrinking of the middle class (and of those in the lower-income bracket) is directly connected to a significant advance in economic well-being as the combined size of the middle- and upper-income groups grew by 5 percent.
Thus, while the New York Times headline evoked a disheartening picture of middle-class decline, the data easily yield a more promising interpretation of the middle-class experience since 1970. The Pew findings offer a somewhat different conclusion, in part because the middle-class definition was pegged at a higher level of income. Although the middle-income group fell by 10 percent, about 6 percent of those who left had climbed into the upper-income category. What a way to go.
Of course, there are other benchmarks against which to evaluate the economic progress and status of the U.S. middle class. Certainly, those concerned about inequality would judge that the middle class has not fared very well in comparison to the income gains realized by the country’s top 1 percent. True; but consider everyone else on the planet. The U.S. middle class boasts among the highest disposable household incomes in the world. The average U.S. family has 38 percent more disposable household income than a family in Italy, 25 percent more than a family in France, and 20 percent more than a household in Germany, when adjusted for differences in purchasing power. (Of course, that doesn’t take fully into account the more efficient provision of many services in Western Europe via the public route: think health care, for example. Which only confirms the point that numbers alone cannot really tell us very much.)
Although some academics invest considerable intellectual energy in debating how to quantify inequality and the significance of change in measures such as the Gini coefficient, most members of the middle class have no idea whether this index is going up or down unless they read about it in the news. And even then the average middle-class citizen is more interested in how much money remains for her family to live on after the give and take of government taxes and transfers than whether or not the Gini index rose or fell by three-tenths of a point.
Could We Ask for More?
Several issues have so far been raised about the divergent approaches to the measurement of inequality, the disparate characteristics of those in different income brackets, the absence of cost-of-living adjustments, the plight of the middle class, the soaring 1 percent, and the sobering revelation of international comparisons. On the whole these issues enable us not so much to dismiss concerns about rising economic inequality as to calm public apprehensions about its rate, degree, and implications. The disparities related to the changing distribution of income in the United States look a lot more acute before taxes and benefits are taken into account, for example—are you listening, Dr. Piketty? As such it can be said that the capitalist market generates and the welfare state mitigates inequality.
Recounted in its most auspicious light, the story of this interaction over the past three decades reveals that while inequality increased, so did household incomes at every level. Measured by disposable household income the U.S. standard of living is among the highest of all the advanced industrial democracies, not to mention the rest of the world. Indeed, reflecting on the rest of the world, Tyler Cowen urges us to preface all discussions of inequality with a reminder that although economic inequality has been increasing in advanced industrialized nations, over the past two decades global inequality has been falling.16 And given global economic patterns, this is not a coincidence but a relationship.
Of course, in an ideal world everyone would have been even better off if the top 1 percent had taken home less than 13 percent of all the income and the bottom 20 percent had gained more—even while the economy grew at the same overall rate. Not to promote the best as an enemy of the good, there is nevertheless a convincing case to be made for social reforms that would to some degree shift the distribution of income away from the top. Progressives and conservatives generally agree on the need to rein in government transfers received by wealthy citizens, particularly the special benefits derived from the favorable tax treatment afforded to homeowners. These benefits, known as “tax expenditures,” allow home owners to deduct the interest paid on mortgages and to net up to $500,000 of capital gains tax-free on the sale of their homes.
The amounts are not trivial. The CBO estimates that the tax expenditures for mortgage-interest deductions amount to $70 billion, almost 73 percent of which goes to households in the top 20 percent of the income distribution, while those in bottom 20 percent receive no benefit. Although there would be some downside for the home-building industry, limiting tax subsidies to wealthy homeowners could lower the level of inequality without seriously adverse consequences for the rate of homeownership.
Yet even if these adjustments were made, much income inequality would still remain, which takes us back to the question: Could we ask for still more? Obviously, there are many ways for government to appropriate additional money from those in the upper-income brackets and deliver more to those on the bottom. Raising income taxes, lifting the ceiling on taxable income for Social Security, increasing the Earned Income Tax Credit and eliminating its marriage penalties, boosting the minimum wage, means-testing Social Security benefits, and taxing the fringe benefits of employment are among the evident alternatives. Then there are the less well-recognized but hardly trivial proposals to tax some classes of advertising and to eliminate the corporate income tax altogether in the context of comprehensive tax reform. Progressives and conservatives argue about whether any and all such measures would kill jobs or boost the economy, discourage work or stimulate activity, generate class conflict or enhance social solidarity, and advance social justice or deny the just deserts of individual merit. A vast literature on these issues has generated mixed findings about the implications of various measures.
Considering the uncertainty surrounding these issues, the degree of support for additional measures to spread the nation’s wealth is heavily influenced by one’s answer to the question: How serious is the problem of rising economic inequality amid abundance? The answer rests on competing ideas about the current state of material well-being in the United States, the integrity of free-market capitalism and, above all, the putative consequences of inequality.
Progressives tend to think that inequality is the story and that, as already noted, nearly everything wrong in U.S. society stems from it. But this argument ultimately depends on presumed maladies arising from inequality that more than stretch scientific criteria for medical causality. The evils ascribed to inequality expand roughly at the same rate as the DSM manual, and that is a suspicious thing.
As long as household incomes are increasing at every level (as measured by the CBO), conservatives are less concerned about rising economic inequality than progressives. They accept inequality as the tribute that equality of opportunity grants to merit, productivity, and luck in the free market, recognizing that this transaction is sometimes distorted by discrimination, exploitation, corruption, and outright larceny, which need to be checked by government. With the average family’s disposable household income in the United States among the highest in the world, inequality is perceived less as a source of social friction between the “haves and the have-nots” than as an imbalance between those who have a lot and others who have even more. This, on balance and seen in an historical perspective, ought to be a cause for celebration, not an occasion for mass self-flagellation.
1Vlastos, “Justice and Equality,” in Social Justice, edited by Richard Brandt (Prentice-Hall, 1962), p. 32.
2Frankfurt, On Inequality (Princeton University Press, 2015).
3“Real Personal Income for States and Metropolitan Areas, 2008-2012,” U.S. Bureau of Economic Analysis, April 24, 2014.
4Michael Forster et al., Society at a Glance 2011, (OECD 2011).
5“Partisan Polarization Surges in Bush, Obama Years: Trends in American Values: 1987-2012,” Pew Research Center, June 4, 2012.
6Piketty & Saez, “Income Inequality in the United States,” Quarterly Journal of Economics (February 2003).
7Burkhauser, “Presidential Address Evaluating the Questions that Alternative Policy Success Measures Answer,” Journal of Policy Analysis and Management (Spring 2011).
8Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income,” American Economic Review (May 2013). The government transfers included here involve both cash and in-kind benefits, specifically food stamps, housing subsidies, and school lunches, but not the value of employer- and government-provided health insurance. For an analysis of the income growth when cash transfers and health insurance are included, but not in-kind benefits, see Richard Burkhauser, Jeff Larrimore, and Kosali Simon, “A ‘Second Opinion’ on the Economic Health of the American Middle Class,” National Tax Journal (March 2012), pp. 7-32.
9Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2008 and 2009 (Government Printing Office, 2012). The major components of income included here differ from those recommended by the Canberra Group mainly in regard to capital gains, which the Canberra guidelines exclude from the measure of household income in favor of their treatment as changes in net worth.
10Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2010 (Government Printing Office, 2013).
11U.S. Treasury Department, Income Mobility in the U.S. from 1996 to 2005 (Government Printing Office, 2007). A similar rate of mobility was reported for those in the bottom quintile from 1986 to 1996. Unlike the CBO measure, these findings are based on pre-tax market income plus cash but not tax-exempt or in-kind transfers. Also, the unit of analysis is not adjusted for household size.
12Wilcox & Lerman, “For richer, for poorer: How Family Structures Economic Success in America,” AEI, October 28, 2014.
13The Distribution of Household Income and Federal Taxes, 2010. In 2010 the top 1 percent netted almost 13 percent of all the after tax income (15 percent before taxes).
14Peter Eavis, “Invasion of the Supersalaries,” New York Times, April 13, 2014.
15Dionne Searcey & Robert Gebeloffjan, “Middle Class Shrinks Further as More Fall Out Instead of Climbing Up,” New York Times, January 25, 2015. Rakesh Kochhar & Richard Fry, “America’s ‘Middle’ Holds Its Ground After the Great Recession,” Pew Research Center, February 4, 2015.
16Cowen, “Income Inequality Is Not Rising Globally. It’s Falling,” New York Times, July 19, 2014.
Neil Gilbert is Chernin Professor of Social Welfare at the University of California, Berkeley. This essay is adapted from his latest book, Never Enough: Capitalism and the Progressive Spirit (Oxford University Press, forthcoming
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Please post that in the Economics thread as well.
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https://www.commentarymagazine.com/american-society/economy/the-stock-market-vs-paul-krugman/
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http://www.alt-market.com/articles/3115-are-you-ready-for-an-inflationary-depression
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Linking this post to this thread:
http://dogbrothers.com/phpBB2/index.php?topic=490.msg101481#msg101481
Audi Super Bowl ad
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Women doctors do tend to pick fields with hours are more 9 to 5 I believe. For many years they were far more likely to pick salaried jobs then go into an office on their own. Though that trend has reversed for all doctors these days.
Perhaps they were paid less in groups of doctors or did not make partnership or perhaps in academia based on being female but other then that it HAS to be that they are working less hard, or less hours.
So when I see occasional stories that female doctors don't make as much and implying it is because they don't have a penis then I know it is it can't be true
Do these authors mean to tell me that women are singled out for lower payments from Medicare, Aetna, United Healthcare , Blue shield cross?
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http://www.againstcronycapitalism.org/2017/01/obamas-final-jobs-report-is-a-fitting-end-to-his-presidency/
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http://www.againstcronycapitalism.org/2017/01/obamas-final-jobs-report-is-a-fitting-end-to-his-presidency/
"Our view has consistently been that the economic recovery from the Great Recession could have been — and should have been — very robust. And that the only reason it wasn’t is growth-choking policies imposed by Obama: Dodd-Frank, ObamaCare, tax hikes, huge new regulatory burdens." - IBD
The crash and the Great Recession were also caused by Democrat policies - Democrat policies that Republicans agreed to.
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Productivity growth is running at roughly one tenth of what it could be.
"From 2011 to 2015 productivity grew only 0.4 percent a year compared with 3.0 percent from 1996 to 2005."
https://economicsone.com/2017/03/01/economic-policy-explains-growth-conundrum/
Trump, with temporary Republican majorities in the House and Senate, is going to have his first economic year scored under the tax system and healthcare system of the far left. Do the same thing. Expect a different result. Insane. Or stupid.
The last crash was caused by Republicans signing on to Democrat policies. (cf. CRAp, Community Reinvestment Act - program).
Good luck everyone.
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A good article by Stephen Moore. I could add quite a few more examples. SSI is a contract with the government to stay poor. So is Food Stamps, Section 8, FAFSA and Obamacare. We used to talk about the success of programs being measured by how many people no longer need assistance. Now we just measure programs by how money they can transfer to how many people.
https://spectator.org/government-makes-the-poor-poorer/
For all the obsession in Washington and in college faculty lounges over income inequality, why isn’t there more outrage over government policies that exacerbate the problem? There are hundreds of programs that make the poor poorer and increase poverty in America. Many of them were exposed last week by my colleagues at the Heritage Foundation forum on this very topic.
Economist Don Boudreaux of George Mason University unmasked two such policies. One is trade protectionism. Trade barriers raise prices and “act as a regressive tax” on Americans, Boudreaux explains. They also stunt the very innovation process that makes goods and services widely available to people at affordable prices to begin with. Think about who the consumers are that shop for those everyday low prices at Wal-Mart. It’s not Hillary Clinton.
Minimum wage clearly fits into this category as well. In every other industry, Boudreaux notes, when something is more expensive, we buy less of it. Why do some economists think that isn’t so when it comes to buying labor? Especially for the young and the lowest skilled, minimum wage becomes a toll that prevents many from entering the work force and gaining the skills that can make a low income or middle class worker a high income worker. This is so obvious that one wonders why liberals keep championing the minimum wage cause.
Marlo Lewis of the Competitive Enterprise Institute points out that the fuel economy standards promoted by the leftist environmentalists add thousands of dollars to the cost of a new car. He estimates that these “green” policies could mean that 5 million fewer Americans each year can’t afford a new car. And, again, those 5 million victims are surely not people like Al Gore or the board members of the Sierra Club.
Another green policy that hurts the poor is the anti-fracking crusade of the environmentalists. In my book with Kathleen Hartnett White, Fueling Freedom, we point out that the lower cost of electricity due to cheap shale natural gas has benefited low income households to the tune of well over $4 billion a year. This is four times the benefit of the low income home energy assistance program. So if liberals really care about the poor, why not get rid of LIHEAP and promote fracking instead?
Social Security is the greatest swindle of the poor ever. A new study by Peter Ferrara for the Committee to Unleash Prosperity shows that the average poor person who works 40 hours a week during his or her working life would retire with a larger monthly benefit and would have $1 million or more in an estate that could be left to a spouse or children at death if they could simply put their payroll tax dollars into a personal 401k retirement account and tap into the power of compound interest.
Under Social Security poor (and middle class) households leave next to nothing for their kids at death. So Social Security robs nearly every low and middle income family with a full time worker of at least $1 million over their lifetime. What a deal!
Occupational licensing laws — in trades like moving companies, realtors, hair dressers, limousine services, beauticians, physical therapy and on and on — stunt small business start-ups, destroy jobs, and raise prices for lower income consumers. What about the right to make a living?
Big government advocates defend these statist occupational barriers to entry by arguing that they are needed to uphold professional service quality. Professor Boudreaux shows evidence that, to the contrary, licensing requirements reduce service quality by shrinking competition in the industry.
Arguably the program that has set back upward income mobility for the poor the most is the government school system in inner cities. Every study finds abysmal educational outcomes and even unsafe environments for schoolchildren despite cities spending upward of $20,000 per child. In Catholic inner-city schools, these same kids could and should be receiving a better education at half the cost. Yet liberals who champion the poor oppose school choice programs that would raise educational achievement and future earnings. (Look at the disgraceful treatment of Trump’s education chief Betsy DeVos).
These examples merely scratch the surface of scores of governmental polices that are regressive. Could it be that the gridlock and polarization in Washington would be ended by a bipartisan reform movement to scout out and remove laws and rules that hurt those at the bottom of the income scale the most? One universal goal that we should all agree on and aspire to is equality of opportunity — which these laws squelch.
Where are Bernie Sanders and Elizabeth Warren and Nancy Pelosi and the class warfare warriors on reversing government policies that are stealing money and opportunities for low income and minority families? Do they care about protecting the poor? Or do they care more about protecting big government? It’s time to really find out.
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https://www.nytimes.com/2017/04/28/business/economy/economy-gross-domestic-product-first-quarter.html?emc=edit_na_20170428&nl=breaking-news&nlid=49641193&ref=cta&_r=0
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https://www.nytimes.com/2017/04/28/business/economy/economy-gross-domestic-product-first-quarter.html?emc=edit_na_20170428&nl=breaking-news&nlid=49641193&ref=cta&_r=0
"The economy barely grew, expanding at an annual rate of only 0.7 percent."
Let's see... Keep Obamacare, the biggest tax and regulation takeover in history, in place. Keep the Obama, Reid, Pelosi tax system fully in place. Watch Democrat Fed Chair Yellen raise interest rates based on this 'robust recovery' she sees. And see economic growth hit zero.
What's that? Did I just hear Brian Wesbury say Doug was right??
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The deep state may well be trying to bring the crash on Trump's watch.
https://www.nytimes.com/2017/04/28/business/economy/economy-gross-domestic-product-first-quarter.html?emc=edit_na_20170428&nl=breaking-news&nlid=49641193&ref=cta&_r=0
"The economy barely grew, expanding at an annual rate of only 0.7 percent."
Let's see... Keep Obamacare, the biggest tax and regulation takeover in history, in place. Keep the Obama, Reid, Pelosi tax system fully in place. Watch Democrat Fed Chair Yellen raise interest rates based on this 'robust recovery' she sees. And see economic growth hit zero.
What's that? Did I just hear Brian Wesbury say Doug was right??
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"The deep state may well be trying to bring the crash on Trump's watch."
For sure, Yellen was not going to risk any damage on Obama's watch.
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One writer gets it. If we don't improve from a period of zero growth and doubling of the debt, what comes next? More of the same? I doubt it. Could be MUCH worse if we don't straighten out stagnation and disincentives system.
http://www.nysun.com/national/make-or-break-moment-at-hand-for-america-over/89968/
Make-or-Break Moment At Hand for America Over Economic Growth.
Conrad Black, May 2 2017, NY Sun
GDP growth declined from 4.5% annually in the last six Reagan years, to 3.9% in the last six Clinton years (as the current-account deficit and the housing bubble ballooned), to 2% in the George W. Bush years, to 1% in the Obama years. If per capita GDP had increased in the first 15 years of this new century as it had in the years between 1945 and 2000, families and individuals in the United States would be 20 percent wealthier than they are. In the Reagan years, the federal debt increased to 50% of GDP from 40%. That debt declined a little in the Clinton years, but, in this century, even as a percentage of GDP, it has more than doubled.
These are extremely dangerous trends. The average American is aware of a 15-year flat-lined income in terms of buying power, and the absence of job security despite an official level of unemployment of a very acceptable 4.7%. Most would know, from their own experiences or acquaintances, that the labor force has shrunk, in fact by 15 million people.
There are now over 20 million Americans of prime employment age (25 to 54) who have dropped out and are sustained by the benefit system, especially Medicaid-supplied painkillers, food stamps, and activities that generally escape official compilation. Many of these are among the 750,000 people released each year by the bloated and corrupt prison system, which does all it can to demotivate, stigmatize, and render unemployable those released — and make more likely the return to its embrace. The system in any case always imprisons at least as many new convicts each year.
If the Trump administration does not get a tax bill through that rekindles economic expansion, the entire American project is going to face its greatest crisis since Roosevelt came in to grapple with the Great Depression.
...
President Trump has proposed tax changes — simplification, rate reductions, elimination of special exemptions, patriation of overseas corporate profits — that will induce a recovery and reverse 30 years of declining economic growth.
More at link: http://www.nysun.com/national/make-or-break-moment-at-hand-for-america-over/89968/
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We won't change anything until the actual collapse.
One writer gets it. If we don't improve from a period of zero growth and doubling of the debt, what comes next? More of the same? I doubt it. Could be MUCH worse if we don't straighten out stagnation and disincentives system.
http://www.nysun.com/national/make-or-break-moment-at-hand-for-america-over/89968/
Make-or-Break Moment At Hand for America Over Economic Growth.
Conrad Black, May 2 2017, NY Sun
GDP growth declined from 4.5% annually in the last six Reagan years, to 3.9% in the last six Clinton years (as the current-account deficit and the housing bubble ballooned), to 2% in the George W. Bush years, to 1% in the Obama years. If per capita GDP had increased in the first 15 years of this new century as it had in the years between 1945 and 2000, families and individuals in the United States would be 20 percent wealthier than they are. In the Reagan years, the federal debt increased to 50% of GDP from 40%. That debt declined a little in the Clinton years, but, in this century, even as a percentage of GDP, it has more than doubled.
These are extremely dangerous trends. The average American is aware of a 15-year flat-lined income in terms of buying power, and the absence of job security despite an official level of unemployment of a very acceptable 4.7%. Most would know, from their own experiences or acquaintances, that the labor force has shrunk, in fact by 15 million people.
There are now over 20 million Americans of prime employment age (25 to 54) who have dropped out and are sustained by the benefit system, especially Medicaid-supplied painkillers, food stamps, and activities that generally escape official compilation. Many of these are among the 750,000 people released each year by the bloated and corrupt prison system, which does all it can to demotivate, stigmatize, and render unemployable those released — and make more likely the return to its embrace. The system in any case always imprisons at least as many new convicts each year.
If the Trump administration does not get a tax bill through that rekindles economic expansion, the entire American project is going to face its greatest crisis since Roosevelt came in to grapple with the Great Depression.
...
President Trump has proposed tax changes — simplification, rate reductions, elimination of special exemptions, patriation of overseas corporate profits — that will induce a recovery and reverse 30 years of declining economic growth.
More at link: http://www.nysun.com/national/make-or-break-moment-at-hand-for-america-over/89968/
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"We won't change anything until the actual collapse."
If the collapse happens under the appearance of Republican governance, the change will not be for the better. (cf. 2008.)
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http://nypost.com/2017/05/07/the-debt-bubble-landmine-obama-left-for-trump/
The debt-bubble landmine Obama left for Trump
By Nicole Gelinas May 7, 2017 | 7:06pm
Modal Trigger The debt-bubble landmine Obama left for Trump
President Trump came in for much jeering when he told reporters he had “inherited a mess” from President Barack Obama. On the economy, though, Obama did indeed leave behind a hidden mess: a seemingly healthy jobs market dependent on cheap debt.
When this debt bubble bursts, just as the last one did, the manufacturing jobs Trump wants to save will be in even greater peril.
The country’s last bubble was in housing. Between 2000 and 2007, Americans nearly doubled their mortgage debt, from $5.9 trillion to $10.6 trillion.
This didn’t bother anyone in a position of power. The housing boom created millions of jobs, from construction to home-furnishing, and people felt rich.
What bothered the pols was when the illusion broke.
Since the 2008 crash, neither Democrats nor Republicans have been interested in creating a sturdier economy. Instead, they’ve built up another bubble, this time in the car and SUV industry.
How? The same way: cheap debt. In 2010, Americans owed $809 billion on their cars (after adjusting for inflation). Today, they owe nearly $1.2 trillion, according to the New York Fed.
And the rate of growth has been accelerating: Last year alone, Americans borrowed $93 billion to buy cars (after accounting for people who repaid such debt); 2016 was “the highest auto loan . . . year in the 18-year history of the data,” Fed researchers said, not entirely enthusiastically.
People with great credit have been buying new SUVs because interest rates have been at record lows. As interest rates rise, they’ll pull back, but perhaps not that much. By definition, they can afford to pay a little more.
But who is borrowing for used cars — and at much higher interest rates — is a huge concern.
People with not-great credit scores have always made up about a fifth of the auto-loan market.
But the percentage of people borrowing even though they have really bad credit scores has surged, reports Bloomberg. It’s now a third of the subprime auto-bond market, up from just 5 percent seven years ago.
A Standard & Poor’s analysis of just one big subprime auto bond tells the story. Last week, a company called DriveTime, which sells used cars in 26 states to people with bad credit, was in the market to issue $442 million worth of bonds backed by auto loans.
The average credit score of borrowers was 538 — indicating a history of serious default. And, as S&P notes, “today’s subprime customer appears to be . . . weaker . . . than that of several years ago,” because people who defaulted right after the housing crash at least had the excuse that they were caught up in a global bubble.
These loans are for people who have no choice but to borrow to buy a car, and no bargaining power on the interest rate they pay: close to 20 percent.
Even though the borrowers pay through the nose, they depend on cheap global credit. With interest rates still near record lows, lenders have to take ever more risk in a low-interest-rate environment to make a little money. As for that risk: Delinquency rates are rising, with 4.32 percent of subprime borrowers in general at least 60 days late last year, up from 3.52 two years earlier, says S&P.
The bigger risk here isn’t the risk to investors, though. The auto-loan market is still much smaller than the housing market, and the investment world hasn’t created trillions of dollars of derivative securities based on this market (at least not that we know of). And unlike with houses, no one ever expects the value of a car to increase with use.
No, this bubble presents a much more direct risk to the economy — and manufacturing jobs. If people with terrible credit can’t borrow an average of nearly $18,000 to buy a used car (what the DriveTime customer pays), the market for used cars collapses.
That, in turn, affects the market for new cars. Indeed, the US auto industry has seen sales decline this year, after clocking half a decade of record highs.
That’s bad news for the 946,300 Americans who work in the nation’s auto-manufacturing industry. Car-makers have been adding jobs since 2009, when the industry hit a low of 653,300 workers. But over the past year, they’ve added only 2,400 workers, down from the 40,300 people they added the previous year.
If the auto-credit market sputters out during Trump’s first term — and it’s hard to see how it won’t — Trump would be justified in blaming his predecessor.
But he’ll face the same bad options previous presidents have. No one has quite figured out how to fix this economy without a lot of short-term pain.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.
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Rep. Tom Suozzi’s “When the Welders Came to Capitol Hill” (op-ed, May 15) further confirms what we have seen for years in the trades—a mismatch of skills and changing demographics. The apprenticeship model is only one piece of the puzzle. Vocational schools must recruit in middle and high schools, as their university counterparts do, with an emphasis on personal success stories. If students see a poster of welders who sat in their same classroom three or four years earlier, who now make an upper-middle-class wage, they will become interested. Technical schools also must invest in high-school partnerships and classroom equipment donations.
Why aren’t we selling top-performing high schools on the economic opportunities the trades offer? Unions have an important role to play, but they must modernize their marketing practices and recruiting techniques—de-emphasize politics that divide and focus on the incredible projects that union labor builds and maintains. It would also help if more credit was given to technical education toward a multiyear apprenticeship. National certification standards are fine, but it has been our experience that a single publisher cannot provide all the answers for a curriculum.
Will we rise to the challenge and start producing the talent needed for a 21st-century labor market? It may well be the difference between growth and stagnation.
Ryan Blythe
Georgia Trade School
New jobs are created in the private sector by employers, not politicians. The welders would have enjoyed more success in their quest had they spoken with employers.
Robert Allan Schwartz
Lexington, Mass.
I reflect on the hundreds and perhaps thousands of welding jobs created in Pennsylvania by fracking for natural gas and the pipelines required for its transportation. It is a shame New York state doesn’t tap into this middle-class job creator. Then maybe the state could stop its multiyear national television ad campaign about how business is booming.
Rae Burton
Upper St. Clair, Pa.
Ben Franklin said it best, “He who hath a trade, hath an estate.”
Bob O’Con
Tarpon Springs, Fla.
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http://www.fresnobee.com/opinion/opn-columns-blogs/article155979969.html
Restaurant die-off is first course of California’s $15 minimum wage
BY JEREMY BAGOTT
In a pair of affluent coastal California counties, the canary in the mineshaft has gotten splayed, spatchcocked and plated over a bed of unintended consequences, garnished with sprigs of locally sourced economic distortion and non-GMO, “What the heck were they thinking?”
The result of one early experiment in a citywide $15 minimum wage is an ominous sign for the state’s poorer inland counties as the statewide wage floor creeps toward the mark.
Consider San Francisco, an early adopter of the $15 wage. It’s now experiencing a restaurant die-off, minting jobless hash-slingers, cashiers, busboys, scullery engineers and line cooks as they get pink-slipped in increasing numbers. And the wage there hasn’t yet hit $15.
ADVERTISING
As the East Bay Times reported in January, at least 60 restaurants around the Bay Area had closed since September alone.
A recent study by Michael Luca at Harvard Business School and Dara Lee Luca at Mathematica Policy Research found that every $1 hike in the minimum wage brings a 14 percent increase in the likelihood of a 3.5-star restaurant on Yelp! closing.
Another telltale is San Diego, where voters approved increasing the city’s minimum wage to $11.50 per hour from $10.50, this after the minimum wage was increased from $8 an hour in 2015 – meaning hourly costs have risen 43 percent in two years.
The cost increases have pushed San Diego restaurants to the brink, Stephen Zolezzi, president of the Food and Beverage Association of San Diego County, told the San Diego Business Journal. Watch for the next mass die-off there.
But what of California’s less affluent inland counties? How will they fare?
Christopher Thornberg, director of UC Riverside’s Center for Economic Forecasting and Development, told the San Bernardino Sun that politicians should have adopted a regional approach. He said it would been better to adapt minimum-wage levels to varying economies – something like the Oregon model, the nation’s first multi-tiered minimum-wage strategy.
Oregon’s minimum-wage law is phased, with increases over six years. By 2022, the minimum will be $14.75 an hour in Portland, $13.50 in midsize counties and $12.50 in rural areas.
“That makes sense,” Thornberg told the Sun. “That’s logical.”
California is even more varied economically than Oregon. Thornberg believes hiking wages in blanket fashion will spark layoffs and edge low-skilled workers out of the job market.
In the Central Valley, wages for all workers, on average, are lower than those of the coastal counties.
U.S. Census Bureau data show about 21 percent of workers in Bakersfield earned from $8 to $12 per hour in 2015, the most recent year for which data was available. In Fresno, 32 percent of workers were in that wage group, and in Modesto about 25 percent. Contrast that with Santa Clara County, home of Silicon Valley, which registered only 12.5 percent at that level.
The state’s diverse unemployment rates tell a similar tale. Unemployment in Bakersfield was 9.5 percent; 8.8 percent in Fresno, and Stanislaus County notched 7.9 percent. Compare that to Silicon Valley’s unemployment rate – 3.2 percent
“Part of our whole concern with (the $15 wage) is it’s a one-size-fits-all,” Rob Lapsley, president of the California Business Roundtable, told The Sacramento Bee last year. “Areas with double-digit unemployment, this is scaring them to death.”
Jamil Dada, chairman of the Riverside County Workforce Development Board, told the Sun that he believed the state’s Inland Empire will be hit harder than other parts of the state.
“It might be tolerable in the coastal regions,” he said. “Their business environment is completely different.”
As politicians insert their sausage fingers into subtle market mechanisms, scarcity and unintended consequences will ensue.
Joining San Francisco’s restaurant die-off was rising star AQ, which in 2012 was named a James Beard Award finalist for the best new restaurant in America. The restaurant’s profit margins went from a reported 8.5 percent in 2012 to 1.5 percent by 2015. Most restaurants are thought to require margins of 3 and 5 percent.
If what’s happening with one early adopter of the $15 wage progression is any indication, locally famous inland hash houses and burger joints from Calexico to the Cow Counties will disappear as mandated wages climb to $15 statewide. And that will only be the start of things.
Jeremy Bagott, a former journalist, writes about California finance and land-use issues. He wrote this for The Modesto Bee.
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http://www.fresnobee.com/opinion/opn-columns-blogs/article155979969.html
Restaurant die-off is first course of California’s $15 minimum wage
BY JEREMY BAGOTT
In a pair of affluent coastal California counties, the canary in the mineshaft has gotten splayed, spatchcocked and plated over a bed of unintended consequences, garnished with sprigs of locally sourced economic distortion and non-GMO, “What the heck were they thinking?”
The result of one early experiment in a citywide $15 minimum wage is an ominous sign for the state’s poorer inland counties as the statewide wage floor creeps toward the mark.
Consider San Francisco, an early adopter of the $15 wage. It’s now experiencing a restaurant die-off, minting jobless hash-slingers, cashiers, busboys, scullery engineers and line cooks as they get pink-slipped in increasing numbers. And the wage there hasn’t yet hit $15.
ADVERTISING
As the East Bay Times reported in January, at least 60 restaurants around the Bay Area had closed since September alone.
A recent study by Michael Luca at Harvard Business School and Dara Lee Luca at Mathematica Policy Research found that every $1 hike in the minimum wage brings a 14 percent increase in the likelihood of a 3.5-star restaurant on Yelp! closing.
Another telltale is San Diego, where voters approved increasing the city’s minimum wage to $11.50 per hour from $10.50, this after the minimum wage was increased from $8 an hour in 2015 – meaning hourly costs have risen 43 percent in two years.
The cost increases have pushed San Diego restaurants to the brink, Stephen Zolezzi, president of the Food and Beverage Association of San Diego County, told the San Diego Business Journal. Watch for the next mass die-off there.
But what of California’s less affluent inland counties? How will they fare?
Christopher Thornberg, director of UC Riverside’s Center for Economic Forecasting and Development, told the San Bernardino Sun that politicians should have adopted a regional approach. He said it would been better to adapt minimum-wage levels to varying economies – something like the Oregon model, the nation’s first multi-tiered minimum-wage strategy.
Oregon’s minimum-wage law is phased, with increases over six years. By 2022, the minimum will be $14.75 an hour in Portland, $13.50 in midsize counties and $12.50 in rural areas.
“That makes sense,” Thornberg told the Sun. “That’s logical.”
California is even more varied economically than Oregon. Thornberg believes hiking wages in blanket fashion will spark layoffs and edge low-skilled workers out of the job market.
In the Central Valley, wages for all workers, on average, are lower than those of the coastal counties.
U.S. Census Bureau data show about 21 percent of workers in Bakersfield earned from $8 to $12 per hour in 2015, the most recent year for which data was available. In Fresno, 32 percent of workers were in that wage group, and in Modesto about 25 percent. Contrast that with Santa Clara County, home of Silicon Valley, which registered only 12.5 percent at that level.
The state’s diverse unemployment rates tell a similar tale. Unemployment in Bakersfield was 9.5 percent; 8.8 percent in Fresno, and Stanislaus County notched 7.9 percent. Compare that to Silicon Valley’s unemployment rate – 3.2 percent
“Part of our whole concern with (the $15 wage) is it’s a one-size-fits-all,” Rob Lapsley, president of the California Business Roundtable, told The Sacramento Bee last year. “Areas with double-digit unemployment, this is scaring them to death.”
Jamil Dada, chairman of the Riverside County Workforce Development Board, told the Sun that he believed the state’s Inland Empire will be hit harder than other parts of the state.
“It might be tolerable in the coastal regions,” he said. “Their business environment is completely different.”
As politicians insert their sausage fingers into subtle market mechanisms, scarcity and unintended consequences will ensue.
Joining San Francisco’s restaurant die-off was rising star AQ, which in 2012 was named a James Beard Award finalist for the best new restaurant in America. The restaurant’s profit margins went from a reported 8.5 percent in 2012 to 1.5 percent by 2015. Most restaurants are thought to require margins of 3 and 5 percent.
If what’s happening with one early adopter of the $15 wage progression is any indication, locally famous inland hash houses and burger joints from Calexico to the Cow Counties will disappear as mandated wages climb to $15 statewide. And that will only be the start of things.
Jeremy Bagott, a former journalist, writes about California finance and land-use issues. He wrote this for The Modesto Bee.
“Economically, minimum wages may not make sense,” the governor said. “But morally and socially and politically they make every sense"
- Gov. Jerry Brown
apnews.com/98cddb672d82427cb910b98c77fd1c4a
It makes moral, social and political sense to do the wrong thing economically and hurt businesses and workers?
Meanwhile, Bernie Sanders can't figure out why Democrats are losing elections outside of Vermont and California.
-
http://www.fresnobee.com/opinion/opn-columns-blogs/article155979969.html
Restaurant die-off is first course of California’s $15 minimum wage
BY JEREMY BAGOTT
In a pair of affluent coastal California counties, the canary in the mineshaft has gotten splayed, spatchcocked and plated over a bed of unintended consequences, garnished with sprigs of locally sourced economic distortion and non-GMO, “What the heck were they thinking?”
The result of one early experiment in a citywide $15 minimum wage is an ominous sign for the state’s poorer inland counties as the statewide wage floor creeps toward the mark.
Consider San Francisco, an early adopter of the $15 wage. It’s now experiencing a restaurant die-off, minting jobless hash-slingers, cashiers, busboys, scullery engineers and line cooks as they get pink-slipped in increasing numbers. And the wage there hasn’t yet hit $15.
ADVERTISING
As the East Bay Times reported in January, at least 60 restaurants around the Bay Area had closed since September alone.
A recent study by Michael Luca at Harvard Business School and Dara Lee Luca at Mathematica Policy Research found that every $1 hike in the minimum wage brings a 14 percent increase in the likelihood of a 3.5-star restaurant on Yelp! closing.
Another telltale is San Diego, where voters approved increasing the city’s minimum wage to $11.50 per hour from $10.50, this after the minimum wage was increased from $8 an hour in 2015 – meaning hourly costs have risen 43 percent in two years.
The cost increases have pushed San Diego restaurants to the brink, Stephen Zolezzi, president of the Food and Beverage Association of San Diego County, told the San Diego Business Journal. Watch for the next mass die-off there.
But what of California’s less affluent inland counties? How will they fare?
Christopher Thornberg, director of UC Riverside’s Center for Economic Forecasting and Development, told the San Bernardino Sun that politicians should have adopted a regional approach. He said it would been better to adapt minimum-wage levels to varying economies – something like the Oregon model, the nation’s first multi-tiered minimum-wage strategy.
Oregon’s minimum-wage law is phased, with increases over six years. By 2022, the minimum will be $14.75 an hour in Portland, $13.50 in midsize counties and $12.50 in rural areas.
“That makes sense,” Thornberg told the Sun. “That’s logical.”
California is even more varied economically than Oregon. Thornberg believes hiking wages in blanket fashion will spark layoffs and edge low-skilled workers out of the job market.
In the Central Valley, wages for all workers, on average, are lower than those of the coastal counties.
U.S. Census Bureau data show about 21 percent of workers in Bakersfield earned from $8 to $12 per hour in 2015, the most recent year for which data was available. In Fresno, 32 percent of workers were in that wage group, and in Modesto about 25 percent. Contrast that with Santa Clara County, home of Silicon Valley, which registered only 12.5 percent at that level.
The state’s diverse unemployment rates tell a similar tale. Unemployment in Bakersfield was 9.5 percent; 8.8 percent in Fresno, and Stanislaus County notched 7.9 percent. Compare that to Silicon Valley’s unemployment rate – 3.2 percent
“Part of our whole concern with (the $15 wage) is it’s a one-size-fits-all,” Rob Lapsley, president of the California Business Roundtable, told The Sacramento Bee last year. “Areas with double-digit unemployment, this is scaring them to death.”
Jamil Dada, chairman of the Riverside County Workforce Development Board, told the Sun that he believed the state’s Inland Empire will be hit harder than other parts of the state.
“It might be tolerable in the coastal regions,” he said. “Their business environment is completely different.”
As politicians insert their sausage fingers into subtle market mechanisms, scarcity and unintended consequences will ensue.
Joining San Francisco’s restaurant die-off was rising star AQ, which in 2012 was named a James Beard Award finalist for the best new restaurant in America. The restaurant’s profit margins went from a reported 8.5 percent in 2012 to 1.5 percent by 2015. Most restaurants are thought to require margins of 3 and 5 percent.
If what’s happening with one early adopter of the $15 wage progression is any indication, locally famous inland hash houses and burger joints from Calexico to the Cow Counties will disappear as mandated wages climb to $15 statewide. And that will only be the start of things.
Jeremy Bagott, a former journalist, writes about California finance and land-use issues. He wrote this for The Modesto Bee.
“Economically, minimum wages may not make sense,” the governor said. “But morally and socially and politically they make every sense"
- Gov. Jerry Brown
apnews.com/98cddb672d82427cb910b98c77fd1c4a
It makes moral, social and political sense to do the wrong thing economically and hurt businesses and workers?
Meanwhile, Bernie Sanders can't figure out why Democrats are losing elections outside of Vermont and California.
That's ok. The left will just shoot the legislators they don't like.
-
http://twitchy.com/sd-3133/2017/07/03/hitting-the-crack-pipe-matt-yglesias-achieves-peak-dumbassery-with-this-take-on-minimum-wage/
I think all blue states should go for it!
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This is Reason magazine, link below, it's good to see famous people caught reading the forum. In a more honest way than the climate alarmists do, I have been trying to start the drumbeat that anyone who doesn't agree that incentives and disincentives matter in economics is a denier of science.
http://dogbrothers.com/phpBB2/index.php?topic=1467.msg99884#msg99884
http://dogbrothers.com/phpBB2/index.php?topic=1791.msg104968#msg104968
http://dogbrothers.com/phpBB2/index.php?topic=2550.msg104435#msg104435
Minimum wage law is a most obvious violator of the laws of supply and demand taught generally in chapter one of any beginning economics textbook. Raising minimum wage laws, which means prohibiting the hiring of people worth a smaller amount, blocks thousands or millions of people from stepping up onto the first rung of the economic employment ladder. It hurts them instantly and the damage can last a lifetime.
http://reason.com/archives/2017/07/12/is-it-time-to-start-dismissing-economics
Is It Time to Start Dismissing 'Economics Deniers'?
Minimum wage laws have negative effects whether or not their advocates acknowledge them.
---------------------------------------
Exhibit B of science denial: Capital employs labor. Capital makes labor more productive. Think digging with your hands, digging with a shovel and wheelbarrow or moving dirt with a 2000hp diesel Caterpillar.
Mike Mulvaney (Director OMB) explains MAGAnomics (Make America Great Again-nomics)
The difference between 2% growth and 3% growth since WWII is median income of 50k versus 26k. Step one is: "Tax reform. We need to boost productivity. Fundamental to that is encouraging capital investment."
https://www.wsj.com/articles/introducing-maganomics-1499899298
The entire left and media (I repeat myself) call that policy "tax cuts for the rich" because the rich by definition have more capital. But to deny that we live in an interconnected economy and deny that labor, productivity and wage and income growth up and down the economy is tied to capital performance is to deny science.
We tried the opposite policies. We raised taxes on capital and we put more and more regulations on employers and the result was stagnant wages for the middle class. We stomped out economic growth, yet 'income inequality' continued to widen anyway. Who knew?
A growing economy benefits all who participate in it. Some participate in it more than others. That is not good reason to oppose economic growth. More people participate in a healthy economy than a sick one. Incomes across the board can only rise in a growing economy. The economy doesn't grow when you handcuff or confiscate capital. See Venezuela - or Obamanomics.
A drying-up economy grounds all ships.
Stop playing defense on economics and start calling out these deniers out for their ignorance and duplicity. MHO )
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"everybody, get out a Sharpie and let's draw an extra zero on all our money to save the economy"
http://twitchy.com/sd-3133/2017/07/03/hitting-the-crack-pipe-matt-yglesias-achieves-peak-dumbassery-with-this-take-on-minimum-wage/
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http://papers.nber.org/tmp/62829-w23667.pdf
ABSTRACT
We study the effect of minimum wage increases on employment in automatable jobs – jobs in
which employers may find it easier to substitute machines for people – focusing on low-skilled
workers from whom such substitution may be spurred by minimum wage increases. Based on
CPS data from 1980-2015, we find that increasing the minimum wage decreases significantly the
share of automatable employment held by low-skilled workers, and increases the likelihood that
low-skilled workers in automatable jobs become unemployed. The average effects mask
significant heterogeneity by industry and demographic group, including substantive adverse
effects for older, low-skilled workers in manufacturing. The findings imply that groups often
ignored in the minimum wage literature are in fact quite vulnerable to employment changes and
job loss because of automation following a minimum wage increase.
Grace Lordan
Department of Social Policy
London School of Economics
David Neumark
Department of Economics
University of California at Irvine
Ms. Lordan and Mr. Neumark show that mandating higher wages kills jobs for low-skill workers across a range of industries. According to the authors, older workers in manufacturing are hit particularly hard, with women and African-American workers also suffering disproportionate harm:
Overall, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers. Our estimates suggest that an increase of the minimum wage by $1 (based on 2015 dollars) decreases the share of low-skilled automatable jobs by 0.43 percentage point... In particular, there are large effects on the shares of automatable employment in manufacturing, where we estimate that a $1 increase in the minimum wage decreases the share of automatable employment among low-skilled workers by 0.99 percentage point... Within manufacturing, the share of older workers in automatable employment declines most sharply, and the share of workers in automatable employment also declines sharply for women and blacks.
Our analysis at the individual level draws many similar conclusions. We find that a significant number of individuals who were previously in automatable employment are unemployed in the period following a minimum wage increase.
---
The authors also warn that the universe of jobs that can be done by machines is expanding, and will likely soon include such occupations as taxi drivers and bricklayers. This means that minimum wage laws could do more damage in the future than they have in the past.
According to the Democrats’ new “Better Deal” economic agenda, “increasing the minimum wage will provide economic security for all working Americans.” But it’s hard for Americans to have economic security if they’re not working.
https://www.wsj.com/articles/a-brief-history-of-minimum-wage-disasters-1502823330
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What's that again? This is the National Bureau of Economic Research, not a right wing blog. Which side favors policies that hurt older workers, women and African Americans disproportionately? Why don't they disclose all of that before they poll who favors it and who opposes the policy!
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I have no problem with enacting Zuckerberg's idea to push for a mandatory salary for all Americans replaced by robots
My difference from him - is he is not going to get away with me paying for this - he is going to pay for it!
F Z!
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https://www.washingtonpost.com/news/wonk/wp/2015/11/03/why-denmark-isnt-the-utopian-fantasy-bernie-sanders-describes/?utm_term=.934c441c28cd
Why Denmark isn’t the utopian fantasy Bernie Sanders describes
By Ana Swanson November 3, 2015
Miss Denmark Mette Riis Sorensen visits a shopping mall in Tokyo on Oct. 23. (Toru Yamanaka/AFP/Getty Images)
There's one country that keeps popping up in the debate among the Democratic candidates for president. It's not China, or Russia, or Iran. It's a little country of 5.6 million people that — beyond a vague image of tall, blond, egalitarian people who like pickled fish and minimalist design — few Americans probably know much about.
Denmark, and to a lesser extent the other Nordic countries, are surfacing in the Democratic debates as examples of relatively equal societies that provide generous benefits for their citizens, including affordable education, health care for all, and subsidized child care. This is mostly due to Bernie Sanders, who likes to use Denmark to explain his vision of democratic socialism. "I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people," Sanders said in the first Democratic debate on Oct. 13. ("But we are not Denmark. I love Denmark. We are the United States of America," Hillary Clinton responded.)
Play Video 1:32
Clinton: 'It’s our job to rein in the excesses of capitalism'
0:00
Democratic presidential candidate Hillary Clinton responds to opponent Bernie Sanders's suggestion that the United States can learn from countries like Denmark. (CNN)
Sanders joins a long tradition of liberal politicians around the world who laud Denmark, Sweden and Norway (and sometimes Finland and Iceland, which aren't technically part of Scandinavia) for their equality and prosperity. These northern European countries enjoy a reputation for being peaceful, egalitarian, progressive, liberal and educated, and having excellent furniture and crime novels, too. For whatever reason, Scandinavia countries just seem to do it better — an idea that supporters and critics label "Nordic exceptionalism."
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Michael Booth, photo courtesy of author. Michael Booth, photo courtesy of author.
But how much truth is there in the popular idea of Nordic exceptionalism? Michael Booth, a British journalist, examines this question in detail in a recent book, "The Almost Nearly Perfect People: Behind the Myth of the Scandinavian Utopia." Booth, a U.K. native who has lived in Scandinavia for over a decade, plays the part of a cultural interpreter, examining, poking and prodding the reality of life in Nordic countries from every angle. Booth finds plenty to question in the rest of the world's assumptions about the Nordic miracle, but also lots that we can learn from them.
You say that many people around the world believe in Nordic exceptionalism without knowing very much at all about Nordic life. They can more easily picture the lives of some remote Amazonian tribe than the typical Swede or Dane. Why is it that the Nordic model has attracted so many fans, but relatively few visitors?
Denmark is a pretty good place to live but it is by no stretch of the imagination the utopia many in politics and the media in the U.S. claim it to be.
We all like to have a "happy place" — somewhere over the rainbow where we imagine life to be perfect - don’t we? For many, that place used to be the Mediterranean: we all dreamed of a stone house among the vines. After the economic crash, I think a lot of people started to look towards Scandinavia for what they believed to be a less rampantly capitalistic form of society.
The difference is, few actually actively seek to move to Scandinavia, for obvious reasons: the weather is appalling, the taxes are the highest in the world, the cost of living is similarly ridiculous, the languages are impenetrable, the food is (still) awful for the most part and, increasingly, these countries are making it very clear they would prefer foreigners to stay away.
What are some of the biggest misconceptions that you find in how the rest of the world understands the Nordic countries?
Again, I think we've all been guilty of projecting some kind of utopian fantasy on them. The Nordic countries are, for example, depicted as paragons of political correctness, yet you still see racial stereotypes in the media here — the kind of thing which would be unthinkable in the U.S. Meanwhile, though it is true that these are the most gender-equal societies in the world, they also record the highest rates of violence towards women — only part of which can be explained by high levels of reporting of crime.
Denmark, meanwhile, promotes itself as a "green pioneer" and finger wags at the world about CO2 emissions, and yet it regularly beats the U.S. and virtually every other country on earth in terms of its per capita ecological footprint. For all their wind turbines, the Danes still burn a lot of coal and drive a lot of cars, their country is home to the world’s largest shipping company (Mærsk), and the region’s largest air hub.
Sweden is supposedly "neutral" (it’s not, and has not been for decades), yet since the days when it sold iron ore to Hitler, its economy has always benefited from its arms industry, which is one of the world’s largest.
The Norwegians have fallen prey to precisely the same kind of problems as other oil-rich states: their economy depends far too much on one industry (oil), they’ve taken their foot off the gas in terms of their work ethic, and now all young Norwegians want to do is be "something in the media" or open a cupcake place.
[The surprisingly fiery debate over whether Denmark is heaven on earth]
Politicians in the U.S. like Bernie Sanders praise Denmark for its relative income equality, its free universities, parental leave, subsidized childcare, and national health system. That all sounds pretty good, right?
It is fantastic in theory, except that, in Denmark, the quality of the free education and health care is substandard: They are way down on the PISA [Programme for International Student Assessment] educational rankings, have the lowest life expectancy in the region, and the highest rates of death from cancer. And there is broad consensus that the economic model of a public sector and welfare state on this scale is unsustainable. The Danes’ dirty secret is that its public sector has been propped up by — now dwindling — oil revenues. In Norway’s case, of course, it’s no secret.
You describe the Danes as having a strong sense of work-life balance – specifically, being much more focused on life than work. What are the positives and negatives of that attitude?
Positives: Danes spend more time with their families. Negatives: Danes spend more times with their families. Plus, they have run up huge private debt levels, and no one answers the phone on a Friday afternoon.
Danes are also experiencing a rising debt level, and a lower proportion of people working. Are these worrying signs for its economy or the country’s model?
Yes, many economists have specifically warned of the Danes’ private debt levels. Perhaps more seriously, productivity has been somewhat stagnant and there is a dire skills shortage.
Participants of the World Congress of Santa Clauses 2015 take part in the annual swim at Bellevue beach, north of Copenhagen, Denmark, July 21, 2015. REUTERS/Scanpix Denmark/Erik Refner The World Congress of Santa Clauses 2015 take their annual swim north of Copenhagen, Denmark. REUTERS/Scanpix Denmark/Erik Refner
One thing that’s often glossed over among outsiders is the extraordinarily high tax level, which is high for the middle class as well as the wealthy. Do Danes think that they get their money’s worth in social services? Do you?
Denmark has the highest direct and indirect taxes in the world, and you don’t need to be a high earner to make it into the top tax bracket of 56% (to which you must add 25% value-added tax, the highest energy taxes in the world, car import duty of 180%, and so on). How the money is spent is kept deliberately opaque by the authorities. Danes do tend to feel that they get value for money, but we should not overlook the fact that the majority of Danes either work for, or receive benefits from, the welfare state.
Greater numbers of immigrants have been leading to rising xenophobia in some Nordic countries, as well as higher income inequality. Do you think these trends say anything about the strength of the Nordic model?
All of Europe is dealing with this issue, but of course smaller populations feel more threatened, and cynical right wing politicians (if you’ll forgive the tautology) take advantage of that fear. Also, there is no "Nordic model" when it comes to immigration and integration: there is the Swedish model (open door) and the Danish model (close the door and put up a "Go Away" sign), which the Norwegians and Finns are copying.
Denmark has won almost every happiness survey since 1973, but you describe them in the book as a “frosty, solemn bunch” who take a lot of anti-depressants. Do they really deserve to be consistently ranked as the world’s happiest country?
No, it’s a nonsense and, in fact, they have dropped from the top spot in recent surveys, mostly because they are not as rich as they once were. The sad take-away from that is, money does, in fact, make you happy. I don’t think they ever were the "happiest" people in the world, but you could argue they have been the most "satisfied." They are good at appreciating the small things in life and making the most of what they have — a legacy, I think, of experiencing the rough hand of geopolitics in the 18th and 19th centuries.
You emphasize, in the end, that there is a lot that we can learn from the Nordic countries. What is one of the best lessons?
At least aim for economic and gender equality. Everyone benefits, so it’s worth a shot, no?
Why Denmark isn’t the utopian fantasy Bernie Sanders describes
By Ana Swanson November 3, 2015
Miss Denmark Mette Riis Sorensen visits a shopping mall in Tokyo on Oct. 23. (Toru Yamanaka/AFP/Getty Images)
There's one country that keeps popping up in the debate among the Democratic candidates for president. It's not China, or Russia, or Iran. It's a little country of 5.6 million people that — beyond a vague image of tall, blond, egalitarian people who like pickled fish and minimalist design — few Americans probably know much about.
Denmark, and to a lesser extent the other Nordic countries, are surfacing in the Democratic debates as examples of relatively equal societies that provide generous benefits for their citizens, including affordable education, health care for all, and subsidized child care. This is mostly due to Bernie Sanders, who likes to use Denmark to explain his vision of democratic socialism. "I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people," Sanders said in the first Democratic debate on Oct. 13. ("But we are not Denmark. I love Denmark. We are the United States of America," Hillary Clinton responded.)
Play Video 1:32
Clinton: 'It’s our job to rein in the excesses of capitalism'
0:00
Democratic presidential candidate Hillary Clinton responds to opponent Bernie Sanders's suggestion that the United States can learn from countries like Denmark. (CNN)
Sanders joins a long tradition of liberal politicians around the world who laud Denmark, Sweden and Norway (and sometimes Finland and Iceland, which aren't technically part of Scandinavia) for their equality and prosperity. These northern European countries enjoy a reputation for being peaceful, egalitarian, progressive, liberal and educated, and having excellent furniture and crime novels, too. For whatever reason, Scandinavia countries just seem to do it better — an idea that supporters and critics label "Nordic exceptionalism."
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Michael Booth, photo courtesy of author. Michael Booth, photo courtesy of author.
But how much truth is there in the popular idea of Nordic exceptionalism? Michael Booth, a British journalist, examines this question in detail in a recent book, "The Almost Nearly Perfect People: Behind the Myth of the Scandinavian Utopia." Booth, a U.K. native who has lived in Scandinavia for over a decade, plays the part of a cultural interpreter, examining, poking and prodding the reality of life in Nordic countries from every angle. Booth finds plenty to question in the rest of the world's assumptions about the Nordic miracle, but also lots that we can learn from them.
You say that many people around the world believe in Nordic exceptionalism without knowing very much at all about Nordic life. They can more easily picture the lives of some remote Amazonian tribe than the typical Swede or Dane. Why is it that the Nordic model has attracted so many fans, but relatively few visitors?
Denmark is a pretty good place to live but it is by no stretch of the imagination the utopia many in politics and the media in the U.S. claim it to be.
We all like to have a "happy place" — somewhere over the rainbow where we imagine life to be perfect - don’t we? For many, that place used to be the Mediterranean: we all dreamed of a stone house among the vines. After the economic crash, I think a lot of people started to look towards Scandinavia for what they believed to be a less rampantly capitalistic form of society.
The difference is, few actually actively seek to move to Scandinavia, for obvious reasons: the weather is appalling, the taxes are the highest in the world, the cost of living is similarly ridiculous, the languages are impenetrable, the food is (still) awful for the most part and, increasingly, these countries are making it very clear they would prefer foreigners to stay away.
What are some of the biggest misconceptions that you find in how the rest of the world understands the Nordic countries?
Again, I think we've all been guilty of projecting some kind of utopian fantasy on them. The Nordic countries are, for example, depicted as paragons of political correctness, yet you still see racial stereotypes in the media here — the kind of thing which would be unthinkable in the U.S. Meanwhile, though it is true that these are the most gender-equal societies in the world, they also record the highest rates of violence towards women — only part of which can be explained by high levels of reporting of crime.
Denmark, meanwhile, promotes itself as a "green pioneer" and finger wags at the world about CO2 emissions, and yet it regularly beats the U.S. and virtually every other country on earth in terms of its per capita ecological footprint. For all their wind turbines, the Danes still burn a lot of coal and drive a lot of cars, their country is home to the world’s largest shipping company (Mærsk), and the region’s largest air hub.
Sweden is supposedly "neutral" (it’s not, and has not been for decades), yet since the days when it sold iron ore to Hitler, its economy has always benefited from its arms industry, which is one of the world’s largest.
The Norwegians have fallen prey to precisely the same kind of problems as other oil-rich states: their economy depends far too much on one industry (oil), they’ve taken their foot off the gas in terms of their work ethic, and now all young Norwegians want to do is be "something in the media" or open a cupcake place.
[The surprisingly fiery debate over whether Denmark is heaven on earth]
Politicians in the U.S. like Bernie Sanders praise Denmark for its relative income equality, its free universities, parental leave, subsidized childcare, and national health system. That all sounds pretty good, right?
It is fantastic in theory, except that, in Denmark, the quality of the free education and health care is substandard: They are way down on the PISA [Programme for International Student Assessment] educational rankings, have the lowest life expectancy in the region, and the highest rates of death from cancer. And there is broad consensus that the economic model of a public sector and welfare state on this scale is unsustainable. The Danes’ dirty secret is that its public sector has been propped up by — now dwindling — oil revenues. In Norway’s case, of course, it’s no secret.
You describe the Danes as having a strong sense of work-life balance – specifically, being much more focused on life than work. What are the positives and negatives of that attitude?
Positives: Danes spend more time with their families. Negatives: Danes spend more times with their families. Plus, they have run up huge private debt levels, and no one answers the phone on a Friday afternoon.
Danes are also experiencing a rising debt level, and a lower proportion of people working. Are these worrying signs for its economy or the country’s model?
Yes, many economists have specifically warned of the Danes’ private debt levels. Perhaps more seriously, productivity has been somewhat stagnant and there is a dire skills shortage.
Participants of the World Congress of Santa Clauses 2015 take part in the annual swim at Bellevue beach, north of Copenhagen, Denmark, July 21, 2015. REUTERS/Scanpix Denmark/Erik Refner The World Congress of Santa Clauses 2015 take their annual swim north of Copenhagen, Denmark. REUTERS/Scanpix Denmark/Erik Refner
One thing that’s often glossed over among outsiders is the extraordinarily high tax level, which is high for the middle class as well as the wealthy. Do Danes think that they get their money’s worth in social services? Do you?
Denmark has the highest direct and indirect taxes in the world, and you don’t need to be a high earner to make it into the top tax bracket of 56% (to which you must add 25% value-added tax, the highest energy taxes in the world, car import duty of 180%, and so on). How the money is spent is kept deliberately opaque by the authorities. Danes do tend to feel that they get value for money, but we should not overlook the fact that the majority of Danes either work for, or receive benefits from, the welfare state.
Greater numbers of immigrants have been leading to rising xenophobia in some Nordic countries, as well as higher income inequality. Do you think these trends say anything about the strength of the Nordic model?
All of Europe is dealing with this issue, but of course smaller populations feel more threatened, and cynical right wing politicians (if you’ll forgive the tautology) take advantage of that fear. Also, there is no "Nordic model" when it comes to immigration and integration: there is the Swedish model (open door) and the Danish model (close the door and put up a "Go Away" sign), which the Norwegians and Finns are copying.
Denmark has won almost every happiness survey since 1973, but you describe them in the book as a “frosty, solemn bunch” who take a lot of anti-depressants. Do they really deserve to be consistently ranked as the world’s happiest country?
No, it’s a nonsense and, in fact, they have dropped from the top spot in recent surveys, mostly because they are not as rich as they once were. The sad take-away from that is, money does, in fact, make you happy. I don’t think they ever were the "happiest" people in the world, but you could argue they have been the most "satisfied." They are good at appreciating the small things in life and making the most of what they have — a legacy, I think, of experiencing the rough hand of geopolitics in the 18th and 19th centuries.
You emphasize, in the end, that there is a lot that we can learn from the Nordic countries. What is one of the best lessons?
At least aim for economic and gender equality. Everyone benefits, so it’s worth a shot, no?
Denmark Isn't MagicWhy Denmark isn’t the utopian fantasy Bernie Sanders describes
By Ana Swanson November 3, 2015
Miss Denmark Mette Riis Sorensen visits a shopping mall in Tokyo on Oct. 23. (Toru Yamanaka/AFP/Getty Images)
There's one country that keeps popping up in the debate among the Democratic candidates for president. It's not China, or Russia, or Iran. It's a little country of 5.6 million people that — beyond a vague image of tall, blond, egalitarian people who like pickled fish and minimalist design — few Americans probably know much about.
Denmark, and to a lesser extent the other Nordic countries, are surfacing in the Democratic debates as examples of relatively equal societies that provide generous benefits for their citizens, including affordable education, health care for all, and subsidized child care. This is mostly due to Bernie Sanders, who likes to use Denmark to explain his vision of democratic socialism. "I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people," Sanders said in the first Democratic debate on Oct. 13. ("But we are not Denmark. I love Denmark. We are the United States of America," Hillary Clinton responded.)
Play Video 1:32
Clinton: 'It’s our job to rein in the excesses of capitalism'
0:00
Democratic presidential candidate Hillary Clinton responds to opponent Bernie Sanders's suggestion that the United States can learn from countries like Denmark. (CNN)
Sanders joins a long tradition of liberal politicians around the world who laud Denmark, Sweden and Norway (and sometimes Finland and Iceland, which aren't technically part of Scandinavia) for their equality and prosperity. These northern European countries enjoy a reputation for being peaceful, egalitarian, progressive, liberal and educated, and having excellent furniture and crime novels, too. For whatever reason, Scandinavia countries just seem to do it better — an idea that supporters and critics label "Nordic exceptionalism."
Economy & Business Alerts
Breaking news about economic and business issues.
Sign up
Michael Booth, photo courtesy of author. Michael Booth, photo courtesy of author.
But how much truth is there in the popular idea of Nordic exceptionalism? Michael Booth, a British journalist, examines this question in detail in a recent book, "The Almost Nearly Perfect People: Behind the Myth of the Scandinavian Utopia." Booth, a U.K. native who has lived in Scandinavia for over a decade, plays the part of a cultural interpreter, examining, poking and prodding the reality of life in Nordic countries from every angle. Booth finds plenty to question in the rest of the world's assumptions about the Nordic miracle, but also lots that we can learn from them.
You say that many people around the world believe in Nordic exceptionalism without knowing very much at all about Nordic life. They can more easily picture the lives of some remote Amazonian tribe than the typical Swede or Dane. Why is it that the Nordic model has attracted so many fans, but relatively few visitors?
Denmark is a pretty good place to live but it is by no stretch of the imagination the utopia many in politics and the media in the U.S. claim it to be.
We all like to have a "happy place" — somewhere over the rainbow where we imagine life to be perfect - don’t we? For many, that place used to be the Mediterranean: we all dreamed of a stone house among the vines. After the economic crash, I think a lot of people started to look towards Scandinavia for what they believed to be a less rampantly capitalistic form of society.
The difference is, few actually actively seek to move to Scandinavia, for obvious reasons: the weather is appalling, the taxes are the highest in the world, the cost of living is similarly ridiculous, the languages are impenetrable, the food is (still) awful for the most part and, increasingly, these countries are making it very clear they would prefer foreigners to stay away.
What are some of the biggest misconceptions that you find in how the rest of the world understands the Nordic countries?
Again, I think we've all been guilty of projecting some kind of utopian fantasy on them. The Nordic countries are, for example, depicted as paragons of political correctness, yet you still see racial stereotypes in the media here — the kind of thing which would be unthinkable in the U.S. Meanwhile, though it is true that these are the most gender-equal societies in the world, they also record the highest rates of violence towards women — only part of which can be explained by high levels of reporting of crime.
Denmark, meanwhile, promotes itself as a "green pioneer" and finger wags at the world about CO2 emissions, and yet it regularly beats the U.S. and virtually every other country on earth in terms of its per capita ecological footprint. For all their wind turbines, the Danes still burn a lot of coal and drive a lot of cars, their country is home to the world’s largest shipping company (Mærsk), and the region’s largest air hub.
Sweden is supposedly "neutral" (it’s not, and has not been for decades), yet since the days when it sold iron ore to Hitler, its economy has always benefited from its arms industry, which is one of the world’s largest.
The Norwegians have fallen prey to precisely the same kind of problems as other oil-rich states: their economy depends far too much on one industry (oil), they’ve taken their foot off the gas in terms of their work ethic, and now all young Norwegians want to do is be "something in the media" or open a cupcake place.
[The surprisingly fiery debate over whether Denmark is heaven on earth]
Politicians in the U.S. like Bernie Sanders praise Denmark for its relative income equality, its free universities, parental leave, subsidized childcare, and national health system. That all sounds pretty good, right?
It is fantastic in theory, except that, in Denmark, the quality of the free education and health care is substandard: They are way down on the PISA [Programme for International Student Assessment] educational rankings, have the lowest life expectancy in the region, and the highest rates of death from cancer. And there is broad consensus that the economic model of a public sector and welfare state on this scale is unsustainable. The Danes’ dirty secret is that its public sector has been propped up by — now dwindling — oil revenues. In Norway’s case, of course, it’s no secret.
You describe the Danes as having a strong sense of work-life balance – specifically, being much more focused on life than work. What are the positives and negatives of that attitude?
Positives: Danes spend more time with their families. Negatives: Danes spend more times with their families. Plus, they have run up huge private debt levels, and no one answers the phone on a Friday afternoon.
Danes are also experiencing a rising debt level, and a lower proportion of people working. Are these worrying signs for its economy or the country’s model?
Yes, many economists have specifically warned of the Danes’ private debt levels. Perhaps more seriously, productivity has been somewhat stagnant and there is a dire skills shortage.
Participants of the World Congress of Santa Clauses 2015 take part in the annual swim at Bellevue beach, north of Copenhagen, Denmark, July 21, 2015. REUTERS/Scanpix Denmark/Erik Refner The World Congress of Santa Clauses 2015 take their annual swim north of Copenhagen, Denmark. REUTERS/Scanpix Denmark/Erik Refner
One thing that’s often glossed over among outsiders is the extraordinarily high tax level, which is high for the middle class as well as the wealthy. Do Danes think that they get their money’s worth in social services? Do you?
Denmark has the highest direct and indirect taxes in the world, and you don’t need to be a high earner to make it into the top tax bracket of 56% (to which you must add 25% value-added tax, the highest energy taxes in the world, car import duty of 180%, and so on). How the money is spent is kept deliberately opaque by the authorities. Danes do tend to feel that they get value for money, but we should not overlook the fact that the majority of Danes either work for, or receive benefits from, the welfare state.
Greater numbers of immigrants have been leading to rising xenophobia in some Nordic countries, as well as higher income inequality. Do you think these trends say anything about the strength of the Nordic model?
All of Europe is dealing with this issue, but of course smaller populations feel more threatened, and cynical right wing politicians (if you’ll forgive the tautology) take advantage of that fear. Also, there is no "Nordic model" when it comes to immigration and integration: there is the Swedish model (open door) and the Danish model (close the door and put up a "Go Away" sign), which the Norwegians and Finns are copying.
Denmark has won almost every happiness survey since 1973, but you describe them in the book as a “frosty, solemn bunch” who take a lot of anti-depressants. Do they really deserve to be consistently ranked as the world’s happiest country?
No, it’s a nonsense and, in fact, they have dropped from the top spot in recent surveys, mostly because they are not as rich as they once were. The sad take-away from that is, money does, in fact, make you happy. I don’t think they ever were the "happiest" people in the world, but you could argue they have been the most "satisfied." They are good at appreciating the small things in life and making the most of what they have — a legacy, I think, of experiencing the rough hand of geopolitics in the 18th and 19th centuries.
You emphasize, in the end, that there is a lot that we can learn from the Nordic countries. What is one of the best lessons?
At least aim for economic and gender equality. Everyone benefits, so it’s worth a shot, no?
New research suggests that the American dream isn’t alive in Scandinavia
Despite liberal arguments that Denmark is so much better than the U.S. at social mobility, its poor kids are no more likely to go to college.
http://www.theatlantic.com/business/archive/2016/08/the-american-dream-isnt-alive-in-denmark/494141/
Danish-Americans have a measured living standard about 55 percent higher than the Danes in Denmark. Swedish-Americans have a living standard 53 percent higher than the Swedes, and Finnish-Americans have a living standard 59 percent higher than those back in Finland.
https://www.bloomberg.com/view/articles/2016-08-16/denmark-s-nice-yes-but-danes-live-better-in-u-s
this Danish Dream is a “Scandinavian Fantasy,” according to a new paper by Rasmus Landersø at the Rockwool Foundation Research Unit in Copenhagen and James J. Heckman at the University of Chicago. Low-income Danish kids are not much more likely to earn a middle-class wage than their American counterparts. What’s more, the children of non-college graduates in Denmark are about as unlikely to attend college as their American counterparts.
http://www.nber.org/papers/w22465
http://www.nber.org/papers/w22465.pdf
-
Between 1950 and 2000, despite a population increase from 7 million to 9 million, Sweden’s net job creation in the private sector was close to zero. Social democracy running wild...
http://dailysignal.com/2015/08/06/why-scandinavia-is-unexceptional/
In truth, the Swedish economy's best years are long gone. Between 1870 and 1950, average growth in Swedish GDP and productivity was, by some measures, the fastest in the world. In 1970 Sweden was the fourth-richest member of the OECD club of industrial countries. But for most of the past 50 years the story has been one of relative decline, including a deep recession in the early 1990s (see chart 1). By 1998 Sweden had fallen to 16th in the OECD rankings. It has since climbed back a bit, but the relatively strong growth of the past decade should be seen mainly as a rebound from the 1990s trough.
http://www.economist.com/node/7880173
Danish-Americans have a measured living standard about 55 percent higher than the Danes in Denmark. Swedish-Americans have a living standard 53 percent higher than the Swedes.
Finnish-Americans have a living standard 59 percent higher than those back in Finland.
https://www.bloomberg.com/view/articles/2016-08-16/denmark-s-nice-yes-but-danes-live-better-in-u-s
Who knew? (readers here)
For every thing we are doing wrong with our economy, they are doing 53-59% worse.
Why have poverty rates in Denmark doubled in the last 20 years from 3% to 6% and will this trend continue or be reversed?
https://www.quora.com/Why-have-poverty-rates-in-Denmark-doubled-in-the-last-20-years-from-3-to-6-and-will-this-trend-continue-or-be-reversed
http://money.cnn.com/2015/10/23/news/economy/denmark-inequality/
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What say Wesbury to this?
80% of U.S. reported less income in 2016 survey than in 2007.
Net-worth midpoint is $42,400 below pre-crisis level.
(What is your net worth AFTER you subtract your share of the federal debt, and how has THAT changed?)
https://www.bloomberg.com//news/articles/2017-09-27/most-americans-still-worse-off-than-before-recession-fed-finds
Newly released income and wealth data from the Federal Reserve Board’s triennial Survey of Consumer Finances show that America’s richest families enjoyed gains in income and net worth over the last decade. Not part of the top 10 percent? Then your income probably fell.
------------------
Readers of this thread know: For ten years we chased the policies of equality over growth. While we destroyed growth and inequality widened.
Lessons learned: NOTHING.
-
“My colleagues and I may have misjudged the strength of the labor market,”
- Janet Yellen Sept 26, 2017
http://www.latimes.com/business/la-fi-yellen-in-ohio-20170926-story.html
So let's oppose all reforms that would energize growth and help labor...
-
From Crafty's post on the cyber war thread:
Cass Sunstein, (Marc: shocked shocked shocked) who co-wrote a book titled “Nudge” with Thaler, which helped to popularize his ideas on behavioral economics, ...
Nudge economics is to blame for Obamacare's tax on the poor, the mandate penalty: https://www.wsj.com/articles/obamacares-tax-on-the-poor-1506118414
Speaking of the memory hole and posted previously, a few years ago I sent a column idea on that book and topic to (friend of the forum?) James Taranto, then online editor of the WSJ opinion page. He hit it out of the park and put yours truly in the credits. )
https://www.wsj.com/articles/SB10001424127887324105204578382572446778866
Don't Nudge Me There
If government may dictate soda size, why not sexual behavior?
March 25, 2013
If you want to get published on the op-ed page of a major newspaper, a good way to go about it is to make a reasonable, or at least reasonable-sounding, case for an unpopular and outlandish position. It's important that the issue be trivial, so that readers will get riled up but no one will really feel offended or threatened.
Philosopher Sarah Conly, author of a new book called "Against Autonomy: Justifying Coercive Paternalism," has discovered the formula. In a New York Times op-ed titled "Three Cheers for the Nanny State," she defends Mayor Michael Bloomberg's almost universally ridiculed (and judicially enjoined) ban on large sodas and other sugary beverages.
Conly's argument doesn't seem unreasonable, though it is incoherent in places. In a parenthetical aside, for example, she mocks opponents for objecting over such a trivial matter: "Large cups of soda as symbols of human dignity? Really?" (Note to the editors: That "Really?" is lazy writing. Why not let a rhetorical question stand on its own? See what we mean?) But of course she wants us to take her defense of this silly policy as a serious philosophical argument.
Then there's this priceless passage: "Do we care so much about our health that we want to be forced to go to aerobics every day and give up all meat, sugar and salt? No. But in this case, it's some extra soda. Banning a law on the grounds that it might lead to worse laws would mean we could have no laws whatsoever."
Oddly, Conly bases her reductio ad absurdum on false empirical premises. The benefits and risks of exercise, and of particular forms of exercise, vary from individual to individual. And giving up all meat and salt, unlike sugar, is likely to harm your health.
The best part is that conclusion. Essentially she's saying that if you accept one slippery-slope argument, you have to accept all slippery-slope arguments. Therefore, slippery-slope arguments are unsound.
But wait, that's a slippery-slope argument! You've heard of the liar's paradox? Its simplest form is the statement "This statement is false." Conly's greatest contribution to philosophy may be the slippery-slope argument against slippery-slope arguments. Call it the slipper's paradox.
We're less impressed with Conly's argument in favor of the soda ban and measures like it. She rebuts John Stuart Mill, the 19th-century liberal philosopher who established the "harm principle"--the idea that coercion is generally justified only to prevent individuals from harming others. Mill also allowed that there were unusual cases in which government would be justified in restricting an individual's behavior for his own good--"when we are acting out of ignorance and doing something we'll pretty definitely regret." Since it's common knowledge that large quantities of refined sugar are bad for you, that wouldn't justify the soda ban.
Conly thinks Mill didn't go far enough in justifying coercion. Science has shown "that we often don't think very clearly when it comes to choosing the best means to attain our ends," she writes. "We make errors. . . . We are all prone to identifiable and predictable miscalculations." Thus we should surrender a measure of autonomy and yield to rules promulgated by experts, who presumably know what's good for us: "Giving up a little liberty is something we agree to when we agree to live in a democratic society that is governed by laws."
Again she brings up the slippery slope: "What people fear is that this is just the beginning: today it's soda, tomorrow it's the guy standing behind you making you eat your broccoli, floss your teeth, and watch 'PBS NewsHour' every day."
Crazy, right? Maybe not. Conly's op-ed never mentions smoking, but in a sympathetic review in the New York Review of Books, Cass Sunstein reports that in "Against Autonomy" she argues "that because the health risks of smoking are so serious, the government should ban it." (Sunstein, a legal scholar and former Obama administration official, is coauthor of the 2008 book "Nudge: Improving Decisions About Health, Wealth, and Happiness," which makes an argument similar to Conly's.)
What's interesting about the smoking-ban proposal is that while it is culturally radical, it is not philosophically radical. Is there any doubt that if cigarettes were a new invention, lawmakers would quickly ban them? Libertarians would object, on the same ground that they argue for the legalization of other drugs. But their point of view would command little public support, at least unless and until illicit cigarette smoking became as widespread as illicit marijuana use is today.
That is to say that a moderate form of Conly's philosophy has long prevailed, even in as freedom-loving a country as America. While we may bridle at being told we can't do something we are used to doing or didn't realize we weren't supposed to do, generally we don't do so as a matter of principle. (Libertarians, you're off the hook on that observation.) Generally speaking, Americans accept a wide variety of regulations on their personal behavior that are designed to be in their own good.
So what does Conly have to say that is original? Well, her book is called "Against Autonomy" and subtitled "Justifying Coercive Paternalism." That makes it sound as if she is advocating aggressive and thoroughgoing government intrusion into individual decision-making. Her positions on the soda ban and tobacco prohibition seem to bolster that. But those take her only slightly beyond the views that today prevail among the left-liberal elite.
Similarly, according to Sunstein, she endorses Bloomberg's ban on trans fats as well as "regulations designed to reduce portion sizes"--presumably of solid food as well as dissolved sugar. But in areas in which her philosophy would seem to conflict with prevailing left-liberal views, she's less adventurous than Bloomberg:
She is far more ambivalent about Mayor Bloomberg's effort to convince the US Department of Agriculture to authorize a ban on the use of food stamps to buy soda. She is not convinced that the health benefits would be significant, and she emphasizes that people really do enjoy drinking soda.
You'd think the logic of "coercive paternalism"--of government-imposed restrictions designed to promote individual welfare--would apply more strongly when individuals are dependent on government for financial support of their welfare. To put it another way, someone who is financially autonomous has a stronger argument that he ought to be personally autonomous. We're not sure what Conly thinks of that argument--the $95 cover price (0% off at Amazon) has nudged us away from acquiring her book--but we suspect she adheres less strongly to "coercive paternalism" than to the orthodoxies of contemporary left-liberalism.
An even better example is this observation from Sunstein's review: "Because hers is a paternalism of means rather than ends, she would not authorize government to stamp out sin (as, for example, by forbidding certain forms of sexual behavior)."
What a staggering cop-out. The past 50 years or so have seen a massive deregulation of personal behavior in the sexual sphere, a revolution of law, technology, custom and economics, all in the name of personal autonomy. Never mind "sin"--this has had bad consequences for public health (AIDS and other new sexually transmitted diseases), for children (far more of whom are born out of wedlock and reared without fathers), and even for the future of the welfare state (since declining fertility makes old-age entitlements unsustainable).
It may be that the sexual revolution is irreversible and the concomitant problems are intractable. If Conly lacks the imagination to come up with policy solutions, so do we. But if she dismisses this enormous question as a matter of "sin" and focuses instead on trivia like soda-size regulations, why should we take her philosophy seriously?
James Taranto
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Does LeBron James’s concern about ‘equality’ extend to the 98.9% very unequal ‘gender pay gap’ for the WNBA vs. NBA?
http://www.aei.org/publication/does-lebron-jamess-concern-about-equality-extend-to-the-98-8-very-unequal-gender-pay-gap-for-the-wnba-vs-nba/
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Well, that's a wickedly made point :-D :-D :-D
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Well, that's a wickedly made point :-D :-D :-D
I think some law that redistributes the money equally, so that every player gets exactly the same pay is required! EQUALITY!
I'm sure LeBron would be happy with that.
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quote author=G M
I think some law that redistributes the money equally, so that every player gets exactly the same pay is required! EQUALITY!
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Yes and some people vote like that makes sense, need it pointed out that not all work has the same value, or even near the same value.
Since equality runs against the natural state of things, it requires coercion. Oppression and tyranny are features, not bugs, of a socialist system.
The nice thing about discovering an economic ladder in a free society is that you can climb up it, not to LeBron's spot, but to your own potential.
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"Since equality runs against the natural state of things, it requires coercion. Oppression and tyranny are features, not bugs, of a socialist system."
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can anyone guess what I am referring to?
If only I could invest . Legitimate yes, but also an element of being a racket:
https://www.yahoo.com/entertainment/former-weinstein-production-assistant-shares-192736022.html
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While we were experimenting with socialism and still have the Pelosi-Obama healthcare system and tax plan as the law of the land:
[Chart from Scott Grannis]
Economic decline and stagnation are policy mix choices. So is growth.
Grannis says the 'gap' is $3T, meaning our economy is running 3 trillion/yr. behind where we would be if we simply continued to grow at the 1965-2007 average trend line of about 3.1%/year. This is a human tragedy of governmental negligence. We have foregone more than $20 Trillion (area under the curve, 2-3T X 9 years and counting) because of misdirected government policies of anti-growth. That is roughly $100,000 per working person or an amount at least EQUAL TO THE FEDERAL DEBT!
Oh well. We were busy pursuing other things, gender diversity, gay marriage, pot, importing terror, soda containment law, medical device taxes, healthcare cadillac taxes, Obama phones, free sh*t, in a word... fairness.
As Prof Krugman and leftists would have you believe, there is no room to grow the economy; this is the new normal.
Half right, under their policies, this IS the new normal.
Or as Collins, Murkowski and the R's seem to think, let's do the same thing and expect a different result.
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I posted a version of my previous post on Scott Grannis' website as a question and he responded:
"My very rough calculation says the amount of "lost output" is somewhere in the neighborhood of $13-15 trillion. That's roughly the current size of the national debt, which is $14.8 trillion. (https://www.treasurydirect.gov/NP/debt/current)
Note: the $20.5 trillion [federal debt] figure is misleading, since it includes $5.7 trillion the government owes itself. $14.8 trillion is the total amount owed to the public, and that is the relevant measure of the national debt."
http://scottgrannis.blogspot.com/2017/10/key-charts-updated.html
That is still more than $100,000 of lost national income for every person who holds a private sector full time job in this country.
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Theresa May’s Warning for the Republican Party
If the main political task is divvying up an unchanging pie, the left will always win.
The Tories forgot how to talk about economic growth, its causes and benefits.
Wsj.com opinion
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A New York IPO for Saudi Aramco Forces Americans to Collude with a Cartel
by Gal Luft
CNBC
November 17, 2017
http://www.meforum.org/7031/nyse-ipo-for-saudi-aramco-collusion-with-cartel
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second post
http://thehill.com/policy/transportation/361616-for-trump-gop-tax-bill-could-have-big-downside
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By
The Editorial Board
Jan. 5, 2018 7:09 p.m. ET
201 COMMENTS
Friday’s Labor Department report on the December jobs market was mostly ho-hum, with the economy creating 148,000 net new jobs and the unemployment rate staying flat at a low 4.1%. But one more hopeful figure leapt out at us and a few others: The unemployment rate for black Americans fell to its lowest rate ever at 6.8%.
That’s right. The jobless rate for African-Americans hasn’t been lower since 1972, the earliest date we could find in the Bureau of Labor Statistics data tables. The jobless rate for blacks has always been substantially higher than for whites, and it tends to fall faster later in the economic cycle as growth picks up steam. The black jobless rate fell into the 7%-8% range in 1999-2000, before the dot-com bubble burst, and briefly in 2007 before the financial panic. But it climbed back to as high as 16.8% in 2010 before a long, slow decline as the economy recovered.
The rate has fallen especially fast the last couple of years, and in December fell another 0.4 percentage points. That big a fall might be a statistical anomaly that bounces back up in future months, but the downward trend is as clear as the political and economic message: Get the economy growing faster, and everyone will benefit.
Appeared in the January 6, 2018, print edition.
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"If the election were held today..." (Democrats lead by double digits...)
- I checked, and the election won't be held today!
"This hugely unpopular tax bill..."
- The old 'polls make news' trick. Tell us how bad it is and poll on that question. See point one - the election won't be held today. Unless Republicans are completely caught with foot in mouth and head up the other end, the election will be held after economic results start coming in on the effects of the Republican policies. People vote their pocketbooks, we are told, and anyone with eyes and ears should know that one party brought you malaise and division and one party is bringing you growth and prosperity for anyone who cares to participate in it.
Growth and prosperity is good for blacks (see previous post), and for gays, for Hispanics, for women, single moms, for suburbanites, for workers, for wages and for neighborhoods. At some point the proof in results has to have some effect on voters and voting groups, even those inclined to vote against us. Taking growth from 2% to 4% is not a 2% improvement; it is a 100% increase in growth!
Here is Peter Ferrara predicting a booming economy. Nice of him to express my view for me. ) If the staticists are right and growth under these policies is the same as growth under anti-growth policies, I will (figuratively) eat crow.
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http://observer.com/2018/01/tax-reform-booming-economy-will-smash-democrats-in-2018-elections/
2018 is a midterm election year, and typically the party that holds the White House gets thrashed in the midterms. But just the opposite will happen this year for several reasons.
The first reason is that tax reform is going to work spectacularly with Trump’s deregulation to finally restore booming economic growth of four percent a year or more. Just like President John F. Kennedy’s tax cuts in the 1960s and President Ronald Reagan’s tax cuts in the 1980s, the critical tax rate cuts in the 2017 tax reform legislation will result in skyrocketing investment, flooding job creation, surging wages, swelling labor supply, rocking business expansion, rolling business creation and booming growth.
That will result in part because tax reform cuts taxes on the middle class and working people directly, which the Democrat-controlled media has strived mightily to keep secret. Even bigger for middle class and working people is the cut in the federal corporate rate from 35 to 21 percent.
Experience and the latest economic studies confirm that roughly 80 percent of corporate income taxes are actually paid by workers in the form of lost wages and jobs. http://www.goodmaninstitute.org/wp-content/uploads/2017/08/BA-120.pdf That’s because in today’s global economy, capital is freer than families are to move across international borders.
America’s formerly outdated corporate tax rates averaged nearly 40 percent, counting state corporate taxes—roughly double Asia’s 20.1 percent and Europe’s 18.9 percent. Other countries worldwide have been cutting their corporate tax rates for decades, creating this crippling tax disadvantage. Those countries responded to global competition and the latest economic studies showing that workers in modern economies actually bear most of the corporate and business tax burden.
America is falling behind the times, crippled by socialist media and misleading Democratic rhetoric.
This is why tax reform focused on cutting corporate and business taxes, bravely doing the right thing for working people and the middle class. Too many voters do not understand this because the Democrat-controlled media won’t tell them.
Besides the tax cuts, the boom will also result from the expensing of capital investment (immediate deduction, replacing depreciation over many years), territoriality in taxation of overseas investment, and repatriation (bringing back to America trillions held overseas by American companies). Investment will flow into America, just as it did under Kennedy and Reagan.
This economic boom will boost Republican candidates by November, all the more because not one Democrat voted for the tax reform. The boom will also rapidly nullify any increase in the deficit, with further help from spending restraint, further boosting Republicans.
Democrats will surely be hurt when voters realize that they and their media lied to them about tax reform. Blue collar workers and the middle class will see their taxes decline, and the fabrications about over 80 percent of the tax benefits going to the top 1 percent will be disrobed.
The realization that Democrats and their media were wrong about tax reform and Trump’s deregulation will spread across America. Voters will see that they don’t understand economics and consequently aren’t able to represent working people and the middle class, who want jobs and higher wages. For over 200 years, Americans have voted for economic growth, not the Democratic Party’s model of higher taxes and redistribution trying to buy votes.
The sharp contrast between Trump’s boom and Obama’s stagnation over the last decade will help Republicans and hurt Democrats. The economy never really recovered from the steep 2008-09 recession, even though the American historical record has been the steeper the recession the stronger the recovery. The Democratic record of less than two percent average real growth is the worst recovery from a recession since the Great Depression.
Trump’s energy deregulation will further boost the boom, as America takes its place as the world’s number one producer of oil, natural gas and coal. Democratic extremism over debunked and falsified global warming hysterics will further sink Democrats, while Republicans will ride even faster growth.
Democratic failure will affect even blue states, which will suffer continued stagnation as Democrats resist cutting radically high taxes. State tax revolts will further benefit brave and articulate Republicans, even in these places.
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http://m.startribune.com/trump-launches-his-long-promised-war-on-imports/470987913/?section=opinion
I take back whatever good I said about him or his policies. "Protectionism", we are back to why I opposed him in the first place.
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This article is from 2013. The measure of the benefits would be even larger now.
http://www.bushcenter.org/publications/articles/2013/03/what-4-growth-would-mean-for-america.html
Growth Fact #1 of 10: If the economy grew at 4% per year, we would create 10 million additional jobs during the next decade, returning the economy to full employment through growth alone, with no rise in government spending.
Growth Fact #2 of 10: If the economy grew at 4% per year, the government would collect more than $3 trillion in additional revenue over the coming decade,[ii] matching the revenue that the Administration proposes to generate by raising income tax rates on the highest earners and allowing some business tax cuts to expire.
Growth Fact #3 of 10: If the economy grew at 4% per year, we would see a 30% reduction in the 10-year budget deficit — subtracting almost $3.2 trillion from the projected $10.9 trillion deficit[iii] and making our budget look less like Greece’s and more like Germany’s.
Growth Fact #4 of 10: If the economy grew at 4% per year, we would generate $260 billion in additional exports over the decade,[iv] creating over 1.5 million jobs.[v]
Growth Fact #5 of 10: If the economy grew at 4% per year, an additional 3,000,000 people would rise out of poverty over the next decade, reducing the burden on government safety nets by $200 billion.[vi]
Growth Fact #6 of 10: If the economy grew at 4% per year, there would be a 1.2 percentage point increase in the aggregate savings rate, making $300 billion available[vii] for investment in plant, equipment, and new technology, and laying the groundwork for future economic growth. This is roughly twice what the U.S. spends each year maintaining and expanding its roads.[viii]
Growth Fact #7 of 10: If the economy grew at 4% per year, there would be about 20,000 fewer robberies and 250,000 fewer instances of larceny during the next decade,[ix] resulting in safer communities and a better environment in which business can flourish.
Growth Fact #8 of 10: If the economy grew at 4% per year, charitable contributions would increase by $200 billion over the next decade, improving health care, the environment, and the arts, with $28 billion more in donations for education alone.
Growth Fact #9 of 10: If the economy grew at 4% per year, developing countries would see stronger growth as well, with increased tourism, imports, and foreign aid from America adding almost an entire percentage point to their annual average growth rates.[xi]
Growth Fact #10 of 10: If the economy grew at 4% per year, U.S. households would be able to buy an extra $8 trillion worth of goods and services in the next decade.[xii] This amounts to over $70,000 per household, or the equivalent of a year’s income for the median household.
See the footnotes documenting all this at the link!
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Who saw THIS coming?
https://www.reuters.com/article/us-usa-economy/u-s-job-growth-cools-as-labor-market-nears-full-employment-wages-up-idUSKBN1EU0EF
https://www.cnbc.com/2017/09/13/what-it-means-that-wages-are-up-and-americans-earn-more-than-ever.html
https://www.economist.com/news/united-states/21731332-weaker-dollar-and-energy-boom-are-pushing-up-pay-blue-collar-wages-are-surging-can-it
Mr Trump’s rise seems to have coincided with a turnaround in fortunes for the middle class. In 2015 median household income, adjusted for inflation, rose by 5.2%; in 2016 it was up by another 3.2%. During those two years, poorer households gained more, on average, than richer ones. The latest development—one that will be of particular interest to Mr Trump—is that blue-collar wages have begun to rocket. In the year to the third quarter, wage and salary growth for the likes of factory workers, builders and drivers easily outstripped that for professionals and managers. In some cases, blue-collar pay growth now exceeds 4% (see chart).
... the biggest beneficiary of a sustained wage boom for workers may be a suited man sitting in the Oval Office.
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Logging some facts for our records. This is the starting point to judge Trump's policies, tax cuts, etc.
1.48% Average growth rate for two full terms, 8 years
1.5% Final year growth
Trump's first year: 2.3%, up 0.8 (more than 50% improvement)
If growth after tax cuts is 3% or more, that is a 100% improvement over Obama's final and average growth rates.
If Obama had 3% growth, we wouldn't have a Trump Presidency - or $20 trillion in debt.
"average annual growth rate of just 1.48% during Obama's business cycle the weakest of any expansion since at least 1949, he has just become the only President to have not had even one year of 3% GDP growth."
https://www.zerohedge.com/news/2017-01-27/barack-obama-now-only-president-history-never-have-year-3-gdp-growth
(http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/01/23/20170127_GDP_Obama2_0.jpg)
The numbers years by year, https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/
2009 -2.8% (recession ended June 2009)
2010 2.5
2011 1.6
2012 2.2
2013 1.7
2014 2.6
2015 2.9
2016 1.5
If you remove the recession year, the average growth rate is only 2.1% over the last seven years, and that is after flooding the economy with "stimulus", "shovel ready jobs", "cash for cars", Solar Solyndra, $3.6 TRILLION in quantitative expansion, NEAR ZERO INTEREST RATES, and adding nearly $10 TRILLION to the national debt.
https://www.brookings.edu/blog/ben-bernanke/2017/01/26/shrinking-the-feds-balance-sheet/
Without the distortion of artificial stimuli, real economic growth under Obama was negative.
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An article by people who actually understand the economy, Investors Business Daily:
https://www.investors.com/politics/editorials/wages-obama-economys-weakest-link-now-surging-under-trump/
A new survey out by the National Association of Business Economics finds that companies are starting to boost pay for their workers in order to attract and keep productive, skilled employees in a tighter labor market.
https://nabe.com/nabe/NABE/Surveys/Business_Conditions_Surveys/January_2018_Business_Conditions_Survey_Summary.aspx
Why are companies doing it? Not to be nice. No, the real reason is that, in what's expected to be a fast-growing economy, they want to retain their best workers.
But they're not only raising pay, they're also investing in their workers.
Both are great news for American workers, who will emerge from this expansion with higher pay, more skills and, hopefully, better job security than following the last two recessions.
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As Boomers Go Gray, Even 2% Growth Will Be Hard to Sustain
Hoping for 3% or more is folly. The fundamentals—people and productivity—seem unlikely to provide it.
By Jason Furman
Feb. 14, 2018 6:58 p.m. ET
53 COMMENTS
Most of what was good in the American economy last year was unsustainable, and most of what was sustainable was not good. A decade after the financial crisis, there is still no sign the economy can generate the consistent growth of 3% a year many continue to hope for. The growth rate for 2017 was just 2.5%, and even that seems unlikely to last. Is this the new normal?
Not exactly. Instead it’s a return to the old normal, a reversion that was widely expected after baby boomers began to retire. While policy makers should do what they can to increase the economy’s long-run growth rate, they also need to avoid making decisions based on unrealistic expectations.
As Boomers Go Gray, Even 2% Growth Will Be Hard to Sustain
Photo: iStock/Getty Images
Economic growth comes from two sources. First is a cyclical rebound in demand as the economy gets closer to full capacity (or even proceeds beyond it). Second is an increase in the economy’s underlying potential output—also called the supply side—driven by growth in either the workforce or productivity.
The trouble is that more than half of last year’s economic growth came from the cyclical factors, which have little left to contribute given that we’re at or near full employment. What this means is that absent much bigger productivity improvements, it will be a challenge for the U.S. to achieve sustained economic growth of even 2%.
The stock market’s recent travails provide a vivid illustration of unsustainable growth. Last year the market went up 19%, which boosted consumer spending through a wealth effect. This surge in consumption probably accounted for about 0.75 percentage point of the growth in gross domestic product. For four straight years, consumer spending has risen faster than GDP, causing the personal-savings rate to drop to 2.4%—nearly the lowest on record.
Now a market correction has happened, and even with their recent rebound stocks are still 6% off their highs, as of close on Wednesday. Whatever may happen in the market, it’s sobering to listen to the people arguing that stocks are correctly valued. The theory that today’s high price/earnings ratios are justified—meaning it simply has become more expensive to buy a given return—implies lower earnings going forward. That, too, would undercut the consumption-fueled growth the U.S. has been enjoying, leaving households vulnerable after the past several years in which they took on increased debt and reduced their personal savings.
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Another unsustainable boost to the economy has been the falling dollar. Last year the dollar’s effective exchange rate—a measure that compares the dollar against a basket of currencies weighted by trade volume—fell 7%. Although the U.S. pursued a de facto strong-dollar policy through higher interest rates and larger budget deficits, this was more than offset by unexpectedly strong global growth. The weak dollar helped roughly stabilize the trade deficit, meaning net exports only subtracted 0.1 percentage point from GDP growth in 2017, compared with an average of 0.5 point a year from 2013-16.
The momentum in GDP growth could continue into 2018, especially given that tax cuts and the recent spending bill will provide about $250 billion in new demand-side fiscal stimulus this year. The unemployment rate, now 4.1%, could fall into the 3% range, a welcome development. Lagging benefits from the weakening of the dollar may arrive. Beyond 2018, however, these factors will begin to lose their force, especially since the Federal Reserve is sure to raise interest rates to offset any additional fiscal stimulus. More important, while predictions about markets are uncertain, it is a mathematical fact that the unemployment rate cannot indefinitely fall by 0.6 percentage point a year, as it did in 2017.
Growth will therefore have to come from the supply side. But a bigger workforce is an unlikely candidate. Assuming that current immigration rates continue and that employment rates by age are stable, the workforce will expand by 0.5 percentage point a year over the next decade. It is theoretically possible that people out of the workforce today could return. Betting on this, though, would be imprudent, given the steady decline in labor-force participation for men since the 1950s and for women since around 2000.
That leaves productivity growth, which is even less certain. The statistics usually reported exclude farms and the government, meaning they cover only a faster-growing subset of businesses. Instead let’s look at economywide productivity, which is what’s relevant for predicting overall economic growth. In 2017 economywide productivity increased 0.9%, slightly below its 1% annual pace over the past decade. If that average rate continues, overall economic growth in coming years will average only 1.5%. But maybe the productivity figure for 2007-17 is too pessimistic, reflecting a combination of fallout from the global financial crisis and bad luck. In that case we might look to the average economywide productivity growth of the past 50 years, 1.6%. That would push the baseline for overall growth to 2.1%.
Actual growth over the next five or 10 years could vary from this range of 1.5% to 2.1%, but there is little basis for a forecast that diverges significantly. As an analogy, imagine you’re asked to predict the high temperature in Boston on Christmas Day. You might say 43 degrees (the average over the past decade) or 40 degrees (the average over the past 50 years). It could well end up being 20 degrees or 60 degrees, but those would be foolish predictions.
Slower growth is less the fault of President Trump than of his generation. Mr. Trump, born in 1946, was in the first wave of boomers. Forty percent of the people born that year have left the workforce. This was predictable, which is why in 2005 the Social Security Trustees projected that the economy would grow 1.8% a year from 2020-30. If anything, additional data since then would lead us to revise that forecast down. Americans simply have forgotten this basic reality. To the degree that policy and business decisions are based on false hopes for much higher growth, the result can only be dashed expectations.
Mr. Furman, a professor of practice at the Harvard Kennedy School, was chairman of the White House Council of Economic Advisers, 2013-17.
Appeared in the February 15, 2018, print edition.
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"As Boomers Go Gray, Even 2% Growth Will Be Hard to Sustain"
And that is why we need to change SS.
We live longer can work longer
and less physical work.
Yet the politics are imposing
one party will bash the other if anyone dares to do this.
Only Trump's fearless big mouth can help us now.
But he is silent . Maybe after 2018?..........
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I saw that headline and glad Crafty posted the details. A thought leader of the Left, this sums up the heart of the left economics view. It reminds me of Nobel prize winner Krugman saying the market will never recover from the Presidential election, right before it ran up like never before. My belief is that the headline, "Hoping for [economic growth of] 3% or more is Folly", will come back to haunt them. We will see!
They brought us the lowest male workforce participation rate in history and much of the country barely knows anyone who works full time in the private sector, yet Furman believes the economy is already running at full employment. (As ccp points out, a slight SS age change alone would affect that.) Furman is admitting that if we had given the Obama-Left and their policies more time, the results would have gotten worse and worse. While the old management goes back to teaching, believing there is no more upside potential, the US economy has re-opened under new management.
He makes valid points about headwinds and how hard it is to increase growth - without real changes in policies. When his side governed, they implemented anti-growth policies, raised tax rates, increased government dependency by intention, reduced workforce participation, and put regulation ahead of enterprise. They at least proved the other side of it, how hard it was to fully kill off growth and economic activity after 8-10 years of trying.
It is hard to increase growth, for one reason, because people are kind of set in their ways. They are not always dynamic, not willing to move to where jobs are, not eager to re-join the workforce after they've left. They don't need to. But keep this math in mind: going from 2% growth to 3% growth is a 50% increase and going from 2% growth to 4% growth is a 100% increase. That still far understates the potential it as it ignores what Einstein allegedly called the most powerful force in the universe, the power of compound [growth].
Furman writes: "absent much bigger productivity improvements..", and after listing all the headwinds limiting growth, writes: "That leaves productivity growth..." What he ignores is that increasing capital from improving capital investment incentives IS what increases productivity, and capital is coming back in the trillions.
An administration that chased away capital and considered ways to punish it for leaving can't imagine that we can do things better than what we do right now.
"Everything that can be invented has been invented."
Charles Duell, Commissioner of US patent office, 1899
That is not my view or a supply side, dynamic economy view. Government doesn't invent things for the most part or find better ways to do things. Just the other way around, oversized government serves as a hindrance to all of that.
Lowering tax rates for production (companies, rich people) doesn't sound like a formula for economic growth to the Left, for one reason, because economic growth wasn't their goal in the first place. But adding trillions of dollars into invested capital is exactly what enables productivity growth.
Without capital you can dig a hole with your hands and get nowhere. With a little capital you can hire workers and equip them with shovels. Efficient capitalism is what makes possible a Caterpillar or Cummins turbo diesel machine that you won't see in third world countries. Egyptians built the pyramids without horses - or a wheel - but now every advancement has already been made? That is as false now as it was in 1899, or 2000 BC. Even if it was true, what we already have invented is most certainly not being fully utilized! Bringing back trillions of dollars of capital employs trillions of dollars of labor, along with productivity and wage increases. Wages can't and don't increase without capital investment and Furman's fingerprints are all over the effort to kill off and chase away capital. New initiatives are bringing old capital back and new capital in. With that comes wage growth, employment growth and a rising economic tide.
On the dependency side of the Obama stagnation, many people in lower incomes face effective marginal tax rates over 100%. For example, I made a few hundred dollars more one year and lost thousands of dollars on my daughter's college tuition support. People can make a little more and lose healthcare support, SSI, housing, food stamps, etc. right after government drove up costs to where they can't afford them without help. It is hard to reverse the damage they did to our economy and economic system, but is it possible to recognize we headed into a hole of our own digging and change the trajectory ever so slightly. That effort is underway. Can we get some who ride the system to start pulling? Yes. Can we get those who are pulling the wagon to pull with a little better traction and little more horsepower, and keep improving that until the plowhorse is powered with jet fuel and the weight of $20 trillion in debt feels like a load of pillows? I don't know but we had better do everything we can, soon!
It takes a small increment of improvement on the margin to double the growth rate that Furman and the Democrats achieved, and that is the difference between a Venezuela-like collapse and prosperity.
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Further on Furman, Krugman, Obama, et al:
Doesn't it seem that it's always the people who tie us up in asphyxiating over-taxation and strangling over-regulation that keep telling us our prosperity is limited by resources and demographics.
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Not just the printing of money but by their interference in markets, take a look:
(http://www.mauldineconomics.com/images/uploads/newsletters/180303-02.jpg)
Notice in the chart below that it is the high-inflation items that are most influenced by government – things like health care and government-subsidized education. (If you think education is not influenced by the government, you are not paying attention.) The items that are not growing in price? Those are more purely market-driven.
http://www.mauldineconomics.com/frontlinethoughts/inflation-and-honest-data
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http://www.aei.org/publication/the-first-lesson-that-larry-kudlow-should-deliver-to-trump-trade-deficits-are-made-in-the-usa/?mkt_tok=eyJpIjoiTldSa1ptWXdZVFkzTjJWaSIsInQiOiJmRlpBVTVaRG8rZlBUT3FEUW51Z25pa1Z6RDZoNDRiNFFaeENCVU9QUittMXNMZzBUMmtVS0RoNUNyYTduOTQ5UVk5WHVsYmI4K1dKXC9oNGdNcGlxSlA0c0VpcE0wNHVpMnV0RDM0XC9SMWc0enk4Vm91V3Q4V1k3K1Q5TTlJRndiIn0%3D
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Second particularly interesting post of the day:
Even thought the graphs won't print here, IMHO it is well worth the time:
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A new U.S. tax reform will boost the country's economy for years to come, especially as U.S. corporations are likely to repatriate many of the funds they hold overseas.
As a result of demographic change in China, Beijing will shift from an export-led economic model to one more predicated on domestic consumption.
The United States will be well-positioned to make the most of new opportunities in emerging trends, such artificial intelligence.
In December 2017, U.S. President Donald Trump signed into law his country's first major tax reform since the Reagan era. Sometimes new legislation is seismic in its effects, directly altering the playing field on which the citizens of the country operate. At other times, a new law can serve as a useful signpost for greater changes that are already underway. In this case, the tax reform represents a bit of both: It will have important ramifications itself, and it will inform the wider trends that occur over decades. From a geopolitical perspective, the move will have three main effects: It will lead to a repatriation of sizable amounts of cash by U.S. corporations, provide a stimulus for the domestic economy and increase the country's debt. The combined dynamics of these effects will play a key role in shaping the outlook for the U.S. economy – and its place in the world – for many years to come.
The Big Picture
As Stratfor said in the 2018 Annual Forecast, battles to dominate the global economy will be a key feature of the year. U.S. tax reform will tie the country's tech companies into the national economy and stimulate potential growth, just as technological developments present new opportunities in international markets. Global demand for the U.S. dollar will also mitigate risks related to increasing debt. And with the United States well-placed to take advantage of emerging artificial intelligence, the future looks bright for the country — particularly when compared to its peers.
See 2018 Annual Forecast
Melting the Cashbergs
Under the previous system, U.S. corporations had incentives to hold their spare cash offshore in tax havens. A high corporate tax rate, coupled with an absence of time limits as to when companies had to repatriate their foreign earnings for taxation purposes, resulted in firms accruing ever larger piles of cash in friendly offshore jurisdictions that were willing to offer favorable terms in exchange for hosting the American giants. The realities of the modern economy greatly impacted this trend. Technology firms whose value largely lies in intangible assets such as intellectual property (iPhone software, for example) found they could choose where they booked their profits because the product was not physical, making its location harder to pinpoint. Accordingly, they often opted to park their profits in tax-efficient locations. The upshot has been the emergence of giant "cashbergs" in offshore havens. One study found that 63 percent of U.S. offshore earnings were reported in six jurisdictions – the Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland. The main beneficiaries of this trend have been companies that rely heavily on intellectual property, such as technology firms like Apple, with an offshore stash of an estimated $216 billion, and Microsoft at $109 billion.
A chart showing U.S. corporate wealth stored offshore.
The new system implemented after the December 2017 ruling was designed to close these loopholes. U.S. corporations will have to pay tax on foreign earnings as well as domestic revenues, and there are specific new provisions designed to eliminate "profit-shifting" or the retention of profits in more favorable jurisdictions. U.S. companies will thus no longer have the incentive to park their earnings offshore — meaning the cashbergs will likely soon start melting. To sweeten the deal, such firms are only required to pay a reduced tax on these repatriated earnings of between 8 and 15.5 percent (Apple will need to pay a one-off $38 billion bill), making the whole exercise relatively painless for all concerned — except for, naturally, the countries that have been playing host to these vast sums of money. Ultimately, the United States will soon have a tax system in which the financial activity of U.S. companies pads U.S. government revenues, which has not always been the case in the recent past.
U.S. companies will no longer have the incentive to park their earnings offshore, which means that the cashbergs will soon begin melting.
The second effect of the tax reform is the positive boost it will give to the domestic U.S. economy. Officials have cut the corporate tax rate from 35 to 21 percent in a move that has dual benefits. First, the United States will become much more competitive in relation to the outside world, potentially attracting more foreign companies to the country as a base for their operations due to the size of the domestic market of consumers. Second, U.S. companies themselves will immediately witness an improvement in their profit and loss columns as their tax bills decrease. U.S. firms could choose to use this windfall in various ways. The prevailing trend in recent years has been that companies have used any extra funds they have accrued (profits have generally been pretty healthy as of late) to buy back their own shares, driving up stock prices and keeping their shareholders happy. But companies could also put this money to work in other, more productive ways. If U.S. corporations were to see new potential in the U.S. economy or in new technologies, they could invest the money in modernizing their activities or in research and development, which could feed back into potential growth. Indeed, this may already be happening: In January, Apple pledged to invest an extra $30 billion in its U.S. operations as a result of the tax reform.
The End of the Party
So far so good, but as always, every positive comes with a corresponding negative – in this case, it's in the shape of the debt. By definition, a fiscal stimulus means a short-term reduction in government revenues (or increase in spending), which necessarily results in increased government borrowing. Moreover, the government's subsequent decision to raise spending on entitlements and defense in the latest budget has increased this effect. The overall result is that the previous targets to balance the budget have now been blown out of the water. Goldman Sachs forecasts a deficit of 5.2 percent of gross domestic product in 2019 and even more thereafter. This will play into the U.S. debt balance: the Congressional Budget Office estimates that the debt-to-GDP ratio is currently around 77 percent, and Goldman Sachs predicts that the figure will rise to 85 percent by 2021 based on the current trajectory. This is high by historical U.S. standards, but compared to some other advanced economies, it remains fairly modest.
The United States is not like other countries. Quite simply, the world's largest economy has an ace up its sleeve — and that just happens to be the U.S. dollar.
The danger with increasing debt is always that lenders begin to doubt debtors' ability to pay it back. This dwindling of faith makes debt holders' bonds less attractive, prompting investors to demand higher interest rates to cover the risk. This can lead to a vicious cycle as an already-indebted country witnesses its debt repayments increase just when it can least afford them. Many countries have succumbed to the resulting death spiral in the past, ultimately requiring a bailout from an external source such as the International Monetary Fund (which, incidentally, could not afford to bail out an economy the size of the United States). One could argue that this effect is already evident in the U.S. bond market. In recent months, interest rates on U.S. bonds have been rising for the first time in a decade (they jumped from 2 percent in September 2017 to nearly 3 percent in February) in tandem with the new debt outlook implied by the tax reform and increased spending. The danger is thus that the negative effects of the increased debt could swamp the positive effects of the tax cut and fatally undermine the health of the U.S. economy.
But the United States is not like other countries; the world's largest economy has an ace up its sleeve in the form of the U.S. dollar. The dollar is the pre-eminent currency in the global economy; it is the unit of choice for central banks looking for a safe asset in which to keep their savings, and 64 percent of global currency reserves are denominated in the greenback. The most common way for anyone, be it a central bank or private investor, to invest in the dollar is to buy U.S. government debt. This results in a unique global demand for U.S. debt that will continue for as long as demand for the dollar holds.
The Dollar Goes the Distance
The critical question, accordingly, is this: How long will demand for the dollar hold? The answer might be found in the experience of the previous issuer of the world's reserve currency, Great Britain. The pound was the global reserve currency through the 19th century and the first half of the 20th – a fact which reflected the global dominance of the British Empire during the period. The pound's pre-eminence survived various economic stresses for its issuer: Following the Napoleonic Wars, for example, the United Kingdom's debt levels rose to 260 percent of GDP in 1819, and it remained above 100 percent all the way through until 1860, but investors remained committed to the sterling for nearly a century more.
But most striking is the lag with which the pound's demise followed Britain's. One could argue that the United Kingdom started to wane by 1890, when the United States began to take over as the world's largest economy. Its descent was certainly underway by 1918, as London owed Washington massive debts accrued during World War I, and it was pretty much complete by 1947, after another world war had battered the United Kingdom and the country lost its key overseas possessions, particularly India. After World War II, the United Kingdom was something of a basket case, suffering currency crises in 1947, 1949, 1951 and 1955. Against this backdrop, it is notable that the pound-to-dollar transition did not occur until 1956, when the Suez Crisis hammered home the British demise. But even then, the process was gradual, as the inertia possessed by a global reserve currency and the energy required to dissuade the world from retaining it are substantial — certainly much larger than the potential debt levels implied by the new U.S. tax reform and spending plans.
A graph showing the transition from the pound to the dollar as the world's reserve currency.
There are other differences between the structure of the historical British Empire and today's United States that suggest a similar "demise" is not even possible. The British Empire was constructed by a small nation that managed, step by step, to physically take control of a large proportion of the world's economic output via military power, economic influence and political guile. Like other empires before it (the Spanish and Roman to name a few), British strength rested on its ability to maintain control of external regions. As it began to lose them, so went its overall importance in the outside world.
The United States is a different story. The dominant U.S. position in the world since 1945 has been the result of a combination of timing and its inherent attributes. Timing because in World War II, the world's other major economies had largely obliterated one another, leaving the United States producing 50 percent of global output, thus empowering it to establish a global system that locked in some of its gains. But the inherent attributes are particularly key. Unlike the United Kingdom, which is but a small handful of islands — even if it is fertile in places and possesses high connectivity potential — the United States sits astride a continent. It boasts a wealth of natural resources including farmland, metals and hydrocarbons, as well as wind, solar and hydropower sources that could become more important with time, while it also has inherent connectivity in the form of an extensive internal river system. The country's position on both the Atlantic and Pacific Oceans provides both maximum maritime access to the world's key power centers and isolation from any threat that might challenge it militarily. It can maintain a giant population, but it is not currently overcrowded like other countries. While a loss of influence and control over far-flung possessions scuppered the United Kingdom's predominance, the United States' strength comes from within itself. So unlike the United Kingdom, the United States as a basic unit has a strong claim to being the world's largest economy just by fulfilling its inherent potential. All of this suggests that the United States is a much more resilient animal than was the British Empire, and will be harder to dislodge from its pole position anytime soon.
China Sailing into Headwinds
Today's rising interest rates are probably not the start of the U.S. death spiral, but they are important for understanding the future that the United States will face. Several influential market commentators declared in recent months that the long-term interest rate cycle is reversing. The cycle is the trend in which bond yields follow a rising path for several decades and then fall for a similar length of time before repeating (see the following chart). The peak of the last cycle was in 1981, when yields hit 15.8 percent; since then, they have been drifting gradually downward, hitting 1.5 percent in 2016. Beyond the simplistic thinking that "it's about time" for the trend to reverse, there is a deeper explanation as to why capital has been so cheap for 30 years and why that might not continue in the future – and that relates to the influence on the global economy of the United States' great rival, China.
A chart showing the multi-decade U.S. interest rate cycle
The arc of China's economic growth since it began its reform process in 1978 is unmatched in history, but the Middle Kingdom has also exerted a seismic impact on the global economy, specifically on capital and labor. The effect on the global labor market was fairly simple. China's opening (and also that of Eastern Europe, which occurred 10 years later) to the global economy resulted in a massive influx of new labor entering the market. As the Bank of International Settlements presented in a 2017 paper, the working population in China and Eastern Europe in 1990 was 820 million – some 135 million more than in industrialized countries. Accordingly, the opening in China and Eastern Europe more than doubled the workforce available for global production. The result has been a global glut of cheap labor over three decades that has driven down wages in the West and largely undermined companies' need to invest in new technology because of the relative cheapness of manpower.
The effect on capital was more subtle. In the Chinese growth model, leaders focused on taking advantage of the country's labor supply to manufacture vast quantities of products very cheaply before shipping them to the developed world. But instead of directing the capital it received in payment toward investment or consumption, China lent it back to the West – largely by purchasing U.S. bonds and holding them as savings. This resulted in the easy availability of capital in the West, as it effectively provided the latter with the opportunity to spend the same money twice; this explains the falling interest rate of the last three decades.
China is now entering a phase in which its demographic advantage is fading away, to be gradually replaced by a surfeit of dependents over workers.
The reason why there could soon be a reversal of this megatrend stems from a major change at its source: Chinese demographics. China's growth since the 1980s has coincided with a remarkable demographic dividend; a burst of young people entered the workforce over time, adding willing hands to the workforce and, importantly, outnumbering the dependent old and young people who must receive financial support and who provide minimal productivity. But the young must grow old, and China is now entering a phase in which its demographic advantage is fading away, to be gradually replaced by a surfeit of dependents over workers. This development changes the whole shape of the Chinese economy, which has been able to monetize its labor advantage in the world for the last three decades. Instead, that advantage will disappear more by the day, with China already shifting from its export-led model to one with a much larger role for consumption. China will need to start spending its own money instead of lending it back to the West. As a result, capital will become scarcer in general, which should drive interest rates upward. As a result, rising yields on U.S. debt will become less of an issue on a relative basis — especially when the United States' largest emerging competitor appears to be facing sizable headwinds of its own.
Discovering the New World
The final question to consider is the new growth opportunities in the coming world – and whether the United States is well-placed to make the most of them. The tax reform might foster investment and growth, but if the potential growth is in an area that does not play to U.S. strengths, it could still go to waste. The answer again lies in China's effects on the rest of the planet, specifically the labor market, and in the latest developments in technology.
China's contributions to the global workforce have already begun to shrink, and indeed rising wages in the country have also eroded the efficiency gains provided by its workers. Aging is not solely a Chinese phenomenon, as the trend is striking the developed world just as strongly. In the coming period, the global workforce will encounter increasing scarcity, which could drive wages upward. A Western corporation that has relied on cheap labor will now have far greater incentive to invest more in technology in order to increase its productivity – as is already occurring, particularly in the automotive sector. The hunt thus turns to technologies that will increase productivity – which is exactly where recent rapid developments in artificial intelligence enter the picture.
It is hard to overstate how much of an impact artificial intelligence is about to make across all industry sectors. The explosion of data availability and storage in the last five years has provided a perfect ecosystem for artificial intelligence, though its foundational technologies have been available since the 1960s. There is an urgency to the trend: one recent survey of 203 executives found that 75 percent of respondents expected to "actively integrate" AI into their firms within the next three years, yet only 3 percent said they had already done so. The potential of AI lies across the board, with consulting firm McKinsey predicting that financial services, retail, healthcare and advanced manufacturing will lead the way. Another consultancy firm, Accenture, expects artificial intelligence to be transformative enough that it will serve as a new factor of production, equivalent to labor or capital. In fact, the firm's model projected that a United States that successfully integrates AI will attain 35 percent more growth by 2035 than one which does not.
A chart showing how AI early adopters earn high profits than their competitors.
Of all the countries in the world, the United States is the best-placed to take advantage of this emerging trend. For one, it has enjoyed a head start. In Silicon Valley, the United States boasts the world's leading center for technological innovation, and AI is no exception – in 2016 the country garnered 66 percent of all external investment (including venture capital, private equity and mergers and acquisitions) in AI, with China lagging behind at 17 percent. The United States has also been producing the most influential research in the area; although China has been publishing a much larger volume of papers, they receive fewer citations than their U.S. and British equivalents. A 2017 McKinsey report identified 39 promising AI startups in the United States but just three in China.
One of the key factors surrounding AI will center on helping the human workforce adapt to the changes – either in retraining people to work with robots or retraining people to find a new job after their displacement by robots.
The United States has one of the world's most flexible labor markets, meaning it should, in theory, be relatively well-prepared for this type of disruption. There are caveats though, in that the last great economic shift toward deindustrialization left sizable parts of society behind, especially in more industrial regions. The United States will no doubt need to invest in retraining and education if it is to make the next transition go smoothly. But regardless of the challenges, positivity about the U.S. positioning for the AI wave is reflected in recent studies, with Accenture finding that the United States has the potential to double its GDP as a result of AI, making it the developed country likely to post the highest potential gains (see the chart "Economic Impact of AI").
A graph showing economic potential of artificial intelligence.
The Shape of Things to Come
The United States currently finds itself on the cusp of a new economic epoch. The story of the last 30 years has centered on the unleashing of China's giant workforce on the global economy, along with the resulting impact. In the coming era, the influence of Chinese labor will fade, and the importance of technology will rise. The leading edge of this trend is in AI, which will arrive on the global economy like a whirlwind in the next few years.
With this in mind, the 2017 tax reform should be a great enabler. In terms of global AI, the United States boasts market leaders such as Apple, Amazon and Google, and by removing those companies' incentives to retain their wealth offshore, the U.S. government will tie their fates more closely to that of the national economy. The reform should release the dormant potential inherent within the United States. As economic capacity increases, so should the ambition of U.S. companies, which will be free to invest their windfalls in new technology.
But the costs of the reform are also real, specifically in the case of increased U.S. debt. The fact that this move coincides with a potential rise in interest rates could cause some problems, particularly in the short term. The U.S. economy is now approaching its longest ever stretch without suffering a recession, and it is possible that disquiet over U.S. debt could coincide with immediate considerations such as the current administration's trade policies, ultimately triggering a brief downturn. As time passes, however, the shape of the world to come will become more apparent, along with the United States' strong position in it.
Mark Fleming-Williams is a Senior Global Economics Analyst at Stratfor, following political economies, trade and financial trends around the world. He joined the company with more than a decade of experience working in London's financial sector.
Stratfor
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Government spending IS a tax. Government spending taxes the private economy the same or even more so than does a tax -tax. Spending in the government takes resources away from the private economy. That drives up the cost of the remaining scarce resources making less and fewer of everything available to the private economy. Over-regulations have the effect of a tax as well. Expanding all of these moves us in the opposite direction of "supply side economics".
George W Bush gave supply side economics a bad name by never trying it. He cut tax rates and then kept increasing spending, designing new government programs and leaving the worst of the existing ones, CRAp for example, in place to take down the whole house of cards.
Some government spending is good. Bricks holding up the school house and ships and tanks. The courthouse, fire station and so on. These resources and services take from the private sector as well, but so be it. That's not what we're talking about in the latest federal spending bull, now law. Without knowing all the details, suffice it to say, Chuck Schumer is thrilled with it.
Here's what's missing. The tax rate cuts and major regulatory reform is designed to grow the economy. With a growing economy, we need less government in certain parts, less support for people needing a hand up from the government. Government gave part of the hand up by getting partly our of the way. That should be a cost SAVINGS. To pass the opposite is to not believe in your own plan.
Why should independent and undecided voters believe that the (Republican) economic plan is going to grow the economy and improve the prosperity of the people if those running for reelection on those policies don't believe it themselves?
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President Trump today called for ending the Filibuster (which is how the Dems block Rep budgeting) and a Line Item Veto.
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I ranted recently my frustration with the lack of an agenda and a silence on the issues that seems to come out of Congress in this once or twice in a lifetime unified Republican (in name only?) government. This is my congressman, Chairman of the Joint Economic Committee, taking a shot at explaining what Republicans are trying to accomplish and how that is going. A very good start IMO at ending the silence and articulating the agenda.
https://www.investors.com/politics/commentary/americas-jobs-boom-and-the-gops-growth-agenda/
Investor's Business Daily
America's Jobs Boom And The GOP's Growth Agenda
America's robust economic potential slumbered in the eight years following the 2008-2009 recession because her greatest resource—American workers and job creators—were sidelined by a pessimism that pervaded federal tax and regulatory policy. Now, with the passage of the most significant tax reform since 1986 and a rollback of the federal regulatory burden, we have an optimistic economic policy that believes in the American worker.
Look at the U.S. economy today: the first two months of 2018 have added 550,000 new jobs, which follows on the heels of the economic resurgence that began in 2017 with the creation of 2.2 million new jobs. What could account for such change? The answer is simple: Republicans' growth-oriented policies are getting government out of the way and once again allowing Americans to do what they do best.
It is rare that economic improvements from changes to federal policy show results so quickly. Yet the results indicate Congress and the new Administration have had a deep impact thanks to the Tax Cuts and Jobs Act and ongoing efforts to eliminate senseless and wasteful, job-choking regulations.
Take business optimism, which according to the National Federation of Independent Businesses is surging for the first time in over 10 years. Consumer sentiment is at its highest level since 2004, Americans are seeing more take-home pay, and many will spend less time preparing their taxes next year.
Last Friday, the Bureau of Labor Statistics announced the 5th straight month of 4.1% unemployment, which is the lowest since the year 2000, and the number of new unemployment claims is at historic lows. In the last six months, nearly 1.2 million more prime working-age men were able to find employment despite what Obama Council of Economic Advisers Chair Jason Furman said about the declining trend in the prime-age male employment rate and the need for more assistance.
In response to tax reform, businesses are giving their employees raises, paying bonuses, repatriating offshore earnings, and investing more in the United States. The list of Americans benefiting from TCJA is long and getting longer every day.
In my home state, we are seeing results among big and small businesses alike. Hormel Foods, Inc. has increased its starting wage for new employees and has pledged to make capital investments in its business. Data Sales Co. has given $1,000 bonuses for all 80 employees. U.S. Bancorp gave $1,000 bonuses for 60,000 employees, a base wage hike to $15 per hour, and a $150 million charitable contribution. House Minority Leader Nancy Pelosi dismisses these moves as crumbs, yet these decisions to invest in America mean more opportunity here at home over a longer term.
This wouldn't have happened were it not for the new course the Trump Administration and Congress are setting. Research by my staff at the Joint Economic Committee shows that America's recovery from the 2008 recession fell far short of past recoveries, and even the Obama administration's own expectations.
Each of the eight years the President Obama was in office, the Congressional Budget Office downgraded the economy's potential output. We were told this would be the "new normal," and it may have been, had we allowed government-first policies to continue.
The Obama administration's policy gave us a prolonged recession because the challenges facing the market economy were amplified by attempts to increase federal control over it. President Obama's tax hikes discouraged domestic investment and incentivized U.S. corporations to move their headquarters overseas. By ignoring the more favorable tax treatment in other countries, our government drove investment and jobs away, and with it, Americans' ability to rebuild the economy.
Worse, as the economy struggled to grow, regulatory costs mounted thanks to the Obama regulatory surge. The supposed justification for the regulatory onslaught was that the benefits greatly exceeded the costs. Yet the Office of Information and Regulatory Affairs never calculated whether claimed benefits would raise GDP.
Meanwhile, the U.S. business startup rate dropped precipitously, and still needs more revival. As each startup creates an average of six jobs, and firms less than a year old account for nearly all net new job creation, elevating the business startup rate is of great importance.
Reversing the Obama policy approaches, as we have started to do, has already yielded encouraging results — both in job creation and in accelerating the lackluster recovery. Going forward, we must pursue sound economic policy to help increase the economy's potential for growth. This is vitally important in the face of long-term challenges like the aging of the population, keeping America's promises on Social Security and Medicare, and reducing the size of the public debt in relation to the economy.
By seizing on the momentum from the Tax Cuts and Jobs Act and pursuing a regulatory overhaul that will lift barriers to job creators, we will succeed in putting Americans — rather than the government — back in the driver's seat of the economy.
Paulsen, a Republican, is chairman of the Joint Economic Committee. He represents the Third District of Minnesota.
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If you like this kind of thing, put U of Chicago Economist Casey Mulligan on your reading list, blog: 'supply and demand, in that order': http://caseymulligan.blogspot.com/
http://caseymulligan.blogspot.com/2018/03/nytimes-packs-five-ungrounded-economic.html
Sunday, March 4, 2018
NYTimes Packs Five Ungrounded Economic Opinions in Two Sentences
Some misconceptions about tax incidence have been getting a lot of press, but Paul Krugman's column from last week is particularly efficient at perpetuating them:
"How much of a trickle-down effect depends on a bunch of technical factors: what share of corporate profits represents monopoly rents rather than returns to capital, how responsive inflows of foreign capital are to the U.S. rate of return. Enthusiasts claim that the tax cut will eventually go 100% to workers; most serious modelers think the number is more like 20 or 25 percent."
Of course I am not a "serious modeler", but let's break this down:
"Enthusiasts claim that the tax cut will eventually go 100% to workers"
Actually, the White House Council of Economic Advisers, I, and anyone else using the standard supply and demand model claims that MORE THAN 100% of the tax cut will eventually go to workers. The analysis is in pdf here and executable Mathematica notebook here.
http://models.economicreasoning.com/FurmanRatio.pdf
"what share of the capital stock is even affected by the corporate tax rate"
This extension of the supply and demand model only strengthens the conclusion, because now workers not only have to pay for the revenue received by the treasury and for the productivity lost due to less aggregate capital, but also the productivity lost due to the misallocation of capital between activities covered by the statutory corporate rate and activities not covered. The analysis is here.
http://caseymulligan.blogspot.com/2018/03/robots-leibniz-dream-is-coming-true-in.html
Perhaps the proponents of this argument are thinking that the tax does less damage when it covers less capital. Maybe, but for sure it brings in less revenue too, and Krugman is referring to damage as a percentage of revenue.
"what share of corporate profits represents monopoly rents rather than returns to capital"
Krugman and the others do not give any citation to "serious modeling" of monopoly rents (monopoly rents = free lunch is not a serious model by any definition). But it looks to me that adding monopoly rents to the model also strengthens the conclusion, because now workers not only have to pay for the revenue received by the treasury, the productivity lost due to less aggregate capital, the productivity lost due to the misallocation of capital, but also exacerbation of the productivity lost due to monopoly. The analysis is here and in the links therein.
http://caseymulligan.blogspot.com/2018/03/corporate-income-tax-incidence-with.html
"how responsive inflows of foreign capital are to the U.S. rate of return"
This is a red herring. All of the models that I have cited make the assumption most charitable to Krugman's conclusions: namely that foreign capital inflows are completely unresponsive (they are closed-economy models!). Nevertheless, they conclude that labor pays more than 100 percent of the corporate-income tax.
These counterintuitive results, and many more, are treated in the forthcoming Chicago Price Theory textbook by Sonia Jaffe, Robert Minton, Casey B. Mulligan, and Kevin M. Murphy.
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https://www.politico.com/story/2018/03/31/trump-amazon-post-office-jeff-bezos-492853
Is this true? The USPS loses $ 1.46 on each Amazon package it delivers ?
How can this be?
Trumps point about the corporate / government racket is a point one would think would be taken up by the Left BIG TIME.
No doubt part of the Big techs strategy at pushing LEFTist agenda to divert being criticized by the big mouth Soros types.
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https://www.politico.com/story/2018/03/31/trump-amazon-post-office-jeff-bezos-492853
Is this true? The USPS loses $ 1.46 on each Amazon package it delivers ?
How can this be?
Trumps point about the corporate / government racket is a point one would think would be taken up by the Left BIG TIME.
No doubt part of the Big techs strategy at pushing LEFTist agenda to divert being criticized by the big mouth Soros types.
http://www.nola.com/business/index.ssf/2011/10/money-losing_amtrak_operated_a.html
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USPS loses $ 1.46 on each Amazon package it delivers.
As G M's link indicates, losing money is what they do. I doubt they have the expertise or even curiosity to calculate what they lose per package.
I thought it was letters they lose on; package delivery should be profitable. It depends on how you apportion costs.
The City of Minneapolis was going to close a golf course because it was losing money and I wondered, what park or program don't they lose money on?
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Media and Leftists, I repeat myself, are starting to cite the latest study to come out on inequality.
https://www.theguardian.com/business/2018/apr/07/global-inequality-tipping-point-2030
Headline: Richest 1% on target to own two-thirds of all wealth by 2030
This of course is being reported and repeated everywhere as if it is true and already happening, yet no one reads the report or knows what they are measuring. They move quickly from alarming headlines to polling to see how people feel about it. When the release the report's details, it will be debunked but still cited Bernie, UK Labour and all the networks.
Normally not measured in these studies is home ownership. They omit the largest store of wealth for most families to tell you most families don't have much wealth. In world wealth, what about the land, ships, buildings, roads, bridges, airports, parks and everything else owned by the governments of the world? Not counted? Why not? To make the headline false but the message more sensational?
How about holding the group constant for measure? They never say that today's top 1% will own tomorrow's wealth, but someone will. Mobility up and down is necessarily ignored.
The people who own a lot of stocks or a phenomenal company have more equity assets than the people who don't own a lot of stocks, if that is what they are measuring. Interesting, but what is the right amount of wealth for the wealthy to own and who should decide that? No one knows but everyone feels the current disparity is bad.
What do the super-rich have without wealth also to the masses? Let's take Zuckerberg, and the owners of Google, Apple and Amazon for examples. Even if they hit 100% market share in the space they invented, what do they have if they don't have wealth out there in the masses? Their value comes only out of creating value with their users, or are we required to use their platforms? They are not taking from the masses to gain their wealth, they are providing something that enhances lives and makes people more productive, more wealthy. These same studies show total global wealth increasing as well. Well of course. FB, etc. is worthless without purchasing power of the users. And will it be FB, GGL, APPL that are dominant in 2030? Maybe so, but far more likely not.
Isn't upward and downward mobility a more relevant measure. Isn't the public policy interest to improve the plight of the lower tiers, not to limit the potential of the top tier?
To address it, the Left always proposes policies that make it worse. Where the inequality alarmists are running things is where inequality is the widest, see NY and California. Where wealth is fully banned or chased out, the poor do worse and the agents of powerful government do best, see Republic of the Congo and Venezuela.
A liberal, caring democratic government should be interested in helping those who can't help themselves and making economic opportunities including upward mobility available - to all of those who want that.
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Unfortunately almost all of economics involves badly measured data. One of my pet peeves is that we discuss questions like income inequality and incomes of the poor without accurately measuring the income of the poor. They are called poor because they lack 'money', but we determine that while ignoring nearly all of their income. Nice to see a published article take my side and spell this out. The number of Americans living in third world poverty is effectively zero.
https://www.nationalreview.com/2018/03/third-world-poverty-in-us-mythical/
Do 5 Million Americans Really Live in Third World Poverty?
By ROBERT RECTOR
& JAMIE BRYAN HALL
March 29, 2018 6:30 AM
The claim that they do is based on a failure to account for all sources of income.
Nobel Prize–winning economist Angus Deaton recently published an op-ed in the New York Times titled “The U.S. Can No Longer Hide from Its Deep Poverty Problem.” Deaton asserted that 5.3 million Americans (or 1.7 percent of the population) live on less than $4 per day and “are as destitute as the world’s poorest people. . . . [Their] suffering, through material poverty and poor health, is as bad [as] or worse than that of the people in Africa or in Asia.”
But measurements of poverty and deep poverty based on income are seriously flawed, because U.S. government income surveys:
• omit or severely undercount most of the $1.1 trillion that the government spends on means-tested welfare assistance each year;
• omit or undercount off-the-books earnings, which are prevalent in low-income communities;
• omit the incomes of cohabiting partners and parents; and
• ignore assets acquired in prior periods.
The omission and undercounting of welfare aid is particularly troubling. For example, in 2016, federal, state, and local governments spent $223 billion on cash, food, and housing benefits for low-income families with children, an amount three times that needed to eliminate all official poverty and ten times that needed to wipe out deep poverty among them. But the Census Bureau’s income surveys counted only $7.6 billion of this spending for purposes of assessing poverty or deep poverty.
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If the labor force participation rate were the same today as it was in December 2000, the unemployment rate wouldn't be 3.9%. It would be 10%!
https://www.investors.com/politics/editorials/unemployment-jobs-economy-wages/
Just mentioned on another thread, we will need a higher retirement age and there are many other people out of the workforce that don't count as unemployed.
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Government creates wealth ...
same way that a tick creates blood.
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By now, everyone knows the published unemployment rate is not the entire out of work rate.
Casey Mulligan, Labor Economist at Univ of Chicago, on his blog, Supply and Demand (in that order) http://caseymulligan.blogspot.com/
"low unemployment is not synonymous with high employment. Aside from identifying Americans as either working or being unemployed, federal government statisticians also put adults into a third category: out of the labor force (OLF).
In other words, "unemployed" is just one of two not-working categories, so that both employment and unemployment can fall at the same time if enough people are switching from unemployed to out of the labor force.
The official distinction between unemployed and OLF is whether the not-working person is actively looking for work. This distinction helps to prevent confusing a retiree or a full-time student with a laid-off head of household who is eagerly looking for a new job.
But a number of people are on the margin of looking for work and could be classified either way."
http://caseymulligan.blogspot.com/2018/05/inflation-has-little-to-do-with.html
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How Income Equality Helped Trump
Working Americans sense that taxes and transfers now leave them little better off than those who work less.
How Income Equality Helped Trump
Photo: Phil Foster
By Phil Gramm and
Robert B. Ekelund Jr.
June 24, 2018 1:47 p.m. ET
Frenzied rhetoric about income inequality was a larger theme in Hillary Clinton’s 2016 presidential campaign than in any previous American election. When the ballots were counted, however, not only did income inequality fail to move voters, but a massive shift in voting preference among lower-middle and middle-income Americans led to the election of the wealthiest president since George Washington. Now, startling new data on government spending and taxes suggests a novel explanation for this voter shift: It was a backlash against rising income equality among the bottom 60% of American household earners.
The new analysis was published in April by the Cato Institute’s John F. Early, a former assistant commissioner of the Bureau of Labor Statistics, and it provides the most comprehensive accounting to date of how taxes and government payments affect income distribution in the U.S. His study includes the roughly $1 trillion of annual government spending not currently counted in the U.S. Census Bureau’s income-distribution tables. That includes Medicaid, food stamps, the earned-income tax credit, and 85 other federal payments and services, along with similar state and local income supplements. The study also subtracts federal, state and local taxes from individuals’ measured income, an adjustment not contained in the census data.
The most surprising finding is the astonishing degree of equality among the bottom 60% of American earners, generated in part by the explosion of social-welfare spending and the economic and wage stagnation during the Obama era. Hardworking middle-income and lower-middle-income families must have recognized that their efforts left them little better off than the growing number of recipients of government transfers. The perceived injustice of this equality helped drive the political shift among blue-collar workers, many of whom supported the pro-growth candidacy of Donald Trump in 2016 despite having voted for Mr. Obama in the two previous presidential elections.
The bottom quintile earned 2.2% of all earned income in 2013, but after adjusting for taxes and transfer payments, its share of spendable income rose to 12.9%—six times its proportion of earnings. The second quintile’s share more than doubled, rising from 7% of earned income to 13.9% of spendable income. For the third quintile, middle-income Americans, the increase was much smaller, from 12.6% to 15.4%.
Not surprisingly, high earners lost a considerable share of their earnings after taxes and transfers are taken into account. The fourth quintile’s share fell from 20.5% to 18.6%, while the top quintile dropped from 57.7% of earnings to 39.3% of consumable income. In other words, the top quintile’s share of earnings was 26 times that of the bottom quintile, but after taxes and transfer payments its share of spendable income was only three times as much.
Even more startling is the near equality among the bottom three quintiles. The bottom quintile, which earned only 2.2% of all earned income, had virtually the same share of spendable income as the second quintile, lower-middle-income Americans. This equality is despite the fact that lower-middle-income workers earned more than three times the share of income and worked 21/2 times as much, measured by comparing each group’s number of full-time workers relative to its working-age population. Middle-income workers earned almost six times the share of income and worked almost four times as much compared with the bottom quintile, but they enjoyed only about 20% more spendable income.
And even these numbers understate the huge difference in work effort. Compared with the bottom quintile, the lower-middle-income quintile had almost four times as many working-age families whose members worked two or more jobs, and the middle-income quintile had more than seven times as many families with members working two or more jobs.
The politics of envy based on income inequality has always been a hard sell in the U.S. Few Americans resent Bill Gates, whose innovations made him megarich but also made the rest of us better off. Who resents Warren Buffett, who became one of the richest men in the world by raising the return on Americans’ savings and retirement accounts? George Mitchell, the Texas oilman who invented fracking, made oil and gas cheaper for the whole world—and he received only a tiny share of the wealth he created in so doing.
Americans tend to believe that people become rich because they are smart and work hard, but it is easy to see how a middle-income husband and wife who both work could resent that people who don’t work are about as well off as they are. It might be fair that Bill Gates is rich, but it seems unjust that 60% of Americans have virtually the same standard of living despite dramatic differences in the effort they exert and the income they generate.
The harder people worked without getting ahead, the more reason they had to feel disrespected and alienated in November 2016. President Obama and Hillary Clinton mocked their values. The tax and regulatory policies of the Obama era caused economic growth and middle-income wages to stagnate. But what must have added insult to these injuries was the increasingly obvious fact that the boom in government benefits and the decline of economic growth had all but eliminated the rewards that middle-income Americans traditionally received for working hard. The explosion of social spending, and the dependency it generated, no doubt benefited the Obama campaign in 2012. But that same spending helped create the wagon-puller backlash that defeated Mrs. Clinton in the next election.
Mr. Gramm is a former chairman of the Senate Banking Committee. Mr. Ekelund is a professor emeritus in economics at Auburn University. This article is adapted from a forthcoming book, “Freedom and Inequality.” Mike Solon and John Early contributed to this article.
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http://www.aei.org/publication/julias-mother-why-a-single-mom-is-better-off-with-a-29000-job-and-welfare-than-taking-a-69000-job/
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http://www.aei.org/publication/julias-mother-why-a-single-mom-is-better-off-with-a-29000-job-and-welfare-than-taking-a-69000-job/
Unbelievable! This is a very important I have been trying to make too, only here it is measured and documented. Some of the highest effective marginal tax rates are faced by inner city single mom's, the people you would think we would want to help the most. But the only way we know how to help is to give people free sh*t, and the only way we know how to control the cost of that is to cut them off if they make over a certain amount. What could possibly go wrong? How much positive work contribution in the economy are we shutting down with our disincentive system. I would argue that it is enough to close the deficit, pay off the debt and have a whole lot more people live prosperously. But somehow there is one whole side of politics including academia and media who don't want that!
Is it rocket science to think people will keep their incomes down to stay on programs?
I made $500 more by accident one year and lost thousands on FAFSA, the federal government program that causes college costs to escalate. Dumb.
SSI (disability) payments, discussed recently, is a contract with the federal government to stay poor the rest of your life - or lose the money they got you dependent on.
Medicaid has been that way for over 50 years. Make more money and lose your free health care. But now the same government made the costs of healthcare prohibitive. You could probably call it child abuse to make a little more money and lose coverage for your kids. Obamacare takes that from 'poverty level' to income at 400% of poverty level, roughly $50,000 income and you are on a federal program, lose your health plan if you make more.
I had Section 8 tenants where the father of the children had to hide his presence or the family loses the subsidy and the home.
There are no easy answers to having a generous welfare state without screwing up the incentive system for people at the income thresholds. Generous welfare systems only work where the population has a work ethic and pride greater than all these distractions. Those days are long gone, world wide. Ask Sweden about it.
Does anyone remember when it was a Democrat in the White House promising to "end welfare as we know it". It worked for a bit except the never applied it to the "layering of programs" discussed in this article.
Instead, welfare as we know it is alive and well, one of the greatest economic forces facing over 50% of our population.
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[Dan Mitchell has done great writings and studies at Cato, Heritage, WSJ, etc.]
https://fee.org/articles/the-western-world-s-most-depressing-chart/
Sunday, July 08, 2018
Economics Government Spending Redistribution
The Western World’s Most Depressing Chart
Western nations are abandoning the policies that made them prosperous.
by Daniel J. Mitchell
..
The “most depressing” chart about Denmark, which shows a majority of the population lives off the government.
A “very depressing” chart about the United States, which shows how big business profits from cronyism.
The “most depressing” chart about Japan, which shows the tax burden has nearly doubled since 1965.
Now it’s time to add to that list. There’s a website called Our World in Data, which is a great resource if you’re a policy wonk who likes numbers. But some numbers are quite depressing.
For instance, if you peruse the “Public Spending” page, you’ll find a chart showing the dramatic expansion of redistribution spending as a share of economic output.
(https://fee.org/media/29457/our_world_in_data_spending.jpg?width=600&height=423.5294117647059)
These numbers are very similar to the table I shared from Vito Tanzi back in 2013, which isn’t surprising since Professor Peter Lindert is the underlying source for both sets of data.
While the above chart is depressing to a libertarian, it’s nonetheless instructive because it confirms my argument that the Western world became rich when governments were very small and redistribution was tiny or even nonexistent.
For instance, nations in North America and Western Europe largely made the transition from agricultural poverty to middle-class prosperity during the “golden century” between the Napoleonic wars and World War I. That was a period when redistribution spending basically didn’t exist, and most nations didn’t even have income taxes (the U.S. didn’t make that mistake until 1913).
Indeed, redistribution spending in Western nations averaged only about 10 percent of economic output, about half the size of today’s supposedly miserly American welfare state.
Even as recently as 1960, welfare states were very small compared to their current size. Indeed, redistribution spending in Western nations averaged only about 10 percent of economic output, about half the size of today’s supposedly miserly American welfare state.
These points are important because some folks on the left misinterpret Wagner’s Law and actually try to argue that bigger government is good for growth.
P.S. South Korea has been a great success story for the past five decades, but that redistribution trendline is very worrisome.
P.P.S. The trendline for Greece helps to explain why that nation is bankrupt.
P.P.P.S. The chart shows that Canada is better than the United States, though that may not last since Canada’s current prime minister is seeking to undermine his nation’s competitive advantage.
P.P.P.P.S. While fiscal trends in the Western world have been unfavorable, that bad news has been offset by positive trends for trade liberalization. Whether we will see a big step backward because of President Trump remains to be seen.
Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.
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http://dogbrothers.com/phpBB2/index.php?topic=1467.msg108440#msg108440
This article is from 2013. The measure of the benefits would be even larger now.
http://www.bushcenter.org/publications/articles/2013/03/what-4-growth-would-mean-for-america.html
Growth Fact #1 of 10: If the economy grew at 4% per year, we would create 10 million additional jobs during the next decade, returning the economy to full employment through growth alone, with no rise in government spending.
Growth Fact #2 of 10: If the economy grew at 4% per year, the government would collect more than $3 trillion in additional revenue over the coming decade,[ii] matching the revenue that the Administration proposes to generate by raising income tax rates on the highest earners and allowing some business tax cuts to expire.
Growth Fact #3 of 10: If the economy grew at 4% per year, we would see a 30% reduction in the 10-year budget deficit — subtracting almost $3.2 trillion from the projected $10.9 trillion deficit[iii] and making our budget look less like Greece’s and more like Germany’s.
Growth Fact #4 of 10: If the economy grew at 4% per year, we would generate $260 billion in additional exports over the decade,[iv] creating over 1.5 million jobs.[v]
Growth Fact #5 of 10: If the economy grew at 4% per year, an additional 3,000,000 people would rise out of poverty over the next decade, reducing the burden on government safety nets by $200 billion.[vi]
Growth Fact #6 of 10: If the economy grew at 4% per year, there would be a 1.2 percentage point increase in the aggregate savings rate, making $300 billion available[vii] for investment in plant, equipment, and new technology, and laying the groundwork for future economic growth. This is roughly twice what the U.S. spends each year maintaining and expanding its roads.[viii]
Growth Fact #7 of 10: If the economy grew at 4% per year, there would be about 20,000 fewer robberies and 250,000 fewer instances of larceny during the next decade,[ix] resulting in safer communities and a better environment in which business can flourish.
Growth Fact #8 of 10: If the economy grew at 4% per year, charitable contributions would increase by $200 billion over the next decade, improving health care, the environment, and the arts, with $28 billion more in donations for education alone.
Growth Fact #9 of 10: If the economy grew at 4% per year, developing countries would see stronger growth as well, with increased tourism, imports, and foreign aid from America adding almost an entire percentage point to their annual average growth rates.[xi]
Growth Fact #10 of 10: If the economy grew at 4% per year, U.S. households would be able to buy an extra $8 trillion worth of goods and services in the next decade.[xii] This amounts to over $70,000 per household, or the equivalent of a year’s income for the median household.
See the footnotes documenting all this at the link
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One more thing on 4% growth, that is the amount we spend on National Defense. We just grew the economy by the amount of the entire military budget.
https://www.usgovernmentspending.com/defense_spending
Our allies should try it, and start defending themselves!
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https://www.therichest.com/celebnetworth/celeb/authors/paul-krugman-net-worth/
https://www.celebritynetworth.com/richest-businessmen/wall-street/larry-kudlow-net-worth/
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Doug, if I am not mistaken, your math is off a bit.
That 4% is an ANNUALIZED RATE.
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"One more thing on 4% growth, that is the amount we spend on National Defense. We just grew the economy by the amount of the entire military budget."
Thank you Crafty, I sensed that needed clarification as I posted it.
The growth in one quarter, 4% annualized, was roughly equal to the entire military budget - of one quarter.
IF we grew GDP 4% for an entire year, then we grew by roughly the size of our entire annual military budget, 4% of GDP.
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The Myth of American Inequality
Taxes and transfers in the U.S. put its income distribution in line with its large developed peers.
547 Comments
By Phil Gramm and
John F. Early
Aug. 9, 2018 6:51 p.m. ET
America is the world’s most prosperous large country, but critics often attempt to tarnish that title by claiming income is distributed less equally in the U.S. than in other developed countries. These critics point to data from the Organization for Economic Cooperation and Development, which ranks the U.S. as the least equal of the seven largest developed countries. American progressives often weaponize statistics like these to urge greater redistribution. But the OECD income-distribution comparison is biased because the U.S. underreports its income transfers in comparison to other nations. When the data are adjusted to account for all government programs that transfer income, the U.S. is shown to have an income distribution that aligns closely with its peers.
The OECD measures inequality by determining a country’s “Gini coefficient,” or the proportion of all income that would have to be redistributed to achieve perfect equality. A nation’s Gini coefficient would be 0 if every household had the same amount of disposable income, and it would approach 1 if a single household had all of the disposable income. The current OECD comparison, portrayed by the blue bars in the nearby chart, shows Gini coefficients for the world’s most-developed large countries, ranging from 0.29 in Germany to 0.39 in the U.S.
How Unequal?Gini Coefficient, adjusted disposable incomeSource: OECD, authors
USA, perOECDUnitedKingdomAustraliaJapanUSA, morecompleteCanadaFranceGermany00.10.20.30.40.5
But there are variations in how each nation reports income. The U.S. deviates significantly from the norm by excluding several large government transfers to low-income households. Inexplicably, the Census Bureau excludes Medicare and Medicaid, which redistribute more than $760 billion a year to the bottom 40% of American households. The data also exclude 93 other federal redistribution programs that annually transfer some $520 billion to low-income households. These include the Children’s Health Insurance Program, Temporary Assistance for Needy Families and the Special Supplemental Nutrition Program for Women, Infants and Children. States and localities directly fund another $310 billion in redistribution programs also excluded from the Census Bureau’s submission.
This means current OECD comparisons omit about $1.6 trillion in annual redistributions to low-income Americans—close to 80% of their total redistribution receipts. This significantly skews the U.S. Gini coefficient. The correct Gini should be 0.32—not 0.39. That puts the U.S. income distribution in the middle of the seven largest developed nations—the red bar on the chart.
Gini scores for other countries in the OECD ranking also might shift with better data: The OECD doesn’t publish transfers by income level for other countries. But the change in income distribution for other countries would likely be less drastic. The poorest fifth of U.S. households receive 84.2% of their disposable income from taxpayer-funded transfers, and the second quintile gets 57.8%. U.S. transfer payments constitute 28.5% of Americans’ disposable income—almost double the 15% reported by the Census Bureau. That’s a bigger share than in all large developed countries other than France, which redistributes 33.1% of its disposable income.
The Myth of American Inequality
Photo: iStock/Getty Images
The U.S. also has the most progressive income taxes of its peer group. The top 10% of U.S. households earn about 33.5% of all income, but they pay 45.1% of income taxes, including Social Security and Medicare taxes. Their share of all income-related taxes is 1.35 times as large as their share of income. In Germany, the top 10% pay 1.07 times their share of earnings. The top 10% of French pay 1.1 times their share.
If the top earners pay smaller shares of income taxes in other countries, everybody else pays more. The bottom 90% of German earners pay a share of their nation’s taxes on income 77% larger than that paid by the bottom 90% of Americans. The bottom 90% in France pay nearly double the share their American counterparts pay. Even in Sweden—the supposed progressive utopia—the top 10% of earners pay only 5.9% of gross domestic product in income-related taxes, 22% less than their American peers. The bottom 90% of Swedes pay 16.3% of GDP in taxes on income, 77% more than in the U.S.
Even these numbers understate how progressive the total tax burden is in America. The U.S. has no value-added tax and collects only 35.8% of all tax revenues from non-income-tax sources, the smallest share of any OECD country. Most developed countries have large VATs and collect a far larger share of their state revenue through regressive levies.
When all transfer payments and taxes are counted, the U.S. redistributes a larger share of its disposable income than any country other than France. Relative to the share of income they earn, the share of income taxes paid by America’s high earners is greater than the share of income taxes paid by their peers in any other OECD country. The progressive dream of an America with massive income redistribution and a highly progressive tax system has already come true. To make America even more like Europe, these dreamers will have to redefine middle-income Americans as “rich” and then double their taxes.
—Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Early served twice as assistant commissioner at the Bureau of Labor Statistics and is president of Vital Few LLC.
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This is a very important piece IMHO. I wish everyone in politics and who votes would learn these lessons.
From the article: "comparisons omit about $1.6 trillion in annual redistributions to low-income Americans—close to 80% of their total redistribution."
The whole theme of one party's politics is income inequality and income redistribution. The evidence the site to back up their view omits 80% of the redistribution that we already do. They don't count transfer payments in amounts greater than the entire GDP in most countries, not a small error, then whine disingenuously that we don't do enough and need to do more.
Ronald Reagan said, "It isn't so much that liberals are ignorant. It's just that they know so many things that aren't so."
It's not just that liberal economic logic is built on half-truths. The problem is that they rely on the wrong half.
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https://www.dailysignal.com/2018/08/10/democratic-socialism/?utm_source=TDS_Email&utm_medium=email&utm_campaign=Top5&mkt_tok=eyJpIjoiTlRKalpHRm1NekJoT1RNeCIsInQiOiJGMEdJVGFheUdiZkJhYldIYjc4cncyYW5teG1tdktRd0VGZmJSSlhVRGZCbkhzeWxTZHloZFEybk12UUdoQ1dJWWs4SHdnU0tuVXh1NnRXOE1jUGZHMUtvNHVHaDg0VGREWFwvN2NuZzZGWjRDTDJGS20ydDdLOCtHTkl3MkRLOHIifQ%3D%3D
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https://www.dailysignal.com/2018/08/10/democratic-socialism/?utm_source=TDS_Email&utm_medium=email&utm_campaign=Top5&mkt_tok=eyJpIjoiTlRKalpHRm1NekJoT1RNeCIsInQiOiJGMEdJVGFheUdiZkJhYldIYjc4cncyYW5teG1tdktRd0VGZmJSSlhVRGZCbkhzeWxTZHloZFEybk12UUdoQ1dJWWs4SHdnU0tuVXh1NnRXOE1jUGZHMUtvNHVHaDg0VGREWFwvN2NuZzZGWjRDTDJGS20ydDdLOCtHTkl3MkRLOHIifQ%3D%3D
Good to see this question getting well answered. Why can't we be like Sweden or Denmark? Sweden got wealthy in a low-tax, capitalist system and Denmark has always been a free Trading, market-oriented country. The strong safety net worked when the population had strong work ethic.
Good point made in the article, Denmark and Sweden are both listed ahead of the United States in the Heritage index list of free countries. They are not governing by the principles of Bernie and Ocasio.
From the article, "these countries are largely homogeneous".
And we aren't.
Leftists also overlook the small point that we provide the Scandinavian defense and they would not be free, secure or prosperous without our sacrifice and expense. Conversely, they cannot and will not provide for ours.
Look at Western Europe and Scandinavia and ask what the top three issues are now. Immigration, immigration, immigration. They are losing their homogeneous society and with that they must lose their generous safety net. Leftists everywhere will have to choose between generous safety net and open borders, they can't have both.
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I couldn't have said it better myself. . The so-called social democracies of Europe haven't been able to increase their growth rate in decades. What do Leftists here think caused our economy to surge, seriously. They think policies are everything in campaigns and when they govern. Then we change course and get far better results and they pretend policies don't matter or the results aren't that good. Paraphrasing Reagan, what they know is wrong. We double the growth rate of the largest economy in the history of the planet in the course of a year and a half and they think it was dumb luck, not pro-growth policies. Good grief.
Read it all and share it with your liberal economic friends.
http://thehill.com/opinion/finance/401055-obamas-economist-grasps-at-straws-trying-to-devalue-trumps-impact
August 09, 2018
Obama's economist grasps at straws trying to devalue Trump's impact
BY LIZ PEEK, OPINION CONTRIBUTOR, THE HILL
Larry Summers is grumpy that President Trump is taking credit for the booming economy. Wait until the former mastermind of President Obama’s economic strategy sees the most recent IBD/TIPP Poll. That survey, according to Investor’s Business Daily, shows Americans giving President Trump an “A” for his handling of the economy.
The poll shows their “Economic Optimism” index climbing in August to 58, the second-highest mark since January 2004.
In addition, they note other indicators that the nation’s mood has brightened:
In August, respondents rated their “Quality of Life” at 64.2; the previous all-time high was 63.1, recorded in January 2004.The average under President Obama was 53.7.
Similarly, the latest reading on “Direction of the Country” hit 50.3, up 13 percent from the prior month, and the highest recorded since 2005. That compares to a 17-year average of 41.6 and an average of 37 during President Obama’s time in office.
The “Financial Stress Index,” which has averaged 59.4 since it was created in 2007, plunged in August to 47.4, its lowest level ever. As IBD explained, “People are feeling more secure in their finances than they have at least since the early 2000s.”
Meanwhile, the president’s approval ratings came in at 41, the highest level since March 2017. Fifty percent of respondents said they disapprove of the job Trump is doing, down 4 points from July. His “Leadership Index," similarly, saw the highest score since his first months in office.
Is it coincidence that these improved ratings have tracked the acceleration in the economy and improving jobs market? Of course not. A recent Rasmussen poll showed that 50 percent of likely voters say Trump deserves plaudits for the improving economy, while only 40 percent credit President Obama.
Even in a Quinnipiac poll taken at the height of the controversy over Trump’s Helsinki summit, when the president came under extreme criticism, respondents by a 49-47 margin were positive on his handling of the economy.
Larry Summers not only disagrees that President Trump has anything to do with our improving economy, he is also reluctant to bury his gloomy “secular stagnation” theory that income and job growth will forever be severely restricted.
He is, of course, in the position of having to explain why the Obama administration, in which he served as director of the National Economic Council, failed to excite higher investment and spending and instead presided over the slowest post-recession growth in modern times.
His arguments are, befitting a distinguished economist, convoluted. He wrote in a recent Financial Times op-ed that “if unemployment were at its long-term level of 5.5%, instead of its current 3.9%, Mr. Trump’s approval rate would fall lower…” Here’s the thing, Mr. Summers: It’s not at 5.5 percent.
He also says that the “acceleration of growth…is well within the normal range of growth forecast errors.” He notes that before the election the estimate for 2018 growth was 2.1 percent. “The consensus forecast of 2.8% for 2018 [does] not represent a statistically significant fluctuation from the mean.” Huh?
It’s been a while since I took statistics, but I’m pretty sure that 2.8 percent is a whale of an increase over 2.1 percent, and without a doubt a significant difference.
The only substantial critique comes from his observation that growth outside the U.S. has outperformed expectations more than here at home and that we benefited from the global increase. That was true last year when the EU, Japan and China all did better than expected; it is not true this year, an inconvenient fact he buries by lumping the two years together.
In fact, this year, the U.S. is the world’s star economy, benefiting from the GOP tax cuts and lighter regulation. That reality bolsters Trump’s claim of credit; other countries have not injected their economies with any optimism-producing tax or rule changes, and their performance has suffered in comparison.
France, under newly-elected Macron, started out attempting to loosen its archaic work rules, for instance, and the U.K. hoped to move along the same lines after Brexit, but neither country has managed to follow through.
But the ultimate argument in favor of President Trump’s impact on the economy is that Americans greeted his election with a surge of optimism the likes of which we haven’t seen in decades.
Summers would not understand that, because like most liberals, he is probably offended by Trump’s disregard for established norms of behavior and his controversial embrace of lower taxes and lighter regulation.
That optimism is real, and powerful — something Obama never appreciated. When he told business owners, “You didn’t build that,” or when he ignored and ultimately shut down the President’s Council on Jobs and Competitiveness, a group offering suggestions on how to create jobs, he displayed a very real antipathy toward private enterprise and actual job creators.
In 2010, the Washington Post reported that “the chairman of the Business Roundtable, an association of top corporate executives that has been President Obama’s closest ally in the business community, accused the president and Democratic lawmakers Tuesday of creating an 'increasingly hostile environment for investment and job creation.'”
They quoted Ivan G. Seidenberg, then CEO of Verizon Communications, blasting Democrats for pursuing higher taxes and costly regulations that “threaten to dampen economic growth and "harm our ability...to grow private-sector jobs in the U.S."
Seidenberg told the Economic Club, "By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses."
Obama and Larry Summers never understood why their economy was stuck in the mud and what was needed to turn it around. They still don’t. President Trump, as a businessman, gets it. The results speak for themselves.
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Aug. 15, 2018
By Jacob L. Shapiro
The Currency Crisis of 2018?
GPF
It’s not too early to consider whether what’s happening in Turkey is simply a Turkish matter.
What do the Turkish lira, the Iranian rial, the Russian ruble, the Indian rupee, the Argentine peso, the Chilean peso, the Chinese yuan and the South African rand all have in common? They’ve all declined steadily this year, and some have depreciated dramatically in the past two weeks alone. But this isn’t the whole story. The whole story is that each of these countries is sitting on a ticking time bomb of U.S. dollar-denominated debt.
This story has been long in the making. In the 1990s, many countries began to accumulate large amounts of debt denominated in U.S. dollars. It was an effective way to kick-start economic activity, and so long as their own currencies remained relatively strong against the dollar, it was fairly risk free. From 1990 to 2000, dollar-denominated debt tripled from $642 billion to $2.17 trillion.
The problem may now be coming to a head. Dollar-denominated debt has ballooned. In its latest quarterly report, the Bank of International Settlements found that U.S. denominated debt to non-bank borrowers reached $11.5 trillion in March 2018 – the highest recorded total in the 55 years the bank has been tracking it. Meanwhile, the dollar has strengthened amid a tepid global recovery from the 2008 financial crisis. As the currencies of indebted countries weaken against the dollar, it is becoming harder for some countries to pay their debts. This could be a bubble waiting to pop, especially if vulnerable countries don’t have the monetary policy options to protect themselves.
Turkey Isn't Alone
Such was the case for Turkey, which is particularly susceptible to the vagaries of currency depreciation. The value of the lira had been declining for some time, but it dropped dramatically late last week. At nearly $200 billion, almost 50 percent of Turkey’s gross external debt is denominated in dollars. (Turkey’s General Directorate of Public Finance, which, unlike BIS, accounts for financial borrowers, puts that figure at nearly 60 percent.) The situation became progressively more dire through a combination of political uncertainty, unorthodox monetary policy and, most important, U.S. interest rate hikes. Turkey’s dollar-denominated debt is now almost twice as much as its total foreign reserves.
But Turkey isn’t alone. A number of emerging market currencies that were already down on the year nosedived as the news of the lira’s demise began to circulate. The starkest decline was the Argentine peso, whose value against the dollar dropped 9.5 percent in just a week, and the South African rand, which fell roughly 8 percent. Other currencies have been affected too – the Chilean peso, for example, has fallen 3.4 percent in the past week, while the Indian rupee hit a record low on the dollar during trading on Aug. 14.
What these countries have in common is that they are all on a 13-country list released by the Bank of International Settlements. Together, they constitute 62 percent of all dollar-denominated debt held by emerging market economies. Turkey was one of the most vulnerable on the list, but there are four other countries facing similar challenges: Argentina, Mexico, Chile and Indonesia. Argentina’s peso is already in free fall. The government announced on Tuesday that it would sell $500 million worth of reserves and raise interest rates to stop the peso’s fall.
Then there is Mexico, which, at $271 billion, holds more dollar-denominated debt than any other country on the list except China. This far exceeds Mexico’s official reserves. As with Turkey, dollar-denominated debt is a disproportionately large share of Mexico’s gross external debt, at roughly 60 percent. (For perspective, Mexico’s gross external debt to GDP is 39 percent, so the dollar’s influence over Mexico is particularly strong.) So far, the Mexican peso has held steady; it is slightly up on the year, and down just 0.3 percent in the past week. But if the Mexican peso begins to weaken on the back of tougher-than-expected NAFTA negotiations, political instability surrounding the new president or any other contingency, Mexico could be as bad off as Turkey is now.
The story is similar for Indonesia and Chile. Of the two, Indonesia is in slightly better shape. Its gross external debt is 35 percent of GDP, and 47 percent of that is denominated in dollars. But Indonesia doesn’t have a lot of reserves, and its currency has been showing signs of weakness, down almost 10 percent against the dollar this year. Chile’s percentage of dollar-denominated debt as a proportion to GDP is the highest of all BIS reporting countries – a whopping 36 percent. Chile’s gross external debt-to-GDP ratio is 66 percent. Most concerning, however, is that Chilean reserves totaled just $37 billion in June 2018, equal to about a third of its total dollar-denominated debt of $100 billion.
(click to enlarge)
Different Problems
Though these countries are the most vulnerable to a stronger dollar, six others – Brazil, India, South Korea, Malaysia, Russia and South Africa – face different but related problems. South Africa, for example, isn’t particularly indebted. The government insists it won’t intervene to stop the rand’s decline, but that’s only because it doesn’t have nearly enough reserves to cover what debt it has. (Its $50.6 billion in reserves could pay off just 28 percent of gross external debt.)
The five other countries are in a better position when it comes to reserves. Though they hold larger amounts of dollar-denominated debt, they have plenty of reserves. The issue for these countries is larger external debt. A strong U.S. dollar won’t cripple these economies, but it could put enough pressure on them to compel monetary intervention.
Particularly well insulated from the budding currency crisis are China and Saudi Arabia. China’s currency has been under pressure in recent weeks, but so far China has chosen not to let the yuan slide too far. China holds $548 billion in dollar-denominated debt, but that makes up just 4 percent of China’s GDP, and China’s gross external debt to GDP is 14 percent – the lowest of the countries on this list. China also has a war chest of $3.2 trillion in foreign reserves that it can deploy.
Saudi Arabia has the benefit of ample foreign reserves too – and it will certainly have to use them. The Saudi rial is pegged to the dollar. This offers stability but comes at a price: Saudi Arabia has to buy and sell reserves to maintain the peg. Though Saudi Arabia has more than enough money to play around with, it has less than it once did. Indeed, it’s been burning through its reserves in recent years – $233 billion since 2014 – to fund its adventurism abroad and its government deficit. Riyadh has no shortage of problems it needs to solve. But the currency crisis likely isn’t one of them.
This is hardly an exhaustive list. The economies surveyed by BIS make up just 37 percent of total dollar-denominated debt held worldwide, meaning there is another $7.2 trillion in such debt in the global system to account for. What started in Turkey may well spread to other countries excluded from the BIS report. Again, Turkey was uniquely susceptible to this sort of thing. The country has low savings rates and high inflation rates and all but refused to make the politically unpopular decision to raise interest rates before it was too late. We will investigate whether the other countries identified in the BIS report have similar structural problems that could aggravate their exposure to a stronger U.S. dollar.
As for Turkey, most of the polices that created its economic problems are still in place, even though investors were somewhat encouraged by the central bank’s promise to pump as much liquidity into the system as necessary. Turkey’s economy will get worse before it gets better. The more important question now is whether that will spread to other vulnerable countries. The most worrying at this point are Argentina, Mexico, Indonesia and Chile. It’s too early to call a full-blown global financial crisis, but it’s not too early to begin to consider whether what’s happening in Turkey is simply a Turkish matter.
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Our government-centric public debate is built on a false premise.
https://www.researchgate.net/publication/320044225_Can_Government_Stabilize_the_Economy#share
Claims that free-market capitalism is inherently unstable (relative socialist or fascist centralized control) led to a vast expansion of government and central banking under the promise that economic experts could put an end to booms and busts. The record says otherwise.
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Looking for a Scott Grannis piece on how the eight years of Obama underperformed , , ,
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Looking for a Scott Grannis piece on how the eight years of Obama underperformed , , ,
This comes from a post called key charts updated.
(https://3.bp.blogspot.com/-Hv9LpCOb9wE/WfOvTTgLXTI/AAAAAAAAXN4/ktJaGh-hlYA77KiLGwE6Ol0BMuM5akUdwCLcBGAs/s1600/Real%2BGDP%2Bvs%2B3%2525%2Btrend.jpg)
I will keep looking.
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Kevin Hassett, chairman of the Council of economic advisers, refutes the idea that the current upward trends are merely a continuation of the trends before Trump was elected. Take a look at these important charts. Short video, well worth your while.
https://youtu.be/LL-XB7rw4OM
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Kevin Hassett, chairman of the Council of economic advisers, refutes the idea that the current upward trends are merely a continuation of the trends before Trump was elected. Take a look at these important charts. Short video, well worth your while.
https://youtu.be/LL-XB7rw4OM
Someone better save this video before the Goolag sends it down the memory hole.
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https://www.atlasnetwork.org/news/article/the-story-of-sweden-is-about-markets-not-socialism
The story of Sweden is about markets, not socialism.
[Norberg's film]...takes viewers on a journey through Sweden’s economic past and present; learning how freedom of the press, a free market, innovation, and reduced taxation helped repair the nation one step at a time.
“Interestingly, many social democrats in the U.S. use Sweden as a kind of cover for their own statist policies,” said Norberg, who also served as executive editor for the program. “I don't think the American Left knows that Sweden is the country of pension reform, school vouchers, free trade, low corporate taxes and no taxes on property, gifts and inheritance. Sweden affords its big welfare state because it is more free-market and free trade than other countries. So if they want to redistribute wealth they also have to deregulate the economy drastically to create that wealth.”
...
“Sweden is not an exception to general economic laws,” said Norberg. “It's not the place where we showed that prosperity and big government go hand in hand. Sweden got rich when taxes and public spending was lower than in other places, including the U.S. Only then, in the 1970s did we start to tax and spend heavily. And that is when we began to lag behind. Only after reforms since the 1990s did we get back on track. So, one message is: don't get cocky, don't think you can do anything and break economic laws just because you're on top of the world for the moment."
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Hispanic incomes up, unemployment down. Hispanics as a group are more entrepreneurial than other so-called demographic groups.
https://thehill.com/opinion/finance/407079-hispanics-flourishing-in-trump-economy
Hispanic unemployment rate remained at a record low — below 5 percent for the fifth consecutive month. This is less than half the unemployment rate that Hispanics faced as recently as President Obama’s second term. Median weekly earnings for full-time Hispanic employees have grown by 4.3 percent, adjusted for inflation, over the past two years.
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It makes me wonder if economic growth based policies are not racist and do not favor the rich over others.
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I post this here just in case it wasn't the lead story in your local newspaper or the on the evening news.
World Bank study and plenty of other studies conclude smaller government is both more efficient and more effective:
(Read it all and all of the links.) ))
https://danieljmitchell.wordpress.com/2018/10/06/more-evidence-that-small-government-works-better/amp/?_27th_twitter_impression=true
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3249289
The World Bank conclusion is backed up by plenty of other studies including those by the European Central Bank:
https://danieljmitchell.wordpress.com/2014/11/10/research-shows-that-small-government-is-efficient-government/
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp242.pdf
https://danieljmitchell.wordpress.com/2014/11/27/singapore-a-remarkable-free-market-success-story/
The IMF’s new working paper on “Fiscal Decentralization and the Efficiency of Public Service Delivery” shows that it’s not only good to have small government, but that it’s also good to have decentralized government. Here are the main findings.
This paper analyzes the impacts of fiscal decentralization on the efficiency of public service delivery. …The paper’s findings suggest that fiscal decentralization can serve as a policy tool to improve performance…http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2594142
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Please read it all. Successfully addressing this one problem would solve so many others.
https://fee.org/articles/poverty-in-the-us-was-plummeting-until-lyndon-johnson-declared-war-on-it/
Poverty in the U.S. Was Plummeting—Until Lyndon Johnson Declared War On It
Yet again, government intervention hurts those it is intended to help.
Tuesday, October 16, 2018
Daniel J. Mitchell
Economics Economic Education Welfare State Marginal Tax Rate
One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity and quality of labor and capital. These “factors of production” are combined to generate national income.
I frequently grouse that punitive tax policies discourage capital. There’s less incentive to invest, after all, if the government imposes extra layers of tax on income that is saved and invested.
Bad tax laws also discourage labor. High marginal tax rates penalize people for being productive, and this can be especially counterproductive for entrepreneurship and innovation.
Still, we shouldn’t overlook how government discourages low-income people from being productively employed. But the problem is more on the spending side of the fiscal equation.
The Welfare State's Effect on the Poor
In Thursday's Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States:
During the 20 years before the War on Poverty was funded, the portion of the nation living in poverty had dropped to 14.7% from 32.1%. Since 1966, the first year with a significant increase in antipoverty spending, the poverty rate reported by the Census Bureau has been virtually unchanged…Transfers targeted to low-income families increased in real dollars from an average of $3,070 per person in 1965 to $34,093 in 2016…Transfers now constitute 84.2% of the disposable income of the poorest quintile of American households and 57.8% of the disposable income of lower-middle-income households. These payments also make up 27.5% of America’s total disposable income.
This massive expansion of redistribution has negatively impacted incentives to work:
The stated goal of the War on Poverty is not just to raise living standards but also to make America’s poor more self-sufficient and to bring them into the mainstream of the economy. In that effort the war has been an abject failure, increasing dependency and largely severing the bottom fifth of earners from the rewards and responsibilities of work…The expanding availability of antipoverty transfers has devastated the work effort of poor and lower-middle income families. By 1975 the lowest-earning fifth of families had 24.8% more families with a prime-work age head and no one working than did their middle-income peers. By 2015 this differential had risen to 37.1%…The War on Poverty has increased dependency and failed in its primary effort to bring poor people into the mainstream of America’s economy and communal life. Government programs replaced deprivation with idleness, stifling human flourishing. It happened just as President Franklin Roosevelt said it would: “The lessons of history,” he said in 1935, “show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”
In another WSJ column on the same topic, Peter Cove reached a similar conclusion:
America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market. According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame… insisting on work in exchange for social benefits would succeed in reducing dependency. We have the data: Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%. But no reform is permanent. Under President Obama, federal poverty programs ballooned.
Edward Glaeser produced a similar indictment in an article for City Journal:
In 1967, 95 percent of “prime-age” men between the ages of 25 and 54 worked. During the Great Recession, though, the share of jobless prime-age males rose above 20 percent. Even today, long after the recession officially ended, more than 15 percent of such men aren’t working… The rise of joblessness—especially among men—is the great American domestic crisis of the twenty-first century. It is a crisis of spirit more than of resources… Proposed solutions that focus solely on providing material benefits are a false path. Well-meaning social policies—from longer unemployment insurance to more generous disability diagnoses to higher minimum wages—have only worsened the problem; the futility of joblessness won’t be solved with a welfare check… various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work… The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work… The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil.
Encouraging Dependency
Why work, though, when the government pays you not to work?
And that unfortunate cost-benefit analysis is being driven by ever-greater levels of dependency.
Writing for Forbes, Professor Jeffrey Dorfman echoed these findings:
…our current welfare system fails to prepare people to take care of themselves, makes poor people more financially fragile, and creates incentives to remain on welfare forever… The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future… It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people… The third flaw in the government welfare system is the way that benefits phase out as a recipient’s income increases… a poor family trying to escape poverty pays an effective marginal tax rate that is considerably higher than a middle class family and higher than or roughly equal to the marginal tax rate of a family in the top one percent.
I like that he also addressed problems such as implicit marginal tax rates and the failure of job-training programs.
Professor Lee Ohanian of the Hoover Institution reinforces the point that the welfare state provides lots of money in ways that stifle personal initiative:
Inequality is not an issue that policy should address… Society, however, should care about creating economic opportunities for the lowest earners… a family of four at the poverty level has about $22,300 per year of pre-tax income. Consumption for that same family of four on average, however, is about $44,000 per year, which means that their consumption level is about twice as high as their income… We’re certainly providing many more resources to low-earning families today. But on the other hand, we have policies in place that either limit economic opportunities for low earners or distort the incentives for those earners to achieve prosperity.
I’ve been citing lots of articles, which might be tedious, so let’s take a break with a video about the welfare state from the American Enterprise Institute.
And if you like videos, here’s my favorite video about the adverse effects of the welfare state.
Even (Some) Leftists Acknowledge the Problem
By the way, it isn’t just libertarians and conservatives who recognize the problem.
Coming from a left-of-center perspective, Catherine Rampell explains in the Washington Post how welfare programs discourage work:
…today’s social safety net discourages poor people from working, or at least from earning more money… you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate—and sometimes quite abruptly. You can think about this loss of benefits as a kind of extra tax on low-income people… Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents… One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found… You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.
To understand what this means, the Illinois Policy Institute calculated how poor people in the state are trapped in dependency:
The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually… A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work “pay” again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes.
Agreeing that there’s a problem does not imply agreement about a solution.
Folks on the left think the solution to high implicit tax rates (i.e., the dependency trap) is to make benefits more widely available. In other words, don’t reduce handouts as income increases.
The other alternative is to make benefits less generous, which will simultaneously reduce implicit tax rates and encourage more work.
I’m sympathetic to the latter approach, but my view is that welfare programs should be designed and financed by state and local governments. We’re far more likely to see innovation as policymakers in different areas experiment with the best ways of preventing serious deprivation while also encouraging self-sufficiency.
I think we’ll find out that benefits should be lower, but maybe we’ll learn in certain cases that benefits should be expanded. But we won’t learn anything so long as there is a one-size-fits-all approach from Washington.
Let’s close with a political observation. A columnist for the New York Times is frustrated that many low-income voters are supporting Republicans because they see how their neighbors are being harmed by dependency:
Parts of the country that depend on the safety-net programs supported by Democrats are increasingly voting for Republicans who favor shredding that net… The people in these communities who are voting Republican in larger proportions are those who are a notch or two up the economic ladder—the sheriff’s deputy, the teacher, the highway worker, the motel clerk, the gas station owner and the coal miner. And their growing allegiance to the Republicans is, in part, a reaction against what they perceive, among those below them on the economic ladder, as a growing dependency on the safety net, the most visible manifestation of downward mobility in their declining towns… I’ve heard variations on this theme all over the country: people railing against the guy across the street who is collecting disability payments but is well enough to go fishing, the families using their food assistance to indulge in steaks.
It’s not my role to pontificate about politics, so I won’t address that part of the column. But I will say that I’ve also found that hostility to welfare is strongest among those who have first-hand knowledge of how dependency hurts people.
P.S. If you want evidence for why Washington should get out of the business of income redistribution, check out this visual depiction of the welfare state:
https://i0.wp.com/waysandmeans.house.gov/wp-content/uploads/2015/11/WM-Welfare-Chart-AR-amendment-110215-jpeg.jpg
P.P.S. The Nordic nations also provide valuable lessons, at least from the don’t-do-this perspective.
https://danieljmitchell.wordpress.com/2016/08/27/nordic-nations-show-how-welfare-and-redistribution-weaken-the-human-spirit/
P.P.P.S. Last but not least, there’s a Laffer-type relationship between welfare spending and poverty.
https://danieljmitchell.wordpress.com/2016/03/20/a-laffer-curve-relationship-between-welfare-spending-and-poverty/
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The Economy Is Doing That Cool Thing Where Wages Rise
By JORDAN WEISSMANN
OCT 31, 2018
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It seems to me the old reason to be a Democrat was a belief in union jobs, factory jobs, manufacturing jobs, tradesman jobs and having a party that advocates for the working 'man'.
Man has that flipped. Manufacturing job growth up TEN-FOLD under Trump and Michigan, Ohio, Pennsylvania all went for Trump before he did that.
Article notes a undeniable correlation between tight labor market and wage growth, ignoring the entire point of what causes employment (and income) growth.
I will spill the answer where no Slate reader can see it: Capital employs labor.
The war on capital is over (for the moment with an update next week). Excessive and punitive levels of regulations and taxes designed to hurt the rich and slow down the creation of wealth had the entirely predictable result of punishing workers instead. The rich already have wealth - by definition. And workers need employment by definition - until they leave the workforce as they did in record numbers under the previous administration.
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Doug you are right
but as long as we are up against the Dem propaganda machine it doesn't much matter.
some Repubs had finally woken up but still some that just have to hate Trump like some of these Bushecrats just have no sense that we are fighting keep from being a one party country
or even a viable sovereign state.
All of them seem to be well to do , and connected in the beltway . They seem fine selling us down the river.
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Doug you are right
but as long as we are up against the Dem propaganda machine it doesn't much matter.
some Repubs had finally woken up but still some that just have to hate Trump like some of these Bushecrats just have no sense that we are fighting keep from being a one party country
or even a viable sovereign state.
All of them seem to be well to do , and connected in the beltway . They seem fine selling us down the river.
More than doublling the growth rate of the largest economy in the history of the planet in just two years and no one mentions it! Wages finally start up. The rate of new manufacturing jobs growth up tenfold. My embattled congressman in one of those suburban districts that will determine our future, a Republican held district since the 1960 election, he is Chair of the Joint Economic Committee, sent us a mailer yesterday touting his support for gun control. "A different kind of Republican" What a waste to compete at their game instead of winning hearts and minds over to our side.
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"More than doublling the growth rate of the largest economy in the history of the planet in just two years and no one mentions it! Wages finally start up. The rate of new manufacturing jobs growth up tenfold."
We were right and it didn't matter.
Imagine if the deregulation and tax rate cuts had not grown the economy. Republicans would have been fully discredited and defeated. Now look at what happened. Trump and the Republicans doubled the growth rate of the largest economy in the world. The policies worked. The difference that it makes is enormous and reaches into all other issues, problems and challenges. Black and Hispanic and other unemployment rates dropping helps the inner city. The growth rate helps us to compete with China and to stop their unfair tariffs and technology theft. The prosperous economy helps us to deal with environmental issues and affordability of healthcare and housing and so on. But people indoctrinated in the opposition to these policies believe results have nothing to do with policies, that results are just dumb luck or they take the renewed prosperity for granted. You can't make the voter agree with you about what is important.
Or is it that no one made the case?
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Doug writes,
" rosperous economy helps us to deal with environmental issues and affordability of healthcare and housing and so on. But people indoctrinated in the opposition to these policies believe results have nothing to do with policies, that results are just dumb luck or they take the renewed prosperity for granted. "
or as in the words of the great objective newscaster dom lemon, Trump inherited a great recovering economy from Obama and it is Obama who deserves the credit , and "everyone knows this".
or another ruse, this doesn't really help the average "folks" . (I don't know who they mean by "folks exactly" - But I know these insiders ain't the "folks")
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DC burb and NYC for his two sites.
Flood the areas with his disciples so he can control things better from there.
This guys business ruthlessness is beginning to tread on me and I don't like all the red flags I am seeing the least of which is him being the Wash comPost:
https://www.nationalreview.com/corner/amazon-hq2-crystal-city-virginia/
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CATO AT LIBERTY
DECEMBER 10, 2018
The 1990 Bush “Tax Increase” Reduced Taxes
By ALAN REYNOLDS
https://www.cato.org/blog/1990-bush-tax-increase-reduced-taxes
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Free market economics vs Krugman was mentioned in energy thread in the context the the 'Green New Deal'. Adding this here:
PART ONE: WANNISKI
>Memo To: Mother Jones Backtalk
> From: Jude Wanniski
> Re: Krugman on the Spiral of Inequality >
>You ask me for my opinion on your Twentieth Anniversary issue, dated
>December 1996, specifically the article on P. 44 by Paul Krugman. Generally
>speaking, Krugman has had nothing much to say about political economy for
>the last several years other than the rich are getting richer faster than
>the poor are getting richer. He has written this story hundreds of times, in
>newspapers, magazines, and books. Unsuspecting editors continue to pay him
>for plagiarizing his own material. Because he appears in such illustrious
>publications as The New York Times Magazine and Foreign Affairs, the editors
>of Mother Jones and no doubt the Ladies Home Journal are thrilled to see his
>manuscripts flow over the transom, with yet another exciting expose about
>how the rich are getting richer faster than the poor are getting richer.
>This is a chain letter he writes to himself, his very own pyramid club, the
>most elaborate Ponzi scheme in American journalism.
> >If you would take the trouble to read the stuff you shoveled into type, you
>would find that he said absolutely nothing about economics until the second
>page of his tract, when he asserted: "What few people realize is that this
>vast gap between the affluent few and the bulk of ordinary Americans is a
>relatively new fixture on our social landscape." This is utter nonsense. A
>century ago, John D. Rockefeller had income the equivalent today of $500
>million, year after year, for a quarter century. Andrew Carnegie did almost
>as well. A handful of Americans possessed a far larger fraction of the
>national wealth than any collection of wealthy Americans possess today.
> >Krugman's childish attempts at economic analysis are able to fool Mother
>Jones editors only because you have nobody on the staff who is competent to
>assess his scribbles. Do any of you know the difference between income and
>wealth? Krugman dances from one concept to the next, and it all sounds so
>plausible, because he has made a name for himself with other editors, none
>of whom are any better fixed than you to realize that he is a charlatan.
>Here are a few simple concepts I put to you, in challenging his idea that
>the rich are getting richer faster than the poor are getting richer. I
>maintain that the central problem of the last 30 years is that the poor are
>getting richer much, much faster than the rich are getting richer.
> >1. First let us get our accounting unit squared away. To measure anything in
>the floating paper dollar will get us nowhere. We must convert all wealth
>into the measure employed by mankind for six thousand years, i.e., ounces of
>gold. On this measure, the Dow Jones Industrial Average of 6000 today is
>only 60% of the DJIA of 30 years ago, when the DJIA hit 1000. Back then,
>gold was $35 per ounce. Today it is $380-plus. This is another way of saying
>that in the last 30 years, the people who owned America have lost 40% of
>their wealth held in the form of equity. Do you understand what I am saying,
>Mother Jones? If you owned no part of corporate America 30 years ago,
>because you were poor, you lost nothing. If you owned lots of it, you lost
>your shirt in the general inflation.
> >2. This is true of the vast majority of shareholders in Main Street America.
>Not those who own a piece of the $6 trillion in the stock market -- less
>than $600 million when converted into gold at 1966 prices. I'm speaking of
>the small businessmen whose shares are not publicly traded. These poor slobs
>have been decimated by a combination of the (1) inflation and (2) federal
>tax codes. According to the best estimates any of us have, these poor slobs
>face a federal tax liability of $2 trillion on the $7 trillion of inflated
>capital gains which have accumulated in our economy, beginning in 1966 when
>President Lyndon Johnson closed our participation in the London gold pool.
>(By that, I mean he no longer promised to pay America's creditors in paper
>dollars with a fixed value in commodities, gold being the proxy.)
> >3. If you were to ask Professor Krugman to put down his coloring book for a
>moment, and put a real number on the wealth of the affluent, please do me a
>favor. Ask him if his number is net of the $2 trillion [$2,000,000,000,000]
>in federal tax liabilities these affluent people face, because Professor
>Krugman's pals refuse to index capital gains retroactively. Please do not
>dismiss this question lightly, Mother Jones. Think about it a moment or two.
>If Krugman cannot answer you to your satisfaction, promise him that his name
>will never again appear in your publication, unless he apologizes for being
>a sophomore.
> >4. Now we get to entitlements. If you own a $100,000 bond that pays 7% a
>year, you will have an annual income of $7000 for the life of the bond. If
>you are entitled to a government check to cover your Medicare bill of
>$35,000 a year, for the rest of your life, you have wealth that is the
>equivalent of $500,000. Because you are only scribes, you are not expected
>to know this stuff, Mother Jones editors. I was once in your boat, a
>reporter who never took a Ph.D. in economics from MIT or Harvard. It took me
>a long while to learn what I am conveying to you in this response to your
>letter. In this example alone, we find that the poor hold guaranteed
>entitlements on $7 trillion of unfunded tax liabilities, for their old age
>and health benefits, which can only be paid for by the rich, who are the
>nation's producers. At the same time, the rich face a 28% tax liability on
>another $7 trillion in inflated capital gains. Add up the portfolios of the
>rich and the poor, 30 years later, and you will find the poor have become
>fat and happy, the rich impoverished. This is why we are in the fix we are
>in. Everyone wants to be poor, because it has so many more advantages!
> >5. These are enormous numbers. You will not find any of them in Krugman's
>Ponzi schemes. He has either not thought about them, in which case I might
>believe he is dumb but honest. Or, he has thought about them, and is
>therefore half-smart and dishonest. I personally believe Krugman is honest,
>but dumb enough to believe in the assumptions he was taught in school to
>believe he really does know the way the world works, when he knows almost
>nothing at all.
> >6. The basic problem the liberal media have with people like Krugman is that
>they are careful to never make economic predictions, so they can never be
>brought to heel. Nobody actually pays Krugman for his economic counsel, or
>they would soon be bankrupt. Like you, they pay him for his political
>blatherings, about the rich getting richer faster than the poor are getting
>rich. In this case, I truly appreciate your insistence that I take time out
>of my life to comment on his jabberings.
> >7.There is only one time where our paths crossed in person. A few months
>back, we were on the same PBS radio program out of Boston, talking about
>taxes and the economy. I append the transcript, which I took the trouble of
>transcribing. Note that Krugman defends himself exclusively by ad hominem
>attacks on supply-side economics -- the only flavor of economics that has
>had predictive power over the last 25 years. If Krugman had to predict to
>make a living, he would starve to death. >
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Wonderful find and exemplary use of this forum!
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https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html
He did not win a Nobel prize with this level of reasoning. I will try to follow up on this, time permitting.
[We did fine with tax rates of 70-80%] "for 35 years after World War II — including the most successful period of economic growth in our history."
- Would he like us to compete again in the 1950s world in 2019? How?
"Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it."
- Put it differently. Take away a thousand dollars from a $20k family and they can't do a damn thing about it. Change the tax rate of a million dollar family and they change their investment math instantly. More funds to employ people go off-shore - like when 4600 American companies moved operation overseas prior to corporate [double] tax reform.
Capital employs labor and people like 'AOC' ,Krugman and the late Hugo Chavez pretend to care about labor as they take or chase away the capital that employs it.
Krugman: "when taxing the rich, all we should care about is how much revenue we raise."
- One data point Krugman can't find is 2018 versus all of Obama's two terms where excess regulation was eased and tax rates reformed. The growth rate of the nation doubled, employment and wages surged, food stamp need plummeted and revenues to the Treasury grew.
This isn't a difference of political opinion; it's intellectual dishonesty. Of course the young and cute little Alexandria agrees with him. His is the economics they teach in college.
Krugman: "So why not tax them at 100 percent? The answer is that this would eliminate any incentive to do whatever it is they do to earn that much money, which would hurt the economy."
- Q.E.D. (That which was to be demonstrated.)
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https://www.nytimes.com/2019/01/04/nyregion/the-15-dollar-minimum-wage-is-not-enough.html?login=smartlock&auth=login-smartlock
--------------------------------------
With $15 all but achieved, next they demand $33. Why not $100? Or a million if it is that easy to legislate prosperity.
The question is not what should wages be, but WHO SHOULD DECIDE? Employers and employees negotiating their best interests consensually in a free market - or your all-knowing, all caring government?
Minimum Wage Laws Are Barriers to Employment [and they hurt the most vulnerable people and groups worst].
https://www.mercatus.org/expert_commentary/minimum-wage-laws-are-barriers-employment
OTOH, minimum wage increases are great for the robotics industry.
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https://mises.org/power-market/socialist-scandinavian-countries-skyrocket-lassiez-faire-index
by Dan Mitchell
Which nations rely most on unfettered markets?
(https://mises-media.s3.amazonaws.com/styles/max_1160/s3/Oct-23-18-LF-Index.jpg?itok=6nYsFgND)
Above ranked by non-fiscal economic freedom.
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His net worth is more than the budgets of every state except California and NY:
https://en.wikipedia.org/wiki/List_of_U.S._state_budgets
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:-o :-o :-o
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His net worth is more than the budgets of every state except California and NY:
https://en.wikipedia.org/wiki/List_of_U.S._state_budgets
Another comparison of his wealth:
USA net worth $90 trillion
Richest man: 0.136 trillion, Richest man's wealth rounds to zero.
And he is about to lose half of it.
USA net income: $20 trillion
Amazon net income: $0.011 trillion
In this rough math, the richest company is hogging a .00055 share of the country's income.
Concentration of wealth is our greatest problem? He will collect zero future income in the Left's zero sum theory that he will eventually have all our money and no one to ship to.
Like Gates and Microsoft, Bezos got rich by making the rest of us more efficient, i.e. richer. Subtract growth projection from his customers' buying and his stock value wealth shrinks by 80%.
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over one trillion:
https://ballotpedia.org/State_debt
So Bezos and the super wealthy crew could not pay it off.
Darn! I was hoping we could form a mob string them all up and steal their money and pay it all off (AOC approves the concept)
Then again as Doug points out most of the wealth is paper wealth.
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Big sweep of things analysis
https://www.youtube.com/watch?v=BHr999RGPQw
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I'm not counting how many Clinton advisers and 'business associates' have died of other than natural causes. Google: Clinton Associates Who Died Mysteriously or see Snopes declaring those 46 (47 now?) false. Add this one to any list, former economic adviser for Clinton and Obama, Alan Krueger took his own life over the weekend.
I'm sure we will never know what was on his mind when he gave up, other than perhaps tragic, untreated depression? My condolences to family, friends colleagues.
Unlike Vincent Foster, I doubt he carried personal baggage for the Clintons (or Obamas). He did carry professional baggage however. It takes major intellectual contortions to be an economic adviser to the Left.
Like Paul Krugman, Krueger was a Professor of Economics at Princeton, a lofty professional height if you ignore all the disinformation and politicization.
He was known for his bold work pretending to refute for the Left the first law of Econ 101, supply and demand:
"Krueger compared restaurant jobs in New Jersey, which raised its minimum wage, to restaurant jobs in Pennsylvania, which did not, and found that restaurant employment in New Jersey increased, while it decreased in Pennsylvania."
https://www.nytimes.com/1993/08/22/weekinreview/conversations-david-card-alan-krueger-two-economists-catch-clinton-s-eye-bucking.html?mtrref=en.wikipedia.org&gwh=E76AB3E1AA6187EDAF9C36F9C38CC82C&gwt=pay
Raising the cost of employment does not reduce the amount of employment demanded? Against everything we know? An amazing breakthrough for the Left.
This is valid because of his high credentials? He conducted a 'scientific', 'peer reviewed' study of apples and oranges to demonstrate exactly what the Left needed to hear, and his career soared.
The reelection of President Obama and a major tax increase, the expiration of the Bush tax rate cuts, happened during Krueger's work as chief economic adviser. Add in his silent accomplishment of covering up failure with his friend Janet Yellen leaving interest rates at zero and quantitative easement in place through all of Obama's second term, against all economic wisdom unless one admits the economy was on the tip of disaster the entire eight years. The Yellen Fed policy was to let the consequences of that fall on the successor.
In 2018 he wrote an opinion in favor of Harvard's admission discrimination policy.
https://admissionscase.harvard.edu/files/adm-case/files/economists_amended_brief_dkt._527-1.pdf
One co-author: Janet Yellen. Small world.
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Jobless claims lowest in 50 years
https://www.pressherald.com/2019/04/11/jobless-claims-sink-to-50-year-low/
Small Business Job Creation Breaks 45-year Record
https://www.nfib.com/content/press-release/economy/small-business-job-creation-breaks-45-year-record/
-----------------------------------------------------------------------------------
Why? It works like this. If the economy tanks under Republicans it is Republicans fault. If the economy surges under Republicans it is a random event unrelated to policies.
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You shall not covet your neighbor's house. You shall not covet your neighbor's wife, or his male or female servant, his ox or donkey, or anything that belongs to your neighbor.
— Exodus 20:17
"You shall not covet" means that we should banish our desires for whatever does not belong to us.
-----------------------
Maybe this belongs under wisdom from the Founders.
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Mike Pence:
We want to make the poor richer.
They want to make the rich poorer.
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https://nypost.com/2019/05/03/experts-predicted-economic-armageddon-under-trump-where-are-they-now/
Experts predicted economic Armageddon under Trump — where are they now?
By Charles Gasparino May 3, 2019
The economy is strong, unemployment is low and wages are rising, according to the latest economic data released Friday, which is in stark contrast to what the vast majority of elite economic opinion predicted just a few years ago from a Trump presidency.
The latest unemployment report has joblessness at 3.6 percent. Where is the Trump Armageddon Squad now?
What’s even more egregious is that the same folks predicting the end of the world refuse to provide sane analysis of radical proposals dribbling out of the mouths of the Democrats. They report on Medicare-for-All, the Green New Deal and college debt forgiveness as if these cockamamie ideas will have no impact on the economy.
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https://www.politico.com/story/2016/10/donald-trump-wall-street-effect-markets-230164
Economists: A Trump win would tank the markets
If GOP nominee pulls off a Brexit-like surprise, Wall Street would face a Brexit-like stock plunge.
By BEN WHITE 10/21/2016 02:46 PM EDT
NEW YORK — Wall Street is set up for a major crash if Donald Trump shocks the world on Election Day and wins the White House.
New research out on Friday suggests that financial markets strongly prefer a Hillary Clinton presidency and could react with panicked selling should Trump defy the polls and deliver a shocking upset on Nov. 8.
---------
When do they print the correction?
---------
https://www.washingtonexaminer.com/opinion/trumps-economy-proves-democrats-are-presently-on-another-planet
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" Economists: A Trump win would tank the markets"
How did we know more then these economists
We here sure as heck know a Sanders win WILL tank markets.
Mayor Butt will do the same for the US economy as he did for South Bend.
How about mayor Mike? (Mike Blasee .)
I am sure he is taking any credit for NewYorkers benefiting from the Trump economy.
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anyone beside me who is not a just a little cynical
that Schumer agrees with Trump and tariffs against China?
come on when has Schumer agreed to go along with Trump for anything
(maybe to harm the economy and farmers in time for the election :wink:) .
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https://www.dailysignal.com/2019/07/11/here-are-6-ways-a-new-report-devastates-the-15-minimum-wage/?utm_source=rss&utm_medium=rss&utm_campaign=here-are-6-ways-a-new-report-devastates-the-15-minimum-wage?utm_source=TDS_Email&utm_medium=email&utm_campaign=MorningBell&mkt_tok=eyJpIjoiWkRVMk5UUTVORFJoWXpCayIsInQiOiIxMGJ6ZmZzS25iVlVcL1ZkT3FYeFdFaUFMTG5JOGpHQXZMdHVJU1I1cnFRY1BRazZ2MkpxTk9QWFJPVTJUS1FEdWVZOVA3NnRDbHRydWdubUF3c2JHdW1xWkRxYW05ZkpvdmdPa2xcL01lUWxaTlZNSlhNN2tUZzdkbExISE1pUThlIn0%3D
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Previously reported here, France and Germany would be among the poorest of the 50 states if they were among the 50 states. That study is measured in income on a PPP (purchasing power parity) basis.
------------------------------
This study is measured in consumption:
https://www.justfacts.com/news_poorest_americans_richer_than_europe.asp
"the poorest 20% of Americans consume more goods and services than the national averages for all people in most affluent countries. This includes the majority of countries in the prestigious Organization for Economic Cooperation and Development (OECD), including its European members. In other words, if the U.S. “poor” were a nation, it would be one of the world’s richest."
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https://www.youtube.com/watch?time_continue=265&v=rv5t6rC6yvg
My opponents would rather have the poor poorer as long as the gap between rich and poor is smaller.
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https://www.youtube.com/watch?time_continue=265&v=rv5t6rC6yvg
My opponents would rather have the poor poorer as long as the gap between rich and poor is smaller.
My opponents would rather have the poor poorer as long as the gap between rich and poor is smaller. it's easier to control them that way.
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to bash Paul krugman and his politics economics'
from Bloomberg magazine :
https://www.bloomberg.com/news/features/2019-09-24/a-week-at-sea-with-the-libertarians-of-the-anti-krugman-cruise
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https://www.youtube.com/watch?time_continue=265&v=rv5t6rC6yvg
My opponents would rather have the poor poorer as long as the gap between rich and poor is smaller.
My opponents would rather have the poor poorer as long as the gap between rich and poor is smaller. it's easier to control them that way.
Under Trump it is even more painful for them that the poor and their stereotyped "groups" are doing much better.
Confronted by a liberal friend aghast that I might support Trump, I hear, "He's despicable, I hate him, name one thing you like about him! " I have replied that the black and Hispanic unemployment rates are the lowest in history. Silence. [I could add, 8 million people off of food stamps, median income up 4,000 /yr., GDP growth up, wage growth up, China on defense, ISIS in retreat, Europe starting to pay their share, Mexico helping at the border, and so on.] That never changes minds but always leaves them speechless. Even if their chosen media won't tell them, facts do. Your policies don't help the poor and ours do.
Look at the question aimed at Thatcher. When everything is admittedly going well economically under Republicans, Tories in this case, they point to inequality. Inequality grows when people don't participate in the growth equally, which is always. Poor people by definition are not fully invested in production.
I ordered a book yesterday, Thomas Sowell, Wealth, Poverty and Politics. In the introduction he questions, why would people think equality is the natural state of things and that inequality is deviation from normal. Equality isn't normal or present ever - except in the very poorest of societies.
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A point made in the WSJ editorials in the last couple of days: Stock transaction costs have dropped to near zero in a free market without government intervention, regulation, prohibition or subsidy. Even for and especially for the 'little guy'. Why?
Yet the government intervenes in 'affordable' housing, healthcare, higher education etc and the costs keep going up and up and up. Why?
When do big government Leftists ever stop and notice the bad results of their policies? Does anybody ever question the validity of their arguments?
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Hint: Not just entertainment but all innovation, healthcare, energy, transportation, housing...
https://www.wsj.com/articles/a-disney-story-for-young-socialists-11570661652
A Disney Story for Young Socialists
Kill the free market? Mickey Mouse would be collateral damage.
The lab-coated scientist rewards a capuchin monkey with a piece of cucumber when she hands the scientist a rock. A second monkey gets a juicy grape for performing the same task, as the first monkey watches. The first monkey again hands the scientist a rock and again is given cucumber. But this time she flings it back, shaking her cage in rage. My students watching Frans de Waal’s TED video erupt in laughter.
Like monkeys, people have an innate sense of fairness. Young people who are attracted to socialism may imagine that capitalism hands the grape to Bernie Madoff. But Mr. Madoff cheated. A better capitalist exemplar is Walt Disney. He took risks, sacrificed and innovated to produce what people wanted.
American animator Walt Disney with Mickey Mouse. PHOTO: GENERAL PHOTOGRAPHIC AGENCY/GETTY IMAGES
This month marks the 100th anniversary of Disney’s first job as an artist. He was hired by Gray Advertising in Kansas City, Mo., but let go when the firm lost a big client six weeks later. He learned skills that helped him create cartoons a couple of years later at his Laugh-O-Gram Films startup, where Disney slept in his studio and subsisted on canned beans. Later he said it wasn’t so bad—he loved beans.
After the studio went bankrupt, Disney tried again in California. He recruited his brother Roy; their parents took out a mortgage to invest in their sons; and an uncle lent them his garage.
Walt’s first major cartoon character was Oswald the Lucky Rabbit. At a New York meeting, his distributor took advantage of a badly written contract to seize control of the character. On the train back, Disney shortened Oswald’s ears and lengthened his tail, creating a mouse his wife named Mickey.
Disney was a “project entrepreneur,” investing the earnings from one project into the next, more ambitious one. The earnings from Mickey Mouse shorts went into other cartoons, and eventually the audacious first full-length animated movie, “Snow White and the Seven Dwarfs” (1937). Long lines formed at theaters as Depression-era audiences embraced a hopeful story in which the little guys overcome dark times by working hard and sticking together.
Project entrepreneurs don’t use their earnings to sail the biggest yacht or display the most opulent estate. Disney’s one luxury was a train that encircled his home. Each car was big enough for one passenger. He would put on his engineer’s cap when he gave visitors rides on his little train.
When Disney took his daughters to amusement parks, he imagined something better. Walt Disney Productions was overextended with movies and short on cash, so he founded a startup to build Disneyland. He had little money in his name, so he borrowed against his life-insurance policy.
When he died, his considerable wealth was mainly in Disney stock. He had worked hard, suffered and persevered. He had put the earnings from one innovative project into the next. It was fair that he got the grape. Bernie Madoff should pay the price for his crimes, but our desire to punish him shouldn’t drive us to destroy the economic system that allowed Walt Disney to bring us Mickey, Snow White and Disneyland.
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Doug,
How was the event last night?
did not see it on cable unless I missed it.
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https://fee.org/articles/poverty-in-the-us-was-plummeting-until-lyndon-johnson-declared-war-on-it/?fbclid=IwAR361lAp3kkbKpM_qUZmQIa3IQBvAvnJpbZiQf9uKD8PzBW0Q2faINbFtT4
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https://fee.org/articles/poverty-in-the-us-was-plummeting-until-lyndon-johnson-declared-war-on-it/?fbclid=IwAR361lAp3kkbKpM_qUZmQIa3IQBvAvnJpbZiQf9uKD8PzBW0Q2faINbFtT4
Excellent piece. I wish every student, voter and politician would read it.
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Like clockwork, even in high wage, high cost of living NYC.
https://nypost.com/2019/09/30/as-predicted-the-15-wage-is-killing-jobs-all-across-the-city/
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https://www.foxbusiness.com/economy/steve-moore-trump-economy-is-really-experiencing-a-middle-class-boom-this-data-doesnt-lie?fbclid=IwAR1s2rfhKSv4nFKqTJtO8VWydaVdv6DLu9FjGAYsxnVCWUevcWUqDBuOxH4
"The $5,003 rise in middle-class incomes is especially impressive given that incomes only rose by $1,200 in the seven years under Obama — after the recession ended."
ISN'T THAT WHAT LIBERALS WANTED? They should support OUR policies.
"Instead, the left has chosen to either ignore this story altogether or to denounce these findings, which come from the gold standard of economic data, the U.S. Census Bureau.
...
This same data also undermines the other riff from the Elizabeth Warren crowd, which is that the Trump economic boom is merely a continuation of the Obama trend. The income gains are four times higher under Trump in less than half the number of years in office."
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Electric car subsidies are pure political corruption: "79 percent of electric vehicle tax credits were claimed by households with an adjusted gross income of more than $100,000 a year" and "46 percent of credit eligibility flowed to one state, California."
- source: economist Alan Reynolds
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Electric car subsidies are pure political corruption: "79 percent of electric vehicle tax credits were claimed by households with an adjusted gross income of more than $100,000 a year" and "46 percent of credit eligibility flowed to one state, California."
- source: economist Alan Reynolds
Obama's "green economy" initiatives were all dem graft operations.
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About ten percent of Americans will spend at least a year in the top one percent and more than half of all Americans will spent a year in the top ten percent.
39% of Americans will spend a year in the top 5 % of the income distribution, 56 % will find themselves in the top 10%, and 73% percent will spend a year in the top 20 %.
https://medium.com/incerto/inequality-and-skin-in-the-game-d8f00bc0cb46
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Very interesting graph. Note well that for all the hoopla about Trump's stock market rally, at this point in his presidency, he's actually a bit shy of where Obama was at the same point. That's not to say that Trump has much more to crow about, but interesting nonetheless. This surprised me.
https://www.macrotrends.net/2482/sp500-performance-by-president
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The market was RECOVERING during Obama, with Trump it is reaching into new territory.
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The market was RECOVERING during Obama, with Trump it is reaching into new territory.
Well, we had 8 summers of recovery, I was told.
:roll:
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Very interesting graph. Note well that for all the hoopla about Trump's stock market rally, at this point in his presidency, he's actually a bit shy of where Obama was at the same point. That's not to say that Trump has much more to crow about, but interesting nonetheless. This surprised me.
https://www.macrotrends.net/2482/sp500-performance-by-president
I know Trump brags about the market under his term and some on the Left say the markets perform better under Democrats. I find that whole direction of analysis flawed.
Judged by today's party's I would say JFK was a Republican and that Nixon governed as a Democrat. Reagan's tax cuts were delayed two years, meaning the main policies in those years were the Carter administration's. Clinton's policies were decidedly Democrat for two years and then merged with Newt Gingrich and the Republicans for the final six years. At the end, Clinton triggered the tech crash that brought down the first two years for W. and then Bush policies was all over the map. They say he gave supply side economics a bad name without ever trying it.
The W. Bush economic policy arrow switched when he lost Congress in Nov 2006 / Jan 2007 and Obama and team (HRC, Biden, Pelosi, Reid, Schumer) were the de facto leaders into the crash. They were leading in all the Presidential polls when people and markets lost confidence. In fact it was there policies, unrepealed by Republicans that led to the crash. Put that period onto his watch and see where the numbers fall.
Then he lost the House two years into his Presidency and was unable to pass any more far Left legislation, just down to his pen and his executive orders. What he was unable to ban was fracking out in the states. He opposed the transformational economic force that happened 'on his watch'.
Trump's market surge started with his election, not his inauguration.
First year budgets come from the predecessor, what I call runners left on base, and the rest come from Congress. Scoring it all as the President's is trickery IMHO. Is the House of Representatives doing everything it can to help grow the markets and the economy right now? Obviously not.
For more instructive analysis, I like GDP better than stocks, a wider measure, and the timeline needs to match the policy arrow shift, not the name on the door.
----
The comparison of Chile and Venezuela over the last 30 years is instructive. One went from statist and poor to free and rich. The other went from free and rich to socialist and poor.
https://danieljmitchell.wordpress.com/2018/07/24/world-bank-compares-chile-and-venezuela/
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The market was RECOVERING during Obama, with Trump it is reaching into new territory.
Well, we had 8 summers of recovery, I was told.
:roll:
He took 8 years to get back what should have recovered in 6 months. Plus the market crash was caused by bad government policies in the first place.
As mentioned in my other post, why make a distinction between a Republican (in name only) or a Democrat who both govern with Democrat policies, cf. letting the federal government run wild with the mortgage finance system.
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are these interests outside his non spot partisan work as a Democrat Partly Professor of Economics, or malicious set up / trap ?
https://www.mediaite.com/print/nyts-paul-krugman-says-hacker-downloaded-child-pornography-using-his-ip-address/
Either way this is bad in general.
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are these interests outside his non spot partisan work as a Democrat Partly Professor of Economics, or malicious set up / trap ?
https://www.mediaite.com/print/nyts-paul-krugman-says-hacker-downloaded-child-pornography-using-his-ip-address/
Either way this is bad in general.
http://ace.mu.nu/archives/385207.php
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Crafty, I was wondering how your daughter's paper on rent control turned out. It is hard to find any information other than that screwing up a market makes everything worse for everyone including the people receiving the so-called benefit.
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Thank you for asking but she changed her mind and instead did something on whether Hermosa Beach should keep its police department or contract the gig out to LA County.
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Thank you for asking but she changed her mind and instead did something on whether Hermosa Beach should keep its police department or contract the gig out to LA County.
Curious what her take on that would be.
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a recent working paper by Gerald Auten and David Splinter, economists at the Treasury and Congress’s Joint Committee on Taxation, respectively, reaches a striking new conclusion. It finds that, after adjusting for taxes and transfers, the income share of America’s top 1% has barely changed since the 1960s (see chart 1).
https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality
https://www.economist.com/img/b/1280/672/85/sites/default/files/images/print-edition/20191130_FBC532_0.png
http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequality.pdf
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Very interesting!
Please post in the Economics thread on S, C, & H forum as well so that it can be more easily found for the deep theoretical implications it contains.
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tries to make the upside down case that Trump win in 2020 would be bad for the economy
https://finance.yahoo.com/news/why-trump-reelection-is-risk-for-markets-economist-220530643.html
as always the business interests making a stink about some trade barriers
all the while China is screwing us over and eating our lunch dinner and our future
Like I said the Economist is a leftist rag
from Europe
isn't even good for toilet paper as the ink comes off on your skin
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I was first exposed to The Economist back when I was at U PA in the 70s. Very impressive back then! Now? Not , , ,
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https://www.dailymail.co.uk/news/article-7940131/How-coronovirus-outbreak-killed-106-wreck-global-economy.html
There is a VERY limited window to prepare for what is coming.
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Barack Obama
@BarackObama
· Feb 17
Eleven years ago today, near the bottom of the worst recession in generations, I signed the Recovery Act, paving the way for more than a decade of economic growth and the longest streak of job creation in American history.
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WHAT?!
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Real after-tax income was virtually flat from the 2008 recession to the end of Obama's first term, despite temporary tax giveaways in 2009-12. GDP briefly grew by ~2.7% in 20014-15 (with Fed's QE) but only 1.6% in 2016. The 2009 spend-spree can't get credit for 2 out 8 years. - Alan Reynolds
(https://pbs.twimg.com/media/ERFCOxUXkAEqqUC?format=jpg&name=900x900)
President Bush passed the Economic Stimulus Act in February 2008 and the Troubled Asset Relief Act in October. Whatever Bush & Obama did was of late and largely irrelevant. What the Fed did (take rates from 5 1/4% to zero) is what mattered.
(https://pbs.twimg.com/media/ERE9JzBW4AEdAvQ?format=jpg&name=900x900)
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I might have mentioned this once before. If Barack Obama wants to talk aboutthe timing and cause and effect of economic outlook and Presidents' policies:
The end of the previous economic expansion coincided exactly to the month with Nancy Pelosi, Harry Reid, Hillary Clinton, Barack Obama, John Kerry and Joe Biden being elevated to the majority in Congress. The financial collapse coincided exactly with the market reaction to the reality that Barack Obama will be the next President, The markets knew Democrats would control all levers of government, tax rates especially on capital will be going up, healthcare will be socialized, and the business climate will be going to hell. And we had financial collapse as smart money pulled out. Business expansion ended and nbew business startups basically went to zero.
That is when "the worst recession in generations" began. Congratulations to Obama for not making policies any worse than the markets expected.
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Obama is also the only president in U.S. history to have never had a single year of 3.0 percent or greater GDP growth.
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https://fee.org/articles/economists-in-denmark-to-america-yeah-were-not-socialist/
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From Middle East and Saudi threads:
Coronavirus and now plunging oil prices might just end the mullahs.
https://www.bloomberg.com/news/articles/2020-03-07/saudi-aramco-slashes-crude-prices-kicking-off-price-war
Remember the 70s, Inelastic demand explained the quadrupling of oil prices. Just because prices go up do not in the short run mean you can adjust in the short run and drive part way to work in the morning, part way to the grocery store or quit taking the kids to little league and girl scouts. Up to some price point, you just pay the price and continue your usage.
Then there was Katrina, 2005, shutting down refineries and domestic gasoline supplies temporarily. Prices spiked until demand came down to match available supplies. People said the large increases were from greed but in fact they found the new and changing supply and demand equilibrium quite accurately.
Jump to 2020 and the economic demand question is asked in reverse. How much must the price fall for demand to pick up enough to match the excess supply?
It could be that no amount of price decrease will make up for the fact that people don't want to travel, board airplanes or drive great distances when then they are told and scared into staying home.
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(https://lidblog.com/wp-content/uploads/2020/03/33zen9-1080x675-1.jpg)
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(https://lidblog.com/wp-content/uploads/2020/03/33zen9-1080x675-1.jpg)
Not true. The elites do very well. Mao didn't miss any meals while living in the Forbidden City and enjoying his harem of very young girls as millions of Chinese starved to death.
See every other attempt at socialism for similar stories.
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"Not true. The elites do very well. Mao didn't miss any meals while living in the Forbidden City and enjoying his harem of very young girls "
And that goes for Stalin too . He many dacas (estates) all over Russia and endless girls.
Castro had many girls and lived well from what I read.
AOC likes her clothes and fine things. Michelle Obama would live like a queen in any socialist system as would her hubby who I find hard to believe did not have at least a few flings.......
Sanders family doing ok as is he.
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Good points. The power and control of the resources that was the market belonging to everyone goes straight to the ruling classes, the few, exactly the opposite of what they advertise.
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https://www.nbcnews.com/think/opinion/bernie-sanders-wrong-democratic-socialism-sweden-everywhere-else-ncna11586
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Please post that in the Socialism and Fascism thread as well :-)
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https://www.dailymail.co.uk/news/article-7940131/How-coronovirus-outbreak-killed-106-wreck-global-economy.html
There is a VERY limited window to prepare for what is coming.
https://charleshughsmith.blogspot.com/2020/03/the-covid-19-dominoes-fall-world-is.html?m=1
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https://www.dailymail.co.uk/news/article-7940131/How-coronovirus-outbreak-killed-106-wreck-global-economy.html
There is a VERY limited window to prepare for what is coming.
https://charleshughsmith.blogspot.com/2020/03/the-covid-19-dominoes-fall-world-is.html?m=1
G M is our most accurate predictor in times of doom. :wink:
Good articles, but I disagree with Charles Hugh Smith on this:
"Here's the S&P 500. Where is the bottom? There is no bottom, but nobody dares say this. Companies with negative profits have no value other than the cash on hand and the near-zero auction value of other assets. Subtract their immense debts and they have negative net worth, and therefore the market value of their stock is zero."
As we had with rising stock prices in the anemic Obama economy, your ownership in stock in major companies (that will survive) is ownership of world market share of all the various market segments. Disruptive innovation is a greater long term threat to Apple, Google, Facebook, 3M, IBM, GE, etc than economic doom.
Tim Cook (of Apple) said a little earlier in this crisis as markets started to fall, I don't see how this changes our long term outlook at all. In the aftermath, in his industry, people are going to demand smartphone communications capability more and more and better and better, if that is possible. People are going to demand health services more and better. People are going to demand private transportation more and better. People are going to value and invest in their house more. You don't need your well pump on the blink in the next crisis. People are demand more of their food supply, and other basic supplies, and so on. People are going to value saving and preparing for their future more, etc. If some of these companies go under, it will be because someone else is doing it better, not because no one is buying, in my view.
The future is more prosperous than ever before - unless we screw it all up in the voting booth with our political-economic public policies.
I am very bullish on buying back in. I just wish I knew when. What is the first sign that the worst (of the investment interruption) is behind us? It sure looks to me like we are close to bottom.
I look forward to buying future CV-19 testing kits at Dollar Tree - for $1, sometime before the next 'unforeseen' crisis hits.
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https://amgreatness.com/2020/03/15/america-in-a-new-upside-down-world/
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"I am very bullish on buying back in. I just wish I knew when. What is the first sign that the worst (of the investment interruption) is behind us? It sure looks to me like we are close to bottom."
We are a very long way from the bottom.
https://www.scg-lv.com/social-collapse/
Social Collapse
March 14, 2020 | No Comments
It might be a good time to discuss the possibility of social collapse. As a risk manager I always tell my clients “it my job to consider the worst-case scenario”. While conducting some research I ran across an article written in 2008 by Dmitry Orlov. https://www.resilience.org/stories/2008-02-26/five-stages-collapse/ Below I have quoted a specific passage however as you read it think how you can put each one into context today.
Stage 1: Financial collapse. Faith in “business as usual” is lost. The future is no longer assumed resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.
Stage 2: Commercial collapse. Faith that “the market shall provide” is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.
Stage 3: Political collapse. Faith that “the government will take care of you” is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.
Stage 4: Social collapse. Faith that “your people will take care of you” is lost. As local social institutions, be they charities, community leaders, or other groups that rush in to fill the power vacuum, run out of resources or fail through internal conflict.
Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for “kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity” (Turnbull, The Mountain People). Families disband and compete as individuals for scarce resources. The new motto becomes “May you die today so that I die tomorrow” (Solzhenitsyn, The Gulag Archipelago). There may even be some cannibalism.
As a security professional and as a father I am considering the real possibility that we may face a serious social break down. I am not a conspiracy theorist or a “prepper” however having a plan is not such a bad idea.
With all that said I have not lost complete faith in humanity however it is possible to see how each stage is being realized. So, I have started to make some basic preparations which I will share. This is by no means a perfect list and I welcome comments that will help me and others on items missed.
First you have to realize your restrictions. Meaning you cannot pack your entire house up if you need to leave. So, keeping the list simple and executable is important.
I contacted my home owners insurance carrier and bumped up my coverage. The thought was that if I had to leave and upon my return my home was burned down what is the worth of everything I would need to replace.
A check list – I started my prep with a check list of items I have on hand, items I need to buy and where those items are located. This will help if you need to leave quickly.
Exit strategy – If I have to leave where am I going? I have a pre-determined location where I can meet up with others. Simple rule Safety in numbers…
Food and Water, non-perishable food items and plenty of water. I didn’t mess around with water bottles rather I purchased the big water cooler style bottles of water. Everyone is buying cases of water and these jugs are left unpurchased
Clothing- no need to pack all your cloths grab functional clothing, not clothing for fashion. Durable shoes, jackets socks and underwear
Personal Hygiene products – enough for a long period of time how long is up to you
Medications, pain killers, vitamins
Flashlights, with spare batteries
Pocket knives preferably utility tool such as a Leatherman
Refillable water bottles
Medical kits, gauze alcohol, bandages, tourniquets, band-aids, Neosporin
Lighters and candles. Candles should be in containers so when burned the melted wax is contained. Candles are fore light not for fragrance.
Pet food, collars, leashes if you have pets.
Trash bags, zip locks bags
Fuel Cans for vehicle gas, filled
Sleeping bags, blankets and pillows
Towels, hand and bathing
Plastic cups, bowls, plates, forks, knives, spoons
Pot, Pan and minimal cooking utensils
Paper products – Paper towels, toilet paper, wet wipes
Soap – dish soap and laundry soap
Physical Cash – minimum of $100
Charging cords for your devices
Backpacks
Spare reading glasses or prescription glasses
Personal items, laptops, paperwork, jewelry etc.
Optional items if you can, camping stove with propane, generator, ice chest
Lastly guns and ammo and personal protective kit. Some may see this as controversial however if you are put in the worst-case scenario how else to you expect to protect yourself and your family?
Once you have packed what you can, stage it for easy access. This list is by no means everything you could consider however I believe it is realistic and executable by anyone.
People are smart, mobs of people are dumb. Be safe out there… Remember plan and prepare for the worst and hope for the best….
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Thanks G M. I really like the planning, prepping, worst case scenario posts. We need to think about these things - before it happens.
Worst case scenario is ONE of the scenarios we need to consider in this case. In my view, this is a practice run.
I live in a climate where winter will kill you. I can't believe people only have one way t heat their home, If electric OR gas goes off, you freeze. Yet I would think home is where you want to be in a crisis.
Anyway, this doesn't look like a crisis where the power goes off, or the food or water supply ends, and at least here we aren't headed into winter.
I doubt if the death toll surpasses the flu or other common maladies and I think the economic bounce back will be quick and relatively sudden, once the crisis phase of it becomes yesterday's news.
There is zero chance this passes abortion as the leading cause of death, so the carnage of it is all a matter of perspective.
Why did Apple re-open all their offices in China? And the hospital beds are not overloaded. Those are more independent data points than hearing the worst has passed from the government.
People who got the virus without symptoms including children still gain immunity from it. There is an end to this. We just don't know when.
After the carnage, some good comes out of this. There will be worse black swan events to follow - if we live long enough to experience them.
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Thanks G M. I really like the planning, prepping, worst case scenario posts. We need to think about these things - before it happens.
Worst case scenario is ONE of the scenarios we need to consider in this case. In my view, this is a practice run.
I hope you are right. I hope everyone learns good lessons and gets ready for the worse case scenario. We never know when the next black swan arrives.
I live in a climate where winter will kill you. I can't believe people only have one way t heat their home, If electric OR gas goes off, you freeze. Yet I would think home is where you want to be in a crisis.
It depends where home is. Also, things happen in the middle of crisis times, like fires or natural disasters. Imagine "The Big One" hits SoCal. What if the New Madrid fault shakes MinneSoCold?
Anyway, this doesn't look like a crisis where the power goes off, or the food or water supply ends, and at least here we aren't headed into winter.
I doubt if the death toll surpasses the flu or other common maladies and I think the economic bounce back will be quick and relatively sudden, once the crisis phase of it becomes yesterday's news.
I hope you are correct. I expect multiple waves, like the Spanish Flu. Also, there are 3rd, 4th, 5th order effects, like China trying to take Taiwan or Lil' Kim launches rockets or Iran fires a nuke at Israel.
There is zero chance this passes abortion as the leading cause of death, so the carnage of it is all a matter of perspective.
Why did Apple re-open all their offices in China? And the hospital beds are not overloaded. Those are more independent data points than hearing the worst has passed from the government.
Expect waves. This is only the first.
People who got the virus without symptoms including children still gain immunity from it. There is an end to this. We just don't know when.
After the carnage, some good comes out of this. There will be worse black swan events to follow - if we live long enough to experience them.
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A point I believe important / crucial to the future discussion and analysis: Because is that we start with the best economy in the world and perhaps the best economy in history, we are in a better position to survive this economically and to come back quickly once the medical side of it is under control. Who knew that the US growth rate is over 3% heading into the forced shutdowns. The average GDP growth rate under Obama was 1.5%. Growth if you can call it that in the final year of the Obama administration was 1.5%. Europe growth was 1% at best. Growth under new Democrat proposals is worse yet. Trump growth is 100% better than Obama growth, 200% better than the European model proposed for us and (again) puts us in a MUCH BETTER POSITION TO SURVIVE THIS.
https://www.frbatlanta.org/cqer/research/gdpnow.aspx
CENTER FOR QUANTITATIVE ECONOMIC RESEARCH
GDPNow
The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.
GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 beyond its impact on GDP source data and relevant economic reports that have already been released. It does not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the model.
Recent forecasts for the GDPNow model are available here. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available as a separate spreadsheet. You can also view an archive of recent commentaries from GDPNow estimates.
Latest estimate: 3.1 percent — March 18, 2020
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 3.1 percent on March 18, up from 2.9 percent on March 17. After this morning's new residential construction report from the U.S. Census Bureau, the nowcast of first-quarter real gross private domestic investment growth increased from 6.3 percent to 7.5 percent.
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https://www.marketwatch.com/amp/story/guid/C5C9915C-6D42-11EA-A687-9E83803F6B96
Far from over.
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https://www.marketwatch.com/amp/story/guid/C5C9915C-6D42-11EA-A687-9E83803F6B96
Far from over.
Yes.
"Miller thinks it is critical that investors understand how bad the downturn in China is so that they can read official reports with some healthy skepticism. "
- "Some healthy skepticism"?? How about inserting "China Lies" at the end of every sentence quoting them.
My fear from the beginning was the economic spillover effect from China. If we protected every American today (and we aren't), we still couldn't lift the travel bans.
This chapter ends when the medical crisis is solved and the regime of China is in the "ash-heap of history". *
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"What I am describing now is a plan and a hope for the long term -- the march of freedom and democracy which will leave Marxism-Leninism on the ash-heap of history as it has left other tyrannies which stifle the freedom and muzzle the self-expression of the people."
- President Ronald Reagan delivered this 1982 speech to members of the British Parliament in the Royal Gallery at the Palace of Westminster in London.
https://www.historyplace.com/speeches/reagan-parliament.htm
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https://www.powerlineblog.com/archives/2020/03/dems-gotta-dem-pelosi-style.php
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Grannis
https://scottgrannis.blogspot.com/2020/03/chart-updates.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
Wesbury
https://www.ftportfolios.com/blogs/EconBlog/2020/3/24/weathering-the-storm-when-will-the-clouds-part
https://www.ftportfolios.com/Commentary/EconomicResearch/2020/3/24/two-invisible-threats
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It’s just the flu, bro!
Wesbury is a moron.
Grannis
https://scottgrannis.blogspot.com/2020/03/chart-updates.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
Wesbury
https://www.ftportfolios.com/blogs/EconBlog/2020/3/24/weathering-the-storm-when-will-the-clouds-part
https://www.ftportfolios.com/Commentary/EconomicResearch/2020/3/24/two-invisible-threats
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https://www.project-syndicate.org/commentary/how-covid19-pandemic-affects-financial-market-narratives-by-robert-j-shiller-2020-03
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The High Cost of Low Interest Rates
Irresponsible policy from the Federal Reserve made the coronavirus crisis worse than it had to be.
By James Grant
April 1, 2020 6:38 pm ET
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It took a viral invasion to unmask the weakness of American finance. Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses.
But the firemen are also the arsonists. It was the Fed’s suppression of borrowing costs, and its predictable willingness to cut short Wall Street’s occasional selling squalls, that compromised the U.S. economy’s financial integrity.
'A Very Tough Two Weeks'
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The coronavirus pandemic would have called forth a dramatic response from the central bank in any case. Not even the most conservatively financed economy could long endure an official order to cease and desist commercial activity. But frail corporate balance sheets and overextended markets go far to explain the immensity of the interventions.
Perhaps never before has corporate America carried more low-grade debt in relation to its earning power than it does today. And rarely have equity valuations topped the ones quoted only weeks ago.
“John Bull can stand many things, but he can’t stand 2%,” said Walter Bagehot, the Victorian-era editor of the Economist, concerning the negative side effects of a rock-bottom cost of capital. Needing income, investors will take imprudent risks to get it. And if 2% invites trouble, zero percent almost demands it.
Interest rates are the critical prices that measure investment risk and set the present value of estimated future cash flows. The lower the rates, other things being equal, the higher the prices of stocks, bonds and real estate—and the greater the risk of holding those richly priced assets.
In 2010 the Federal Reserve set out to lift market prices through a rate-suppression program called quantitative easing. Chairman Ben Bernanke was forthright about his intentions. “Easier financial conditions will promote economic growth,” he wrote at the time. Lower interest rates would make housing more affordable and business investment more desirable. Higher stock prices would “boost consumer wealth and help increase confidence, which can also spur spending.” The Fed commandeered investment values into the government’s service. It seeded bull markets in the public interest.
But investment valuations don’t exist to serve a public-policy agenda. Their purpose is to allocate capital. Distort those values and you waste not only money but also time—human heartbeats.
ILLUSTRATION: DAVID GOTHARD
Like a shark, credit must keep moving. Loans fall due and must be repaid or rolled over (or, in extremis, defaulted on). When the economy stops, as the world’s has effectively done, lenders are likely to demand the cash that not every borrower can produce.
To resolve the devastating panic of 1825, the Bank of England rendered “every assistance in our power,” as a director of the bank testified, “and we were not upon some occasions over nice.”
In a still more radical vein, the Fed has set about buying (or supporting the purchase of) commercial paper, residential mortgage-backed securities, Treasurys, investment-grade corporate bonds, commercial mortgage-backed securities and asset-backed securities. It has abolished bank reserve requirements. Through a new direct-lending program, the Fed has become a kind of commercial bank.
If not for the buildup of the financial excesses of the past 10 years, fewer such monetary kitchen sinks would likely have had to be deployed. No pandemic explains the central bank’s massive infusions into the so-called repo market that followed this past September’s unscripted spike in borrowing costs. For still obscure reasons, a banking system that apparently is more than adequately capitalized was unable to meet a sudden demand for funds on behalf of the dealers who warehouse immense portfolios of government debt.
The superabundance of Treasury securities is the spoor of America’s trillion-dollar boom-time deficits. Persistently low interest rates have facilitated that borrowing, as they have the growth of private-equity investing (ordinarily with lots of leverage), the rise of profitless startups, the raft of corporate share repurchases, and the unnatural solvency of loss-making companies that have funded themselves in the Fed’s most obliging debt markets.
For savers in general, and the managers of public pension funds in particular, lawn-level interest rates confer no similar gains. On the contrary: To earn $50,000 in annual interest at a 5% government bond yield requires $1 million of capital; to earn the same income at a 1% yield demands $5 million of capital. To try to circumvent that forbidding arithmetic, income-famished investors buy stocks, junk bonds, real estate, what have you. It worked as long as the bubble inflated.
In a bubble, performance is the name of the investment game. Over the past 10 years, skeptics of our debt-financed prosperity have had to fall in line. To keep up with the Joneses, fiduciaries have sought an edge in lower-quality assets. Managers of investment-grade bond portfolios dabbled in junk bonds. Junk-bond investors slummed it in lower-rated junk or in the kind of bank debt that is senior in name but structured without the once-standard protective legal fine print.
Investing at positive nominal yields, Americans are still comparatively lucky. The holders of some $10.9 trillion of yen-, euro- and Swiss franc-denominated bonds are paying for the privilege of lending. “Investors seeking safety were prepared to face a guaranteed loss when holding the debt to maturity,” was how the Financial Times last summer tried to explain the nearly inexplicable.
Negative nominal bond yields are a 4,000-year first, according to Sidney Homer’s “A History of Interest Rates,” republished for a fourth edition with co-author Richard Sylla in 2005. Topsy-turvy investment-grade bond markets aren’t without precedent, but the extent of the upheaval today is startling. If adversity is the test of the quality of a senior security, as old-time doctrine held, segments of today’s corporate bonds and tradable bank loans have already flunked. On March 20, according to S&P Global Market Intelligence, the volume of such loans quoted below 80 cents on the dollar topped the peak distress level of 2008. While the panic subsequently abated, many supposedly senior corporate claims are proving to be fair-weather investments, not so different from common equity.
Deceived by ultralow interest rates, Americans borrow and lend in the kind of false economy that candidate Donald Trump properly condemned in 2016. Covid-19 will sooner or later beat a retreat. For the sake of honest prices and true values, it would be well if the central bankers did the same.
Mr. Grant is the editor of Grant’s Interest Rate Observer.
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The Fed’s ‘Main Street’ Mistake
The central bank’s terms favor Wall Street and take new credit risks.
By The Editorial Board
April 9, 2020 7:28 pm ET
The essential facts of the coronavirus economic disaster are these: Federal and state governments have shut down most American commerce, robbing tens of thousands of successful companies of revenue through no fault of their own. Mass layoffs are already underway, with 6.6 million new jobless claims in the week that ended April 4, and cascading bankruptcies loom.
That’s the backdrop for the Federal Reserve’s unprecedented $2.3 trillion expansion of its lending and bond-buying programs on Thursday to offer a liquidity lifeline. The Fed isn’t scrimping on the firepower, but the details released Thursday are disappointing, and perhaps even dangerous to a robust recovery. The Fed is rescuing weaker credits as well as the strong, is diving ever-deeper into risky assets, and is putting Wall Street ahead of companies across Middle America.
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Financial markets reacted well to the news, but look below the price surface and the complications appear. The big winners included non-investment grade corporate bonds and real-estate investment trusts that will now qualify for Fed programs despite their credit risk. High-yield and municipal bond prices also rose. Growth companies like Amazon, Intel and Nvidia fell or were flat, and the overall market reaction was underwhelming.
Bernie Sanders Bows Out
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This reflects the priorities of the Fed’s new lending facilities, and how far out on the risk curve it is going. Take the Term Asset-Backed Securities Loan Facility that the Fed first used in 2008 and that it revised last month. In 2008 TALF accepted only triple-A-rated securities and it made money on the loans. On Thursday the Fed said it will now accept much riskier credits including commercial mortgage securities and collateralized loan obligations.
These are loan pools packaged into securities by Wall Street, which lobbied the Fed and Treasury hard for the TALF expansion. This means the Fed will in effect buy the worst shopping malls in the country and some of the most indebted companies. The opportunities for losses will be that much greater. Treasury is backstopping losses, but the taxpayer risks here are greater than what the Fed took on in 2008-2009.
The Fed may feel all of this is essential to protect the financial system’s plumbing and reduce systemic risk until the virus crisis passes, but make no mistake that the Fed is protecting Wall Street first. The goal seems to be to lift asset prices, as the Fed did after the financial panic, and hope that the wealth effect filters down to the rest of the economy.
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Contrast that with the Fed’s new Main Street Lending Program, which these columns have pushed. This is aimed at middle-market companies from zero to 10,000 employees and up to $2.5 billion in 2019 annual revenue. These companies are the backbone of the U.S. economy, typically well managed, with modest leverage. They need liquidity because banks won’t lend to them now and the government has eliminated their customers.
Yet the details make us wonder if the Fed really wants anyone to take up the offer. The Fed will accept comments on the program until April 16, which means it probably can’t launch until May 1, and money might not start flowing for weeks after that. By then many of these companies will be going bust.
The Fed has also attached strings that will make the loans far less attractive—including bans on stock buybacks and limits on compensation and dividends that weren’t stipulated in the recent Cares Act for Fed loans made “in the ordinary course of business.” The Fed seems to have imported strings that were intended for Treasury’s direct lending to companies. This sounds like political protection for Treasury and the Fed from getting banged on by Congress.
The loans will last four years, which makes these strings even more unappealing and extends the Fed’s reach into private business far longer. The companies will also have to “make reasonable efforts” not to lay off employees, which means it will be harder to manage after the crisis.
The better solution would be no-strings loans to all-comers with good collateral and only for the short-term. But the Fed is forcing lenders that make Main Street loans to keep 5% of the risk, which means the borrowers will have to meet both bank covenants and the Fed’s terms. The risk is that many companies will resist taking the loans until they are in the ICU, and then it may be too late.
***
All of this adds up to the following contrast: A company bought by a Wall Street firm and loaded up with debt that is part of a CLO security will now face far easier terms for liquidity relief than will a similar privately owned company in the Midwest that never took on too much debt. This is employing political discretion, and picking winners and losers, far more than the Fed did in 2008.
Perhaps, with a lot of luck, the economy will restart faster than we fear and these Main Street firms will manage to survive. That was the note Fed Chairman Jerome Powell hit Thursday when he paraphrased predecessor Ben Bernanke’s comment that “you’ll be looking back on this and you will, you won’t see much, only modest effects, I think he said, on the economy from this event.” Mr. Powell and Treasury Secretary Steven Mnuchin may underestimate how much this shutdown is hollowing out the heart of the U.S. economy.
It is also putting the future of American capitalism at risk in a way even the financial panic did not. The Fed and Treasury are becoming the main lenders to American business, and in this storm there is no choice. But will they recede when the virus is defeated?
Mr. Powell said Thursday that this is a “truly rare” intervention by the Fed, which will retreat when the virus plague is over. But that is what the Fed also said during the financial panic, and it never did come close to normalizing policy. If the shutdown lasts for many more weeks, the Fed could become America’s lender of first resort.
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https://www.dailywire.com/news/nancy-pelosi-says-congress-will-not-reopen-in-april-warns-trump-not-to-restart-economy/
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https://chicagoboyz.net/archives/62405.html
Far from over.
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".Far from over."
well many people far smarter about finance and markets agree
saying this bump is a bear trap.
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Yes. Much bad economic news to come - for an extended period. I don't know who to warn or how to warn them. It isn't good for the economy for everyone to pull all money out, but the alternative is the roller coaster described earlier.
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"FDR’s policies prolonged Depression by 7 years, UCLA economists calculate"
"vice chair of UCLA’s Department of Economics"
"Journal of Political Economy"
These are NOT right wing think tanks.
Before we set up another New Deal to do this again, does everybody know the last one nearly killed us?
--------------------------------------------
https://www.ff.org/fdrs-policies-prolonged-depression-by-7-years-ucla-economists-calculate/
...
After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”
In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.
“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Cole, also a UCLA professor of economics. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”
Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt’s policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt’s policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.
Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.
“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”
The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.
Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.
Roosevelt’s role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century’s second-most influential figure.
“This is exciting and valuable research,” said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. “The prevention and cure of depressions is a central mission of macroeconomics, and if we can’t understand what happened in the 1930s, how can we be sure it won’t happen again?”
NIRA’s role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.
“Historians have assumed that the policies didn’t have an impact because they were too short-lived, but the proof is in the pudding,” Ohanian said. “We show that they really did artificially inflate wages and prices.”
Even after being deemed unconstitutional, Roosevelt’s anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.
The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.
NIRA’s labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor’s bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.
Recovery came only after the Department of Justice dramatically stepped up enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”
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All measures in economics are imperfect but I will try to put the best numbers I can find to this.
Numbers before corona virus, rounded:
US economy = $22 Trillion
Federal government spending = $5 Trillion
Federal taxation = $ 4 Triillion
Deficit = $ 1 Trillion
State and local government spending = $ 3 Trillion
US Govt Debt: $ 23 Trillion
Government / public spending was a 36% burden on the economy. Visualize that any number of ways. At that ratio, one has to earn $1.57 to keep, spend, save or invest 1.00. Much of that is in hidden taxation and even more burden yet comes from regulations. It's a heavy burden, it has been killing economic growth, but we were living with it, almost, falling behind by a trillion a year in debt.
Enter Chinese Wuhan Corona Virus and all the shutdowns. One optimistic estimate by Goldman today sees an economic decline of 35%:
https://www.cnbc.com/2020/04/14/goldman-downturn-will-be-four-times-worse-than-the-financial-crisis.html
That makes a new GDP rate 14 trillion per year, with government trying to make up the difference of 8 trillion. Federal spending if they did that becomes $13 trillion (not counting state bailouts, on let's say revenues shrunk to $3 trillion. New deficit rate is $10 trillion/year, almost equal to the new GDP. That is why they started with a spending package of $2 trillion, sounds big, but buys you not 2 months, or as Trump called it, up to 6 trillion which gets you not fully through the summer and early fall. And it's money we don't have, not spending down a reserve we tucked away for times like these.
Meanwhile 50 state governments go bankrupt or get bailed out by federal printing presses.
What could possibly go wrong?
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All measures in economics are imperfect but I will try to put the best numbers I can find to this.
Numbers before corona virus, rounded:
US economy = $22 Trillion
Federal government spending = $5 Trillion
Federal taxation = $ 4 Triillion
Deficit = $ 1 Trillion
State and local government spending = $ 3 Trillion
US Govt Debt: $ 23 Trillion
Government / public spending was a 36% burden on the economy. Visualize that any number of ways. At that ratio, one has to earn $1.57 to keep, spend, save or invest 1.00. Much of that is in hidden taxation and even more burden yet comes from regulations. It's a heavy burden, it has been killing economic growth, but we were living with it, almost, falling behind by a trillion a year in debt.
Enter Chinese Wuhan Corona Virus and all the shutdowns. One optimistic estimate by Goldman today sees an economic decline of 35%:
https://www.cnbc.com/2020/04/14/goldman-downturn-will-be-four-times-worse-than-the-financial-crisis.html
That makes a new GDP rate 14 trillion per year, with government trying to make up the difference of 8 trillion. Federal spending if they did that becomes $13 trillion (not counting state bailouts, on let's say revenues shrunk to $3 trillion. New deficit rate is $10 trillion/year, almost equal to the new GDP. That is why they started with a spending package of $2 trillion, sounds big, but buys you not 2 months, or as Trump called it, up to 6 trillion which gets you not fully through the summer and early fall. And it's money we don't have, not spending down a reserve we tucked away for times like these.
Meanwhile 50 state governments go bankrupt or get bailed out by federal printing presses.
What could possibly go wrong?
Funny you should ask that:
https://thehill.com/opinion/finance/491503-far-worse-to-come-covid-19-collapse-of-state-and-local-governments
Far worse to come: COVID-19 collapse of state and local governments
BY GRADY MEANS, OPINION CONTRIBUTOR — 04/12/20 09:00 AM EDT
View Latest Opinions >>
Another sudden and unexpected factor will transform this year’s elections. Many states, cities and counties are about to, suddenly, run out of money. Wages won’t be paid. Services won’t be delivered. Institutions will shut down abruptly. Many state colleges may fold. And yet most state and local political and administrative leaders just sit and watch. Voters will not be pleased.
Millions of American workers filed for unemployment insurance during the past two weeks. That is a record and represents a collapse of our local economies. Across the country, in every state, county and city, businesses have been shut down, and many will not return after the coronavirus crisis is over. Tens of millions have lost jobs, homes, savings and retirement incomes that will never return. Owners of rental property will go under when their loan payments come due and renters can’t pay. Across the country, state and local economies are being badly damaged — many of them permanently.
The result is that state and local tax revenues will plummet. States and localities will burn through any reserves they’ve maintained like wildfire. Since most of our politicians and government managers have been raised during a decade of expanding economies, their first instinct will be to wait and then panic and then raise taxes to cover shortfalls — perhaps a special “coronavirus surtax.” Taxpayers across the country have tolerated various forms of high state and local taxes; the politicians would naturally ask, “Why should now be any different?”
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But it is different. The resulting increased tax burden would be a disaster. Businesses that were barely hanging on would go under. Workers and homeowners who were barely surviving would go under. State and local tax bases would collapse even faster. There would be social unrest, possibly requiring martial law. People would migrate from high-tax states toward new jobs, accelerating a downward spiral. These large migrations would make the 2020 census results nonsense.
The only answer for the states, counties and cities that want to survive is to slash budgets now — probably 30 to 50 percent — eliminate all nonessential spending and reduce taxes today. Business leaders know that, in these types of situations, the only way to save a company is to cut costs immediately. There is no other answer, and those who act first and most aggressively are the most successful in saving the company and the greatest number of its employees. In short, “fiscal distancing” — that is, separating politicians from taxpayers’ money by cutting budgets and taxes now — is literally the only useful thing that state and local governments can do to prevent further economic and social catastrophe.
There is actually no other significant role that states and local governments can play in saving their economies, tax bases and quality of life. Only the federal government can provide truly useful, significant financial help to businesses and individuals during this historic disaster because only the federal government can print money in a crisis. Cutting taxes is the only state and local option to help their economies. Spending extra money now is throwing rocks into their own lifeboats.
I've talked to and written to many state and local officials over the past couple of weeks. Their recorded messages say they are all “working nonstop on coronavirus task forces.” Not to be rude, but most of that is a complete waste of time and public resources. With few exceptions, little or nothing useful will come of that. Only private businesses, individuals and the federal government are able to address this problem. For the most part, state and local governments will be in the way, except for critical, essential services such as police forces, fire departments and health care. Nearly everything else must go, now.
Of course, I’m not optimistic that many officials or politicians at the state or local levels will take massive budget cuts or slashing taxes seriously — yet. They were raised in a different world of explosive economic growth. Most would prefer to promote vanity and virtue-signaling projects from their towering sandcastles they’ve built with taxpayer money over the past couple of decades, even as their castles crumble around them. They could never grasp that cutting taxes is the only tool they have to preserve their states, counties and cities. The concept is far beyond their political vocabulary — none of them could grasp the public finance, let alone the Darwinian game theory, aspects of the enormous challenge in front of them.
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States are now furiously competing for ventilators. Tomorrow they will be fighting for taxpayers. Their primary (only) goal today should be to support and save their local economies — businesses, homeowners and other taxpayers — so that they have a foundation left on which to build later. If they kill off their tax base or drive businesses and taxpayers out of their states or localities, they will have poured salt on their fields and they will starve in the future. Their political careers will be over.
And so, as the coronavirus preys on the weakest human bodies, it also preys on the weakest state and local politicians. We can only hope that the fiscal mortality rate among those will be lower than the models suggest. In the end, though, the ruthless force of American politics probably will claim a new crop of unexpecting victims.
Grady Means is a writer (GradyMeans.com) and former corporate strategy consultant. He served in the White House as a policy assistant to Vice President Nelson Rockefeller. Follow him on Twitter @gradymeans1.
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growing up I never would have dreamed this could happen here.
A friend of mine 40 ish yrs ago was right :
https://pittsburgh.cbslocal.com/2020/04/15/emergency-money-for-the-people-act-stimulus-bill/
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Hopefully he convinces the President NOT to have the government take an equity position if the companies bailed out.
Laffer’s even less charitable when it comes to Mnuchin’s push to have the U.S. government hold an equity stake in airlines and other businesses: “That’s really what you want now? We can become Venezuela – whoooaaa!”
https://www.realclearpolitics.com/articles/2020/04/14/art_laffers_inside_track_to_trumps_economic_recovery_team__142939.html#2
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Isn't that real fascism
the binding of government with private business .............
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Isn't that real fascism
the binding of government with private business .............
I don't know, but that is what the most infamous fascist did.
There is a struggle between what needs to be done in an emergency and what values and principles we have that CANNOT be violated. Government owning the means of production certainly is socialism and communism. Government controlling the means of production is really the same thing.
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https://wilderwealthywise.com/ripples-in-the-fabric-of-the-world-what-happens-next/
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https://dailyreckoning.com/worst-recession-in-150-years/
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https://dailyreckoning.com/worst-recession-in-150-years/
"This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct."
Most likely true on both counts. Worst recession ever by some measure perhaps. '
Bear market' means: 'prolonged price declines...securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment over a sustained period of time—typically two months or more.
Right, this hasn't fallen enough to handle all the bad news already scheduled. We are forcing and paying people to be unemployed. I've never seen anything like it. Not even in a history book. [Maybe not in a fiction book.] If there is another big round or two of market drops it will span two months easily.
Similarly, recession means two quarters of negative growth [arbitrary definitions for general terms.] Yes that will be true, but it will only be two quarters and there will most certainly be growth on the other side of this as things reopen and we learn better how to handle the future outbreaks. Nothing like the Great Depression - unless we screw it all up, starting with the Nov elections and including what other nations do.
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Check out these numbers.
https://listwithclever.com/real-estate-blog/financial-impact-coronavirus/
https://dailyreckoning.com/worst-recession-in-150-years/
"This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct."
Most likely true on both counts. Worst recession ever by some measure perhaps. '
Bear market' means: 'prolonged price declines...securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment over a sustained period of time—typically two months or more.
Right, this hasn't fallen enough to handle all the bad news already scheduled. We are forcing and paying people to be unemployed. I've never seen anything like it. Not even in a history book. [Maybe not in a fiction book.] If there is another big round or two of market drops it will span two months easily.
Similarly, recession means two quarters of negative growth [arbitrary definitions for general terms.] Yes that will be true, but it will only be two quarters and there will most certainly be growth on the other side of this as things reopen and we learn better how to handle the future outbreaks. Nothing like the Great Depression - unless we screw it all up, starting with the Nov elections and including what other nations do.
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quote author=G M
Check out these numbers.
https://listwithclever.com/real-estate-blog/financial-impact-coronavirus/
---------------------------------
"45% of renters don't have enough in savings to cover their rent payment for one month"
"Homeowners are at greater risk of becoming delinquent or defaulting on their mortgages due to stay-at-home mandates."
The Left has a plan for that. I had the pleasure of hearing Jeremiah Ellison on liberal radio Friday. He is my inner city, city councilman, son of Keith Ellison, current state attorney general. You will hear of him. His plan is simple, cancel rent and mortgage payments during coronavirus [before cancelling them forever]. Co authors in St. Paul and other cities. He said Rep. Omar has same plan with some different terminology. This is going viral.
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Cloward-Piven 2020
quote author=G M
Check out these numbers.
https://listwithclever.com/real-estate-blog/financial-impact-coronavirus/
---------------------------------
"45% of renters don't have enough in savings to cover their rent payment for one month"
"Homeowners are at greater risk of becoming delinquent or defaulting on their mortgages due to stay-at-home mandates."
The Left has a plan for that. I had the pleasure of hearing Jeremiah Ellison on liberal radio Friday. He is my inner city, city councilman, son of Keith Ellison, current state attorney general. You will hear of him. His plan is simple, cancel rent and mortgage payments during coronavirus [before cancelling them forever]. Co authors in St. Paul and other cities. He said Rep. Omar has same plan with some different terminology. This is going viral.
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https://moneymaven.io/mishtalk/economics/as-unemployment-claims-rise-so-do-missed-mortgage-payments-dws51EfOMEWsaayJG7OY1A
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https://medium.com/handwaving-freakoutery/the-long-term-economic-benefits-of-a-deadly-epidemic-dea1606ac68e
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[Reply #1861 on: April 19, 2020] "the plan is simple, cancel rent and mortgage payments during coronavirus [before cancelling them forever]...He said Rep. Omar has the same plan..."
PJ Media, 3 days later, reading the forum:
https://pjmedia.com/trending/ilhan-omar-wants-to-cancel-rent-for-coronavirus-and-upend-the-entire-housing-market-in-the-process/
"Omar's "Rent and Mortgage Cancellation Act of 2020" would indeed cancel rent and mortgage payments until a month after the end of the national emergency President Donald Trump declared on March 13. All payments would be canceled across the entire country, "regardless of income or payment level." Tenants and homeowners would not have to make payments, while landlords and lenders would not be able to use their failure to pay as a cause for eviction or foreclosure. The inability to pay would also have no impact on credit scores."
https://omar.house.gov/sites/omar.house.gov/files/Bill%20Text%20-%20Rent%20and%20Mortgage%20Cancellation%20Act%5B1%5D.pdf
----------------------------------------------------
Why single out housing? They didn't even single out people who face hardship! Why not cancel all obligations on all business contracts?!
In Hennepin County (Minneapolis), traffic court is open; housing court is closed.
To the Left, the more important the industry, the more they want to get away from basic economic principles that work and switch to ones that don't.
Imagine for a second that we cancel the other side of that contract. People don't get the house but the rent and mortgage money is taken from them anyway. Ridiculous.
The consequence of default on a contract IS part of the contract, an ESSENTIAL part. No one will give you the keys to the apartment if they can't take it back when you don't pay. No one would lend on a house if there is no consequence on default. For most people, no lending on a house and no rentals means you don't get a house until you save up for 30 years. But under their system, the banks wouldn't still have your money you tucked away for 30 years, so that wouldn't get you a house either.
Would you do that in other industries, have all the goods in the store but no cash register. Rich or poor, you don't have to pay. Does it take me ranting to point out the obvious result of that? No one is going to replenish the merchandise in the store. No one is going to open a store. No goods will be available. No housing would be built, renovated, maintained or made available. This isn't theoretical. It is SO Soviet and has been tried in so many places at so many times with a 100% failure rate. Third world countries have unenforceable contracts, and every country that acts like one, becomes one.
Does anyone think this proposal is limited to housing? They want free healthcare, mandated that someone provide, free transportation, free food, free clothing, free energy, free phone and free housing. It's God Damned COMMUNISM when it is no longer a safety net, and it is Fascism when you mandate people to provide instead of the government funding.
None of these things get provided at all in their system without the total coercion, surveillance, compliance and punishment by an all powerful BIG GOVERNMENT. Leftists think this is better, more "liberal", than free people making their own choices in a free market - with limited government enforcing a fair playing field??
How does that kind of communist, fascist totalitarianism have appeal beyond a tiny cult of the economically ignorant and deranged? Why won't the Democratic party demand their brand name back from these people, call them out and win back those seats? How come the Republican party can't win in all 50 states until the Dem party distinguishes its message and an economic system from what just failed in Venezuela, Soviet Union and Republic of the Congo that they want us to have here?
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https://dailyreckoning.com/worst-recession-in-150-years/
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second
Michael Nocerino and Josh Levine
ChangeWave’s latest survey on the consumer economy produced results that offer a stark contrast to the optimism seen in the months leading up to the stateside COVID-19 outbreak. Importantly, the findings present an accounting of a stunning rate of change as a consequence of the nationwide stay-at-home orders and vast business closures.
Our March survey picked up only the front edge of the wave of fear and uncertainty as it began to infect the consumer spending outlook. This month’s results pull no such punches in describing an economy brought to its knees by severe restrictions on social contact and commerce.
In addition to the plunge in spending activity, consumers’ expectations for the economy and confidence in the job market have been deeply shaken. We note that during the two weeks when this survey was in the field, the number of reported deaths in the US from COVID-19 surged more than 400%, before leveling off in the subsequent days.
This report represents the findings of an April 1-14, 2020 ChangeWave survey of approximately 1,100 primarily North American respondents from 451 Research’s Leading Indicator panel focused on consumer spending plans for the next 90 days, as well as consumer sentiment and personal finances.
Consumer Spending Goes Off the Cliff
April’s consumer spending outlook took a remarkable dive as the full effect of the coronavirus crisis and related mitigation efforts precipitated a widespread shutdown of consumer activity. This follows our reading in March, which indicated that people had turned more cautious as risks of the virus outbreak grew more apparent.
The chart below reflects the power and swiftness of the pandemic’s impact on the US economy. With three-quarters (75%) of respondents saying they plan to spend less over the next 90 days compared to only 7% saying more, the net 55-point drop versus March indicates a systemic shock; the magnitude of such a rapid change is unrivaled in the post-war era.
Consumer spending is being negatively impacted with equal force across both higher income (>$125,000) and lower income (<$125,000) households, with 59-point and 58-point declines, respectively, compared to March. However, the proximity of these numbers is a bit deceptive. Higher income households typically have the advantage of larger safety nets in their personal finances than lower income households. This affords them greater flexibility because even at reduced spending levels, the higher income group benefits from more options in their discretionary spending.
Another important aspect is the juxtaposition of households reporting that spending will remain the same. More lower income households (18%) cited this compared to higher income households (12%). It indicates that more lower income households are at risk of reaching the limit of their spending capacity, while losing the ability to trim expenses without resorting to cuts in essential products and services.
Multiple Threats to Economic Well-Being
Each month we ask respondents about the macroeconomic forces posing the greatest threat to their personal finances. In response to the near total shutdown of non-essential businesses across the country, concerns over the US job market (21%; up 16-points) spiked in relation to the March reading. This finding corresponds to the unprecedented jump in initial unemployment claims in recent weeks, which increased by 22 million in just four weeks. We address our findings on job security in the next section.
Coronavirus (81%; up 8-points), already the leading threat last month, increased in the current survey as the pandemic ravaged the country’s healthcare system. The fact that coronavirus jumped to an even higher level reflects the sweeping force of its impact, the urgency to contain it, and the pressure to loosen restrictions on certain parts of the economy.
One of the side-effects of the COVID-19 crisis is that it has diminished threats that until recently had weighed heavily on consumers. China economic slowdown (6%; down 27-points) and trade war/tariffs (7%; down 15-points) have mostly dissipated since February. Like so many other consequential drivers, trade issues are now thrown into the maelstrom that is blurring visibility for all economic actors.
Job Security Fears Soar on Devastation to Employers, Workforce
Unemployment claims in recent weeks have overwhelmed the filing process as layoffs and furloughs swept through industries such as restaurants, hospitality, retail and transportation. Small and medium-sized businesses most affected by social distancing directives are especially at risk of being unable to meet obligations such as payrolls, regardless of how quickly they reopen.
In fact, concern is growing that many of these businesses will struggle to recover, with millions of jobs at risk of disappearing for the long-term. The Paycheck Protection Program, which was initially funded at $349 billion in Congress’s $2 trillion economic rescue bill, ran dry on April 16 as the Small Business Administration had stopped accepting loan applications. A new small business package is nearing finalization.
Still, further aid will likely be needed. Our April findings mark a stunning break from the unusually steady, long-term employment trend that we’ve tracked over the last few years. Currently, 41% of respondents now say they worry a great deal or quite a bit about someone in their family losing their job with only 16% saying they do not worry at all – a net -41-point reversal from March.
Last month we found essentially no differences between higher and lower income households with regards to the initial increase in respondent worries. We noted it was a warning for potential mounting job losses at all income levels. Our new findings reinforce this position.
Once again, we find that the escalation in the current employment crisis equally cuts across higher income (net -40) and lower income (net -42) households. Although these numbers are nearly identical, their implications are vastly different. Mainly, higher income households – due to savings, retirement funds and alternative sources of income – are generally in a far better position to withstand job loss of family members than lower income households.
In a separate question, we asked respondents the most important reasons why they were spending less over the next 90 days. Here the findings uncover differences based on household income in four key areas – underscoring the more perilous situation confronted by lower income households.
Despite the nearly equal impact of employment concerns on each income level, lower income households are more likely than higher income households to cite reduced income (8-point margin), paying off debt (3-point margin) and inflationary pressures (5-point margin). Alternatively, we find higher income households more inclined to save money (4-point margin).
Enormous Differences in Affects of COVID-19 on Various Spending Categories
Restrained social contact due to the COVID-19 outbreak and mitigation efforts targeting containment is impacting spending categories in wildly different ways. Due to restrictions on travel and social gatherings, it’s no surprise that planned spending over the next 90 days on travel/vacation (net -73) and restaurants/everyday entertainment (net -71) are experiencing massive declines.
The only categories that indicate positive spending momentum are household repairs/improvements (+20) – as consumers tackle projects while cocooned in their homes – and healthcare (+17). Additionally, we see a large increase in spending on ‘other’ (+17), which includes items such as groceries and cleaning supplies that were not included in the listed category choices.
In a follow-up question, we looked at the products and services that respondents have increased using as a result of the coronavirus outbreak. Here we also saw cleaning supplies (54%), groceries (43%) and personal safety products (38%) as the items experiencing the greatest rise in usage among consumers.
Depressed Sentiment Levels Sink Further
The extremely negative view of the economy and stock market reported in last month’s survey has worsened, as the full disruption of the pandemic came into greater relief while our April survey was in the field.
Consumer Outlook Engulfed by Dark Clouds. Consumer expectations for the overall direction of the economy declined further as more stringent coronavirus mitigation efforts went into effect that severely limited economic activity and pushed millions of workers to the sidelines. An astonishing 80% of respondents expect the economy to worsen over the next 90 days, with only 13% expecting it will improve. At net -67, this reading is now the highest number of respondents with a pessimistic view that we have ever recorded in a ChangeWave survey. The last time we saw comparable numbers was at the bottom of the Great Recession in early 2009.
It is noteworthy that lower income households (-58) offer a considerably less pessimistic view than higher income households (-76). Although we can speculate on everything from lifestyle to political leanings, one bit of data we can point to is mild inflation and energy costs: lower income households regularly show a greater sensitivity to these factors than higher income households. In an environment where the national average price of regular gas has fallen 35% in the last year, price-sensitive consumers are effectively gaining a tax break.
Investor Sentiment Plummets to Anemic Level. Confidence in US stocks has tumbled to the weakest reading ever in a ChangeWave survey, with 80% of respondents now saying they are less confident in the US stock market and only 4% saying more confident (net -76). Additionally, the number of respondents saying they are more confident matches the lowest ever recorded.
As the chart above illustrates, investor sentiment is prone to wild swings in reaction to the daily news cycle. Yet, the sharp decline over the last three months is a direct response to the real-world impact of the coronavirus shutdown of the economy and excessive volatility in the equity markets.
Overall, the survey paints a disturbing portrait of diminished consumer activity due to the public health crisis and large-scale efforts to restrict social contact to only essential activities. While the impetus for this shutdown was health and safety and not a fundamental breakdown in the economy, the results – barring a viable therapeutic for the virus in the near future and a relatively quick reopening of states and major cities – will likely be the same.
No matter when and how the country returns to some semblance of normalcy, there will be large numbers of businesses – especially small and medium-sized – that do not survive. Potentially millions of jobs may be permanently lost as companies are forced to shutdown or downsize in response to the new realities of the economy.
Of course, pent up demand and summer weather will help to catalyze the economy, but we shouldn’t expect a return to comparable levels of consumer activity that existed prior to the crisis. There will be many more households in dire straits in the aftermath seeking to reclaim lost wages, coping with debts, and replenishing depleted savings.
A challenging path to recovery lies ahead for the US, which is grappling with striking the right balance between the health and welfare of the population and of the economy and its productive engines. ChangeWave’s monthly consumer surveys – combined with our quarterly business trends survey – will continue to deliver context and insight as our research captures the rate of relative change in pivotal economic indicators.
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Watermelon environmentalism = green on the outside, red on the inside
"The trouble for environmentalists is that the public is getting a big taste of degrowth right now with the current privation and danger from a more immediate threat than climate change. To a public that has been showing signs of apocalypse fatigue for some time, it is dawning on many that the current lockdown, and the palpable enthusiasm of so many politicians toward extreme control, is a dry run for the permanent regimentation of the Green New Deal. To which many environmentalists lend credence with their current celebrations of how great it is that the lockdown is lowering pollution, not to mention some famous old environmental hits such as the research biologist for the U.S. Geological Survey, David Graber, who wrote years ago in the Los Angeles Times that humans “have become a plague upon ourselves and upon the Earth… Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along.”
Earth Day at 50, Prof. Steve Hayward
https://www.realclearenergy.org/articles/2020/04/23/earth_day_at_50_489793.html
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darwinism which has always been filter out the weakest
to filter out conservatism
survival of the most politically correct
the rest can perish ............
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darwinism which has always been filter out the weakest
to filter out conservatism
survival of the most politically correct
the rest can perish ............
As I say to my Leftward friends,
The Left overstepped,
The establishment of the right couldn't distinguish itself from the establishment of the Left,
And now we have Trump.
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The three most harmful addictions are heroin, carbohydrates, and a monthly salary.
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Risk management isn't about being very prudent and careful - it is about eliminating risk of ruin so that you can very AGGRESSIVELY take non-ruin risks.
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https://twitter.com/nntaleb
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https://amgreatness.com/2020/04/22/the-deadly-costs-of-extended-shutdown-orders/
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https://raconteurreport.blogspot.com/2020/05/counting-casualties.html
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https://raconteurreport.blogspot.com/2020/05/counting-casualties.html
Much truth and much to agree with there. I also differ with parts of it.
Education is exposed for the sham they have become. Forever changed.
The oil industry is screwed. The untimeliness of the Saudi-Russia feud was beyond bizarre. Obviously US producers are similarly hurt and many destroyed.
How does the airline business get back to where it was. It doesn't.
One factor he doesn't account for is bankruptcy. When one owner defaults, another gets the assets at lower to zero cost. Fewer airplanes fly, but airplanes do fly. Masks, sanitizers, vaccines, antibodies, better spacing and fewer flights. I never understood the attraction but plenty of people are eager to travel "when this thing is over". The definition of over will be in the eyes of the beholder.
Cars? I would be more worried about mass transit. The personal automobile is the solution, if unenlightened government will let us have and use them.
Bricks and mortar offices? If half the people work from home and offices require twice the spacing, that equals same square feet plus a big investment to make the change.
Offsetting that is that people who still have jobs and money are putting more emphasis on their home and home office. If that's where your time goes, that's where your money will go.
It's a shift, not necessarily a meltdown. Investors will freak when they hear of oil, auto and airline bankruptcies. They should freak when they hear of the fabricated money put in to prevent that. They will freak when they hear the Q1, Q2 GDP numbers, and forced unemployment. What they should look at is GDP per day, not per quarter.
Previously in this thread: DougMacG, Political Economics, GDP Now = 3.1%
« Reply #1837 on: March 23, 2020, 07:51:26 AM
About a week off in their data, that was the best estimate of the economic health the day before the economy closed, I would say March 15, so we lost a half a month of Q1 to the virus, to our reaction to the virus. We are losing April and much of May also, two months out of three in Q2. That is the bottom. The economy is slowly reopening to differing degrees in almost every state right now. GDP per day is increasing already and will every day from now until the election, when America decides whether of not to change course, and in which direction.
There will be more outbreaks, new quarantines and more re-openings. There will also be new news stories about treatments, testing, protections and immunizations.
But this recession is over, except for the antiquated way we measure it in economic quarters. It lasted half of March, all of April and half of May. That's two months. Or as the dismal scientists call it, two or more quarter of negative economic growth. But `it's not 6 months, it was two months. We aren't back to where we were in December or early March, blind to the biggest risk we faced. We are back to where tomorrow is better than yesterday, economically.
It will come back differently and restructured from where we were. Hopefully better and stronger, and there is plenty of room for public policy people to screw this up in every way.
MHO
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https://enewspaper.latimes.com/desktop/latimes/default.aspx?edid=adffe755-553f-4d93-ae9a-9a4cfbd2f62b
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https://www.theepochtimes.com/health-experts-say-pandemic-could-lead-to-154000-deaths-of-despair-due-to-substance-abuse-suicide_3344899.html?__sta=vhg.qblkmhbwphzxphzemdsbg%7CHJV&__stm_medium=email&__stm_source=smartech
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https://www.wsj.com/articles/older-europeans-reject-calls-to-remain-in-isolation-as-lockdowns-ease-11589112002?mod=djem10point
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https://www.wsj.com/articles/should-mild-coronavirus-cases-isolate-at-home-many-asian-countries-say-no-11589108401?mod=djem10point
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(https://pjmedia.com/instapundit/wp-content/uploads/2020/05/fauci_crash_05-12-2020.jpg)
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worse is the Bill and Melinda Gates
cure
Have everyone on Earth monitored with regards to location
immunity status
and have all that data go to MSFT
which can analyze the data and then tell all of us what we can and cannot do and where and where not we can go
and of course share with the Gate's favorite political party .
sound so cozy and neat and "data driven" and "scientific".
This everything thing on the planet now is "data" driven
with regards to populations
I see it is medicine too and it drives me nuts.
NO I don't want to give Gates that kind of control over the world
F him and his wife
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https://www.vox.com/policy-and-politics/2020/5/1/21243357/coronavirus-covid-19-trump-protests
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Elon Musk Isn’t Taking It Anymore
The mercurial Tesla CEO has a point about disparate lockdown treatment.
By The Editorial Board
May 12, 2020 7:26 pm ET
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Tesla CEO Elon Musk
PHOTO: HANNIBAL HANSCHKE/REUTERS
Tesla CEO Elon Musk is no Paul Revere. But his defiance of Alameda County’s shutdown order captures the frustration among businesses like Howard Beale’s primal scream in the movie “Network.”
California Gov. Gavin Newsom last week allowed some non-essential businesses to begin to reopen, but six Bay Area counties including Alameda, where Tesla assembles most of its electric cars in the U.S., doubled down on their lockdowns.
“Frankly, this is the final straw. Tesla will now move its HQ and future programs to Texas/Nevada immediately,” Mr. Musk tweeted Saturday. “If we even retain Fremont manufacturing activity at all, it will be dependen [sic] on how Tesla is treated in the future. Tesla is the last carmaker left in CA.”
A decade ago Mr. Musk rescued and retrofitted an auto-manufacturing plant in Fremont that Toyota had abandoned. The plant now employs 10,000 middle-class workers, many of whom live in rural San Joaquin County where another Tesla factory has been allowed to operate amid California’s shutdown because it is classified as essential.
“This disparate [government] treatment is arbitrary and without a rational basis,” Tesla states in a lawsuit against Alameda County, pointing out that the infection and fatality rates in Alameda and San Joaquin counties are similar. Mr. Musk also argues that Tesla is an essential business because it makes electric motors and battery systems that are “critical infrastructure.”
“The County’s order violates the Due Process Clause of the Fourteenth Amendment because it fails to give reasonable notice to persons of ordinary intelligence of what is forbidden under the law,” the lawsuit argues. He has a point, and arbitrary government distinctions about which businesses can stay open often seem to be based on politics rather than public health or science.
You can understand Mr. Musk’s frustration when Alameda County officials have allowed pot shops to stay open while shuttering his Tesla plant though the company has developed protocols to protect workers. Other governors including Michigan’s Gretchen Whitmer have given the green light to auto plants run by Tesla’s competitors.
Mr. Musk dared Alameda officials to arrest him when he reopened Tesla’s plant Monday, and he may get his wish. We don’t encourage lawbreaking, but a legal test of disparate lockdown treatment might rein in the inner dictators who are appearing in many places in America in these pandemic days.
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https://www.washingtonexaminer.com/opinion/as-in-the-1960s-violent-rioting-hurts-the-most-disadvantaged
Who knew?
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Recession or Depression
By: George Friedman
In March, we declared our 2020 forecast null and void. The COVID-19 pandemic had essentially rendered it irrelevant. The question we posed in March was whether the disease and the steps taken to manage it would lead to a recession or a depression. A recession is a cyclical financial process inherent in the business cycle. It is inevitable, stabilizing and somewhat painful. A depression is entirely different. It includes myriad financial dimensions as well as an added element of physical economic damage. It can destroy businesses and dramatically increase unemployment and thus transform our very existence. I would encourage you to read Studs Terkel’s “Hard Times: An Oral History of the Great Depression.” The greatest effect of a depression is on the existential reality of daily life. In that sense, we must all care about what this is.
The answer has not yet emerged – I will explain why below – but the numbers are ominous. We are close to completing the second quarter of 2020 and the Federal Reserve Bank of Atlanta is predicting a 48.5 percent decline in gross domestic product. Others are speaking of a 30-40 percent decline. Unemployment is at 15 percent and climbing. Even the more optimistic numbers are staggering not simply because of the size of the contraction but because of the speed with which it is happening. In the United Kingdom, the economy contracted by 20 percent in May alone. Germany expresses the most confidence: a 10 percent contraction in the second quarter. Most countries are expecting more modest declines in the third quarter, and then recovery in the fourth quarter.
Numbers of this sort indicate massive dysfunction in the economy, but the question is whether it is recoverable, and how quickly. The airline industry, for example, dramatically curbed its operations, leaving many pilots, ticket agents, mechanics and baggage handlers out of work. But unless all these workers found employment elsewhere already, the industry will probably survive and probably rehire them as soon as the economy recovers. (The airlines were among the hardest hit businesses. The kind of economic damage they suffered may well affect other businesses later, but for now it’s most visible in the airlines.)
An equally ominous but not quite clear force is the apparent increase in hospitalizations of COVID-19 cases in states that “opened up” in early June. There’s a debate over whether the increases signal a new wave. I am certainly not an expert, but if the virus is as infectious, and if it is as deadly, then it would seem that ending sequestering would simply have the same effect now as before. And if that’s true, and people who know more than I do disagree, then we should see not another wave but the consequences of opening up.
The root of the economic crisis is based on the fact that medical research has so far yielded no vaccine nor much in the way of mitigation. The only medical solution was sequestration. That meant that people should avoid contact with other people, since they could be infectious without knowing they carried the disease. In a sense, the medical problem was not the cause.
Medicine, except for helpful suggestions, was irrelevant. What drove the problem was that the only viable solution would hurt the economy. There is, after all, a social aversion to accepting deaths in return for a viable economy.
Therefore, if there’s a chance that the disease will swell as reopening occurs, and that that will lead to the reimposition of sequestration, then we are heading to a depression. Or rather, we are in a depression according to the numbers, but we are protected temporarily from a full depression by the speed by which it is taking place. That speed buys time to make economic reconstruction possible. But it is a window that will close. Using March 1 as the starting date, we have now been in this cycle for nearly four months. If we assume that we will reverse in September, it would be seven months. That’s a long time for a business with thin margins to survive without layoffs, and a long time for the unemployed to wait for reemployment.
The primary reason that forecasters are looking for a turnaround in the third or fourth quarter is the expectation that a vaccine will be developed. There are indications that there may be one by then, and even that production is already on the way. The problem is that it is unlikely to match demand (especially global demand) by then. As important, the logistics of distributing and administering the vaccine in the context of a massively disrupted economy will mean that at least two months will be required. You will recall how long it took to manufacture and distribute ventilators.
If my assumption is correct, and if an effective vaccine is released on, say, Sept. 15, then administering the vaccine would take until Nov. 15 at the earliest, which would be nearly nine months from the time the country was shut down. It also means five months of soaring unemployment and economic contraction on a global scale. It’s hard to imagine that we would be able to rapidly reconstruct the economy by this point. Obviously, the government could print more money, and that would basically fulfill both John Maynard Keynes and Milton Friedman’s prescription. Keynes called it increasing demand, and Friedman called it monetary management, but in both cases it uses increased money to prime demand.
However, in this case there is a difference. The foundation of economics is land, labor and capital. The origin of this crisis is the shortage of labor. The problem is not lack of demand but lack of supply. What you get from that is inflation, as happened in Weimar Germany. There are two arrestors in this process. One is a massive shift in the public’s willingness to accept the risk of disease. The second is a rapid medical solution.
A change in public attitude is possible for two reasons. The first is that time routinizes risks. People may be shifting their risk models. The second is that the meaning of depression has been abstract for them. We have not seen a depression for 80 years. I am old enough to have known some of those who lived through the Great Depression. I remember one clearly. He was in his second year of medical school during the Depression, but the money wasn’t there to finish. He got a job in a Kosher deli on Jerome Ave. in the Bronx. Forty years later he was still there. The Depression robbed him of the life he dreamt of.
If you get a chance, read Terkel’s book. Gambling with this virus is dangerous. But we all need to see that the economic problem isn’t about banks and corporations. It is how the Great Depression destroyed lives.
Am I predicting a depression? I still can’t. The ability of the American people to rally is enormous. The power of American science is remarkable. Still, the numbers we are seeing, if they pan out, are stunning.
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G M: "What is the probability of the Twin Cities bouncing back vs. plunging deeper into Detroitification?"
[Moving this over from google thread]
My opinion only, 100% chance of a bounceback in the short run anyway. Twin Cities does not rely on one dying industry or a dozen industries for that matter. The economy is very strong and resilient. 700 buildings damaged is like America losing the World Trade Center. It's devastating, it's scary, but it didn't touch the real wealth.
"At $99,764, the median family income for Minneapolis was at a new inflation adjusted high in 2018." [Plus relatively low cost of living compared to many other big cities]
https://www.deptofnumbers.com/income/minnesota/minneapolis/
The politics in the city is bizarre. I can't figure out why the wealthy are on the same political page as the underclass. But somehow they keep surviving bad governance.
I'm more worried about the nation surviving this. People are on edge because of virus lockdown. The tensions of being lied to about Ferguson, Baltimore and police killings nationwide boiled to the surface when people saw the knee hold video. Next will be the not guilty verdicts designed to re-incite. I should get property insurance in place for that.
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Interesting and bizarre.
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G M: "What is the probability of the Twin Cities bouncing back vs. plunging deeper into Detroitification?"
[Moving this over from google thread]
My opinion only, 100% chance of a bounceback in the short run anyway. Twin Cities does not rely on one dying industry or a dozen industries for that matter. The economy is very strong and resilient. 700 buildings damaged is like America losing the World Trade Center. It's devastating, it's scary, but it didn't touch the real wealth.
Keep in mind that food might get real expensive in Minnadishu:
https://nypost.com/2020/06/13/truckers-wouldnt-deliver-to-cities-that-defund-police-poll/
"At $99,764, the median family income for Minneapolis was at a new inflation adjusted high in 2018." [Plus relatively low cost of living compared to many other big cities]
https://www.deptofnumbers.com/income/minnesota/minneapolis/
The politics in the city is bizarre. I can't figure out why the wealthy are on the same political page as the underclass. But somehow they keep surviving bad governance.
I'm more worried about the nation surviving this. People are on edge because of virus lockdown. The tensions of being lied to about Ferguson, Baltimore and police killings nationwide boiled to the surface when people saw the knee hold video. Next will be the not guilty verdicts designed to re-incite. I should get property insurance in place for that.
I hope that insurance includes firearms and training, as well as beans, bullets and bandages.
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https://www.powerlineblog.com/archives/2020/06/liberals-bring-the-war-home.php
G M: "What is the probability of the Twin Cities bouncing back vs. plunging deeper into Detroitification?"
[Moving this over from google thread]
My opinion only, 100% chance of a bounceback in the short run anyway. Twin Cities does not rely on one dying industry or a dozen industries for that matter. The economy is very strong and resilient. 700 buildings damaged is like America losing the World Trade Center. It's devastating, it's scary, but it didn't touch the real wealth.
Keep in mind that food might get real expensive in Minnadishu:
https://nypost.com/2020/06/13/truckers-wouldnt-deliver-to-cities-that-defund-police-poll/
"At $99,764, the median family income for Minneapolis was at a new inflation adjusted high in 2018." [Plus relatively low cost of living compared to many other big cities]
https://www.deptofnumbers.com/income/minnesota/minneapolis/
The politics in the city is bizarre. I can't figure out why the wealthy are on the same political page as the underclass. But somehow they keep surviving bad governance.
I'm more worried about the nation surviving this. People are on edge because of virus lockdown. The tensions of being lied to about Ferguson, Baltimore and police killings nationwide boiled to the surface when people saw the knee hold video. Next will be the not guilty verdicts designed to re-incite. I should get property insurance in place for that.
I hope that insurance includes firearms and training, as well as beans, bullets and bandages.
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Well, maybe not Detroit...
https://www.frontpagemag.com/fpm/2020/06/minnesota-state-rep-antifa-and-muslim-groups-plan-robert-spencer/
Sharia Law and Order!
https://www.powerlineblog.com/archives/2020/06/liberals-bring-the-war-home.php
G M: "What is the probability of the Twin Cities bouncing back vs. plunging deeper into Detroitification?"
[Moving this over from google thread]
My opinion only, 100% chance of a bounceback in the short run anyway. Twin Cities does not rely on one dying industry or a dozen industries for that matter. The economy is very strong and resilient. 700 buildings damaged is like America losing the World Trade Center. It's devastating, it's scary, but it didn't touch the real wealth.
Keep in mind that food might get real expensive in Minnadishu:
https://nypost.com/2020/06/13/truckers-wouldnt-deliver-to-cities-that-defund-police-poll/
"At $99,764, the median family income for Minneapolis was at a new inflation adjusted high in 2018." [Plus relatively low cost of living compared to many other big cities]
https://www.deptofnumbers.com/income/minnesota/minneapolis/
The politics in the city is bizarre. I can't figure out why the wealthy are on the same political page as the underclass. But somehow they keep surviving bad governance.
I'm more worried about the nation surviving this. People are on edge because of virus lockdown. The tensions of being lied to about Ferguson, Baltimore and police killings nationwide boiled to the surface when people saw the knee hold video. Next will be the not guilty verdicts designed to re-incite. I should get property insurance in place for that.
I hope that insurance includes firearms and training, as well as beans, bullets and bandages.
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https://nypost.com/2020/06/27/minneapolis-council-members-who-voted-to-abolish-cops-get-private-security/
Well, maybe not Detroit...
https://www.frontpagemag.com/fpm/2020/06/minnesota-state-rep-antifa-and-muslim-groups-plan-robert-spencer/
Sharia Law and Order!
https://www.powerlineblog.com/archives/2020/06/liberals-bring-the-war-home.php
G M: "What is the probability of the Twin Cities bouncing back vs. plunging deeper into Detroitification?"
[Moving this over from google thread]
My opinion only, 100% chance of a bounceback in the short run anyway. Twin Cities does not rely on one dying industry or a dozen industries for that matter. The economy is very strong and resilient. 700 buildings damaged is like America losing the World Trade Center. It's devastating, it's scary, but it didn't touch the real wealth.
Keep in mind that food might get real expensive in Minnadishu:
https://nypost.com/2020/06/13/truckers-wouldnt-deliver-to-cities-that-defund-police-poll/
"At $99,764, the median family income for Minneapolis was at a new inflation adjusted high in 2018." [Plus relatively low cost of living compared to many other big cities]
https://www.deptofnumbers.com/income/minnesota/minneapolis/
The politics in the city is bizarre. I can't figure out why the wealthy are on the same political page as the underclass. But somehow they keep surviving bad governance.
I'm more worried about the nation surviving this. People are on edge because of virus lockdown. The tensions of being lied to about Ferguson, Baltimore and police killings nationwide boiled to the surface when people saw the knee hold video. Next will be the not guilty verdicts designed to re-incite. I should get property insurance in place for that.
I hope that insurance includes firearms and training, as well as beans, bullets and bandages.
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Just some context on the Twin Cities. Population of Minneapolis is 400+k (smaller than Omaha). Population of the Twin Cites metro area is 4 million. 90% or more of the local economy is outside the city. So when you see the city run by 14 nutty Leftists, know that this group alone cannot take down the economy of the area.
3M is headquartered in the east suburbs, Mayo clinic southeast, Medtronic (among the largest medical device companies in the world) in the north suburbs, General Mills, Cargill (largest private co. in the US), United Health Group (largest healthcare company in the world) and Optum all on the west side of town, Best Buy headquarters, south of the city, Mall of America, south suburbs, MSP airport outside the city, even the Minnesota Vikings built outside the city. In other words, the 14 nutty leaders of Mpls couldn't shut down the food supply or the main industries if they tried. When the suburbs go nutty-Left too, that is another matter.
The last Republican mayor of Minneapolis finished his term I think in 1978. The processes of people fleeing the core and others coming in have been going on for decades. Somehow, life goes on.
One reason Minnesotans mostly trusted the DFL as they are known (Democrat party), Hubert Humphrey kept the Chicago and east coast mafia/mob/organized crime out of the city in the 60s. Can you say that today? More like it's a breeding ground for antifa and international terrorism, including al Qaida:
https://www.twincities.com/2010/08/04/12-minnesota-residents-charged-with-aiding-terrorists-in-somalia-linked-to-al-qaeda/
My question for the politics of the moment, as the Democrats turn Left to Ellison, Omar and the far Left, will the rest in the state flip to Trump? If so, will that flip bring a Senate seat and a House seat with it? And the Minnesota House too? If so, so goes the nation. If Trump carries MN, he's already won 40 states.
Ask the question in reverse, do the crises of the times give people confidence in Democrat Party governance? How could anyone honestly answer yes??
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Thank you for that background context.
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Strangely, the dollar has fallen dramatically over the time that Biden opened a lead over Trump,while Democrats lead in House and Senate expectations too. The reason for the dollar plunge is said to be "political uncertainty".
Why don't they say the truth, the dollar falls, the value of the nations income and wealth falls when Marxism is immanent. Will voters really vote against their nation's economic interest? We have just a few months to find out.
"The US dollar has tumbled the most in a decade this month, propelling sterling and the euro sharply higher, on questions over the recovery of the world’s biggest economy and growing political uncertainty. The greenback weakened 0.4 percent against a basket of its trading peers by mid-morning on Friday in Europe. The greenback has shed 4.9 percent in July, its worst monthly sell-off since September 2010. Other currencies made gains as the dollar slipped. The euro rose 0.3 percent against the US currency to $1.1886, its highest level in two years, while the pound gained by the same amount to trade above $1.31. Japan’s yen rose 0.3 percent to ¥104.43 a dollar, a more than four-month high. “The dollar sell-off remains relentless,” said Lee Hardman, currency analyst at MUFG." - Financial Times today
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Millennials Slammed by Second Financial Crisis Fall Even Further Behind
The economic fallout of the Covid pandemic has been harder on millennials, who are already indebted and a step behind on the career ladder from the last financial crisis. This second pummeling could keep them from accruing the wealth of older generations.
By Janet Adamy
Aug. 9, 2020 1:07 pm ET
The economic hit of the coronavirus pandemic is emerging as particularly bad for millennials, born between 1981 and 1996, who as a group hadn’t recovered from the experience of entering the workforce during the previous financial crisis.
For this cohort, already indebted and a step behind on the career ladder, this second pummeling could keep them from accruing the wealth of older generations.
Jaclyn Jimenez put herself through college working for her father’s manufacturing company, but couldn’t find anything comparable when she graduated amid the economic slump of 2008. Even though she lowered her sights, she was turned down for roles from office assistant to drugstore worker. As credit-card debt piled up, she took a job selling wedding gowns at a bridal salon, then leveraged that experience to land a sales position at Nordstrom. She was finally gaining traction, she says, having worked her way up to manager.
Then the pandemic struck the nation in February, sending the economy into a tailspin. She lost her job, and Ms. Jimenez has now joined the 4.8 million millennials who the Federal Reserve Bank of St. Louis says lost work since the new coronavirus triggered a recession. The group had more losses than the two previous generations.
“It’s been difficult to struggle so much and think that you’re getting somewhere, and you’re moving forward, and you finally see a glimmer of hope, and then this all hit,” said the 34-year-old Orange, Calif., resident. “Am I ever going to have an opportunity to have what my parents had?”
The 12.5% unemployment rate among millennials is higher than that of Generation X (born between 1965 and 1980), and baby boomers (1946 to 1964), according to May figures from the Pew Research Center.
One reason is that some of the hardest hit industries, including leisure and hospitality, have a younger workforce.
Millennials have found it fundamentally more difficult to start a career and achieve the financial independence that allowed previous generations to get married, buy a home and have children. Even the most educated millennials are employed at lower rates than older college graduates, research shows, and millennials’ tendency to work at lower-paying firms has caused them to lag behind in earnings.
“It’s a sign that something has broken in the way the economy is working,” said Jesse Rothstein, professor of public policy and economics at the University of California, Berkeley, and a former chief economist at the Labor Department during the Obama administration. “It’s gotten harder and harder for people to find their footholds.”
As a result, the millennial generation has less wealth than their predecessors had at the same age, and about one-quarter of millennial households have more debt than assets, according to the St. Louis Fed.
Harder Hit
More millennials than older generations have lost jobs because of the coronavirus-triggered recession.
People who became unemployed between February and May 2020*
Source: Federal Reserve Bank of St. Louis
*Not seasonally adjusted
.million
Millennials
GenX
Boomers
0
1
2
3
4
5
About one in six were unable to cover a $400 emergency expense before the pandemic started; that share is about one in eight among all Americans, the bank found.
Millennials are now at risk of falling further behind because they entered the pandemic in a weaker position than older Americans.
Caitlin Robles, 35, said she felt lucky to get a job maintaining a website for Sacred Heart University when she graduated from there in 2007 with a business management degree. But with $67,000 in student loans, she needed a second job to pay for them and cover $650 a month in rent to live with two friends in Milford, Conn. Ms. Robles eventually got a second job working the front desk at a Massage Envy wellness franchise 15 hours a week. She planned to work there just long enough to make a dent in her debt.
Instead, she’s still working there nine years later and doubled her hours to pay the rising interest rates on her student loans and knee-surgery bills. Even after being promoted at both jobs, to associate director of web content at the university and to assistant manager at the spa, the $70,000 to $80,000 she earned a year wasn’t enough to pay down all her debt. She skipped a family vacation to save money. Her 70-hour workweeks left little time for dating.
To improve her credit score and lower her interest rates, Ms. Robles last year borrowed $30,000 from her 403(b) retirement account to pay off her student loans. She planned to pay off that loan in five years and start saving so she could buy a home when she turned 40.
That plan got derailed in March when Massage Envy shut down because of the pandemic, leaving Ms. Robles without a second income for three months. Since her location reopened in June, she has worked only seven hours a week because the company cut its hours and services. To conserve cash, Ms. Robles deferred payments on her retirement loan. Now she doesn’t know when she’ll be able to buy a home.
“I don’t want to work this way for the rest of my life,” Ms. Robles said. “I thought I had that figured out. And I don’t think I do now.”
Caitlin Robles graduated in 2007 and has worked two jobs for years as she chips away at her school debt.
PHOTO: TRACY DEER-MIREK
Economists are most concerned that millennials’ scars from starting their careers amid the last recession never went away. Millennials on average missed out on more than $25,000 in pay, or 13% of their total earnings, during the decade that ended in 2017 as a result of the rising unemployment rate that started in 2007, according to an analysis published last year by Census Bureau economist Kevin Rinz.
That was a greater share than Gen X, which had their earnings reduced 9% over that time, and baby boomers, which didn’t get 7%. That’s mainly because millennials were less likely to work for high-paying employers than older Americans.
Although younger workers’ employment rates recovered more quickly than those of older workers, millennials’ earnings didn’t bounce back, Mr. Rinz found.
Lead barista Dani Marina cleaned tables last month at Albi in Washington.
PHOTO: ALYSSA SCHUKAR FOR THE WALL STREET JOURNAL
Demographers say that financial instability is prompting some millennials, who are aged 24 to 39 this year, to cohabit instead of wed, and to delay or forgo childbearing. Millennials helped push down the marriage rate to its lowest level on record in 2018, and drove the general fertility rate to an all-time low the following year.
“Exposure to something like this twice in the early part of your career,” Mr. Rinz said, “could certainly have important and negative long-term effects on people’s finances, on their work prospects and all sorts of other family outcomes as well.”
Millennials’ early headwinds mirror those of the G.I. Generation, born between 1901 to 1924, said Neil Howe. The economist and demographer coined the phrase “millennial generation” in 1991 with co-author William Strauss. The G.I. Generation was first hit by recessions that followed the Spanish flu pandemic of 1918, and then the stock market crash of 1929 and the subsequent Great Depression. They recovered economic ground later in life thanks to a sharp rise in schooling and a booming post-World War II economy.
Michael Rafidi, a 35-year-old chef, spent more than a decade working at top eateries in Philadelphia, Washington and San Francisco while dreaming of opening his own restaurant. In 2016, he started raising more than $1 million to develop an upscale Levantine restaurant that drew on his Palestinian heritage with dishes like smoked lamb and sumac carrots. He named it Albi (“my heart” in Arabic) and opened its doors in Washington’s hip Navy Yard on Feb. 20.
“I didn’t think twice about the timing being wrong,” Mr. Rafidi said. “D.C. is going in the right direction with restaurants. The dining scene is incredible. Everything was aligning perfectly.”
For the first few days, Albi was so popular that it was hard to get a table. Three weeks later, the pandemic forced Mr. Rafidi to shut down and switch to a limited takeout menu. He secured a Paycheck Protection Program loan. He said it isn’t enough to replace the lost revenue from operating at just over a third of his original capacity.
“I’m worried,” said Mr. Rafidi, who is relying on outdoor seating, a few inside tables and a newly added cafe serving pastries and coffee. “I put everything on the line these last couple of years to do this.”
Millennials with a bachelor’s degree have about four times as much wealth as their peers who lack that diploma, according to Ana H. Kent, a policy analyst at the St. Louis Fed. Yet the most educated millennials lag behind older college graduates in the job market.
Old Scars
Millennials came into the pandemic in weakerfinancial shape than older generationsbecause they haven't recovered from the lastfinancial crisis. They have less savings...
Percentage of households that wouldn't beable to pay for a $400 emergency
Source: Federal Reserve Bank of St. Louis
Note: Data as of 2019
%
Millennials
GenX
Boomers
All
0
5
10
15
20
...They had bigger losses on overall earningsduring and after the last recession...
Average cumulative loss of earnings from2007 through 2017
Source: Kevin Rinz, Census Bureau
%
Millennials
GenX
Boomers
0.0
2.5
5.0
7.5
10.0
12.5
...And even after the overall jobs picture recovered, millennial jobs continued to lag behind older workers.
Employment rate among college graduates
Source: Jesse Rothstein, UC Berkeley
Note: Seasonally adjusted
%
RECESSION
Age 22-30
Age 31-40
1980
'85
'90
'95
2000
'05
'10
'15
70
75
80
85
90
Berkeley’s Prof. Rothstein studied employment rates among recent college graduates and identified what he calls a dramatic structural break for the group that entered the workforce around 2005. He found that each successive year’s group of college graduates has had lower employment rates relative to older workers in the same labor market than those before them.
Prof. Rothstein concluded that adverse early conditions permanently reduce college graduates’ employment prospects. That adds to a body of research showing that starting your career in a bad economy often carries a long-term penalty.
What surprised him was that when employment rates rose significantly following the 2007-09 recession for those already in the workforce, new entrants didn’t share in this improvement, he found in a paper he released last month.
Even college graduates who started their careers in 2015, and enjoyed several subsequent years of a strong labor market, were less likely to work.
For example, 24-year-old college graduates had an employment rate of 79.8% in 2015. Had the age-24 employment rate improved at the same rate as for older workers from 2009 to 2015, their employment rate would have been 81.6%, Prof. Rothstein found.
“It’s a finding that I don’t have a great explanation for,” he said. “I would have thought that the people who finished college in 2017, 2018 would be doing pretty well. But you don’t see that.”
Seeking to mitigate that penalty is Ankur Jain, an entrepreneur who founded the venture fund Kairos, which builds businesses that help make life more affordable for young adults. Last month, Kairos started to place thousands of young adults in home health-care jobs through CareAcademy and Care.com and pay for them to earn the necessary certification.
Although home health jobs typically pay low wages, Mr. Jain said the program will include a path toward becoming a licensed practical nurse, which pays more and can act as a springboard for a career in health care. “What we need to do is find ways to get people back on their feet,” said Mr. Jain, chief executive of Kairos.
Millennials have some advantages as they face a second severe recession. A larger percentage have college degrees than previous generations, which could pay dividends over time. They will also help fill gaps in the workforce as the large baby boomer cohort retires. The young workers behind them, members of Generation Z, who this year are 23 and younger, have even higher rates of unemployment and less experience to buffer them from the economic fallout of the pandemic.
Ms. Jimenez, the former Nordstrom employee, paid her way through college at California State University, Fullerton, with the roughly $45,000 a year she earned helping run her father’s printed circuit boards design and fabrication business. She expected she would at least match that salary soon after graduating with a business degree in 2008.
But as she sent out resumes during the crisis, no one wanted to hire her. Even office manager or executive-assistant jobs required five years of experience that she didn’t have. As her father’s business took a turn for the worse, she started applying for hourly positions at CVS and Disneyland. They didn’t bite either.
Desperate for a paycheck, Ms. Jimenez took a few shifts a week at a bridal shop in Orange, where her mother worked. She was barely getting by when the bank foreclosed on her parents’ home, where she lived with her younger sister. Ms. Jimenez moved into an apartment with both of her sisters and a niece and leaned on her credit cards.
“That really locked me into being permanently behind,” she said.
By 2013, she was still struggling to get traction. She parlayed her bridal-salon experience into a job selling wedding dresses at Nordstrom in Brea, Calif., for $12 an hour plus commission. She made about $22,000 a year. Although she was grateful for the steady paycheck, her inability to find a professional job felt defeating, she said. “This is not where I thought I would end up.”
Still, she stuck with the upscale retail chain because it offered a path for advancement. Over the next six years, she moved up little by little, first to an interim wedding suite manager, then to an assistant manager in a few other departments. Last year, she clinched a job as service experience manager at the chain’s Riverside location, which paid $56,000 a year plus a $4,300 bonus.
Ms. Jimenez grew more optimistic about her career. She started thinking about one day becoming a Nordstrom regional manager, or even a director. With her bonus, she set her sights on whittling down the $12,000 of credit card debt she had accumulated during years of scraping by.
“I was finally on the track of basically almost becoming an adult because honestly I have never felt that way,” said Ms. Jimenez. “Then Covid hit.”
Nordstrom told workers in May that it would permanently close the Riverside store as part of a broader retrenchment. That put Ms. Jimenez out of a job in early July. Now she feels like “it’s 2008 all over again.”
Ms. Jimenez got $7,000 of severance that will help her pay the $700 a month she spends to live with her younger sister, a friend and the friend’s 7-year-old daughter. She is considering going back to school to earn an advanced degree in psychology so she can eventually become a therapist.
Recently a friend offered to help her get a job as a front office administrator at a dermatology practice in Newport Beach. It would pay about $15 to $17 an hour. She hasn’t decided whether to pursue it.
“I do feel like I’m starting back at square one,” she said.
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https://www.intellectualtakeout.org/when-half-of-nycs-tax-base-leaves-and-never-comes-back/
I was told by a very smart person with Credentials this doesn't happen!
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https://www.intellectualtakeout.org/when-half-of-nycs-tax-base-leaves-and-never-comes-back/
I was told by a very smart person with Credentials this doesn't happen!
The out-migration of disgruntled people from failed liberal states is strangely bringing failed liberalism to formerly red states. We haven't figured how to convince them to leave their bad ideas behind.
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https://www.powerlineblog.com/archives/2020/08/this-week-in-racial-retribution.php
Steve Hayward: I have previously referred to Kurt Vonnegut’s famous 1961 short story “Harrison Bergeron,” which is a mordant satire of the tyrannical world of perfect equality. If you’ve never read it, here’s the first paragraph:
Kurt Vonnegut: THE YEAR WAS 2081, and everybody was finally equal. They weren’t only equal before God and the law. They were equal every which way. Nobody was smarter than anybody else. Nobody was better looking than anybody else. Nobody was stronger or quicker than anybody else. All this equality was due to the 211th, 212th, and 213th Amendments to the Constitution, and to the unceasing vigilance of agents of the United States Handicapper General.
Hayward: In order to make everyone equal, handsome men and beautiful women had to wear masks; very intelligent people had to wear a headset that blared loud noise in their ears every 20 seconds or so to prevent them from using their higher intelligence, talented ballerinas had to dance with weights on their ankles—you get the picture. It makes clear as well as a thousand pages of Hayek that achieving perfect equality requires tyranny.
----------------------------
He goes on to connect that with Dem proposals today. It shouldn't be that hard to argue that equality is not the natural state of things, and that moving toward equality requires massive, coercive force, not offensive to today's radical left.
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https://governor.utah.gov/2020/08/28/utah-ranked-best-economy-in-u-s/
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Positive Policies to Cut the Debt Burden To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/8/2020
When government forces businesses to close (even if it is for a pandemic), it's a "taking" in the legal sense. And we can think about $3 trillion in extra federal spending as "just compensation" to businesses and workers for that taking. Basically, we decided to borrow from future generations in an attempt to stop a virus and save the economy.
Federal borrowing is already more than 100% of GDP and politicians are debating how much more money to borrow as shutdowns drag on. Some of this potential borrowing, up to $1 trillion, is for direct state bailouts. And it appears some of that borrowing is to bailout states for problems that already existed. For example, in Illinois, unfunded pension obligations were roughly $200 billion before COVID hit. Illinois politicians are not letting a crisis go to waste and want to get bailout money now.
Those who worry about federal spending and the "moral hazard" of rewarding bad financial behavior by states look at a bailout as a huge mistake. The question is: Could there be anything positive that comes from this? What policies could the US put in place to limit the damage to future generations from all this borrowing? If we are asking our children and grandchildren to pay for this, are there things we can do that boost growth and limit the odds of more bailouts ahead?
We think there are.
First, the Treasury should issue 50- and 100-year Treasury bonds to finance Coronavirus debt. While the virus will pass, the economic costs will not and should be financed over a long period of time.
One of the reasons this has not happened already is that, in the normal budget process, issuing longer-term debt at higher interest rates than short-term borrowing rates increases debt costs and therefore total government spending. This takes away short-term budget dollars that politicians hope to spend on other things, so they don't like it. But these days, nobody in Washington, D.C. seems to care about adding to spending. So, lock-in the financing costs for decades to come. After all, that's realistically how long it will take to pay it back.
Second, if US taxpayers are going to bail out states, we should force states to change policies so bailouts are less likely in the future. This means the President and Congress should ask for three changes in the way state and local governments manage their affairs.
Taxpayers should demand that sates immediately shift to defined contribution pension plans (like 401-K's) from defined benefit plans. The private sector has already done this; states should too. It limits the liabilities of state and local governments and pushes government workers to think more about their own retirement rather than putting the burden on taxpayers. If taxpayers are going to bailout Illinois for running up $200 billion of unfunded pension debt, they deserve to know it won't happen again.
Taxpayers should require any states getting a bailout to provide universal state-wide school-vouchers so that parents can choose where their kids go to school with the property taxes they already pay. Right now, private schools in many states are open for in-person education, while public schools are not. The incentives are all wrong and vouchers will adjust those incentives.
Any state that gets a bailout should be forced to pass a Right-to-Work law and follow Wisconsin's example of making Union dues truly voluntary, with no gimmicks about when a worker has to give notice to stop paying dues. Unions support more pay and bigger pensions for government workers with campaign donations to government officials. This helped create the budget problems that state and local government currently have today and government workers have not been hit as hard by shutdowns as private sector workers.
If taxpayers need to spend $1 trillion to bail out state and local government for decisions made prior to (and during) COVID, and these states are unwilling to open up their economies today, these states should be willing to make changes that will limit the chances of similar problems recurring in the future.
And if Washington, D.C. made these changes a requirement to receive bailouts, it would help offset the financial burden that federal taxpayers are being asked to shoulder. Any bailouts should come with conditions. Every bailout of banks in 2008/09 came with conditions, why shouldn't states be required to do the same?
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https://www.realclearpolitics.com/articles/2020/09/09/policies_that_will_help_us_dig_out_of_massive_debt_144153.html
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Just like the MSM told you! (sarc)
https://www.census.gov/content/dam/Census/library/publications/2020/demo/p60-270.pdf
Record High Income and Low Poverty in 2019
Real median household in 2019 increased $4,379 over 2018, 6.8%. More income growth in one year than in 8 years of Obama-Biden.
(http://click1.e.freedomworks.org/cjhmctcckgnfcljqfgkqdfmvzkfmnznjntzrmllfqjct~cpttmthjcl.gif)
That's the largest one-year increase in median income since the data has been kept. Real median income grew by 7.9% for black Americans, 7.1% for Hispanic Americans, and 10.6% for Asian Americans. All record highs.
The poverty rate fell to a new record low of 10.5% in 2019, the lowest in six decades that such figures have been tracked. Over 4 million people were lifted out of poverty between 2018 and 2019 for a 1.3 percentage point decrease.
(http://click1.e.freedomworks.org/mbcpncnnztklndbsltzsqlpmvzlpkvkbkcvgpddlsbnq~cpttmthjcl.gif)
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https://pjmedia.com/news-and-politics/rick-moran/2020/09/22/cbo-has-a-terrifying-warning-about-the-federal-debt-n953546
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Thomas Sowell
@ThomasSowell
I have never understood why it is “greed” to want to keep the money you have earned but not greed to want to take somebody else’s money.
Sep 28, 2020·Twitter for iPhone
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What happens when economic growth accelerates in a tight labor market? Incomes rise. Biden deceives that into a negative for the economically ignorant.
From the article below:
"For the eight years of the Obama-Biden administration, there wasn’t a single month when job openings exceeded the number of people unemployed. Zero. ... when Obama and Biden left office in January 2017, there were 1.9 million more people unemployed than there were job openings.
...
By March 2018, that situation had reversed. Following Trump’s regulatory overhaul and passage of the Tax Cuts and Jobs Act, employment openings exceeded the number of people unemployed for the first time on records going back to 2000.
Astoundingly, that remained the case for 24 consecutive months — until the pandemic — with over 1 million more job openings than people unemployed for 17 of those months.
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https://nypost.com/2020/10/01/unpacking-joe-bidens-lies-about-the-trump-job-creation-miracle/
Unpacking Joe Biden’s lies about the Trump job-creation miracle
By Andy Puzder October 1, 2020
President Trump's tax cuts and elimination of burdensome regulations have spurred the economy.
Try as they might, Democrats, the media and the blue-check Twitterati can’t wish away President Trump’s enormously successful stewardship of the US economy.
“You talk about the economy booming,” moderator Chris Wallace told Trump at this week’s presidential debate. But “in Obama’s final three years as president, more jobs were created, a million and a half more jobs, than in the first three years of your presidency.” Wallace was echoing one of the Biden campaign’s favorite talking points.
But here’s the thing: That talking point depends on misleading and cherry-picked data.
Most significantly, it ignores the worker shortage during Trump’s second and third years in office. Obviously, it’s harder to add jobs when employers can’t find workers. But rather than an economic shortcoming, this shortage was a result of the Trump economy “booming,” producing job openings so abundant that they exceeded the number of people looking for work — by a lot.
It’s called a tight labor market, and it’s good for workers, as economists of every stripe agree.
This worker shortage was the defining difference between the Obama-Biden era and Trump’s first three years in office.
Every month, the National Federation of Independent Businesses asks business owners to name “the most important problem facing your business today.” The No. 1 and No. 2 most important problems under Obama-Biden were — not surprisingly — high taxes and burdensome, unpredictable government regulation. Should we elect Biden president, those will once again be the foremost problems facing businesses.
By contrast, once Trump cut taxes and slashed regulations in 2017, business growth accelerated, and business owners identified “finding qualified workers” as the most pressing problem they faced. The numbers — the full numbers — prove the point.
For the eight years of the Obama-Biden administration, there wasn’t a single month when job openings exceeded the number of people unemployed. Zero.
US economy adds 661K jobs amid COVID-19 pressure
US workers file 837,000 more jobless claims as COVID-19 total nears 63 million
How to handle a second COVID-19 wave
In fact, when Obama and Biden left office in January 2017, there were 1.9 million more people unemployed than there were job openings. So there was an abundance of people looking for work, but too few jobs opportunities open to them.
A little more than a year later, in March 2018, that situation had reversed. Following Trump’s regulatory overhaul and passage of the Tax Cuts and Jobs Act, employment openings exceeded the number of people unemployed for the first time on records going back to 2000.
Astoundingly, that remained the case for 24 consecutive months — until the pandemic — with over 1 million more job openings than people unemployed for 17 of those months.
NYC's economy may never recover from COVID-19, Trump says
This unprecedented competition for workers had extremely positive consequences. It lowered the unemployment rate, which consistently hit 50-year lows, and as a result, employers began competing for workers and raising wages.
In August 2018, year-over-year wage growth exceeded 3 percent for the first time in nearly a decade and stayed at or above 3 percent for 20 consecutive months until the pandemic. By comparison, under Team Obama-Biden there wasn’t a single post-recession month when wage growth exceeded 3 percent. Again, zero.
With wages rising, people started coming out of the woodwork to fill those abundant good-paying job openings. In the fourth quarter of 2019, 74.2 percent of workers who took jobs came from outside the labor force rather than the ranks of the unemployed. That was the highest percentage since 1990, when the government began reporting such data.
By contrast, under the Obama-Biden administration, people fled the labor force, discouraged by limited opportunities and stagnant wages. During Biden’s eight years in office, the labor force participation rate — the share of people working or actively looking for work — dropped from 65.7 to 62.8 percent. During Trump’s first three pre-pandemic years, it rose back up to 63.4 percent, as people rejoined the labor force.
Thus, when Trump talks about “a booming economy,” he is absolutely correct. Wallace’s question ignored the overwhelmingly positive impact of Trump’s policies on businesses and workers alike.
Before a once-in-a-generation pandemic decimated the whole global economy, Trump took the weakest economic recovery since the Great Depression and turned it into the strongest labor market in modern times, maybe ever. Democrats cherry-picking the economic data to make it appear otherwise won’t change that reality.
Andy Puzder a senior fellow at the Pepperdine University School of Public Policy, served for 16 years as CEO of CKE Restaurants. Twitter: @AndyPuzder
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Misleading headline of the week: “Layoffs Still Piling Up As Jobless Claims Remain Stubbornly High”
This was brought to you by the Washington Post on Thursday—the folks that are genetically incapable of reporting any good news on the economy while Trump is president.
The weekly unemployment insurance claims released yesterday show that 837,000 new Americans signed up for benefits and that is a tragically high number. But what the Washington Post, CNN, and others omitted reporting is that some 1.8 million Americans fell off benefit rolls. So the number of people who are collecting benefits FELL by almost one million in recent weeks. How is this NOT good news? By the way, the newest addition of 837,000 was actually 36,000 BELOW the number from last week and BELOW the expected level. That’s good news too.
- Stephen Moore
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School closures hurt women in the workplace, and hurt the economy for everyone.
https://www.bloomberg.com/news/articles/2020-09-30/leanin-org-finds-covid-19-could-push-women-out-of-workforce-and-senior-roles
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Does anyone remember when hurting women and children most was a bad thing?
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"Atlanta Fed's GDPNow model estimate for real GDP growth in the third quarter 34.6% on October 1, up from 32% on September 25. Such annual rates show what the percent change would be if continued four quarters - quite impossible for Q4. But 4-6% isn't." - Economist Alan Reynolds
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In a new report, AEI economist Benjamin Zycher examines the Green New Deal (GND) and concludes the current resolution would yield no benefits while imposing substantial economic and social costs. He explains that while the ostensible goal of the GND is to fix what its proponents call an ongoing climate crisis, the GND in reality would have no effect on the climate. Zycher points out that instead, the GND at its core substitutes central planning in place of market forces to allocate resources in the US economy.
Zycher identifies several key flaws:
The GND’s central premise is that global temperatures must be kept below 1.5 degrees Celsius above pre-industrialized levels to avoid the most severe impacts of climate change, and achieving this end will require a “10-year national mobilization” to reduce US greenhouse gas emissions to “net zero” by 2050. However, the future temperature impacts of the zero-emissions objective would be barely distinguishable from zero: just a 0.173°C difference by 2100.
Chief among the GND’s goals is “meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources…by dramatically expanding and upgrading renewable power sources.” A highly conservative estimate of the aggregate cost of this goal alone would be $490.5 billion per year. The GND renewable electricity mandate would also create significant environmental damage and require over 115 million acres of land, an area approximately 15 percent larger than the land area of California.
The renewable electricity mandate would also do surprisingly little to curb US emissions. Without fossil-fired backup generation, the reliability of the US electric power system would decline significantly. As considerable increases in service interruptions would be unacceptable to most Americans, stabilizing the power system would require roughly 1.4 million gigawatt-hours of non-renewable backup power generation annually. The emissions from backup generation would amount to more than 35 percent of the 2017 emissions from all power generation. The renewable energy mandate is thus to a large extent self-defeating.
The GND calls for implementing single-payer health care and an employment guarantee, providing “free” college and “free” family and medical leave, and investing in high speed rail. Those proposals are intended to forge a political coalition in support of the GND. Those costs, combined with the excess economic burden that the GND’s required spending would create through the tax system, mean that the total economic cost of the GND would be roughly $9 trillion per year.
This $9 trillion total remains a highly conservative estimate. It excludes the costs of the massive shift away from fossil fuels in the transportation sector, the total cost of the GND’s high-speed rail component, the cost of retrofitting every building in the country for “efficiency,” and most of the economic costs of the adverse environmental effects of the GND.
The full report is available here: The Green New Deal: Economics and Policy Analytics
http://www.aei.org/spotlight/green-new-deal/
https://www.aei.org/press/new-aei-report-examines-details-of-the-green-new-deal/
Before joining AEI, Zycher conducted a broad research program in his public policy research firm, and was an intelligence community associate of the Office of Economic Analysis, Bureau of Intelligence and Research, US Department of State. He is a former senior economist at the RAND Corporation, a former adjunct professor of economics at the University of California, Los Angeles (UCLA) and at the California State University Channel Islands, and is a former senior economist at the Jet Propulsion Laboratory, California Institute of Technology. He served as a senior staff economist for the President’s Council of Economic Advisers, with responsibility for energy and environmental policy issues.
Zycher has a doctorate in economics from UCLA, a Master in Public Policy from the University of California, Berkeley, and a Bachelor of Arts in political science from UCLA.
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https://www.bloomberg.com/news/articles/2020-10-08/top-50-richest-people-in-the-us-are-worth-as-much-as-poorest-165-million?utm_source=pocket&utm_medium=email&utm_campaign=pockethits
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I have big doubts on the way this is measured. Why do they look at people instead of households? Do they count houses owned, real estate? Cars and houses are the assets of the lower 50%. Also their future earning power. What's that worth? Some are the future rich, investing in their own endeavors instead of publicly held stock. From the article: "The wealthiest 1% own more than 50% of the equity in corporations and in mutual fund shares, the Fed data show." Very often, disparity studies don't count the wealth of people who they conclude lack wealth. (Me, for example.)
This study picks the bottom of a historic pandemic shutdown for its key data point. Great benchmark for a serious, long term study (sarc). Narrative alert.
Intended point, the rich are too rich. We should enact laws to stop wealth creation! [Not]
Laws and policies designed to stop disparity make it worse. The rich are already rich and not hurt by tough laws. It's the next wave of wealth that is blocked, while it is the next wave of wealth that is needed.
Better idea: Legalize wealth creation. Way too many people are not rich that could be.
It's not a fixed pie. What's blocking wealth creation, what laws, agencies and regulations are blocking new innovation and new enterprise formation so complex only the rich can navigate them? Repeal them and grow more people rich.
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I'm guessing a lot of them are tech oligarchs who got rich selling out our country to China.
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A Bdien win - buy China!
tariffs gone
US big techs to get broken up in ways to helps Dem Party
and provide the government with lots of funds to pay off their voters
China as has been doing for decades will ride the results .
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Changing the subject slightly, I think the US should buy Siberia. What was Alaska, 2 cents per acre?
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we trial ballooned Greenland and the left mocked us.....
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we trial ballooned Greenland and the left mocked us.....
Yes. Buying Greenland was a GREAT idea, but both of these would require a willing seller. That means private negotiations before going public.
Pres. Biden should buy both Greenland and Siberia knowing they will both soon become tropical paradises.
OK, back to more serious topics...
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(https://ci6.googleusercontent.com/proxy/UKELODkGOdXa0XAPDMG4vi9wMo67rhzheHnXTM0Y1UKxqRmpYiVFlEdBm7H1e_uonIvgV8aJZ_fULPW1joOoFNXEVxh38Zwvb1f6jA9JFjoaHM7T7v73QkVeDv3dGCdkhGxndcaiH9mYdbbfr1AE0yPSMNuCGQ=s0-d-e1-ft#https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/9229bac3-5417-4b0e-9f78-42b6582fb2dd.png)
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Four years under Obama Biden, from 10% down to 8%:
(https://ci5.googleusercontent.com/proxy/znLkbIg4huOa5t4dxmQmyWIFyfNhFXM2v5uNqJaIBuvzXEcWzz-mtBituxOu9K6_oXRh2tQRK_A8Q09jKb3tmAyBshcM3WECrRK2ECpnjr_Lx5tTBGbVhrxgeVpmkw0kQWkWP5IiEiSHKyNbNDjcbXECSuWoow=s0-d-e1-ft#https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/9063e9de-ea71-4316-a68c-2cf4bd0afb10.png)
Five months under Trump, from 14.7down to 7.9:
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Unemployment headed back to near zero if you let him.
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When attacked last night by Trump on his economically illiterate tax plan, Biden again said that a leading economist from Wall Street predicts that his plan will create more than 18 million jobs. That economist is Mark Zandi of Moody’s Analytics. A $4 trillion tax increase magically creates millions of new jobs. (Yeah, in China!)
In 2016 he predicted that Trump’s policies would cause “a lengthy recession” and that unemployment rate would rise to 6% or higher. Whoops. No recession. Instead, we had a barnburner economy in 2017, 2018, and 2019 and the unemployment rate hit its lowest level in 50 years at 3.7%.
Regarding Obama's $1 trillion stimulus plan, he said that it would get us to 4% growth and create millions of new jobs. As readers of this newsletter know well, the Obama stimulus plan actually ended up keeping unemployment at 9% and LOST jobs.
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exactly
like I see in medicine
the same "data" can be interpreted in many ways
or juiced to say more than it does
"come on man, look at the data"
as though that means a lot.
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Now and then I here people claim this banner. Trying to be hip with social righteousness and yet smart with the money
What they DON"T seem to understand
it is impossible to be both .
If one is a social liberal you cannot be a fiscal conservative - sorry it just does not work
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https://www.washingtonexaminer.com/washington-secrets/american-dream-74-reach-it-or-on-their-way-blacks-top-for-better-opportunities
74% are there or on their way.
A majority of black people believe they have more opportunities than their parents,
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3rd quarter 2020 economic growth (annualized) = 33.1%, largest in history.
Did anyone see this coming?
cnbc.com/2020/10/29/us-gdp-report-third-quarter-2020.html
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https://thehill.com/opinion/finance/524985-bidens-economic-agenda-and-its-effects
Casey Mulligan, Economist, Univ of Chicago
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https://www.bloomberg.com/opinion/articles/2020-10-30/trump-s-economy-really-was-better-than-obama-s
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https://fee.org/articles/us-household-incomes-increased-more-in-2018-than-in-the-previous-20-years-combined/
US Household Incomes Increased More in 2018 Than in the Previous 20 Years—Combined
Why did US incomes suddenly explode in 2018 after decades of tepid growth? The answer is not difficult to find.
Monday, November 16, 2020
Image Credit: Pxfuel
Jon Miltimore
Jon Miltimore
Economics Wages Workers Income Corporate Tax Capital Tax Cuts Grover Norquist Donald Trump Joe Biden Tariffs
For years, a school of economists has complained that US wages have been virtually stagnant for decades.
“Jobs are coming back, but pay isn’t. The median wage is still below where it was before the Great Recession,” former Labor Secretary Robert Reich said in 2015. “Last month, average pay actually fell.”
In fact, it’s not hard to find data showing that wages have barely increased since the 1970s, a figure many have used to stoke classy envy.
The truth is, there have always been problems with the claim that real wages (adjusted for inflation) have been stagnant for years. As economist Don Boudreaux has pointed out (see below), Reich and others overlook several important factors—including how inflation is calculated, compensation outside of wages such as healthcare, and the distinction between individuals and statistics.
The stagnant wage narrative was always mostly wrong. Federal Reserve data (which uses a chain-weighted price index) shows US hourly earnings have seen impressive growth in recent years.
Nevertheless, if one does choose to use Bureau of Labor Statistics data to measure family incomes over the last two decades, the picture is indeed a bit bleaker—at least it was.
Government statistics, which use the Consumer Price Index to measure inflation, show that from 2002 through 2015 median weekly earnings didn’t budge at all, but surged between 2018 and 2020.
I’m not the first person to notice this stunning wage growth. Writing in Bloomberg, economist Karl W. Smith describes the growth in income using a slightly different metric, real median household income.
“In 2016, real median household income was $62,898, just $257 above its level in 1999,” writes Smith. “Over the next three years it grew almost $6,000, to $68,703.”
Indeed, median household incomes increased from $64,300 to $68,700 in 2018 alone—an increase of $4,400. To put it another way, US incomes increased more in 2018 than the previous 20 years combined. (Household incomes were $61,100 in 1998 and $64,300 at the end of 2017.)
The question, of course, is why did US incomes suddenly explode after decades of tepid growth? The answer is not difficult to find.
The year 2017 saw massive deregulation and passage of the Tax Cuts and Jobs Act (TCJA). Estimates placed the deregulation savings at $2 trillion. But what was likely even a bigger factor was the cut businesses saw in corporate taxes.
Prior to 2017, the US had the highest corporate tax in the developed world (if not the whole world). With a top bracket of 35 percent, its corporate tax rate was higher than Communist China and socialist Venezuela.
This was a terrible policy on a number of levels. For starters, the revenue-maximizing rate of a corporate tax is 15-25 percent, which means anything above that isn’t even generating more revenue, it’s simply punitive and economically harmful. (Evidence bears this out. The United Kingdom, for example, reduced its corporate tax rate and saw revenues grow.)
Second, high corporate taxes actually hurt workers more than "Big Business." Tax experts point out that roughly 70 percent of what businesses earn in profits gets paid to workers in the form of wages and other benefits. So it’s no surprise to see that studies show that workers bear between 50 and 100 percent of the brunt of corporate income taxes.
But the reverse is also true: cutting corporate taxes leaves companies more capital to grow and invest.
“Lower corporate taxes increase rewards for improving techniques, technology, and increasing capital investments, which increase worker productivity and earnings,” writes economist Gary Galles. “They expand rewards for risk-taking and entrepreneurship in service of consumers. They reduce the substantial distortions caused by the tax. And those changes benefit others, such as workers and consumers.”
So in 2017, when the Tax Cuts and Jobs Act was signed into law, companies saw their tax rate fall from 35 percent to 21 percent. Just that fast, businesses suddenly had more capital to spend to grow their business, improve productivity, and hire more workers—and few things attract workers more than higher wages.
Media scoffed at the possibility that corporate tax cuts would actually result in wage increases for US workers. But the data speaks for itself: Families saw incomes increase faster than at any time in generations.
Moreover, though median wages surged, showing the benefits were broad-based, every segment benefited from these wage gains.
“The lowest quintile increased their pay more than the upper quintile,” Americans for Tax Reform president Grover Norquist recently pointed out in a conversation with FEE’s Brad Polumbo.
To be sure, reducing the corporate tax rate wasn’t the sole factor for the surge in wages, but it was likely by far the biggest.
The surge in family incomes no doubt helped soften the impact of the economic destruction the world suffered in 2020 during the recession precipitated by economic lockdowns during the coronavirus pandemic.
Whether the wage gains continue may depend to some extent on the permanency of the corporate tax cut. Former Vice President Joe Biden, who appears poised to become the next US president, has signaled he’d restore the corporate tax to its 35 percent rate or raise it to 28 percent.
“Biden would make our business tax higher than China’s,” Norquist quipped. (He’s not wrong. China’s corporate tax rate stands at 25 percent.)
This appears unlikely to happen, however. Even if Biden’s claim was more than campaign rhetoric, it appears unlikely that he’ll have enough votes in the Senate to roll back the tax cuts.
Even more promising for US workers, Biden appears inclined to roll back Trump’s tariffs, which are basically taxes on Americans and imposed costs on businesses.
“When you put a tariff on steel, you make American cars not competitive anymore. You make everything made with steel less competitive,” Norquist observed. “We did a lot of damage to the American economy that way.”
If a Biden administration rolls back Trump’s tariffs while leaving the corporate tax rate in place, the US economy could build on the gains made prior to the arrival of the lockdowns.
That would be a winning formula for US workers, businesses, and the US economy.
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https://www.ff.org/fdrs-policies-prolonged-depression-by-7-years-ucla-economists-calculate/
FDR’s policies prolonged Depression by 7 years, UCLA economists calculate
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After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
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“President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services,” said Cole, also a UCLA professor of economics. “So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.”
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NIRA’s labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor’s bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.
Recovery came only after the Department of Justice dramatically stepped up enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”
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"Holding a black belt in karate, Walter was a tough customer. One night three men jumped him – and two of those men ended up in a hospital."
"As a person, Walter Williams was unique. I have heard of no one else being described as being “like Walter Williams.” "
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Thomas Sowell: Walter E. Williams 1936-2020
By Thomas Sowell Dec 3, 2020
Walter Williams loved teaching. Unlike too many other teachers today, he made it a point never to impose his opinions on his students. Those who read his syndicated newspaper columns know that he expressed his opinions boldly and unequivocally there. But not in the classroom.
Walter once said he hoped that, on the day he died, he would have taught a class that day. And that is just the way it was, when he died on Wednesday, Dec. 2, 2020.
He was my best friend for half a century. There was no one I trusted more or whose integrity I respected more. Since he was younger than me, I chose him to be my literary executor, to take control of my books after I was gone.
But his death is a reminder that no one really has anything to say about such things.
As an economist, Walter Williams never got the credit he deserved. His book “Race and Economics” is a must-read introduction to the subject. Amazon has it ranked 5th in sales among civil rights books, nine years after it was published.
Another book of his, on the effects of economics under the white supremacist apartheid regime in South Africa, was titled “South Africa’s War Against Capitalism.” He went to South Africa to study the situation directly. Many of the things he brought out have implications for racial discrimination in other places around the world.
I have had many occasions to cite Walter Williams’ research in my own books. Most of what others say about higher prices in low income neighborhoods today has not yet caught up to what Walter said in his doctoral dissertation decades ago.
Despite his opposition to the welfare state, as something doing more harm than good, Walter was privately very generous with both his money and his time in helping others.
He figured he had a right to do whatever he wanted to with his own money, but that politicians had no right to take his money to give away, in order to get votes.
In a letter dated March 3, 1975, Walter said: “Sometimes it is a very lonely struggle trying to help our people, particularly the ones who do not realize that help is needed.”
In the same letter, he mentioned a certain hospital that “has an all but written policy of prohibiting the flunking of black medical students.”
Not long after this, a professor at a prestigious medical school revealed that black students there were given passing grades without having met the standards applied to other students. He warned that trusting patients would pay – some with their lives – for such irresponsible double standards. That has in fact happened.
As a person, Walter Williams was unique. I have heard of no one else being described as being “like Walter Williams.”
Holding a black belt in karate, Walter was a tough customer. One night three men jumped him – and two of those men ended up in a hospital.
The other side of Walter came out in relation to his wife, Connie. She helped put him through graduate school – and after he received his Ph.D., she never had to work again, not even to fix his breakfast.
Walter liked to go to his job at 4:30 a.m. He was the only person who had no problem finding a parking space on the street in downtown Washington. Around 9 o’clock or so, Connie – now awake – would phone Walter and they would greet each other tenderly for the day.
We may not see his like again. And that is our loss.
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University,
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By some measures, the Obama Biden economy was worse for small business than Covid.
https://mailchi.mp/d39b6c682059/unleash-prosperity-hotline-830534?e=17d44a0477
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Brilliant man. Easy to understand. His life work lives on.
https://imprimis.hillsdale.edu/future-prospects-for-economic-liberty/?utm_campaign=williams&utm_medium=email&_hsmi=101929147&_hsenc=p2ANqtz-_0OBIk_wlKAidlkfDsa29tNO5Lo0I5bcQqp7JAVV4Fgc5n9KaX9r2AMW1VAIWbGjj0I9GRf0LhyLlvLM2aUlYsZtlpzA&utm_source=housefile
One of the justifications for the massive growth of government in the 20th and now the 21st centuries, far beyond the narrow limits envisioned by the founders of our nation, is the need to promote what the government defines as fair and just. But this begs the prior and more fundamental question: What is the legitimate role of government in a free society? To understand how America’s Founders answered this question, we have only to look at the rule book they gave us—the Constitution. Most of what they understood as legitimate powers of the federal government are enumerated in Article 1, Section 8. Congress is authorized there to do 21 things, and as much as three-quarters of what Congress taxes us and spends our money for today is nowhere to be found on that list. To cite just a few examples, there is no constitutional authority for Congress to subsidize farms, bail out banks, or manage car companies. In this sense, I think we can safely say that America has departed from the constitutional principle of limited government that made us great and prosperous.
On the other side of the coin from limited government is individual liberty. The Founders understood private property as the bulwark of freedom for all Americans, rich and poor alike. But following a series of successful attacks on private property and free enterprise—beginning in the early 20th century and picking up steam during the New Deal, the Great Society, and then again recently—the government designed by our Founders and outlined in the Constitution has all but disappeared. Thomas Jefferson anticipated this when he said, “The natural progress of things is for liberty to yield and government to gain ground.”
To see the extent to which liberty is yielding and government is gaining ground, one need simply look at what has happened to taxes and spending. A tax, of course, represents a government claim on private property. Every tax confiscates private property that could otherwise be freely spent or freely invested. At the same time, every additional dollar of government spending demands another tax dollar, whether now or in the future. With this in mind, consider that the average American now works from January 1 until May 5 to pay the federal, state, and local taxes required for current government spending levels. Thus the fruits of more than one third of our labor are used in ways decided upon by others. The Founders favored the free market because it maximizes the freedom of all citizens and teaches respect for the rights of others. Expansive government, by contrast, contracts individual freedom and teaches disrespect for the rights of others. Thus clearly we are on what Friedrich Hayek called the road to serfdom, or what I prefer to call the road to tyranny.
As I said, the Constitution restricts the federal government to certain functions. What are they? The most fundamental one is the protection of citizens’ lives. Therefore, the first legitimate function of the government is to provide for national defense against foreign enemies and for protection against criminals here at home. These and other legitimate public goods (as we economists call them) obviously require that each citizen pay his share in taxes. But along with people’s lives, it is a vital function of the government to protect people’s liberty as well—including economic liberty or property rights. So while I am not saying that we should pay no taxes, I am saying that they should be much lower—as they would be, if the government abided by the Constitution and allowed the free market system to flourish.
And it is important to remember what makes the free market work. Is it a desire we all have to do good for others? Do people in New York enjoy fresh steak for dinner at their favorite restaurant because cattle ranchers in Texas love to make New Yorkers happy? Of course not. It is in the interest of Texas ranchers to provide the steak. They benefit themselves and their families by doing so. This is the kind of enlightened self-interest discussed by Adam Smith in his Wealth of Nations, in which he argues that the social good is best served by pursuing private interests. The same principle explains why I take better care of my property than the government would. It explains as well why a large transfer or estate tax weakens the incentive a property owner has to care for his property and pass it along to his children in the best possible condition. It explains, in general, why free enterprise leads to prosperity.
Ironically, the free market system is threatened today not because of its failure, but because of its success. Capitalism has done so well in eliminating the traditional problems of mankind—disease, pestilence, gross hunger, and poverty—that other human problems seem to us unacceptable. So in the name of equalizing income, achieving sex and race balance, guaranteeing housing and medical care, protecting consumers, and conserving energy—just to name a few prominent causes of liberal government these days—individual liberty has become of secondary or tertiary concern.
Imagine what would happen if I wrote a letter to Congress and informed its members that, because I am fully capable of taking care of my own retirement needs, I respectfully request that they stop taking money out of my paycheck for Social Security. Such a letter would be greeted with contempt. But is there any difference between being forced to save for retirement and being forced to save for housing or for my child’s education or for any other perceived good? None whatsoever. Yet for government to force us to do such things is to treat us as children rather than as rational citizens in possession of equal and inalienable natural rights.
We do not yet live under a tyranny, of course. Nor is one imminent. But a series of steps, whether small or large, tending toward a certain destination will eventually take us there. The philosopher David Hume observed that liberty is seldom lost all at once, but rather bit by bit. Or as my late colleague Leonard Read used to put it, taking liberty from Americans is like cooking a frog: It can’t be done quickly because the frog will feel the heat and escape. But put a frog in cold water and heat it slowly, and by the time the frog grasps the danger, it’s too late.
Again, the primary justification for increasing the size and scale of government at the expense of liberty is that government can achieve what it perceives as good. But government has no resources of its own with which to do so. Congressmen and senators don’t reach into their own pockets to pay for a government program. They reach into yours and mine. Absent Santa Claus or the tooth fairy, the only way government can give one American a dollar in the name of this or that good thing is by taking it from some other American by force. If a private person did the same thing, no matter how admirable the motive, he would be arrested and tried as a thief. That is why I like to call what Congress does, more often than not, “legal theft.” The question we have to ask ourselves is whether there is a moral basis for forcibly taking the rightful property of one person and giving it to another to whom it does not belong. I cannot think of one. Charity is noble and good when it involves reaching into your own pocket. But reaching into someone else’s pocket is wrong.
In a free society, we want the great majority, if not all, of our relationships to be voluntary. I like to explain a voluntary exchange as a kind of non-amorous seduction. Both parties to the exchange feel good in an economic sense. Economists call this a positive sum gain. For example, if I offer my local grocer three dollars for a gallon of milk, implicit in the offer is that we will both be winners. The grocer is better off because he values the three dollars more than the milk, and I am better off because I value the milk more than the three dollars. That is a positive sum gain. Involuntary exchange, by contrast, means that one party gains and the other loses. If I use a gun to steal a gallon of milk, I win and the grocer loses. Economists call this a zero sum gain. And we are like that grocer in most of what Congress does these days.
Some will respond that big government is what the majority of voters want, and that in a democracy the majority rules. But America’s Founders didn’t found a democracy, they founded a republic. The authors of The Federalist Papers, arguing for ratification of the Constitution, showed how pure democracy has led historically to tyranny. Instead, they set up a limited government, with checks and balances, to help ensure that the reason of the people, rather than the selfish passions of a majority, would hold sway. Unaware of the distinction between a democracy and a republic, many today believe that a majority consensus establishes morality. Nothing could be further from the truth.
Another common argument is that we need big government to protect the little guy from corporate giants. But a corporation can’t pick a consumer’s pocket. The consumer must voluntarily pay money for the corporation’s product. It is big government, not corporations, that have the power to take our money by force. I should also point out that private business can force us to pay them by employing government. To see this happening, just look at the automobile industry or at most corporate farmers today. If General Motors or a corporate farm is having trouble, they can ask me for help, and I may or may not choose to help. But if they ask government to help and an IRS agent shows up at my door demanding money, I have no choice but to hand it over. It is big government that the little guy needs protection against, not big business. And the only protection available is in the Constitution and the ballot box.
Speaking of the ballot box, we can blame politicians to some extent for the trampling of our liberty. But the bulk of the blame lies with us voters, because politicians are often doing what we elect them to do. The sad truth is that we elect them for the specific purpose of taking the property of other Americans and giving it to us. Many manufacturers think that the government owes them a protective tariff to keep out foreign goods, resulting in artificially higher prices for consumers. Many farmers think the government owes them a crop subsidy, which raises the price of food. Organized labor thinks government should protect their jobs from non-union competition. And so on. We could even consider many college professors, who love to secure government grants to study poverty and then meet at hotels in Miami during the winter to talk about poor people. All of these—and hundreds of other similar demands on government that I could cite—represent involuntary exchanges and diminish our freedom.
This reminds me of a lunch I had a number of years ago with my friend Jesse Helms, the late Senator from North Carolina. He knew that I was critical of farm subsidies, and he said he agreed with me 100 percent. But he wondered how a Senator from North Carolina could possibly vote against them. If he did so, his fellow North Carolinians would dump him and elect somebody worse in his place. And I remember wondering at the time if it is reasonable to ask a politician to commit political suicide for the sake of principle. The fact is that it’s unreasonable of us to expect even principled politicians to vote against things like crop subsidies and stand up for the Constitution. This presents us with a challenge. It’s up to us to ensure that it’s in our representatives’ interest to stand up for constitutional government.
Americans have never done the wrong thing for a long time, but if we’re not going to go down the tubes as a great nation, we must get about changing things while we still have the liberty to do so.
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https://townhall.com/columnists/terryjeffrey/2020/12/09/schumer-wants-biden-to-transfer-wealth-from-auto-mechanics-to-harvard-grads-n2581260?fbclid=IwAR1fXOJc_0HwdfXyGUWsPu11kclsqb6psW43yeQ_hs-a6fTweL24HDcaF7g
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It's such an odd program. 1200 last summer. 600 now? 2000 now?? It's a different economic phenomenon but it reminds me of minimum wage law: If $8 is good, why not 15? If 15, why not 20? If 20, why not 100 per hour. Can we mandate our way into wealth? No.
We ask the question of why not more to expose the reality that more is not better. Minimum wage is government wishful thinking. It's not even a mandate. These businesses still (mostly) have the liberty to hire fewer or hire none and close their doors.
The stimulus is different. Our representatives in Washington pick a number based on sheer gall. How much do they dare not even borrow, but just create out thin air. Like issuing new stock, they are just diluting the shares of the existing US Dollars in the world. And they know that, right??
So, 600 is good. 2000 and 4000 per couple is great. Why don't we do $100,000 if the question is how much wealth to put in the hands of the American people. If $100,000 isn't an absurd enough example, let's do a million. Make everyone a millionaire who isn't one already. Yay! And get reelected, or liked, or whatever the goal is.
Why not gift the whole country US$30 Trillion and pay off the national debt? Don't borrow it. Just print it and mail it.
I hate to be the only adult in the room, but it just isn't so. We aren't giving ourselves anything, no matter the amount. We are taking from ourselves the exact same amount we are giving. Zero gain. Nothing. Nada. Zippo. Goose egg. Nix. Null. Nought. Got it?
Try it another way. The car is out of gas and you add 100 pounds of pressure to each tire. Or the tires are flat and you add a hundred gallons of gas. Better yet, you syphon your own gas out to add gas.
The problem is not that you aren't receiving enough free money in the mail. The problem is that the government shut down your business or your employment. Why not address THAT?
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A impoverished population begging for government handouts is easy to control.
It's such an odd program. 1200 last summer. 600 now? 2000 now?? It's a different economic phenomenon but it reminds me of minimum wage law: If $8 is good, why not 15? If 15, why not 20? If 20, why not 100 per hour. Can we mandate our way into wealth? No.
We ask the question of why not more to expose the reality that more is not better. Minimum wage is government wishful thinking. It's not even a mandate. These businesses still (mostly) have the liberty to hire fewer or hire none and close their doors.
The stimulus is different. Our representatives in Washington pick a number based on sheer gall. How much do they dare not even borrow, but just create out thin air. Like issuing new stock, they are just diluting the shares of the existing US Dollars in the world. And they know that, right??
So, 600 is good. 2000 and 4000 per couple is great. Why don't we do $100,000 if the question is how much wealth to put in the hands of the American people. If $100,000 isn't an absurd enough example, let's do a million. Make everyone a millionaire who isn't one already. Yay! And get reelected, or liked, or whatever the goal is.
Why not gift the whole country US$30 Trillion and pay off the national debt? Don't borrow it. Just print it and mail it.
I hate to be the only adult in the room, but it just isn't so. We aren't giving ourselves anything, no matter the amount. We are taking from ourselves the exact same amount we are giving. Zero gain. Nothing. Nada. Zippo. Goose egg. Nix. Null. Nought. Got it?
Try it another way. The car is out of gas and you add 100 pounds of pressure to each tire. Or the tires are flat and you add a hundred gallons of gas. Better yet, you syphon your own gas out to add gas.
The problem is not that you aren't receiving enough free money in the mail. The problem is that the government shut down your business or your employment. Why not address THAT?
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"A impoverished population begging for government handouts is easy to control."
- Step 1: impoverish them. Close businesses, order lockdowns, shut down opposition communications, train them to wait and listen for the next round government orders on what they are and are not allowed to do. Start with 15 day lockdowns, then 30 days, then until the end of the year, then until further notice. Note those who don't comply - unless they are among those in power. Tear down statues and traditions. Close the courts, churches, gyms, health clubs. Align the media with the regime. Continue until the emergency is over all subjects are compliant.
Next: Take all they have, give back 2% and tell them we are the ones enriching you.
Change the 'elected' government from individual liberty oriented to a state control regime.
All steps designed to camouflage the objective above, government control of the population, in the name of ending the pandemic, control that stays in place as the health threat subsides.
I don't want $600 'from them'. I don't want $2000. I want the right to go to work, to set my own prices, business hours, work rules, contract terms etc., the right to enter private, enforceable, consensual contracts.
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The groups helped most by the Trump economy were hurt most by lockdown policies. Teenagers, Hispanic, Black and Women hurt more than whites overall. The lockdowns were measurably racist.
(https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/6ebd3463-4bb5-476f-ad1c-71ed5cdbda70.png)
https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/6ebd3463-4bb5-476f-ad1c-71ed5cdbda70.png
What could go wrong shutting teenagers (and blacks and Hispanics) out of the working economy? Like minimum wage laws, take away their first job and what else have you taken away? The damage is lasting.
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https://lawliberty.org/the-democrats-paranormal-economics/
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Horrible disincentives have no economic consequences.
How long do you think it will take to debunk this drivel?
We just saw the opposite happen here. Tax rate cuts they said were for the rich, lost NO revenue and grew the economy for workers more than anyone else.
http://eprints.lse.ac.uk/107919/1/Hope_economic_consequences_of_major_tax_cuts_published.pdf
"Major reforms reducing taxes on the rich lead to higher income inequality but do not have any significant effect on economic growth or unemployment, according to new research by LSE and King’s College London. Researchers say governments seeking to restore public finances following the COVID-19 crisis should therefore not be concerned about the economic consequences of higher taxes on the rich. The paper, published by LSE’s International Inequalities Institute, uses data from 18 OECD countries, including the UK and the US, over the last five decades. The Economic Consequences of Major Tax Cuts for the Rich, by David Hope and Julian Limberg, shows that the last 50 years were a period of falling taxes on the rich in the advanced economies. Major tax cuts were spread across countries and throughout the observation period but were particularly clustered in the late 1980s. (via London School of Economics)"
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https://www.nytimes.com/1987/01/14/opinion/the-right-minimum-wage-0.00.html?pagewanted=all&src=pm
(https://s1.nyt.com/timesmachine/pages/1/1987/01/14/689687_360W.png?quality=75&auto=webp&disable=upscale)
Raising the minimum wage by a substantial amount would price working poor people out of the job market,” the editorial reads. “A far better way to help them would be to subsidize their wages or - better yet - help them acquire the skills needed to earn more on their own.”
In 1987, when the NYT urged policy makers to “put this hoary debate behind us,” the minimum wage was $3.35 an hour.
https://www.huffpost.com/entry/new-york-times-minimum-wage_n_2696194
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2019, NYT,All is lost:
"Double the Federal Minimum Wage
State and local governments are proving that higher minimum-wage standards are good for workers. Congress should take the lesson."
By The Editorial Board
Dec. 30, 2019
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I remember making 3.35 an hour back then.
https://www.nytimes.com/1987/01/14/opinion/the-right-minimum-wage-0.00.html?pagewanted=all&src=pm
(https://s1.nyt.com/timesmachine/pages/1/1987/01/14/689687_360W.png?quality=75&auto=webp&disable=upscale)
Raising the minimum wage by a substantial amount would price working poor people out of the job market,” the editorial reads. “A far better way to help them would be to subsidize their wages or - better yet - help them acquire the skills needed to earn more on their own.”
In 1987, when the NYT urged policy makers to “put this hoary debate behind us,” the minimum wage was $3.35 an hour.
https://www.huffpost.com/entry/new-york-times-minimum-wage_n_2696194
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2019, NYT,All is lost:
"Double the Federal Minimum Wage
State and local governments are proving that higher minimum-wage standards are good for workers. Congress should take the lesson."
By The Editorial Board
Dec. 30, 2019
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Since the job and the worker haven't really changed, Democrats are voting to wipe out 4/5ths of the calue of the dollar since then, if it wasn't lost already.
Crank up spending. Crank up debt. Hold interest rates at zero. Yellen knows how. Whip up inflation, then tax people at exorbitant rates on purely inflationary gains. If you save, invest and hold while everyone is getting free money, you are a sucker. Welcome to Bidenomics. What could go wrong?
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"If you save, invest and hold while everyone is getting free money, you are a sucker."
and as we know once government starts giving out free money
it is very hard to end it.
I wonder what would happen with student "debt " going forward .
Are they promising to wipe out existing debt now only?
So this generation gets "free" college while everyone previously spent a lot on it
and those later generations get what ?
also free?
and all the while the academic institutions make out just fine ....
while teaching communism that promotes themselves only
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"If you save, invest and hold while everyone is getting free money, you are a sucker."
and as we know once government starts giving out free money
it is very hard to end it.
I wonder what would happen with student "debt " going forward .
Are they promising to wipe out existing debt now only?
So this generation gets "free" college while everyone previously spent a lot on it
and those later generations get what ?
also free?
and all the while the academic institutions make out just fine ....
while teaching communism that promotes themselves only
Replacing specific debt with general debt that shifts the obligation from the person who CONSENSUALLY incurred the debt to all the people who didn't. Real logic would say the exact opposite. Fairness would be if the institution provided good value in the first place for their price to the customer who received good value and paid the bill, and if everyone not involved in the transaction stayed out of it.
What were they called when sold, federally backed student loans with a repayment requirement, or federal student loans wink wink?
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says RINO Bushie Washington Examiner:
https://www.newsmax.com/politics/romney-child-taxcredit/2021/02/06/id/1008914/
Furthermore they claim it is budget neutral
Oh, I get it, if we invest in our Nation's children they will all grow up to be tax paying rocket scientists . :wink: :roll:
Or when they claim it is better than Biden's plan - as though that is supposed to make me happy
Bottom line
Romney has zero chance for '24 so he and his plan is a non starter for 75 million people
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In a series of interviews for the great PBS documentary “Commanding Heights,” Shultz made clear how important Ronald Reagan’s economic policies were in restoring the economy. “The economy was basically going nowhere and had inflation,” he recalled. “It was a consequence of not paying enough attention to the supply side of the economy; that is, to freeing people up to react to markets and to engage in their entrepreneurial activities.”
He remained a staunch supporter of supply side economics, telling one of us in a 2016 interview that "the best stimulus of an ailing economy is almost always to reduce the tax and regulatory burdens weighing it down."
- Stephen Moore
https://mailchi.mp/8b203ad12729/unleash-prosperity-hotline-862590?e=17d44a0477
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I was a tremendous admirer of GS. Deep and right on so many issues, a truly class act and a great American. We are blessed that he was there for President Reagan to call upon.
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(https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/810a663b-56b6-4d84-b615-78732b4a8f75.png)
https://mailchi.mp/3e5d57c72eeb/unleash-prosperity-hotline-865040?e=17d44a0477
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https://fee.org/articles/bloomberg-venezuela-turns-to-privatization-after-being-bankrupted-by-socialism/
Bloomberg: Venezuela Turns to Privatization After Being Bankrupted by Socialism
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"Bloomberg: Venezuela Turns to Privatization After Being Bankrupted by Socialism"
looks like we will have to do the same to re - learn what has been demonstrated throughout history
free school health care sick leave PTO family leave maternity leave child care
reparations free energy get out of jail free laws not enforced on party members enforced every way possible on political enemies
free government money make the rick pay for it all
Krugman suddenly silent and hiding in a dacha deep in the woods protected by tenure but realizing the protections of critical race theory does not apply to him; he though because he is a Jew he would be exempt
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https://www.washingtonexaminer.com/opinion/editorials/take-the-win-joe-jobs-numbers-show-no-more-stimulus-is-needed
Jobs up. Closures down. Vaccinations spreading across the nation. No more stimulus needed.
But they passed it anyway. Free money and national socialist objectives advanced, disguised as part of the free money.
The good news is that the 'stimulus' passed and not needed is not a stimulus at all.
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Don't they need to send the House bill and the Senate bill to the Joint Conference Committee now to come up with one version?
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https://www.heartland.org/news-opinion/news/maximum-facts-about-the-minimum-wage
MAXIMUM FACTS ABOUT THE MINIMUM WAGE
MARCH 9, 2021
By James Agresti
The estimated tradeoffs for this meager increase in income is the destruction of 1.4 million jobs, a slight decline in the overall economy, increased inflation, more government debt, and greater burdens on taxpayers.
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Did your local Dem representative tell you this?
Did your local paper tell you this?
Do they all still believe free money?
If it's really free to mandate private sector raises, why are they spending another $2Trillion in public (play) money?
Who pays the millions who lose jobs. Who loses out and for how long when young don't get what would otherwise be their first job?
Do the math.
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(https://i2.wp.com/www.powerlineblog.com/ed-assets/2021/03/Screen-Shot-2021-03-17-at-12.46.39-PM.png?resize=768%2C461&ssl=1)
https://i2.wp.com/www.powerlineblog.com/ed-assets/2021/03/Screen-Shot-2021-03-17-at-12.46.39-PM.png?resize=768%2C461&ssl=1
Not being sufficiently woke, I can't remember if unemployment is good or bad.
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This is a question I used to ask a liberal friend who used to be willing to spar with me:
Are you for or against prosperity?
It's a simple question and the answer separates the sides. The AOC, Bernie Sanders, socialist side opposes wealth (other than their own). On the other side, Jack Kemp famously said about rich people, "what we need is more of them". Moderate Democrats, and Joe Biden used to be one, need to figure out where they are on this.
Is it good for the larger society that I worked hard and saved and invested all my adult life? Nothing heroic but I am one more person willing to pay in (at a reasonable rate) and wanting nothing from the government n the way of payments or support.
Is it bad for their society in a poor country that no one has wealth to hire people at good wages to do big things?
The reason I ask now is that the Biden so called infrastructure proposal includes massive tax rate increases that will discourage further wealth creation including the end of 'stepped up basis' that is the heart of being able to leave assets to your heirs. If you cannot pass along small amounts of wealth, why work, save, invest to accumulate it?
From another thread, G M: March 22, 2021
"The problem is, many on the left have a serious inability to grasp cause and effect".
I've been wanting to copy that quote to this topic. By discouraging wealth creation, we will get less of it. Why is that so hard to grasp? And when we get less orosperity and wealth, whar will be able to do less of as a society? Well, we will be able to do less to clean up the environment. We will be able to do less in the way of health care and public health. We will be able to do less to help the poor. We will employ fewer people. We will have less in wage gains. We will have more poor needing help competing for fewer dollars. We will have less money for future infrastructure. We will lose the ability to borrow in our own currency, cf. Argentina. We will have a diminished ability to defend ourselves against enemies foreign and domestic.
Now, someone from the Left jump in here and explain the other side of it, the benefits of killing the golden goose, of being borrowed to the hilt and being broke. Can't wait to hear it. Instead we will hear tonight from the President the denial of science, that the discouragement and confiscation of private wealth will maje us better, richer. But how do pay for future big government programs without a healthy, vibrant private sector. We can't. (cf. Venezuela)
But: "The problem is, many (all?) on the left have a serious inability to grasp cause and effect."
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"This is a question I used to ask a liberal friend who used to be willing to spar with me:"
I don't know about your friend
but liberals do not want to discuss anything, now they control corporate media entertainment and both houses and the WH they just want to ram their politics down our throats and hunt us like Tasmanian tigers to extinction .
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"I don't know about your friends
but liberals do not want to discuss anything,..."
They think and talk in terms of people (and hate of people, Trump, Trump, Trump) and not policies. But tax and spend, the infrastructure plan coming tonight, is policy, nothing to do with Trump, me or anyone on the right.
In the case of my friends, I think they fear losing the friendship over these matters in polarized times. But doesn't being unwilling to discuss real issues in honest terms, being uncurious to understand the other's view, limit the depth of the friendship?
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"ram their politics down our throats and hunt us like Tasmanian tigers to extinction"
THIS.
"This is a question I used to ask a liberal friend who used to be willing to spar with me:"
I don't know about your friend
but liberals do not want to discuss anything, now they control corporate media entertainment and both houses and the WH they just want to ram their politics down our throats and hunt us like Tasmanian tigers to extinction .
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“But let me offer you my definition of social justice: I keep what I earn and you keep what you earn. Do you disagree? Well then tell me how much of what I earn belongs to you - and why?” —Walter E. Williams
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https://www.zerohedge.com/markets/there-are-absolutely-no-job-seekers-how-trillions-stimulus-sparked-historic-job-market?utm_campaign=&utm_content=Zerohedge%3A+The+Durden+Dispatch&utm_medium=email&utm_source=zh_newsletter
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When you compare incomes of people from different places, it needs to be done with PPP, purchasing power parity. In other words, income dollars need to be adjusted for cost of living. Now we have this:
Dept. of Labor: "Consumer prices rise more than expected, pushed by 9.1% jump in gasoline"
https://www.cnbc.com/2021/04/13/us-consumer-price-index-march-2021.html
Of course gas prices are going up. The administration is blocking pipelines, drilling, refining, even the buying of gas powered vehicles.
Who does that hit hardest? A multi-millionaire with a taxpayer subsidized Tesla plugged in at home, or a tradesman out making a living, paying more for all his materials, now looking at a hundred dollars for a tank of gas?
Biden and the liberals agenda push prices up - on everything. Look what their doing to electricity. Look at the cost of living in the places they run. Look at the price growth in the things they regulate most versus those that are more free market.
Now they are pushing the costs of living up before employment and wages come back. Who does that help?
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Jobs report, 250k 'created' out if one million ' expected'.
https://www.foxbusiness.com/politics/groups-slam-biden-war-small-business-disappointing-jobs-numbers
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Who expects anti-jobs, anti-growth, anti-market policies to create jobs or growth?
Does anyone remember Obama saying those jobs (manufacturing) are never coming back - before Trump and the Republicans brought them back?
Decline is a (bad) choice.
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The Supply-Side Jobs Slowdown
When you pay people not to work, guess what? Many people don’t.
By The Editorial Board
May 7, 2021 6:27 pm ET
An economy doesn’t live by demand alone. There is no clearer evidence of that dictum than Friday’s surprising jobs report for April, which undershot the expectations of economists by more than 700,000. Welcome to the supply-side jobs slowdown.
Employers added a net 266,000 jobs in April, while the unemployment rate ticked up 0.1 percentage point to 6.1%. Payrolls for March and February were revised down a combined 78,000, and 48,000 of the new jobs in April were in government, mostly local education as schools reopened.
The report wasn’t a total washout, as private payrolls grew 218,000, mostly from leisure and hospitality jobs (331,000) as the lockdowns continued to ease. But there were large losses in temporary positions (-111,400), couriers (-77,400), food and beverage stores (-49,400), and nursing homes (-19,500). Some of this reflects a reallocation of jobs as businesses reopen and consumption shifts.
The Keynesians who now run U.S. policy, at the Treasury and Federal Reserve, have been using their usual demand-side playbook. Bathe the country in government cash, keep interest rates at zero, and the resulting rise in consumer demand will drive everything.
They’ve underestimated the supply-chain constraints that have been screaming across the economy for months—from too few workers to the computer chip shortage and soaring lumber and freight prices. The economy can’t produce enough goods and services fast enough to meet the soaring demand from the easing pandemic and government policies that have shoveled cash to consumers and rewarded Americans for not working.
Employers across the country have been complaining for months that the federal $300 weekly jobless bonus has made it difficult to hire. Most lower-income workers can make more sitting on the couch. It’s notable that half of the new labor market entrants last month were teens, most of whom don’t qualify for jobless benefits because of their short or nonexistent employment histories.
This was all predicted a year ago by these columns and a few others, including Sens. Ben Sasse and Lindsey Graham and economists Casey Mulligan and Steve Moore. But even as the economy was growing fast again, Democrats in March extended the $300 weekly bonus into September even as they ladled out a bonanza of other transfer payments.
Democrats claimed their $1.9 trillion spending bill was needed to jolt the economy, though it was fast recovering as vaccines rolled out and lockdowns eased. Now the White House is spinning the jobs miss after its spending blowout as something it expected.
“I want to remind everybody it was designed to help us over the course of a year, not 60 days,” President Biden said Friday, adding that the small job growth is “a testament to our new strategy of growing this economy from the bottom up and the middle out” and underscores the need for more government stimulus.
He also said there was no “measurable” data that people aren’t looking for jobs because it pays more not to work. He should get out more and ask some small business owners. Treasury Secretary Janet Yellen walked that back some by saying unemployment benefits weren’t a “major factor.” But the Labor Department’s latest Jolts survey showed 7.4 million job openings in February. There are plenty of available jobs but not enough willing workers.
The good news for those who are working is that employers are paying more to attract and keep them. Average hourly earnings last month increased at an 8.4% annual rate and even more for lower-income jobs like retail (16.8%) and leisure and hospitality (19.2%). The risk is that these wage increases will become embedded in expectations and lead to a more general inflation.
The policy lesson is to ease government constraints on supply. That means repealing the federal bonus not to work. And it should mean withdrawing the Biden tax increases that are a frontal attack on investment and supply. There is no need for more Keynesian stimulus, which has become part of the problem.
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Great article. The irony of it is, liberals would benefit most from pro-growth policies. Aside from the massive deficit spending, liberals, if they were sincere about helping people in need, would have more money to spend on programs that help the poor or improving the infrastructure if they would optimize private sector growth.
But they don't.
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https://www.nationalreview.com/podcasts/capital-record/episode-16-incentives-still-matter/
44 minute podcast.
Title is understated. Incentives don't just matter, they are everything in economics.
Why are there still deniers of this, and why are those people running our country?
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https://www.ff.org/fdrs-policies-prolonged-depression-by-7-years-ucla-economists-calculate/
FDR's policies prolonged the Great Depression by 7 years. - UCLA economists calculate
Biden wants to flood the economy with $6 trillion of new money, however, lack of money wasn't the cause of the economy closing (mostly in blue states).
This isn't the Great depression - and those policies didn't work then either!
Employment and wage growth was the best ever in 2018, 2019 and in the beginning of 2020 when Wuhan Covid closings began. A year later, we know the virus has a kill rate one tenth of what we were told to justify the first closings. We have multiple vaccines available now to all who want them. The vaccines have a 95% efficacy of preventing the infection and roughly a 100% efficacy of preventing death from covid. Other than not let a good crisis go to waste politically, why are we growing the 'regular' budget by 16% while adding trillions upon trillions of new spending onto it?
Milton Friedman said, "Nothing is more permanent than a temporary government [spending] program."
None other than candidate Barack Obama said in 2008,
WATCH THIS and share it, it's 30 seconds:
https://www.youtube.com/watch?v=1kuTG19Cu_Q
"The problem is, is that the way Bush has done it over the past eight years, is to take out a credit card, from the bank of China, in the name of our children, to drive up our national debt from 5 trillion dollars from our first 42 Presidents, number 43 added 4 trillion dollars by his lonesome, so we now have over 9 trillion dollars of debt, that we are gonna have to pay back. Thirty thousand dollars for every man, woman and child. That's irresponsible! That's unpatriotic!" - Barack Obama at campaign event in Fargo ND, July 3, 2008
Is it?
What a master. In 30 seconds, he blamed it all on Bush while Obama himself was the de facto leader of the Senate in the highest spending years. He brought in the children, framed it in history, put it in per person terms, included the consequence of destroying our future, then he did the same thing in his Presidency, only far worse.
Jump forward 8 years: In President Obama's last fiscal year, 2016, national debt increased by $1,422,827,047,452--That's $12,036 per household - in one year. Total debt of $19,573,444,713,936 had more than doubled from what his 43 predecessors ran up, worse than Bush by two and half times.
That's irresponsible. That's unpatriotic - by times two and a half times. And I don't mean that mockingly; I mean it literally.
https://www.cnsnews.com/news/article/terence-p-jeffrey/federal-debt-fy-2016-jumped-142282704745246
https://treasurydirect.gov/NP/debt/current
Imagine for a second that Barack Obama meant what he said, every word of it, that he truly cared about the economy, the debt, the children, and the future, and the credit card with China, that we really did hold Presidents accountable, that he had not run up the national debt $10 trillion further in his 8 years, that he was patriotic to his country over his party and serious about the economic impact, and now asked to comment on the $6 trillion in new spending proposed by Biden... Play the youtube video again with those arrows aimed at Biden instead of Bush. Irresponsible. Unpatriotic. How about it's just bad policy? What prolonged the Great Depression is destined to make this economy worse too.
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https://www.realclearpolitics.com/articles/2021/05/11/will_biden_reverse_trumps_super_v-shaped_recovery.html
By Stephen Moore
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https://www.jobcreatorsnetwork.com/opeds/democrats-wage-war-on-small-business-with-credit-suppression/
https://www.realclearmarkets.com/articles/2021/05/13/democrats_wage_war_on_small_business_with_credit_suppression_776789.html
Democrats Wage War On Small Business with Credit Suppression
OP-EDAPPEARED IN REALCLEAR MARKETS ON MAY 13, 2021BY ALFREDO ORTIZ
After a brutal year, American small businesses are poised to take advantage of the end of the pandemic and the associated pent-up consumer demand. Many small businesses are looking to scale up to leverage this opportunity by taking out loans to increase supply and capacity. Access to credit will allow small businesses to capitalize on this moment and help lubricate the broader economic recovery.
Yet Congressional Democrats threaten to significantly reduce credit availability by voting to overturn President Trump’s “true lender” rule via the Congressional Review Act as soon as this week. (The CRA allows Congress to spike recent executive orders through a simple majority vote.) This attack on access to capital is part of Democrats’ broader war on small businesses — an assault that includes massive new tax increases and onerous regulations like a $15 federal minimum wage.
Last October, the Trump administration finalized its true lender rule, defining the regulatory requirements and compliance obligations between banks and third-party lenders. It clarifies that banks are generally the real lenders when they partner with intermediaries to offer loans. The order is needed to harness and provide regulatory certainty for the growing number of app-based lenders that make up the fintech revolution. In January, nearly 50 economists and financial scholars noted that reversing this rule would hurt secondary lending markets and reduce access to credit.
Community banks have been decimated over the last decade largely due to onerous Dodd-Frank financial regulations. In Wyoming, for instance, the number of FDIC-insured banks has fallen by nearly half since the year 2000. Fintech has stepped in to fill these banking deserts, helping small businesses access loans that big banks generally don’t offer. These 21st-century lenders make loan origination easier and more consumer-friendly. They increase credit options for small businesses, especially those from underbanked communities.
The rule also helps community banks themselves, which often can’t afford to acquire the personnel and infrastructure needed to offer the wide range of financing options required by consumers. According to a survey by the consultancy Cornerstone Advisors, two-thirds of banks and three-quarters of credit unions said fintech partnerships are important to their business strategies. Reversing the true lender rule would put further financial pressure on community banks across the country and further entrench big banks’ power.
So why do Democrats oppose this rule? They claim it weakens consumer protections. Sen. Chris Van Hollen states that by issuing this rule, “The Trump Administration ripped consumer protections to shreds, leaving Americans vulnerable to unscrupulous predatory lenders who charge outrageous interest rates.” Actually, the rule doesn’t alter consumer protection laws; it allows lenders to extend credit to those limited to more expensive payday or title loan lenders. Fintech fills a vital gap between these non-bank lenders and major financial institutions.
Democrats’ real opposition is likely more due to their paternalistic view that some people can’t understand interest rates, their antipathy toward the needs of small businesses, and their hatred of any reform passed by the Trump Administration.
Over 200,000 small businesses permanently closed during the pandemic. Those that hung on are poised to reap the rewards as the vaccine stimulus begins to pay dividends. Curtailing access to credit for these businesses by using the CRA to eliminate the true lender rule would pull the rug out under them at the worst possible time and put the brakes on the fintech revolution. It would amount to another major escalation in Democrats’ war on small businesses.
Alfredo Ortiz is the president and CEO of the Job Creators Network.
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https://www.realclearpolitics.com/articles/2021/05/20/bidens_inflation_tax_targets_the_poor_and_middle_class_145787.html
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We warned that the policies of Bernie Sanders were the same of those of Chavez, Maduro and Venezuela. We warned that if you enact those policies, you will get those results. Now we have a Joe Biden Administration pursuing Bernie Sanders policies, same as Venezuela. In just four short months, the main concern of the electorate now is inflation.
Fine, so what are we in for?
Venezuelan economy: In 2018, the annual inflation rate reached 929,790% and was expected to reach 10,000,000% by the end of 2019. According to the October 2019.
If we want that here, keep doing exactly what we are doing.
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I have to ask Biden and everyone who votes Left, do you even want prosperity and widespread economic growth? If so, why do you keep doing the opposite? Wayne Winegarden explains how this works in Forbes this month. The Biden approach substitutes government money for private income on the demand side, and directly harms the supply side.
https://www.forbes.com/sites/waynewinegarden/2021/05/10/its-time-for-a-supply-side-resurgence/
May 10, 2021,02:16pm EDT|852 views
It’s Time For A Supply-Side Resurgence
Wayne Winegarden
Economic Growth and Prosperity
The Biden administration’s multi-trillion-dollar stimulus and spending policies are exclusively demand-side measures aimed at supporting the consumer. But this focus is blinding the Biden team from mounting economic crises that are resulting from this anti-growth agenda.
Instead, the federal government desperately needs to implement a comprehensive supply-side agenda – low-taxes, affordable government spending, sound money, free international trade, and low-cost regulations.
Starting with spending, Keynesian logic is driving President Biden’s spending proposals that will, in total, expand the federal budget by nearly $6 trillion dollars. Pre-Covid, the entire federal budget was only $4.4 trillion.
The demand-centric economic models claim that this spending boosts demand, which then encourages greater production. The expanding production creates even more demand, which starts a virtuous cycle that ultimately promotes broad-based economic growth.
Even under the generous assumption that government spending is just as efficient as private sector spending, which is unlikely given the current size and expanded scope of the federal government, every dollar that the government spends means that the private sector has one less dollar to spend. And, this is true whether the government funds the spending through taxes or debt.
Materiality Across Asset Classes: A Look At Fixed Income ESG Integration
Consequently, there is no stimulus from government spending once the sources of the government funding are appropriately considered. Every positive impact that the government spending creates is completely offset by an equal and opposite negative impact from the reduced spending in the private sector.
But, this is not the end of the story. Government taxation and borrowing creates disincentives and distortions that disincentivize economic growth. These are the supply-side considerations that the demand-side models informing the Biden Administration ignore.
President Biden proposes funding his $6 trillion spending bonanza by increasing corporate income and capital gains taxes. Corporate income tax rates would go from around the global average to one of the highest corporate income tax rates among the developed economies. Capital gains taxes would increase to its highest rate in over a century.
These tax increases will disincentivize the investment that is necessary to incent the innovations necessary to promote broad-based prosperity and robust economic growth. Due to these effects, the Biden stimulus plan will ultimately de-stimulate the economy.
The Biden plan also fails in its distributional intent. While the President promised not to raise taxes on anyone making less than $400,000 annually, he cannot promise that the economic consequences will not harm people of all income levels. Empirical studies have found that workers bear a disproportionate share of the tax increases’ costs through more unemployment and sluggish wage growth.
And it will not simply be big companies and the rich who will directly pay more in taxes. According to the U.S. Chamber of Commerce, there are over 1.4 million small business organized as corporations. These smaller “Mom and Pop” businesses will be hit directly with the corporate tax hikes in the Biden plan.
As the Chamber notes, many of these small businesses suffered some of the worst consequences during the pandemic but “would also see their tax bills increase significantly. In turn, this would have a negative impact on small businesses’ investment and growth plans and, most critically, hiring and job creation.” Put differently, the Biden tax increases are counterproductive because they will create the very problems that their proposed spending increases are supposed to resolve.
Monetary policy, which is a much more complicated and esoteric policy area, suffers from a similar problem.
Over-simplifying, the Federal Reserve uses a demand-centric framework to actively manage the economy. Their actions are unintentionally creating an unstable pricing environment that causes wild swings in commodity prices, persistent asset bubbles and crashes, and a volatile dollar-euro exchange rate. These instabilities impose many adverse consequences on families and businesses (particularly small businesses) including suppressing returns for savers in safe assets, encouraging people to take on greater financial risks than they should, and distorting the economy’s capital structure.
Another important plank of the supply-side policy mix is a sound regulatory structure that ensures important social issues are addressed while imposing as low a cost as possible. Unfortunately, the President’s policies here would also take us in the wrong direction through regulations that would be economically costly, yet achieve few results.
For instance, his target of reducing GHG emissions between 50% and 52% below 2005 levels by 2030 is unachievable, yet will be incredibly costly for lower- and middle-income families who cannot afford significant increases in the price of energy.
Similarly, when President Biden indicated he would support “temporarily” waiving biopharmaceutical patent rights for Covid-19 vaccines, he undermined one of the U.S. economy’s key comparative advantages – a regulatory system that protects intellectual property (IP) rights.
Thanks to an environment that respects intellectual property, the U.S. has become a global leader in cutting edge industries such as the biopharmaceutical sector. Waiving these rights is political theater because the IP protections are not causing vaccine shortages in many developing countries. Worse, undermining property rights will discourage investment in U.S. high-tech sector over the long-term, threatening the creation of good paying U.S. jobs of the future.
Taken altogether, the Biden economic agenda is dis-incentivizing economic growth. Once the initial surge out of the shutdowns peters out, we will see a stagnant economy that exacerbates income inequality, reduces prosperity, and weakens long-term growth. Ultimately, the financial stability for millions of families will be threatened.
A principled supply-side economic agenda would rectify these problems. From a fiscal perspective, a supply-side agenda would replace the current complex anti-growth tax system with a streamlined system that has smaller compliance costs and imposes fewer distortions on the economy. As the evidence amassed by the U.S. Chamber of Commerce demonstrates, the real-world benefits from streamlining the tax system includes a more vibrant environment for businesses, large and small, that expands employment and leads to broad-based growth in incomes.
The flip side of taxes is spending. As I have argued previously, government spending is just like any other good. As more and more government services are provided, the value of that spending declines. Eventually, should the government budget continue to grow, its value will become less than the value of those resources in the private sector.
Judged against the goal of maximizing economic growth, the amount of government spending should be around 16% of the economy. Instead of this growth maximizing rate, federal outlays are now around 31% of the economy, which is all-time highs for the U.S. during peacetime. The unprecedented spending is why the total debt of the federal government is now larger than the entire economy (129% of GDP).
Reforming this clearly unaffordable amount of spending is an essential plank of a supply-side policy mix. This should be achieved by imposing strict controls over the growth of spending. Within this tight budget constraint, spending should be reprioritized to reflect pressing public needs (such as infrastructure) as opposed to the many wasteful and lower-valued projects.
While space limitations restrict a detailed discussion of the other policy areas, the basic logic is that the government should promote a rules-based environment that enhances the ability of private individuals to work and thrive.
The focus of monetary policy should be establishing a stable price level that does not punish savers nor distort the capital structure. This requires replacing the discretionary authority of the Federal Reserve with a rules-based system. There are many sound proposals, and most would be a large improvement over the current volatile system.
The current regulatory morass should be streamlined to minimize its costs on private businesses and individuals. Similarly, trade with other countries should be expanded to foster greater opportunity for all Americans.
In contrast to the current government-centric approach of the Biden Administration, a supply-side economic policy mix recognizes that market driven growth, freer international trade, and a stable price system are the sine qua non for creating broad-based and sustainable economic prosperity.
Wayne Winegarden
I am a Senior Fellow in Business and Economics at the Pacific Research Institute and the Director of PRI's Center for Medical Economics and Innovation. My research explores the connection between macroeconomic policies and economic outcomes, with a focus on the health care and energy industries. I have over 25 years of experience advising Fortune 500 companies, medium and small businesses, and trade associations. I received my Ph.D. in economics from George Mason University.
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Three pillars of Bidenomics will bring our economic demise:
Reversing energy independence
Increasing government dependence
Embracing "Modern Monetary Theory"
https://www.washingtonexaminer.com/opinion/three-pitfalls-of-bidenomics
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Good bullet points.
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https://nypost.com/2019/10/10/zimbabwe-struggles-with-hyperinflation-its-a-nightmare/
Modern Zimbabwean Monetary Theory
Three pillars of Bidenomics will bring our economic demise:
Reversing energy independence
Increasing government dependence
Embracing "Modern Monetary Theory"
https://www.washingtonexaminer.com/opinion/three-pitfalls-of-bidenomics
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https://nypost.com/2019/10/10/zimbabwe-struggles-with-hyperinflation-its-a-nightmare/
Modern Zimbabwean Monetary Theory
Three pillars of Bidenomics will bring our economic demise:
Reversing energy independence
Increasing government dependence
Embracing "Modern Monetary Theory"
https://www.washingtonexaminer.com/opinion/three-pitfalls-of-bidenomics
They are deniers of math, science, history and world affairs if they don't believe these policies have these results. Also, they are the definition of insanity, trying reckless irresponsible socialist communist totalitarian governance again and again and again expecting a different result.
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The economic recovery (Super V) of last May-Aug was from business reopening wage growth, not from the government handouts.
https://www.researchgate.net/publication/351784462_CARES_Act_Stimulus_Did_Not_Replace_Lost_Wages
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Trump achieved highest wage growth in 20 years.
Now Biden has the highest inflation in 30 years.
https://www.nationandstate.com/2021/06/10/core-consumer-prices-surge-at-fastest-rate-since-1992/
Choose economic policies wisely.
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"Trump achieved highest wage growth in 20 years.
Now Biden has the highest inflation in 30 years.
https://www.nationandstate.com/2021/06/10/core-consumer-prices-surge-at-fastest-rate-since-1992/
Choose economic policies wisely."
But Krugman. and Reich told us "the world is awash in cash" (most in the hands of the top 10 K people in the world
so nothing is a biggee
spend on .....
*debt as per GDP* is supposedly better than in past (or any other ratio they can dream up to play the numbers around to swindle us into thinking all is good)
look at the data, c'mon man
problem is the type of data, how it is arranged or used in "formulas" can easily be manipulated to show almost anything
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https://www.marketwatch.com/story/an-inflation-storm-is-coming-for-the-u-s-housing-market-11623419869
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https://www.zerohedge.com/markets/seven-things-nobody-talks-about-will-eventually-matter-lot
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Could just as well be written today.
https://www.americanexperiment.org/milton-friedman-on-the-proper-role-of-government-in-the-united-states/
The battle over a ceiling on Federal spending has spotlighted the major economic problem facing this country in the coming decade: can we halt the growth of Leviathan––to use Hobbes’s expressive term for government? Or will Leviathan crush us?
Until 1930, Federal spending was less than 5 per cent of the national income except during or just after major wars (the War of 1812, the Civil War, World War I). With the same exceptions, local and state governments spent several times as much as the Federal government. For example, in 1930, Federal spending was 4 per cent of national income; state and local spending, 11 per cent. Spending at all levels of government combined thus amounted to roughly 15 per cent of the national income.
The New Deal changed all that. Already by 1936, the final year of FDR’s first term, Federal spending had reached 13 per cent of the national income and had passed state and local spending.
World War II brought an enormous expansion of Federal spending, and the end of the war a sharp reduction. But then the New Deal pattern resumed. By 1950, Federal spending amounted to 17 per cent of national income; by 1960, to 22 per cent; and by now, to more than 26 per cent. State and local spending––over and above Federal grants––has been rising even more rapidly; from 8 per cent of national income in 1950 to nearly 14 per cent today.
In short, active war apart, from 1789 to 1930, residents of the U.S. never spent more than about 15 per cent of their income on the expenses of government. In the past four decades, that fraction has nearly tripled and is now about 40 per cent.
War and defense spending have played an important role in the growth of government, but only a supporting role. During each war, Federal spending rose sharply and so did Federal taxes. After the war, both spending and taxes were reduced, but taxes were reduced less than spending. Instead, following one of Parkinson’s laws, peacetime spending rose to exhaust the revenue. As a result, up to 1930, Federal spending, as a fraction of national income, consists of a series of steps, each higher than the preceding, though lower than an intervening wartime peak.
The New Deal started a new pattern of ever higher spending and taxes for civilian purposes that has continued ever since. The recent increase in total Federal spending has occurred despite a decline in military spending from 12 per cent of national income in 1968 to 8 per cent today. And certainly the recent rapid rise in state and local spending can hardly be blamed on the military.
The plain fact is that governments are now spending an amount approaching half of our national income not because of war or fear of war, not because of the machinations of a military industrial complex, but because of a major change in the past 40 years in the role that we, as citizens, have assigned to the government.
Until 1930, citizens of the U.S. viewed the Federal government primarily as a keeper of the peace and an umpire. Today, we view it as responsible for treating every social and personal ill, as the source from which all blessings flow.
Senator McGovern is riding this wave. His proposals would boost Federal spending from 26 to 31 per cent of national income. Mr. Nixon has expressed great concern about the growth in spending, yet his proposals would only hold the line rather than cut sharply Federal spending as a fraction of national income.
Neither a legislated ceiling nor any other administrative devices designed to improve the budgetary process––welcome though they would be––will halt Leviathan unless we, as citizens, once again change drastically the role that we assign to government.
There is hardly one among us who believes that he is getting his money’s worth for the nearly half of his income that government––Federal, state, and local––spends for him. Yet so long as we simply blame waste and bureaucracy, but continue to believe in the omnipotence and beneficence of government, the trend toward ever bigger government will continue.
That trend will stop only when and if we come to recognize that government is the problem, not the solution; that the general welfare requires that we dethrone the Federal government from its role as Big Brother and restore it to its historic role as keeper of the peace and umpire.
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https://www.marketwatch.com/story/an-inflation-storm-is-coming-for-the-u-s-housing-market-11623419869
(https://i0.wp.com/www.powerlineblog.com/ed-assets/2021/07/image004-1.png?resize=600%2C565&ssl=1)
https://i0.wp.com/www.powerlineblog.com/ed-assets/2021/07/image004-1.png?resize=600%2C565&ssl=1
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https://www.oann.com/imf-economist-bidens-policies-to-turn-u-s-into-latin-american-style-economy/
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https://www.oann.com/imf-economist-bidens-policies-to-turn-u-s-into-latin-american-style-economy/
https://www.politico.com/news/2021/07/05/biden-housing-dilemma-low-income-497921
per Insty: THE ‘ELITES’ ARE DETERMINED TO CRASH THIS COUNTRY WITH NO SURVIVORS.
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https://www.oann.com/imf-economist-bidens-policies-to-turn-u-s-into-latin-american-style-economy/
https://www.politico.com/news/2021/07/05/biden-housing-dilemma-low-income-497921
per Insty: THE ‘ELITES’ ARE DETERMINED TO CRASH THIS COUNTRY WITH NO SURVIVORS.
Government is going to solve a problem that government caused - by doing more of the same. They can't even define affordable housing. The proposal is to bring back the policies that caused the last collapse.
Some call it Obama 3.0. More descriptive is Dumb and Dumber.
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"Some call it Obama 3.0. More descriptive is Dumb and Dumber."
Same thing.
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May I put this pearl of wisdom in our political economics thread!
ccp: How about we are trying to stave off socialism?!
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The Leftists approach to economics should be exhibit one and come immediately to mind everyone utters the phrase:
Deniers of Science.
More like: Deniers of science, math and history.
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https://pjmedia.com/news-and-politics/tyler-o-neil/2021/07/13/an-ominous-portent-for-america-under-biden-gets-even-worse-n1461371
https://www.oann.com/imf-economist-bidens-policies-to-turn-u-s-into-latin-american-style-economy/
https://www.politico.com/news/2021/07/05/biden-housing-dilemma-low-income-497921
per Insty: THE ‘ELITES’ ARE DETERMINED TO CRASH THIS COUNTRY WITH NO SURVIVORS.
Government is going to solve a problem that government caused - by doing more of the same. They can't even define affordable housing. The proposal is to bring back the policies that caused the last collapse.
Some call it Obama 3.0. More descriptive is Dumb and Dumber.
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https://pjmedia.com/news-and-politics/tyler-o-neil/2021/07/13/an-ominous-portent-for-america-under-biden-gets-even-worse-n1461371
Who knew that continuing to print $3 trillion per year excess worthless money even after the crisis was over would affect the value of [existing] money?
https://www.cbsnews.com/news/federal-deficit-to-hit-3-trillion-congressional-budget-office-says/
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https://nomadcapitalist.com/2014/04/20/top-5-worst-cases-hyperinflation-history/
Good thing that can't happen here!
https://pjmedia.com/news-and-politics/tyler-o-neil/2021/07/13/an-ominous-portent-for-america-under-biden-gets-even-worse-n1461371
Who knew that continuing to print $3 trillion per year excess worthless money even after the crisis was over would affect the value of [existing] money?
https://www.cbsnews.com/news/federal-deficit-to-hit-3-trillion-congressional-budget-office-says/
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https://fraser.stlouisfed.org/title/economic-review-federal-reserve-bank-atlanta-884/september-1982-34971/supply-side-economics-guiding-principles-founding-fathers-266083
Federal Reserve Bank of Atlanta, 1982, pages 42-53
...
[Summary / Conclusion]
American statesmen and the American public were influenced importantly (either directly or indirectly) by such writers as Locke, the English Whigs, Montesquieu, Hume, and the Physiocrats. These writers' views were fully consistent with and indeed synonymous with supply-side principles. Benjamin Franklin supported many of these supply-side views. As a result of these firmly held views in the American colonies and the sudden imposition of additional British taxes and regulations after 1763, the American Revolution occurred. In the post-Revolutionary period, American thinking was further influenced by Adam Smith's Wealth of Nations. Smith and the leaders of the American Revolution had been influenced by the same supply-side-oriented writers; they had a common intellectual heritage that helps to explain the immediate American acceptance and endorsement of Smith's views. Nevertheless, Smith's lucid articulation of these supply-side principles had a powerful influence on American statesmen who mapped out the structure of a new government This influence is unmistakable in the economic policy realm of the Federalist Papers and the U.S. Constitution. Supply-side economics, then, was the very essence of the economic principles serving to inspire the American Revolution and to guide the architects of the U. S. Constitution. Supply-side economics represents a re-emergence of the economic principles governing the founders of the American experience. It is, consequently, astonishing to observe the opposition to and skepticism of supply-side economics not only by the American leaders and statesmen but especially by economists in the U. S. This is particularly surprising in view of the increases in both marginal tax rates and government regulation in recent years. These additional burdens are in many ways identical to the government intervention imposed by mercantilists that was resisted by our American forefathers centuries earlier.86 This article is excerpted from a longer working paper, "Supply-Side Economics and the Founding Fathers: The Linkage," Working Paper Series, Federal Reserve Bank of Atlanta, July 1982. —Robert E. Keleher
ROBERT E. KELEHER was monetary adviser at the Federal Reserve Board, and also served as Senior Macroeconomist at the Council of Economic Advisors. He has also been Research Officer and Senior Financial Economist at the Federal Reserve Bank of Atlanta and an economist at First Tennessee National Corporation, a major regional bank holding company. He is coauthor of one book and the author of more than 40 articles in academic journals and other publications.
https://www.amazon.com/Monetary-Policy-Market-Price-Approach/dp/1567200591
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http://ace.mu.nu/archives/394812.php
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You Just Don't Understand Socialism Like I Do,' Says College Freshman To Man Who Escaped Socialism On A Raft
https://babylonbee.com/news/you-just-dont-understand-socialism-like-i-do-says-college-freshman-to-man-escaping-socialism-on-raft
America's newspaper of record.
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Who knew?
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Americans Prefer Economic Growth To Income Redistribution
https://tippinsights.com/untitlamericans-prefer-economic-growth-to-income-redistributioned-2/
When polled, more than half of Americans chose economic growth as the higher priority for the country, while a quarter picked income redistribution.
Larry Kudlow, the former Chief of the National Economic Council under President Trump, collaborated with the latest TIPP Poll to gauge Americans' opinion of the proposed tax hikes. The TIPP Poll conducted at the end of June covered close to 1500 American adults, a cross-section of the society. The data reads:
63% Growing the economy
25% Redistributing income
12% Not sure
Even though this is seen as a partisan issue, it is interesting to note that more than half of those polled from both sides of the aisle favor economic growth over income redistribution. Only the magnitude of support varies.
Political Affiliations
Republicans, predominantly, choose economic growth, and very few among them favor income redistribution. The gap in the numbers supporting each method of economics is vast.
78% Growing the economy
15% Income redistribution
8% Not sure
But, there is much support from the other side. While more than half align with the economic growth option, a third chose income distribution as a priority. Among Democrats, the difference between the two choices is only 23 points.
55% Growing the economy
33% Income redistribution
13% Not sure
As expected, the Conservatives fall between the red and blue parties when it comes to numbers. While close to two-thirds favor economic growth, more than a quarter prefer income redistribution.
61% Growing the economy
27% Income redistribution
12% Not sure
(https://tippinsights.com/content/images/size/w1000/2021/07/Higher-Priority_-Growing-Economy-Or-Redistributing-Income_.png)
[Doug] Maybe policy ought to reflect the will of the people.
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https://www.americanexperiment.org/research-from-germany-shows-that-lower-corporate-taxes-lead-to-increased-wages-and-employment/
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The Black unemployment rate INCREASED to 8.8% in August.
The unemployment rate for Black men INCREASED to 9.1% in and INCREASED to 7.9% for Black women in August.
The unemployment rate for Black youth (16-19 years old) INCREASED to 17.9% in August. https://bls.gov/news.release/empsit.t02.htm
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Under Trump and Republicans, black unemployment hit its all time low with record wage gains.
Whose policies are racist?
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Americans spent more on taxes than food, clothing, healthcare and entertainment COMBINED.
https://www.cnsnews.com/article/washington/terence-p-jeffrey/americans-spent-more-taxes-2020-food-clothing-healthcare-and
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https://www.msn.com/en-us/money/news/biden-official-reveals-the-failure-behind-america-s-epic-chip-shortage/ar-AAOMjeJ?ocid=winp1taskbar
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GPF
More supply chains problems. Suppliers for a slate of U.S. tech giants in China, including Apple, Dell and Tesla, are warning of major cuts to production capacity due to stricter government policies on energy consumption. Chipmaking giants like Qualcomm, Nvidia and Intel are also vulnerable, potentially worsening the global chip crunch. Some suppliers say they’ve already had to halt or reduce operations after local authorities in Jiangsu province slashed electricity supplies to industrial users through the end of this month. This came after Beijing in mid-August warned local governments in several key industrial hubs against exceeding annual energy consumption caps and carbon reduction targets.
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Chip making. New Delhi and Taipei have reopened talks on building chip manufacturing factories in India. Taiwan is reportedly seeking a bilateral investment agreement and tariff cuts on materials involved in the chipmaking process, as well as further talks on a bilateral trade deal. U.S. chipmaking giant Intel, meanwhile, officially broke ground on a big new fab in Arizona, just months after Taiwan Semiconductor Manufacturing Corp., the world’s largest manufacturer of advanced chips, did the same.
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https://pjmedia.com/vodkapundit/2021/10/13/forget-what-youre-being-told-heres-the-real-reason-for-californias-trucker-shortage-n1523635
There are multiple causes, including union rules preventing extra shifts or longer hours to get the ships unloaded, a lack of rail capacity for the extra goods, and not enough truckers to haul everything away.
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(Doug) Also the programs of paying people to not work makes it hard to find people who will work. Calif rules ban owner operators with (not union). That takes away a lot of available truckers. Transportation rules say over the road truckers must be 21. Men who don't go to college are generally 18 and therefore do something else.
Government is the cause. Solution must be more government.
Important article. Sorry I don't have access to the full text.
Hat tip: Mark Levin radio show today.
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https://www.theburningplatform.com/2021/10/16/what-5-or-more-gas-will-mean/#more-251046
Plan accordingly.
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https://www.zerohedge.com/economics/they-insist-everything-will-be-fine-we-face-shortages-chicken-coffee-diapers-fish-sticks
Happening now.
Cloward-Piven in action.
Plan accordingly.
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https://amgreatness.com/2021/10/29/big-tech-companies-apple-and-amazon-warn-of-worsening-supply-chain-crisis/
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https://nypost.com/2021/10/31/pete-buttigieg-says-supply-chain-crisis-could-continue/
Pete Buttigieg says supply chain woes could last as long as pandemic.
NO. Supply side woes last as long as Democrats are in power.
What is Supply Side Economics? Simply a movement to reduce the government imposed barriers on supply and production.
What are the problems at the port? Government imposed barriers on moving supply to where it is needed.
"Democrats' spending package will 'fight inflation'": Buttigieg
Transportation Secretary Pete Buttigieg on climate change, how the Democrats' spending will 'fight' inflation and the latest on backups in the supply chain.
https://video.foxnews.com/v/6279638991001
Umm, Spending what you don't have, can't borrow but just print: THAT IS INFLATIONARY.
17 Nobel Laureates say better roads will help with inflation? Paul Krugman has 16 friends? Barack Obama, Jimmy Carter and Yassir Arafat are Nobel Prize winners. This bill isn't about better roads, note that he worked child care, meaning government takeover of child care, into every thought. See G M post: Also vaccinations!
Buttigieg ignoring the question goes on: "...making child care affordable for everyone in this country..."
(Like they made health care affordable, college affordable, housing affordable?)
But we just read it raises the cost of child care for a single mother by thousands per year - if she marries!
He should say, keeping Dads out of the house for every family in America.
BTW, Why is this newborn mother/father(?) already back to work and wearing a business suit? What changed from a minute ago when he could not be disturbed with cabinet secretary responsibilities? No mention of paid time off during a crisis, mostly because government policies are the problem, not the solution.
He's got $12,500 for rich people to buy a new electric vehicle but nothing to say about regular people waiting on the ports.
Natural gas prices DOUBLED in one year!
"So glad you raised this Chris."
Are you fkig kidding? Natural gas is what POOR PEOPLE use to heat their homes, and COLD kills for more people than heat.
Doubling of transportation costs under this transportation secretary is a "short term transitory problem"?
- No your governance is the short term transitory problem.
Not to pick on weak media in the wrong thread, but Chris Wallace asks tough questions, then settles for bullshit answers.
On the screen, "Ships waiting to unload at the Port of LA increased from 55 to 77" in the 2 weeks since Biden announced the new policy.
Buttigieg answer: It's the pandemic. 'Closures in Beijing in late summer mean lack of goods on the west coast of the US in early fall.' WHAT??!! These are goods that were shipped from China in late summer, sitting there, stopping the ships from going (empty) back to China where all our goods are made.
Chris Wallace followup: "What will your kids wear for Halloween?"
I kid you not.
Buttigieg top three answers for supply chain disruptions: Child Care, Child Care, Government Child Care.
Forget about how bad this administration is, the worst ever. How bad are the media and voters who tolerates this?
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It's deliberate. "You don't have food or fuel because of the unvaxxed!"
https://nypost.com/2021/10/31/pete-buttigieg-says-supply-chain-crisis-could-continue/
Pete Buttigieg says supply chain woes could last as long as pandemic.
NO. Supply side woes last as long as Democrats are in power.
What is Supply Side Economics? Simply a movement to reduce the government imposed barriers on supply and production.
What are the problems at the port? Government imposed barriers on moving supply to where it is needed.
"Democrats' spending package will 'fight inflation'": Buttigieg
Transportation Secretary Pete Buttigieg on climate change, how the Democrats' spending will 'fight' inflation and the latest on backups in the supply chain.
https://video.foxnews.com/v/6279638991001
Umm, Spending what you don't have, can't borrow but just print: THAT IS INFLATIONARY.
17 Nobel Laureates say better roads will help with inflation? Paul Krugman has 16 friends? This bill isn't about better roads, note that he worked child care, meaning government takeover of child care, into every thought.
Buttigieg ignoring the question goes on: "...making child care affordable for everyone in this country..."
(Like they made health care affordable, college affordable, housing affordable?)
But we just read it raises the cost of child care for a single mother by thousands per year - if she marries!
He should say, keeping Dads out of the house for every family in America.
BTW, Why is this newborn mother/father(?) already back to work and wearing a business suit? What changed from a minute ago when he could not be disturbed with cabinet secretary responsibilities? No mention of paid time off during a crisis, mostly because government policies are the problem, not the solution.
He's got $12,500 for rich people to buy a new electric vehicle but nothing to say about regular people waiting on the ports.
Natural gas prices DOUBLED in one year!
"So glad you raised this Chris."
Are you fkig kidding? Natural gas is what POOR PEOPLE use to heat their homes, and COLD kills for more people than heat.
Doubling of transportation costs under this transportation secretary is a "short term transitory problem"?
- No your governance is the short term transitory problem.
Not to pick on weak media in the wrong thread, but Chris Wallace asks tough questions, then settles for bullshit answers.
On the screen, "Ships waiting to unload at the Port of LA increased from 55 to 77" in the 2 weeks since Biden announced the new policy.
Buttigieg answer: It's the pandemic. 'Closures in Beijing in late summer mean lack of goods on the west coast of the US in early fall.' WHAT??!! These are goods that were shipped from China in late summer, sitting there, stopping the ships from going (empty) back to China where all our goods are made.
Chris Wallace followup: "What will your kids wear for Halloween?"
I kid you not.
Buttigieg top three answers for supply chain disruptions: Child, care, Child care, Child care.
Forget about how bad this administration is, the worst ever. How bad are the media and voters who tolerates this?
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The price doubled. gas and oil, because the policy direction arrow changed. All policies now are aimed at curtailing supply. They closed the construction of a major, NEEDED pipeline the first day. The only argument against the pipeline was that it aids in supply and they are at war against it. Therefore, THEYT OWN IT.
As G M says, "It's deliberate."
While were at it, what else is deliberate? Trump had black and Hispanic unemployment at record lows. They reversed the policies that led to that great achievement, and they know the consequences. Anyone who tracks the numbers knows. Why are they not held to account that the usual 'unintended consequences' of their policies, slow growth, no growth, unemployment, inflation, unaffordable basics and multi-generational government dependency, are all intentional?
Why can't we run a 2-4 year or longer information campaign on these truths and call them out on all it until it stops?
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Just like Newt's Contract with America in 1996!
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November 5, 2021
View On Website
Open as PDF
Status of the Global Economic Recovery
The recovery is on track but plenty of factors could derail it.
By: Geopolitical Futures
Global Economic Trends and Projections | 2021
(click to enlarge)
This is not our first Weekly Graphic on global economic trends, and it certainly won't be our last. Economies around the world are still climbing out of the hole created by the pandemic, and plenty of things could derail the recovery, from supply chain shortages to rising prices.
Earlier this year the International Monetary Fund warned about disparities in the recoveries between advanced and developing economies. Differences in vaccine accessibility and governments' fiscal capacity have widened the gap as the year went on. Another factor is inflation: Advanced economies have less poverty and thus more ability to absorb price increases, especially temporary ones, compared to developing countries, where rising food costs in particular can be devastating.
Commodity prices are another important variable. The IMF expects oil prices to increase by nearly 60 percent this year compared to their 2020 low, while non-oil commodity prices like food and metals could climb by almost 30 percent. However, higher commodity prices produce winners as well as losers. Major metals exporters like Peru and Chile, for instance, will fare better than big importers like China.
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https://redstate.com/mike_miller/2021/11/06/biden-considers-killing-another-us-pipeline-as-oil-crisis-continues-n471035
They sure don’t act like they have to worry about elections, do they?
It's deliberate. "You don't have food or fuel because of the unvaxxed!"
https://nypost.com/2021/10/31/pete-buttigieg-says-supply-chain-crisis-could-continue/
Pete Buttigieg says supply chain woes could last as long as pandemic.
NO. Supply side woes last as long as Democrats are in power.
What is Supply Side Economics? Simply a movement to reduce the government imposed barriers on supply and production.
What are the problems at the port? Government imposed barriers on moving supply to where it is needed.
"Democrats' spending package will 'fight inflation'": Buttigieg
Transportation Secretary Pete Buttigieg on climate change, how the Democrats' spending will 'fight' inflation and the latest on backups in the supply chain.
https://video.foxnews.com/v/6279638991001
Umm, Spending what you don't have, can't borrow but just print: THAT IS INFLATIONARY.
17 Nobel Laureates say better roads will help with inflation? Paul Krugman has 16 friends? This bill isn't about better roads, note that he worked child care, meaning government takeover of child care, into every thought.
Buttigieg ignoring the question goes on: "...making child care affordable for everyone in this country..."
(Like they made health care affordable, college affordable, housing affordable?)
But we just read it raises the cost of child care for a single mother by thousands per year - if she marries!
He should say, keeping Dads out of the house for every family in America.
BTW, Why is this newborn mother/father(?) already back to work and wearing a business suit? What changed from a minute ago when he could not be disturbed with cabinet secretary responsibilities? No mention of paid time off during a crisis, mostly because government policies are the problem, not the solution.
He's got $12,500 for rich people to buy a new electric vehicle but nothing to say about regular people waiting on the ports.
Natural gas prices DOUBLED in one year!
"So glad you raised this Chris."
Are you fkig kidding? Natural gas is what POOR PEOPLE use to heat their homes, and COLD kills for more people than heat.
Doubling of transportation costs under this transportation secretary is a "short term transitory problem"?
- No your governance is the short term transitory problem.
Not to pick on weak media in the wrong thread, but Chris Wallace asks tough questions, then settles for bullshit answers.
On the screen, "Ships waiting to unload at the Port of LA increased from 55 to 77" in the 2 weeks since Biden announced the new policy.
Buttigieg answer: It's the pandemic. 'Closures in Beijing in late summer mean lack of goods on the west coast of the US in early fall.' WHAT??!! These are goods that were shipped from China in late summer, sitting there, stopping the ships from going (empty) back to China where all our goods are made.
Chris Wallace followup: "What will your kids wear for Halloween?"
I kid you not.
Buttigieg top three answers for supply chain disruptions: Child, care, Child care, Child care.
Forget about how bad this administration is, the worst ever. How bad are the media and voters who tolerates this?
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(https://pjmedia.com/instapundit/wp-content/uploads/2021/11/Screen-Shot-2021-11-07-at-5.04.01-PM-543x600.png)
https://pjmedia.com/instapundit/wp-content/uploads/2021/11/Screen-Shot-2021-11-07-at-5.04.01-PM-543x600.png
Instapundit: "DON’T WORRY, PETE BUTTIGIEG IS ON THE JOB! sort of"
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Has it gotten worse? Perhaps she needs to go back to spending more quality time with her husband and campaign props.
(https://pjmedia.com/instapundit/wp-content/uploads/2021/11/Screen-Shot-2021-11-07-at-5.04.01-PM-543x600.png)
https://pjmedia.com/instapundit/wp-content/uploads/2021/11/Screen-Shot-2021-11-07-at-5.04.01-PM-543x600.png
Instapundit: "DON’T WORRY, PETE BUTTIGIEG IS ON THE JOB! sort of"
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Instapundit: "DON’T WORRY, PETE BUTTIGIEG IS ON THE JOB! sort of"
doesn't matter how worthless he is
at this rate Pete will have a tank named after him
as well as a couple of military academies and bases
for you know ......
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Progress. Some of China’s myriad supply chain problems are getting better. The state grid over the weekend insisted that electricity supplies have returned to normal and will remain that way, thanks to a rapid rebound in thermal coal inventories. (Chinese coal imports doubled in October.) But now diesel prices are surging. And despite attempts to rein in panic over food shortages, folks are still hoarding some staples, such as cabbage.
Chinese exports. The supply chain snarls haven’t had a major impact on Chinese exports. October alone saw more than $300 billion in Chinese exports, according to official figures, or a 27.1 percent annualized increase. The month pushed China’s trade surplus to an all-time high. Shipments to Europe were up 44 percent compared to a year earlier. Imports also soared by around 20.6 percent in October year over year, though it’s getting hit here by the shipping container pileup in the West.
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https://fee.org/articles/real-wages-declined-05-in-october-amid-mounting-inflation/
REAL WAGES DECLINED 0.5% IN OCTOBER
Every Biden policy is the opposite of growth economics.
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https://worldview.stratfor.com/article/race-boost-semiconductor-manufacturing-global-powers-take-their-marks?id=743c2bc617&e=de175618dc&uuid=d5de7741-28bd-4058-b4c5-4fb30a887271&mc_cid=8faadc3ae7&mc_eid=de175618dc
ASSESSMENTS
In the Race to Boost Semiconductor Manufacturing, Global Powers Take Their Marks
13 MIN READNov 11, 2021 | 22:43 GMT
Employees make chips at a semiconductor factory in China's eastern Jiangsu province on March 17, 2021.
Employees make chips at a semiconductor factory in China's eastern Jiangsu province on March 17, 2021.
(STR/AFP via Getty Images)
Increased investments following the pandemic-induced semiconductor shortage will lead to more chip factories being built in more parts of the world. But the sector’s rigid nature and boom-and-bust cycles will still result in countries facing similar supply disruptions in the future. China, the European Union, Japan and the United States are all offering incentives to chipmakers amid the global semiconductor shortage in the hopes of insulating themselves from a repeat in the future. Governments seeking to become largely self-sufficient in the semiconductor industry will find that their investment leads to a dead end. Not all government-backed programs will succeed and some risk wasting billions of dollars of public money on projects that fail. Taiwan Semiconductor Manufacturing Company (TMSC), the global contract chipmaker heavyweight, already plans to invest $100 billion over the next three years. And South Korea, home to Samsung, is targeting $450 billion in investment into semiconductors over the next decade.
China: In its 14th Five-Year Plan adopted in March, Beijing singled out the semiconductor industry as one of seven strategic sectors to prioritize investment in. China is already targeting 70% self-sufficiency by 2025.
European Union: The European Union wants to double its share of global chipmaking to 20% by 2030. In September, the European Commission also unveiled the European Chips Act to promote investment into the sector.
Japan: In June, the Japanese government said it plans to treat the semiconductor industry’s growth as a “national project” akin to energy and food supplies, after Japan’s share of global chip making dropped from 50% in 1988 to just 10% in 2019.
United States: The U.S. Congress is currently weighing the CHIPS for America Act that has passed the Senate and includes $52 billion in support for the semiconductor industry.
The chip shortage during the pandemic exposed how critical the semiconductor industry is to the modern economies, which — coupled with growing U.S.-China competition over technology — will drive government support toward the sector long after the current supply disruptions end. In the short term, the semiconductor shortage will continue to ripple across the global economy, Little respite appears to be on the horizon, with U.S. automakers Ford and General Motors both reporting lower profits on Oct. 27 and saying they see the chip shortage for automakers lasting into 2022. On Oct. 21, Intel CEO Pat Gelsinger also said he thinks the overall shortage will last until 2023. At the same time, tech competition between the United States and China will lead to both countries eyeing further investments into the semiconductor sector as Washington seeks to strengthen its own production capabilities while Beijing tries to build a domestic industry.
The United States has viewed China’s rise in the semiconductor industry as a potential disruptor to the current U.S.-led semiconductor and technology industries, even though some parts of the supply chain (like assembly and packaging) are no longer based in the United States. Many China hawks in Washington fear that Chinese advancements in the semiconductor sector could pave the way for China to eventually replace the United States as the global leader in tech innovation for decades to come.
With a structural overhaul of the global semiconductor industry likely unrealistic, most countries will have little choice but to partner with established players like TSMC, Samsung or Intel. The semiconductor industry is very fragmented and requires high levels of specialization to offset the steep costs of investment. This, in turn, often leads to just a handful of players dominating a few segments of the market. Taiwan’s TSMC and United Microelectronics Corporation (UMC), for example, specialize in contract chip making. These companies neither design the chips they produce nor build most of the equipment they use to manufacture semiconductors. The Netherlands’ ASML, on the other hand, holds a monopoly over some of the world’s most advanced lithography machines needed to build high-end chips that companies like TSMC must buy. The high barriers to entry and the tens of billions of dollars of investment needed to enter the semiconductor industry means that the European Union, the United States and Japan are likely to have the most success in partnering with established chip manufacturers. The alternative can be an expansive long-term investment that those governments are probably unwilling to pay for.
China has struggled to advance its semiconductor sector, despite pouring billions of dollars worth of investment into the industry over the past decade. China is targeting 70% self-sufficiency in chip production by 2025, but only reached 16% self-sufficiency in 2020. One of China’s initially most promising semiconductor ventures, Tsinghua Unigroup, also defaulted on a bond payment in 2020 and is now facing bankruptcy unless it receives a bailout from Beijing.
Though China will make gains in older generation semiconductor technologies, the country will continue to fall short of Beijing’s self-sufficiency goal, especially as the West becomes increasingly nationalistic over the industry amid the competition. China’s overall fab plant capacity growth over the next decade is likely to far outpace that of Japan, Europe and the United States. Chinese companies, however, are largely focusing on older generation technology. China’s SMIC is only just starting to manufacture 10nm or fewer chips. The company also still relies on imported chemicals, raw materials and lithography machines that China cannot produce domestically. This means it will take years for SMIC to invest in the same cutting-edge technologies that competitors like Intel are already researching and investing in. U.S. export controls are impeding China’s ability to import higher-end machines, like those produced by ASML, making it unlikely China will be able to domestically develop those anytime soon as well. But while it’ll struggle to compete with TSMC, Intel and Samsung in the high-end chip market, China can reduce its reliance on other chips, which represent the bulk of its domestic semiconductor consumption for household appliances and Internet-of-Things devices, among other products.
China’s most advanced semiconductor equipment manufacturing company is just beginning to produce equipment that can produce 28nm chips, several generations older than current cutting-edge chips in the market.
Japan will never regain the market share in chipmaking it had in the 1980s, but the country’s unique position in the electronics industry will still enable it to increase its semiconductor manufacturing capacity and seize other market opportunities across the supply chain. Although its share of semiconductor manufacturing has declined, Japan remains an important part of the overall semiconductor industry in certain areas, like chemicals. Japan’s domestic semiconductor industry and human capital, along with its ideal location in East Asia and large customer base, also makes it an attractive destination for nearby chipmakers seeking to diversify their production capabilities, like Taiwan’s TMSC.
On Oct. 4, the Taiwanese chipmaker announced that it would build its first fabrication plant in Japan. The $7 billion factory will use TSMC’s older generation 22-nm and 28-nm processes, which commonly make chips for consumer products that Japan’s electronics industry specializes in, like televisions. TMSC recently announced the plant will be built in partnership with Japanese electronics giant Sony, which is investing $500 million in the project.
Tokyo Ohka Kogyo is the world’s largest maker of photoresist materials, which are needed to produce the extreme-ultraviolet lithography machines that manufacture high-end chips. Japanese companies account for about 90% of the global market share of photoresist materials. Japenese companies Shin-Etsu Chemical and SUMCO also produce more than half the world’s silicon wafers.
The United States’ chipmaking capacity will also rise as Intel, TSMC and others increase investments into fabrication plants within its borders. But the breadth of the U.S. tech sector will keep it dependent on global semiconductor supply chains, even as domestic capacity increases. Despite a decline in logic chip manufacturing share over the last few decades, the United States remains an indispensable part of the overall semiconductor industry. U.S. intellectual property is found throughout the industry; the United States is also home to some of the world’s most important fabless semiconductor companies like Qualcomm, which designs chips that companies like TSMC manufacture. Chip design remains one of the more technologically advanced parts of the industry. The United States plays a large role in manufacturing analog and memory chips.
Nonetheless, the growth of TSMC and Samsung in Asia is now fueling bipartisan support in Washington for increased domestic manufacturing of chips. Although the CHIPS Act has not been fully passed by Congress, some level of federal government support is likely in addition to state- and municipal- level support. This has resulted in several companies announcing plans to build new semiconductor fabrication plants in the United States, including TSMC. But even with these efforts, the United States will remain tied to the global industry, as many U.S.-produced semiconductors will still be shipped elsewhere for the final and more labor-intensive packaging, assembly and testing stages of chipmaking. And most of the electronics where those chips will ultimately be used will also be manufactured in other countries. The United States will still need large imports of materials, chip-making equipment and other inputs for chips as well, further increasing its reliance on the global supply chain.
Construction has already begun on a new $12 billion TSMC plant in Arizona, which is scheduled to come online in 2024.
Samsung is planning to build a $17 billion plant for high-end chips in the United States and is currently evaluating sites for the plant.
Intel is also building new chipmaking capacity in the United States, with plans to introduce new CPU chips every year between 2021 and 2025, as part of its so-called “IDM 2.0” strategy to build more semiconductors for companies that design but don't manufacture them (like Qualcomm and, Apple), in addition to designing and manufacturing its own chips.
Europe’s chip ambitions are facing the steepest uphill battle, as the European market offers few customers (i.e. companies that design but don't make chips) and consumers (i.e companies that build smartphones and personal computers) for high-end chips that chipmakers like Samsung and TSMC transact with. Europe is not tied into the broader electronics industry the same way that the United States and Asia are, with only limited industrial customers for both chip design companies and contract chip makers to target. Still, the European Commission wants to target high-end chips because it is the most innovative part of the industry. The commission’s strategy has been criticized for focusing too much on that aspect of the industry instead of parts of the semiconductor industry that make more sense for Europe to focus on, like the automotive sector. Europe’s large industrial manufacturing base provides a large market for legacy chips. No single European country can compete with the type of aid that China or the United States can give the industry, requiring a pan-European approach — something French President Emmanual Macron has backed significantly — to make meaningful progress. Financial support, however, would still need to come from governments. France and Germany have pledged around 9 billion euros (roughly $10 billion) in funding for the sector, although it remains to be seen if commitments survive German coalition talks and French elections next year. But while Europe will have a harder go in boosting domestic semiconductor manufacturing compared with other regions, U.S.-based Intel has given EU leaders some hope, with the company’s CEO announcing in September that it would build a “big, honking chip fab” in Europe.
Intel plans to build two chip fabrication plants at a mega-site in Europe that could hold up to eight factories as a part of its IDM 2.0 strategy. The plants would be among the company’s most advanced. Intel’s new business model will require building new chipmaking plants.
Intel currently has just four chipmaking plants located outside of North America, including two in Israel and one in Ireland. As the company seeks to build more chip fabrication plants, Intel may see greater growth opportunities in Europe compared with Asia, where it has no existing presence and would face many competitors.
The United States, China, Japan and Europe’s different strategic interests in boosting semiconductor manufacturing could increase the number of high-end chip factories located outside of Taiwan and South Korea by 2025. Having more plants in more places, however, will not defuse the threat of another global semiconductor shortage. Over-investment could also still create a bust in the industry. The geographic concentration of semiconductor manufacturing was only a small part of the chip shortage and it is likely that the shortage would have been nearly as bad over the last two years even if the plants were widely distributed. A quick, unanticipated surge in demand for chips occurred due to the pandemic as more consumers wanted to buy laptops, networking devices, electronics and other products to work from home. The semiconductor industry and the long investment horizons to increase capacity means that the industry will never be structured to deal with sudden shifts in demand. Moreover, the automotive industry’s chip shortage has been exacerbated by the intense certification process that the auto sector undergoes, which makes shifting suppliers particularly difficult. When the pandemic began, auto companies canceled many of their orders, anticipating the economic crisis hitting demand for vehicles. But when they went back to place new orders as demand rose, automakers found themselves behind other customers. And because of the certification process, it takes months for auto companies to shift to other suppliers. The supply issues automakers are dealing with would have thus occurred regardless of whether the chips were made in Taiwan or Germany. The booms and busts the chip industry often sees as new capacity comes online will also continue to be a problem. In fact, the United States, China, Europe and Japan’s increased focus on domestic manufacturing capacity — along with that of established producers South Korea and Taiwan — could lead to an even bigger bust, should many of these new plants be built by the mid-2020s. The high-end chip market at the core of many Western strategies may not be entirely immune to this risk either. At some point, saturated demand for new computers, smartphones and other home electronics that use advanced processors may blunt further demand growth since most people won’t replace as many devices as they did at the start of the pandemic. But the bigger risk may be for older mature technologies, where the scale of China’s investment may overwhelm markets if the country no longer needs to import as many legacy chips. And as seen in other industries, China’s self-sufficiency targets can lead to producers being less responsive to market price signals to reduce production or investment.
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This article is from May of this year:
Milton Friedman’s Revenge
Column: The specter of inflation haunts Joe Biden’s presidency
Matthew Continetti • May 7, 2021
https://freebeacon.com/columns/milton-friedmans-revenge/
Treasury Secretary Janet Yellen got into trouble Tuesday for telling the truth. That morning, at a conference sponsored by the Atlantic, she raised the possibility that one day the Federal Reserve may raise interest rates "to make sure our economy doesn't overheat."
Anyone with a basic understanding of economics knew what she was talking about. The combination of President Joe Biden's gargantuan spending and the accelerating economic recovery may well lead to a rise in consumer prices and hikes in interest rates. But an end to the Federal Reserve's program of easy money would hurt asset prices and possibly employment as well.
Which is not what most investors want to hear. When Yellen's words reached Wall Street, the market tanked. By the afternoon she was in retreat, telling the Wall Street Journal CEO summit that she had been misunderstood. "So let me be clear," she said. "That’s not something I'm predicting or recommending."
No, of course not. But it still might happen anyway.
A specter is haunting the Biden administration—the specter of inflation. Past inflations have not only harmed consumers, savers, and people on fixed incomes. They have also brought down politicians. Among the risks to the Democratic congressional majority is a rise in prices that lifts inflation to near the top of voters' concerns, coupled by the type of Fed rate increase that hits stocks and housing. Inflation is one more signpost on the road to Republican revival, along with illegal immigration, crime, and semi-closed public schools embracing far-left critical race theory.
The classic definition of inflation is too much money chasing too few goods. That might also describe America sometime soon—if not already. [This was 6 months ago] The economy has started its post-virus comeback. Jobs and growth are on the upswing. U.S. households sit on a trillion-dollar pile of savings. Over the last year, on top of its regular spending, the federal government has appropriated a mind-boggling amount of money: a $2 trillion CARES Act, a $900 billion COVID-19 relief bill, and a $2 trillion American Rescue Plan. And President Biden wants to spend about $4 trillion more.
Surging this incredible amount of cash into an economy that is rapidly approaching capacity may have unintended and harmful consequences. But the Biden administration is either unconcerned about inflation or afraid of bringing it up in public.
Why? Well, one reason is that earlier warnings, after the global financial crisis in particular, didn't seem to come true. (The inflation may have shown up in the dramatic ascent in prices of stocks and bonds, as well as in odd places such as the market for high-end art.) Another reason is that some economists think a little bit of inflation would be a good thing. But the main explanation may be related to status-quo bias: Inflation hasn't been a driving force in our economic and public life for decades, and so we blithely assume it won't be in the future.
Which is why an experienced leader worries about repeating the mistakes of the past. And yet, for a politician who came to Washington in 1973, Joe Biden has a lackadaisical attitude toward inflationary fiscal and monetary policy. Was he paying attention? It was the great inflation of the '60s and '70s, caused in part by high spending, the Arab oil embargo, and spiraling wages and prices in a heavily regulated and unionized economy, that helped ruin the presidencies of Gerald Ford and Jimmy Carter.
Inflation led to bracket creep, with voters propelled into higher income tax brackets by monetary forces over which they had no control. And bracket creep inspired the tax revolt, supply-side economics, and the Reaganite idea that, "In this present crisis, government is not the solution to our problem; government is the problem." The eventual cure for inflation was the painful "shock therapy" administered by Federal Reserve chairman Paul Volcker and what at the time was the worst recession since the Great Depression.
Why anyone would want to repeat this experiment in the dismal science is a mystery. Biden, however, is fixated not on inflation but on repudiating the legacy of the man known for describing it as "always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."
Milton Friedman, whose empiricism led him to embrace free market public policy, was the most influential economist of the second half of the 20th century. But Biden has a weird habit of treating Friedman as a devilish spirit who must be exorcised from the nation's capital. For Biden, Friedman represents deregulation, low taxes, and the idea that a corporation's primary responsibility is not to a group of politicized "stakeholders" but to its shareholders. "Milton Friedman isn't running the show anymore," Biden told Politico last year. "When did Milton Friedman die and become king?" Biden asked in 2019. The truth is that Friedman, who died in 2006, has held little sway over either Democrats or Republicans for almost two decades. But Biden wants to mark the definitive end of Friedman and the "neoliberal" economics he espoused by unleashing a tsunami of dollars into the global economy and inundating Americans with new entitlements.
The irony is that Biden's rejection of Friedman's teachings on money, taxes, and spending may bring about the same circumstances that established Friedman's preeminence. In a year or two, the American economy and Biden's political fortunes may look considerably different than when Janet Yellen blurted out the obvious about inflation. [Prescient] Voters won't like the combination of rising prices and declining assets. Biden's experts might rediscover that it is difficult to control or stop inflation once it begins. And Milton Friedman will have his revenge.
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https://www.nytimes.com/2021/11/11/opinion/inflation-history.html
Paul Krugman says inflation is nothing to worry about.
Worry.
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Paywalled. No worries, the point is clear.
https://historicphotographs.blogspot.com/2013/04/using-banknotes-as-wallpaper-during.html
https://www.nytimes.com/2021/11/11/opinion/inflation-history.html
Paul Krugman says inflation is nothing to worry about.
Worry.
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quote author=G M
Paywalled. No worries, the point is clear.
Right. I meant to say, don't click. Assuming this Nobel prize winner is not a moron, what you will find there is the worst kind of duplicity to back his desired (political, not economic) conclusion.
------------------------------
https://historicphotographs.blogspot.com/2013/04/using-banknotes-as-wallpaper-during.html
Yes. Who could look around the world or back through history and not conclude inflation is dangerous?
2% inflation (current Fed target) is horrible IMHO. The years and the compounding roll by kind of quickly. Then the all powerful government taxes that against you as a "gain". That's worse than a moral hazard; it's theft by armed robbery - on a RICO racketeering scale.
And THIS is not 2% inflation!
---------------------------------
Here is Obama chief adviser, Harvard Economics Professor Jason Furman:
[Biden policies] "They poured kerosene on the fire."
“A sizeable chunk of the inflation we’re seeing is the inevitable result of coming out of the pandemic,” said Furman, now an economist at the Harvard Kennedy School.
Furman suggested, though, that misguided policy played a role, too. Policymakers were so intent on staving off an economic collapse that they “systematically underestimated inflation,” he said.
“They poured kerosene on the fire.”
A flood of government spending — including President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households in March — overstimulated the economy, Furman said.
“Inflation is a lot higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States is, the same supply chain issues. But they didn’t do nearly as much stimulus.’’
--------------------------------
quote author=DougMacG
Paul Krugman says inflation is nothing to worry about.
Worry.
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https://medium.com/@ryan79z28/im-a-twenty-year-truck-driver-i-will-tell-you-why-america-s-shipping-crisis-will-not-end-bbe0ebac6a91
"There is literally NO incentive to change ... This is the new normal."
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He talks about shortages of truckers and equipment. I would add to that, 50% increase in fuel cost (Joe wasn't slow on that one), and telling them all future vehicles have to be electric, does not motivate the owner operator to invest or drive more.
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".He talks about shortages of truckers and equipment. I would add to that, 50% increase in fuel cost (Joe wasn't slow on that one), and telling them all future vehicles have to be electric, does not motivate the owner operator to invest or drive more."
the LEFT:
just a small price to pay for saving humanity from the rapid destruction of the Earth
:roll:
as well as increase the control over us from the elites
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".He talks about shortages of truckers and equipment. I would add to that, 50% increase in fuel cost (Joe wasn't slow on that one), and telling them all future vehicles have to be electric, does not motivate the owner operator to invest or drive more."
the LEFT:
just a small price to pay for saving humanity from the rapid destruction of the Earth
:roll:
as well as increase the control over us from the elites
"as well as increase the control over us from the elites" <--------THIS!!!
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https://scottrasmussen.com/61-say-policy-should-focus-on-encouraging-economic-growth-27-say-fighting-economic-inequality/
61% SAY POLICY SHOULD FOCUS ON ENCOURAGING ECONOMIC GROWTH; 27% SAY FIGHTING ECONOMIC INEQUALITY
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Right. For one thing, because fighting "economic inequality doesn't raise the income of those you intend to help.
If the real vote was near 61-27%, that would be quite a challenge for the purveyors of vote fraud to overcome.
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And this: 57% to 23% say inflation is a tax on the poor.
https://scottrasmussen.com/57-say-inflation-is-a-tax-on-the-poor-23-disagree/
23% disagree? How so?? Didn't understand the question? Afraid truthful answer will hurt them politically?
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https://accordingtohoyt.com/2021/11/12/when-the-wheels-come-off/
Plan accordingly.
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https://dailycaller.com/2021/11/11/patel-biden-reckless-spending-inflation-undoing/?utm_source=piano&utm_medium=email&utm_campaign=2906&pnespid=vbM2DiBALvhAhuDBvG66SpGN5EmjUJRlfLC1m7dzoBlmXQmMhVqmeAcUDSjGTinCmNWrCV_z
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https://dailycaller.com/2021/11/11/patel-biden-reckless-spending-inflation-undoing/?utm_source=piano&utm_medium=email&utm_campaign=2906&pnespid=vbM2DiBALvhAhuDBvG66SpGN5EmjUJRlfLC1m7dzoBlmXQmMhVqmeAcUDSjGTinCmNWrCV_z
Go long on heavily armed rural homesteads.
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https://accordingtohoyt.com/2021/11/12/when-the-wheels-come-off/
Plan accordingly.
Nice article full of wisdom. Very optimistic - in an end of the world, collapse of civilization sort of way.
It took a woman to mention prep includes a sewing kit.
"People are already buying direct from farmers."
[Doug: Might want to find a good one and take them out to dinner or something, while we still have restaurants, and hope they remember you when the grocery store shelves go empty.]
3- What they’re doing is going to encourage more and more going under/going over/going around. Which makes people more independent and resourceful and less likely to fall for their bag of tricks.
[It's more thasn a little ironic that the more they tried to take away your right to defend, the more arms were purchased.]
Keep your clothes and weapons where you can find them in the dark.
Adapt, Improvise, Overcome.
- Yes. I would add what the Left said during Trump, resist.
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From another topic, questions came up,
Does intelligence matter?
Why is the left so concerned with importing millions of low IQ 3rd worlders?
Permanent underclass. Easily controlled and manipulated.
May I add one point to that.
The Lifeblood of the redistributive economics they sell is income inequality.
Every time they bring in one low wage or no wage person, and they are bringing them in by the millions, they lower the median income in the country and widen the income inequality they pretend to hate so badly.
It's the age old question, do you want the issue or do you want the solution, and they of course want the issue to live forever. They make no pretense otherwise. In their mind, income inequality justifies everything they support.
We are told we need government healthcare, government child care, government housing, and so on, because of evil income inequality and then they do everything they can to perpetuate and widen it to justify more and more socialism across every sector of the economy.
That is how they control everyone and everything.
It used to be that illegals were the hardest workers. Now it's become a vacation, retirement plan, no matter your age. This is the fault of Democrats, not the people they are luring in.
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"Every time they bring in one low wage or no wage person, and they are bringing them in by the millions, they lower the median income in the country and widen the income inequality they pretend to hate so badly."
Well articulated! I will be using this.
"We are told we need government healthcare, government child care, government housing, and so on, because of evil income inequality and then they do everything they can to perpetuate and widen it to justify more and more socialism across every sector of the economy , , , This is the fault of Democrats, not the people they are luring in"
Very good follow up point.
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"Every time they bring in one low wage or no wage person, and they are bringing them in by the millions, they lower the median income in the country and widen the income inequality they pretend to hate so badly."
- BTW, Puerto Rico statehood falls into this same trap. It's a wonderful place with wonderful people but it is not anywhere near in line with the other 50 states economically, (and speaks a different language). Someone doing well in PR, maybe a doctor or lawyer, is someone Democrats here would define as needing a leg up. Then we start with the handouts that pervert incentives for them and bankrupt the budget and taxpayers for us.
Federal minimum wage law is an example of this. It doesn't do much damage when it is set below what most low wage workers make anyway. In the PR economy, the 15/hr proposal is economically the equivalent of $68 here:
https://fee.org/articles/puerto-ricos-effective-minimum-wage-would-be-68hour-under-biden-plan/
If you want the same laws to have the same effect, they would have to be adjusted, and then they aren't the same laws.
West Germany was bold to absorb the economy of East Germany and they seem to have succeeded, but there are many differences, such as a history as one country, common culture and language and national desire to make that sacrifice, whatever it takes. European integration with Middle East migration, OTOH, has not been successful.
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https://www.youtube.com/watch?v=3LtUaOeh9zY&feature=emb_imp_woyt
Natural gas prices are highest in decades because of negligent political policies.
WHO DOES THIS HURT?
What happened to the promise, no tax increases for anyone making less than 400k per year?
Inflation IS a tax. And it's a tax that brought down every President associated with it. This President cannot blame someone else for it. He canceled pipelines and drilling in his first minutes in office.
Some history on Presidents and inflation and out of control energy costs:
https://www.politico.com/news/magazine/2021/11/16/joe-bidens-empty-inflation-toolbox-522552
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Heal Gaia by making America a 3rd world country!
https://www.youtube.com/watch?v=3LtUaOeh9zY&feature=emb_imp_woyt
Natural gas prices are highest in decades because of negligent political policies.
WHO DOES THIS HURT?
What happened to the promise, no tax increases for anyone making less than 400k per year?
Inflation IS a tax. And it's a tax that brought down every President associated with it. This President cannot blame someone else for it. He canceled pipelines and drilling in his first minutes in office.
Some history on Presidents and inflation and out of control energy costs:
https://www.politico.com/news/magazine/2021/11/16/joe-bidens-empty-inflation-toolbox-522552
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"Heal Gaia by making America a 3rd world country!"
Sounds crazy but so many people actually favor that or are neutral toward it that I feel the need to clarify, I oppose making America a 3rd world country. Poorer countries are dirtier and unhealthier. Blocking prosperity does not make us cleaner. It's just the opposite. People will burn something to stay warm if clean natural gas is unaffordable or unavailable.
Sorry but Brazil, Russia, India and China do not have tighter environmental standards. The plastic in the ocean is coming from 10 rivers in Asia and Africa. Sanitation systems cost money and require energy. Poverty solves nothing.
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"Heal Gaia by making America a 3rd world country!"
Sounds crazy but so many people actually favor that or are neutral toward it that I feel the need to clarify, I oppose making America a 3rd world country. Poorer countries are dirtier and unhealthier. Blocking prosperity does not make us cleaner. It's just the opposite. People will burn something to stay warm if clean natural gas is unaffordable or unavailable.
Sorry but Brazil, Russia, India and China do not have tighter environmental standards. The plastic in the ocean is coming from 10 rivers in Asia and Africa. Sanitation systems cost money and require energy. Poverty solves nothing.
https://www.theburningplatform.com/2021/11/16/this-is-how-they-intend-to-get-us-to-you-will-own-nothing-and-be-happy/#more-253084
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I wonder how many billions in capital "gains" revenues they make for every point of inflation.
-------------------------------------------------
Total net worth = US$16 Trillion
8% Biden inflation = 1.3 trillion per year
Capital gains tax rate federal plus state = 25 - 30%
Potential government revenue from inflation theft: $400 billion
Times 4 years, that pays for a lot of infrastructure, in their mind.
That is without any real gain. And they want to tax unrealized, inflationary "gains".
It is criminal.
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https://www.newsbusters.org/blogs/business/joseph-vazquez/2021/11/16/defeat-paul-krugman-admits-i-got-inflation-wrong
New York Times economist Paul Krugman appears to have finally admitted defeat on the issue of inflation, adding another notch to his belt of being consistently wrong on economic issues. In a shocking tweet, Krugman conceded: “I got inflation wrong; I didn't see the current surge coming.
-----------------------------------------------------------
Paul Krugman Wrong - his words. But we already knew that on the forum where he alone is known as the index of leading contrary indicators:
Index of leading contrary indicators says don't worry
« Reply #2015 on: November 12, 2021, 06:53:52 AM »
https://www.nytimes.com/2021/11/11/opinion/inflation-history.html
Paul Krugman says inflation is nothing to worry about.
Worry
------------------------------------------------------------
One might ask, what else is he wrong about, but who has the time.
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quote author=DougMacG link=topic=1467.msg139997
"Sorry but Brazil, Russia, India and China do not have [cleaner environments]. The plastic in the ocean is coming from 10 rivers in Asia and Africa. Sanitation systems cost money and require energy. Poverty solves nothing."
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https://www.upi.com/Top_News/World-News/2021/11/16/india-India-air-pollution-lockdown/2651637092222/
Officials weigh lockdown for New Delhi as pollution levels skyrocket
(https://cdnph.upi.com/svc/sv/upi_com/2651637092222/2021/1/a4cde089a0b8d4377f59bb5961f095d7/Officials-weigh-lockdown-for-New-Delhi-as-pollution-levels-skyrocket.jpg)
From the article:
Officials in India are debating the need to institute a lockdown for New Delhi as northern regions of the country remain blanketed by a thick layer of toxic smog.
The air quality has become so bad that justices on the country's supreme court last weekend ordered authorities to halt all nonessential travel on roads in the National Capital Region and directed offices to close in the area, which caused tens of millions of people to work from home on Monday. However, it remained unclear if or when such an unprecedented lockdown would take place, according to NPR.
Schools across New Delhi, home to more than 20 million, closed or switched to remote learning on Monday due to the risk of breathing the toxic air.
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Ripped from the forum, Trump's to economic adviser makes the case, Dems deny science.
https://nypost.com/2021/11/17/facts-trump-dems-claims-on-donalds-economy/
Trump steered the economy to the right direction with corporate tax cuts.
When President Donald Trump took office in 2017, economists around the world had accepted the fact that the US economy had entered the “new normal” where economic growth would be low, and wage growth nonexistent. Trump’s team argued that deregulation, trade policy and tax cuts could bring us back to the old normal or, more memorably, make America great again.
The economy’s response to these policies confirmed everything Trump said would happen, and the Democrats’ rush to reverse his policies with their misnamed “Build Back Better” plan is the highest form of science denial.
Thanksgiving dinner cost soars 14 percent, most expensive year ever
The week in whoppers: Kamala’s border dodge, Psaki’s inflation rubbish and more
What’s the plan? Dems privately grill Powell on inflation as renomination looms
Inflated ego? NYT contributor dismisses inflation worries as ‘rich people flipping their sh–‘
Democrats argued, for example, that the corporate tax cuts would lead to a collapse in tax revenue. That hypothetical collapse is a key excuse for the huge tax hike they now contemplate. Yet corporate tax revenue in 2017 was, according to the Congressional Budget Office, $297 billion. The CBO now estimates that 2021 revenue will be $370 billion.
Even if one adjusts for economic growth by expressing the numbers as a share of GDP, corporate revenue has climbed proportionally by 7.2 percent. Just as Trump promised, the dynamic effects of the corporate tax reduction led to revenue going up, not down.
The point was not to make businesses rich. Trump’s team argued that the explosion in the business sector would benefit workers, famously promising that a typical family’s wages would jump $4,000 in three to five years. That assertion was widely ridiculed by the same Democratic economists now pushing the Build Back Better plan. Yet before the pandemic struck, wages were well ahead of that schedule, jumping about 50 percent more than that, $6,000.
An assembly line worker works on a 2021 Ford Bronco on the line at Michigan Assembly Plant, Monday, June 14, 2021, in Wayne, Michigan.
Blue-collar workers had flourished under the Trump administration’s sound economic policies.
The booming economy especially benefited those less fortunate. Seven million people were lifted off of food stamps. Poverty rates for Hispanic and African Americans reached record lows, as did their unemployment rates. Income inequality declined by the most in decades. Blue-collar wages rose faster than white-collar wages.
Wealth inequality even declined, with the bottom half of the wealth distribution seeing their wealth increase by 40 percent, in part because home ownership skyrocketed. The share of African Americans owning their own homes climbed from 41.7 percent to 46.4 percent.
One could go on and on. Against that backdrop, the Build Back Better campaign is nothing short of a factually challenged policy reversal that promises to harm the American worker.
The massive corporate tax hike planned will chase jobs, incomes and factories overseas, while the green spending binge accomplishes practically nothing. Democrats will lift the top marginal income tax rate to the highest in the developed world, penalizing noncorporate businesses even more than corporations. Trump killed the “new normal” for a while, but Biden is intent on bringing it back.
What stuns the most is the profound lack of intellectual curiosity required to roll back these policies. Trump’s team had a theory of how things would turn out if their tax cuts were passed. The subsequent data matched that theory.
If Democrats don’t want to give those policies credit, then at the very least, they should put forward their own theory for why the lower and middle classes flourished after the tax cuts. Why is corporate tax revenue so much higher now despite the lower rates? Why did income inequality decline so much, while incomes climbed five times more in the Trump years than they did under President Barack Obama? Why will lifting marginal tax rates increase capital formation as opposed to magnifying supply disruptions and increasing inflation?
President Joe Biden’s “Build Back Better” agenda is dismantling his predecessor’s achievements — making Americans pay in high inflation.
Of course, there is no reasonable alternative explanation grounded in economic science. Which makes support for the bill despite all of the latest evidence unconscionable.
Kevin Hassett served as chairman of President Donald Trump’s Council of Economic Advisers and is vice president of the Lindsey Group and a distinguished visiting fellow at the Hoover Institution.
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https://townhall.com/columnists/timothynash/2021/11/22/the-teachings-of-milton-friedman-and-thanksgiving-2021-n2599444
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Countries With the Cleanest Environments in the World Are Also the Most Economically Free, Research Shows
Research shows that countries with the highest levels of economic freedom also have the highest environmental performance,
Monday, November 22, 2021
https://fee.org/articles/the-countries-with-the-cleanest-environments-in-the-world-are-also-the-most-economically-free-research-shows/
More info in Environmental thread.
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I remember a conversation with a friend who blamed oil company greed for high gas prices during the aftermath of Hurricane Katrina.
Production and flow stopped for a time. The price mechanism responded near perfectly as the scarce resource went to it's most valued uses, almost no outages. Then prices returned to normal.
The supply curve had been turned on its ear. Price and demand adjusted. The only thing that stayed constant through all of it, before, during and after Hurrican Katrina was 'corporate greed'. I mean seriously, does a liberal really believe that when gas prices are low, it is because the greed level went? has anyone ever heard of market forces, supply and demand?
--------------------------------
Here is F.E.E. calling out Elizabeth Warren for her economic ignorance:
https://fee.org/articles/elizabeth-warren-just-blamed-high-gas-prices-on-corporate-greed-here-s-why-that-doesn-t-make-any-sense/
Americans are feeling the impact of inflation on their wallets, especially at the pump.
The latest inflation data show a 6.2 percent year-over-year increase in consumer prices, the highest level of inflation recorded since 1990. Gas prices are seeing a particularly acute spike, rising roughly 49.6 percent over the last year. Suffice it to say consumers aren’t happy with such crushing increases in the costs of essentials, and concern over inflation is becoming a top political issue. So, it’s not surprising that politicians like Senator Elizabeth Warren are already twisting themselves in knots trying to deflect blame for rising prices.
In a recent MSNBC appearance, the progressive senator from Massachusetts argued that gas prices are rising not because of government-fueled inflation but simply due to corporate greed by oil companies like Chevron and Exxon.
“We know exactly what the oil companies pay attention to, what is their main number one priority: profit,” she said. “If this were just ordinary inflation, we might see prices go up. But prices at the pump have gone up, why? Well, let me give you a hint: Chevron, Exxon have doubled their profits.”
“This isn’t about inflation… this is about price-gouging for these guys,” Warren continued. “When we see prices go up we’re all concerned, and the Republicans want to come in and just try to hammer on one thing about this economy. But we’ve got to pay attention to the fact that folks like the oil companies say this is just another opportunity to make profits, and we need to call them out on that.”
Elizabeth Warren
@SenWarren
"Prices at the pump have gone up. Why? Because giant oil companies like @Chevron and @ExxonMobil enjoy doubling their profits. This isn't about inflation. This is about price gouging for these guys & we need to call them out."
[How can you teach at Harvard and be that dumb?]
Senator Warren’s attempt to pin the blame for rising gas prices on corporate greed makes little sense. Are companies “greedy” in the sense that they’re focused on increasing profits? Yes, absolutely. (Although that’s not actually a bad thing). But it does not in any way explain the current increase in gas prices that is hurting Americans.
Chevron and Exxon are no more or less greedy or profit-focused than they were last year. Or the year before that. Or 20 years ago. There’s simply no reason to believe that they suddenly became extra greedy this year, or something.
So, too, are we supposed to believe that gas companies are uniquely greedy or especially profit-obsessed? Surely the CEOs of massive companies in other sectors that haven’t seen as drastic price hikes, like food, are just as greedy. If corporate greed could really explain high gas prices, why wouldn’t all prices be skyrocketing from all corporations?
The true causes of high gas prices are complicated, and ultimately, prices are set by supply and demand—not by the whims of individual companies. (Otherwise, they’d always set them as high as they could. But other suppliers and customer demand keep companies’ prices in check). Today’s high gas prices are influenced by international market dynamics involving OPEC, supply chain issues created by government pandemic restrictions, federal policies restricting the energy sector, and the Federal Reserve’s rampant money-printing that is fueling widespread consumer price inflation. So, too, some of the current increase represents a correction after 2020, a year of lockdowns, which saw unusually low demand for gas and even negative oil prices at one point.
Ultimately, no one can perfectly explain the complex causes of rising gas prices or offer an easy fix. But I can say with certainty that despite Elizabeth Warren’s rhetoric, “corporate greed” is not at all to blame. The senator’s emotional demagoguery against oil companies is likely just a cynical effort to deflect blame away from the federal government in which she serves.
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https://www.washingtonexaminer.com/news/dollar-tree-to-start-$1.25-products
'It's not inflation, it's the devaluing of the dollar.'
What??!!
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Not really sure in which thread to follow the matter of chips, so for the moment putting it here:
More Chips Will Be Made in America Amid a Global Spending Surge
Samsung’s $17 billion bet on Texas mirrors large spending increases in Asia and elsewhere
New investment promises to boost America’s production foothold in advanced chip making after years of ceding ground to Asian nations.
PHOTO: INTEL CORPORATION
By Jiyoung Sohn
Nov. 24, 2021 9:00 am ET
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SEOUL—Investment in U.S. chip production is on the rise. But so too, is semiconductor spending elsewhere.
Samsung Electronics Co. ’s planned $17 billion chip factory in Texas is expected to crank out top-end semiconductors that are essential to 5G cellular networks, self-driving cars and artificial intelligence. It follows hefty bets on U.S. soil by Intel Corp. , Taiwan Semiconductor Manufacturing Co. and Texas Instruments Inc.
The new factories won’t be operational for years. But the investment promises to boost America’s production foothold in advanced chip making after decades of ceding ground to locations in Asia like Taiwan, South Korea and China. It comes at a time, though, when chip makers are investing heavily in these locations, too.
Europe,MiddleEast &Africa+44%*
Americas+52%*
Asia+29%*
2019
'20
'21
0
25
50
75
100
125
150
$175
billion
A chip shortage has snarled global business and amplified calls from governments world-wide to boost local production of the tiny tech components in devices that power much of our daily lives. Component shortages have hit everything from car production to availability of some consumer goods, raising the stakes for politicians—particularly in the U.S. and Europe—to reduce their reliance on Asian suppliers.
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That has triggered a spree of record chip investment—and driven governments to offer financial incentives to secure these new factories.
U.S.-based companies represent about half of the $464 billion semiconductor industry, according to the Semiconductor Industry Association and market-researcher International Data Corp. But many of the biggest names, like Qualcomm Inc. and Nvidia Corp. , design chips but don’t manufacture the parts themselves, choosing instead to outsource the work. And that is often done overseas.
About three-quarters of global semiconductor production capacity sits in just four Asian locations: Taiwan, South Korea, China and Japan, according to the Semiconductor Industry Association. The U.S. represents just 13%.
Global chip manufacturers are projected to lay out $146 billion in capital expenditures this year, about 50% higher than before the Covid-19 pandemic began and double the level of just five years ago, according to Gartner Inc., a market researcher.
The U.S. is capturing just about a seventh of that global investment, a level similar to two years ago, Gartner said. Asia, by contrast, represented more than 80% of the total spending. The ratios are expected to be similar through 2025, Gartner says.
Earlier this month, TSMC and Sony Group Corp. said they would build a $7 billion chip plant in southern Japan, a project that is expected to receive billions of dollars in subsidies from the government in Tokyo. In September, China’s Semiconductor Manufacturing International Corp., which is partially state owned, said it would spend nearly $9 billion on a new plant outside Shanghai. In May, South Korea unveiled a road map to support local semiconductor companies’ plans to invest roughly $450 billion by 2030.
How the Chip Shortage Is Forcing Auto Makers to Adapt
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How the Chip Shortage Is Forcing Auto Makers to Adapt
How the Chip Shortage Is Forcing Auto Makers to Adapt
The number of semiconductors in a modern car, from the ignition to the braking system, can exceed a thousand. As the global chip shortage drags on, car makers from General Motors to Tesla find themselves forced to adjust production and rethink the entire supply chain. Illustration/Video: Sharon Shi
Only about 6% of new semiconductor global capacity added over the next 10 years is expected to be located in the U.S., according to a Monday report from the U.S. Chamber of Commerce, which urged Congress to pass legislation that provides $52 billion in direct subsidies for new chip factories.
“While U.S. domestic manufacturing flatlined, China, South Korea and others are investing heavily in their own industries, aiming to ensure global manufacturing leadership and leave the United States behind,” the report said.
The U.S. brings advantages as a host country for cutting-edge chip factories, from access to skilled workers, protection of intellectual property and proximity to buyers, the Semiconductor Industry Association says.
But the U.S. also has drawbacks. The costs of owning a new chip factory are roughly 30% higher than in South Korea, Taiwan or Singapore, and are as much as 50% more than in China, according to the SIA report published last year. The cost differences are largely attributable to the availability—or absence—of government incentives, the SIA said.
In a speech last month, Morris Chang, the founder of TSMC who retired three years ago, warned that manufacturing chips in the U.S. was more costly and posed supply-chain challenges when compared with Taiwan.
“Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete and costs to be higher than what you currently have,” Mr. Chang said.
The Taiwanese government over the years has showered subsidies on its local chip industry that leaders refer to as Taiwan’s “silicon shield,” helping protect it from military conflicts. China is in the middle of a heavily subsidized drive to become self-sufficient in chips. Private investment has also grown in recent years, as U.S. companies and their Chinese affiliates have ramped up investment in Chinese semiconductor companies, according to a Wall Street Journal investigation.
TSMC is building a $12 billion chip-manufacturing facility in Phoenix.
PHOTO: ASH PONDERS FOR THE WALL STREET JOURNAL
South Korea, aiming to double annual chip exports from today to $200 billion by 2030, has offered billions of dollars in tax breaks, lower interest rates and other investments. President Moon Jae-in’s administration has pledged to cut regulations and asked local governments over the next decade to ensure adequate water supply—a key resource for chip making.
Earlier this year, Japan’s Ministry of Economy, Trade and Industry said investment of up to 1 trillion yen, or the equivalent of $8.6 billion, may be necessary to reduce the country’s reliance on foreign-made chips. New Prime Minister Fumio Kishida, vowed to revive Japan’s semiconductor industry and has created a new spot in his cabinet for a minister of economic security.
The U.S.’s gains, for now, are tilted more toward quality than quantity. By 2027, the U.S. is projected to possess about 24% of the world’s production capacity for the most cutting-edge chips—those that use circuitry measured at 10 nanometers or below—according to Counterpoint Research, a market-research firm. That would be up from 16% at present.
More countries have come to see an overreliance on Asia-based chip factories as a national security risk, said Dale Gai, a Taiwan-based director at Counterpoint Research covering semiconductors and components.
In addition to Samsung’s Texas bet, TSMC is currently building a $12 billion chip manufacturing facility in Phoenix. Intel has pledged to spend $20 billion on two plants in Arizona and a $3.5 billion expansion effort in New Mexico.
The Biden administration welcomed Samsung’s investment in Texas and added that it is working around the clock with Congress, allies and partners to boost American manufacturing capacity, according to a joint statement late Tuesday from National Economic Council Director Brian Deese and national security adviser Jake Sullivan.
“More work remains to be done to ensure America remains the most innovative and productive nation on Earth,” the statement read.
—Yang Jie in Tokyo contributed to this article.
Write to Jiyoung Sohn at jiyoung.sohn@wsj.com
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"Blue States - YOU ARE THE PROBLEM!"
"Why do states with Democratic majorities fail to live up to their values?"
https://www.nytimes.com/2021/11/09/opinion/democrats-blue-states-legislation.html
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Information available 24/7/365 on the forum suddenly appears in the New York Times , out of the blue, in an opinion video.
Will anyone see it?
Paywall blocked of course, but covers how the bluest states have the most homeless, highest crime, greatest income inequality, and generally the highest unemployment and slowest growth of all the states.
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(https://i1.wp.com/www.powerlineblog.com/ed-assets/2021/11/259962798_4645368448819710_7917902395898989179_n.jpg?w=526&ssl=1)
https://i1.wp.com/www.powerlineblog.com/ed-assets/2021/11/259962798_4645368448819710_7917902395898989179_n.jpg?w=526&ssl=1
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(https://i1.wp.com/www.powerlineblog.com/ed-assets/2021/11/260269155_10220478724580703_1422822764113164509_n.jpg?w=526&ssl=1)
https://i1.wp.com/www.powerlineblog.com/ed-assets/2021/11/260269155_10220478724580703_1422822764113164509_n.jpg?w=526&ssl=1
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https://townhall.com/columnists/michaelbusler/2021/11/28/we-need-another-dose-of-supplyside-economics-today-n2599727
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Mohamed El-Erian is chief economist for Allianz - the largest insurance company in the world. I have followed him some, would call him centrist, not a supply sider, but he warns of the issues on the supply side on Fox News Sunday after the market dropped 900 points on Friday:
“I don’t think we have an issue with demand. I think incomes are strong, retail sales are strong. Companies have lots of money,” he said. ”The problem is the supply side. And unless we fix the supply side, it will contaminate the demand side. So, that’s why it’s really important to focus on two big issues that we have. Supply disruptions and inflation.”
...
"Mohamed El-Erian called on Federal Reserve Chairman Jerome Powell to make reining in inflation a top priority."
https://nypost.com/2021/11/28/top-economist-warns-of-possible-1970s-style-stagflation/
----------------------------------------------
He did not give more detail, but I would say the supply side issues we face now are over-regulation related to ports, trucking, etc. and government over-reach in terms of shutdowns. Paying people to not work has caused both a labor shortage as people leave the workforce. A low unemployment rate sounds good but it is not an good measure of the number of people not working. We've had record numbers of people leaving the work force, 4.4 million in September for example, and these millions coming across our non-existent border are not immediately able to step in for the people quitting and retiring, who have specific skills and licenses, such as a Class A commercial driver's license, heating, plumbing licenses, engineering, MD, etc.
---------------------------------
https://www.msn.com/en-us/money/markets/biden-economic-adviser-4-4-million-workers-quitting-in-september-actually-a-good-sign/ar-AAQFF9O
"After the number of U.S. workers voluntarily quitting their jobs reached a record high in September, White House Council of Economic Advisers member Jared Bernstein framed the labor crunch as a "good sign," saying that employees now have more leverage to negotiate better-paying roles."
---------------------------------
[Doug] Are you kidding? A worker has more leverage, maybe, but they can't get anything done if their co-workers, suppliers and customers quit, and deliveries don't come.
A nurse shortage is good - during a pandemic??!!
These people are nuts.
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In the spirit of reading opposing points of view, this is pretty good, up until they say what to do about it. Reign in inflation with rent control? Good grief. Why not just STOP DOING THE THINGS WE KNOW ARE CAUSING IT?
https://www.thenation.com/article/society/inflation-democrats-debate/
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I remember the stagflation of the 70s.
BTW, retired Senator Gramm is also a PhD in Economics.
The Biden Stagflation Is Coming
His approach to the economy is already causing prices to rise. It will soon stifle growth as well.
By Phil Gramm and Mike Solon
Dec. 13, 2021 1:07 pm ET
The White House continues to insist that inflation will soon fade away and the country will return to its pre-pandemic prosperity. But the Biden administration’s regulatory agenda virtually ensures that the post-pandemic economy will be nothing like it was before. The mounting regulatory burden of Mr. Biden’s executive orders, his regulators’ open hostility toward America’s economic system, and the return to Progressive-era antitrust enforcement will stifle growth. All the ingredients will be present to turn the current inflation into stagflation.
America’s experience with regulatory excess is both recent and painful. When the subprime recession ended in mid-2009, economists predicted a strong recovery. In early 2010 the Office of Management and Budget projected 3.7% average real gross domestic product growth through 2016, the Congressional Budget Office estimated 3.3% growth for the same period and the Federal Reserve expected 3.5% to 4% through 2014. Instead, GDP growth slumped to an 80-year low of 2.1% during the 2010-16 recovery.
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Democrats claimed the nation suffered from secular stagnation. But when subsequent deregulation and tax cuts revived the economy and the Biden administration needed justification for more stimulus spending, Democrats suddenly decided that Mr. Obama had stopped stimulating the economy too soon. While federal spending in 2009 hit the then-postwar high of 24.4% of gross domestic product, the 23.3% in 2010 and 23.4% in 2011 were the second and third highest postwar levels. By 2012, some 3½ years after the recession ended, federal spending was still 22% of GDP, then the fourth-highest postwar level.
Soaring spending and massive monetary accommodation couldn’t offset Mr. Obama’s stifling regulatory burden. While ObamaCare’s taxes harmed the economy, the wet blanket of his regulatory burden smothered the recovery, long before the 2013 tax increases.
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In imposing ObamaCare, government increasingly dominated the healthcare industry, the green energy agenda hit auto producers and power plants and stifled the domestic energy industry with regulatory actions such as blocking the Keystone pipeline. Large banks were regulated as if they were public utilities, forcing them to replace tellers and loan officers with lawyers and compliance officers. The new Consumer Financial Protection Bureau (CFPB) investigated and harassed mortgage companies, as well as auto and personal lenders, and the Federal Communications Commission sought to regulate the internet as a 1930s monopoly. With some 279,000 federal regulators churning out more than 650,000 pages in his Federal Registers, Mr. Obama bound the economy in red tape and imposed 50% more costly “major rules” than had ever been issued.
Despite strong private investment levels during the Obama era, labor productivity—the mother’s milk of wage gains—averaged less than half the growth of the previous 20 years. The problem was business “investment” was made to meet regulatory requirements, rather than to increase efficiency and expand the productivity of the economy.
During the first days of the Biden administration, the cold dead hand of government regulation reached further than it had during the Obama years. Initial executive orders eviscerated cost-benefit analysis as the basis for regulatory policy by defining benefits to include “social welfare, racial justice, environmental stewardship, human dignity, equity and the interests of future generations.” Executive orders opposed business mergers and acquisitions independent of consumer benefit and targeted the oil and gas industry for extinction.
In seeking to reregulate railroads, Mr. Biden is trying to overturn the deregulatory legacy of President Carter and Sen. Ted Kennedy, whose achievements made the American transportation system the most efficient in the world and cut the cost of moving people and shipping goods in half. In antitrust enforcement Mr. Biden seeks to reverse almost a half century of bipartisan reform that junked Progressive-era regulations and profoundly expanded productivity, especially in transportation and high-tech communications
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I recall people saying that if the Fed waits till we have inflation to act - it is too late
thus we are headed for a world of hurt
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Stagflation is the optimistic outlook under these policies. Total, downward spiraling, freefall collapse is the pessimistic possibility.
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I am amazed at what is not on the shelves in stores today. No white grout at Home Depot? Adhesives, out. Tennis ball shortage. Dollar Tree already announced a dollar will buy nothing next year, and the shelves are already bare in some locations. Besides Venezuela under the tyrants of socialism, what does that remind you of, the Soviet socialist system, of course, deep in the ash heap of history.
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http://blog.chron.com/thetexican/2014/04/when-boris-yeltsin-went-grocery-shopping-in-clear-lake/
Boris Yeltsin had the very same response when he visited a Houston supermarket in 1989; he immediately knew the Soviet Union was dead when he saw its shelves stocked to the brim. Bernie Sanders considered this a bad thing — both the abundant selection of the typical supermarket and the fall of the Soviet Union.* Or as Lindsey Graham joked in October of 2015, Sanders “went to the Soviet Union on his honeymoon,” and never came back.
Look at Yeltsin’s reaction below, the photos are from 1989. Yeltsin was the Moscow delegate to the Soviet Politburo. He knew and admitted aloud, socialism doesn't compete with freedom:
(https://pjmedia.com/instapundit/wp-content/uploads/2021/12/andy_craig_bastiat_supermarkets_12-14-2021-scaled.jpg)
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ohn Kerry’s Financial Crusade Against Oil and Gas
Public officials have told the climate envoy to stop trying to raise energy costs for U.S. consumers.
By Andy Puzder
Dec. 15, 2021 6:29 pm ET
‘The reality is the Biden administration is not standing in the way of increasing domestic oil production to meet today’s energy needs,” Deputy Energy Secretary David Turk asserted at the World Petroleum Congress in Houston last week. Really? He might want to check with John Kerry.
The president’s climate envoy has been pressuring banks and financial institutions to reduce their commitments to U.S. oil and gas companies and join the Net-Zero Banking Alliance, which would hobble the ability of oil and gas companies to increase production. Citi, Wells Fargo, Bank of America, Morgan Stanley, Goldman Sachs and JPMorgan Chase signed on to the alliance this year.
Mr. Kerry’s efforts didn’t go unnoticed. In April, members of the Senate Banking Committee sent him a letter expressing concern that he had “been pressuring banks to make extralegal commitments regarding energy-related lending and investment activities” that would result in “higher energy costs for American consumers.”
In May, 15 state treasurers sent a letter to Mr. Kerry observing that he and other members of the Biden administration are “privately pressuring U.S. banks and financial institutions to refuse to lend to or invest in coal, oil, and natural gas companies, as part of a misguided strategy to eliminate the fossil fuel industry in our country.” They urged banks and financial institutions “not to give in to pressure from the Biden Administration.”
It will take more than letters to halt the Biden administration’s war on fossil fuels. Responding to the Dallas Fed Energy Survey for the third quarter, one oil-and-gas producer identified “expanding credit” as a major headwind because “the money center banks continue to seek to reduce their commitments to oil and gas borrowers.”
On Nov. 22, another group of 16 state financial officers signed an open letter to the U.S. banking industry with some teeth. The letter states that the signers will take “concrete steps” to “select financial institutions that support a free market and are not engaged in harmful fossil fuel industry boycotts for our states’ financial services contracts.” If these officials follow through, noncompliant banks would lose lucrative state contracts. According to the letter, these officials are responsible for a combined total of more than $600 billion in assets.
Texas went a step further in June, enacting a law banning state investments in businesses that boycott oil and gas companies and another law that blocks state investments in companies that restrict business with the firearms industry. Since the laws took effect, two of Wall Street’s biggest municipal-bond underwriters—Bank of America and JPMorgan Chase—haven’t managed a single municipal-bond sale in Texas, the second-largest issuer of state and local government debt with some $58 billion sold last year.
The antiboycott approach is a good start, but it fails to address a significant threat. Under the Texas law, state agencies can still do business with financial firms such as BlackRock, Vanguard and State Street that advocate transforming our economy to net-zero carbon emissions by 2050 because they own—rather than boycott—oil-company stocks.
That is a problem. Exxon Mobil is the largest energy company in Texas. Climate activist hedge fund Engine No. 1 recently waged a proxy war to put insurgent directors on Exxon’s board. Reuters described it as “the first major shareholder contest to make climate change the leading issue for choosing directors.” Engine No. 1 gained the support of BlackRock, Vanguard and State Street Global Advisors, which voted their combined 21% of Exxon’s shares in favor of two insurgent directors who won election to Exxon’s board. BlackRock supported a third insurgent who was also elected.
The Employees Retirement System of Texas and the Teacher Retirement System of Texas also voted in favor of the three successful insurgent director nominees and a shareholder proposal requiring a report on corporate climate lobbying aligned with the Paris agreement, which passed.
Engine No. 1’s proxy fight was about altering Exxon’s business model away from oil and gas production. By October Exxon’s board was debating whether to continue some major projects despite the world’s oil shortage and rising prices.
A more comprehensive state legislative solution might have produced a different result. The Texas law could have included a provision placing the voting rights for shares purchased by Texas entities, or the financial advisers those entities employ, under a committee that includes individuals answerable to Texas voters, rather than climate-change activists.
The Biden administration will pursue its nonstop war against America’s oil and gas producers for at least the next three years. Unless it meets resistance, prices will increase and the U.S. energy industry will continue to shrink. While state legislatures can’t stop Mr. Biden from pursuing his agenda, they can discourage the financial sector and institutional investors from supporting it.
Mr. Puzder is a former CEO of CKE Restaurants, chairman of 2ndVote Value Investments, Inc., and a visiting fellow at the Heritage Foundation.
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The driver of 'strong consumer spending' is the reality you won't buy things at pre-Biden prices ever again. Buy now or pay more later for basics and essentials and everything else.
If you can't remember gas more than a dollar a gallon cheaper under Trump, there is always Dollar [Twenty Five] Tree:
https://abcnews.go.com/Business/wireStory/dollar-tree-makes-official-items-now-cost-125-81361316
Strange to call prepping for collapse a sign of 'consumer confidence'. Would you rather have a dollar in your pocket or something you can eat when there is no food left on the shelves?
https://www.cnn.com/2021/12/08/business/dollar-tree-1-dollar-price-dollar-stores/index.html
No, $1.25 won't sink 'Dollar Tree'. Hardly anything really costs the consumer a dollar anyway; 40 states have a sales tax 6% or greater, 6 more at 5% or more. Only 2 states have no sales tax:
https://www.salestaxhandbook.com/highest-salestax-states
The 'dollar menu' at McDonalds doesn't have food on it and the "$5 footlong" at Subway is now $9?
And a median house doesn't cost 175k anymore except maybe in the heartland.
"Between 1999 and 2021, the median price has more than doubled from $111,000 to $269,039."
What's political about economics? The more Democrat a state is, the more a house costs. That's strange.
https://worldpopulationreview.com/state-rankings/median-home-price-by-state
Bidenflation reportedly added $3500 to the cost of goods and services in 2021:
https://townhall.com/columnists/christalgo/2021/12/17/bidenflation-translates-to-3500-in-added-costs-for-average-family-in-2021-n2600711
https://budgetmodel.wharton.upenn.edu/issues/2021/12/15/consumption-under-inflation-costs
So is consumer demand up or are they just spending more to stay afloat?
The FUSD (former US dollar) is f'd.
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Productivity gains are what make wage gains and a lot of other positive economic things possible. Now read and watch the business reaction to supply chain failures. "Just-in Time" (JIT) manufacturing, where everything gets to just the right place at just the right time, now gives way to just in case purchasing and stocking, setting that part of the economy back 40+ years when people had to win a lottery to buy gas.
https://www.nytimes.com/1979/10/24/archives/carter-empowered-to-establish-plan-for-gas-rationing-final-house.html
A cave man didn't need a computer to know he will need a big pile of firewood for winter. Welcome to the Biden economy.
https://www.ft.com/content/8a7cdc0d-99aa-4ef6-ba9a-fd1a1180dc82?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
[Financial Times - Paywall blocked but there are plenty of articles out there on companies coping with supply chain unreliability and all of it revolves around operating less efficiently.]
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You can't make this up. Democrats blame the victims for the problems THEY cause.
https://thehill.com/homenews/senate/586710-warren-accuses-supermarket-chains-executives-of-profiting-from-inflation
Blame grocery stores. Great. They should consider closing if proving her wrong was of any interest. What's the price of food WITHOUT producers and suppliers, seeking a profit or not?
Talk about a never-thanked industry, like housing, if grocers were greedy, then the only thing that remained constant during BidenDemflation was grocer greed. It is HER people, Harvard elite liberal brats, that are fucking with monetary policy and it's her people who can't balance a budget, won't let you pump gas, heat your home, eat without a federal subsidy, or breathe, cf. mask mandates.
If you ate today, thank a farmer and grocer. If you ate in the Soviet Union today, thank a 'democratic' socialist - in the ash heap of history.
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Famous people caught reading the forum, John Hinderaker at Powerlinblog:
https://www.powerlineblog.com/archives/2021/12/big-grocery-seriously.php
"Big Grocery? Seriously?!"
"The idea that there is such a thing as “Big Grocery” is so laughably stupid that only a far-gone ideologue like Elizabeth Warren could take it seriously."
You can't make this up. Democrats blame the victims for the problems THEY cause.
https://thehill.com/homenews/senate/586710-warren-accuses-supermarket-chains-executives-of-profiting-from-inflation
Blame grocery stores. Great. They should consider closing if proving her wrong was of any interest. What's the price of food WITHOUT producers and suppliers, seeking a profit or not?
Talk about a never-thanked industry, like housing, if grocers were greedy, then the only thing that remained constant during BidenDemflation was grocer greed. It is HER people, Harvard elite liberal brats, that are fucking with monetary policy and it's her people who can't balance a budget, won't let you pump gas, heat your home, eat without a federal subsidy, or breathe, cf. mask mandates.
If you ate today, thank a farmer and grocer. If you ate in the Soviet Union today, thank a 'democratic' socialist - in the ash heap of history.
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Ray Dalio sees economic collapse coming. I believe decline/collapse is a choice. Seems to me he is coming to my way of thinking, writing about what we can do to avoid catastrophe. Earn more than you spend, for example.
https://www.marketwatch.com/story/ray-dalio-warns-the-feds-hands-are-tied-and-that-higher-u-s-inflation-is-sticking-around-democracy-maybe-not-11639578847
Ray Dalio warns Fed’s hands are tied and higher U.S. inflation is sticking around. Democracy, maybe not.
Last Updated: Dec. 18, 2021
Founder of the world’s largest hedge fund tells investors to avoid holding cash and keep an ‘all-weather’ portfolio — just in case
Ray Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world.
As an investor, Ray Dalio eyes the rearview mirror to see what’s ahead. If this paradox makes sense, then you likely agree with the view of history that those who cannot remember the past are condemned to repeat it.
Put another way, it’s hard to know where you’re going if you don’t know where you’ve been. In his latest book, “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail,” Dalio, the founder and co-chairman of hedge fund Bridgewater Associates, shows investors their future by taking them back in time to study the rise and fall of great countries and powerful currencies. Because one question you never want to ask about either your money or your situation in life is: “How did I get here?”
In almost 600 pages of narrative and charts, the book paints Dalio’s interpretation of the tectonic shifts now reshaping global politics and financial markets in ways that loudly echo the past but are yet to be determined — namely the competitive, complex relationship between the U.S. and China.
How the world’s two most-formidable nations coexist — or not — is affecting and will continue to impact not only your wealth and opportunities in the 21st century but your children’s and their children’s as well. Says Dalio: “[Americans] have to do three things: We have to earn more than we spend by being productive and get our finances in order; we have to work well together economically and politically, and we have to avoid war with China.”
In this interview, which has been edited for clarity and length, Dalio offers insights about the similarities between the current economic and political cycle and previous ones, the disturbing external and internal threats to American democracy and influence, and how to and what to hold in your investment portfolio, including bitcoin, as history unfolds.
MarketWatch: Your new book is the latest in a series where you share your fundamental principles for investing in and living with the world as it is — essentially ways to accept and play the hand you’re dealt. What conditions and circumstances concern the United States right now that you want investors to understand, and why look to the past for answers?
Dalio: In my investing, I learned a lesson that many things that surprised me hadn’t happened in my lifetime but had happened before. The first time that happened was in August 1971 when the U.S. broke its promise to exchange dollars for gold so that it could print a lot of money, which led to the devaluation of the U.S. dollar. I was working on the floor of the New York Stock Exchange. I was surprised that the stock market rose a lot, so I looked into history and I found that same thing happened in March 1933. And I learned why.
As a result of that, I always study what drove major economic and market movements in history. My study of the Great Depression is the reason we anticipated the 2008 financial crisis.
Many people are interested in the news of the day, but they’re not interested in the history and lessons of the past. But you won’t understand what’s going on if you just react to the news of the day. My approach has always been like [that of] a doctor, that if I haven’t seen many cases of it before I want to go back and study all the cases in history so I can make decisions today.
There are three things happening now that I needed to study:
Zero interest rates with the creation of a lot of debt and a lot of money printing to finance that debt.
The internal conflict between left and right, rich and poor, Democrats and Republicans, which is producing a level of conflict in the U.S. that is the highest since 1900. This also has tax implications. There is an anti-capitalist swing under way that will affect U.S. tax policy, where people live, and how they are with each other.
The rise of a great power to challenge an existing great power and the existing world order. The existing world order began in 1945, and it was the American world order. Now China is rising to challenge the United States.
These things are big. Almost every day we’re going to be talking about these three things and what’s happening with them. The last time that happened was in the 1930-1945 period. They happened many times in history basically for the same reasons in the same way.
MarketWatch: The political and social divisions in the U.S. affect so much of what Americans take for granted, and maybe it’s because they’re taken for granted that they confront us now. Can this country move forward together?
Dalio: The fundamentals are clear. We have to do three things: We have to earn more than we spend by being productive and get our finances in order, we have to work well together economically and politically, and we have to avoid war with China. When I look at different countries, I judge them based on whether they have good finances, internal order and external peace.
‘If the causes people are behind are more important to them than the system, the system is in jeopardy. I worry that’s where the U.S. is now.’
We have the ability to do these things, but I worry about us being our own worst enemy. History has shown that if the causes people are behind are more important to them than the system, the system is in jeopardy. I worry that’s where the U.S. is now.
There is a great polarity, a fight-and-win-at-all-costs mentality. Looking ahead, in the 2022 elections we will see the primary battle between the extremists and the moderates in both political parties and probably see moves to greater extremism. In the general election, there is a good chance that neither side will accept being the loser.
This type of fight-to-the-death mentality could lead to some form of “civil war.” What I mean by civil war is a series of battles not resolved by the law or the Constitution, in which power is used instead — including the failure of our democracy to work.
Barron’s on MarketWatch: Ray Dalio on the possibility of U.S. civil war
Also, as I look ahead economically for the U.S., I see a worsening of the situation. Because of all the money that has been pumped out we’re now on a sugar high, but we are beginning to see that inflation will pick up, and the stimulus checks that came in won’t come in at the same rate, causing conditions to worsen.
It all comes down to a couple of basics. To be successful we have to be financially strong and be good with each other. That’s it.
MarketWatch: Easier said than done. There doesn’t seem to be much political will right now in Washington or among the U.S. states to work together.
Dalio: I know. In these cases — the French Revolution, the Russian Revolution, the Chinese Revolution, for example — the divides became greater and greater. And then you have to pick a side and fight for that side. We are starting to see this in the U.S. by the movement of Americans to different states. It’s not just a tax issue. It’s a values issue.
Most likely you’re going to see disagreements between the federal government and state governments on the matter of what is states’ rights that probably won’t be all settled legally, so they will be settled through tests of power. There will be places that people won’t want to be because it’ll be threatening. People will want to be with their own kind.
See: I’m done with Illinois! I want to retire in a small town in a neighboring state — so where should I go?
Also: I want to move to the South, I want the beach — and a liberal mindset. Where should I retire?
I want individuals to understand the mechanics of this, which is why I wrote the book. For example, I’d like them to see historical cases and fundamental cause-effect relationships to understand what it means to produce a lot of debt and a lot of money, so I wrote a chapter on the value of money.
MarketWatch: What could this situation mean for U.S. investors? You’re describing a very different America to consider.
Dalio: Right. I want people to be well-informed and worry about what they should worry about.
I have a principle: If you worry, you don’t have to worry. And if you don’t worry, you have to worry. If you worry, you’ll take care of the thing you’re worried about. If people worry about the fighting and they worry about the finances, then they can work together and deal with these things.
‘People think the safest investment is cash, but they don’t look at the inflation-adjusted return.’
Financially, the way it works is when the government needs to send out checks, it could either get the money from taxes or from borrowing. If it can’t get all the money it needs from borrowing, the central bank can print the money. That devalues the value of money.
Central banks can create a lot more money and debt, but that won’t raise living standards. I’d like to help people see how money and credit move through the system to drive things. I’d like to show people how money and credit are created and how a person who gets the money and credit buys goods, services and financial assets, which makes those things go up in price.
I’d like to help them understand the reasons why cash is so bad in this type of environment. People think the safest investment is cash, but they don’t look at the inflation-adjusted return.
Don’t hold cash. It’s better to hold a liquid, diversified portfolio of assets — if it’s balanced. Make sure you’re well-diversified outside of cash — stocks SPX, 1.02%, bonds TMUBMUSD10Y, 1.455%, inflation-indexed bonds, commodities and gold GLD, +0.94%, and across many countries, particularly those with stronger income statements and balance sheets. An “all-weather” portfolio has currency diversification, asset-class diversification, country diversification and industry diversification.
MarketWatch: So you’re thinking that higher U.S. inflation is not transitory. It’s going to stick.
Dalio: Yes. There’s two types of inflation. There’s inflation when the demand for goods and services rises against the capacity to produce them. That’s normal, cyclical inflation. Then there’s monetary inflation — the creation of a lot of money and credit relative to the quantity of goods and services. The U.S. is having both.
When I look at the country’s financials going forward, what the size of the deficit will be and how much money is produced, that’s a concern. There’s also the risk, or even the probability, that those who are holding cash and bonds will choose to sell those to move into other things. If that happens, the U.S. central bank will have to decide if it raises interest rates, which will hurt the economy — and I don’t believe they can do that in a significant way. It would be bad for the economy, politics and the markets if they tried to rectify that by allowing interest rates to rise. So they’re probably going to have to print more money, and that causes more monetary inflation.
Today it doesn’t cost anything to borrow. Right now if you take out debt, you have practically no interest rate and principal payments can be deferred, so money is essentially free. With the cost of money negative and below the nominal growth rate, it’s very profitable to borrow and invest in anything that can grow at the inflation rate or more. That’s what’s priced into the markets now. And if they change things — raise interest rates to be higher than is priced into the markets — asset prices will go down and there will be more of an economic problem.
Central bankers, especially the Fed, are between a rock and a hard place. They need to tighten quite a lot to restrain inflation, yet if they do they will hurt the economy.
Central bankers, especially the Fed, are between a rock and a hard place. They need to tighten quite a lot to restrain inflation, yet if they do they will hurt the economy. Imagine what would happen if there was a tightening of monetary policy in the classic way of first causing asset prices to go down and then the economy to contract.
Politically, imagine what that would be like. People are at each other’s throats and they’ve been given a lot of money. I’m afraid of another economic downturn. We can’t even get along on whether we can wear masks or not. You can’t allow another economic downturn. You can’t raise interest rates enough to bite. Interest rates have to be significantly below both the inflation rate and the nominal GDP growth rate.
It’s easy to see what type of policy biases will exist by looking at whether circumstances favor debtors or creditors being favored. High real interest rates will exist when circumstances make it better for the creditor to be helped and credit growth to show while low real rates will exist when central banks want to help debtors and want to stimulate credit growth.
History shows that when countries need more money and don’t have other ways of getting it that they will produce more money. Producing money doesn’t take money away from anyone so it’s politically easier because it’s a hidden tax. Nobody’s complaining about where the money came from. If you get it through taxes, everybody squawks. History has shown that the easiest way is to print more money and give it out. If instead you tighten, it has consequences.
MarketWatch: Bitcoin and other cryptocurrency also is politicized. Crypto has become a political statement as much as a way to make and lose money.
Dalio: There’s a lot of money chasing all sorts of things, crypto among them. It has been an amazing accomplishment for bitcoin BTCUSD, -0.13% to have achieved what it has done, from writing that program, not being hacked, having it work and having it adopted the way it has been. I believe in the blockchain technology; there’s going to be that revolution, so it has earned credibility.
I’m not an expert on bitcoin, but I think it has some merit as a small portion of a portfolio.
I’m not an expert on bitcoin, but I think it has some merit as a small portion of a portfolio. Bitcoin is like gold, though gold is the well established blue-chip alternative to fiat money.
However, bitcoin has a number of other issues. If it is a threat to governments, it will probably be outlawed in some places when it becomes relatively attractive. It may not be outlawed in all places. I don’t believe that central banks or major institutions will have a significant amount in it.
I have a little bit of it because I believe a portfolio should start off with, under a worst-case scenario, what assets protect it and make sure it’s diversified. It’s almost a younger generation’s alternative to gold and it has no intrinsic value, but it has imputed value and it has therefore some merit.
MarketWatch
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(https://www.visualcapitalist.com/wp-content/uploads/2021/12/Global-GDP-by-Country-2021-V13-Mobile.jpg)
https://www.visualcapitalist.com/wp-content/uploads/2021/12/Global-GDP-by-Country-2021-V13-Mobile.jpg
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Another news omissions story. Pre-covid, the media never really dwelled on the great, Trump GOP-led American economy, did they?
https://townhall.com/columnists/stephenmoore/2021/12/28/the-trump-economic-record-looks-better-every-day-n2601117
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Source: WSJ
Economic success changes lives and changes votes. Who knew?
Replicate success.
https://unleashprosperitynow.us19.list-manage.com/track/click?u=dc8d30edd7976d2ddf9c2bf96&id=7df3b08a8a&e=17d44a0477
"The social constraints that were once a barrier to voting Republican have eroded, in large part because the strong economy during much of Mr. Trump’s term caused many Latino voters to give the party a second look."
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Same phenomenon applies to black males and other groups not benefiting from failed Democrat economic policies.
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(link below) "Averting climate catastrophe will be expensive"
Yes. Only prosperous nations and a more prosperous world can truly clean up the environment, proven true over and over throughout history and around the world. You don't address higher needs when you are starving, freezing or sick, or have half the people out of the workforce.
"The Nation" is one of the most leftward websites I can think of. I might agree with them on nothing, but let's face it, all the great things liberals want to do cost money, lots of money. Isn't the first step in that all-important process to ignite the economy into a robust economic growth machine? Unleashing free market capitalism that spreads to all is the only known way to do that, to allow us to afford all these expensive fixes. Can't we all agree on that?
https://www.thenation.com/article/society/averting-climate-catastrophe/
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https://www.cnbc.com/2021/12/29/economists-warn-of-inflation-inequality-in-2022.html
Did anyone warn us that this would happen?
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Government pending (cf stimulus checks) plus monetary expansion equals increased demand without increasing supply. More money per goods and services, result is increased prices, not increased supply.
Is THAT what we want?
https://mises.org/wire/why-doesnt-increased-demand-bring-more-supply
(https://cdn.mises.org/styles/max_1160/s3/fs2_0.jpg?itok=QB-GpoUO)
Percentage change in AMS, a measure of monetary supply:
AMS is defined as currency plus demand deposits with commercial banks and thrift institutions plus saving deposits plus government deposits with banks and the central bank. See Shostak, Making Sense of Money Supply Data.
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Supply side policies increase supply first, meaning you ease the disincentives to produce, produce more goods nd services, increasing supply, income, wealth and demand for goods and services. Not the other way around. Thus is an important distinction.
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Imagine you're an Econ prof grading this answer.
Softball question from a softball "journalist", Margaret Brennan, host of Meet the Press:
Q: "Was it wrong to consider inflation transitory? These price spikes seem like they’re going to be with us for a while," Brennan asked.
A: "We have to address the fact that we have got to deal with the fact that folks are paying for gas, paying for groceries, and are -- need solutions to it. So let's talk about that," Harris said. "Short-term solution includes what we need to do around the supply chain, right? So, we went to the ports of Los Angeles, Long Beach, Savannah, Georgia, and said, 'Hey, guys, no more five days a week, eight hours a day; 24/7, let's move the products because people need their product – they need what they need.' We're dealing with it in terms of the long term. And that's about what we need to do to pass Build Back Better. It strengthens our economy."
- US VP Kamala Harris, Dec 2021
https://www.foxnews.com/media/kamala-harris-struggles-question-inflation
Not much from either Milton Friedman or John Maynard Keynes, whomever you prefer, in that answer.
Like I used to ask of candidate and President Obama, name a book on economics you've read that wasn't about Marxism and class struggles. How about George Gilder's 'Wealth and Poverty' or 'Spirit of Enterprise' just for exposure to another view? No such thing.
Clue to the clueless: Lady, you and yours are the cause of the modern class struggles, and inflation is a monetary phenomenon, not solved with spending programs. Join the forum for nothing and read up on it. )
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One more time with this, annotated. This isn't a gaffe. This is her answer.
"We have to address the fact that we have got to deal with the fact [Filler, nothing said so far]
that folks [the term that worked for Obama] are paying for gas, paying for groceries, [word intentionally omitted TWICE, paying MORE for gas, food, housing, healthcare. Can't say that aloud!] and are -- need solutions to it [Yes, throw the bums out]. So let's talk about that," Harris said[Liberal-speak drivel, we need to have a discussion. No, we need to end failed policies and return to those that worked.].
"Short-term solution includes what we need to do around the supply chain, right? So, we went to the ports of Los Angeles, Long Beach, Savannah, Georgia, and said, 'Hey, guys, no more five days a week, eight hours a day; 24/7, let's move the products because people need their product – they need what they need.' [Brain dead doomed to repeat the mistakes of history, cf Nixon Ford, Carter. Paul Volcker ended inflation, look it up.]
We're dealing with it in terms of the long term. [Meaning you won't see any improvement anytime soon] And that's about what we need to do to pass Build Back Better. [Blather and pivot, just like her handlers advised] It [massive new government programs, spending and debt] strengthens our economy." [Pure Bullsh*t.
Increased individual freedoms are what strengthen our economy.]
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https://m.theepochtimes.com/mkt_morningbrief/why-more-young-people-favor-socialism-and-what-we-should-do-mary-eberstadt_4187479.html
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For lack of opposing views on the forum, I took a look at this one:
https://outline.com/4FKX8x
Cassidy at the New Yorker. He mixes facts and questions with distortions and omissions and the Dem politicians will most certainly follow this spin.
1. Unemployment claims are now amazingly low. Wow. But no mention of the tsunami of people leaving the workforce.
2. We had good GDP growth last year, but that is year over year (that the economy was shut down) not compared to the robust Republican-led economy we had just before covid.
3. Economic analysis under Biden without mentioning inflation, gas costs, heat costs, food costs or purchasing power parity? Did your income rise if your costs rose more?
4. No mention of massive, unsustainable stimulus payments.
The Democrats will argue the economy is fine, but the people already seem to know better.
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Steve Moore’s new book Govzilla: How the Relentless Growth of Government Is Devouring Our Economy – And Our Freedom
...
don’t want to spoil the ending, but among the key findings, if the Biden Build Back Better bill is enacted, on top of the $3 trillion in spending already authorized this past year:
Federal government spending will rise much faster than the private economy and will exceed 50% of GDP by 2049.
The debt to GDP ratio catapults from 105% today to above 300% of GDP by 2049. These are debt burdens that are associated with bankrupt nations like Argentina, Venezuala, and Zimbabwe.
Paying for all this added spending would require tax rates for EVERYONE – not just the rich – of 50%.
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Steve Moore’s new book Govzilla: How the Relentless Growth of Government Is Devouring Our Economy – And Our Freedom
...
don’t want to spoil the ending, but among the key findings, if the Biden Build Back Better bill is enacted, on top of the $3 trillion in spending already authorized this past year:
Federal government spending will rise much faster than the private economy and will exceed 50% of GDP by 2049.
The debt to GDP ratio catapults from 105% today to above 300% of GDP by 2049. These are debt burdens that are associated with bankrupt nations like Argentina, Venezuala, and Zimbabwe.
Paying for all this added spending would require tax rates for EVERYONE – not just the rich – of 50%.
At this point, what difference would it make?
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https://www.cnn.com/2022/01/04/economy/us-job-openings-november/index.html
What says success like a disappearing Workforce?
Still haven't needed a Biden Accomplishment thread.
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https://twitter.com/JohnStossel/status/1477767659290693635
John Stossel
@JohnStossel
.
@SenSanders
say America should become more like Sweden. I agree. Sweden has a private pension system, school vouchers, and no minimum wage law:
Watch the video at the link.
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"But no mention of the tsunami of people leaving the workforce"
Can someone rustle up a chart with labor force participation numbers over the years?
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Hat tip to Doug, who accidentally posted this on the Iran forum :-D
https://www.bls.gov/charts/employment-situation/civilian-labor-force-participation-rate.htmc
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https://fee.org/articles/these-84-places-in-america-are-raising-their-minimum-wages-to-ring-in-the-new-year/
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https://www.zerohedge.com/geopolitical/rickards-exposes-globalisms-achilles-heel
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https://www.zerohedge.com/geopolitical/rickards-exposes-globalisms-achilles-heel
From the article:
"The supply chain is the global economy."
------------------------------------------------
"Supply side economics" is the study of easing the the barriers that work against supply and production, and a whole lot of those apply to understanding this crisis. We don't need a new set of government programs to address the problems the existing government programs caused. We need to let markets work to the extent that is possible.
But here is a new government programs, the container dwell fee:
https://gcaptain.com/port-of-los-angeles-announces-dwell-fees-for-empty-export-containers/
Port of Los Angeles Announces Dwell Fees for Empty Export Containers
Charge the shipping companies for the empty containers in port so they will have an incentive to send them back (empty) to China sooner for refilling and shipping back to us.
WHAT'S WRONG WITH THIS PICTURE?
Why are shipping containers crossing the Pacific full one way and empty the other way? They are building belts and roads all over the world to address their supply chain, and we don't build anything they want, not even coal, liquified natural gas or grain from the Midwest, and they build everything we want. Trump tried to address this and the country yawned.
I know what might solve the "supply chain" crisis. A free or freer market. China isn't a free market supplier selling goods the United States. China is a bullshit supplier stealing our technology and selling it back to us. When they aren't stealing it, we are giving it to them.
Right at the start of covid, funny coincidence, we had their testicles in a wringer. There was doubt they could survive their own 'political' problems if they didn't come to the table, soon, and make a free and fair agreement with this tough, willing to risk it all, American President. With covid, we went down a different course and ended up with a different President, Congress and so on. Now it's year three of the covid diversion/ Why doesn't the other political party continue where Trump left off??
In the DEM debates, the question was asked, who would end the Trump tariffs on the first day in office and none of the candidates raised their little hand, meaning none of even the Democrat electorate wanted the pressure taken off of China.
So what did we do? Take the pressure off of China. Worsen the work rules making us unable to produce here. Pile up the containers and bottleneck the ports. Watch stores close and watch workers leave the workforce in record f*cking numbers, and wonder, duh, why are prices going up and shelves going empty?
Oh, it's just toilet paper. Oh, it's just hand sanitizer. Oh it's just N95 masks. Oh, it's just plastic toys kids don't need for Christmas. Wait, it's pipelines and gas for our cars, and cars themselves screwing up the affordable used car market for everyone who needs affordable transportation to f'ing work, and it's HEAT FOR OUR HOMES, and it's FOOD. And they just passed us up militarily while we left our gear in Afghanistan and they are already there taking ownership of it, and they host the Olympics while imprisoning a million Muslims and no one on the Left cares...
As Larry Elder is known to say, tapping his microphone, IS THIS THINK ON?
-
https://www.zerohedge.com/geopolitical/rickards-exposes-globalisms-achilles-heel
From the article:
"The supply chain is the global economy."
------------------------------------------------
"Supply side economics" is the study of easing the the barriers that work against supply and production, and a whole lot of those apply to understanding this crisis. We don't need a new set of government programs to address the problems the existing government programs caused. We need to let markets work to the extent that is possible.
But here is a new government programs, the container dwell fee:
https://gcaptain.com/port-of-los-angeles-announces-dwell-fees-for-empty-export-containers/
Port of Los Angeles Announces Dwell Fees for Empty Export Containers
Charge the shipping companies for the empty containers in port so they will have an incentive to send them back (empty) to China sooner for refilling and shipping back to us.
WHAT'S WRONG WITH THIS PICTURE?
Why are shipping containers crossing the Pacific full one way and empty the other way? They are building belts and roads all over the world to address their supply chain, and we don't build anything they want, not even coal, liquified natural gas or grain from the Midwest, and they build everything we want. Trump tried to address this and the country yawned.
I know what might solve the "supply chain" crisis. A free or freer market. China isn't a free market supplier selling goods the United States. China is a bullshit supplier stealing our technology and selling it back to us. When they aren't stealing it, we are giving it to them.
Right at the start of covid, funny coincidence, we had their testicles in a wringer. There was doubt they could survive their own 'political' problems if they didn't come to the table, soon, and make a free and fair agreement with this tough, willing to risk it all, American President. With covid, we went down a different course and ended up with a different President, Congress and so on. Now it's year three of the covid diversion/ Why doesn't the other political party continue where Trump left off??
In the DEM debates, the question was asked, who would end the Trump tariffs on the first day in office and none of the candidates raised their little hand, meaning none of even the Democrat electorate wanted the pressure taken off of China.
So what did we do? Take the pressure off of China. Worsen the work rules making us unable to produce here. Pile up the containers and bottleneck the ports. Watch stores close and watch workers leave the workforce in record f*cking numbers, and wonder, duh, why are prices going up and shelves going empty?
Oh, it's just toilet paper. Oh, it's just hand sanitizer. Oh it's just N95 masks. Oh, it's just plastic toys kids don't need for Christmas. Wait, it's pipelines and gas for our cars, and cars themselves screwing up the affordable used car market for everyone who needs affordable transportation to f'ing work, and it's HEAT FOR OUR HOMES, and it's FOOD. And they just passed us up militarily while we left our gear in Afghanistan and they are already there taking ownership of it, and they host the Olympics while imprisoning a million Muslims and no one on the Left cares...
As Larry Elder is known to say, tapping his microphone, IS THIS THINK ON?
https://theconservativetreehouse.com/blog/2022/01/07/minnesota-trucking-company-ceo-warns-about-what-vaccine-mandate-will-do-to-economy/
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The more they screw things up, the sooner they lose power. I'm kind of neutral on it.
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The more they screw things up, the sooner they lose power. I'm kind of neutral on it.
The trucks carrying the mail in ballots will somehow arrive.
https://www.ncsl.org/research/elections-and-campaigns/vopp-table-18-states-with-all-mail-elections.aspx
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http://www.realclearpolitics.com/video/2022/01/07/vp_kamala_harris_there_is_a_level_of_malaise_after_two_years_of_covid-19.html
Reminds me that Jimmy Carter won 6 states (?) in 1980 after being fairly even in the campaign.
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https://www.newsmax.com/newsfront/larrykudlow-inflation-fed-interestrates/2022/01/09/id/1051621/
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In which case BTC/ETH/GBTC are fuct , , ,
-
In which case BTC/ETH/GBTC are fuct , , ,
Ironic. The first Bitcoin purchase was for a pizza, at some point soon, my Bitcoin investment will maybe buy me a pizza…
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Wages soared under Trump and plummet under Biden. Excuse me but which side REALLY cares about working people - and it's not Democrats.
https://www.nationandstate.com/2022/01/10/real-wages-plummet-as-inflation-hits-the-us-recovery/
-------------------------------------------------------------
Funny thing about Hispanics switching to Republican, Hispanics work.
-------------------------------------------------------------
Nothing really new here. Look at the Clinton administration that was divided into 2 years of pure Dem rule with tax and regulatory increases followed by 6 years of governing with Newt that included bold, capital gains tax rate cuts and "ending welfare as we know it". Wage growth was 8 times faster in the latter. Who knew?
https://firehydrantoffreedom.com/index.php?topic=1467.msg98177#msg98177
http://www.heritage.org/research/reports/2008/03/tax-cuts-not-the-clinton-tax-hike-produced-the-1990s-boom
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https://www.realclearpolitics.com/articles/2022/01/07/a_resolution_for_the_biden_administration_146998.html
The new year often feels like an opportunity to correct past mistakes -- for example, improving one's diet or quitting smoking. This explains why 25% of Americans, and 40% of those under 30, make New Year's resolutions. Based on the latest poll from The Economist and YouGov, the Biden administration should adopt a New Year's resolution too. In particular, it should reconsider its domestic policy agenda. Americans aren't buying it.
YouGov is an influential international research data and analytics group headquartered in London. Pollsters asked 1,500 American adults about the state of the economy, the COVID-19 pandemic, inflation and more. Their findings show that people aren't particularly happy right now.
When asked whether the country is headed in the right direction, only 23% of respondents said yes, while 62% think we're on the wrong track. Black Americans seem more content than most, with 38% answering yes, as opposed to only 22% of Hispanics. There is also a small gender disparity in these opinions: 33% of white male college grads believe the country is heading in the right direction, while only 22% of white female college grads have the same optimistic view. Meanwhile, only 17% of white, non-college grads of all genders are happy with the country's current direction.
Not surprisingly, 91% of Trump voters believe the country is now heading in the wrong direction. Biden voters are more divided; 40% believe the country is heading in the right direction, 39% believe we are heading in the wrong direction and 22% aren't sure what they think.
Either way, this isn't great news for the administration heading into this year's midterm election, especially because only 22% of Americans believe that the current state of the economy is "good" or "excellent." Forty percent believe it to be "poor."
This is a big deal, as 96% of Biden voters think the economy and jobs are "very important" and "somewhat important" issues. They also rate this issue third in terms of importance after climate change and health care. The poll shows that inflation is another concern, including among many Biden voters, which is understandable with rates reaching levels unseen since 1982.
This anxiety is bound to continue. The administration prefers blaming the surge in prices on corporations, especially in the oil industry, rather than on its own policies -- like the unnecessarily extravagant $2 trillion COVID-19 relief bill that passed in January 2021 and flooded the economy with fresh cash. More spending and taxes will inevitably follow such a large government expansion, and like most other Americans, 88% of Biden voters think these are both important issues.
During a recent address to the country, Biden noted that there is no federal solution to this pandemic, yet he declared his administration's commitment to a legally dubious vaccine mandate for private employers. This could be explained by the fact that while Americans are equally divided on requirements by private employers to ask for proof of vaccination, 83% of his voters approve.
The poll could also help explain Biden's seemingly contradictory support for in-person schooling. More people are against requiring proof of vaccination to attend in-person classes than are for it (though women are more supportive than men are of such measures). Fifty-seven percent of Americans are against asking for proof of a booster to attend in-person classes.
Based on these numbers, there are some obvious resolutions Biden's team could adopt. With a strong majority of Americans believing 2021 was one of the worst years of this nation's history, the president and his party can't afford to continue down their current path.
Of course, most Americans don't follow through on their New Year's resolutions and quickly return to their old habits. If the administration follows this pattern, it will be at its own risk.
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https://www.washingtonpost.com/business/2022/01/12/december-cpi-inflation/
December prices rise 7 percent, compared to a year ago, as 2021 inflation reaches highest in 40 years.
Hey Brandon, any idea what's causing it??
The man knows more about what's up Tara Reade's skirt than he knows about economics.
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https://www.washingtonpost.com/business/2022/01/12/december-cpi-inflation/
December prices rise 7 percent, compared to a year ago, as 2021 inflation reaches highest in 40 years.
Hey Brandon, any idea what's causing it??
The man knows more about what's up Tara Reade's skirt than he knows about economics.
The Dems are really insisting that “Build back Bolshevik” will fix inflation. I wish I was joking.
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https://www.dailymail.co.uk/news/article-10392001/Empty-shelves-grocery-stores-US.html?ito=social-twitter_dailymailus
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https://www.newsweek.com/why-progressives-are-wrong-long-danish-welfare-opinion-1656943
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How bad is the Biden Harris economy?
My neighbor got a pre-declined credit card in the mail.
CEO's are now playing miniature golf.
Exxon-Mobil laid off 25 Congressmen.
I saw a Mormon with only one wife.
McDonald's is selling the 1/4 ouncer.
Angelina Jolie adopted a child from America.
Parents in Beverly Hills fired their nannies and learned their children's names.
A truckload of Americans was caught sneaking into Mexico.
A picture is now only worth 200 words.
When Bill and Hillary travel together, they now have to share a room.
The Treasure Island casino in Las Vegas is now managed by Somali pirates.
I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, etc., I called the Suicide Hotline. I got a call center in Afghanistan, and when I told them I was suicidal, they got all excited, and asked if I could drive a truck.
Music on hold at the Suicide Hotline was "Jump" by Van Halen.
Lyrics: Ah, might as well jump (jump)
Might as well jump
Go ahead and jump (jump)
Go ahead and jump
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Good morning. Mike Shelby here with a hot take on hyperinflation.
One sentiment I see on social media and in opinion/news is that hyperinflation is an outlandish scenario, it's not a concern, the likelihood is very low, etc.
I think that's dead wrong.
In a previous email, I mentioned that war is the most common trigger of hyperinflation.
Foreign bombardment and civil wars are destructive to economies and erode the tax base, forcing governments to expand the money supply, which in numerous cases has resulted in hyperinflation. (I got into more detail on why/how in the previous email.)
A high end conventional war with China or a disruptive domestic conflict/national emergency is not unrealistic over the next several years. It's also not unrealistic to image a scenario where cyber and physical attacks cripple critical infrastructure, the financial sector, and other strategic or symbolic targets.
So if the effects of war are the most common trigger of hyperinflation, the U.S. is facing the potential for two highly destructive conflicts this decade, and we're already seeing the erosion of global dollar dominance, I ask: why is hyperinflation such an "outlandish" scenario.
The answer is that it's NOT an outlandish scenario.
It’s important to reiterate that a hyperinflationary event is not merely extreme inflation, but a loss of faith in the dollar.
In last week's Economic Early Warning, which is available to Forward Observer subscribers, I outlined six scenarios that could trigger hyperinflation in the United States.
I want to share them with you today. If you want access to our weekly Economic Early Warning report, subscribe here.
Here are the six scenarios, along with an abbreviated analysis:
The Fed’s 10x10 scenario gone awry. While high inflation is politically unpalatable, the Fed may pursue something like a 10% annualized rate of inflation over 10 years so the US Government can reduce its debt to sustainable levels. Fed chairman Jerome Powell last week called the US national debt situation “unsustainable,” adding that “it is best to address it soon.” Although Fed officials maintain that this option is not being considered, in this scenario, the US Treasury would be able to pay down debt faster with inflated dollars. The risk here is that the Fed loses control of inflation, causing a catastrophic loss of confidence in the dollar as a safe haven asset, which could accelerate into a hyperinflationary scenario.
A domestic conflict. A high intensity civil war that brings economic devastation would likely shake the world’s confidence in the US Dollar as a safe haven asset, which could lead to foreign investors and central banks dumping the dollar in favor of a more stable currency. Even a low intensity conflict, such as an American version of the Irish Troubles, would likely bring attacks against strategic and symbolic targets, and a protracted conflict would likely diminish foreign investment and use of the dollar. Hyperinflation could occur if a global sell-off of the dollar accelerates, causing bank runs and sensitivity to holding money (i.e., spending it quickly), which is highly inflationary.
An American Suez Crisis. In 1956, Egypt nationalized the Suez Canal. In response, Britain, France, and Israel launched an invasion to take it back by force, but the operation was short-lived. US President Dwight Eisenhower threatened to sell US reserves of the Great British Pound, which forced the British to cease military operations after 10 days. The event was so humiliating for Britain that it caused a monetary and financial crisis, forcing the British to accept financial support from the International Monetary Fund. It also officially ended Great Britain’s reign as a world power. An American Suez Crisis could occur over Taiwan if the US lost face against China. If the US backed down, then the world would lose faith in the US as a protectorate, and we’d see a run on the dollar and U.S. Treasuries, similar to Great Britain’s 1956 financial and monetary crisis.
Economic destruction from war with China. First, in a conventional war, Chinese imports stop. Second, in a high intensity conflict, we should absolutely expect a degraded information and communication environment. This could mean severe disruption to the internet, satellite communications, global positioning satellites (GPS), and cellular communication. Third, in a high end conflict, we’re likely to face severe domestic disruption from Chinese attacks. In December 2020, the US Army warned of the use of hybrid war tactics from peer competitors like China. This would include cyber attacks, the fomenting of civil unrest and riots by foreign information operations, the use of transnational criminal organizations, and other conventional or unconventional means, according to the document. The 2018 National Security Strategy infamously warned that “the homeland is no longer a sanctuary” due to the ability of peer and near-peer competitors to attack the United States. Even a pyrrhic victory against China would be economically and financially devastating, which could lead to hyperinflation.
Forced sale of foreign-owned property. One reason for high property prices is foreign investment. According to the US Department of Agriculture, foreign ownership of American farmland doubled over the past 10 years. Foreign investors own around 3% of agricultural land, or an area roughly the size of Iowa. Could we see the forced sale of foreign-owned land and critical infrastructure due to national security concerns? In a conflict with China, for instance, the forced sale or expropriation of Chinese-owned property could scare off other foreign investment and cause foreign central banks to dump U.S. investments and the dollar, risking hyperinflation.
The financial “nuclear” option. As Bridgewater’s Ray Dalio has described, the US and China are locked in a capital war, where the two countries are attempting to deplete the other of foreign investment. These are “gray zone” tactics intended to cause harm but remain well below the risk of conventional conflict. China does not want a high intensity conflict with the United States and its global allies, so the exploitation of the gray zone remains its preferred course of action. If a financial “nuclear” option becomes necessary, the United States could threaten to cancel its own Chinese-held debt in lieu of war reparations or to punish China, below the threshold of conventional war, over a military campaign against Taiwan. Similarly, China retains the option to threaten or actually dump US Treasuries, which would not only tank US markets but likely cause a global economic, financial and monetary crisis. Both options would cause catastrophic effects for each country, making this a less likely, but not impossible, course of action.
I don’t believe hyperinflation is an imminent threat or a foregone conclusion. One observation from the Obama era is that Americans who tend to catastrophize the news also tend to overestimate threats and underestimate the strength of the US, the value of the country’s natural resources, and the ability of the Fed and US Government to change the rules as they go along to ensure some level of stability.
Pundits like Gerald Celente and Jim Rickards, Jim Rogers and David Stockman, among others, have created so much fear and at points warned their readers and listeners to dump stocks and move to hard assets due to a Greater Depression, hyperinflation, or some other imminent calamity. They’ve been doing this for over 10 years and in hindsight, that’s been horrible advice as the Fed has continued to pump up equity prices while silver and gold have underperformed the S&P over the same time period. Even being in cash has been a horrendous return on investment.
But the Fed won’t always be able to change the rules as they go along.
My belief is firm that we will at some point experience an economic, financial, and monetary catastrophe. But the national debt could conceivably expand to $40-50 trillion without triggering hyperinflation. In context, Celente and others were warning of imminent hyperinflation back when we eclipsed $10 trillion in national debt, which has nearly tripled since his warnings. I look at Japan, for instance, which has run sub-1% interest rates for the past 20 years and has a debt-to-GDP ratio of 257%, and yet has not experienced hyperinflation there. There are many differences between the US and Japan, but national debt for a superpower doesn’t alone lead to hyperinflation.
There may be black swans or other events not included in my list, but these are the six plausible scenarios that concern me regarding hyperinflation.
This is something you should be thinking about.
Until next time, be well.
Always Out Front,
Mike Shelby
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I like the balanced, centered tone.
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I like the balanced, centered tone.
Mike Shelby is former US Army Intel. He strives to be balanced and reasoned.
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https://nypost.com/2022/01/19/us-allows-teens-to-drive-semi-trucks-amid-supply-chain-issues/
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https://www.cnbc.com/2022/02/04/heres-where-the-jobs-are-for-january-2022-in-one-chart.html
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https://www.cnbc.com/2022/02/04/heres-where-the-jobs-are-for-january-2022-in-one-chart.html
Interesting observation, jobs surged as the Biden Big Blowout Build Back Broker Bill failed, and while lockdowns and mask and vaccine mandates are failing, not because of his policies.
Still, real wages and wealth are shrinking because of the very real BidenFlation.
https://www.manhattancontrarian.com/blog/2022-2-6-biden-blowout-spending-bill-fails-employment-surges
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"No tax increase for anyone making less than US$400,000."
(1) Who pays the inflation tax?
Only people making 400k or less. Everyone else can arrange their affairs to either benefit or not get hurt by it.
Pass through taxes: (2). Who pays the increases in the corporate income tax? EVERYONE knows it's the consumers and the workers.
(3). Who pays the 'deficit tax'? Does President Genius think 23/30 Trillion (going on 100T), at say 10% future interest rate, has no cost?
(4). SALT rewards:. Tax cuts for the rich but 9nly if they live in blue states. Almost no one making under 100k benefits, they just get stuck with the tab.
Link not pasting, free beacon
Hakeem Jeffries Wanted a Massive Tax Cut for the Rich. Now, He Says They Aren’t ‘Paying Their Fair Share’
What if every dollar of income,, no matter how earned by whom, paid its fair share of the public spending burden, (skin in the game)?
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https://www.washingtonpost.com/opinions/2022/02/18/great-resignation-is-also-great-retirement-baby-boomers-thats-problem/?utm_campaign=wp_post_most&utm_medium=email&utm_source=newsletter&wpisrc=nl_most&carta-url=https%3A%2F%2Fs2.washingtonpost.com%2Fcar-ln-tr%2F361539c%2F620fd1e19d2fda34e7996f0c%2F61cdf026ae7e8a4ac205b2b3%2F16%2F72%2F620fd1e19d2fda34e7996f0c
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"It's not that our friends on the Left are ignorant; it's just that so much of what they know isn't so."
- If not AOC, we can always count on Sen Bernie Sanders for his 'knowledge' that just isn't so:
https://www.based-politics.com/2022/02/17/bernie-sanders-pushes-anti-capitalist-conspiracy-theory-about-gas-prices/
Bernie Sanders
@SenSanders
Shock. Shock. Shock. Gas prices are at the highest level in 7 years while Exxon Mobil, Chevron, Shell & BP made nearly $25 billion in profits last quarter – the highest level in over 7 years. The problem is not inflation. The problem is corporate greed, collusion & profiteering.
5:36 PM · Feb 15, 2022
--------------------------
What a moron. Where do you start with this? As supply and demand change and prices shift to balance out all those forces, corporate 'greed' [desire to make a return on investment in a free-ish society] is the only thing that stays constant.
Let's review what happened to supply.
1. Biden and the Dems promised so much killing off of American oil and gas supply that, as price is determined in futures markets, oil and gas prices began their rise the minute the 2020 election was called for Biden - in November.
2. In his first minute in office in January, he canceled the Keystone XL pipeline, breaking contracts and supply commitments, without any action from Congress, signaling this administration would use powers beyond constitutionality if needed to stop American consumers from filling their tanks and heating their homes. By f'ing with supply, he invokes the price mechanism to ration out the scarcity.
3. What else? He killed ANWR, drilling offshore and on federal lands, the Feds own more than half the American west, and signaled that fracking that reduced CO2 emissions more than any other energy supply would be halted under his administration.
Do I have that about right?
Now, Bernie, you math and science genius, what happens if you kill off 10 or 20% of supply? Prices go up 10 or 20%? Right, only if you're (a moron) unable to read a demand curve and don't know elastic from inelastic demand. When supply is reduced, the price at the pump goes up and up and up until 10 or 20% of the volume is no longer affordable or useful to consumers. In this case double and still rising.
These policies aimed at ["greedy"] oil companies hurt whom? Not the rich who own oil company stocks. Those just go up and up and up. Not the rich who buy gas. They just pay more and it still amounts to roughly 0% of their monthly budget. Not the rich who bought a Tesla [with taxpayer subsidy] and don't need to fill up. It hurts the poor. The price increases squeeze them until they finally cut back their purchases by the supply shortfall, leaving the remaining supply to be bought and used by people who are relatively richer, paying ever-increasing amounts to the oil companies to produce less and less oil.
Your class warfare policies declare war on no uncertain terms against the people you PRETEND to want to help.
If you don't believe me, look at any recent opinion poll.
Guess what else happens, as if that wasn't bad enough. The higher energy prices drive up the cost producing and transporting everything else, let's start with food. Not just at the grocery store, everywhere. The cost of a Big Mac (big deal?) went up 40% and the cost of idling in the drive thru went up 100% and the dining room is closed, no bathrooms. The cost of a Subway sandwich is up 40%. The cost of EVERYTHING at Dollar Tree, now $1.25 Tree, is up 25%. It drives up the cost of manufacturing. Whose jobs get cut there?
YOU THINK THAT HURTS THE RICH? Sorry, it's not the top 1% or top 10% idling at the drive thrus, hurt by inflation and real wages declining. It's not the rich working the assembly line or filling their plumbing or electrical service vans. It may give the rich something to talk about but it's the poor and the working class that are hurt most, for those of you who divide people into classes. Math science, economic science, and history tell us what you pretend to deny with your wrong-headed policies and your projection of greed on others while you jet between your luxury homes with no visible income but a government check.
Bernie, AOC and President B, it is your political greed that is hurting real people and making solvable problems worse every day. You win your elections and we get these results. This is not the mere failure of liberals and Leftists to use second level thinking. This is complete brain dead denial of their own culpability in the destruction of our country and the lives of the working people who make it go.
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Atlanta Fed REAL wage 'growth' rate: -2.38%
Question for Biden, is this growth rate SUSTAINABLE?
https://www.atlantafed.org/cqer/research/gdpnow
https://confoundedinterest.net/2022/02/28/oh-atlanta-atlanta-fed-gdpnow-q1-forecast-drops-to-0-631-with-real-wage-growth-at-2-38-coal-is-soaring/
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"Atlanta Fed REAL wage 'growth' rate: -2.38%
Question for Biden, is this growth rate SUSTAINABLE?
Answer : Ukraine
just wait for the pack of BS we will get tomorrow at SOU address
:roll:
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"Atlanta Fed REAL wage 'growth' rate: -2.38%
Question for Biden, is this growth rate SUSTAINABLE?
Answer : Ukraine
just wait for the pack of BS we will get tomorrow at SOU address
:roll:
Wouldn't it be amazing if Biden went off-script at the podium where his handlers can't touch him, and just told the truth about everything? Become a JFK Democrat for his last 2 years. Embrace peace through strength and rising tide, instead of covet thy neighbor, economics.
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VDH on Biden flation
https://www.realclearpolitics.com/articles/2022/03/03/the_biden_inflation_octopus_147278.html
Read it all. Prof. Hanson has an amazing way of spelling out how this hurts everyone.
Fox Business:
Inflation nation: These states are paying the highest prices
Inflation costs the average American family $385 more per month: JEC
https://www.foxbusiness.com/economy/inflation-nation-states-paying-highest-prices
Oil soars to $113 /barrel
https://www.ft.com/content/dc93a656-5305-4642-9bc5-6922e33faa06?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
Fed Chair says interest costs going up:
https://www.foxbusiness.com/economy/fed-powell-25-basis-point-rate-increase-march
Food inflation 7%
https://www.nytimes.com/2022/02/03/business/economy/food-prices-inflation-world.html
Producer prices up 9.7%
https://abcnews.go.com/US/wireStory/us-producer-prices-surge-97-year-ago-82899605
Gas prices double. Heat your home: Double. Electricity up, up, up and getting less reliable.
President Joe Biden has the answer: "lower costs". God help us. Sooner rather then later.
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Rents are up 29% in Portland.
https://hotair.com/ed-morrissey/2022/02/16/nbc-news-rent-inflation-is-real-and-is-spectacularly-bad-for-working-class-americans-n449094
There is something interesting here. We saw the riots. No one would want to live there. Rents are up 29%. It seems a contradiction. Similar thing is happening in Mpls and many other 'blue' cities. They make life expensive with taxes and regulations, then they expand the programs to make it 'affordable'. Real costs, rents and prices just keep going up - for as long as deficit spending can support it.
Center city is where the arts are, where the universities often are, where the culture is, where the transportation hubs are, where the employment and businesses once grew, where the programs are, and where the crime and unrest is. Also where new housing investors are reluctant to take more risks.
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https://issuesinsights.com/2022/03/17/four-charts-prove-biden-is-lying-about-putin-and-inflation/
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https://media.gab.com/system/media_attachments/files/101/794/693/original/547b1f88764a6c78.png
(https://media.gab.com/system/media_attachments/files/101/794/693/original/547b1f88764a6c78.png)
VDH on Biden flation
https://www.realclearpolitics.com/articles/2022/03/03/the_biden_inflation_octopus_147278.html
Read it all. Prof. Hanson has an amazing way of spelling out how this hurts everyone.
Fox Business:
Inflation nation: These states are paying the highest prices
Inflation costs the average American family $385 more per month: JEC
https://www.foxbusiness.com/economy/inflation-nation-states-paying-highest-prices
Oil soars to $113 /barrel
https://www.ft.com/content/dc93a656-5305-4642-9bc5-6922e33faa06?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
Fed Chair says interest costs going up:
https://www.foxbusiness.com/economy/fed-powell-25-basis-point-rate-increase-march
Food inflation 7%
https://www.nytimes.com/2022/02/03/business/economy/food-prices-inflation-world.html
Producer prices up 9.7%
https://abcnews.go.com/US/wireStory/us-producer-prices-surge-97-year-ago-82899605
Gas prices double. Heat your home: Double. Electricity up, up, up and getting less reliable.
President Joe Biden has the answer: "lower costs". God help us. Sooner rather then later.
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https://www.vox.com/the-goods/22994731/inflation-rate-russia-gas-prices-jerome-powell
"America’s inflation problem is weirdly hard to fix"
This is vox at the end of a long piece presenting one idea that 'some might argue':
... "different ideas for fixing inflation depend on what you think is causing it. For those in the camp that government stimulus and an overly accommodative Fed are part of the problem, that means that in the future,
they’ll push for less stimulus and a less lenient Fed. "
Part of the problem? Those who don't believe there is a Santa Claus in real macroeconomic? Um, that were three rounds of multi trillion dollar 'stimuli' (more money chasing fewer goods and services, it's definitional) coupled with dozens of anti-work, anti-production measures, on top of the regular deficits already over a trillion a year. Yes, that might be "part of the problem"!
To stop inflation, you first must STOP DOING WHAT IS CAUSING IT.
An equally valid possibility for them is the Elizabeth Warren, AOC, Karl Marx idea that it's corporate greed causing all ILLS, they throw that in to keep their Left readership. However, ' corporate greed is a constant while inflation is at a 40 year high and escalating. And their definition of corporate greed is investors and producers wishing to make a return on investment. The alternative to that is no investing. In that case, there are places in the world to study that have no private investment. Stomping out private investment actually caused, did not solve, Venezuela's inflation.
"Weird".
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https://www.bloombergquint.com/onweb/u-s-households-face-5-200-inflation-tax-this-year-chart
We were promised this would hit only the super rich, was transitory, was a sign of a strong economy. Promised!
Oops, consumer spending slows sharply:
https://finance.yahoo.com/news/u-consumer-spending-slows-sharply-124922632.html?fr=sycsrp_catchall
There is a lesson in this regarding "supply side economics".
"Stimulating" demand doesn't work. We sent everybody a check, and then another check. Then they wanted to send another and another. We saw an artificial and apparent boost in economic activity but we did not see a boost in production, of oil, of food, of fertilizer, of consumer goods or of anything else. The only thing boosted with lasting effect was the number of people leaving the workforce.
OTOH, we had tax RATE cuts that appeared and were alleged to only help employers, yet wages, employment and income surged while inflation stayed near zero. People in the lower incomes, working people including blacks and Hispanics benefited the most.
How many times do we have to keep heading down the wrong road in the wrong direction over and over and over to learn the already known lessons and laws of economic science?
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https://www.dailymail.co.uk/news/article-10677009/New-chart-proves-Biden-blame-inflation-Former-CEO-ANDY-PUZDER.html
See chart.
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Analogous to "professional journalists" is now the term award winning economists:
https://www.epi.org/open-letter-from-nobel-laureates-in-support-of-economic-recovery-agenda/
Direct causation of inflation won't cause inflation. You can trust that because WE SAID SO.
Oops, all wrong. No consequence to reputations. They will all still be Nobel Prize winning Economists next time a partisan Left political issue needs false support again.
https://thehill.com/opinion/finance/3259197-nobel-economists-were-dead-wrong-on-inflation-dont-expect-an-apology/
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https://pjmedia.com/news-and-politics/rick-moran/2022/04/09/fed-study-stimulus-checks-worsened-inflation-n1588317
Democratic deniers of economic science, is there any way we could have known in advance that more money chasing fewer goods and services would worsen inflation?
Oh wait, that's the definition of inflation.
https://en.m.wikipedia.org/wiki/Demand-pull_inflation
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"https://pjmedia.com/news-and-politics/rick-moran/2022/04/09/fed-study-stimulus-checks-worsened-inflation-n1588317"
and the way to solve this problem of inflation just before an election
as per many dems:
send out more checks to pay for inflated goods and services
endless steal and bribe scams
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and I would add
of course ,
it is "for the children"
and if you disagree your a rotten white supremacist who is against children
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14.4% annualized inflation in March
https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report
Highest in 40 years.
Trump's fault Putin's fault, it's just the 40 year business cycle?
Do Dem voters really believe bad outcomes are not caused by their policies??
See previous post, their policies are the definition of inflation and stagnation/collapse.
Everything that has to do with healthy economic growth and stable currency they are against.
Then THIS happens.
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just shopped and everything is going up
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Major shrinkage.
https://www.dailywire.com/news/real-wages-plummet-nearly-3-due-to-inflation
------
Need opposite phrase for wage expansion under Trump/Republicans:
https://thefederalist.com/2020/11/02/under-trump-americans-have-seen-their-best-wage-growth-in-40-years/
We can't seem to ever communicate persuasively with the electorate, but shrinking wages do.
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My economics used to be free market libertarian.
Now it is not.
My simple example of why is any approach that leaves us dependent on China for our antibiotics is unsound.
Well, if not free market libertarian, then what?
======================================
The Market's Border Crisis - The American Mind
The Market’s Border Crisis
Oren Cass
Corporate Skyscraper skyline concept piece depicting global business and finance with China being the global superpower in the middle.
Revitalizing the American industrial base requires moving beyond globalization.
American economists and policymakers dug our nation into its current industrial hole by failing to notice that the world has changed. For economists, it’s forever the 1770s, when Adam Smith observed that investors, “preferring the support of domestic to that of foreign industry” and “directing that industry in such a manner as its produce may be of the greatest value,” would be “led by an invisible hand to promote” the public interest.
Or else it’s the 1960s, when Friedrich Hayek professed his faith that the “self-regulating forces of the market will somehow bring about…some necessary balance, between…exports and imports.” For free-market policymakers, it’s still 1980, and nothing’s wrong with the economy that a good dose of tax cuts, deregulation, and free trade won’t cure.
In fact, globalization has created an economy in which wildly imbalanced flows of goods and capital, distorted intentionally by policymakers abroad with no interest in the values of democratic capitalism, place the pursuit of profit at odds with the national interest. America does not benefit when its corporations offshore production in search of foreign subsidies and exploitable labor, no matter how much profits rise. Nor can America’s industrial commons thrive when the first move upon developing a new product in an American lab is to determine which Asian country has the best ecosystem for bringing it to scale.
So while I agree with David Goldman’s assessment of the challenges that America faces in a globalized economy against a much larger peer-competitor in China, I cannot agree with his suggestion that “we have nothing to learn: we only need to remember,” and that “we only have to dust off the old ideas and get the band back together.” Not that there’s anything wrong with the oldies—we do need modern moonshots to spur problem-solving by engineers, and our Department of Defense must start pushing the envelope on physics in pursuit of dual-use technologies. But on their own, such engines of innovation will fail to reenergize domestic industry.
Just imagine if the Apollo program or DARPA were spinning out their gizmos and gadgets in the 2010s. Goldman writes that government “got entrepreneurs to commercialize these things not by betting on the entrepreneurs, but by covering the costs of the fundamental research. That’s it.” But that’s not it. Implicit in the success of funding the research was the promise that entrepreneurs commercialized these things in America, investing in American production capacity, building the skills and expertise of American process engineers, and entrenching American supply chains.
In the 1960s, we could take all that for granted and leave it unsaid. Today, thanks to decades of U.S.-led and -celebrated globalization, the process looks different. We can generate world-beating innovation, we can even hand the intellectual property to U.S.-domiciled corporations run by American executives, but commercialization and production will still happen across the Pacific, with the finished goods shipped back to us, for which we pay as a nation by handing over assets and going further into debt.
We can and should strive for better innovation policy, but the central challenge for policymakers is to counteract globalization’s corrosive effect on our system of free-market capitalism. So long as we treat the whims of the Chinese Communist Party as just another market force, our market will not behave in the accustomed way or deliver the accustomed prosperity. Adopting free trade in pursuit of a “free market” has the opposite effect, corrupting our market with heavy-handed policies from abroad that siphon away the benefits of our innovation and create incentives for our corporations to pursue profit in ways that harm the national interest.
One part of the answer is industrial policy—channeling investment toward the uses most valuable to the nation. Goldman calls for this, but beyond mentioning a price tag of $1 trillion and a timeframe of ten years, he never explains what it would entail. Is the idea to spend that much subsidizing domestic investment? To leverage some smaller set of subsidies into that much private investment? In which industries?
Industrial policy isn’t free, but neither is spending gobs of money the point. Rather than placing government in control of investment, effective industrial policy alters market rules so that investments important to the nation become more attractive to market participants. Direct public spending should focus on supplying the public goods that are prerequisite to private investment, augmenting private investments that meet broadly applicable criteria, or financing speculative projects that cannot attract private capital. An appreciation of the market’s benefits and the government’s limitations distinguishes sensible industrial policy from the progressive formulations that hand responsibility for allocating resources and building enterprises over to bureaucrats.
And while industrial policy has its place, it will not overcome globalization’s pressures on its own. To create the market conditions in which domestic innovation fuels domestic industry (which is itself vital to further innovation), policymakers should foreclose the alternative. A number of tools—a global tariff, a market access charge, or an import certificate—would have the effect of making domestic production relatively more attractive, all the way to the point where trade comes into balance and we export as much as we import. We would still buy from abroad, but only in proportion to what the world buys from us, and only those things for which foreign producers had the largest insurmountable advantages.
That might seem a heavy-handed intervention, but it’s simpler, less intrusive, and more effective than the tangle of multilateral agreements needed to make globalization work, the countervailing policies needed to offset unfair practices abroad, and the ever-growing safety net needed to compensate everyone left behind. Require balanced trade, and the assumption that innovation begets industry will once again hold true. Investors and businesses pursuing profit will more consistently advance the national interest as well. China will no longer transmit its economic distortions and authoritarian politics into our market. Given the chance to work, American capitalism can still win.
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Biden took credit for the growth coming from red states reopening the previous quarters and called it unprecedented economic growth. Now who owns the 1.4% GDP shrinkage in Q1 2022?
https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html
Worst economy since the initial lockdown.
We are coming out of a pandemic and have economic decline? Why? How? As mentioned here ad nauseum, THESE ARE ANTI-GROWTH POLICIES.
Yet the coverage of the economic decline including Fox calls it "unexpected". Unexpected would be anything that goes right under these anti-economic clowns.
One generally accepted definition of recession is two consecutive quarters of negative GDP growth and now we have one. In other words, they don't officially call it recession until we are 7 - 9 months into it, which if this continues puts us in the heat of the upcoming election cycle.
Steering the car by looking only through the rear view mirror has obvious dangers.
Every Democrat to the right or center of Stalin and Warren should triangulate right now. Force pro-growth policies through the process now, like indexing capital gains to inflation. Steal the initiative from the Republicans or lose the country and lose the electorate by historical proportions.
It's that simple.
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Isn’t it funny how the Dems don’t seem to be acting like they’ll lose power, no matter what they do.
https://ace.mu.nu/archives/398886.php
Biden took credit for the growth coming from red states reopening the previous quarters and called it unprecedented economic growth. Now who owns the 1.4% GDP shrinkage in Q1 2022?
https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html
Worst economy since the initial lockdown.
We are coming out of a pandemic and have economic decline? Why? How? As mentioned here ad nauseum, THESE ARE ANTI-GROWTH POLICIES.
Yet the coverage of the economic decline including Fox calls it "unexpected". Unexpected would be anything that goes right under these anti-economic clowns.
One generally accepted definition of recession is two consecutive quarters of negative GDP growth and now we have one. In other words, they don't officially call it recession until we are 7 - 9 months into it, which if this continues puts us in the heat of the upcoming election cycle.
Steering the car by looking only through the rear view mirror has obvious dangers.
Every Democrat to the right or center of Stalin and Warren should triangulate right now. Force pro-growth policies through the process now, like indexing capital gains to inflation. Steal the initiative from the Republicans or lose the country and lose the electorate by historical proportions.
It's that simple.
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Isn’t it funny how the Dems don’t seem to be acting like they’ll lose power, no matter what they do.
https://ace.mu.nu/archives/398886.php
Datapoints to the contrary:
1. In the House this year, incumbent Dems are fleeing like rats from a sinking ship...
https://www.theguardian.com/us-news/2022/mar/06/democrats-retirements-election-2022-brenda-lawrence
...largely because everyone including their own internal polling expects Dems to lose the House.
2. What was the rush to pressure a healthy but aging Justice Breyer to resign early from the Supreme Court? The powers behind the President and the party, judging by their actions, believe Republicans will also take the Senate.
3. Note the shift of emphasis from failed legislation to executive orders as Dems already lost two members, Manchin and Sinema, on key issues.
4. The contested electoral map keeps expanding into so-called blue states.
5. Dem gatekeepers and access controllers, judging by their actions, are also scared to death of having either Slow Joe or the brainless and the childless cackling Mamala on the ballot in '24.
From where I sit, the Dem party sees nothing but losing for the foreseeable future, at least until Republicans screw up again.
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Isn’t it funny how the Dems don’t seem to be acting like they’ll lose power, no matter what they do.
https://ace.mu.nu/archives/398886.php
Datapoints to the contrary:
1. In the House this year, incumbent Dems are fleeing like rats from a sinking ship...
https://www.theguardian.com/us-news/2022/mar/06/democrats-retirements-election-2022-brenda-lawrence
...largely because everyone including their own internal polling expects Dems to lose the House.
2. What was the rush to pressure a healthy but aging Justice Breyer to resign early from the Supreme Court? The powers behind the President and the party, judging by their actions, believe Republicans will also take the Senate.
3. Note the shift of emphasis from failed legislation to executive orders as Dems already lost two members, Manchin and Sinema, on key issues.
4. The contested electoral map keeps expanding into so-called blue states.
5. Dem gatekeepers and access controllers, judging by their actions, are also scared to death of having either Slow Joe or the brainless and the childless cackling Mamala on the ballot in '24.
From where I sit, the Dem party sees nothing but losing for the foreseeable future, at least until Republicans screw up again.
"5. Dem gatekeepers and access controllers, judging by their actions, are also scared to death of having either Slow Joe or the brainless and the childless cackling Mamala on the ballot in '24."
Why? He got 81 million votes last time, he should expect even more next time, right?
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"Inflation spurs record decline in workers’ wages and benefits."
https://www.cnn.com/2022/04/29/economy/inflation-worker-compensation/index.html
-------------------
Today our most liberal family member twice mentioned wages not keeping up with inflation.
Biden decline is real and affecting everyone, not a statistic on the economics page or a campaign ad.
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Did you suggest that the government create a UBI program to fix that?
"Inflation spurs record decline in workers’ wages and benefits."
https://www.cnn.com/2022/04/29/economy/inflation-worker-compensation/index.html
-------------------
Today our most liberal family member twice mentioned wages not keeping up with inflation.
Biden decline is real and affecting everyone, not a statistic on the economics page or a campaign ad.
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Good one. A govt spending program to fix a govt spending problem. No, I kept my mouth shut but wanted to say many things like, isn't that what you voted for?
Persuasion in politics is a delicate art. Telling them they're stupid hasn't been an effective launching point for me.
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"Telling them they're stupid hasn't been an effective launching point for me."
Powerful point.
My best effort is:
"What do you do when the facts prove you wrong?"
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https://ace.mu.nu/archives/399066.php
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Biden blames Republicans for taxing
and for inflation
I recall with clarity that the Democrats
swore up and down they were going full Alinsky
and decided they would lie , cheat , steal
blame everything that goes wrong
on republicans take no blame
when Trump gave them TDS
with his personality (never admit a mistake, never take blame)
they were intent on in their minds "getting even"
(of course they have had their way now for 30+ yrs)
so now they are shoving down our throats
There was a show called OZ
on HBO
I remember
the narrator was pointing out that one inmate was crazy because he found getting *revenge* was more important then risking his own life.
The TDS crowd is similar
getting even, revenge , and their way are more important then the election they will lose because they are ruining the country in the process
just an observation
they like the CCP are in for the long haul
so if they lose this time they will get power back and never stop their agendas the whole time
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In 1974 in the NYT.
It's shortages and corporate greed, right.
https://mobile.twitter.com/AlanReynoldsEcn/status/1524134876827598849/photo/1
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Nice touch!
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https://twitter.com/AuronMacintyre/status/1524186858334433281
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https://www.youtube.com/watch?v=mS5WYp5xmvI
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https://www.zerohedge.com/economics/how-inflation-got-away-washington-screw-ups
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https://www.zerohedge.com/economics/how-inflation-got-away-washington-screw-ups
Good article and good question, is it incompetence or malevolence, or more likely, a combination of the two.
I wrote an article on Janet Yellen in June 2016 for SpartaReport, the gist of it is here:
https://firehydrantoffreedom.com/index.php?topic=1948.msg97013#msg97013
For liberals in general, they have a stronger belief in capitalism (aka free enterprise) than do those of us who favor it. They think you can throw all this bullsh*t up against it, taxes and regulations in particular, and it will keep going and going, without interruption. We think economic liberty, like all kinds of liberty, is fragile and needs to protected at every turn or it will go away, be destroyed.
Yellen in particular is pro-inflation, well documented in the article. Inflation enables what they, the Left, want to do.
It's kind of obvious now, in Venezuela as it is here in America, that is a dangerous position.
Once it spirals, where is the path other than up?
Paul Volcker alone did not have the answer. Like a hammer approaching a nail, he knew only one thing, hit the nail, and Volcker tightened the money supply causing an immediate, horrible downturn under Carter. The second half of the cure was to stimulate (remove hindrances to) production, known as the Reagan tax rate cuts, but those did not go into full effect until 1983, over three years later.
The economic carnage that happened in between DID NOT HAVE TO HAPPEN.
Is it incompetence or malevolence to refuse to look objectively at what we already know through experience? Yes. Both.
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I heard him on newsmax (or was it c span)
he was saying the beginning of our problems started in 1971 When Nixon took us off the gold standard:
https://www.forbes.com/sites/johntamny/2022/03/16/book-review-steve-forbes-nathan-lewis-and-elizabeth-amess-inflation/?sh=91d924856c76
I thought his thesis was logical though I am no economist.
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Yes. It's not quite that simple. I think they had to take away the gold convertibility (or default, same thing) by then. Then they tried the price wage freeze which was stupid and statist, and inflation doubled from 7% to 14% by the end of the decade.
They could use a 'basket' of goods (that includes gold) as the benchmark in place of gold convertibility, and now we have the Taylor rule, statistical monetary guidelines from Prof John Taylor at Stanford - that they don't follow, .
They are worse than don't care. Monetary policy enables reckless fiscal policies and they have other objectives ahead of price stability, such as employment, holding power and intentional inflation to devalue the debt.
The book, Seven Fat Years (and how to do it again) by then WSJ Editor Robert Bartley tells the story of 1971 and the years leading up to the Reagan revolution.
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thanks for reply
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Free email newsletter. They make a few great points every few days. I've passed along some of them. It is always worthwhile, though there are rare issues where I disagree with them.
Lead guy is Steve Moore. Founders and contributors include Art Laffer, Steve Forbes, University of Chicago economist Casey Mulligan.
I highly recommend signing up and spreading the word. - Doug
https://committeetounleashprosperity.com/hotline/?utm_source=MailChimp&utm_medium=click
About The Committee To Unleash Prosperity
A Brief History of the Policies of Equitable Prosperity
The phrase “Supply-Side economics” was first coined by Jude Wanniski.
Polyconomics’ chief economist Alan Reynolds flagged the phrase “Supply-Side fiscalists” from Republican economist Herb Stein, from which Wanniski clipped away “fiscalists.” The policies to which it referred were made relevant and compelling by political heroes, most prominently Rep. Jack Kemp (R-NY) and President Ronald Reagan.
In the late 1970s America was beset by a staggering “Misery Index,” meaning high inflation accompanied by high unemployment which, per the prevailing Neo-Keynesian economic doctrine, was an impossibility. “Supply-Side” contained an allusion to Say’s Law, named for free market economist Jean-Baptiste Say: “Supply creates its own demand.”
Supply-Side is a species of free market economics, among whose variants a great deal of intramural skirmishing occurs.
Supply-Side differentiates from libertarian, Austrian, laissez faire and classical liberalism, generally not in substance but in emphasis.
Supply-Side emphasizes the prosperity-generating quality of free markets.
The “Creators” or “Producers” of goods and services — entrepreneurs, businesses, investors—are the key driver of the economy, rather than the prevailing Neo-Keynesian emphasis on the consumer, known in the economist’s jargon as “aggregate demand.” Supply-Side economics is about empowering new or greater production, rather than consumption. All consumption, or “spending,” is the result of one’s production because one cannot consume, or spend money, without first producing (e.g. by working or investing).
Supply-Side is rooted in counsels of generosity and benevolence and its policies have historically been either neutral between capital and labor, creditors and debtors or, more often, leaned toward moderately privileging labor and debtors over capital and creditors. It is no coincidence that the two great political progenitors of Supply-Side economics, Rep. Jack Kemp and President Ronald Reagan had been presidents of labor unions before going on to political greatness. Supply-Side indicts misers and exalts benefactors.
To resolve the persistent economic misery besetting America and the world-pioneering economic visionaries Prof. Robert Mundell, who later received the Nobel Prize in economics for his work on optimal currency areas, and Dr. Arthur B. Laffer, who later received the Presidential Medal of Freedom from President Donald Trump, proposed to invert the conventional policy prescription of easy money and high marginal tax rates.
The new economic policy doctrine was set forth in the charter document of Supply-Side Economics, The Mundell-Laffer Hypothesis by Jude Wanniski, and Arthur Laffer, published in The Public Interest in the Spring 1975 issue.
The essence of their proposition, contained at page 49, was:
Since 1961, Mundell has argued that monetary and fiscal policies are totally distinct policy instruments that can be employed for separate purposes and even utilized in opposing directions.
Monetary policy is the appropriate instrument to maintain external balance; fiscal policy is the appropriate instrument to maintain external balance; fiscal policy is the appropriate instrument to maintain aggregate demand and internal balance. If the world economy has inflation and unemployment at the same time, the proper policy mix is tight money and fiscal ease. The latter should preferably take the form of tax reductions although Mundell agrees that government purchases of good (sic) and services will also have beneficial effects.
The vast bulk of this, the Supply-Side’s charter document, was devoted to monetary stability, fixed exchange rates, referencing, without quite prescribing, the classical gold standard. As a secondary matter it addressed the excessive marginal income tax rates – as nominally high as 70% for investment income — into which inflation had ambushed even the members of the middle class.
Footnote four of this article was devoted to what became known as the Laffer Curve, which came to the fore in the political discourse. Wanniski went on to add: “Laffer, who took the insight from his friend Mundell and refined it to embrace the effects of transfer payments, also argued the case in a memorandum to Treasury Secretary Simon”:
The best program to combat inflation simultaneously reduces money growth and increases real output growth. In order to increase real output growth, it is first necessary to focus
on why people, machines, land, and other factors of production choose to be employed. Secondly, it is necessary to focus on why firms choose to employ these productive factors. It is taken here as a simple truth that in part productive factors’ choice to work is based upon their ability to earn after-tax income. It is likewise taken as a virtually obvious proposition that the more an employer has to pay his factors of production the less he will want. Marginal taxes of all sorts stand as a wedge between what an employer pays his factors of production and what they ultimately receive in after-tax income.
The Mundell-Laffer Hypothesis challenged both the conservative conventional wisdom of “monetary and fiscal restraint” (i.e. tight money and high tax rates) to fight inflation and the liberal conventional wisdom of “monetary and fiscal ease” (i.e. easy money and lower tax rates) to combat recession. This heterodox proposition, violating the dogmas of both the right and left, was ridiculed and derided
by the Establishment. It was called by George H.W. Bush “Voodoo Economics” for its claim, among other things, that by cutting punitively high (e.g. 70%) marginal tax rates one could grow the tax base and thereby, over time, increase tax revenues. While it seemed counterintuitive that one could increase tax revenue by cutting rates it turned out to be correct.
And common sense. A government that taxes too heavily is akin to a company that charges prohibitive prices for its products. People will stop buying what is priced above its value and its purveyor’s revenue will wither. Or, as the oldest book of political and moral philosophy in the world, the Tao Te Ching, states:
Why are the people starving?
Because the rulers use up the money in taxes. Therefore the people are starving.
Why are the people rebellious? Because the rulers interfere too much. Therefore they are rebellious.
Notwithstanding the attendant establishment ridicule, presidential candidate Ronald Reagan embraced the Supply-Side policy formulation. In the process Reagan gained the presidential campaign endorsement of Rep. Kemp and the support of the Supply-Side “cabal.” And went on to beat the incumbent Jimmy Carter.
On the day in November 1979 that Reagan formally announced his presidential candidacy, the Dow Jones Industrial Average stood at 814. US real GDP was slightly below $2.9T.
The stable money policies called for by Mundell and Laffer were adopted by Fed Chairman Paul Volcker with Reagan’s political support.
The marginal rate cuts called for by Kemp, emulating Kennedy, under the guidance of, among others, Mundell and Laffer, Congress enacted the Kemp-Roth 30%-across-the board marginal tax rate cut (diluted in practice to 24%, and phased in rather than immediately adopted). Beneficially, Democratic officials in the Congress led the dropping of the top tax rate from 70% to 50%, and, then, again led by Democrats, to 28%.
Committee senior fellow Ralph Benko founded and led, followed by committee chairman Stephen Moore, the Prosperity Caucus in the 1980s and following years. Originally called “the gathering of the Supply-Side tribes” it was designed to coordinate the various free market policy thinkers and minimize factionalism. The group, still meeting regularly today, was thereafter led by Jim Lucier, Bob Stein, James Carter and Ike Bannon. Jonathan Decker, executive director of the Committee to Unleash Prosperity, currently is the chief organizer of the Supply-Side Capitalist League’s youth group and its monthly gathering..
President Bill Clinton later raised the top rate to 39.6%, much to the dismay of Supply-Siders. Dismay aside, such a raise did not prevent real GDP growth from growing at a real 4% rate. To his credit (and with due credit to the mercurial and entrepreneurial House Speaker Newt Gingrich in pushing these reforms), Clinton adopted the Supply-Side policies of welfare reform and cutting the capital gains tax rate. The good achieved by such policy innovations more than offset the damage done by raising the top marginal rate.
Over time, US GDP grew from $2.9T to about $20T in 2018. Meanwhile, with much of the world having adopted something very like the Supply-Side formula, world GDP rose from $11T in 1979 to $88T today.
Some Voodoo!
The Committee’s analysis concludes that there are five major factors needed to “unleash prosperity” and thereby, achieve “universal opulence.”
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Signed up-- even though they collect my data grrrrr.
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Blue-collar employers seek young recruits for high-paying jobs
BY SEAN SALAI THE WASHINGTON TIMES
Plumbers, truckers and pipe fitters are offering hiring and signing bonuses — and promoting their six-figure incomes — to entice high school graduates willing to do dirty jobs, but young people keep turning up their noses to blue-collar work.
Even the prospect of a $1,000-a-week starting salary that could double in six years isn’t persuading young people to get into plumbing, says Chris Robertson, who has worked as a plumber for 24 years in Rockville, Maryland.
“It requires you to work hard, and I think a good part of the younger generation wants to be rich without putting in the effort,” said Mr. Robertson, owner of Robertson Plumbing Services. “And I think that’s part of the problem. Why do I want to dig with a shovel when I can sit at home, post videos and become YouTube famous?”
He said he’s been looking for an assistant since his employee of four years quit in February to work for a bigger company that offered a signing bonus. And the job vacancy is forcing him to turn down jobs, he added.
“Every single plumber I know is busy and can use extra help,” he said.
Truckers also are hurting for help amid retirements, rising gasoline prices, a lack of mechanics and a semiconductor shortage that has added tens of thousands of dollars to the price tag of a new big rig. The trucking industry added 27,300 payroll jobs in April and May combined, according to the latest Bureau of Labor Statistics data.
“It’s a nightmare, with all the truck drivers retiring,” said Ivan Isakovic, a trucker based in Florida who hauls tractors for John Deere.
The Serbia-born Mr. Isakovic says inflation is scaring off recruits, noting that truckers can take home $5,000 to $6,000 a month if all goes well. He’s now paying $1,200 to fill up the 200-gallon fuel tank of his aging big rig, and he worries about what repairs will cost if it breaks down.
“Right now, we’re barely covering the cost of fuel and maintenance. Some of my friends are clearing only $1,100 a week,” Mr. Isakovic said.
Unable to attract young people to blue-collar labor, some tradesmen are looking to former felons to fill job vacancies. Indeed Hiring Lab recently found that fair chance job listings open to ex-felons spiked by 31% from May 2019 to last month.
What’s more, a study from the nonprofit Rand Corp. in February found that more than half of unemployed men in their 30s have a criminal arrest record that otherwise would bar them from millions of openings in the labor shortage.
Meanwhile, trade groups are emphasizing the benefits of vocational education — onthe- job training, work security, high salaries, pension plans — to attract young people to apprenticeships.
“Graduates leave with ‘industry- recognized credentials’ and licenses within their field of study,” noted David Ferreira, a longtime vocational-technical high school science teacher and principal.
In the D.C. area, the Steamfi tters Local 602 is running ads on radio and social media that offer apprenticeships to anyone who will take them for sixfi gure jobs with good benefits and retirement plans.
The union’s business manager, Chris Madello, said the campaign generates “word-ofmouth” for pipefitting, pipewelding and pipe-building work.
“There isn’t a shortage of people trying to get into the profession, but there may be a shortage of people qualified to be top-level journeymen, and this campaign could help us attract better candidates,” Mr. Madello said.
So far, more than 600 people have applied since January. Those who graduate from the five-year apprenticeship will earn more than $100,000 a year and another $50,000 annually in benefits, the union said.
“There seems to be a renewed interest in apprenticeship because of the student loan crisis. You earn while you learn, you get an education and you don’t have any college debt,” said Lou Spencer, assistant business manager at the UA Local No. 5 Plumbers and Gasfitters that covers the Washington metro area. “What else could you want?”
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Inflation: Reagan and Trump vs. Carter and Biden
The results of pro-economic growth, supply-side policies are clear
By Newt Gingrich
Americans suffering from rising prices and the highest inflation in 40 years need to demand the results Presidents Ronald Reagan and Donald Trump gave them. They need to reject the policy failures of Presidents Jimmy Carter and Joe Biden.
The difference in economic outcomes is not theory or an ideological or political position. The difference in everyday pocketbook results is a purely historic fact.
Big Government socialists (as I outline in my new book, “Defeating Big Government Socialism”) have to be reality deniers. As Theodore White warned back in 1972, liberal ideology has become a liberal theology. Ideologies can evolve. Theologies must be obeyed.
Washington Post columnist Catherine Rampell recently gave us a perfect example of left-wing reality denial when she wrote, “Republicans demagogue about President Biden’s supposed ‘war on fossil fuels’ and socialism. Neither party has a serious plan for dealing with inflation overall or gas prices specifically.”
Given the history of the Reagan and Trump administrations, it is hard to believe that a columnist at a major newspaper could be so misinformed about the real world.
Consider the facts of inflation first.
When Mr. Carter was in office, the inflation rate grew out of control. In fact, the inflation rate grew so high U.S.
Federal Reserve Chair Paul Volcker had to raise interest rates to high levels. Mr.
Carter’s destructive energy policies combined with a weak foreign policy led to so much inflation the Fed funds rate reached a peak of 20% in June 1981 (with the commercial prime rate reaching 21.5%).
Compare this with the 1.75% Fed funds rate and 4.75% prime rate today.
Of course, the big difference in interest rates is that Chair Jerome Powell and the Federal Reserve are well behind the curve in trying to slow down or stop inflation. Because Mr. Carter let things get so out of control, the unemployment rate grew to over 10% in the 1980-1982 recession.
Reagan backed Volcker’s anti-inflation policies but combined them with a tax cut and regulatory reform policy which increased the incentives to create American jobs and mop up the surplus money with new goods and services.
In effect, Reagan had endorsed the supply-side economics of Jack Kemp, Art Laffer, Jude Wanniski and Larry Kudlow. (I was a junior member of this band of revolutionary enthusiasts who believed you could beat inflation by mopping up the money supply with more goods and services.)
Mr. Kudlow a generation later would carry this doctrine into the Trump White House to profound effect.
The result of the Reagan supply-side policy was a dramatic decline in inflation and unemployment. Consider the facts of the historic record. Under Mr. Carter infl ation shot up from 6.3% in 1977 to a peak of 12.4% in 1980 (then Reagan defeated Mr. Carter by the largest electoral college margin against an incumbent president in modern history).
With Reagan’s leadership, the inflation rate dropped to 10.4% in 1981 and then averaged 4.4% for the rest of his two terms.
Unemployment followed the inflation rate down, and by 1988 was about half of what Reagan had inherited. The economy grew year after year, and Reagan ran for reelection in 1984 on the theme of “Morning in America.”
Mr. Trump inherited a healthier economy from President Barack Obama than Reagan got from Mr. Carter, but Mr. Trump promptly improved on Mr.
Obama’s record. Inflation rates were 1.8% in 2017, 2.1% in 2018, 2.2% in 2019, and 1.7% in 2020.
The sound, pro-economic growth, supply-side policies were reinforced by an American energy independence drive which dramatically increased American oil and gas production — and brought the price of gasoline down to $2.11 a gallon the week of the 2020 election.
Mr. Biden came in and promptly gave up on all the policies which had worked. Big Government socialism is anti-energy, anti-sound money, anti-small business, anti-investment and anti-job creation. The left’s words sound good, but the results of their policies are terrible.
Given the history of the Reagan and Trump years, Republicans can campaign with confidence this fall that they know how to bring down the cost of gasoline and diesel fuel, how to bring inflation under control, and how to encourage job creators in both big and small businesses to invest, invent and flourish.
Sorry, Rampell, your fantasy version of history is just wrong. Your promise that Republicans will be as dumb and destructive as Democrats are just historically inaccurate. A brief course on the economic and political history of the last 50 years might help you understand why Democrats fail on inflation and fuel prices and Republicans can campaign with confidence this fall
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Great post from Newt. Why do so few people (outside of the forum) know that.
The basics of economic policy are as simple (and irrefutable) as the law of gravity. In a nutshell, incentives and disincentives matter.
People care widely, deeply and personally about the economy, yet 99+% of the discussion is about things, gender bathrooms, government giveaways, etc.
Follow up to what Newt said, it is because of Republican policies getting better results than Democrats that the media and Left must always point to something else.
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Looks like recession to me. Just what the policies ordered.
In terms of timing, we are just now seeing more accurate information for the first quarter of this year, and the revisions are all downward:
"US Personal Spending Is Revised Sharply Lower in First-Quarter Data"
https://finance.yahoo.com/news/us-personal-spending-revised-sharply-125806874.html
Second quarter ends tomorrow. Expectations for the quarterly growth are around 0.0%. If that comes in negative it means we are in a recession and have been since the first of the year. If it comes in barely positive. it means revisions to it could come in just before the midterm elections making the Biden recession front and center.
Per the previous post it begs the question, what are they doing to spur economic growth? Answer, nothing. What are they doing to hinder economic growth? Answer, everything.
Nothing other than adopt the pro-growth policies of their hated opponents will work for these people who hold Biden's puppet strings, and they aren't going to do that.
You don't need economists to declare when you're in a recession; people know. Since the crash of 2008 and the so-called great recession, Gallup shows that people had a negative view of the economy every minute since then with the exception of the exact period starting when Republican tax reform went into effect and ending when covid shutdowns hit. Scroll right if necessary to see that:
(https://i0.wp.com/www.powerlineblog.com/ed-assets/2022/06/Screen-Shot-2022-06-02-at-9.38.22-AM.png?resize=1536%2C864&ssl=1)
Speaking of Newt and his analysis, Clinton had two Presidencies economically, his first two years with a Democratic House and Senate where he raised taxes and added regulations, then his last 6 years 'triangulating' with a Republican House and Senate where he cut capital gains rates and 'ended welfare as we know it'. Funny thing happened, real wags grew 8 times faster in that second period. Check those dates on the Gallup chart. Lines up perfectly.
It's not the name or party on the door of the Oval Office; it's the policies, stupid.
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The media and the Left never admitted how good the economy was under Republican governance right up until covid, but those policies and results raise the bar for his successor . Now a return to Carter Biden misery is glaringly unacceptable. (Ask Hispanics about it if my rich liberal suburban friends can't see it.) The following today is from AP. 80% of Democrats think this economy sucks. Can't they read the biased talking points, low unemployment rate etc.? (Turns out, Democrats don't like rising crime rates either.)
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"An overwhelming and growing majority of Americans say the U.S. is heading in the wrong direction, including nearly 8 in 10 Democrats, according to a new poll that finds deep pessimism about the economy plaguing President Joe Biden. Eighty-five percent of U.S. adults say the country is on the wrong track, and 79% describe the economy as poor, according to a new survey from The Associated Press-NORC Center for Public Affairs Research. The findings suggest Biden faces fundamental challenges as he tries to motivate voters to cast ballots for Democrats in November’s midterm elections. " (Sources: apnews.com, apnorc.org)
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Those two in 10 Democrats can fight until the death, literally, over abortion while the rest notice gas prices going up faster than paychecks. There is a lot right with this economy but none of that matters when you can't buy anything.
Work all day and watch net worth go down.
Trump proved that Obama Biden were wrong, this is not the new normal. Decline is a choice. Stop choosing it!
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From a recent CTUP Newsletter, our own Scott Grannis gets a mention:
"What Do You Know: Runaway Spending Caused Bidenflation
One of our favorite financial analysts, Scott Grannis, has been tracking the growth of the monetary base since the start of the pandemic.
The charts below show that almost all of the excess spending – some $4.6 trillion over the past 30 months – was monetized. In other words, we paid for the spending almost exclusively by the Fed printing money.
Is it any surprise that inflation hit a near 40-year high this year with all the pandemic spending in 2000 under Trump and then Biden’s $3 trillion of added spending?
Biden denies that his spending blitz led to inflation, but these pictures show fairly conclusively the relationship between massive debt spending and the tidal wave of higher prices.
(https://ci4.googleusercontent.com/proxy/Q4O9F2zHTTjMaYZQoSlt8EQsG2hhIdCIEMbMMpZUXtFH4diGyPVh_4KNt8hF54Hl417atoTx4yOhjvRDQ39TEE3vkJS45CAJU44USRMskEjPPS_VCvCJkj7QnwCMx27dC7sfHTY1Vyhrz0jBFkkiopGnxwtssA=s0-d-e1-ft#https://mcusercontent.com/dc8d30edd7976d2ddf9c2bf96/images/e31d708b-882e-2957-0523-2f4fa8dde35a.png)
The good news is that because the absurd Build Back Better appears dead (notwithstanding Manchin's latest lovefest in Davos), spending is starting to decelerate and this should mean somewhat lower inflation in the months ahead. But we are still looking at between 4 and 6% inflation over the next year – at least.
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I'll say it if no one else will. Where did we just hear that these economic estimates get revised downward regularly - and today we find out the feared recession is already on?
These are not the final or official numbers but the source is the Atlanta Fed looking at real US economic data:
https://www.atlantafed.org/cqer/research/gdpnow
Latest estimate: -2.1 percent — July 1, 2022
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -2.1 percent on July 1, down from -1.0 percent on June 30. After this morning's Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively.
ECONOMIC DECLINE IS A CHOICE. I warn and warn and warn my Biden voting friends (and family), these policies lead to economic decline, but nobody listens.
Stock Market and your retirement funds? Worst first 6 months in the market of any year in 52 years.
Record spending, double digit inflation, record drop in productivity (https://www.cnbc.com/2022/05/05/labor-productivity-fell-7point5percent-in-the-first-quarter-the-fastest-rate-since-1947.html), declining real wages, declining GDP (national income), record high energy prices, record high food prices, no fertilizer, food shortages projected to worsen...
They won't change course. They could lose 60 seats in the House... AND THEY STILL WON'T CHANGE COURSE!
The productivity collapse in the US is Vladimir Putin's fault? No. It started the first hour Joe Biden and his puppetmasters walked into the Oval Office.
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https://www.zerohedge.com/markets/one-worst-downturns-recent-history-zuck-warns-facebook-employees-brace-layoffs?utm_source=&utm_medium=email&utm_campaign=752
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https://www.zerohedge.com/markets/one-worst-downturns-recent-history-zuck-warns-facebook-employees-brace-layoffs?utm_source=&utm_medium=email&utm_campaign=752
:cry: :cry: :cry:
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https://www.zerohedge.com/markets/one-worst-downturns-recent-history-zuck-warns-facebook-employees-brace-layoffs?utm_source=&utm_medium=email&utm_campaign=752
:cry: :cry: :cry:
He should lay off his political donations before he lays off the people who helped build his ostensibly great company.
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https://www.zerohedge.com/markets/one-worst-downturns-recent-history-zuck-warns-facebook-employees-brace-layoffs?utm_source=&utm_medium=email&utm_campaign=752
:cry: :cry: :cry:
He should lay off his political donations before he lays off the people who helped build his ostensibly great company.
FaceHugger is evil. We want it bankrupt.
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"FaceHugger is evil. We want it bankrupt."
I agree. I was calling Google and Facebook evil for a very long time, on a whim, and facts keep proving that assessment accurate.
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Prof. Art Laffer, Stephen Moore, ctup, wsj
https://www.wsj.com/articles/growth-austerity-inflation-larry-summers-unemployment-prices-jobs-rates-11656596482?mod=Searchresults_pos1&page=1
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(Doug). Subscription required so I can't read it.
As has been posted on these threads, the huge growth rate of M2 has now been curtailed but the growth of producing more goods and services needs to be accelerated on steroids. That happens with incentives, known as reducing the government imposed disincentives to produce, energy sector first, and the food sector as a result.
Just because Biden and the Democrats refuse to do what needs to be done doesn't mean we shouldn't be putting it out there in detail. Offer the country an alternative even if it's not a presidential election year, or it won't get done then either during the mudslinging and food fights we call campaigns.
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Way too late in the game.
We will have to rebuild after the collapse.
If we aren't nuked off the planet.
Art laffer, Stephen Moore, ctup, wsj
https://www.wsj.com/articles/growth-austerity-inflation-larry-summers-unemployment-prices-jobs-rates-11656596482?mod=Searchresults_pos1&page=1
--------------------
(Doug). Subscription required so I can't read it.
As has been posted on these threads, the huge growth rate of M2 has now been curtailed but the growth of producing more goods and services needs to be accelerated on steroids. That happens with incentives, known as reducing the government imposed disincentives to produce, energy sector first, and the food sector as a result.
Just because Biden and the Democrats refuse to do what needs to be done doesn't mean we shouldn't be discussing it in detail. Offer the country and alternative even if it's not a presidential election year, or it won't get done then either.
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Wrong. The collapse following surrender to the Left and deep state, if/when it happens, is into statism, not economic liberty. It won't get better in our lifetimes if you/we don't try to save it now.
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People are building a parallel economy. There is no surrender, it's called working around planning accordingly.
Wrong. The collapse following surrender to the Left and deep state, if/when it happens, is into statism, not economic liberty. It won't get better in our lifetimes if you/we don't try to save it now.
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https://www.paralleleconomy.com/
https://help.gab.com/article/gab-pay-overview
https://foreignpolicy.com/2011/10/28/the-shadow-superpower/
The Shadow Superpower
Forget China: the $10 trillion global black market is the world's fastest growing economy -- and its future.
By Robert Neuwirth
TED ALJIBE/AFP/Getty Images
TED ALJIBE/AFP/Getty Images
TED ALJIBE/AFP/Getty Images
OCTOBER 28, 2011, 9:16 PM
With only a mobile phone and a promise of money from his uncle, David Obi did something the Nigerian government has been trying to do for decades: He figured out how to bring electricity to the masses in Africa’s most populous country.
It wasn’t a matter of technology. David is not an inventor or an engineer, and his insights into his country’s electrical problems had nothing to do with fancy photovoltaics or turbines to harness the harmattan or any other alternative sources of energy. Instead, 7,000 miles from home, using a language he could hardly speak, he did what traders have always done: made a deal. He contracted with a Chinese firm near Guangzhou to produce small diesel-powered generators under his uncle’s brand name, Aakoo, and shipped them home to Nigeria, where power is often scarce. David’s deal, struck four years ago, was not massive — but it made a solid profit and put him on a strong footing for success as a transnational merchant. Like almost all the transactions between Nigerian traders and Chinese manufacturers, it was also sub rosa: under the radar, outside of the view or control of government, part of the unheralded alternative economic universe of System D.
You probably have never heard of System D. Neither had I until I started visiting street markets and unlicensed bazaars around the globe.
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System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man is a débrouillard is to tell people how resourceful and ingenious he is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of “l’economie de la débrouillardise.” Or, sweetened for street use, “Systeme D.” This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy. A number of well-known chefs have also appropriated the term to describe the skill and sheer joy necessary to improvise a gourmet meal using only the mismatched ingredients that happen to be at hand in a kitchen.
I like the phrase. It has a carefree lilt and some friendly resonances. At the same time, it asserts an important truth: What happens in all the unregistered markets and roadside kiosks of the world is not simply haphazard. It is a product of intelligence, resilience, self-organization, and group solidarity, and it follows a number of well-worn though unwritten rules. It is, in that sense, a system.
It used to be that System D was small — a handful of market women selling a handful of shriveled carrots to earn a handful of pennies. It was the economy of desperation. But as trade has expanded and globalized, System D has scaled up too. Today, System D is the economy of aspiration. It is where the jobs are. In 2009, the Organisation for Economic Co-operation and Development (OECD), a think tank sponsored by the governments of 30 of the most powerful capitalist countries and dedicated to promoting free-market institutions, concluded that half the workers of the world — close to 1.8 billion people — were working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often, avoiding income taxes.
Kids selling lemonade from the sidewalk in front of their houses are part of System D. So are many of the vendors at stoop sales, flea markets, and swap meets. So are the workers who look for employment in the parking lots of Home Depot and Lowe’s throughout the United States. And it’s not only cash-in-hand labor. As with David Obi’s deal to bring generators from China to Nigeria, System D is multinational, moving all sorts of products — machinery, mobile phones, computers, and more — around the globe and creating international industries that help billions of people find jobs and services.
In many countries — particularly in the developing world — System D is growing faster than any other part of the economy, and it is an increasing force in world trade. But even in developed countries, after the financial crisis of 2008-09, System D was revealed to be an important financial coping mechanism. A 2009 study by Deutsche Bank, the huge German commercial lender, suggested that people in the European countries with the largest portions of their economies that were unlicensed and unregulated — in other words, citizens of the countries with the most robust System D — fared better in the economic meltdown of 2008 than folks living in centrally planned and tightly regulated nations. Studies of countries throughout Latin America have shown that desperate people turned to System D to survive during the most recent financial crisis.
This spontaneous system, ruled by the spirit of organized improvisation, will be crucial for the development of cities in the 21st century. The 20th-century norm — the factory worker who nests at the same firm for his or her entire productive life — has become an endangered species. In China, the world’s current industrial behemoth, workers in the massive factories have low salaries and little job security. Even in Japan, where major corporations have long guaranteed lifetime employment to full-time workers, a consensus is emerging that this system is no longer sustainable in an increasingly mobile and entrepreneurial world.
READ MORE
Women work at a sweatshop sewing clothes under contract with local clothing manufacturers in Manila, the Philippines, on July 12, 2013.
Women work at a sweatshop sewing clothes under contract with local clothing manufacturers in Manila, the Philippines, on July 12, 2013.
‘We Need a New Vision in Development’
World Bank chief economist Pinelopi Goldberg says equality can’t be an afterthought in plans for economic growth.
Q&A | MICHAEL HIRSH
GettyImages-505325038
GettyImages-505325038
Even China-Backed Development Bank Won’t Touch Coal Projects
The World Bank rival says it will only fund environmentally-friendly projects.
THE CABLE | DAVID FRANCIS
GERMANY:German Chancellor Adolf Hitler (L) standing in a convertible Mercedes reviews SA and SS troops and wellwishers in 1937 somewhere in Germany. (Photo credit should read AFP/Getty Images)
GERMANY:German Chancellor Adolf Hitler (L) standing in a convertible Mercedes reviews SA and SS troops and wellwishers in 1937 somewhere in Germany. (Photo credit should read AFP/Getty Images)
The Developing World Thinks Hitler Is Underrated
In the West, the Nazi Führer is thought of as a genocidal maniac — everywhere else, he’s considered a political inspiration.
ARGUMENT | DAVID CLAY LARGE
So what kind of jobs will predominate? Part-time work, a variety of self-employment schemes, consulting, moonlighting, income patching. By 2020, the OECD projects, two-thirds of the workers of the world will be employed in System D. There’s no multinational, no Daddy Warbucks or Bill Gates, no government that can rival that level of job creation. Given its size, it makes no sense to talk of development, growth, sustainability, or globalization without reckoning with System D.
The growth of System D presents a series of challenges to the norms of economics, business, and governance — for it has traditionally existed outside the framework of trade agreements, labor laws, copyright protections, product safety regulations, antipollution legislation, and a host of other political, social, and environmental policies. Yet there’s plenty that’s positive, too. In Africa, many cities — Lagos, Nigeria, is a good example — have been propelled into the modern era through System D, because legal businesses don’t find enough profit in bringing cutting- edge products to the third world. China has, in part, become the world’s manufacturing and trading center because it has been willing to engage System D trade. Paraguay, small, landlocked, and long dominated by larger and more prosperous neighbors, has engineered a decent balance of trade through judicious smuggling. The digital divide may be a concern, but System D is spreading technology around the world at prices even poor people can afford. Squatter communities may be growing, but the informal economy is bringing commerce and opportunity to these neighborhoods that are off the governmental grid. It distributes products more equitably and cheaply than any big company can. And, even as governments around the world are looking to privatize agencies and get out of the business of providing for people, System D is running public services — trash pickup, recycling, transportation, and even utilities.
Just how big is System D? Friedrich Schneider, chair of the economics department at Johannes Kepler University in Linz, Austria, has spent decades calculating the dollar value of what he calls the shadow economies of the world. He admits his projections are imprecise, in part because, like privately held businesses everywhere, businesspeople who engage in trade off the books don’t want to open their books (most successful System D merchants are obsessive about profit and loss and keep detailed accounts of their revenues and expenses in old-fashioned ledger books) to anyone who will write anything in a book. And there’s a definitional problem as well, because the border between the shadow and the legal economies is blurry. Does buying some of your supplies from an unlicensed dealer put you in the shadows, even if you report your profit and pay your taxes? How about hiding just $1 in income from the government, though the rest of your business is on the up-and-up? And how about selling through System D even if your business is in every other way in compliance with the law? Finding a firm dividing line is not easy, as Keith Hart, who was among the first academics to acknowledge the importance of street markets to the economies of the developing world, warned me in a recent conversation: “It’s very difficult to separate the nice African ladies selling oranges on the street and jiggling their babies on their backs from the Indian gangsters who control the fruit trade and who they have to pay rent to.”
Schneider suggests, however, that, in making his estimates, he has this covered. He screens out all money made through “illegal actions that fit the characteristics of classical crimes like burglary, robbery, drug dealing, etc.” This means that the big-time criminals are likely out of his statistics, though those gangsters who control the fruit market are likely in, as long as they’re not involved in anything more nefarious than running a price-fixing cartel. Also, he says, his statistics do not count “the informal household economy.” This means that if you’re putting buckles on belts in your home for a bit of extra cash from a company owned by your cousin, you’re in, but if you’re babysitting your cousin’s kids while she’s off putting buckles on belts at her factory, you’re out.
Schneider presents his numbers as a percentage of the total market value of goods and services made in each country that same year — each nation’s gross domestic product. His data show that System D is on the rise. In the developing world, it’s been increasing every year since the 1990s, and in many countries it’s growing faster than the officially recognized gross domestic product (GDP). If you apply his percentages (Schneider’s most recent report, published in 2006, uses economic data from 2003) to the World Bank’s GDP estimates, it’s possible to make a back-of-the-envelope calculation of the approximate value of the billions of underground transactions around the world. And it comes to this: The total value of System D as a global phenomenon is close to $10 trillion. Which makes for another astonishing revelation. If System D were an independent nation, united in a single political structure — call it the United Street Sellers Republic (USSR) or, perhaps, Bazaaristan — it would be an economic superpower, the second-largest economy in the world (the United States, with a GDP of $14 trillion, is numero uno). The gap is narrowing, though, and if the United States doesn’t snap out of its current funk, the USSR/Bazaaristan could conceivably catch it sometime this century.
In other words, System D looks a lot like the future of the global economy. All over the world — from San Francisco to São Paulo, from New York City to Lagos — people engaged in street selling and other forms of unlicensed trade told me that they could never have established their businesses in the legal economy. “I’m totally off the grid,” one unlicensed jewelry designer told me. “It was never an option to do it any other way. It never even crossed my mind. It was financially absolutely impossible.” The growth of System D opens the market to those who have traditionally been shut out.
This alternative economic system also offers the opportunity for large numbers of people to find work. No job-cutting or outsourcing is going on here. Rather, a street market boasts dozens of entrepreneurs selling similar products and scores of laborers doing essentially the same work. An economist would likely deride all this duplicated work as inefficient. But the level of competition on the street keeps huge numbers of people employed. It liberates their entrepreneurial energy. And it offers them the opportunity to move up in the world.
In São Paulo, Édison Ramos Dattora, a migrant from the rural midlands, has succeeded in the nation’s commercial capital by working as a camelô — an unlicensed street vendor. He started out selling candies and chocolates on the trains, and is now in a more lucrative branch of the street trade — retailing pirate DVDs of first-run movies to commuters around downtown. His underground trade — he has to watch out for the cops wherever he goes — has given his family a standard of living he never dreamed possible: a bank account, a credit card, an apartment in the center of town, and enough money to take a trip to Europe.
Even in the most difficult and degraded situations, System D merchants are seeking to better their lives. For instance, the garbage dump would be the last place you would expect to be a locus of hope and entrepreneurship. But Lagos scavenger Andrew Saboru has pulled himself out of the trash heap and established himself as a dealer in recycled materials. On his own, with no help from the government or any NGOs or any bank (Andrew has a bank account, but his bank will never loan him money — because his enterprise is unlicensed and unregistered and depends on the unpredictable labor of culling recyclable material from the megacity’s massive garbage pile), he has climbed the career ladder. “Lagos is a city for hustling,” he told me. “If you have an idea and you are serious and willing to work, you can make money here. I believe the future is bright.” It took Andrew 16 years to make his move, but he succeeded, and he’s proud of the business he has created.
We should be too. As Joanne Saltzberg, who heads Women Entrepreneurs of Baltimore — a business development group — told me, we need to change our attitude and to salute the achievements of those who are engaged in this alternate economy. “We only revere success,” she said. “I don’t think we honor the struggle. People who have no access to business development resources. People who have to work two and three jobs just to survive. When you are struggling in this economy and still you commit yourself to having a better life, that’s really something to honor.”
Robert Neuwirth is a writer and investigative reporter. This article is excerpted and adapted from his new book: Stealth of Nations: The Global Rise of the Informal Economy.
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https://www.zerohedge.com/markets/something-snaps-us-labor-market-full-part-time-workers-plunge-multiple-jobholders-soar?utm_source=&utm_medium=email&utm_campaign=771
What is the labor force participation rate? Would love to see a chart over time , , ,
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Unleash Prosperity Hotline – Weekend Edition
Issue #572
07/08/2022, 07/09/2022, 07/10/2022
New to the Hotline? Click here to subscribe–it's free.
1) Over Last Three Months, FEWER Americans Working
We bet you haven’t read THAT headline anywhere else.
To the contrary, the Biden administration and the media are trumpeting Friday's June labor report which counted a healthy 372,000 new jobs added.
Not so fast. Another Labor Department survey - the survey of households and the one used to calculate the monthly unemployment rate - recorded a reduction of 315,000 Americans working last month.
The chart below shows that over the past three months, while the survey of firms found more than one million job gains, the household survey has found 300,000 fewer Americans are working today than in March.
What accounts for the difference in these two reports? The payroll survey is more likely to count the jobs created at larger businesses and corporations, whereas small startup firms and self-employment are often undercounted in that survey. What this suggests is that big businesses are still doing pretty well, but hiring by small entrepreneurial companies appears to be shrinking. Fewer Americans are starting companies or are self-employed — thanks to the Biden war on business.
Our view is that the actual jobs trend is somewhere between these two survey estimates, which means almost no job growth at all. That is unfortunately consistent with our contention that the U.S. is already in recession.
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Could we please leave Biden and his pretend woke in the ash heap of history:
Fewer Americans working when we should be in a v-shaped recovery. (Yes, how come corrupt media don't report that news?)
All the job growth is in red states.
We are in month seven of the Biden caused recession: https://www.atlantafed.org/cqer/research/gdpnow
Inflation is arguably double digit.
Energy prices doubling and quadrupling because of the intentional policies of the ruling party.
Talk of food shortages has gone from fringe web to mainstream to dinner table.
I couldn't figure out why Democrats wouldn't change course during the slow growth years of the Obama administration.
Now we know they won't even try to change while falling off the cliff.
Don't convert them. Defeat them.
Quoting former President Ronald Reagan, “... the march of freedom and democracy will leave Marxism-Leninism on the ash-heap of history, as it has left other tyrannies which stifle the freedom and muzzle the self-expression of the people.”. - Amen.
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It's like they aren't worried about losing power.
https://www.youtube.com/watch?v=MA8a2g6tTp0
Could we please leave Biden and his pretend woke in the ash heap of history:
Fewer Americans working when we should be in a v-shaped recovery. (Yes, how come corrupt media don't report that news?)
All the job growth is in red states.
We are in month seven of the Biden caused recession: https://www.atlantafed.org/cqer/research/gdpnow
Inflation is arguably double digit.
Energy prices doubling and quadrupling because of the intentional policies of the ruling party.
Talk of food shortages has gone from fringe web to mainstream to dinner table.
I couldn't figure out why Democrats wouldn't change course during the slow growth years of the Obama administration.
Now we know they won't even try to change while falling off the cliff.
Don't convert them. Defeat them.
Quoting former President Ronald Reagan, “... the march of freedom and democracy will leave Marxism-Leninism on the ash-heap of history, as it has left other tyrannies which stifle the freedom and muzzle the self-expression of the people.”. - Amen.
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Wait. What is a woman?
https://apnews.com/article/prices-world-economic-forum-606d0f4a99a1792e223b49bcd2eb17cc
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https://mailchi.mp/93b6b736db8d/unleash-prosperity-hotline-866888?e=320eaee609
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Make sure I have this right.
Biden spending (and war on energy and production) caused Biden inflation.
Biden inflation caused Biden interest rates to spike.
Biden interest rates are causing Biden recession.
Massive job losses will help ease Biden inflation, Keynesians falsely tell us. (The massive job losses aren't necessary and don't help.)
Meanwhile son Hunter blackmailed father Pedo Pete, as he calls him, into releasing oil from our US strategic petroleum reserve to China via his own paid ties with China, where he either gets a cut or was already paid.
Democrats in power refuse to change course to stop this train wreck. Want to spend more before losing power.
Biden left $7 billion of equipment in Afghanistan, now needs $54 billion in Ukraine, for same arms. .
Pretty soon soon we're talking about real play money.
33% see all this and think Trump, out of power for going on two years, is the main threat we face.
(From the copper clapper caper):
Do I have that about right?
PS. I hate giving Biden blame and credit for all this. He's just doing what he's told.
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Wholesale prices shoot up near-record 11.3% in June on surge in energy costs
https://www.cnbc.com/2022/07/14/producer-price-index-june-2022-gain-11point3percent-on-surge-in-energy-costs.html
There ought to be a law against that. Or just charge all Democrats in power under the Treason statutes?
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Re-hashing what we already know to see where it leads...
ya's link: https://thebitcoinlayer.substack.com/p/is-bitcoin-an-inflation-hedge-yes
One point made: "price inflation is a lagging indicator behind one of its root causes: money supply inflation."
In other words, what we call inflation, "that's an outrageous price for ______," is a symptom of inflation, not the inflation itself.
Rough definition of inflation: More money chasing fewer goods.
A little more accurately, inflation is when money supply growth exceeds real growth of goods and services. None of which is measured very accurately.
Milton Friedman: MV = PQ. But velocity of money is calculated by knowing the other 3. Not very helpful.
The market is made up of all its interrelated markets, from each producing and purchasing decision outward.
Debt and deficit, we have known for a long time that we are paying for a major part of our 'public services' with 'borrowing' and trickery, "leaving it to the next generation", as it accumulates exponentially. But markets can't be tricked for long and who says the coming back to bite us won't be during our generation? Today's problems aren't all about debt and monetary policy, but that's part of it.
Same for QE, ZIRP and NIRP, quantitative expansion, zero interest rate policy and negative interest rate policy. We knew it was going to come back to bite us. Did it? Most certainly yes.
Energy policies: Biden made promises in the campaign, oil is a futures market, and the US was the number one producer. Energy prices started up the day the election was called and again when Biden took office and started canceling pipelines and leases etc. Pushing up the price of fossil fuels was intentional, but they forgot or neglected to tell us the rest of the story, food was certain to follow, directly tied to fossil fuels. Put it in the campaign and see how it polls: On day one, we are going to drive up the price of energy to slow its consumption and with that we are going to drive up the price of food and slow its production. That's exactly what happened and the policy decision yesterday (climate emergency) is more of the same.
One thing they forgot about is inelastic demand. That's the problem messing with gas and food. In the short run, higher gas at the pump means you pay more, a larger number on your credit card transaction, and maybe you bitch about it. Work, if you are a tradesman, doesn't move closer to home as gas prices go up. Driving the kids to their activities is the same distance, going to the store, visiting Grandma, same. The needs for heat and A/C haven't changed in your climate. The price only brings down total consumption when you hit the nerve and people start canceling what they were doing. Eating food, for example. We make substitutions but the demand is a bit inelastic. Junior is going to scream until you fed him, something he likes.
The prices also went up because of disincentives to produce. It stops going up when reductions in consumption match that, which is either never or in financial disaster. More on that coming.
Then what? You would think the poor would hit the breaking point first. But a carpet layer or roofer has to go to the job even more than a software engineer or hedge fund manager does. So both keep doing the same and paying more until someone or everyone hits the breaking point, when there is no carpet to lay, home building stops, for example.
In Democrat-think, that breaking point is recession, welcome to month seven of the latest one. A necessary evil, they believe, (which is false).
My point goes back to the beginning, all of this was a choice and completely unnecessary.
"More money chasing fewer goods". Per the posted charts, growth of "M2" is now "under control", but what's up with producing fewer goods? There is a reason for that slowdown. Government policies hinder production, and they're getting worse, not better.
Our 'price level' inflation is a result of monetary and spending insanity, yes of course, but it is also a result of the anti-production, anti-investment, anti-growth policies.
Study the period where we most recently went through this, look at the 1970s, 1979 in particular, through 1982. Best documentary of this period is in a book by Robert Bartley (then editor of the WSJ), The Seven Fat Years and how to do it again.
Before this time we had the Phillips curve telling us that recession tames inflation and growth economic feeds inflation. A tradeoff. Stagflation and the "misery Index" proved that false as malaise and hypr-inflation occurred simultaneously. It was proved false again with the cure, as they were solved (not exactly) simultaneously.
It was called a two-pronged solution. Paul Volcker, Chair of the Federal Reserve began tightening the money supply and Ronald Reagan campaigned on across the board tax rat cuts to stimulate production (the economy), alleviating BOTH sides of more money chasing fewer goods.
The money supply tightening started in late 1979 and the tax rate cuts were passed in 1981, but didn't fully go into effect until 1983. The policy time lag resulted in a very dep, painful and unnecessary recession.
Lesson (not) learned, DO THOSE TWO THINGS SIMULTANEOUSLY and avoid the deep recession and all the human tragedy associated with it.
But then we had Jimmy Carter. A moderate but not a free thinker or a thinker at all. And now w have Joe Biden and the small Politburo that pulls his strings. Of all the people you can say the powers that be are beholden to, doing what's best right now for the American people isn't one of them. Like with Carter to Reagan, we have to have the root canal first, then wait for an election, and another election, and argue the issues before any kind of policy relief can come, and then those policies take time to implement. All because Democrats in power refuse to admit and do what needs to b done.
The right policies almost write themselves, or read these threads here to find them. It starts with energy production, public spending restraint and removing the disincentives to work and invest. Not rocket science but not quick or easy to do an about face with a ship this size, also with the whole rest of the world headed in the wrong direction.
Build the pipelines and refineries we need. On top of that, get nuclear going, if it's the planet you're saving, and fossil fuel use won't be forever. Replace it before you remove it. Energy will bring food back (after the starving and famine). Denial won't. Balance the budget, and not by stepping on the people who produce. Stop paying people to do nothing - when there is so much to be done. Index capital gains taxation to inflation. Let the productive assets to their most productive use.
Let freedom ring.
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Concur.
Looking to condense that into something pithier-- as I have stated previously
There are two reasons prices go.
1) Increase in Money relative to the same number of goods. This needs to account for changes in Velocity. Back in 2008-2010 we predicted inflation due to increase in Money. We were wrong and Scott Grannis was right because he saw the decline in Velocity where we did not.
2) Decrease in supply. This is NOT inflation. This is a Price Increase.
Failure to distinguish the two leads to conceptual murk.
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CNN is pre-announcing the Big Biden Recession:
https://www.cnn.com/2022/07/25/politics/biden-big-week-for-economy-inflation/index.html
Atlanta Fed also knows:
https://www.atlantafed.org/cqer/research/gdpnow
As Bob Dole might say, You know it, I know it and the American people know it:
Direction of Country, Politico/Morning Consult (latest), Right Direction 22, Wrong Track 78
There are ways to spin that the economy is fine, low unemployment rate, etc. The American people aren't buying it.
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Concur.
Looking to condense that into something pithier-- as I have stated previously
There are two reasons prices go.
1) Increase in Money relative to the same number of goods. This needs to account for changes in Velocity. Back in 2008-2010 we predicted inflation due to increase in Money. We were wrong and Scott Grannis was right because he saw the decline in Velocity where we did not.
2) Decrease in supply. This is NOT inflation. This is a Price Increase.
Failure to distinguish the two leads to conceptual murk.
Yes, I was laying out the long version in hope of leading to something shorter and catchier. Strange thing is, for all the work we do, people don't need to be told about real economic conditions. Sometimes they don't even need to be told about cause and effect; they watched it happen.
Hispanics understood the Trump economy (pre-covid) was great when the media wouldn't say it. Everyone who buys gas or food today knows something is wrong, and it's not (just) Putin.
Points 1) and 2) above are both true and important points of understanding. I would just add that (unfortunately) the concept of velocity and the distinction between inflation of the money supply and price increases are what you might call the inside baseball of economics.
The usage of the term 'inflation' has come to mean prices going up for the things we buy.
Yes, 'velocity' decline of the last recession meant that the monetary expansion did not show up (right away) as price increases. But tricks like that then and the tricks they would eventually have to do to reel it back in (we warned) will most certainly do great damage to the economy and to the people.
Hard to make pithy your second point, the government constraints on supply, stopping the drilling and pipelines for examples, are driving up costs big time. 'Growth economics', the easing of the disincentives to produce, solves that. Or as some would say, growth, blah, blah. )
Then we have half-wits like Larry Summers saying we desperately need a tax increase on top of the Fed tightening. Root canal economics. Tax rate increases never lead to a balanced budget and curtail supply even further, meaning more price increases.
The pithy way to fit it on a bumper sticker is: "Biden Sucks", or FJB, but I wish to indict the entire Left way of thinking, not just the politicians of the moment.
I agree we need better expression of the fact that these wrongheaded policies lead to these dismal results, and real people, working people, minorities, women, children are hurt most. But because these people really are hurt badly, they don't need to be told.
The point of explaining further is to answer the questions that follows, what caused this and what actions will you (the candidate) take to address these problems. We could all use a better understanding of the right answers to that.
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because he underestimated the impact of corona :
:wink:
https://www.nytimes.com/2022/07/21/opinion/paul-krugman-inflation.html
It takes a really gracious humble man with 100 % integrity to admit when he was wrong !!
( just joshin' :wink:)
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Prof. Krugman's face could become the emoji for wrong.
He lies and deflects even when admitting he was wrong. He blames the pandemic, and Putin.
With Dan Rather it was false but true. With Krugman it is wrong but right?
Headline says, "I was wrong about inflation". I thought it might be more encompassing like, I was wrong about everything!
He should have told the truth, I knew inflation was coming big time but my job was to be a shill.
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Economist Brian Westbury thinks this is not a recession. (see transcript Hugh Hewitt show this am)
He was time limited from fully explaining his view. Paraphrasing: 2020 was the lockdown. 2021 was the reopening, drugged with stimulus and pent up demand. The Q1 this year retraction was a fluke, to do with trade. US opened, others didn't, we imported but didn't export. Q2 measured down is skewed by artificial stimuli of last year.
We borrowed 5 trillion and printed 4 trillion, time frame not specified. These are not normal times.
Unlike Biden and Yellen in recession denial, Westbury expects a recession in the next 24 months. That is worse news than saying we are in one now. He didn't say it, but the interest rate doubling without any supply side relief on taxes and regulations will cause a (further) slowdown.
For what it's worth, I disagree with Westbury. This should be a V-shaped recovery. Biden was handed a rapidly growing economy. The stupid free money of last year, demand side stimulus, was a) Biden's fault, b) not of ANY lasting benefit, and c) did more harm than good. That and worse, his war on energy driving up the cost of everything and causing supply disruptions, the result is what in current definition and word usage we call a recession. It's not a business cycle recession, it's a big intrusive government-caused recession. A Biden Pelosi Schumer caused slowdown.
You can tell me this is up and that is up, but GDP is all inclusive and it is down year over year when it should be up 3 or 4% or more.
Also missing in any Biden and US numbers is the red state / blue state divide. All the growth is coming from the former. We are not one economic nation.
One other thing, didn't this President let in a million illegals a year while canceling wall construction and border enforcement. Where is the increased production from THESE people? Uncounted in the underground economy? Is that what we want?
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Salon today:
Why the Midterms Look Bleak for Democrats: Biden
Um, no. 'Biden' is a Politburo governing right out of the current Democrat playbook. He doesn't tie his own shoes much less set policy.
The policies would be the same if it was Bernie, Warren, Butti, Klobi or Newsom, unless someone would have stood up to the party's script and done the right thing somewhere along the way.
The conundrum is, the economic answer requires policies now known as Republican.
It didn't have to be this way. A short time ago Democrats were the pro-growth party. "A rising tide lifts all boats." Who said this? He cheated to get elected and then didn't try to destroy the country.
The difference is leaders and followers. Leftism is a religion, not a science. A Dem today, even if elected to the highest office in the land must follow the ideology or be toppled. Kennedy and Reagan, from different parties, were leaders. Right or wrong, they tried to figure what was best and worked as leaders to persuade and bring the the country along. Clinton changed course grudgingly, after losing big time in midterms. He adopted pro-growth policies and grew the economy. Maybe for personal political survival reasons, but did it nonetheless.
This band of ideological followers is not capable of learning or pivoting.
I hope they prove me wrong.
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With every failure of the left, the leftists respond "The wrong people were in charge" or "That wasn't REAL leftism".
Salon today:
Why the Midterms Look Bleak for Democrats: Biden
Um, no. 'Biden' is a Politburo governing right out of the current Democrat playbook. He doesn't tie his own shoes much less set policy.
The policies would be the same if it was Bernie, Warren, Butti, Klobi or Newsom, unless someone would have stood up to the party's script and done the right thing somewhere along the way.
The conundrum is, the economic answer requires policies now known as Republican.
It didn't have to be this way. A short time ago Democrats were the pro-growth party. "A rising tide lifts all boats." Who said this? He cheated to get elected and then didn't try to destroy the country.
The difference is leaders and followers. Leftism is a religion, not a science. A Dem today, even if elected to the highest office in the land must follow the ideology or be toppled. Kennedy and Reagan, from different parties, were leaders. Right or wrong, they tried to figure what was best and worked as leaders to persuade and bring the the country along. Clinton changed course grudgingly, after losing big time in midterms. He adopted pro-growth policies and grew the economy. Maybe for personal political survival reasons, but did it nonetheless.
This band of ideological followers is not capable of learning or pivoting.
I hope they prove me wrong.
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Two consecutive quarters of decline. It's not a recession. Okay, then we need a new word for it. Because redefining words is an essential part of their playbook.
https://www.powerlineblog.com/archives/2022/07/yes-we-have-a-banana.php
Another example speaking of redefining words, weird that pro-choice people oppose school choice. Maybe they aren't pro-choice after all.
Recess, Webster, action of receding.
(Doug) Like an economy?
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Perhaps it identifies as a woman. Are you a Biologist, Doug?
Two consecutive quarters of decline. It's not a recession. Okay, then we need a new word for it. Because redefining words is an essential part of their playbook.
https://www.powerlineblog.com/archives/2022/07/yes-we-have-a-banana.php
Another example speaking of redefining words, weird that pro-choice people oppose school choice. Maybe they aren't pro-choice after all.
Recess, Webster, action of receding.
(Doug) Like an economy?
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https://www.washingtonexaminer.com/opinion/the-biden-recession
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WIN FOR CRATS:
https://www.yahoo.com/news/manchin-says-health-energy-tax-211108925.html
somehow tax and spend hundreds of billions is always viewed as victory by Dems and MSM
and portrayed as Great.
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WIN FOR CRATS:
https://www.yahoo.com/news/manchin-says-health-energy-tax-211108925.html
somehow tax and spend hundreds of billions is always viewed as victory by Dems and MSM
and portrayed as Great.
Isn't tax and spend, spending in particular, what got them their 28% economic approval rate in the first place?
Live and not learn. The simple life of being a Leftist.
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https://www.zerohedge.com/political/watch-white-house-resorts-economy-doing-great-because-its-not-famine-defense
Yet.
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Professor Glenn Reynolds (caught reading the forum.
This was written in May before the latest damage. Note that he has the producer price index (real inflation?) over 16%.
Note that he covers the two components, more money, fewer goods. I'm tired of seeing it covered as more money only. More money set this up. Fewer goods triggered the crisis.
https://nypost.com/2022/05/26/team-biden-might-be-purposefully-crushing-the-middle-class/
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WSJ lead editorial today on the Schumer Manchin tax increase on EVERYONE. Poor time to hit manufacturers, tax on labor, tax on the economy. Tax on everyone making UNDER 400k, breaking everyone promise, Dem House and Senate complicit.
R's need Kirsten Sinema and/or 4 vulnerable House Dems to sink it, or the President to keep a promise.
I wonder if my BINO bipartisan in name only Representative could find his way to split just once with Pelosi coming nto the midterm.
No deficit relief for years means no deficit relief ever.
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Contrary indicator, CNN:
https://www.cnn.com/2022/08/01/politics/kyrsten-sinema-democrats-big-week-for-biden-presidency/index.html
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Recession coming (already here). Businesses and consumers should cut back on purchases. What could possibly go wrong?
https://www.cnn.com/2022/07/29/success/recession-effect-jobs-housing/index.html
(Doug) The recession is going to be deeper, much deeper, than we thought, if we don't start correcting policy mistakes SOON.
Everyone sees it coming. No one (in power) is doing anything about it.
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More here: https://tippinsights.com/economic-gloom-fuels-broader-personal-finance-concerns/
https://www.wsj.com/articles/dollar-store-dinners-and-vats-of-shampoo-help-families-cope-with-high-prices-11659302735
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https://www.bloomberg.com/news/articles/2022-07-28/argentina-offers-leliq-at-60-marking-800bps-rise-in-key-rate
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https://www.nbcnews.com/think/opinion/inflation-bill-sinema-manchin-senate-horribly-misnamed-rcna41712
By Wilbur John Coleman, professor of economics at Duke University's Fuqua School of Business
excerpts:
"The “inflation reduction” label is being used to justify a hodgepodge of special interest spending that has absolutely nothing to do with inflation."
...
"Powell has increased the money supply by some $6.2 trillion since the start of the pandemic (a 40 percent rise in cash and other assets easily convertible to cash in the economy). A 40 percent rise in money will lead to a roughly 30 percent rise in prices over three years, according to my calculations, which is about 10 percent inflation for three years. Unfortunately, we seem to be on target for the first year."
(Doug: Deficit reduction of 0.3T that doesn't come until the out years if ever doesn't touch this and tax increase don't increase production.)
Prof. Coleman :
" It’s difficult to understand why Congress thinks this would reduce inflation. What’s needed is more supply or less demand, not higher demand. The act seems to get this point exactly wrong."
--------------
Read it all. This is a Duke econ professor and mainstream NBC News pointing out this rather obvious truth. And yet all 50+1 Dem Senators will vote for this farce. Need 4 House Dems to defect.
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https://issuesinsights.com/2022/08/04/in-battle-of-red-vs-blue-states-red-states-are-winning-handily/
Unexpectedly.
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https://www.lawenforcementtoday.com/oh-the-economy-is-great-right-except-it-looks-like-america-is-being-duped-about-the-job-numbers/?fbclid=IwAR1Jxsb8fQqhYJfnV26CxUhdN-LIY1IbdBD2eG0IvYzWL1kBk0mOEPYaClc
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https://www.lawenforcementtoday.com/oh-the-economy-is-great-right-except-it-looks-like-america-is-being-duped-about-the-job-numbers/?fbclid=IwAR1Jxsb8fQqhYJfnV26CxUhdN-LIY1IbdBD2eG0IvYzWL1kBk0mOEPYaClc
The feral government is lying? I shannot believe such a thing!
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"In 2020, the numbers got a bit screwed up due to difficulties collecting data due to the COVID-19 pandemic lockdowns. Each survey also classified some workers differently. Taking that period of time out of the equation, the last time there was such a large divergence in the numbers was 1968."
:roll:
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https://ace.mu.nu/archives/400380.php#400380
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Did anyone see this coming?
U.S. productivity posts biggest ever annual drop in second quarter
https://news.yahoo.com/u-productivity-drops-second-quarter-124335395.html?fr=sycsrp_catchall
What part of widespread decline don't they see? Everyone's wages went down with (intentional) inflation.
More money, fewer goods, it was in the campaign, it was in the first executive order, it was in the first legislation, it is in the latest bill with the bad humor name, inflation reduction act.
How do you grow productivity without capital, without energy? Easy answer: not possible.
Either these people are idiots or something very sinister is going on. More likely both.
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https://www.foxbusiness.com/economy/jobless-claims-rise-highest-level-2022
https://money.yahoo.com/next-fed-rate-hike-size-040006591.html
If inflation ended, why is Fed planning more interest rate increases?
Answer: They have better info than you do. And inflation did not end last month.
(Dem) Larry Summers, Inflation still a serious problem
https://www.realclearpolitics.com/video/2022/08/10/larry_summers_very_serious_inflation_problem_in_us_not_likely_to_go_away_of_its_own_volition.html
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University of Chicago Economist Casey Mulligan:
The Inflation Reduction Act contains multiple negative incentives on work and investment that
will have substantial negative effects on the U.S. economy. These negative effects include 1) the
reduced incentives for businesses to invest because of the corporate tax increase and the increased
tax rate on certain investments (carried interest); 2) the negative effects on work due to the
expansions in health care subsidies under the Affordable Care Act - subsidies not tied to working;
3) the negative impact on new drug development due to new federal price controls on the
pharmaceutical industry.
The impact of these policies over the next ten years are as follows:
• Employment will be reduced by 900,000
• Annual GDP will be reduced by 1.2%
• Average Household income will fall by roughly $1,200
• The rate of inflation and the federal budget deficit are both likely to rise, not fall.
https://committeetounleashprosperity.com/wp-content/uploads/2022/08/CTUP_NegativeIRAReport_082022.pdf
------------------------------------------------------------------------
[Doug] Grow the IRS and shrink the economy. By my math, shrinking the economy with one act by 1.2% per year when it was already shrinking at 1.25% makes for combined shrinkage of 2.45% per year net. With compounding, in what year will we hit zero GDP?
Further discussion of this on Seinfeld:
https://www.youtube.com/watch?v=GG2dF5PS0bI
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https://stevecortes.substack.com/p/the-gathering-economic-storm?r=awib6&s=w
It's NOT a recession!
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Inflation is a tax on everyone, disproportionately hurts the poor
https://www.usatoday.com/story/opinion/2022/08/28/inflation-disproportionately-hurts-poor-money-becomes-scarce/7893313001/
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Where have we heard that before.
-
can't see article and I refuse to subscribe to USA Today.
:wink:
"Where have we heard that before."
the woke feminists who control USA today read the forum?
:-D
-
can't see article and I refuse to subscribe to USA Today.
:wink:
"Where have we heard that before."
the woke feminists who control USA today read the forum?
:-D
I wouldn't open it either. It was a link from Real Clear Politics showing that mainstream media started to cover real people feeling real hardship.
Like the elites, I start to see it as numbers and political arguments. The reality is, real people are getting hit hard and there is no escaping it.
A whole lot of people at a range of incomes were living mostly paycheck to paycheck, even before Biden. They paid for their rent and all the basics, could go out a few times and have little or nothing left at the end of the month. Then rent goes up 30%. Electric and gas more than double. Food goes crazy. All the things people HAVE to pay for skyrocket. With a real good job they get 3% raises. Something has to give.
The utilities are on automatic pay so the green mandates driving up rates happen like the frog in heating water. Maybe it even felt good for a while, paying a few extra tens of dollars for "green energy", but somehow there it less money left in the bank accounts and more owing on the credit cards.
Welcome to Biden-Dem world.
Is their reaction to dump the bums and get things going right again, or do they succumb to the lure of debt cancellation, subsidized health care, free stuff and tax the ultra wealthy, while Republicans keep tripping over themselves instead of telling what went wrong and offering a better way.
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Ford Electric Mustang Price Going Up After Biden, Dems Handed Out EV Tax Credit.
https://www.dailywire.com/news/ford-electric-mustang-price-going-up-after-biden-dems-handed-out-ev-tax-credit
Who.Bleeping.Knew.
Any politician who can't explain how this phenomenon works, at this point, should be impeached.
Might as well write the headline now, 'Tuition going up after Biden cancelled student debt'.
As InstaPundit likes to say, "UNEXPECTEDLY!"
DO WE EVER LEARN?
----------------------
America’s Newspaper of Record (Babylon Bee) “reports:”
Harvard To Pay Elizabeth Warren $400,000 To Teach Class On Why College Is So Expensive.
A not really made up spoof.
-
https://www.cnbc.com/2022/08/27/the-rent-crisis-on-main-street-just-took-a-turn-for-the-worse.html
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One view:
https://www.ft.com/content/b2ca227e-9fd2-4f47-8a35-18b176a864f0?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
-----------
[Doug]
1. Spending and debt that preceded Biden set up this situation.
2. Covid shutdowns and spending pre-Biden made it worse.
3. Biden made it worse.
4. Biden increased spending.
5. Biden increased debt.
6. Biden ordered both blatant and more subtle energy shortages driving up the cost.
7. Energy costs up, enriched Russia, triggered the Ukraine war.
8. Biden's war on the supply side, shutdowns, increasing taxes and regulations hit the other side of the inflation equation, more money chasing relatively fewer goods.
9. Inflation taxes everyone.
10. Increased costs and constrained production triggered (phase one of) the recession.
11. Biden's inflation triggered the Fed squeeze including interest rates hikes.
12. Fed rate hikes drive up the cost of housing, cars, appliances and so on, causing slowdown and deepening the recession.
13. Fed rate hikes drive up the cost of the national debt, putting the budget even further in deficit.
14. The solution to ease this, "supply side incentives", meaning reducing the government imposed disincentives to produce is politically off-limits to the ruling party.
15. The midterm correction is confounded by abortion politics, individual candidate weaknesses and election cheating.
16. If the party out of power, Republicans, wins the House or the House and Senate, they will still be unable to reverse almost anything the Democrats in power have done.
17. If this goes on in a downward spiral until 2024, unfathomable damage will be done.
18. Currently the frontrunners for 2024 are, drum roll please, Joe Biden and Donald Trump.
That should bring the country together, lol.
What could possibly go wrong? I mean that literally. Famine, homelessness, crime, foreign wars, civil war. I will stop short of noting Venezuelans were reduced to eating zoo animals.
If this is a deepening spiral recession, the lack of action to get the economic damage stopped or slowed approached criminal neglect.
It's weird being the optimist here.
-----
One additional point to consider: The Fed has a "dual mission", price stability and jobs. For twenty years the Fed did nothing but expansionary policies. Since they are clearly making the recession worse now, the numbers they are see on on the money and inflation front must be MUCH WORSE than we think.
-----
Food guns and training, yes, but what else on the investment front?
-
One view:
https://www.ft.com/content/b2ca227e-9fd2-4f47-8a35-18b176a864f0?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
-----------
[Doug]
1. Spending and debt that preceded Biden set up this situation.
2. Covid shutdowns and spending pre-Biden made it worse.
3. Biden made it worse.
4. Increased spending.
5. increased debt.
6. Ordered both blatant and more subtle energy shortages driving up the cost.
7. Energy costs up, enriched Russia, triggered the Ukraine war.
8. The war on the supply side, shutdowns, increasing taxes and regulations hit the other side of the inflation equation, more money chasing relatively fewer goods.
9. Inflation taxes everyone.
10. Increased costs triggered (phase one of) the recession.
11. Biden's inflation triggered the Fed squeeze including interest rates hikes.
12. Fed rate hikes drive up the cost of housing, cars, appliances and so on, causing slowdown and deepening the recession.
13. Fed rate hikes drive up the cost of the national debt, putting the budget even further in deficit.
14. The solution to ease this, "supply side incentives", meaning reducing the government imposed disincentives to produce is politically off-limits to the ruling party.
15. The midterm correction is confounded by abortion politics, individual candidate weaknesses and election cheating.
16. If the party out of power, Republicans, wins the House or the House and Senate, they will still be unable to reverse almost anything the Democrats in power have done.
17. If this goes on in a downward spiral until 2024, unfathomable damage will be done.
18. Currently the frontrunners for 2024 are, drum roll please, Joe Biden and Donald Trump.
That should bring the country together, lol.
What could possibly go wrong? I mean that literally. Famine, homelessness, crime, foreign wars, civil war. I will stop short of noting Venezuelans were reduced to eating zoo animals.
If this is a deepening spiral recession, the lack of action to get the economic damage stopped or slowed approached criminal neglect.
It's weird being the optimist here.
-----
One additional point to consider: The Fed has a "dual mission", price stability and jobs. Since they are clearly making the recession worse, the numbers they are see on on the money and inflation front must be MUCH WORSE than we think.
Food guns and training, yes, but what else on the investment front?
Beans, bullets and bandages are primary. Bitcoin in cold wallets, junk silver and silver and gold coins in very small denominations. IMHO, common ammo calibers will be the most immediately useful currency.
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CNN: "THIS is why stagflation won't come to America"
"The US economy added another 315,000 jobs in August after tacking on more than half a million jobs in July."
https://www.cnn.com/2022/09/02/perspectives/stagflation-economy-jobs-labor-market/index.html
- CNN Sept 2.
Oops, Jobs report revised downward:
https://www.cnn.com/2021/09/03/economy/august-jobs-report/index.html
"Only 235,000 jobs were added back to the economy last month, the lowest number since January, vastly missing economists' expectations."
- CNN Sept 3.
Jobs report was overstated by 80,000 jobs, 34%. How does THAT happen?
From the article above, Point 2: "The unemployment rate is 3.7%, not far from a 50-year low."
The unemployment rate is reported artificially low due to the record numbers leaving or have left the workforce. "The unemployment rate is rising": https://finance.yahoo.com/video/august-jobs-report-unemployment-rises-124916008.html
Inconvenient truth.
What does 3.7 unemployment mean?
Out of a population of 335 million, oops that just went up at the southern border while writing this,
84 Million people work full time in the private sector supporting 148 million receiving benefits and the millions who work for the government, federal, state and local.
https://www.cnsnews.com/commentary/terence-p-jeffrey/86m-full-time-private-sector-workers-sustain-148m-benefit-takers
https://www.worldometers.info/world-population/us-population/
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https://www.startpage.com/av/proxy-image?piurl=https%3A%2F%2Fencrypted-tbn0.gstatic.com%2Fimages%3Fq%3Dtbn%3AANd9GcQkKFX9S2e5h4UP5IgTFUuo0sxUOsSPPR6-FWZGfsN48bnEPeYA%26s&sp=1662306025Tcd587a109ba6628bcf369c1cd3de2ec2778e8adfc0524b34d5629c4d4a1f7075
(https://www.startpage.com/av/proxy-image?piurl=https%3A%2F%2Fencrypted-tbn0.gstatic.com%2Fimages%3Fq%3Dtbn%3AANd9GcQkKFX9S2e5h4UP5IgTFUuo0sxUOsSPPR6-FWZGfsN48bnEPeYA%26s&sp=1662306025Tcd587a109ba6628bcf369c1cd3de2ec2778e8adfc0524b34d5629c4d4a1f7075)
Sorry, couldn't resist.
-
All the military age males coming across the border are going to do what when they arrive at the destinations?
CNN: "THIS is why stagflation won't come to America"
"The US economy added another 315,000 jobs in August after tacking on more than half a million jobs in July."
https://www.cnn.com/2022/09/02/perspectives/stagflation-economy-jobs-labor-market/index.html
- CNN Sept 2.
Oops, Jobs report revised downward:
https://www.cnn.com/2021/09/03/economy/august-jobs-report/index.html
"Only 235,000 jobs were added back to the economy last month, the lowest number since January, vastly missing economists' expectations."
- CNN Sept 3.
Jobs report was overstated by 80,000 jobs, 34%. How does THAT happen?
From the article above, Point 2: "The unemployment rate is 3.7%, not far from a 50-year low."
The unemployment rate is reported artificially low due to the record numbers leaving or have left the workforce. "The unemployment rate is rising": https://finance.yahoo.com/video/august-jobs-report-unemployment-rises-124916008.html
Inconvenient truth.
What does 3.7 unemployment mean?
Out of a population of 335 million, oops that just went up at the southern border while writing this,
84 Million people work full time in the private sector supporting 148 million receiving benefits and the millions who work for the government, federal, state and local.
https://www.cnsnews.com/commentary/terence-p-jeffrey/86m-full-time-private-sector-workers-sustain-148m-benefit-takers
https://www.worldometers.info/world-population/us-population/
-
Any good charts on the labor participation rate?
-
https://thehill.com/opinion/finance/3624372-bidens-student-loan-bailout-treats-hard-working-americans-as-chumps-on-labor-day/
-
Any good charts on the labor participation rate?
Yes:
https://fred.stlouisfed.org/series/CIVPART
(Please post the chart if possible. I can't post the image with my phone.)
Note that we are downwardly approaching the rate from before women entered the workforce.
-
Thank you, very helpful to see the trends over time.
I wonder what the rate is right now?
The participation rate seems relevant to me in discussion of the meaning of the unemployment rate.
Also, highly relevant are the numbers about unfilled jobs and whether they are skilled or not (welder or waiter) that sort of thing-- my wife challenged me on this and I would love to be able to back her up haha.
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The latest jobs numbers seem impressive — until you look closer
The labor market, like the rest of the economy, is anemic
By E.J. Antoni
The latest Labor Department employment report shows the economy added 315,000 jobs in August, ordinarily a healthy increase and sign of a robust economy. Sadly, the devil is in the details, which shows that the labor market is running on fumes. The report, like the economy as a whole, looks good from afar but is far from good.
The first red flag in the report was revisions to the previous two months, which totaled 107,000 to the downside. So about a third of the jobs added in August were jobs we thought the economy already had.
While this headline jobs number comes from a survey of businesses, the unemployment rate and other details come from a survey of households, and that also contained troubling data. The household survey actually peaked back in March and has never recovered to its prepandemic level. And while labor force participation rose overall in August, a healthy indicator, it fell for Black people, as did the number of Black people employed.
Yet another cause for alarm is weekly earnings, which were flat in August. When those numbers are adjusted for inflation, real weekly earnings will be negative; that means workers are demonstrably poorer because prices are rising faster than incomes.
These stagnating weekly earnings are not surprising when other data is considered. Businesses are facing tremendous uncertainty and are hiring fewer full-time employees and more part-time ones. The number of full-time workers peaked in May and continued falling in August. Although wages are rising, the average workweek continues to decline, so weekly earnings are still flat.
But there are still more problems under the hood. The survey of businesses allows for double counting of some jobholders, and there is considerable evidence that this doublecounting has accelerated recently. For example, people holding multiple jobs are counted for each job they have. Also, when someone transitions from self-employment to working for someone else, that is counted as a new job, even though there is no net gain in employment.
The result is that of the 5.8 million jobs recovered in the last year, approximately 1.3 million are double-counting. For August, the double-counting was approximately 208,000.
Accounting for this and the downward revisions from the previous two months, there were technically no jobs added in August.
The headline jobs number appears strong, but the reality of the labor market, like the rest of the economy, is more anemic. The economy already contracted in the first half of the year and the headwinds are building. For example, the housing market is in free fall, with the typical monthly mortgage payment up 54% to over $1,900 in the last year, while home builder sentiment has collapsed, falling every month this year and down 42% since December. But the trend is broader than the housing market. The Conference Board’s leading economic indicators have trended down for the last six months and, disturbingly, show new orders slowing. Other data from Federal Reserve Banks in Dallas, Philadelphia, Richmond, New York, and Chicago also show new orders declining.
This is troubling because current levels of business activity are only being sustained by a near-record backlog of unfilled orders, which are not being replaced by new orders. Once businesses work through those unfilled orders, there won’t be enough new orders to replace them.
That translates into reduced future output and layoffs, which means unemployment. So, the monthly headline job numbers seen in the news are not only weaker than they appear, but even this illusion will be disappearing soon. These figures are the swan song of an anemic economy weighed down by President Biden’s inflation, regulation, and taxation.
E.J. Antoni is a research fellow for re-gional economics in The Heritage Foun-dation’s Center for Data Analysis and a senior fellow at Committee to Unleash Prosperity
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https://www.reuters.com/markets/us/us-household-wealth-falls-again-second-quarter-fed-says-2022-09-09/
But "experts" don't know if we're in a recession.
"Sept 9 (Reuters) - U.S. household wealth fell by a record $6.1 trillion in the second quarter to its lowest in a year as a bear market in stocks far outweighed further gains in real estate values, a Federal Reserve report showed on Friday.
Household net worth tumbled to $143.8 trillion at the end of June from $149.9 trillion at the end of March, its second consecutive quarterly decline, the Fed's quarterly snapshot of the national balance sheet showed. Through June, Americans' collective wealth had fallen by more than $6.2 trillion from a record $150 trillion at the end of 2021."
Americans' record wealth was in 2021. Weird, isn't that the year Trump left office.
We had "job growth" from shutdown businesses reopening, and decline ever since.
No mention of underlying causation, just that markets dropped.
The markets dropped because PEOPLE LOST CONFIDENCE after their government enacted policies of decline.
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https://www.americanexperiment.org/if-you-support-fiscal-responsibility-you-might-be-a-maga-republican/
If you support fiscal responsibility, you might be a ‘MAGA Republican’
Last week, President Biden gave a speech outside Independence National Historical Park in Philadelphia, where he said “Donald Trump and the MAGA Republicans represent an extremism that threatens the very foundations of our republic.” Americans were assured that “This was not a speech targeting all Republicans:” “I want to be very clear,” the president said, “Not every Republican, not even the majority of Republicans, are MAGA Republicans.”
One would certainly not want to be an extremist who “threatens the very foundations of our republic,” so how do you know if you’re a ‘MAGA Republican’? Fortunately, President Biden has offered some detail on what it is that ‘MAGA Republicans’ believe:
Joe Biden @JoeBiden
Republicans have pushed an ultra-MAGA agenda to:
—Threaten Social Security and Medicare
—Raise taxes on working families
—Give big corporations and billionaires tax breaks
7:35 AM · Sep 9, 2022
The GOP has said little recently about entitlement reform which is a shame. Social Security, for example, is an absolute dog of a policy which is on a fast track to insolvency. As I wrote in 2019:
Social Security is estimated to run out of reserves in 2034, after which benefits would have to be reduced by about 25 percent to keep spending within available annual revenue. Over 75 years, Social Security has an unfunded liability of $13.9 trillion.
The Medicare hospital insurance trust fund will run out of reserves in 2026. Medicare’s second trust fund, for physician and outpatient services and for prescription drugs, is permanently “solvent” because it has an unlimited call on the general fund of the Treasury—the incomes of future taxpayers. Premiums paid by the beneficiaries will cover only about 25 percent of program costs; the rest of the spending is unfinanced. Medicare’s overall unfunded liability over 75 years is more than $37 trillion.
…
This is only going to get worse. According to Census Bureau projections, by 2030 each 100 working-age Americans will be supporting 35 retirees, and this could rise to 42 by 2060. Another way to think of this is to calculate the number of retirees each worker must support. In 1946, the burden of one retiree was shared between 42 workers. Today, according to the SSA, roughly three workers cover each retiree’s Social Security and Medicare benefits. By 2030, however, there will be only two workers supporting each retiree.
In other words, a working couple will have to support not only themselves and their family but also someone outside the family thanks to Social Security and Medicare.
To make Social Security solvent again, the payroll tax rate would need to be hiked immediately from 12.4 percent to 15.2 percent, or Social Security benefits would need to be cut on a permanent basis by about 17 percent. According to economists Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North:
“[F]or Social Security and Medicare to stay as they are, the payroll tax rate may have to rise to 25 percent of wages over the next decade. And a payroll tax rate of 40 percent is not unlikely by the middle of the twenty-first century.”
Wanting to reform this program and avoid this situation ought to be an imperative for any responsible government, But, to President Biden, it makes you a ‘MAGA Republican’ like those whose “extremism…threatens the very foundations of our republic.” To paraphrase Jeff Foxworthy, if you believe in fiscal responsibility, you might be a MAGA Republican.
When it comes to raising taxes on working families, nobody has any clue what the President is talking about. But, considering that his recent Inflation Reduction Act, which won’t reduce inflation, will increase taxes, according to the nonpartisan Joint Committee on Taxation, for every income bracket, with more than half of the tax increases on people making less than $400,000 annually, the question has to be asked: Why is President Biden pushing a ‘MAGA Republican’ agenda?
The strategy here is obvious. You start by saying that some group or other are beyond the pale. You offer genuine lunatics as examples of this group. Then, you expand that definition to include everybody who disagrees with you. Now, everyone who opposes you is beyond the pale. It didn’t take long for the criteria for being a ‘MAGA Republican’ to expand from “election denialism…outlandish-to-the-point-of-being-embarrassing conspiracy theories… [and] weird weekend MAGA warriors training as if their militia might take on the U.S. military” and include entitlement reform. Just eight days, in fact.
White House Press Secretary Karine Jean-Pierre stated this strategy explicitly last week:
"When you are not with what majority of Americans are, then you know, that is extreme. That is an extreme way of thinking."
Such moves — to delegitimize any opposition — are deeply troubling whoever is responsible for them and should concern all Americans.
John Phelan is an Economist at the Center of the American Experiment.
Give at: https://center-of-the-american-experiment.revv.co/donate
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Here it is, posting the Democrat 2022:view of economics in their own wotds. What's wrong is capitalism (economic freedom) run amok. The answer is simple. "Stymie Capitalism". Shut down what's left of economic freedom and put all the control in the all knowing, all powerful federal government. Hear Wisconsin Sen Ron Johnson's opponent in his own words explain how Democrat today equals fascist socialist and why I will never be a Democrat (fascist socialist).
https://freebeacon.com/democrats/video-watch-mandela-barnes-say-world-must-stymie-capitalism-to-combat-climate-change/
All I can think of is send money now to Send Ron Johnson. Name an amount by private message and I will match you.
https://secure.winred.com/ron-johnson/website
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https://www.theepochtimes.com/1-3-million-jobs-were-the-result-of-double-counting-this-year-says-heritage-economist_4729402.html?utm_source=partner&utm_campaign=BonginoReport
I thought distorting data in medicine was questionable
but it is nothing to what politicians due
to cherry pick , distort , fudge and mis interpret for their own gains:
https://www.theepochtimes.com/1-3-million-jobs-were-the-result-of-double-counting-this-year-says-heritage-economist_4729402.html?utm_source=partner&utm_campaign=BonginoReport
we just can't trust anything anymore........
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You can count on them lying.
https://www.theepochtimes.com/1-3-million-jobs-were-the-result-of-double-counting-this-year-says-heritage-economist_4729402.html?utm_source=partner&utm_campaign=BonginoReport
I thought distorting data in medicine was questionable
but it is nothing to what politicians due
to cherry pick , distort , fudge and mis interpret for their own gains:
https://www.theepochtimes.com/1-3-million-jobs-were-the-result-of-double-counting-this-year-says-heritage-economist_4729402.html?utm_source=partner&utm_campaign=BonginoReport
we just can't trust anything anymore........
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https://justthenews.com/nation/states/center-square/poll-63-americans-say-they-are-falling-behind-cost-living
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https://www.bbc.com/news/business-62970803
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https://www.theguardian.com/news/2022/sep/20/number-global-ultra-high-net-worth-individuals-record-high
Who knew?
-
Just copying a headline, not saying click on CNN.
Even CNN admitting soaring prices hurt ordinary people / everyone.
https://www.cnn.com/2022/09/26/economy/fixed-income-seniors-budget/index.html
I wonder if they mention, every policy of the last two years falls within the definition of inflation:
more money [chasing] fewer goods and services.
---------------------------------------
Also CNN:
https://www.cnn.com/2022/09/27/economy/economy-inflation-savings/index.html
71% of workers say their pay isn’t keeping up with inflation
[20% more won't yet admit it.]
---------------------------------------
Cost to heat your home is going up double digits from last year's record high cost:
https://www.foxbusiness.com/lifestyle/winter-coming-families-brace-large-heating-bill-again
Heating your home is kind of a big deal here.
http://news.minnesota.publicradio.org/features/200212/04_robertsont_heating/
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CNN
garbage
read CNN post above
ABSOLUTELY NO MENTION IT IS BIDEN'S POLICIES CAUSING THIS
just Trump just corona just ukraine
it is all due to world wide problem blah blah blah
CNN are lying bastards - they will never really change
and they need to rid us of that beady eyed Vanderbilt guy .. I am sick of his partisan BS ..
Yes I have hate, but it is due to MSM BS
not because I am "fascist ", "white supremacist", or 'threat to democracy "
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:|"CNN is garbage". Right, but ...
they can't hide the fact that this economy is hurting their people, people who voted for this.
And we only need 20%, 10%, 5%, maybe less, of their [former] voters to reconsider the wisdom and efficacy of suicidal economics to swing the balance and save the republic.
As I drive the rich liberal urban, well kept neighborhoods of the Twin Cities, I see no conservative yard signs but perhaps fewer liberal ones than in the past. Then in the tougher and minority neighborhoods I frequent, I see a few liberal signs, mostly local candidates, but NO real Dem enthusiasm since Obama's first election in 2008. They know now, these economic policies do NOTHING for them. Converting them to our side is another matter.
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:|"CNN is garbage". Right, but ...
they can't hide the fact that this economy is hurting their people, people who voted for this.
And we only need 20%, 10%, 5%, maybe less, of their [former] voters to reconsider the wisdom and efficacy of suicidal economics to swing the balance and save the republic.
As I drive the rich liberal urban, well kept neighborhoods of the Twin Cities, I see no conservative yard signs but perhaps fewer liberal ones than in the past. Then in the tougher and minority neighborhoods I frequent, I see a few liberal signs, mostly local candidates, but NO real Dem enthusiasm since Obama's first election in 2008. They know now, these economic policies do NOTHING for them. Converting them to our side is another matter.
You will get this instead:
https://media.gab.com/system/media_attachments/files/116/616/434/playable/0f611395286397ee.mp4
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Examiner column with scathing comments from Dem pollster John Zogby:
https://www.washingtonexaminer.com/news/washington-secrets/white-house-report-card-wheres-jackie-is-a-problem
by Paul Bedard, Washington Secrets Columnist |
October 01, 2022 11:34 AM
This week’s White House Report Card finds President Joe Biden muttering through another week that didn’t help his party’s chances in the 2022 congressional midterm elections just about five weeks away.
The highlights of the week were continued increasing inflation, a surprise decision to rip 770,000 students out of the college loan forgiveness program, Russia’s annexation of four Ukrainian territories, and Biden’s shocking decision to call out for the late Jackie Walorski, an Indiana Republican who died in an August car crash.
Biden and his administration displayed their characteristic bumbling and fumbling this week, but for the past seven days, it wasn’t the least bit funny.
To begin with, the bear Dow Jones Industrial Average dropped below 30,000, losing all the gains it had made since Biden became president. That was a direct result of the inflation and higher interest rates brought about by Biden’s reckless and wasteful spending.
Inflation continues to rage, and gasoline prices are rising again. That didn’t prevent Biden from claiming on Tuesday that gas prices in some states were below $3 per gallon. This, of course, was entirely false: The American Automobile Association said that no state had an average gas price below $3.
One of the reasons that gasoline has been cheap for the past few weeks is that Biden has been draining our Strategic Petroleum Reserve to produce oil that could and should have been produced by all the off-and-onshore drilling and fracking Biden is blocking. Biden is selling oil from the SPR at 6 million or 7 million barrels per week, effectively using the Strategic Reserve as a credit card for the Democrats’ 2022 campaigns. The SPR reportedly now holds less than it has held in 38 years.
The SPR oil supply was intended to, and should, be used only for real emergencies such as an anti-U.S. oil embargo. Now that Biden has made us again dependent on foreign oil, his use of it is another abuse of power. And so is his $400 billion-plus buyout of student loans. That loan buyout, as presented in a new lawsuit to block it by several states, is beyond Biden’s legal and regulatory powers.
What was more pathetic? Biden’s obvious mental decay on display in a Wednesday speech and his inept press secretary’s explanation of it. Biden, speaking at the White House Conference on Hunger, Nutrition, and Health, praised several members of Congress and singled out the late Rep. Jackie Walorski (R-IN), asking, “Jackie, are you here? Where’s Jackie? I think she wasn’t going to be here — to help make this a reality.” She died in a car crash in August.
Biden’s press secretary later tried to explain away the huge flub by saying Walorski was at the “top” of Biden’s mind. Glad to know something’s there.
Meanwhile, mortgage interest rates went above 7%.
On a funnier but more serious note, Vice President Kamala Harris praised our alliance with “North” Korea during a visit to the DMZ. I sometimes
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from above Doug post
"effectively using the Strategic Reserve as a credit card for the Democrats’ 2022 campaigns"
The DNC would love pay this off with MORE TAXES!!!!!!
:x
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"effectively using the Strategic Reserve as a credit card for the Democrats’ 2022 campaigns"
Pithily put!
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Two weeks ago in The Atlantic:
https://www.msn.com/en-us/news/opinion/economic-growth-is-essential-so-is-resilience/ar-AA127mB6
[Posted with comments]
Economic Growth Is Essential. So Is Resilience.
Opinion by Janet Yellen - Sep 22
[Yellen is right to favor "resilient growth", wrong in the implementation.]
Policy makers have long tried to foster rapid economic growth. [No, Democrats have not! Almost every Dem policy is anti-growth.] But as we shape our post-pandemic economy, we also need to strengthen our economic resilience both in America and around the world.
In recent years, the global economy has become more and more vulnerable to supply shortages and price shocks. The coronavirus pandemic led to severe supply-chain disruptions as economic activity recovered from the fastest drop in global commerce on record. Russia’s immoral war in Ukraine [True] has created [worsened] turmoil in global energy markets and spikes in the prices of other commodities.
Experts expect periodic supply shocks to become more frequent.[Because Democrats and others have made us more vulnerable, cf. canceling pipeline on day one] Climate change produces an acceleration of extreme weather events [BS], with longer and more intense disasters potentially sidelining a greater number of farms and factories. These disruptions will affect workers, businesses, and households across the economy. [the weather isn't the problem.]
In a speech in Michigan earlier this month, I explained how the Biden administration’s economic plan will mitigate such shocks for American workers and businesses. The plan advances solutions to these global supply shocks, with America acting in concert with our partners and allies worldwide. We have four priority areas: energy, food, digital technology, and public health.
First, energy security. [Energy Insecurity was their first policy.] The contribution that our global dependence on oil makes to climate change has long been evident. It also exposes us to geopolitical risks. In the past, Russia marketed itself as a reliable energy partner. But it is leveraging its exports of natural gas and oil as a tool of geopolitical coercion over the rest of the globe. When we and our allies reduce our reliance on fossil fuels, we are not only tackling the climate crisis but strengthening our resilience to supply shocks like the one we are experiencing this year.
To that end, the administration has just enacted the most aggressive climate action in our nation’s history. The Inflation Reduction Act [Falsely named] provides consumers and businesses with tax credits that will boost clean-energy production in the United States. [The cleanest energy we know is nuclear and it does NOTHING on that. Electric cars burn fossil fuels on the grid, do nothing to reduce emissions.] That legislation, together with the Bipartisan Infrastructure Law, is expected to reduce greenhouse-gas emissions by more than 1 billion metric tons in 2030 [No it doesn't], directly contributing to our effort to combat climate change. Accelerating the clean-energy transition will protect the planet and make the American economy less vulnerable to the actions of an autocrat halfway around the world. [Their policies have achieved the exact opposite result she seeks.] In addition, U.S. energy investments will deliver significant benefits to the rest of the world by driving down the costs of new clean-energy technology.
The administration is also responding directly to the near-term disruptions caused by Russia’s actions. The Department of Energy has released a historic volume of oil from the Strategic Petroleum Reserve to shore up crude-oil supplies, and through the International Energy Agency, we have coordinated with other countries that have committed to supplying tens of millions of additional barrels this year from their reserves. We have also expanded liquefied-natural-gas exports to Europe and set up a joint energy-security task force with the European Commission. [Complete duplicity. How does releasing our reserves, before the worst of it, ready us for disruptions??]
Finally, the G7 finance ministers have agreed to finalize and implement a cap on the price of Russian oil. Our goal is to keep oil flowing into global markets at lower prices, while also reducing the Kremlin’s revenues. We shouldn’t let Vladimir Putin profit from a war he started. The price cap on Russian oil will particularly benefit citizens of low- and middle-income oil-importing countries. This group includes some of the world’s poorest and most vulnerable countries, which have suffered most from the spillovers resulting from Russia’s war in Ukraine.
Our second priority is improving food security. [Seriously, how could they have made food security worse, canceling fuel and fertilizer?] Regional conflicts, climate change, and COVID’s economic disruptions have hampered global food production for some time. But Russia’s illegal war on Ukraine has turned the stress on our food systems into a crisis in many countries.
The United States has taken—and will continue to take—strong action to get food to those who need it now. Our efforts include emergency interventions such as the $2.9 billion in additional food-security assistance announced yesterday, on top of billions already committed this year. We are also scaling up investment in long-term food resilience, including by encouraging production practices that increase agricultural yields while mitigating emissions. We are promoting innovations such as urban agriculture. And we are focusing on crucial logistics and infrastructure—not only to grow food but also to store and transport it. [Because "smart government" knows better than the private sector?]
In May, the International Monetary Fund, World Bank, and other international financial institutions released a food-security action plan that will support vulnerable people and climate-resilient food systems, help mitigate fertilizer shortages [fertilizer shortages that they caused], and promote open trade. The Biden administration is particularly pleased to be contributing $155 million this year to the Global Agriculture and Food Security Program, which will leverage multilateral institutions to advance promising new projects—for example, providing farmers with seeds that are more resilient to droughts, heat, and other extreme conditions. This will help boost agricultural production. [The movement against GMO, fertizer, pesticides, toward organics has the exact opposite effect, requiring more and more farmland to produce the world's food.]
Our third priority is digital technology. During the pandemic, significant supply disturbances resulted from fragile supply chains for crucially important goods, particularly semiconductors. Microchips have been in such short supply that, by one estimate, the shortage resulted in $240 billion in lost U.S. output just last year. Auto production had to be cut by millions of vehicles. Moreover, the semiconductor industry is characterized by extreme concentration risk. As of last year, nearly all manufacturing of the world’s most advanced semiconductors occurred in just one East Asian economy: Taiwan. [Other Democrats, cf. Pelosi, heightened the tensions facing Taiwan.]
The United States and other countries need secure and reliable supply chains for semiconductors, which are among the most fundamental modern technologies. The recently passed CHIPS and Science Act will establish and expand the production of leading-edge semiconductors in the United States and build a sufficient and stable supply of mature semiconductors. The law’s tens of billions of dollars in incentives for semiconductor fabrication in America will reduce the risk from “critical points of failure” in the supply chain. It will restore confidence that the chips needed for the global production of goods—toasters, computers, advanced industrial machinery—will be available whenever and wherever they’re needed.
Our fourth priority is promoting public health. [By blocking the free flow of information regarding public health?] If nothing else, the past two years have taught us that pandemics can happen. And when they do, they can bring the domestic and global economy to a standstill.
We have, first and foremost, been dedicated to fighting the coronavirus pandemic. [But not investigate the source of Covid.] More than 600 million vaccine doses have been administered in the United States through our nation’s largest-ever vaccination campaign. [Thanks to President 45] And the United States has also led the global effort to share COVID-vaccine doses. We’ve delivered more than 620 million doses to more than 110 countries. [Without investigated the side effects.] These vaccines are part of our strategy to fight COVID worldwide, which in turn helps protect Americans. Even though they don't help with transmissibility.]
But COVID will not be the last threat to global health and our own economic stability. So our work also extends to long-term public-health investments. Those investments will enable us to respond more rapidly and effectively to future threats. At home, the American Rescue Plan provided a historic investment in our public-health infrastructure. Abroad, with leadership from the United States, the G20 and other partners earlier this month launched a new fund, housed at the World Bank, for pandemic prevention, preparedness, and response. The fund’s goal is to provide a dedicated stream of financing for low- and middle-income countries. So far, the United States and our partners have committed $1.4 billion, and this is just the beginning.
Looking to the future, we intend to mitigate supply-chain vulnerabilities [supply-chain vulnerabilities that they caused] while strengthening global economic ties [that they broke, cf. Saudi]. Global trade brings economic efficiencies. We can count on many countries and are committed to deepening economic integration with them. This approach—which we call “friendshoring”—enables us to continue to securely extend market access. And it reduces both our own risks and those of our trusted partners.
In all these ways, the Biden administration has put resilient growth at the core of its economic plan. [Exact opposite is true. Biden administration policies made us more vulnerable, less resilient.] Promoting economic growth is essential [thwarting growth is on the ballot, see Dem candidates in PA and WI, "stymie capitalism"], but it’s also not enough. The pandemic and the war in Ukraine offer vivid reminders of how suddenly circumstances change. We must increase our ambitions and protect ourselves and people around the world from the economic volatility that we may witness in the months and years ahead. [Platitudes to cover up past failures]
[Strange that the Treasury Secretary has an opinion on everything except failure at the Treasury under her watch. People's pay has shrunk a record amount in purchasing power in less than two years. If you truly believe her priorities, it makes you think she might be voting 'R' in the midterms.]
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Heather Cox Richardson
10h
·
October 7, 2022 (Friday)
The day began with news that during Trump’s first impeachment trial, all the Republican senators believed Trump had broken the law when he tried to force President Volodymyr Zelensky of Ukraine to smear Hunter Biden before he would release the money Congress had appropriated to help Ukraine fight off Russia. “Out of one hundred senators, you have zero who believe you that there was no quid pro quo. None. There’s not a single one,” warned Senator Ted Cruz (R-TX), according to a forthcoming book by Politico reporter Rachael Bade and Washington Post reporter Karoun Demirjian.
But then–Senate majority leader Mitch McConnell (R-KY) kept the Republican senators behind Trump by telling them: “This is not about this president. It’s not about anything he’s been accused of doing…. It has always been about November 3, 2020. It’s about flipping the Senate.”
Republicans did not manage to hold the Senate, of course, in part because Trump’s fury at Republican leaders’ refusal to force Georgia to throw out its electoral votes made him depress Republican voting in the special Senate election that ultimately yielded two Democratic senators—Jon Ossoff and Raphael Warnock—and gave Democrats 50 seats. Because Vice President Kamala Harris, the deciding vote in the tied Senate, is a Democrat, control of the Senate shifted to the Democrats.
Democratic control of the House, Senate, and presidency ushered in an economic strategy discredited by Republicans since 1981. Rather than cutting taxes and regulations to move money upward to the “supply side” of the economy in the hope that wealthy investors would expand industries and hire more workers, the Democrats focused on getting money into the hands of ordinary Americans. This investment in the “demand side” was the heart of government economic policy between 1933 and 1981 and brought about what economists know as the “great compression,” in which the wealth gap that had characterized the country in the 1920s shrank considerably. After President Ronald Reagan took office in 1981 and shifted the country toward supply side economics, that compression reversed to become the “great divergence.”
Their approach to the economy made Democrats invest in economic recovery from the worst of the pandemic with the American Rescue Plan, a $1.9 trillion economic stimulus bill passed in March 2021 with no Republican votes. That bill ushered in a dramatic economic recovery—the most rapid of any of the G7 wealthy nations—with the U.S. adding ten million jobs since Biden’s inauguration. No other president in our history has seen this level of job growth in his first two years in office.
Today a new jobs report revealed that the U.S. economy added 263,000 jobs last month and the unemployment rate fell to 3.5%. That was more jobs and a lower unemployment rate than economists expected. That job growth has affected all Americans. The Hispanic jobless rate has fallen from 8.6% in Trump’s last month to 3.8% now; the Black jobless rate went from 9.2% to 5.8%. Notable in the numbers, though, was that K–12 education lost more than 21,000 workers in September, putting the number of teachers and support staff 309,000 people lower than it was before the pandemic.
That extraordinary job growth, along with money saved during the pandemic, helped to drive inflation, as people were able to pay higher prices for goods and services jacked up by supply chain tangles, transportation shortages, and price gouging. But so far, it does not seem that we are locked into an inflationary spiral as we were in the 1970s.
Seemingly paradoxically, today’s good news about jobs drove the stock market downward. Investors are guessing that the Federal Reserve will raise interest rates to slow down the economy. If it costs more to borrow, businesses will likely cut back hiring and wages. Less money in people’s hands should slow the inflation that’s still high.
The Democrats have also hammered out legislation to rebuild the nation’s infrastructure. Last November, they passed the $1.2 trillion Infrastructure Investment and Jobs Act to rebuild the nation’s crumbling roads and bridges and to extend broadband to rural areas. More than 60% of Americans wanted infrastructure investment, and for that bill, which is often called the Bipartisan Infrastructure Law, the Democrats picked up “aye” votes from 19 Republican senators and 13 Republican representatives.
But former president Trump attacked those Republicans who voted for the measure, insisting that Republicans’ main goal was to keep Biden from accomplishing anything. “Very sad that the RINOs in the House and Senate gave Biden and Democrats a victory on the ‘Non-Infrastructure’ Bill,” Trump said. “All Republicans who voted for Democrat longevity should be ashamed of themselves, in particular Mitch McConnell, for granting a two month stay which allowed the Democrats time to work things out at our Country’s, and the Republican Party’s, expense!”
Trump loyalists threatened to strip committee assignments from Republicans who supported the bill. They complained about what Minnesota representative Tom Emmer called “President Biden’s multi-trillion dollar socialist wish list.” Arizona representative Paul Gosar said: “this bill only serves to advance the America Last’s socialist agenda, while completely lacking fiscal responsibility.” Kentucky representative Andy Barr said the measure was a “big government socialist agenda.” Iowa representative Ashley Hinson said the law was a “socialist spending spree.” Representative Markwayne Mullin of Oklahoma said: “I will not support funding for policies that drive our country into socialism.”
In the CNN piece today that collected all those quotations, authors Edward-Isaac Dovere and Sarah Fortinsky went on to point out that, despite their insistence that government investment in infrastructure is socialism (it is not, by the way), all these representatives and more have been quietly applying to take that money to their districts, often in the same language Democrats used to justify the bill in the first place. Improving highways would “serve as a social justice measure,” Emmer wrote. “The completion of this project means improved economic opportunities for ethnically underserved communities.” Adding bicycle lanes to a rural area, Mullin wrote, “would greatly improve sustainability by reducing emissions and redeveloping an existing infrastructure plan.”
The president has directed his administration not to let politics or votes for the bill influence how project grants are awarded. But for all their talk of socialism and wasteful spending, Republicans clearly understand that the American people want investment in the country and that such investment improves their quality of life. They just don’t want to vote for it after years of rallying voters with a narrative that any Democratic investments in the country are far-left radicalism.
Today Biden named the Republicans who voted against the infrastructure law and then asked for money. Biden said, "I was surprised to see so many socialists in the Republican caucus."
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one response would be to look at how unemployment/employment are calculated
AS ALWAYS data can be manipulated :
https://www.investopedia.com/financial-edge/0609/what-the-unemployment-rate-doesnt-tell-us.aspx
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Say Goodbye to the Labor Shortage
Jeffrey A. Tucker
Jeffrey A. Tucker
October 5, 2022
It was good, or at least fascinating, while it lasted. The labor shortage is ending.
In the entirety of the post-lockdown period, labor markets have been behaving strangely. We’ve seen incredibly low unemployment numbers (3.6 percent) that everyone has known don’t tell the whole story. That figure only calculates people in the market but leaves out everyone else.
Labor participation has been very low, not having recovered from lockdowns either. This has given rise to a whole genre of literature revolving around odd themes. There has been a contest over what phrase best characterizes it:
The Great Resignation
Quiet quitting
The Lost Generation
Mostly there has been a labor shortage that has been something of a solace to those with jobs. Workers have been able to name their price. Employers have been pulling their hair out trying to find warm bodies who are willing to do work. The canonical job portal Indeed.com has been flooded with applicants, but it’s not clear how many are real or how many are just people applying in order to extend unemployment benefits.
Then we’ve seen a strange anomaly in job creation. It’s been very high but not matched by increases in the labor force. How is this possible? A careful look has revealed that this job creation has been dominated by people who are taking second and third jobs. It’s good that there are jobs for the taking, but doesn’t this seem a bit strange? At the very least, it’s not great news.
As an aside, the scene reminds me of a book I read on the Weimar hyperinflation. One might believe that the times were characterized by sadness and poverty. Not so, at least not in the early stages. Jobs were plentiful, and money flowed like mad. People were working 18 hours per day, chasing down every opportunity to make bank. The problem was that all the frenzy was fake, a sign of monetary fakery. We’re nowhere near that point, but we’ve seen some signs of that over the past two years.
Meanwhile, economic output as measured by the gross domestic product (GDP) figures in real terms has been negative for two straight quarters, technically an indicator of recession. But the Biden administration—the same gang that says inflation is either flat or moving up barely “an inch”—says there’s no recession. The evidence they give is the unemployment rate and job creation.
They claim it isn’t possible to be in recession while the job market is so obviously healthy. It’s not a bad point when you consider the history of recessions. There’s something strange going on. At what point will the labor markets start flashing signs of red?
That point seems to have arrived. The Labor Department reported that total job openings fell by 10 percent in August, a huge drop by any historical standard. The 1.1 million drop in openings is the largest decline since the lockdowns. Job openings are now at their lowest level in a year. At the same time, labor participation is still stuck. Millions are missing from payrolls. Counterfactual history suggests that we’re missing as many as 8.3 million people from payrolls who otherwise would be working.
What this means is fewer job opportunities for those who are bothering to look for work, which is to say that the salad days are over. The crash in job openings affects every industry: leisure and hospitality, construction, manufacturing, and the whole of the private sector. This would seem to indicate a major weakening of the entire business environment.
Epoch Times Photo
(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)
Such a dramatic drop is a sure sign of recession, thus robbing the Biden administration of one of its talking points. It’s also reinforced by anecdotes of job cuts in major industries. The currently employed haven’t yet begun to panic, but the superfluous management layers in many businesses are being culled. This will get worse as the recession deepens.
The GDP numbers for the third quarter will be reported on Oct. 27 at 8:30 a.m. They’re highly likely to show that the negative trend will continue. After all, I’m not recalling any data releases from July, August, and September that would bump the negative into positive territory, but it’s impossible to say.
If there ever were a way for a sitting administration to lean on the Commerce Department to make sure that the first estimates were positive, this would be the time to do it. Not that the White House is this corrupt. Surely not. But it would be truly disastrous for the data release to confirm three consecutive quarters of declining real output just before the November elections.
Another talking point by the Biden administration has been the decline in gas prices. That trend has reversed itself. And based on what we’ve seen in the EU and the UK, we can expect rising prices throughout the winter months. Biden is already blaming OPEC.
Epoch Times Photo
Meanwhile, utility bills are still rising by 14.2 percent year-over-year, and inflation in food has ticked up too, now running 9.6 percent year-over-year. All of this inflation is seriously eating into household income in real terms, which entered into decline 18 months ago with absolutely no sign that the trend is going to change.
Many people are still in denial about the reality of our times. They want to believe that all will be well, that prices are going to settle down and things will become affordable again, and that the money and wealth are going to continue to flow no matter what. It’s a complete delusion at this point. The Great Reset has already happened. We’re living amid the carnage. Any appearance of normalcy can’t last for much longer.
The fall in housing is but one indication.
Let’s end with some final thoughts on the labor problem. The shortage of workers has been one of the more puzzling features of these times. The explanations have focused on issues such as early retirement, lack of child care, demographic upheaval, large shifts in various sectors and their labor needs, and so on. None of these explanations really do fully account for the strangeness of it all.
It’s impossible to avoid the real underlying reason: mass demoralization. Before the lockdowns, most people generally had the feeling that the trajectory of history was toward rising prosperity and progress for most people. After the lockdowns, the realization has set in that this isn’t necessarily the case. The multitudes that once planned their daily habits, work and education lives, and life choices around the expectation of improved living standards have subtly changed their outlook for the future.
This is the real tragedy of our times. The fundamental shift in the culture of civilization isn’t easily fixed in the next election or a positive data release from the Department of Labor. To rebuild will require a restoration of public confidence in the regime and the whole system under which we live. We’re nowhere near that point. Until something changes in that respect, we can’t look forward to seeing the return of the good old days that we knew only a few years ago.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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https://www.zerohedge.com/personal-finance/americans-continue-pay-inflation-credit-cards
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why is is ok for US government to print money
but I can't ?
:wink:
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https://www.zerohedge.com/personal-finance/americans-continue-pay-inflation-credit-cards
https://www.theburningplatform.com/2022/10/10/dallas-fed-over-half-of-americans-experienced-real-wage-declines-this-year/
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quote author=G M
https://www.theburningplatform.com/2022/10/10/dallas-fed-over-half-of-americans-experienced-real-wage-declines-this-year/
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"53.4% of all workers experienced real wage declines"
I would have guessed closer to 100%. Good companies are giving out 6% adjustments against 8% inflation. That's not good for either side of it.
Also remember CPI is under counted in the eyes of many experts and consumers.
Our cheapest grocer Aldi has some items up 33% and some items up more than 100%. Everything is up very noticeably.
Gas at the pump is up more than 100% in less than two years. Heating costs quadruple, depending on the location and time line.
Try doing without heat (in our climate) and groceries. What do you substitute for those?!
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I always wonder if the best liberal economic analyses are dishonest or just ignorant. One thing they aren't is spot-on.
Here is John Cassidy at the New Yorker. He cites published data to the tenth of a percent in what appears to be a serious pursuit of the truth.
[Don't click on it. That's just encourages them.]
https://www.newyorker.com/news/our-columnists/why-is-high-inflation-proving-so-persistent
He wants so badly to know how inflation can persist when we are doing all these things to stop it.
Seriously?
Another reason to not click on his article is because the answers and the solutions aren't in there.
Without using the discredited word "transitory", he suggests inflation should be coming down soon on it's own. [Good luck with that!]
The best expert he can find says:
“Downward pressure on inflation is visible everywhere except in the inflation numbers,” Ian Shepherdson, a chief economist at Pantheon Macroeconomics, wrote in a client circular after the C.P.I. report came out.
[Cassidy] There was some gallows humor in that comment. But it wasn’t far off the truth.
What?!
Look around. What is coming down the pike other than 'more money chasing fewer goods'?
The Saudis and all of OPEC agreed to produce significantly less energy.
10% loss of supply of an inelastic demand product leads to what rise in price? 10%? No.
The US government won't let up on our war against energy here. And our war against producing goods and services. They still think the weather is the real crisis and that manufacturers are greedy assholes. Forgive the language but is that overstated?
Pipelines were blown up and freighters next, I suppose. War costs money but doesn't produce more goods or services to alleviate our scarcity.
The Midterm Petroleum Reserve is badly depleted. That has to either be brought back up at higher prices )more money and less gas to the pump), or left depleted making us even more vulnerable to future shocks and future inflation. (I wonder if they thought of that when they opened it.)
Food costs, supply shortages and famine are going from bad to worse. Who knew fertilizer (and a thousand other products) come from petroleum or that ag production requires energy.
What about the trillion dollar deficits, the 6 trillion emergency spending, "infrastructure" that isn't infrastructure, and the skyrocketing costs coming to service our rapidly expanding debt?
Every dollar we use to pay people to not produce is inflationary. Isn't that most of the budget?
But none of that is in there as he quickly switches back to hoping the psy-op polls last through the election and that Dems can keep these policies on the wrong course.
Fact is, the only answer to inflation on the liberal left side is economic slowdown, which also risks spiraling downward out of control. cf. Jimmy carter, deja vu.
It's going to be hard for me to switch teams and vote for more liberal policies, dishonesty and ignorance in these economic times.
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"I always wonder if the best liberal economic analyses are dishonest or just ignorant. One thing they aren't is spot-on."
liberals NEVER either can or will admit they are wrong - EVER!
so when confronted with truths that do not fit their agendas
they ignore it every way possible
endless wishing the truth away
the facts are wrong
the interpretation of the facts are wrong
twist logic on its head to somehow argue they are really right
people who see with their own eyes must be confused or just don't understand
for ex. we who believe Trump are members of a "cult"
when. all else fails they simply remain silent, or
rarely make a non admission by saying well all sides do this .....
to shut down the debate
in the end NEVER ADMIT they are wrong NEVER
we all know libs like this .
indeed I know of none who are not like this.
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"I always wonder if the best liberal economic analyses are dishonest or just ignorant. One thing they aren't is spot-on."
liberals NEVER either can or will admit they are wrong - EVER!
so when confronted with truths that do not fit their agendas
they ignore it every way possible
endless wishing the truth away
the facts are wrong
the interpretation of the facts are wrong
twist logic on its head to somehow argue they are really right
people who see with their own eyes must be confused or just don't understand
for ex. we who believe Trump are members of a "cult"
when. all else fails they simply remain silent, or
rarely make a non admission by saying well all sides do this .....
to shut down the debate
in the end NEVER ADMIT they are wrong NEVER
we all know libs like this .
indeed I know of none who are not like this.
On some issues, we don't need media or conservatives to tell you, Joe shut down certain gas and oil operations and the price at all stations you know more than doubled.
There are leaders and there are followers. A liberal leader HAS to tell you the Dem spin of the story, from Ron Klaine to Juan Williams. If he doesn't, he isn't a liberal leader.
But Joe Blow, let's say a hard working Hispanic raising a family, (Jose?). He isn't invested that way. He is told Democrats care more about the little guy and he thinks he's the little guy so he votes all Democrat. He sees and hears Trump. Thinks what a jerk. Votes against him but watches his own economy grow by leaps and bounds. Then he sees and hears slow Joe. Maybe votes for him and watches prices go up and everything good go down.
Somehow we ARE getting through to people. Our main weapon has been to give liberals a chance to govern.
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".There are leaders and there are followers. A liberal leader HAS to tell you the Dem spin of the story, from Ron Klaine to Juan Williams. If he doesn't, he isn't a liberal leader. "
Doug,
I respectfully don't agree that leaders have to spin everything or they are not leaders
remember All I have to offer is "blood toil sweat and tears "
or something like that.
A real leader does not tell us the economy is very good when it ain't.
Say gas prices are someone else's fault or due to causes those who keep up with current events knows is not true.
Who wants to follow a leader that tells followers what they see with their own eyes ain't what they see with their own eyes?
not me
tired of bullshit
lay it to me straight.
-
Thank you ccp, good points. In the context, I meant leaders of the Left, on economics. They don't have an honest leg to stand on. Everything they do makes everything they say they care about worse.
For examples, the most deep blue states with the most socialistic policies have the widest income inequality gaps, while the growth policies they abhor bring in the most revenues to the government. Go figure.
So instead you talk about J6, abortion and orange man bad, and 'caring'.
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https://en.m.wikipedia.org/wiki/Jared_Bernstein
Chair of the Council of Economic Advisers has his degrees in social work and philosophy.
He was on Fox News Sunday this morning, argued inflation is getting better because Pres. Biden has released a lot of oil from the strategic reserve.
He argued the deficit has come down (as the economy reopened from COVID disaster years).
No one asked him, if this IS full employment, as the administration contends, should we be running deficits at all? Aren't those inflationary by definition?
What do you call this (non-existent) school of economics, selective Keynesian?
-
https://en.m.wikipedia.org/wiki/Jared_Bernstein
Chair of the Council of Economic Advisers has his degrees in social work and philosophy.
He was on Fox News Sunday this morning, argued inflation is getting better because Pres. Biden has released a lot of oil from the strategic reserve.
He argued the deficit has come down (as the economy reopened from COVID disaster years).
No one asked him, if this IS full employment, as the administration contends, should we be running deficits at all? Aren't those inflationary by definition?
What do you call this (non-existent) school of economics, selective Keynesian?
Magical thinking. If you just wish hard enough, it becomes true!
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https://media.gab.com/cdn-cgi/image/width=1050,quality=100,fit=scale-down/system/media_attachments/files/117/944/604/original/6f639eaca1cb6354.jpg
(https://media.gab.com/cdn-cgi/image/width=1050,quality=100,fit=scale-down/system/media_attachments/files/117/944/604/original/6f639eaca1cb6354.jpg)
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(https://instapundit.com/wp-content/uploads/2022/05/joe_biden_inflation_1978.jpg)
https://instapundit.com/wp-content/uploads/2022/05/joe_biden_inflation_1978.jpg
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https://www.wishtv.com/news/national/us-economy-will-soon-start-losing-175000-jobs-a-month-bank-of-america-warns/#:~:text=US%20economy%20will%20soon%20start%20losing%20175%2C000%20jobs,the%20New%20York%20Stock%20Exchange%20in%20New%20York.
-
https://thegrio.com/2022/10/18/black-voters-inflation-economy-kff-thegrio-midterm-elections/
---------------------------------------------------------------------------
Stereotyping blacks as only interested in welfare programs ("free shit") does everyone a disservice.
Democrats should stop doing that.
Vast majority of blacks are middle class and above.
https://en.wikipedia.org/wiki/African-American_middle_class
Working class voters of all divisions are seeing the fallacy of the Democrat paradigm.
-
(https://i0.wp.com/www.powerlineblog.com/ed-assets/2022/10/Trump-Biden-inflation.png?w=940&ssl=1)
Scroll right if needed. 4 years of Trump and so far with Biden. What do you see?
https://i0.wp.com/www.powerlineblog.com/ed-assets/2022/10/Trump-Biden-inflation.png?w=940&ssl=1
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Middle class in many cases from government make-work jobs. From the Griot, 69 % of black voters support Biden. Why is that? The great job he is doing? His brilliant public speaking?
https://thegrio.com/2022/10/18/black-voters-inflation-economy-kff-thegrio-midterm-elections/
---------------------------------------------------------------------------
Stereotyping blacks as only interested in welfare programs ("free shit") does everyone a disservice.
Democrats should stop doing that.
Vast majority of blacks are middle class and above.
https://en.wikipedia.org/wiki/African-American_middle_class
Working class voters of all divisions are seeing the fallacy of the Democrat paradigm.
-
"69 % of black voters support Biden. Why is that?"
- Down from the 98% who used to reflexively support Democrats. Why is that?
-
"69 % of black voters support Biden. Why is that?"
- Down from the 98% who used to reflexively support Democrats. Why is that?
Because the free shit isn't keeping up with the inflation.
-
Here's why the Left can't fix it.
If you pivot to support the policies it would take to fix this, you wouldn't be the Left anymore.
cf. SPEND LESS. Produce energy. Reduce the disincentives for everyone to be productive.
-----------------------------------------------------------------------------------------------------
http://www.realclearpolitics.com/video/2022/10/20/victor_davis_hanson_left_would_rather_be_ideologically_correct_and_destroy_everything_than_save_everything_and_be_incorrect.html 1:32 min, must see.
VDH about the Left: They're not confronting what's destroying America, and that is their ideology. And they know they can't confront it because they are ideological, not empirical, and the're not going to change.
-
All of us knew prices would go up.
On Thursday’s broadcast of MSNBC’s “Jose Diaz-Balart Reports,” House Majority Whip Rep. James Clyburn (D-SC) stated that “all of us knew” prices would increase “when we put in place this recovery program. Any time you put more money into the economy, prices tend to rise.” Clyburn also stated that President Joe Biden put kids back in school and has ensured schools are “getting fixed up for climate change” and said, “I resent people who feel that we would much rather not have jobs and education so long as we can pay ten cents less for a gallon of gasoline.”
https://pjmedia.com/news-and-politics/matt-margolis/2022/10/20/top-democrat-admits-all-of-us-knew-their-partys-policies-would-cause-inflation-n1638723
Why isn't that a headline in the NYT (and Mpls Startribune) ?
-----------------------------------------
FYI, you miserable ideologues, gas didn't go up 10 cents and it wasn't just gas, and the people you call your people are hurt the most by it. It would be even worse if you weren't so badly depleting our reserves - right before the crisis.
Now you can serve in the minority with a President whose approval is in the 30s.
-
". “I resent people who feel that we would much rather not have jobs and education so long as we can pay ten cents less for a gallon of gasoline.”
I resent pompous race baiting democrats like Clyburn (thanks to him we have Biden)
who do not confront the problem with education - it starts in the home
no racism
not lack of funds
it is cycle of "victimhood"
and endless spending down the sewer
James Clyburn neg
worth
https://networthgorilla.com/james-clyburn-net-worth/
https://www.opensecrets.org/personal-finances/james-e-clyburn/net-worth?cid=N00002408
I don't know where he hides his money
if wife's name
-
Pompous, yes, that's what spilled out the truth. "We all knew."
-
https://www.powerlineblog.com/archives/2022/10/the-week-in-pictures-dis-truss-ted-edition.php
(https://i0.wp.com/www.powerlineblog.com/ed-assets/2022/10/Screen-Shot-2022-10-20-at-6.53.25-PM.png?w=1340&ssl=1)
(https://i0.wp.com/www.powerlineblog.com/ed-assets/2022/10/401-Kaput.png?w=1174&ssl=1)
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https://www.zerohedge.com/markets/how-bernanke-broke-world
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I'll readily take Scott Grannis over that:
https://scottgrannis.blogspot.com/
-
This is quite a controversy. "Trump appointed" economist David Malpass, head of the World Bank, friend of Scott Grannis(?), said he wasn't a climate scientist when pressed to do more on "climate change".
-----------------------------
https://fortune.com/2022/09/22/david-malpass-world-bank-president-climate-change-al-gore-not-a-scientist/
Malpass apologized for his late September remarks downplaying the effect humans and fossil fuels have on climate change,
https://www.msn.com/en-us/money/markets/malpass-survives-climate-gaffe-but-the-world-bank-e2-80-99s-fossil-fuel-policy-may-not/ar-AA12ZMDc
------------------------------
[Doug] One might ask, how is the focus on climate change working out as it relates to temperatures, energy supplies and world finances?
That this man is still head of the World Bank should go down as a Trump accomplishment. The only un-woke world agency.
-
In hindsight, Trump was the best economic President since Reagan. But 370 economists signed a letter Nov 1, 2016 trying to stop his election.
https://www.wsj.com/public/resources/documents/EconomistLetter11012016.pdf
Had they succeeded, they would be right. He was dangerous, ignorant, doesn't listen to experts and would have destroyed the country as far as they knew.
What we know in hindsight is that he knew more than these Ivy League trained experts, and was better than all the alternatives, Hillary, Biden, Obama, Klain, Bernanke, Yellen, et al.
-----------------------------------
The letter: [with added comments]
We, the undersigned economists, represent a broad variety of areas of expertise and are united in
our opposition to Donald Trump. We recommend that voters choose a different candidate [Hillary!] on the
following grounds:
He degrades trust in vital public institutions that collect and disseminate information
about the economy, such as the Bureau of Labor Statistics, by spreading disinformation
about the integrity of their work.
[All these statistics are flawed, cf. Unemployment rate ignores workers laving the workforce.]
He has misled voters in states like Ohio and Michigan by asserting that the renegotiation
of NAFTA or the imposition of tariffs on China would substantially increase employment
in manufacturing. [Funny, now they love him in Ohio and Michigan.]
In fact, manufacturing’s share of employment has been declining since
the 1970s and is mostly related to automation, not trade.
[The renegotiation of NAFTA was successful - and no one else could have done it.]
He claims to champion former manufacturing workers, but has no plan to assist their
transition to well-compensated service sector positions. Instead, he has diverted the
policy discussion to options that ignore both the reality of technological progress and the
benefits of international trade.
He has misled the public by asserting that U.S. manufacturing has declined. The location
and product composition of manufacturing has changed, but the level of output has more
than doubled in the U.S. since the 1980s. [Manufacturing BOOMED under his policies.]
He has falsely suggested that trade is zero-sum and that the “toughness” of negotiators
primarily drives trade deficits.
He has misled the public with false statements about trade agreements eroding national
income and wealth. Although the gains have not been equally distributed—and this is an
important discussion in itself—both mean income and mean wealth
have risen substantially in the U.S. since the 1980s.
He has lowered the seriousness of the national dialogue by suggesting that the
elimination of the Environmental Protection Agency or the Department of Education
would significantly reduce the fiscal deficit. A credible solution will require an increase
in tax revenue and/or a reduction in spending on Social Security, Medicare, Medicaid, or
Defense.
He claims he will eliminate the fiscal deficit, but has proposed a plan that would decrease
tax revenue by $2.6 to $5.9 trillion over the next decade according to the non-partisan
Tax Foundation. [Oops, they were wrong, revenues increasd!]
He claims that he will reduce the trade deficit, but has proposed a reduction in public
saving that is likely to increase it.
He uses immigration as a red herring to mislead voters about issues of economic
importance, such as the stagnation of wages for households with low levels of education.
[Oops, stagnation of wages ended under his policies.]
Several forces are responsible for this, but immigration appears to play only a modest
role. Focusing the dialogue on this channel, rather than more substantive channels, such
as automation, diverts the public debate to unproductive policy options.
He has misled the electorate by asserting that the U.S. is one of the most heavily taxed
countries. While the U.S. has a high top statutory corporate tax rate, the average effective
rate is much lower, and taxes on income and consumption are relatively low. Overall, the
U.S. has one of the lowest ratios of tax revenue to GDP in the OECD.
[Oops, the top rate is what dissuades additional investment.]
His statements reveal a deep ignorance of economics and an inability to listen to credible
experts. He repeats fake and misleading economic statistics, and pushes fallacies about
the VAT and trade competitiveness. [And Democrats give us the straight truth!]
He promotes magical thinking and conspiracy theories over sober assessments of feasible
economic policy options.
Donald Trump is a dangerous, destructive choice for the country. He misinforms the electorate,
degrades trust in public institutions with conspiracy theories, and promotes willful delusion over
engagement with reality. If elected, he poses a unique danger to the functioning of democratic
and economic institutions, and to the prosperity of the country.
[Oops, we had the greatest prosperity gains under Trump in decades.]
For these reasons, we strongly recommend that you do not vote for Donald Trump.
Signed, [I'll spare you the 9 pages of signatures, but they all got it wrong.]
-
https://www.ftportfolios.com/retail/blogs/economics/index.aspx
excerpts:
The [2.6%] growth in the third quarter was led by net exports, particularly in the goods sector, where exports surged and imports fell. However, don’t expect that to continue. The dollar has strengthened substantially versus other major currencies and so will limit future purchases by foreigners while making foreign goods relatively inexpensive for Americans.
...
Moving forward, it’s hard to be optimistic about growth in consumer purchasing power when “real” (inflation-adjusted) earnings are falling and consumers have reduced the extra balances they had in bank accounts due to massive government stimulus checks in 2020-21.
We like to follow personal consumption, business investment, and home building, combined, which we call “core” GDP. This excludes the effect on real GDP of government purchases, inventories, and international trade, all of which are very volatile from quarter to quarter and which are hard for the US to rely on for long-term growth. The problem is that although overall real GDP increased at a 2.6% annual rate in Q3, core GDP rose at a meager 0.1% pace. That’s a growth rate in core GDP that we usually see just before, during, or just after recessions. No bueno.
The construction industry already appears to be in a recession of its own. Home building declined at a 26.4% annual rate in Q3, the sixth consecutive quarterly drop and the largest decline since COVID first hit the US. Commercial construction fell at a 15.4% annual rate, also the sixth consecutive negative quarter and the weakest since COVID first hit.
Meanwhile, inflation remains a problem. ... These figures signal that monetary policy still needs to tighten to bring inflation back down and a monetary policy tight enough to do that is likely to eventually cause a recession.
-----------------------------------------------------------
Or as Joe Biden would say: "Great economic report today. Things are looking good!"
https://www.nbcnews.com/nightly-news/video/gdp-grows-2-6-as-midterms-approach-151751237610
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In calendar year 2023, inflation would probably be between 0.1 percentage point lower and 0.1 percentage point higher under the bill than it would be under current law.
https://www.cbo.gov/system/files/2022-08/58357-Graham.pdf
Funny way of saying No Inflation Reduction.
-
https://www.nbcnews.com/business/consumer/credit-card-interest-rates-hit-record-high-rcna56373
Who does that hurt? Do you know any rich people carrying high credit card balances? By definition, no.
-
https://hotair.com/tree-hugging-sister/2022/11/15/bidenomics-update-household-debt-increased-at-fastest-pace-in-15-years-n511209
Worst - since the first time Pelosi Reid Schumer took Congress.
-
https://reason.com/2022/11/17/republicans-need-an-actual-plan-to-grow-the-economy/
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https://geopoliticalfutures.com/wp-content/uploads/2022/11/2022_Economy_Inflation.pdf?utm_source=GPF+Customers&utm_campaign=283b45cd51-20221116_PL_New_Econ_Reality_SR&utm_medium=email&utm_term=0_fa39571b29-283b45cd51-264975290&mc_cid=283b45cd51&mc_eid=415e14f76b
Can you guys see this?
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https://geopoliticalfutures.com/wp-content/uploads/2022/11/2022_Economy_Inflation.pdf?utm_source=GPF+Customers&utm_campaign=283b45cd51-20221116_PL_New_Econ_Reality_SR&utm_medium=email&utm_term=0_fa39571b29-283b45cd51-264975290&mc_cid=283b45cd51&mc_eid=415e14f76b
Can you guys see this?
Yes. Thank you.
-
November 23, 2022
View On Website
Open as PDF
New US Barriers Against Russia’s Economy
Black Friday has a new meaning for the Kremlin.
By: Antonia Colibasanu
Harvest festivals are not unusual around the world, but the American holiday of Thanksgiving is in a league of its own. Over time it has shed its religious roots and become a largely secular holiday celebrating family and togetherness. Many elements of Thanksgiving are little known outside of North America, but around the world businesses and consumers know what comes next: Black Friday, marking the start of the Christmas shopping season. According to myth, after a year of operating at a loss (“in the red”), stores would sell discounted merchandise for large profits (“go into the black”) on the Friday after Thanksgiving. Retailers everywhere have been importing the holiday since the early 1990s. With the end of the Cold War, the American business model triumphed, and countries everywhere had to adapt.
American Triumph
The U.S. and Western Europe promoted their particular capitalist model after World War II, and it worked because it ensured safe, reliable and relatively cheap trade and investment within a network secured by U.S. warships and British insurers. Originally the General Agreement on Tariffs and Trade, this network became the World Trade Organization in the 1990s. Designed in accordance with Western rules, it served as a platform for the growth of global trade and, subsequently, for Western influence over the world economy. For a country to enjoy the benefits of WTO membership, all other members must recognize its status as a functioning market economy. In theory, a market economy is one in which supply and demand direct the production of goods and services. State intervention is minimal. As one would expect, this assessment is somewhat political.
After the Cold War, WTO membership was essential for a country to trade globally. For the West and especially the U.S., welcoming new members meant greater influence. It brought in countries like Russia and China, thinking they would get on board with the U.S.-led liberal order. In the strongly unipolar age of the 1990s and early 2000s, alternatives were scarce.
This is how Black Friday made it to places like China and Russia. Beijing formally asked to join the WTO in 1995 and was admitted in 2000. Western markets, especially U.S. consumers, benefited from access to cheap Chinese goods. China had to reform, reduce tariffs and promise further liberalization. It did not go as far as the West wanted, but it did copy the Black Friday concept. China’s is called Singles’ Day, celebrated on Nov. 11. It was not originally a shopping holiday, but since the late 2000s, it has morphed into the largest shopping day in China.
Russians preserved the name but changed other features. First, Russia’s Black Friday does not have to be on a Friday, nor is it limited to one day. Second, the discounts are not so great; stores usually mark up prices a few weeks before the season and then cut them – sometimes to levels still above the normal price – for the Black Friday (or Black November) season. Despite the war in Ukraine, sanctions and the flight from Russia of most Western brands, the holiday is alive and well in the country.
A Black Day for Russia
However, not everything is business as usual. On Nov. 10, the U.S. revoked its recognition of Russia’s market economy status, and on Nov. 11, it started imposing import duties on Russian goods. (That the latter came on the same day as Singles’ Day is probably a coincidence, not a straightforward warning to Beijing.)
The U.S. recognized Russia as a market economy two decades ago, following years of Russian lobbying. But Washington maintained its position that state subsidies in the form of cheap energy gave Russian goods an unfair advantage, and it continued to block Russia’s entry into the WTO. By the time Russia finally acceded to the WTO in 2012, 18 years after formally requesting admission, Russia’s economy and energy strategy were already directed toward Europe, WTO member or not. Still, WTO membership was important for Russian producers in search of new markets. It was equally important for Russian consumers, who could buy foreign goods at lower prices after import tariffs were cut. However, Russia was in the process of opening its market to imports when it annexed Crimea in 2014. Moscow imposed counter-sanctions on EU agricultural products in response to Western sanctions and effectively abandoned WTO trade rules.
Washington’s decision to no longer recognize Russia’s market economy status follows a U.S. Commerce Department investigation into sales of Russian urea ammonium nitrate fertilizer in the U.S. “at less than fair value.” The investigation concluded that “extensive” government involvement was giving Russian companies an unfair advantage. Moscow can challenge the U.S. decision in the WTO. Conversely, the U.S. could go further and seek Russia’s expulsion from the body. In the meantime, the change in status will not have much effect on Russian trade. (The U.S. accounts for just 4 percent of Russia’s foreign trade.) But the reversion to non-market status is the latest U.S. sanction against Russia since the latter invaded Ukraine at the end of February, and marks an escalation in the global economic war.
Significance and Signals
WTO expulsion is possible, but the more significant sanction would be convincing the European Union to also lift its recognition of Russia’s market status. About 40 percent of Russia’s non-energy foreign trade goes to the EU, several times the value of U.S.-Russian trade.
The move is also significant as a signal to Beijing. Just days after the U.S. revoked Russia’s status, the nonpartisan U.S.-China Economic and Security Review Commission recommended in its annual report to Congress that the U.S. investigate whether China is engaged in predatory trade practices. A ruling against China could justify Washington’s revocation of its market economy status, which would hurt its economy much more than the move hurt Russia’s. The U.S. would suspend so-called normal trade relations, which Congress approved in 2000 when China joined the WTO.
Finally and most importantly, the U.S. move must be considered in the context of Russian overtures for negotiations with the United States. Given Russia’s unwinnable battlefield position, its incentive to strike a deal is high. It would enable Russia to hang on to Crimea and the four oblasts in eastern and southern Ukraine that it has claimed, and it would enable Russian President Vladimir Putin to say his regime had successfully defended Russians in eastern Ukraine over the long term. The U.S. may well want to offer Russia a dignified exit from the war, and what better time than Thanksgiving? But Washington first has to convince Ukraine to sit down and give things away to Russia. The WTO sanction, then, is a signal from the U.S. to Russia that it is still willing to escalate.
The U.S. knows sanctions alone will not end the war. However, the two sides are locked in an economic war, and the U.S. needs to ensure that sanctions leakage and Russia’s search for new allies do not weaken the U.S. position. The U.S. is also in the process of restructuring the global system it created, contributing in effect to its balkanization. In an earlier age of globalization, the U.S. introduced the world to Black Friday. Its next contribution may be a new global economic order.
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41% of small businesses can't pay rent this month.
https://justthenews.com/nation/states/center-square/report-41-small-businesses-cant-pay-rent-month
What Biden calls full employment, "strong economy". What Obama called the new normal. https://gop-waysandmeans.house.gov/what-magic-wand-do-you-have/
-
https://asiatimes.com/2022/11/supply-side-inflation-and-its-cures/
-
A couple of minor quibbles, but as far as the big picture goes IMHO this is dead on.
-
https://asiatimes.com/2022/11/supply-side-inflation-and-its-cures/
A couple of minor quibbles, but as far as the big picture goes IMHO this is dead on.
Agree. He introduces a lot of important facts, truths and insights, and for his prescriptions/ solutions, the author is entitled to his opinion. )
I like that he breaks with the overwhelming media and Fed view that inflation will broken with tightening alone, aka 'slowing the economy'. He rightly points out, crushing or even slowing the economy only makes things worse.
He focuses on differences between 1979 and now. I would focus on the similarities, keeping the differences in mind.
Author writes:
"The demand-side inflationary shock from fiscal policy ran headlong into a supply-side barrier."
- What he calls "fiscal policy", taxes and spending, should be called 'spending'. Don't mask or dilute the problem. It's the spending, federal government spending.
"The demand-side inflationary shock from fiscal policy ran headlong into a supply-side barrier.
US industrial capacity could not meet the demand surge."
- Of course it couldn't keep up. They were sending out a trillion at a time, all at once, with NO new goods or services produced. If anything, fewer goods and services are produced when money is paid with no regard to production. All in the context of the other Biden et al unforced errors, shutting down oil and gas with the result that has on other industries, while discouraging capital investments and labor.
On the plus side is this, analysis we don't ever seem to see outside the forum:
"In 1979, the Federal Reserve’s monetary tightening addressed the manifest problem of excess credit creation driven by inflation expectations. But the Volcker monetary tightening was only one half of a successful policy combination inspired by Robert Mundell: tight money to reduce inflation and deep tax cuts to promote growth.
The 1981 Kemp-Roth tax cut reduced the United States’ top marginal personal rate to 40% from 70% and drew out reserves of labor and entrepreneurship."
- The only question today is, what is the equivalent policy we need NOW to address the constraints on production today? [Let's discuss this further.]
Idea number one from the author:
"Restoring incentives for US oil and gas production"
- [Doug] No. It's more complicated than that. We don't need to favor oil and gas. We need to stop discriminating against it, except in the real pursuit of lower emissions.
Biden administration is blaming the oil and gas industry for not making long term investments where they can in drilling, fracking, pipelines, right while same government wages a long term war against them. The individual policy actions aren't the problem, like canceling Keystone XL and ANWR. It is the larger government regulatory war against them, symbolized by these actions, that is killing off badly needed new investment.
There will be a transition away from fossil fuels, if we allow it. But if we don't want to kill off the economy in the meantime, fossil fuels are a necessarily part of the transition, and Biden and Democrats in power and the voters who put them in power must admit it.
For one thing, wind and solar both require matching capacities of oil and gas for backup. Not emergency backup, but for the more than half the time everyday that wind and solar are not producing.
Oil and gas doesn't need special incentives. It needs full recognition that it is a vital national and world interest until a better alternative is fully available.
Our only chance out of this a month ago was to defeat Biden and the Democrats in the midterms, and we didn't. Now our only chance is for Democrats to change their minds, from the Dem voters up to the leaders, who all just doubled down on inflation and stagnation.
We want a vibrant economy. We want abundant energy. And we want federal spending returned to sanity, roughly a trillion a year lower than the current trend line, not higher and higher.
If both parties can't agree on that, it ain't gonna happen.
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"the typical American household has lost more than $7,000 owing to inflation and rising interest rates."
- Economist E.J. Antoni
https://www.dailysignal.com/2022/12/13/average-american-family-has-effectively-lost-7100-biden-economist-says/?utm_source=feedly&utm_medium=rss&utm_campaign=average-american-family-has-effectively-lost-7100-biden-economist-says
https://pjmedia.com/news-and-politics/matt-margolis/2022/12/13/how-much-has-bidenflation-cost-you-you-probably-dont-want-to-know-n1653230
Makes people want to vote for ... ... more of the same!
--------------------------------------------------------------
Update, another measure, Inflation only, excludes the cost of higher interest rates too, another cost of inflation. Still, 500/month is 6000 per year. Who can afford that?
https://www.cnn.com/business/live-news/stock-market-cpi-ftx/h_09e705d0af5b5ab4ff01006cbf5fec5b
"While that nearly $400 extra needed per month isn't as bad as the $493 needed per month when inflation soared to 9.1% in June, the high prices are still wearing down Americans and their finances.
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Biden Has the Economy Back on Track
His policies have helped the country weather a global economic storm and invest for the long term.
By Janet L. Yellen
Dec. 14, 2022 5:36 pm ET
The global economic storm unleashed by a once-in-a-century pandemic and a brutal land war in Europe has caused three years of economic disruptions in the U.S. and around the world. These are turbulent times, but the policies of the Biden administration have propelled the American economy to one of the fastest recoveries in modern history. Because of President Biden’s plan, we have improved the economic well-being of American families and workers and strengthened the economy’s resilience in the face of significant global headwinds.
Since his first day in office, Mr. Biden’s goal has been to get the U.S. economy back on its feet and invest for the long term. In January 2021, the nation was facing some of the darkest days in its modern history. Approximately 3,000 Americans were dying from the novel coronavirus every day. The public-health crisis triggered an economic calamity, with millions of jobs lost and the country still haunted by fresh images of long lines outside food banks and unemployment offices. With the vaccines’ effectiveness untested, the country faced the tail risk of an economic downturn that matched the Great Depression.
Yet the worst didn’t materialize. Fears of a protracted economic crisis—in which millions of homes, businesses and livelihoods would be lost, many never to return—didn’t become reality. Instead, the American Rescue Plan and vaccination campaign helped spur the fastest pace of job creation in American history.
Importantly, the recovery avoided the scars that are typically inflicted during recessions and borne in their aftermath. Foreclosures and evictions fell and remain below pre-pandemic levels, as did bankruptcies and debt collection. By one measure, child poverty plunged to a record low last year. And early this year the uninsured rate reached an all-time low.
Now the Biden administration’s task is to navigate the economy’s transition from rapid recovery to stable and sustainable growth. Historically, these transitions haven’t been straightforward. But the task became significantly more challenging when Vladimir Putin launched his brutal invasion of Ukraine, which sent global energy and food prices skyrocketing.
The Biden administration’s top economic priority is to tackle inflation. The Federal Reserve has the primary responsibility, but we are taking complementary actions to expand supply and provide cost relief. While the future path of the economy remains uncertain, there are signs that the supply-demand imbalances that have been boosting inflation are now easing in many sectors of the economy.
Energy has been a key focus of the administration’s work. Most recently, the U.S., along with allies and partners, implemented an innovative policy to cap the price of Russian oil and stabilize energy prices. We have also shored up crude-oil supply through the president’s release of 180 million barrels of oil from the Strategic Petroleum Reserve. Today, average U.S. retail gas prices are about $1.50 a gallon lower than this summer’s peak.
We are seeing signs of progress in other areas where we’ve taken action, even as we redouble our efforts. Freight shipping rates and wait times at many U.S. ports have fallen, in part due to the Biden administration’s work to ease supply-chain bottlenecks. Late last month, there were no container ships waiting outside the Ports of Los Angeles and Long Beach, down from more than 100 at the start of this year. The administration has also provided targeted relief to families to help with rising costs of living. Thanks to the Inflation Reduction Act, millions of Americans will save on their energy, health-insurance and prescription-drug costs.
More broadly, recent economic reports indicate that the U.S. economy remains resilient. It’s growing amid a global slowdown and tightening financial conditions. The labor market is strong, with the unemployment rate near a 50-year low. Household balance sheets remain healthy, consumer spending is robust, and credit-card delinquencies are low.
As the economy emerges from the global economic storm, the U.S. will be in a uniquely strong position to capitalize on the future. This fall, I toured the country to see the early results of a trifecta of historic long-term investments that the Biden administration has made: a generational investment to modernize crumbling roads and bridges, a major expansion of American semiconductor manufacturing, and the most aggressive action on the climate crisis and long-term energy security in our nation’s history.
Together, these investments are expanding the American economy’s productive capacity while enhancing its resilience. Already, companies have announced tens of billions of dollars in investments in new production and manufacturing facilities that will extend America’s global competitiveness and expand economic opportunity. This ranges from Taiwan Semiconductor Manufacturing Co.’s announcement last week of a $40 billion investment in Arizona to the emergence of a new electric-vehicle “battery belt” across the South and Midwest.
Times can be tough, but Americans are tougher. From the depths of the crisis, we have bounced back—and the president’s economic plan has bolstered the U.S. economy’s resilience to today’s global challenges. Looking to the future, I am confident that our long-term investments, enabled by the historic legislation Congress has enacted over the past two years, will advance America’s global economic leadership in this decade and beyond.
Ms. Yellen is U.S. Treasury Secretary.
Advertisement - Scro
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Tesla CEO Elon Musk speaks during the official opening of the new Tesla electric car manufacturing plant near Gruenheide, Germany, on March 22, 2022. (Christian Marquardt - Pool/Getty Images)
US NEWS
Elon Musk: Auto Loans Could Be Source of ‘Biggest Financial Crisis Ever’
By Liam Cosgrove December 16, 2022 Updated: December 17, 2022biggersmaller Print
The automotive market may be under stress as several experts call for a massive wave of repossessions in early 2023, with prominent figures like Tesla founder Elon Musk and Ark Invest’s Cathie Wood sounding the alarm about the potential impact on financial markets.
“Potentially the biggest financial crisis ever,” Musk posted on Twitter Friday in response to a tweet by Wood and a series of tweets from the CEO of a car dealer group about the potential auto loan crisis.
Reports by the anonymous Twitter account CarDealershipGuy revealed an “extremely alarming” trend among auto lenders. The CEO behind the account claimed that many lenders are ignoring red flags associated with loan applicants who are already “underwater” on a prior auto loan.
“This morning I discovered something extremely alarming happening in the car market, specifically in auto lending,” CarDealshipGuy, who authors a newsletter for auto market insights, wrote on Twitter, catching many people’s attention.
“I’m now convinced that there is a massive wave of car repossessions coming in 2023.”
He went on to explain that many people had no choice but to buy a costly car during the pandemic. He said car values have been falling recently, with some dropping by nearly 30 percent year on year.
“And these same people that took out these big loans are now ‘underwater.’ Basically, they owe banks more on these cars than they are worth,” he stated, adding that the banks are well-aware of the problem.
CarDealershipGuy, who wished to remain anonymous, told The Epoch Times that many of these underwater borrowers are attempting to purchase additional vehicles, despite having unpaid debts on their prior auto loans. He is hearing that 35 to 40 percent of new subprime applicants already have outstanding debt, he said.
Normally, banks would consider this a warning sign and refuse the loan, but the dealer said that 65 percent of his associated lenders are issuing the loans anyways.
“I’ve been in the business for a decade and this is completely unprecedented.”
When asked about whether large institutional banks are involved in this lending, he said, “Some of the big household names that you and I know are participating in this.”
He described the dynamic further on Twitter.
“The lender lets the consumer buy the car KNOWING that they already have an open auto loan with another bank!” wrote the dealer. He hypothesizes that banks are making this choice strategically, assuming that customers will default on their previous loan—issued by a competing bank—but continue making payments on the more recent one.
He referred to the dynamic between competing banks as “dog eat dog style.”
Declining Values
CarDealershipGuy’s Twitter thread caught the attention of Cathie Wood, head of the investment management firm Ark Invest, who expressed concerns about “the impact of declining residual values on the $1+ trillion auto loan market.”
Wood, who manages assets over $14 billion as of September, added that this crisis might be exacerbated as more consumers opt to purchase electric vehicles, further diminishing the prices of gas-powered cars.
Elon Musk responded to Wood’s tweet, echoing the same concerns.
Musk has been an outspoken critic of the Federal Reserve’s hawkish interest rate policy, posting on Twitter last month that the ”Fed needs to cut interest rates immediately.” Since the start of the year, the U.S. central bank, led by Chairman Jerome Powell, has raised its overnight lending rate from near-zero to over 4 percent.
Ticking Time Bomb
As The Epoch Times covered in November, the post-COVID boom and corresponding chip shortage caused car prices to explode throughout 2020 and 2021.
Car dealers were forced to overpay for their merchandise and, in turn, overcharged banks that were providing auto loans. Lucky Lopez, a Las Vegas-based auto loan broker, told The Epoch Times that loans originated throughout 2021 far exceeded the values of the underlying vehicles.
“The dealers started calling banks, ‘Hey man, I gotta sell this for 150 percent, 160 percent of LTV [loan-to-value] … Can you do this?’ and banks that traditionally wouldn’t, started doing it,” Lopez said, paraphrasing the industry dynamics he had witnessed.
For perspective, the online loan broker LendingTree quoted the average LTV ratio for an auto loan in 2019 at 87 percent.
Lopez is also calling for a massive wave of lender repossessions, which could spell trouble for the automotive market. After repossession, cars typically go to auction, but banks are reluctant to commit to an auction sale, where it’s difficult to fetch even 100 percent of a car’s value.
As a result, banks have largely refused sales and continue to delay the auction process, according to Lopez.
The lack of sales is causing a supply glut, which is a ticking time bomb, according to former adviser to the Federal Reserve Bank of Dallas Danielle DiMartino Booth.
“This massive overhang of inventory continues to grow on a weekly basis because the lenders don’t want to recognize the loss on the loans,” Booth said in an interview on the Forward Guidance podcast.
She predicts that regulators will step in at some point and question why lenders haven’t liquidated the cars and force them to sell. Booth added that this “is what regulators did in the housing crisis.”
“They’re going to make them clean those loans off their books, and then we’ll see used car prices fall.”
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https://www.powerlineblog.com/archives/2022/12/sorry-about-those-jobs.php
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The percentage of prime age men not in the workforce has doubled since the late 1970s.
https://www.cnn.com/videos/business/2022/12/15/labor-force-men-women-yurkevich-dnt-contd-cnntm-vpx.cnnbusiness
Here's why:
https://mises.org/wire/why-are-so-many-men-leaving-workforce
there are at least six million men of "prime age" (age 25-54) who are out of the workforce for various reasons. Historically, this number has been getting larger at a rate faster than growth of total men in that age group. That is, fewer than 3 percent of prime-age men were "not in the workforce" in the late 1970s, but 5.6 percent of men in this group were out of the labor force in 2022. That translates into approximately 7.1 million men according to the Census Bureau's count of men "not in labor force."
...
the reasons driving the lion's share of missing men to leave the workforce appear to be illness, drug addiction, a perceived lack of well-paying jobs, government welfare, and the decline of marriage.
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(Doug). I would suggest a combination of these reasons, government support payments and under the table (gig) work that keeps the eligibility of the govt programs, SSI for example.
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14% over two years, $10,000 thrown away,
and they still vote Dem.
Hatred of Republicans and economic comm sense is expensive!
But rest assured, with more of the same planned, things will get worse.
https://nypost.com/2022/12/22/the-pain-isnt-goin-away-inflation-cost-households-an-extra-10k/
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https://confoundedinterest.net/2022/12/23/let-it-blizzard-home-sales-slumped-35-in-november-the-biggest-decline-on-record/
Everything's fine, really!
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The question of the day is the question of our lifetime and the question for almost every thread on the forum. I was going to ask it on the border thread but it fits just as well in political economics.
What does it take for Democrat voters to be offended by the results of democrat policies?
It doesn't matter that I don't like their policies and I don't like their results. When are their voters outraged and aghast? That's what I want to know.
https://nypost.com/2022/05/26/team-biden-might-be-purposefully-crushing-the-middle-class/
Higher prices are crushing the middle class and you don't need a newspaper to see it.
Who bleeping cares? No really, who cares?
Another 2 trillion of spending past this past week. With Republican help! If you don't care now, when will you care? Maybe that is the question. When will you care? When it's too late? Aren't we there yet?
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The Labor-Force Participation Rate Is the Economic Indicator of Our Day
By DAVID L. BAHNSEN
December 26, 2022 6:30 AM
The share of working-age adults participating in the labor force tells us more about the economy and our culture than ever before.
The labor-market data revealed by the Bureau of Labor Statistics the first Friday of each month has become a sort of blood-sport for both political junkies and market watchers. The political angle is easy to discern — a bad jobs report is deemed bad for incumbent politicians, and a good jobs report is inversely deemed good. The possibility of a disconnect between cause and effect here is ignored; the headline number is used to create or support a narrative and there is heavy political cheerleading attached to the data (one way or the other).
Market watchers have a different agenda. For years the basic assumption was that a strong jobs report indicated a strong economy, and therefore positive ramifications for markets. If more people were employed, it stood to reason that more people were buying goods and services, and therefore corporate profits should be growing. Associating good news in employment with good news in the economy seemed almost tautologically true for decades (with the same being true of the inverse — that bad news on the employment front was bad for the economy and corporate profits).
It is only a by-product of highly interventionist monetary policy that the opposite is now considered conventional wisdom. Low unemployment is considered inflationary (it is not) and the Fed is deemed to be the primary agent for countering inflation (it is not). Therefore, as current thinking goes, a positive jobs report is bad for financial markets because it implies ongoing Fed tightening while job losses are associated with a “cooler” economy — ergo, a Fed pivot. Up becomes down and left becomes right when the Federal Reserve is granted the role of deity in economic stewardship.
A casualty in politics-centered or Fed-centered analysis of jobs data is focusing on the cultural reality of our labor force. The labor-force participation rate (those working combined with those actively looking for work as a percentage of the non-institutionalized, working-age population) was steady and reliably around 66 or 67 percent for years before the financial crisis. The number dropped to between 62 and 63 percent after that and only started to trend higher after the deregulation and tax reform of 2017–18. That, of course, was upended by Covid and the 2020 shutdowns.
As we now know, the economic pain of the shutdowns reversed quickly, and not only did economic activity resume by late 2020, with strong GDP growth in 2021, but the unemployment rate dropped quickly. Indeed, the narrative of 2021 shockingly became one of inadequate access to workers instead of millions looking for work. One problem was seemingly solved, but another problem was seemingly created.
That problem is the failure of the labor-force participation rate to return to normal. At approximately 62 percent, we sit 1.5 percentage points below pre-Covid levels despite the economic normalization that has taken place in almost all other categories. While 1.5 percentage points may seem like a small number, with a working-age population of about 260 million people, it means we are about 4 million people below the trend-line number from before Covid. And paradoxically, this comes with more job openings than we have people looking for jobs.
The inability to return to pre-Covid levels in the workforce since economic reopenings began is only the latest episode of the nearly 15-year story of lower labor-force participation since the financial crisis. The majority of the reduction can be found in men over the age of 55, though young adults post–high school are also less likely to work than they used to be.
One of the most underrated explanations of 2021 inflation is found in the reduction of workers available to produce needed goods and services in a supply-constrained economy. Total consumption and aggregate demand never rose above pre-Covid levels, but supply and available workers stayed below them. From truck drivers to package handlers to food-and-beverage to hospitality, the supply of workers has been below the need, and prices have correspondingly increased.
The White House is well aware of this challenge and is apparently looking at ways to throw money at it. Increasing benefits and transfer payments to incentivize people back to work risks exacerbating the problem. Transfer payments without a work requirement will result in more people not working. Incentives still matter.
More concerning than the broad economic impact of the reduced labor-force participation rate is the cultural impact. The American ethos values the dignity of work and sees purpose, meaning, and hope in productive activity. Not only does our economy desperately need the full weight of American ingenuity, innovation, and productivity, but our souls do as well. In a time of increased alienation, isolation, and desperation, a larger labor force would mean a greater number of people engaged in meaningful activity with attendant duties and responsibilities. It would allow for less substance abuse, less emotional angst, and more pursuits of passions.
The unemployment rate (those unemployed divided by those in the labor force) can be a deceptive metric if the labor-force participation rate is shrinking. Our goal must be not only maximum employment of those looking for work, but also that more people who are able to participate in the labor force actually do so. A society of self-government that values human dignity does not encourage late entry to or early exit from the labor force. A labor-force participation rate equal to our pre-2008 levels is attainable, but not without a resurgence of values focused on productivity. The end result would be far more meaningful than what we find in a GDP calculation.
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Easy come, easy go - except for that first part. Those trillions we're really hard to earn and save and invest, and easy for them to lose for you.
Source: CTUP
Could the economy and stock market have performed any WORSE than these past 12 months? You'd have to go back to 2008 to see bigger losses.
Americans lost an estimated $13.5 trillion in their net household wealth after adjusting for inflation. The chart below shows the nominal and real returns on the three major stock indices and the return on bonds.
Nominal Real
Nasdaq -33% -38%
S&P -20% -25%
Dow -9% -15%
Bonds -12%. (-18%?)
(Doug). I would add REITs, down 26% nominal, 30+% after inflation
(CTUP) Wait. We thought all these trillions of dollars of government spending were supposed to STIMULATE the economy.
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(Doug). They lied to you. Worse than anything Santos ever said.
Lesson learned? No! First act coming into the new year is 2 trillion more of discretionary spending.
Good f'ing grief. We.Learned.Nothing.
P.S. Michigan Democrat Rashida Tlaib, used her 'proxy' to vote “present” - when she wasn’t there.
You can't make this stuff up.
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"Contributing to inflation"? When wages lag inflation? Seriously?
===============================================
Stay for Pay? Companies Offer Big Raises to Retain Workers
Recent record-high wage gains for workers who remain in their jobs are a factor contributing to inflation
Employers are giving existing employees more merit and other pay increases, to defend against poaching by rivals and avoid the drain of training new workers.
PHOTO: RACHEL WOOLF FOR THE WALL STREET JOURNAL
By Gabriel T. Rubin
and Sarah Chaney Cambon
Jan. 2, 2023 5:30 am ET
Workers who stay put in their jobs are getting their heftiest pay raises in decades, a factor putting pressure on inflation.
Wages for workers who stayed at their jobs were up 5.5% in November from a year earlier, averaged over 12 months, according to the Federal Reserve Bank of Atlanta. That was up from 3.7% annual growth in January 2022 and the highest increase in 25 years of record-keeping.
Faster wage growth is contributing to historically high inflation, as some companies pass along price increases to compensate for their increased labor costs. Prices rose at their fastest pace in 40 years earlier in 2022. Inflation has cooled in recent months but remains high. Federal Reserve officials are closely monitoring wage gains as they consider future interest-rate increases to slow the economy and bring down inflation.
Employees who changed companies, job duties or occupations saw even greater wage gains of 7.7% in November from a year earlier. The prospect that employees might leave for bigger paychecks is a main reason companies are raising wages for existing employees.
Many workers aren’t feeling the pay gains, though. Wages for all private-sector workers declined by 1.9% over the 12 months that ended in November, after accounting for annual inflation of 7.1%, according to the Labor Department.
Workers in sectors such as leisure and hospitality can easily find job openings that might pay more, making it more enticing to switch jobs, said Layla O’Kane, senior economist at Lightcast.
“If I can see that the Burger King down the street is offering $22 an hour, and I’m making $20 an hour at the Dunkin’ Donuts that I work at, then I know very clearly what my opportunity cost is,” she said. “Employers are reacting to that and saying, ‘Well, we’re going to increase wages internally because we don’t want to lose the staff that we’ve already trained.’”
Employee bargaining power has increased as the economy rebounded from the pandemic, likely emboldening some employees to ask for wage increases from their current employers, Ms. O’Kane added.
Alexandria Carter, a billing specialist and accountant at an insurance company in Baltimore, received a promotion and a small pay bump earlier in 2022. After her year-end performance review, she received another 7% pay increase to reward her for her progress, and her bosses told her about their plans for her to keep moving up in the company.
That was a contrast with some previous jobs she has held, where praise and pay raises were less forthcoming.
“They were telling me that I’m excelling in my position, and I just got it,” she said. “To have that recognition and that they notice the work I’ve put in and to be rewarded, it’s just nice.”
There are signs wage gains are beginning to ease as the tight labor market loosens a bit. Average hourly earnings were up 5.1% in November from a year earlier, slowing from a recent peak of 5.6% in March. Many analysts expect wage growth could cool further in coming months.
In industries with high demand for workers, “companies are prepared for wage growth to match inflation,” said Paul McDonald, senior executive director at Robert Half, a professional staffing company. “As inflation comes down, it will be more in line with what wage growth has been.”
The consumer-price index, a measurement of what consumers pay for goods and services, climbed 7.1% in November from a year earlier, down from 7.7% in October. The pace built on a trend of moderating price increases since June’s 9.1% peak.
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One more time for year end highlights, searchable:
https://pjmedia.com/news-and-politics/matt-margolis/2022/10/20/top-democrat-admits-all-of-us-knew-their-partys-policies-would-cause-inflation-n1638723
These policies, this spending, causes inflation.
How could it not? More money. Chasing fewer goods.
Direct quote:
“Well, let me make it very clear. All of us are concerned about these rising costs, and all of us knew this would be the case when we put in place this recovery program. Any time you put more money into the economy, prices tend to rise,” - Rep. James Clyburn (D-S.C.), House Majority Whip, Oct 20, 2022
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Further to the discussion in the out of control spending:
"As Daniel J. Mitchell points out, there is evidence of a displacement cost, as rising government spending displaces private-sector activity and means higher taxes or rising inflation in the future, or both. Higher government spending simply cannot be financed with much larger economic growth because the nature of current spending is precisely to deliver no real economic return. Government is not investing; it is financing mandatory spending with resources of the productive sector. Every dollar that the government spends means one less dollar in the productive sector of the economy and creates a negative multiplier cost."
https://confoundedinterest.net/2022/11/14/keynesian-policies-have-left-high-debt-inflation-and-weak-growth-inflation-remains-near-40-year-highs-and-19-straight-months-of-negative-real-wage-growth/
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"Almost half of young adults are living at home; the highest rate since the Great Depression"
"According to data from the US Census Bureau, nearly half of young Americans between the ages of 18 and 29 are not living on their own but with their parents."
https://www.audacy.com/wwjnewsradio/news/national/almost-half-of-young-adults-are-living-at-home
https://www.census.gov/data/tables/time-series/demo/families/adults.html
But their vote counts same as their parents.
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"groundbreaking" look at the real data not simple census date
the Democrats and many economists point towards
https://www.c-span.org/video/?522780-1/the-myth-american-inequality
I doubt this will be discussed on Chuck snot Todd or George snot Brooke Shields husband or major snob Chris Wallace, PBS , NPR etc
the data evaluation is not useful to crats propaganda
so it is ignored
Krugman will shrug
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So frustrating that quality work like this is solely on the radar screen of serious policy wonks.
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The Economist this week
Highlights from the latest issue
The Economist
Sometimes news charges at you, sometimes it creeps up. Our cover story this week is about news in the creeping category. In the past two years America’s Congress has passed three bills, on infrastructure, semiconductor chips and greenery. They’re complicated and they have misleading names such as the “Inflation Reduction Act”, which isn’t really about inflation (and certainly won’t reduce it). What matters, though, is that these bills will together lead to spending of $2trn on remaking America’s economy.
The idea is that, with government action, America can reindustrialise itself, bolster national security, revive left-behind places, cheer up blue-collar workers and dramatically reduce its carbon emissions all at the same time. It is the country’s most ambitious and dirigiste industrial policy for many decades. In a series of articles beginning this week The Economist will be assessing Joe Biden’s giant bet on transforming America.
The president is taking an epoch-making political gamble by acting on so many fronts. But the only way to build a majority in Congress was to bolt a Democratic desire to act on climate change on to hawkish worries about the threat from China and the need to deal with left-behind places in the American heartland. On its own, each of these concerns is valid. But the political necessity to bind them together has led America into a second-best world. The goals will sometimes conflict, the protectionism will infuriate allies and the subsidies will create inefficiencies.
A giant plan that has so many disparate objectives does not simply succeed or fail. Its full consequences may not become clear for many years. But, as our coverage will show over the coming months, it is sure to change America profoundly
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https://theconservativetreehouse.com/blog/2023/02/14/consumer-price-index-increases-0-5-in-january-6-4-annual-inflation-rate/
Take a look at the compounding loss of value, a dollar today turns into almost nothing in a very short time.
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https://theconservativetreehouse.com/blog/2023/02/14/consumer-price-index-increases-0-5-in-january-6-4-annual-inflation-rate/
Take a look at the compounding loss of value, a dollar today turns into almost nothing in a very short time.
I am so old, I remember when it was temporary!
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I repeat my distinction between monetary inflation and price increases.
Inflation is a monetary phenomenon. As such it means a generalized increase in prices.
Yet what we have here are highly uneven price increases, with food prices increasing far more than other sectors.
There being a world-wide scarcity of food, and food being an absolute necessity, of necessity food prices go up. This is not a monetary phenomenon.
Also see https://scottgrannis.blogspot.com/ especially the Jan 24 entry.
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No Joe, THIS isn't normal. And it's not sign of a recovery. It is sign of policy
and Presidency failure.
Credit card debt spiraling!
https://www.cnn.com/2023/02/16/economy/us-household-debt-fourth-quarter/index.html
Funny (or not funny) that consumers would want more credit card debt while interest rates are spiraling upward.
Real wages have tumbled for two years while the cost of essentials keeps going up.
How is 'four more years' going to ring after two more like this?
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I repeat my distinction between monetary inflation and price increases.
Inflation is a monetary phenomenon. As such it means a generalized increase in prices.
Yet what we have here are highly uneven price increases, with food prices increasing far more than other sectors.
There being a world-wide scarcity of food, and food being an absolute necessity, of necessity food prices go up. This is not a monetary phenomenon.
Also see https://scottgrannis.blogspot.com/ especially the Jan 24 entry.
Right. Yet here are the wrong people imposing more of the wrong policies on us:
https://www.ft.com/content/fba4dd36-eedc-4bec-a63a-113581a21141
Crashing the economy over money doesn't solve too few goods produced, energy, food, tradesmen services etc.
Robert Mundell was right. Only a two prong approach will work, and repealing and repairing laws and policies that hinder production is not within the purview of the Fed.
President Numbnuts needs to pull his head out and smell the coffee
Food and energy in particular, what about ANWR? What about nuclear? It was in the Dem platform. What about pipelines? Fracking on federal lands? How about privatizing federal lands? How about restraints on spending?
Everything about mitigating the damage requires admitting he was wrong and siding with Republicans.
Old Joe isn't capable of it.
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While bachelors in diversity repair or produce nothing.
https://www.thecollegefix.com/high-paying-trade-jobs-left-unfilled-as-college-value-declines/
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https://issuesinsights.com/2023/02/17/the-cbo-exposes-bidens-5-45-trillion-lie/
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https://www.wsj.com/articles/more-auto-payments-are-late-exposing-cracks-in-consumer-credit-3cbc2382?mod=hp_lead_pos5
Worst economy since Obama Biden
https://tippinsights.com/three-quarters-report-suffering-hardship-from-bidenflation-i-i-tipp-poll/
Credit card debt skyrocketing, car loans defaulting, I keep asking my Democrat buddies,
"What do YOU like best about the Biden economy?"
Mutterings of Trump, election denying and Jan 6 don't really answer the question.
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"Mutterings of Trump, election denying and Jan 6 don't really answer the question."
like Bill Maher pointed out
typical lib response when they are confronted with facts showing they are wrong
time to straw man the answer
NEVER an admission of being wrong - never no matter what
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Paul Mirengoff at Substance:
(formerly of powerline)
"The U.S. came out of World War I with massive problems. The economy fell into a deep recession. According to one speaker (or at least my notes), unemployment rose to more than 10 percent, GDP fell by 15 percent, and the Dow Jones average dropped more than 30 percent.
Race relations were terrible. Blacks suffered due to Woodrow Wilson’s rollback of civil rights. Lynching and race riots — usually in the form of whites attacking blacks — were not uncommon.
Revolutionary sentiment, inspired by the the success of the Bolsheviks, was in the air. Labor unrest and work stoppages were the order of the day. And, to top it all off, the country was experiencing a pandemic worse than the one we recently came out of.
The Harding-Coolidge administration addressed the nation’s economic woes by cutting both taxes and spending. It also established the Bureau of the Budget to keep close tabs on federal spending.
Facing resistance from Democrats and progressive Republicans led by Sen. La Follette, the administration was able, initially, to reduce the top tax rate only from the low 70s to a little more than 50 percent. After Coolidge was elected in 1924, Republicans eventually got it down to around 25 percent. But even with the more modest cuts of the Harding years, together with the decrease in federal spending, the economy quickly came out of recession.
The Roaring 20s followed. They roared loudly enough that even with the sharp reductions in taxation, federal tax revenues increased during the decade (and the taxes paid by the bottom 10 percent decreased as a percentage of all taxes paid). Car ownership became the rule not the exception. So did electrification. This was a period of unprecedented prosperity.
The boom of the 1920s ended seven or eight years after it began, which is normal. The stock market underwent a huge correction and panic ensued, which is also normal.
The response of the Hoover administration, and later that of FDR, was exactly the opposite of the Harding-Coolidge response. The government increased taxes, increased spending in the hope of stimulating the economy, and unlike Harding and Coolidge, pressured employers to keep wages high.
We all know the outcome. What might have been a very serious but fairly short-lived recession turned into a depression that plagued America for the better part of a decade.
The Harding-Coolidge era wasn’t just one of prosperity. It was also a time of improved, albeit unsatisfactory, race relations. The two presidents reversed both the tone and some policies of Wilson. Harding pushed for anti-lynching legislation, but racist Democrats blocked this effort."
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(Doug)
Two periods of time. Two different sets of policies. Two different outcomes.
Lower tax rates and lighter government control lead to great prosperity.
And the opposite. Leftist economic policies have lousy results - even when they're enacted by Republicans.
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Jude Wanniski wrote of this very well in his "The Way the World Works".
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https://www.morningstar.com/news/marketwatch/20230224436/worrying-about-the-economy-has-overtaken-covid-as-the-main-driver-of-anxiety-in-america-poll
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Economist Veronique de Rugy
https://reason.com/2022/09/01/the-biden-administration-is-taking-from-the-poor-and-giving-to-the-rich/
The Biden Administration Is Taking From the Poor and Giving to the Rich
From student debt cancellation to green subsidies, the White House is giving handouts paid for by hardworking lower-wage Americans.
VERONIQUE DE RUGY | 9.1.2022 2:30 PM
If you had any doubts that those in power have dropped the pretense of fighting for the working class, you can dispense with them after President Joe Biden administration's latest concessions to the laptop class. From student loan forgiveness to subsidies for people who drive pricey electric cars and profitable semiconductor company CEOs, this administration is working hard to shower its friends with handouts paid for by hardworking lower-wage Americans.
We learned of the most outrageous handout of them all, of course, when Biden announced that he will—unilaterally, mind you, and for no apparent reason that I can see—extend the pause on student loan payments until the end of the year and forgive up to $10,000 for those persons making less than $125,000 a year. This generosity with other people's money extends up to $20,000 for Pell Grant recipients.
As David Stockman, a former director of the Congressional Office of Management and Budget, reported recently, "Only 37% of Americans have a 4-year college degree, only 13% have graduate degrees and just 3% have a PhD or similar professional degree. Yet a full 56% of student loan debt is held by people who went to grad school and 20% is owed by the tiny 3% sliver with PhDs."
Picture two young married lawyers who together earn just under $250,000 and are on their way to making even more money in the future. They will be able to collect from Uncle Joe a nice bonus of $40,000, taken from the pockets of the many people who didn't go to college—perhaps because they did not want to take on debt—and from those who have responsibly already paid back their debt.
It's no wonder that so many left-leaning economists and policy wonks have loudly criticized this so-called student loan forgiveness. The Washington Post, for instance, editorialized that the decision is "regressive," "expensive" and "likely inflationary," nullifying "nearly a decade's worth of deficit reduction from the Inflation Reduction Act."
Meanwhile, Jason Furman, who headed former President Barack Obama's Council of Economic Advisers, napalmed the plan in a brutal Twitter thread. He explained that, thanks to Biden's move, interest rates would have to rise by an additional 50 to 75 basis points to counteract the added inflationary effect. Furman made clear that he regards this outcome as remarkably unfair and regressive.
Then there's the Inflation Reduction Act's gusher of green subsidies, many of which disproportionately benefit wealthier Americans. Take the extension of the tax credit of up to $7,500 for the purchase of new electric vehicles. For those buying used EVs, the tax credit is now $4,000, little consolation for people who can't afford the luxury of buying electric cars, which remain much pricier than their gasoline-powered alternatives. The bill hopes to address this issue by making expensive EV cars ineligible for the credit, but it counteracts this provision with a requirement that only cars assembled in the United States are eligible.
To underscore how disconnected policymakers are from average Americans, the vehicle credits are limited to those making less than $150,000 annually (single filing) and $300,000 (joint filing), presumably to avoid criticism for subsidizing the rich. That still leaves about 93 percent of individuals or 97 percent of households able to seize the subsidy. And given that it's mainly been taxpayers with annual incomes over $100,000 using the credit in the past, this subsidy will mostly still serve a swath of fairly well-off people.
But politicians are not just showering higher-income individuals with subsidies; they do the same for companies. A quick look at the semiconductor subsidies in the CHIPS Act reveals that the well-publicized $52 billion giveaway will benefit well-connected and rich companies.
We could go on and on with more examples, such as Democrats' incessant demand to restore remarkably regressive state and local tax ("SALT") deductions to their pre-2017 heights. The only persons who will gain are high-income earners—and their big-spending elected officials—in high-tax blue states. They lost parts of these deductions when the Trump tax cuts were implemented, and they want them back.
If you're surprised by any of this, you haven't been paying attention to Democrats' recent record. Few are even pretending to be the party of anyone other than the privileged laptop class.
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At some point these failures are going to give Marxism a bad name.
(We might want to defeat it here!)
https://www.americanthinker.com/blog/2023/03/south_africa_is_in_freefall.html
From the article:
"As a predicate to this post, it’s important to note that, since 1994, when the all-white government finally ended, all South Africa’s presidents have come from the African National Congress, a communist front group. It’s also important to note that South Africa, although in chaotic fashion, has been bowing down before “green colonialism.” As I use it, that phrase means that economically fragile countries destroy their energy infrastructure to suit the climate delusions coming from affluent western nations."
(Doug). They didn't have to replace apartheid racism with Marxism. There were plenty of better models out there. Economic freedom, for example.
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At some point these failures are going to give Marxism a bad name.
(We might want to defeat it here!)
https://www.americanthinker.com/blog/2023/03/south_africa_is_in_freefall.html
From the article:
"As a predicate to this post, it’s important to note that, since 1994, when the all-white government finally ended, all South Africa’s presidents have come from the African National Congress, a communist front group. It’s also important to note that South Africa, although in chaotic fashion, has been bowing down before “green colonialism.” As I use it, that phrase means that economically fragile countries destroy their energy infrastructure to suit the climate delusions coming from affluent western nations."
(Doug). They didn't have to replace apartheid racism with Marxism. There were plenty of better models out there. Economic freedom, for example.
They should follow what African country's model?
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The best real world economies at the time they could have modeled were:
Hong Kong, New Zealand, Singapore, US, Switzerland, UK, Ireland, Canada, Australia, Japan and Netherlands.
As a practical matter, they could have kept the South African economic system while extending all rights whites had to blacks.
But no. They chose poverty, anti-freedom and failure - like we are doing here, now.
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https://www.theepochtimes.com/the-economic-upheaval-has-just-begun_5105225.html?utm_source=Opinion&src_src=Opinion&utm_campaign=opinion-2023-03-08&src_cmp=opinion-2023-03-08&utm_medium=email&est=qd3li39Jqynfh3ixSyueXtuPcQVgNzCFtQAg4HkOKNitkF4foAzhQdSQ71QxkZTKc70S
A “Help Wanted” sign is displayed at a restaurant in Arlington Heights, Ill., on Jan. 30, 2023. (Nam Y. Huh/AP Photo)
Jeffrey A. Tucker
By Jeffrey A. Tucker
March 7, 2023Updated: March 8, 2023
biggersmaller Print
This weekend, a good man who owns a landscaping business came up to the microphone during a question-and-answer period following my speech at an event. He posed a simple but sincere question. He has endless demand for his services. He has all the capital he needs. He has a thriving business with a bright future. How come he can’t get workers to actually do the work? Why is this happening?
My answer was correct, if probably too abstract. The labor markets are a mess. Vast millions are in professions to which they don’t belong. They were drawn there by capital that flowed to sectors to which it shouldn’t have. This began in 2008 with zero-interest-rate policies, which massively subsidized capital-goods-producing industries and boosted speculation in information and professional technological sectors.
Other sectors in the overall structure of production were gradually starved of both capital and labor. That greatly upset the time balance of production, pushing the focus of investors toward laptop jobs and away from hands-on work in the consumer-goods industries. The imbalance worsened as time went on but became wildly unstable during pandemic lockdowns.
Here was a period of zero interest rates plus aggressive money printing that exceeded $6 trillion in 18 months. At this point, the two classic casualties of loose money—malinvestment and monetary depreciation—colluded. Facebook (Meta), Google (Alphabet), Microsoft, Amazon, and all their associated downstream partners blew up to an unsustainable size.
The labor problem was exacerbated by controls on migration such that normal workers became hard to come by; meanwhile, millions flooded across the Southern border.
While last year and this year we started to see some rebalancing, we are nowhere near complete with this process. The companies that ballooned in size during lockdowns aren’t back where they were in 2019. The firings so far amount to a small fraction of what needs to happen to draw workers from the right side to the left side of the yield curve. That’s to say, workers need to move from do-nothing Zoom jobs in unprofitable professional ventures toward where they are desperately needed, in services and hospitality.
This signals a gigantic cultural change. An entire generation has been raised with skewed expectations about economic life. They don’t need skills. They only need a ticket to get into the door of a high-end firm and the rest takes care of itself. That’s already starting to change. Full-time employment is now leaving information tech and entering into real work in sectors focused on consumer services.
Why is it taking so long? Simply put, this amounts to a perceived downgrading of social status for millions of people. They shouldn’t care, but they do. For 15 years, they’ve been fed a steady diet of social media baloney in which status and influence are the desiderata of life itself. They know no other way. The idea of cooking, cleaning, bartending, serving tables, taking orders, doing data entry, and working in customer support is anathema; lawn care is out of the question.
As a result of these persistent imbalances, we have very strange dislocations everywhere in sight. In my neck of the woods, there are excellent restaurants with plenty of capital and customers. Their weekends are booked up even before they open. But they can’t open on Monday through Wednesday. They can’t find workers!
This isn’t normal. Labor is supposed to operate like capital, flowing to the highest-valued uses. Wages should reflect that, too. No one has to operate the economy like a machine to make this happen. The signaling systems of the market are an ongoing process that’s always pushing out inefficiencies and discoordination in favor of efficiency and coordination.
But one of those signals is the interest rate. It isn’t just a payment from lenders to borrowers. It’s a mechanism directing capital to its highest-valued uses. Without external intervention, a low interest rate should signal a buildup of savings resulting from deferred consumption and growing prosperity. That serves as a signal to invest in products that are more long term: paying returns only years down the line.
This is how the interest rate operates as an allocator not only of capital but also time. A central bank that games the system with low lending rates essentially forces savings into existence that aren’t actually there. This results in unsustainable capital-sector ventures that thrive only temporarily at the expense of consumer-goods sectors.
This scenario you can find in any industry tutorial on economics and finance, but there are many unknowns in practice. One unknown is for how long can an artificial boom persist before resources run out and the boom turns to bust? One year? Five years? We’ve just lived through the longest boom in modern history, likely dating all the way back to the turn of the millennium when central banks massively ramped up the use of their powers for political purposes.
During this whole time, we’ve mostly had low and non-painful rates of inflation. It all seemed to work, until it suddenly stopped working. That was in January 2021. Since then, we’ve experienced about a 16 percent depreciation of the dollar (in terms of its purchasing power of goods and services). This affects savings, salaries, and wages, meaning a relentless trend toward great impoverishment.
Inflation works like taxes. It’s a transfer from the public to the authorities. Even worse, as the policy has changed and interest rates have risen, federal expenditures on debt payments are rising ever higher, putting an even greater burden on taxpayers.
January’s inflation numbers looked awful across the board, confirming what many of us suspected last year. It’s embedded and not temporary. To root it out requires that the Federal Reserve continue on its present course of ever-higher rates. This is following the largest and fastest increases on record over two years. Still more is necessary to reach that terminal rate. After all, remember that they began at zero! There are few signs that the Fed will back off and call it a day, and many think that it will keep at it for the better part of a year.
Household finance is in a terrible mess. The gap between credit card debt and personal savings has never been this vast. And debt services rates are rising, too, headed toward 20 percent.
The implications of this for the labor sector could be monumental, the shock of a generation. My friend who asked the question is going to continue having a hard time getting hands on deck for a long time. But eventually, the rebalancing has to occur. We’ve lived through many years of wild illusions about what’s possible. Post-pandemic realities are hitting very hard and they are nowhere near done with us yet.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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A couple of weeks ago I quoted some comments from Thomas Hoenig, a former president of the Kansas City Fed. They date from a few years ago:
“An entire economic system. Around a zero rate. Not only in the U.S. but globally. It’s massive. Now, think of the adjustment process to a new equilibrium at a higher rate. Do you think it’s costless? Do you think that no one will suffer? Do you think there won’t be winners and losers? No way. You have taken your economy and your economic system, and you’ve moved it to an artificially low zero rate. You’ve had people making investments on that basis, people not making investments on that basis, people speculating in new activities, people speculating on derivatives around that, and now you’re going to adjust it back? Well, good luck. It isn’t going to be costless.”
Mispricing money comes with consequences. And the longer that money is mispriced the more uncomfortable those consequences will be. We are now seeing what look to be the early stages of a long, painful period of readjustment.
This is contributing to the tough times now facing commercial real estate (specifically office buildings) a sector that, if things really go south, will be faced with consequences ranging from unknown unknowns, known unknowns, to known knowns. Few of the repercussions will be agreeable, as banks, non-banks, a number of major cities, and who knows who else are likely to discover.
Making matters worse is (or will be) the effect of Covid-19 — and the catastrophic response to it
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https://nitter.net/KimDotcom/status/1533524778610348032#m
Sure looks grim.
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https://www.theepochtimes.com/recession-odds-rise-to-highest-in-40-years-fed_5263247.html?utm_source=Goodevening&src_src=Goodevening&utm_campaign=gv-2023-05-13&src_cmp=gv-2023-05-13&utm_medium=email&est=U18KCbbleaBQoTy95CfO7FkISTuS8R6OkQIAXS8Zs1osZH%2BoccWwE4cbfGWYTV0u8ljg
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https://www.zerohedge.com/markets/battered-inflation-90-million-americans-struggle-paying-bills-credit-card-usage-spikes
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Veronique de Rugy, Reason.com
Senior research fellow at the Mercatus Center at George Mason University.
https://reason.com/2023/07/13/bidenomics-is-nothing-new/
'Bidenomics' Is Nothing New
It's a familiar program. And it will result in higher prices, slower growth, and fewer jobs.
VERONIQUE DE RUGY | 7.13.2023 11:00
Politics is sometimes little more than marketing. As evidence, behold the sudden use of the term "Bidenomics" by Democrats to describe administration policies of the past few years. Indeed, what's being branded as "new" is nothing but the same old program of big spending, big regulations, and big cronyism. The only difference is that it's on a much bigger scale.
The administration will need all the marketing it can get to sell these ideas, especially to a public that's been giving it approval ratings in the thirties. But no marketing effort should distract us from the economic realities of the past two years.
Begin with Bidenomics' hallmark: record spending. The president likes to claim he's cut the deficit, but his allies in a unified Democratic congress have enacted $5 trillion in new spending over the decade. In an old-fashioned move, they have put most of it on Uncle Sam's credit card rather than engaging in the politically unpopular move of paying with new taxes and spending offsets. As a result, annual budget deficits will grow over the next 10 years to around $3 trillion. For perspective, remember that just before the pandemic, the annual deficit was around $1 trillion.
This is no partisan argument. Looking at the spending trajectories under different presidents and Congresses, one realizes that this has been going on for a long time. Each administration and Congress irresponsibly outspends its predecessors, and each kicks the can down the road for future generations to deal with. This includes Republican presidents like Donald Trump and George W. Bush. Yet, this president took it to another level with an over-the-top embrace of the fiscal irresponsibility of the $2 trillion American Rescue Plan, which turned modest post-pandemic inflation into a 40-year inflation record.
If Bidenomics is about building up the middle class—as the president claims—it isn't cutting it. Since 2021, real wages have fallen every month. Unsurprisingly, the fight against inflation has raised interest rates and mortgage rates, putting pressure on millions of household budgets.
And while Bidenomics has allegedly created some 13.4 million new jobs, this number should be taken with a grain of salt. Most are what David Stockman, one of former President Ronald Reagan's budget directors, calls "born again jobs." That's because they aren't actually new—they are simply the product of reopening the economy after the terrible COVID-19 lockdowns. Many of the remaining jobs were created by the same inflationary infusion of cash that overheated the economy. This is nothing to brag about.
While few people (other than rabid ideologues) deny that most of the inflation surge was created by Biden and Congress' extravagant spending, some of it was the result of a continued comfort with constraining the available supply of goods and services. Take, for instance, the administration's early support for COVID-19 lockdowns and mandates coupled with its refusal to remove the Trump-era tariffs that were helping to keep prices elevated.
Further contributing to high prices is Biden's reversal of Trump's productive regulatory reforms and imposition of additional regulations. These include new environmental standards along with additional restrictions on the supply of energy and health care.
A Hoover Institution study of Bidenomics looked at the impact of taxes, regulations, and spending. The authors found that "in the long run, Biden's full agenda would reduce full time equivalent employment per person by 3 percent, the capital stock per person by about 15 percent, real GDP per capita by more than 8 percent, and real consumption per household by 7 percent." Meanwhile, the failure to reform immigration and address the crisis at the border deprives the labor market and employers of the additional workers they need to produce more.
There is one area, however, where Bidenomics has been extremely successful: favoritism. The administration's industrial policy has aggressively subsidized preferred industries such as semiconductors and electric cars, sheltered special interests from the accountability of consumers through mandates and bans, and boosted the fortunes of its union friends. Most of this took place under the cover of reviving the manufacturing sector and making long-term investments in sectors vital to our national well-being—and, of course, competing with China. As The Wall Street Journal's Andy Kessler noted, "All that's missing from his 'new Washington consensus' is Soviet-style Five Year Plans."
Bidenomics will make a few fat cats happy, but the result will be higher prices, slower growth, and fewer jobs. The rest of us will be left with a sour taste in our mouths, slimmer pocketbooks, and heightened worries for the future.
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(Doug) Blue city, blue state, blue nation, what could go wrong? The more we spend, the worse it gets. They don't know how to govern and we don't seem to know how to beat them.
BTW, bookmark "confoundedinterest.net", Anthony B. Sanders, economist.
https://confoundedinterest.net/2023/07/13/bidenomics-nationwide-spike-in-family-homelessness-up-37-6-yoy-nyc-homeless-rate-up-66-4-yoy-chicago-up-82-2/
Berkeley Research Group
Anthony B. Sanders is Distinguished Professor of Real Estate Finance in the School of Business at George Mason University.
He has previously taught at the University of Chicago (Graduate School of Business) and The Ohio State University (Fisher College of Business). He served as director and head of Asset-backed and Mortgage-backed Securities Research at Deutsche Bank in New York City.
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I can't find it now but heard [Democrat] Jamie Dimon
on the Economist interview pointed out we can't keep spending and chasing with interest rate hikes
sooner or later the dominoes will crash....
or something to the effect
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Buy one for yourself and one for your favorite Democrat. The book is persuasive. The point is prescient.
Her main point is similar to mine. We've been here before and what we are doing now is not the answer to it. Keynes is dead. You don't cure inflation with recession. Money supply is half of it, easing the constraints on production, starting with energy, regulations and taxes make up the other essential part of it.
As one group's message says, unleash prosperity now!
https://www.wsj.com/articles/carter-biden-2024-presidential-election-primary-trump-inflation-war-ukraine-russia-regulation-agency-c79b9a04
Carter, Biden and American Malaise
A combination of domestic morass and bumbling leadership ties two presidents together across the decades.
By Kimberley A. Strassel
July 14, 2023 5:26 pm ET
Jimmy Carter lost the 1980 general election by a landslide to Ronald Reagan, so it's difficult to understand why Joe Biden continues to follow the Carter 'malaise' playbook today (07/15/22). Bettman via Getty Images/Shutterstock Composite: Mark Kelly
When Jimmy Carter ran for president, the first U.S. senator to endorse him was Delaware’s Joe Biden. Mr. Carter later wrote in his White House diary that the first-term Democrat had been his “most effective supporter during the 1976 campaign.” In 2021 Mr. Biden was the first president since Mr. Carter left office 40 years earlier to visit him in Plains, Ga. “Those guys love each other,” a former Biden aide told Maureen Dowd of the New York Times.
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Industrial production down, why wouldn't it be, we do everything we can to stomp it out.
https://confoundedinterest.net/2023/07/18/the-feds-minsky-moment-even-top-1-of-net-worth-is-lower-with-fed-tightening-us-industrial-production-yoy-goes-negative/
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"Industrial production down"
What happened to build back better ?
What about all that supposed investment in our industrial base ?
How can this be ?
Billions and billions later ? (down the sewer)
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Trillions later.
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Rose colored glasses?
https://www.theatlantic.com/ideas/archive/2023/07/us-economy-labor-market-inflation-housing/674790/?utm_source=msn
Excerpt below follows description of how great 1999 was and precedes admission of how people hate the Democrat made inflation disease:
Author is wife of Ezra Klein.
Note that much of the gains were in the Trump years. Biden's pathetic rebound has taken until now to get back to those pre pandemic levels, with all the trillions wasted in the process.
Annie M. Lowrey, The Atlantic:
"I’m here to tell you that this is the best economy ever. Really. This year’s economy has now outpaced that of 1999, the previous best on record. It is growing more equitably than it has in years. American families are more financially secure and wealthier than they ever have been. Things are going great, I swear.
The labor market is flourishing, and not just for rich folks for once. The unemployment rate is at its lowest level in 60 years—jobs are more plentiful than they have been in a generation. Competition for workers has not only pushed earnings up—median household income is sitting near its brand-new high, one that is $6,000 higher than it was in the late 1990s. It has also pushed earnings up more for the lowest-paid workers than the highest-paid workers. The past three years have erased a quarter of the run-up in wage inequality created in the past four decades. Real wages for the lowest-paid workers are growing faster than they have since the 1960s. The country’s wage structure is getting more equal, not less.
Arindrajit Dube, a labor economist studying this “unexpected” phenomenon, told me that the country’s “job ladder” had broken about 20 years ago: Workers in crappy jobs found themselves stuck in those crappy jobs, unable to move up. “Starting around 2018 or 2019, you start to see the tight labor market bring back some health and dynamism,” he told me. “People are making more changes. The Great Resignation, the Great Reshuffle, whatever you want to call it—it means the market is working better. And it’s allowing people to leave jobs that are really bad.” As a result, workers report feeling more satisfied with their jobs now than at any point since the 1980s, and 4 million more people have full-time jobs (and 1.6 million fewer people have part-time jobs) than before the pandemic.
Improvements in earnings, along with the stimulus payments the government made during the pandemic, have helped lift millions of families out of poverty. The child-poverty rate has fallen from 12.5 percent to just 5.2 percent over the past three years. That’s the lowest level ever recorded. The share of people living in deep poverty and near-poverty has declined, too, and food insecurity is at its lowest-ever rate.
Bigger paychecks are helping middle-class families buy houses and build wealth. The homeownership rate was increasing faster than it ever had, until interest rates spiked a year ago; families in the lower half of the income distribution are more likely to own their homes now than at any point since the real-estate bubble burst in 2006. Most Millennials own property; the generation is starting to catch up with Gen Xers and Boomers in terms of net worth and household formation.
The economy has also delivered extraordinary gains for Black Americans. The jobless rate for Black workers is near a historic low, and the gap between the unemployment rate for white workers and Black workers is the smallest it has ever been. Black workers’ earnings are increasing rapidly too.
Measured in all sorts of more esoteric ways, American families are doing the best they ever have. The delinquency rate on loans is the lowest it has ever been. Real disposable income is the highest it has ever been. The personal-bankruptcy rate is at an all-time low."
(Doug) Then she gets to inflation, but never mentions highest wrong direction numbers in history, which completely blows her 1999 comparison.
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"The economy has also delivered extraordinary gains for Black Americans. The jobless rate for Black workers is near a historic low, "
was not THE lowest under Trump ?
(not mentioned )
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which I would rephrase as "returning to the historically low rates achieved under Trump"-- with the difference being that under Trump real wages were increasing and under Biden they are decreasing.
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US Labor Market Challenges
Some states have experienced better outcomes than others.
By: Geopolitical Futures
America's Labor Shortage
(click to enlarge)
The U.S. labor market is still adjusting to the realities of the global economy. Currently, there are 75 workers per 100 available jobs. Early retirements, family care responsibilities, decreased immigration and a mismatch of skill sets (Narc: !!!) have all contributed to a deficit of workers in the country. Despite the presumption that the "Great Resignation" has run its course, quitting rates remain high, particularly in the hospitality, retail and business services sectors.
Some states have experienced better outcomes than others. Rural areas across the Great Plains, parts of the Rocky Mountains and the extreme northeast face the most severe worker shortages. Interestingly, New York, Nevada and California stand out as exceptions to the worker shortage trend, as they actually have a labor surplus. Job creation has also been uneven. Georgia, Colorado, New Mexico and Nevada saw the most significant increase in job openings. Their job openings rose by 70 percent or more from February 2020 to June 2023, while the national average for that period was 41 percent.
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CBO projects 2023 (real) growth at 0.1%.
https://www.cbo.gov/publication/58957#:~:text=For%202023%20as%20a%20whole,to%20declines%20in%20interest%20rates.
This is dated February 2023. Reported growth has been around 2% this year, half what it should be IMHO.
Price increases / inflation is the curve ball, and the different ways of measuring that.
The V shaped recovery coming of COVID ended with the change of administration..
Those who argue things are fine or better have 3 things in common, they are invested politically in the status quo, they don't work so-called blue collar jobs and they don't mention skyrocketing credit card debt:
https://thehill.com/business/personal-finance/4023009-americans-owe-1-trillion-in-credit-card-debt/#:~:text=The%20nation's%20credit%20card%20debt,at%20the%20end%20of%202022.
NO ONE runs up high interest unpaid credit card debt by choice.
Wrong direction leads right direction polling 65-25.
https://www.realclearpolitics.com/epolls/other/direction_of_country-902.html
Safe to say those 25% likely know better.
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Credit to Crafty for pointing out there is a distinction difference between price increases and inflation. It all gets blurred, even when the experts talk. In this case, especially and intentionally when the experts talk.
https://www.breitbart.com/clips/2023/08/10/deputy-treasury-secy-weve-seen-prices-come-down-inflation-keeps-coming-down/
A Biden Treasury official says prices are coming down and inflation is coming down. Complete, deceptive nonsense.
Egg prices, for example, went from something like $2 to $4, now down to $1. That has to do with the market price mechanism adjusting for variations in supply and demand. If the price doubled or quadrupled during "9% inflation", that wasn't inflation, that was (mostly) a price change.
Gas price increases eased during the massive release from the strategic petroleum reserve, now going upward again in the face of our reserve being depleted and domestic production still being blocked. That is the price mechanism working, but also inflationary in the sense of fewer goods relative to the money supply as we block energy and other production.
Inflation is more dollars chasing fewer goods and services in relative terms. Inflation is a rate of change measure which by definition is calculus. In what other way do ordinary people speak in terms of calculus? To the consumer, we see price increases; we don't see total money supply or total value of goods and services. Even the best economists can't measure these things accurately, just see relative indicators moving up or down.
The official says "prices are down and inflation is down", but "inflation down" means PRICES ARE STILL GOING UP AT AN UNACCEPTABLE RATE. The 5% is ON TOP OF the 9% increase. It's not a 4% decrease or a 40% decrease, it's added on, cumulative and compounding. It's not calculus, it's arithmetic. You don't need calculus or even junior high math to see it and feel it.
Real wages are down (4% nationwide) because the cost of living has risen faster than income. That's a lot of people losing a lot of money to bad policies, squeezed to use credit card debt and make early 401k withdrawals to make ends meet. That's a very bad sign! They can't 'downsize' because small houses and small apartments have gone sky high too. The real world results of these policies are hurting a lot of people in very real ways.
Deceptive use of terms and statistics doesn't make any of that go away. Shame on them.
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2% inflation (and compounding) is criminal (figuratively), though it is the law of the land. Isn't it unconstitutional, an intentional violation of: "the validity of the public debt of the United States, authorized in law. ...
shall not be questioned”? Intentionally devaluing the debt is honoring the validity of our debts? How so?
When you start with 2% inflation and double and triple that, almost any descriptor is not an overstatement, incompetent, immoral, unconstitutional, stupid, mass thievery * , etc.
* 'Thievery, the action of stealing another person's property'... On a scale of trillions and trillions and trillions over decades and decades! (And then they tax you on the increase!)
It would be nice (nation saving) if a leader / politician would explain this and offer a true and credible alternative in a way that captured the common sense of the majority of the people.
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Everyone Is Forgetting About GROWTH
Everyone outside the White House is worried about the national debt, which is expected to accelerate from 100% of GDP today to nearly 200% over the next 30 years. But the standard forecast from the Congressional Budget Office is predicated on the assumption of 1.7% annual economic growth. But that’s way below the 3.2% average real growth rate of the U.S. economy from 1950-2005.
To borrow a phrase from JFK, when he was running for president in 1960: “We can do bettah.”
So what if we set a national priority to do everything humanly possible to make the economy grow at between 3 and 3.5%, not the anemic rate of growth CBO predicts?
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https://hotair.com/karen-townsend/2023/08/11/bidenomics-food-prices-went-up-4-9-in-july-n570505
Since when do food prices go up in July?
Climate change? No. Higher CO2 content, more moisture in the air, longer growing season, these things add up to more food production, not less.
What then could be the reason?
Most obvious answer is that the production of food requires energy, lots of fossil fuels. Even the production of corn for ethanol fuel requires massive use of fossil fuel energy. The war on energy is a war on food production, and a war on the consumer, seen not only in your gas and electric bills.
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"Since when do food prices go up in July?"
Could the end of the Russian-Uke grain deal have a role here?
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Too bad John Maynard Keynes died in 1946. Maybe he would like to comment on Bidenomics.
In a time of alleged full employment we are spending 40% more than we take in. But with a near zero growth rate, what what would we do to stimulate the economy, spend more?
Brain dead thinking. Literally.
https://en.m.wikipedia.org/wiki/Keynesian_economics
Joe Biden: "we're going to grow this economy from the bottom up and the middle out."
Please name one economist who knows what the f*** he is talking about.
You're not growing the economy. You're implementing every policy you can think of to stop economic growth.
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1. I notice that US media has ignored the expansion of the BRICS group. Study the countries who got added and why. Looks like the global south wants to join, which means Africa, Latin America and many others. Global geopolitics and geoeconomics is changing. Unfortunately, Biden speeded up the process, by sanctioning Russia, particularly their bank reserves.
2. Very little coverage in the media, on India being the first to land on the South Pole of the Moon, along with a moon rover.
https://www.youtube.com/shorts/hDQuKfWMrpo (https://www.youtube.com/shorts/hDQuKfWMrpo)
(https://pbs.twimg.com/media/F4TK7ClWQAAwug7?format=webp&name=small)
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Yes, this is a deep trend that deserves our attention!
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Even Ethiopia is speaking out.. The US better get its act together. Biden has been a failure. A multipolar world is in its early stages. Things change slowly, then suddenly.
https://twitter.com/jcokechukwu/status/1695327296381440205
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I'm not able to follow the logic of BRICS. I get it that the US has been an unreliable (or absent) ally to India, that Latin American countries have reason to distrust the US, that African and Asian countries have a history of exploitation by Western Europe. There are plenty of reasons to cherish their independence and sovereignty, and I prefer the world to be made up of local, consensual governments, not some form of one world government run by misguided western elites.
That said, to be drawn to Russia and China instead is insane, IMHO. What independence (or prosperity) do the little states around Russia and China have?
Quoting the head of Eritrea regarding US, NATO, Russia, Ukraine,
"These suffocating and malicious policies are embellished by high-sounding phrases in order to claim the moral high ground.
I know it's more complicated than big country invaded small country, but isn't Putin (a BRICS leader) the one invading Ukraine, claiming moral high ground, using the supply of food and gas as a weapon?
I don't see Poland, Finland, Lithuania similarly flocking to the Russia versus the NATO, western Europe umbrella. And how are the China Belt and Road recipients doing? (And the Xinjiang Uyghurs?)
US under the Biden regime runs our economy (and foreign policy) irresponsibly, risking the investments of those who tie to the dollar, and the trust of those who rely on us. And that makes you turn to countries like Brazil. Argentina, Iran (and Russia, China) for safety and stability? US can (theoretically) be turned around in one or two election cycles. How do you do that in Russia or China?
Sorry, I just don't get it.
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Some coverage here:
https://www.nytimes.com/2023/08/23/world/asia/brics-nations-new-members-expansion.html
BRICS Summit
What to Know
New Members Announced
Xi’s Pitch in Africa
Putin Tries to Rally Support
Global Interest Piqued
What to Know About the 6 Nations Invited to Join BRICS
Iran was the surprise among the countries invited to join the bloc of emerging economies. Saudi Arabia, the United Arab Emirates, Egypt, Argentina and Ethiopia were also tapped.
President Luiz Inácio Lula da Silva of Brazil, President Xi Jinping of China, President Cyril Ramaphosa of South Africa, Prime Minister Narendra Modi of India and Foreign Minister Sergey V. Lavrov of Russia sit at white and wood desks on a stage. Countries’ flags stand on either side of the stage, and a blue and white banner in the background reads “XV BRICS Summit.”
From left, President Luiz Inácio Lula da Silva of Brazil, President Xi Jinping of China, President Cyril Ramaphosa of South Africa, Prime Minister Narendra Modi of India and Foreign Minister Sergey V. Lavrov of Russia at the BRICS conference in Johannesburg on Thursday.Credit...Gianluigi Guercia/Agence France-Presse — Getty Images
By Farnaz Fassihi, Vivian Yee, Natalie Alcoba and Declan Walsh
With reporting from Cairo, Buenos Aires, New York, Jakarta and Johannesburg
Published Aug. 23, 2023
Updated Aug. 25, 2023
The five-nation group of emerging economies known as BRICS, which views itself as a counterweight to the West, has invited six more countries to join — most of them from the Middle East — during its summit in Johannesburg this week.
The choices by the current members — Brazil, Russia, India, China and South Africa — contained a few surprises, the biggest being the addition of Iran, which joined three other Middle Eastern states: Saudi Arabia, the United Arab Emirates and Egypt. Argentina and Ethiopia rounded out the half-dozen nations tapped for inclusion, while Indonesia, which was thought to be among the top candidates for admission, did not make the cut.
The expansion was a victory for China’s leader, Xi Jinping, who strongly backed the rapid addition of new members. But Prime Minister Narendra Modi of India was said to be concerned about adding nations close to Beijing; India and China have border disputes and tend to consider each other potential adversaries.
Here is a look at some of the new BRICS members.
Iran
Iran, which holds the world’s second-largest gas reserves and a quarter of the oil reserves in the Middle East, sought membership in BRICS to strengthen its economic and political ties with non-Western powers.
For the past few years, Iran has forged a deepening security and military partnership with Russia and bolstered its economic ties to China. The invitation to join BRICS was viewed by many as a reward.
Iran’s addition will almost undoubtedly increase geopolitical tensions with the West, which could make other current members of the bloc, like India, uncomfortable.
Iran’s economy, ranked the 22nd-largest in the world in 2022, has been plagued by inflation, slow growth and economic sanctions from the United States. But the country has stayed afloat by selling discounted oil to China, among other maneuvers. It has also diversified its economy away from oil and increased trade with BRICS members.
Image
Oil and gas infrastructure in southern Iran. Home to the world’s second-largest gas reserves, Iran is looking to strengthen its ties with non-Western powers.Credit...Solmaz Daryani for The New York Times
Mohammad Jamshidi, Iran’s vice president for politics, called the invitation to join BRICS a “historic achievement and a strategic victory.”
Saudi Arabia
The inclusion of Saudi Arabia and the United Arab Emirates, the Persian Gulf’s two biggest political and financial heavyweights and two of the world’s largest energy suppliers, is likely to give the bloc added heft in its quest to challenge the U.S.-dominated world order.
Both countries are longtime American allies who rely on the United States to protect them in a volatile region. But at the same time, both have chafed at the partnership in recent years, increasingly going their own way on issues like oil production, the war in Ukraine and their relationships with Iran and Syria — countries the United States would prefer to keep isolated.
Image
Prince Faisal bin Farhan, Saudi Arabia’s foreign minister, at a meeting during the BRICS meeting in Johannesburg on Thursday.Credit...Pool photo by Marco Longari
Speaking at the BRICS summit in South Africa on Thursday, the Saudi foreign minister, Prince Faisal bin Farhan, said his country and the BRICS members shared a strong belief in “respecting the independence and sovereignty of states, and not interfering in their affairs.”
Saudi Arabia sees joining the bloc as another step in its efforts to balance out its traditional partnerships with the United States and Europe with its largest trading partners in the East, China and India.
The Saudi foreign minister indicated that his country had not yet decided on whether to join BRICS. He said it appreciated the invitation but was waiting for more details from the group on the nature of membership.
“Based on that and after our internal deliberations, we will make the appropriate decision,” he told the local news media on Thursday.
United Arab Emirates
The Emirates, like Saudi Arabia, has sought a bigger leadership role in the Middle East in recent years, even when that meant diverging from American interests.
Despite counting on American security guarantees, the Emirati ruler, Sheikh Mohammed bin Zayed Al Nahyan, has cozied up to both Russia and China. He visited Russia twice over the past year to meet with its president, Vladimir V. Putin, and agreed to have the Emirati Air Force train with China’s this month.
Economically, too, the Emirates has thrived on non-Western relationships. The glitzy city-state of Dubai is flush with Russian money, oil and gold that found a home there after Western sanctions hit Russia following its invasion of Ukraine. Its trade with India and China has flourished.
Image
Dubai became a haven for Russians and Russian money after Western sanctions hit the country following the invasion of Ukraine.Credit...Andrea DiCenzo for The New York Times
The country still gets most of its weaponry from the United States, and analysts say it is not about to abandon the United States’ security umbrella anytime soon.
But officials have expressed frustration with what they see as the United States’ failure to protect the Persian Gulf from threats from Iran, which gulf countries believe has launched attacks on both the Emirates and its close partner, Saudi Arabia, in recent years. And they are skeptical that the American leadership is truly committed to the Middle East.
Those concerns were factors in the Emirati and Saudi decisions to reach separate détentes with Iran, their longtime regional nemesis, making it possible for the first time in years for all three countries to belong to the same bloc.
Argentina
Argentina has the third-largest economy in Latin America, after Brazil and Mexico. Its backers in BRICS include India; Brazil, its largest trading partner; and China, with which it has increasingly close financial ties.
President Alberto Fernández of Argentina said in a recorded address on Thursday that entrance into BRICS represented an economic opportunity for his country, which is mired in one of its worst financial crises in decades, with annual inflation surpassing 100 percent.
Image
A market in Buenos Aires. Annual inflation in Argentina has surpassed 100 percent.Credit...Luis Robayo/Agence France-Presse — Getty Images
Gabriel Merino, an international relations expert based in Buenos Aires, said admission into BRICS would reinforce important markets for Argentina and open new ones. It will also provide new financing avenues once the country gains admission into the BRICS’s New Development Bank.
Egypt
Egypt is one of the top recipients of American aid, but it has long maintained a strong relationship with Russia and has growing trade ties with China.
Its interest in weaning itself off American dependence strengthened over the last year and a half, as Egypt learned just how troublesome relying on the dollar can be. Russia’s invasion of Ukraine touched off a foreign currency crisis and then put the Egyptian economy in a tailspin.
Investors pulled billions of dollars out of Egypt in a panic, and crucial wheat and fuel imports, bought with dollars, soared in price. Some imports became scarce and prices rose.
The dollar shortage also made it harder for the country to repay its debts and forced it to devalue its currency steeply, worsening the pain for ordinary Egyptians.
Inside BRICS, Egypt could trade in local currency. It also hopes to attract more investment from member countries.
Ethiopia
Not long ago, Ethiopia was the rising star of Africa — one of the world’s fastest-growing economies, led by Abiy Ahmed, a dynamic young leader who had won a Nobel Peace Prize.
But two years of civil war in the Tigray region ruined most of that. The economy tanked, the United States cut trade privileges and suspended food aid to Ethiopia, and Mr. Abiy has struggled to hold together a volatile nation.
Although the Tigray conflict ended last November, Mr. Abiy’s forces have begun a new fight with powerful militias in another region.
Image
Prime Minister Abiy Ahmed of Ethiopia in 2019. A connection to other BRICS nations would potentially help the country rebuild after its civil war.Credit...Finbarr O'Reilly for The New York Times
For Mr. Abiy, BRICS offers an opportunity to move further from the American orbit. He is already closely allied to the Emirates, which provided crucial military support during the Tigray war.
And economically, Mr. Abiy needs foreign help to bolster Ethiopia’s flagging currency and to seek new investments: This week, his finance minister, Ahmed Shide, estimated it would cost $20 billion to rebuild from the Tigray war alone.
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My glib answer is that in one sense it is a specious bluff for negotiating leverage with the West. More thoughtfully I would say it is also a search for lateral connections to lessen dependence on the West.
Here is Zeihan:
https://www.youtube.com/watch?v=7tG7hh-Vx2A&fbclid=IwAR3YshBMpTnpgsgniPVMrSA9Ycb7curmV6tVtblemuN78FTfELDB-Jcjh0Y
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https://unherd.com/thepost/americas-blue-states-are-faring-worst-under-joe-biden/
What does stagflation do for Dem core voter enthusiasm?
Don't worry, the mules will cast your vote if you don't?
Biden regime uses red state successes to get their national economic numbers up to near zero growth.
It sets the stage for a DeSantis-Newsom debate.
What are the odds Newsom backs out?
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https://www.nationalreview.com/2023/09/chinas-economic-crisis-wont-be-contained-to-china/
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Defaults haven't been this high since ... Obama was president.
https://nypost.com/2023/09/04/credit-card-and-car-loan-defaults-hit-10-year-high-as-inflation-squeezes-families/
If only some forum on the internet could have warned us not to enact the stupid, counterproductive policies...
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This is from Steve Moore et al, CTUP. They want to pin Biden withe the tag, poverty President, but the blame goes all the way up and down the Democrat Party in their anti-economic policies.
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Unleash Prosperity Hotline
Issue #855
09/13/2023
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1) Biden Is The Poverty President
It’s almost laughable that just two weeks ago Biden was using his weird whisper to boast about the secret of Bidenomics: “It’s working.”
For whom, exactly?
Not poor people. The poverty measure soared in the new report for every measurable group. Old people. Blacks. Hispanics. Whites. Children. Single mothers. The child poverty rate more than doubled.
As the chart shows, this is a complete and tragic reversal from the Trump years when poverty fell to its lowest level EVER recorded.
And Bidenomics has surely not worked for middle-income Americans. Median household income has fallen by nearly $3,000 since Trump came into office.
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Biggest drop in real income since the previous Obama Biden administration, 2010.
The financial crisis was 2008. Why did income fall two years later?
COVID crisis was 2020. Why did incomes fall two years later.
Find out what's causing that and stop doing it.
Instead, what will be their campaign slogan, stay the course, more of the same, give the great Marxist policies more time to work?
Good grief we are collectively stupid choosing the policies of decline.
As an aside, every illegal border crosser coming in with reported, taxable income under 75k(?), and there have been tens of millions of them, brings down the median income in the country. I wonder if any of Joe's treasonous, anti-American advisers told him that would happen, and that his name and Presidency would be synonymous with American decline.
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The surge of migrants hurts low-income Americans.
- Says Eric Adams, Democrat Mayor of NYC
https://nypost.com/2023/09/17/eric-adams-says-migrant-crisis-is-going-to-hurt-low-income-new-yorkers/
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10-year Treasury just hit a 16-year high of 4.5%
Source: US Department of the Treasury.
Besides the inexcusable, negligent deficits of the current budget years piling up more trillions of debt, the interest costs of servicing that debt on each dollar just tripled. Not exaggerating, triple the interest cost on 33 trillion.
I never wanted to be a deficit hawk but what does it take to get people's attention on this? Run deficits like this, massive debt, overspend by trillions year after year only getting worse, spend 40% more than what's coming in, every minute, every day, something's got to give? No. Everything's got to give.
Our chance of balancing the budget just got more than 3 times harder and it was impossible before.
All of us knew". - Jim Clyburn D-SC
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NBC News poll shows GOP with largest-ever lead on the economy.
nbcnews.com
https://www.nbcnews.com/meet-the-press/first-read/nbc-news-poll-shows-gop-largest-ever-lead-economy-rcna117330
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Why America Has a Long-Term Labor Crisis, in Six Charts
While the hot pandemic-era job market is cooling, it is set to remain tight for years
U.S. population by age and gender in 2000, 2010 and 2020
Animated chart showing U.S. population by age and gender, highlighting Baby Boomers aging out of the workforce.
MALE
FEMALE
100+
Baby boomers
90
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60
AGE
50
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30
20
10
0
3
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1
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MILLIONS
Note: Generational age defined by the Census Bureau
Source: Census Bureau
By Lauren WeberFollow
and Alana PipeFollow
Sept. 25, 2023 5:30 am ET
The U.S. economy has been running, improbably, with an unemployment rate under 4% for nearly two years.
That isn’t just a holdover from pandemic bottlenecks, when employers let millions of people go and then struggled to find workers when demand roared back, economists and business leaders say. It is a storm that has been brewing for decades, flaring up most recently in the form of labor fights at automakers and airlines. Labor shortages are turning into a long-term labor crisis that could push wages and turnover higher.
Work experts have warned for years that the combination of baby boomer retirements, low birthrates, shifting immigration policies and changing worker preferences is leaving U.S. employers with too few workers to fill job openings. While the labor market is softening, none of those factors are expected to change dramatically in the coming years.
RECESSION
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%
“It is a talent supply chain and you have to think about it that way, except in this case, talent has a choice,” said Teresa Carroll, chief executive of Magnit, a firm that manages temp, contract and freelance workers for companies. Workers are choosing arrangements such as part-time, flexible or remote work, prompting employers to adapt to fill roles.
Total employment will grow about 0.3% a year until 2032, the Labor Department recently projected, much slower than the 1.2% rate over the past decade, largely because of population constraints. That will contribute to slower growth in gross domestic product, the agency said.
The baby boomers were the largest generation of Americans, with 76 million children born between 1946 and 1964. They currently range in age from 58 to 77. By the end of 2028, even the youngest living baby boomers will have reached the average retirement age of approximately 64.
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1960
'70
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2000
0
5
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The next largest generation, millennials, numbered 62 million births in the U.S. from 1981 to 1996, per the Pew Research Center, but has grown because of immigration.
Baby boomers, who had been on a steady trend of working more years, pulled back during the pandemic. Many retired and haven’t returned.
The U.S. birthrate—the number of births per 1,000 people—has been falling for decades, declining by about half since the 1960s.
The share of people living in the U.S. who are in the labor force peaked at 67.3% in the first three months of 2000, when the oldest baby boomers were 54 years old and the youngest were 35. It helped that the U.S. was in the midst of an economic expansion, the first dot-com boom.
RECESSION
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Participation hasn’t fully recovered from pandemic-era losses, though there have been signs of growth for prime-age workers—those between ages 25 and 54. The overall participation rate is expected to drop to 60.4% in 2032, according to the Labor Department, mainly because of baby boomer retirements.
Wages reflect supply and demand. They shot up during the pandemic recovery and have recently outpaced inflation, which gives workers more spending power. Long-term labor shortages could lead to a faster pace of wage growth for the foreseeable future.
John Fish, chairman and CEO of construction contractor Suffolk, said an aging workforce and fewer young people entering the industry are a combustible combination. “A carpenter now is making 20% to 25% more than they did 24 months ago, and that is not sustainable.”
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RECESSION
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$35
Filling the void
Labor shortages can be eased by funneling more people into the labor force or making the current workforce more productive. That can be done through immigration; outsourcing more work overseas; tapping underutilized labor pools such as people with disabilities and the formerly incarcerated; and improving productivity through automation, training and refining business and production processes.
Companies and countries have three options when it comes to managing a shortfall of workers, said Magnit’s Carroll. “They can plan for it, they can do nothing, or they can have hope. And to me, hope is not a strategy.”
As a general rule, an economy is able to grow about as quickly as its workforce expands, plus any gains in how productive the workforce is. Productivity is difficult to measure, and in the past few years, the numbers have been muddled by shocks from the pandemic. Overall, productivity growth has been mostly lackluster, rising about 1.4% a year over the past decade.
Generative AI tools such as ChatGPT could help, but the technology is too new to know exactly where large language models can be reliably applied in business or work settings.
2010
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Offshoring, the scourge of the U.S. manufacturing workforce in the last decades of the 20th century, has lost favor with some business leaders after the pandemic highlighted the vulnerabilities of a global supply chain. Reshoring—bringing manufacturing back to the U.S.—is gathering momentum, backed by billions of dollars in government subsidies.
That leaves immigration. After falling during the pandemic because of Covid-related policies, immigration has come back strongly. But it remains a divisive issue, and business leaders say the lack of a coherent, stable policy is contributing to the labor problem.
“If we don’t solve this with a thoughtful immigration program, we’re going to drive wage rates through the roof in the next two to three years because of the systemic shortfall of labor at the end of the day,” Fish said.
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While some economists are optimistic as hiring booms, employees are actually working fewer hours. Usually, reducing working hours has been a reliable sign of incoming layoffs – and a possible recession. WSJ explains what it may mean moving forward. Illustration: Ryan Trefes
Write to Lauren Weber at Lauren.Weber@wsj.com and Alana Pipe at alana.pipe@wsj.com
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https://westernrifleshooters.us/wp-content/uploads/2023/09/Screenshot_20230929-131249_Chrome-691x1536.jpg
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https://archive.org/details/CNBC_20230929_130000_Squawk_on_the_Street
"We are on a sustainable fiscal path'
Biden economic adviser.
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On Friday’s broadcast of CNBC’s “Squawk on the Street,” White House National Economic Council Director Lael Brainard asserted that we’re “on a sustainable fiscal path” due to the deal brokered between Congress and the White House on spending a few months ago and defended the spending on legislation passed by the Biden administration.
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(Doug). We are spending 40% more than we take in.
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"We are on a sustainable fiscal path'
me:
and the border is closed!
and racism , lynching , is rampant!
blacks and jews and gays are being slaughtered in the streets (by whites), hung from trees etc!
The Republican party is the party of the rich !
no problem with China!
people can be boys or girls or in between or neither at will!
Republicans are a danger to Democracy!
No proof Biden did anything wrong!
Application requirements for Feinstein's Senate seat - you must be Black and have a vagina !
There is no deep state!
I could go on, as we all can think of even more lies to add .
At least Jimmy Carter was honest!
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https://www.theepochtimes.com/opinion/please-stop-telling-us-everything-is-fine-with-the-economy-it-is-not-5503128?utm_source=partner&utm_campaign=ZeroHedge
Please Stop Telling Us Everything Is Fine With the Economy; It Is Not
By Salena Zito. 10/3/2023
ERIE, Pennsylvania—Two weeks ago, Nobel Prize-winning economist Paul Krugman told CNN anchor Christiane Amanpour there is a peculiar disconnect between how the economy is doing and how the public is feeling about it.
Ms. Amanpour pressed him on why people weren’t understanding that they are living in a “sunny economy.” He had asserted that “the economy’s rebound has been surreally good,” yet people keep saying it is terrible.
Mr. Krugman pointed to surveys and even some people’s behavior, noting robust discretionary spending on travel with hotels and restaurants, and was perplexed as to why people, as if all people were traveling, thought there was a problem.
“We don’t really understand why this is happening ... (but) there is a real profound disconnect going on,” Mr. Krugman said.
A few days earlier, “The View” co-host Joy Behar was strident in her assertion that everything was fine for all in our economy: “The economy is booming, inflation is down, the stock market is doing well, people are having an easier time putting bread on the table, etc.
[President Joe Biden] doesn’t seem to be getting the credit for that.”
She then asked whether people think because President Biden is old that the economy is bad.
Huh? People think the economy is bad because they are paying, at least here in western Pennsylvania, $3.99 a gallon for gas, and in places such as Arizona, where the state now ranks seventh among the nation’s highest-paying markets, $4.69; last week alone it climbed by 14 cents a gallon. In Nevada, it jumped by a whopping 33 cents a gallon, with California coming in at a 29-cents-a-gallon jump.
When gas prices rise, food prices rise. Has Mr. Krugman or Ms. Behar bought milk lately? A staple in almost every family’s home is now well over a dollar more a gallon than it was in 2021, with the average price at $4.31 per gallon for conventional whole milk, $4.26 per gallon for conventional reduced-fat 2 percent milk, $4.86 per half-gallon organic whole milk, and $4.86 per half-gallon organic reduced-fat 2 percent milk.
And that is just one food staple. The USDA said this week that on top of the already escalated costs, all food prices are predicted soon to increase by another 5.8 percent, with a prediction interval of 5.4 percent to 6.2 percent.
And food-away-from-home prices are predicted to increase by 7.1 percent, with a prediction interval of 6.9 percent to 7.4 percent.
Ardell Martin, a retiree who lives on a fixed income, said her trips to the grocery store, a thing she used to enjoy, now fill her with dread.
“Everything has gone up, and gone up a lot,” she said. “What irks me is that people keep telling us that everything is fine. Well, everything is not fine. When your income doesn’t change but the costs of basics keep going, your ability to find what you need shrinks because you cannot afford it.”
Interviews with a number of voters across the political and economic spectrum find them frustrated by the Biden administration not understanding that by the administration’s measure, the economy is doing well, but for them, it is not.
They are even more incensed when an economist or a Hollywood figure scolds them for not feeling good about something that has not trickled down to them. This week’s Reuters/Ipsos poll showed that the economy remained the public’s top concern, with 23 percent of respondents selecting it as “the most important problem facing the U.S. today.”
U.S. inflation rates have been historically high during President Biden’s term, prompting central bankers to raise interest rates in a bid to
tame prices. President Biden’s pitch saying “Bidenomics is about the future” and “Bidenomics is just another way of saying ‘restore the American Dream’ because it worked before” still isn’t resonating with voters, even ones who voted for him.
Ms. Martin said she is frustrated by President Biden and everyone else telling her everything is OK: “He needs to walk in our shoes before telling us something is working.[/list]
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"Nobel Prize-winning economist Paul Krugman told CNN anchor Christiane Amanpour "
:roll: :roll: :roll:
two massive snobs in a pod....
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https://www.reviewjournal.com/opinion/editorials/editorial-when-you-pay-people-not-to-work-guess-what-2920714/
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https://www.reviewjournal.com/opinion/editorials/editorial-when-you-pay-people-not-to-work-guess-what-2920714/
They want $.99 from me to relay what Captain Obvious said. Am I correct to assume, Doug, paying people to be unproductive leads to unproduction?
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Krugman states if you are homeless, and don't eat or drive inflation is all but over:
https://nypost.com/2023/10/13/ny-times-columnist-paul-krugman-mocked-for-saying-inflation-is-over/
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https://tippinsights.com/18-charts-provide-a-360-degree-view-of-bidens-lowest-approval-rating-in-office/
Coming into Obama's re-election I would tease Dem friends with, is it his economic policies or his foreign policies you like best, all in sarcasm, both were in ruins. And then he won.
That said, all indicators point to a disaster for the incumbent and incumbent party - unless R's somehow screw it up.
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massive accumulation of debt,
raising taxes,
growing government bureaucracy at an unprecedented rate,
increasing government regulations,
tampering with free enterprise,
opening our borders, and
crushing the middle class to finance the expansion of the ultra-wealthy and freeloader classes.
https://www.americanthinker.com/articles/2023/10/i_am_all_for_calling_joes_policies_bidenomics.html
Call it out and run against it. In every race. In every state. And nationwide. The whole world should run against this.
Why do people think this election is just more of the same? It's not. We know more now than ever before about what they want and where it leads.
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"That said, all indicators point to a disaster for the incumbent and incumbent party - unless R's somehow screw it up."
taken from other thread :
""If you're about to lose power and your people are mass wyou for your corruption, just start a war and everyone will forget about it immediately and still unify behind you. Oldest trick in the book."
that is why Biden wagged the tail in Israel ! :evil:
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Biden didn't start this war, but:
his weakness was certainly a factor, and
we don't see Americans taking any responsibility for the intelligence failures in all the hotspots.
His military focus was on gender bs while the world sets ablaze.
Yes, this is economics. Look at the costs.
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Crafty posted earlier this year:
"A couple of weeks ago I quoted some comments from Thomas Hoenig, a former president of the Kansas City Fed. They date from a few years ago:
“An entire economic system. Around a zero rate. Not only in the U.S. but globally. It’s massive. Now, think of the adjustment process to a new equilibrium at a higher rate. Do you think it’s costless? Do you think that no one will suffer? Do you think there won’t be winners and losers? No way. You have taken your economy and your economic system, and you’ve moved it to an artificially low zero rate. You’ve had people making investments on that basis, people not making investments on that basis, people speculating in new activities, people speculating on derivatives around that, and now you’re going to adjust it back? Well, good luck. It isn’t going to be costless.”
Mispricing money comes with consequences. And the longer that money is mispriced the more uncomfortable those consequences will be. We are now seeing what look to be the early stages of a long, painful period of readjustment.
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(Doug). Understatement alert. We don't want zero interest rates and we don't want them so high no one can afford money.
A guy named Keynes wrote of how government needed to make adjustments to compensate for failures of the private sector, or something like that. Good God, would he squirm in his grave if he saw where that led.
And don't tell me fiscal and monetary policy are two different things. It's all interconnected.
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The hidden price of inflation: High costs disrupt life in more ways than we can see
Inflation forces people to invest less, spend time negotiating for raises and devote more energy to coping with rising prices.
Paul Davidson. USA TODAY
High inflation doesn’t just leave you with less money in your wallet and struggling to pay bills. It also imposes long-term costs on society and the economy by forcing consumers to invest less, negotiate wages more frequently and devote time and energy to coping with rapidly rising prices, according to a new paper by the Federal Reserve Bank of Cleveland.
...inflation imposes significant costs on society," the authors argue in the paper, titled “The Long-Run Costs of Higher inflation.”
https://www.usatoday.com/story/money/2023/10/18/hidden-costs-of-inflation/71220144007/
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Rep. Clyburn: "All of us knew..."
(Doug). All of you should be sued for reckless endangerment leading to death of an economy and a nation.
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Laws of the ‘70s are now hamstringing development now, with the enviro crowd pulling said strings and the poorest suffering most:
https://www.cato.org/commentary/environmentalists-attempt-thwart-affordable-housing
I’ll note I have my share of issues w/ Trump, but suspect his battles with this sort of stuff in NY played a role in his abrasiveness et al. And as far as these enviros, judges, and fellow travelers are involved … it must be nice to be so well off you don’t have to worry about benefits and costs.
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Note some of the political connections shown herein:
https://freebeacon.com/democrats/meet-the-major-u-s-philanthropy-financing-an-israeli-designated-terror-group/?utm_source=actengage&utm_campaign=conservative_test&utm_medium=email&fbclid=IwAR24GoN0Z0d3scaaiQvdt5utl6JA7aP38bYX-irhqm2eXKpPAa0IYCgwcF8
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https://apnews.com/article/argentina-election-milei-massa-vote-bullrich-cead0d423f2e51444b48770af618940b
https://www.nationalreview.com/2023/10/its-time-to-dump-the-peso-and-dollarize-argentina/
There is still a runoff, but
250% inflation and people still vote for more of the same.
Decline is a choice. In this case, staying in decline is a choice.
It's hard to believe there are economic policies worse than ours - all over the world.
The idea that it can't happen here is ludicrous
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Scott Grannis will be bummed.
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https://confoundedinterest.net/2023/10/25/about-bidens-claims-about-job-creation-trump-actually-created-more-full-time-jobs-10-8-million-in-8-months-than-biden-has-9-1-million-in-almost-3-years/
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I will first point out I am not good in economics
but my logic
GDP was reportedly above expectations a few days ago
Due to increase in consumer spending
but would this not be due to prices going up so of course consumer spending is up
debt is also going up to buttress consumer spending
perhaps this analysis if for economics for "dummies"
but it seems like a logical connecting the dots
bottom line we are in deep doodoo.
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What do you mean, not good at economics, you got it exactly right! We are in deep doo doo.
I believe Crafty (correctly) argued in the past for higher interest rates because of the distortion in the market toward debt and away from savings. But these mistakes have consequences. Now with all the excess spending and the inflation (and higher interest rates) it caused, the savings rate is collapsing right while the interest rates are rising. The savings rate is collapsing while credit card debt is exploding because people can't afford to live you in these circumstances.
https://confoundedinterest.net/2023/10/27/bidenomics-at-work-savings-rate-plunges-as-spending-soars-inflation-slows-as-govt-wage-growth-nears-record-high-commercial-office-delinquencie-on-the-rise-san-francisco-soars-to-30-4-in-q3/
The average interest rate on credit card debt in the United States is 21% right now. How are people going to ever get out from under that debt?
https://money.usnews.com/credit-cards/articles/what-is-apr-understanding-credit-card-interest-rates#:~:text=According%20to%20the%20Federal%20Reserve,be%20lower%20than%20the%20average.
What have they done locally to address the High Cost of Living? Added 1% to the sales tax ( that's a double digit increase) for the metropolitan area here to help finance the light rail boondoggle overruns that no one wants and no one rides.
https://www.cbsnews.com/minnesota/news/1-sales-tax-increase-in-metro-area-goes-into-effect-sunday/
At the height of the high interest rates I pulled money out of the market and into insured savings. Now instead of adding to my savings I made a significant withdrawal to cover escalating costs and the outrageous property taxes that include properties I leave vacant for other bad tax and regulatory reasons.
Bad economic policies lead to bad business decisions.
Free(r) market policies allow assets to move freely to their most productive use. We've gotten so far away from that that no one knows how to turn back.
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Consumer spending is up? GDP is up? But meanwhile credit card debt is up, real wages are down, savings rate is negative.
I guess that is the success of Bidenomics. But Bidenomics is wrong and supply-side economics is right, in my experience looking at this. Anyone can see this trend is unsustainable.
What we want is production up, new business starts up, savings rate up , business investment up, new home starts up. workforce participation rate up, number of people needing assistance down.
Everything that the ruling party is doing for us right now is exactly wrong, and inflation, stagnation, growing dependency , unsustainability are the consequences.
More working age males don't work and aren't looking for work than ever in our nation's history. Why is that.
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"GDP was reportedly above expectations a few days ago
Due to increase in consumer spending"
IIRC Kudlow said GDP growth was 1/3 due to increase in inventory.
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GDP rises: Third-quarter GDP numbers released by the U.S. Bureau of Economic Analysis on Thursday came in higher than the expected 4.3%, rising to 4.9%. While that number looks like an indication of strong economic growth, the economy is not entirely healthy. Job Creators President Alfredo Ortiz called the number a "mirage created by unprecedented deficit spending." Ron DeSantis also weighed in: "Today's GDP numbers are reflective of the wider Biden economy — inflated. Much of last quarter's growth was driven by unsustainable government spending and monetary policy. In reality, consumer confidence is falling, inflation is still nearly double the average of the last 30 years, our oil reserves are at a 40-year low, auto loan delinquencies and credit card debt are near all-time highs, and more Americans are forced to take on multiple jobs to cover basic expenses. Bidenflation is killing the average American's bottom line, and things will only get worse in the months ahead as credit dries up and gas prices increase even further because of Biden's anti-energy policies."
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Excellent response by DeSantis.
Strong GDP growth is what we want, but this isn't right and everyone knows it.
Just like the unemployment percentage tells us nothing now, we will need a GDP measure for private sector only. Public sector growth is not a good thing.
If everything was truly going swimmingly, wouldn't we need smaller government checks written to fewer and fewer people?
That is apparently not the case. More and more people rely on the government for more and more things. Oops, that was the plan.
On this path, pretty soon nearly everyone will be riding on the wagon and no one pulling it. Everyone eating from the trough, no one filling it.
Too bad we don't have real debates among the major players.
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https://themessenger.com/business/consumer-confidence-october-conference-board-economy-recession
I didn't know there was further to dip. I just heard Kamala say things are great and Joe doesn't get enough credit.
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https://www.marketwatch.com/story/u-s-fiscal-deficit-a-more-serious-problem-than-ever-before-says-larry-summers-055d8cbc
and worse Janet Yellen and Jerome Powell still in charge
no shame , no responsibility , no accountability.
what's new.
reminds me of Dodd and Franken.............
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https://healthy-skeptic.com/2023/11/03/ooops-the-labor-statistics-mirages-comes-to-a-crashing-halt/
How do you have downward revisions of past months, fine print, of 62,000 jobs? Somebody counted wrong? And why is the benchmark "expectations"?
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" why is the benchmark "expectations"?"
Because that is what markets reflect until the moment the report(s) come out.
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Bidenomics, the honeymoon is over.
Instapundit: Rape usually doesn't come with a honeymoon.
https://redstate.com/bonchie/2023/11/05/the-press-turn-on-bidenomics-n2165927
(Doug). I'm tired of hearing that Joe Biden is old. These policies are old.
Who on the Democrat side is going to run against them?
Policies have consequences. You can't be this stupid for this long and not pay a high price for it.
There is no easy way out of this but rule one for being in a hole is stop digging.
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From Doug's article above:
"Bidenomics"...lol
Some staffer actually thought, "Hey, let's just name all these price increases and high-interest rates after the president." Brilliant job
Great point. I thought this too.
This might do well making this point part of the campaign
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The team we can't seem to beat:
Commercial Real Estate Time Bomb: Occupancy Falls, Delinquencies Rise
https://themessenger.com/business/commercial-real-estate-prices-could-sharply-fall-feds-lisa-cook-warns
WeWork's Bankruptcy Will Make the Office Vacancy Problem Worse
https://www.cnn.com/2023/11/07/business/wework-bankruptcy-offices-real-estate/index.html
Credit Card Balances Spiked in Q3 Amid Signs of Financial Stress
https://www.cnn.com/2023/11/07/economy/household-debt-credit-card-delinquencies-q3/index.html
It isn't that the crowd can't shoot straight. They aim for failure and hit nothing but bullseye.
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Biden campaign official says one term not enough to fix financial woes
https://www.foxnews.com/politics/biden-campaign-cites-maga-extremism-for-job-woes-argues-president-needs-another-term-for-improvements
Umm, it was 12 years for this group and they aren't trying to fix anything. Aren't they trying to tear it down - America as we once knew it.
They couldn't be more clear, make America great again is what they fight hardest against - more so than Islamic Jihad, the southern border invasion, Chinese totalitarianism or anything else.
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Jay Cost at Washington Examiner below.
(Doug). They are selling us the second derivative to an electorate that won't do basic arithmetic. The rate of change to the rate of change of prices is falling (slightly from record highs). Translated to English this means cost of living is still rising at the fastest rate in memory, still rising faster than incomes.
https://www.washingtonexaminer.com/news/campaigns/beating-biden-democrats-panic
"... why people remain frustrated. The inflation rate is not like the unemployment rate. When the unemployment rate decreases, that means a smaller percentage of workers are without jobs. When the inflation rate decreases, it does not mean prices have fallen, only that their rate of increase has slowed. Prices for goods and services are still rising, just not as quickly as they were a year ago. It must be remembered that the lower increases are coming off the backs of large jumps in prices, so it makes sense that consumers would still be reeling. Moreover, the sharp increase in interest rates has made it harder to get the credit needed to buy a car or a home — little wonder why young voters, those looking to start out in life, are so unhappy with Biden."
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there is some talk the dollar is doomed to devalue a lot. And Fed knows it, but playing silent.
I don't know enough to comment further.
Anyone else hearing any mumblings about this?
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I underline my point that some prices increases are exactly that-- price increases.
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I underline my point that some prices increases are exactly that-- price increases.
Fair enough and 100% true as stated, but in the context of voter disapproval and political economics, I believe we are talking about the whole mix of prices a person faces for the things they want and need throughout the year.
Some of these are up for monetary reasons, some are up for regulatory reasons, some are up for taxation reasons, some are up for trade policy reasons, and some (or all) fluctuate with market supply and demand conditions. But prices are up.
We can rejoice if eggs that skyrocketed to $4 and $6 per dozen in a supply shortage can now be bought for $1, (while beef stays sky high) but weren't eggs 10 cents per dozen in our grandfather's time?
People can argue about measurement methods for Consumer Price Index and Cost of lLving Adjustments, CPI and COLAs, but no voter can really argue that general price level increases didn't TRIPLE the rate of increase under Joe Biden, Kamala Harris and the Democrats with reckless, runaway spending combined with their all-out assault on production and distribution.
https://www.ssa.gov/oact/cola/colaseries.html
https://www.usinflationcalculator.com/
https://babylonbee.com/news/thousands-already-lined-up-for-black-friday-after-grocery-store-offers-prices-from-when-trump-was-president
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Agreed, but serious policy errors result when price increases from supply issues are called inflation.
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https://www.wsj.com/business/entrepreneurship/with-interest-rates-above-9-small-businesses-slam-the-brakes-4944a075?mod=hp_lead_pos3
WSJ: With Interest Rates Above 9%, Small Businesses Slam the Brakes
(Doug). Credit card interest rates above 24% will very soon catch up with consumers.
(Definition of unsustainable) Economic forecast is not more of the same.
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30 year rates peaked at 5.1% and now are down to , , , 4.7%?
VIX peaked in the low 20s. In the high 13s this morning.
Oil from mid 80s to mid 70s.
Market up.
Why are these things so?
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30 year rates peaked at 5.1% and now are down to , , , 4.7%?
VIX peaked in the low 20s. In the high 13s this morning.
Oil from mid 80s to mid 70s.
Market up.
Why are these things so?
I also saw something about empty oil tankers coming to America to fill for export. Surprises me.
https://www.bloomberg.com/news/articles/2023-11-06/a-record-number-of-supertankers-is-headed-to-collect-us-oil
Please explain VIX (options volatility index) importance to the layman, it's not something I have followed.
Oil price down I assume is from weak demand at home and worldwide. Also the Biden price spikes ironically may have spurred production even in the face of hostile regulations.
I have followed the 10 year Treasures a bit, not the 30, but that aside, 4.7% for re-issuance of debt and for issuance of new debt still means a tripling and more of the cost of debt service going forward, if I understand that correctly. Means the likely year of the next balanced budget is either never or post-collapse.
Market up? With due respect sounds like weather versus climate. Market up from lows but not up from when Biden policies started to take effect. Even then, as I pointed to in Obama sluggish years, Dow, Nasdaq and S&P are all indices of very large companies, and are generally skewed by a few giant ones. Even "small cap stocks" are companies up to $2 billion in value, doesn't tell you how the rest of us are doing.
Here's another 'market', not up, office vacancy rate is well into the double digits in every major city, 34% in once great San Fran for example.
https://www.cbre.com/insights/figures/san-francisco-office-figures-q3-2023#:~:text=The%20San%20Francisco%20office%20market,%2C%20full%2Dservice%20gross%20basis.
It's not just owners that lose their shirt. Cities, banks (and nations?) potentially collapse.
It's not just commercial property, worst housing affordability since Jimmy Carter.
https://www.livenowfox.com/news/home-affordability-worst-in-nearly-40-years-study-real-estate.amp
What happens after things aren't affordable?
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"Please explain VIX (options volatility index) importance to the layman, it's not something I have followed."
As one layman to another, I would describe it as a measure of the market's proclivity to volatility.
"Oil price down I assume is from weak demand at home and worldwide. Also the Biden price spikes ironically may have spurred production even in the face of hostile regulations."
I have seen uncontested assertions by Dems that our oil production is at an all-time high. Not what I expected! I gather that "our" response is that it would be much higher but for Biden's policies.
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Yes, production would be higher and prices would be lower. Hard to prove except to compare with Trump years. There is the oil price, gallon of gas price and natural gas prices. For gas at the pump, it is down recently but seems to me 50% higher than in the Trump years. A helluva tax on the economy affecting all other sectors.
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"new poll by the Financial Times and the University of Michigan finds that 14% of Americans believe they are better off financially now than when Biden took office.
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I like the title of this book that takes various rich folk with savior complexes that conveniently also further line their pockets to task:
https://nypost.com/2023/11/14/news/bill-gates-buying-up-land-threatening-small-farms-under-guise-of-saving-planet-author-claims/?utm_source=twitter&utm_medium=social&utm_campaign=nypost&fbclid=IwAR1OiinuFMF4Doi7_iVGinon9DJ1YPl6SBrEh1IWiy7yDnkbFJWU-UdcXaM
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yup
tell all the peasants how to live and all the while scheme to profit from their agendas the whole time.
OTOH Gates does give a lot away for good causes so it is a mixed bag for him.
Buffett gave his money to Gates to give away.
I am not clear they are using to bribe Democrats directly though, like Soros or Zuckerberg but many of their agendas correlate with the DNC
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Controligarchs”
« Reply #2379 on: November 15, 2023, 09:38:37 PM »
QuoteModifyRemoveSplit Topic
I like the title of this book that takes various rich folk with savior complexes that conveniently also further line their pockets to task:
====================
I like this A LOT and will be playing it forward in my articulations.
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https://issuesinsights.com/2023/11/17/two-words-describe-bidens-presidency-reckless-endangerment/
Government net interest payments – up 77% from a year ago and up 153% from two years ago.
The Treasury projects that gross interest payments will top $1 trillion this fiscal year.
For four months in a row – and 27 out of the past 31 months – worker wages failed to keep pace with Bidenflation. As a result, real wages today are more than 3% below when Biden took office. That, combined with rising interest rates, is costing the average family $7,400 a year, according to economist E.J. Antoni.
Also this week, the Customs and Border Protection agency reported that more than 300,000 migrants entered the U.S. illegally in October, the most ever for that month. There were also 13 arrests of people on the terror watchlist last month. Remember, none of these numbers includes “got-aways” – those who purposely avoided “encounters” with border patrol agents.
A congressional report came out putting an annual price tag on this flood of illegals – $451 billion!
(Doug) Interest payments (far) more than doubled in two years! Real wages are still down! The flood across our southern border is costing us a half trillion a year! Why are we roughly even in the polls? Can't we get candidates with clear messages?
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Why allow failure to ebb and flow over time when politicians pretending to be protecting our interests can cause things to crash and burn catastrophically?
https://www.samizdata.net/2023/11/samizdata-quote-of-the-day-a-further-exploration-of-ponzi-economics/
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40% of all personal income tax pays only interest on the debt debt from prior excess spending.
https://confoundedinterest.net/2023/11/22/fiscal-inferno-40-of-personal-income-taxes-going-towards-interest-on-staggering-national-debt-unfunded-entitlements-now-6-27-times-the-current-debt-level-of-33-75-trillion/
Where have we heard a variation of this?
Missing in that data is that this is only getting worse.
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84% of likely voters say Bidenomics has hurt them.
My question, who are these other 16%, they live underground in Hamas like tunnels and haven't come up yet to replenish supplies? They are from the pro-inflation wing of the Democrat Party? Good that they're out there so we have someone to run against.
https://www.washingtonexaminer.com/news/washington-secrets/trump-lead-grows-as-84-say-bidenomics-hurting-them
We were searching for 60-40 issues that favor us and suddenly we see one of several elephants in the room, this one an 84-16 issue jumps to front and center.
But once they realize it's the wasteful spending stupid and it needs to stop, the wasteful spending people are going to scream bloody murder, literally, and the division goes on.
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I do thank Biden however for the label he gave his economic policy himself by putting his name on it:
BIDENOMICS!
what a dumb blunder, one of many. :wink:
https://images.search.yahoo.com/search/images?p=upside+down+head+image&fr=mcafee&type=E210US1494G0&imgurl=https%3A%2F%2Fthumbs.dreamstime.com%2Fz%2Fyoung-girl-head-hanging-upside-down-caucasian-blonde-schoolyard-45173354.jpg#id=25&iurl=https%3A%2F%2Fthumbs.dreamstime.com%2Fz%2Fyoung-girl-head-hanging-upside-down-caucasian-blonde-schoolyard-45173354.jpg&action=click
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We used Bidenomics right away, tying those policies to these results. It started with energy prices going up once the winner was declared, in anticipation of his policies.
When excess spending exploded and led to massive inflation, "all of us knew", you couldn't help but call the disaster Bidenomics.
Then one day the Biden, Yellen, Krugman et Al decided to embrace the term and persuade the unwashed they were wrong, it's really a great economy.
As ccp says, dumb move. But what else could they do?
Pres Clinton triangulated, but that was after two years, not four. Ironically, losing Congress saved his reelection, gave him cover to contain spending and cut capital gains rates.
More spend, tax, regulate for Biden isn't going to bring a better result than the first 3 years of it, and a head fake doesn't seal the border or reverse the 4 Nebraskas he already let in.
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Another Wrong Way to Measure Poverty
The real rate is 2.5%, but the Census Bureau inflates it by excluding most social-welfare benefits.
By Phil Gramm and John Early
Dec. 5, 2023 6:33 pm ET
The credibility of the Census Bureau’s official measure of poverty didn’t survive the pandemic. Though government payments for social benefits rose by $1.5 trillion, or 47%, between 2019 and 2021, they didn’t dent the official poverty rate. The rate rose to 11.6% from 10.5%. President Biden claimed that the pandemic increase in the refundable child tax credit would cut child poverty in half, but the subsequent official census rate rose from 14.4% to 15.3%. These results were predictable because the official poverty measure fails to count 88 social benefits that low-income Americans receive from the government as part of their income, including almost all of the pandemic benefits.
With the official poverty measure discredited, the Biden administration is pushing the experimental Supplemental Poverty Measure, which counts about half of the social benefit payments as income but redefines the income thresholds that determine who is counted as poor in a way that ensures the poverty threshold rises as median income rises. The official poverty measure has hardly changed for more than 50 years, even as social benefit payments to the average household in the bottom 20% of income earners have risen from $9,700 to $45,000 in inflation-adjusted dollars, because most of these payments simply aren’t counted as income to the recipients.
To address the public incredulity and embarrassment arising from its preposterous official measure of poverty, the Census Bureau began highlighting the Supplemental Poverty Measure by publishing it in the same press release along with the official measure. This newer measure, which counts refundable tax credits and other pandemic benefits as income, produced a poverty rate that declined from 11.7% in 2019 to 7.8% in 2021 and the politically desired effect of reducing child poverty from 12.6% to 5.2% over that period.
The fatal flaw of the official poverty measure is that it doesn’t count most government subsidies, such as Treasury checks beneficiaries receive from refundable tax credits, debit cards loaded with food-stamp allowances, and Medicaid payments as income to the recipients. When all benefits are counted, the percentage of Americans living in poverty falls to only 2.5%. Bruce Meyer of the University of Chicago and James Sullivan of the University of Notre Dame arrived at a similar figure by comparing the actual goods and services consumed by poor households in 1980 with the actual level of consumption of households that were being counted as poor in 2017. They found that only 2.8% of households in 2017 were consuming at or below the actual poverty consumption level. These findings also comport with the Census American Housing Survey, which has found that 42% of poor households own homes with an average of three bedrooms, 1½ bathrooms, a garage and a porch or patio. The average poor American family lives in a home larger than the average home of middle-income families in France, Germany and the U.K., and 80% of poor American households have air conditioning.
Although the Supplemental Poverty Measure counts more government benefits as income than the official measure, it defines poverty in relative terms so that it rises as median income rises. The Census Bureau defines the official poverty measure as “the inability to satisfy minimum needs.” By that definition, “the poor are those whose resources—their income from all sources, together with their asset holdings—are inadequate.” The thresholds used in the official measure are the cost of a defined quantity of goods and services required by a specific size and type of family to satisfy its minimum needs. The thresholds have been adjusted for inflation, increasing in current dollars by 776% since 1967, but the definition hasn’t changed.
The Supplemental Poverty Measure defines the poverty threshold in relative terms as the amount of income necessary to purchase 83% of the median family’s consumption of food, apparel, shelter and utilities plus an additional 20% of that total for other smaller necessities. Under this relative definition, no matter how much the median household spends on food, apparel and other necessities and no matter how luxurious those items might be, members of families that don’t have enough income to pay for that percentage of median household consumption will always be counted as poor, no matter how well off they are.
Since its inception in 1999, the supplemental poverty thresholds have risen by 42% more than the official poverty thresholds and about the same amount as median income simply because median households have bought more and higher-quality items in categories defined by the Census Bureau as necessities. Adopting the Supplemental Poverty Measure as the official measure would assure that economic growth that raises the level of income and consumption across the entire economy wouldn’t significantly reduce the poverty rate. It would decline significantly only with additional income redistribution. The American Enterprise Institute’s Kevin Corinth has shown that adopting the supplemental measure as the qualification standard for welfare payments alone would add more than three million households to the welfare rolls and increase federal welfare payments by more than $124 billion over the next 10 years.
When will Congress end this charade and demand that the Census Bureau give the nation an accurate measure of poverty? At what point does bureaucratic and political bias become fraud when it raises government spending by hundreds of billions of dollars and causes millions to leave the workforce?
Mr. Gramm is a former chairman of the Senate Banking Committee and a nonresident senior fellow at the American Enterprise Institute. Mr. Early served twice as assistant commissioner at the Bureau of Labor Statistics and is an adjunct scholar to the Cato Institute. They are co-authors with Robert Ekelund of “The Myth of American Inequality.”
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I used to do this work, respond point by point to people like this,. Now I don't want to give them a click of attention in hopes they will go away.
To paraphrase the start, Paul Krugman is either stupid or dishonest. As a past Nobel winner we can rule out the former.
https://www.americanthinker.com/blog/2023/12/paul_krugman_explains_economics_for_us_hysterical_conservatives.html
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Let me look at the data and find anything somewhere that will kind of support my DNC case
and then ignore everything else:
https://images.search.yahoo.com/search/images;_ylt=AwrNZzKdN39l8EIvtidXNyoA;_ylu=Y29sbwNiZjEEcG9zAzEEdnRpZAMEc2VjA3Nj?p=huge+page+full+of+data+image&fr=mcafee#id=45&iurl=http%3A%2F%2Fwww.expertsystem.com%2Fwp-content%2Fuploads%2F2018%2F05%2FBig-Data-World-Post.jpg&action=click
This will allow the Dems and MSM to use my credentials , "a noble laureate" says the economy is good and we do not understand why so many people do not understand.
They are uninformed and we need to message better.....
me:
WATCH THE DATA for manipulation ! repeat ad nauseum this thought every time anyone talks about the "data"
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A pretty good article on the outlook for the economy. We keep seeing mixed indicators.
Recession yes or no? The forecast is nuanced.
https://www.ft.com/content/5fe28c71-005b-4772-bfc5-08f39d61d88e?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9
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can't see
pay wall
can we move these pay walls to the Southern border :wink:
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There are a lot of mixed indicators out there. From the article:
We tend to think about the economy in binary terms. Recession: yes or no? Will markets be up or down? Will interest rates rise or fall? The answer to the latter question, at least in the US, appears to be “fall,” as the Federal Reserve held rates steady during its meeting last week while hinting that we could see as many as three rate cuts next year. That has, of course, buoyed stock markets, which have gone long on the soft landing story. But economic reality in 2024 is likely to be far less binary, and much more nuanced, than many market participants and policymakers believe.
There are three reasons for this. The first and most obvious is that the pandemic and the policy response to it has made it very difficult to predict where the US and global economy will be based on old models. Employment, wages and other key metrics are refusing to follow historic trends in many places. Second, decoupling and the rise of industrial policy have introduced a new dynamic into fiscal policy and trade relations — one that will continue to play out no matter who wins the US presidential election next year.
And third, there is an ongoing interest rate arbitrage affecting business and consumers that still has years to run. Yes, rates are now far higher than they have been for several decades, and even if we get some cuts in 2024, that will still be the case. But many borrowers locked in cheap financing before inflation hit and rates rose. Those costs will reset over time, not all at once, which means we may see more slow moving, unpredictable disruptions, rather than a single big event.
Take the first issue, namely that of the pandemic and the massive fiscal stimulus that followed. On the one hand, the fact that Covid savings, particularly in the US, have been largely spent down from their peak, coupled with somewhat slower job growth, validates the idea that we could see less inflation and a slightly weaker economy in 2024.
But on the other, as JPMorgan chief executive Jamie Dimon pointed out last month, the push for re-industrialisation and energy security that has followed the pandemic and Russia’s war in Ukraine is inherently inflationary. “I think quantitative easing and tightening and these geopolitical issues can bite,” he said at the New York Times’ DealBook Summit, where he warned that both higher inflation and recession were still possibilities.
Add to this the fact that the pandemic and its responses weren’t synchronised, as monetary and fiscal policy were after, say, the financial crisis of 2008, and you simply have a much more complicated global environment for accurate policymaking. For years, asset classes and geographies moved in lockstep. Now, that’s changing, and will likely change more as central bankers in different regions take different decisions.
Investors are certainly swooning over Fed chair Jay Powell’s recent messaging about rates, but should they? The Dow and the S&P 500, not to mention the Nasdaq, are wildly overvalued by numerous metrics, as we all know.
Furthermore, there are unpredictable political risks looming on the horizon right now, including two hot wars in Ukraine and Gaza, as well as the possibility of more trade and tariff tensions in the year ahead. I wouldn’t be at all surprised, for example, to see difficulties erupt between both the US and China, and Europe and China, around things such as steel, EVs, clean tech or rare earth minerals.
The problem is that all these regions are trying to produce more goods locally right now. Long term, that’s a good thing, because we need more diversified and resilient supply chains, as well as a lot more clean technology at scale. But there’s little doubt that it is inflationary in the short to medium term.
China is desperately trying to expand its own global manufacturing footprint as a way of both hedging against further western decoupling and mitigating the slowdown from its housing crisis. That raises the risk that we will see China flooding global markets with more cheap goods. European Commission President Ursula von der Leyen made it clear at a recent meeting in Beijing that she was concerned about such Chinese product dumping.
We will hear the same in the US in the coming year in advance of the presidential election. In the past, the US and EU might simply have hoovered up low cost Chinese items and let jobs and investment dollars in key sectors go elsewhere. That is no longer a political possibility. If I had to make one firm bet for 2024, it would be that we are about to enter an even thornier global trade environment.
The final reason the year ahead will be difficult to predict is that the shift in interest rates and the ramifications for both consumer and companies won’t be felt all at once. Instead it will become clear over time. As I’ve written in the past, the fact that mortgage rates are now near 8 per cent in the US has not had the predicted impact on housing prices because so many owners locked into lower rates over the past 15 years. There will be a reckoning as those reset. But it will happen over the course of years, possibly at unexpected moments.
The same goes for companies. We were supposed to see massive corporate defaults this year, but we didn’t get the tsunami that was predicted. That’s because many big companies locked in cheap funding before rates began to rise. Maybe they’ll fall again in 2024. But even if that happens, the results won’t be binary.
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As the population grows, everything economic grows... Oops
Except 4600 stores closed in just the last year under Biden:
https://www.cbsnews.com/news/retailers-closed-4600-stores-chains-with-the-most-closures/
'Everything is going swimmingly'
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https://www.nysun.com/article/milei-makes-his-move-a-reverse-new-deal
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https://www.wsj.com/economy/jobs/finding-a-new-job-is-getting-harder-499dcf8e?mod=hp_lead_pos6
Employers finished 2023 with far fewer open positions than at the start of the year, according to private-sector estimates, as businesses filled more jobs and decided not to hire for others.
Total job postings as of the end of 2023 declined more than 15% from a year earlier, according to data from job-listing site Indeed through Dec. 29.
“The era of this frantic labor shortage [is] behind us,” Federal Reserve Chair Jerome Powell said in December. He listed a variety of indicators showing the labor market had come back into balance: numbers of job openings, labor-force participation rates and the rate at which workers are quitting jobs.
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Certainly a biased source, but they do well support their conclusions:
https://nam.org/wp-content/uploads/2023/11/NAM-3731-Crains-Study-R3-V2-FIN.pdf
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Change in credit card debt is a true economic indicator, and the sharp increase lately is due to the results of the Biden/Dem policies, namely the new, high cost of living. Unless you're a federal worker, you didn't keep up with inflation.
At 21-22% interest, you would pay off the credit card statement balance every month if you could, and 49% are not!
https://www.foxbusiness.com/economy/more-americans-are-racking-up-credit-card-debt
That's a LOT of insolvent people out there.
The party that talks sustainability is not talking about this unsustainability in their cherry picked economic points. They say people are still spending but people can't pay when the bill comes due, and that has an ending to it. Think of that next time you hear Obama tell Biden to tell America how great the economy is.
Maybe they see people buried in debt as their target market, iin need of government services, and it's expanding rapidly!
By the way, the whole credit card system is corrupt and inefficient, IMHO.
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Piece noting inflation total during the Biden admin, and points out a semantic trick being used to make continued bad news sound like an improvement:
https://pjmedia.com/catherinesalgado/2024/01/24/prices-up-176-since-joe-biden-took-office-n4925806
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2nd post, which contemplates the commercial real estate vacancies in blue cities, quantitive tightening, the Fed’s interest rate gaming, and their possible impacts on inflation et al. It ain’t a pretty picture:
https://pjmedia.com/vodkapundit/2024/01/24/bidenflation-ii-fiscal-boogaloo-another-sequel-nobody-asked-for-n4925789
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https://www.msn.com/en-us/money/markets/i-would-be-bragging-about-it-too-trump-economic-adviser-admits-biden-economy-is-good/ar-BB1hgPuB?ocid=msedgntp&pc=DCTS&cvid=6daaee9bcd2b450d954c1423a5f2433b&ei=71
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Another one in the same vein, this one from the WSJ:
It mentions govt. spending, but as we have seen here (spending 40% over revenues IIRC?!?) this is a really big fg deal and deserves far more mention.
That said , , ,
===================
America’s Remarkably Resilient Economy
Spending by consumers and governments keeps powering growth. Can it last?
By
The Editorial Board
Follow
Jan. 25, 2024 6:31 pm ET
Thursday’s fourth-quarter GDP report no doubt elated the White House and Federal Reserve. The economy grew at a solid 3.3% clip last quarter and 3.1% over the past year while inflation is now nearing the central bank’s 2% target. The question is whether—and for how long—consumers and government can sustain the expansion.
Maybe the best news in the report is that the personal consumption expenditures (PCE) price index—the Fed’s preferred inflation gauge—rose by only 1.7% in the fourth quarter, down from 2.6% in the third. Excluding food and energy, the PCE rose 3.2% year-over-year. Declining inflation helped lift real disposable personal income by 2.5% in the fourth quarter.
A buoyant labor market and rising real wages (at long last) are also boosting purchasing power while Americans continue to spend down their pandemic savings. Consumer spending continues to drive GDP growth, contributing 1.91 percentage points of the 3.3% in the fourth quarter. Net exports added 0.43 points while government spending chipped in 0.56.
States and localities are blowing through federal pandemic and infrastructure money. Over the last two years, state and local government spending has contributed more than twice as much to GDP than from 2017 to 2021. Increased government spending is partly compensating for a slowdown in business investment.
Non-residential investment contributed a mere 0.26 points to fourth-quarter GDP. Research and development spending has been essentially flat for 18 months. The surprise is that business investment is so weak despite the Administration’s gusher of subsidies.
One explanation could be that the Administration’s regulatory avalanche is magnifying the business uncertainty from Fed tightening and growing geopolitical risks. Its flirtation with a ban on new liquefied natural gas export projects is a case in point. Nearly every day businesses wake up to a new proposed rule.
It’s a testament to America’s economic resilience that the economy keeps chugging despite a regulatory fusillade. President Biden has a growing economy, but can he keep it?
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Still reopening from covid closures, artificially injecting trillions of printed dollars, have millions upon millions coming in across no border, and getting 2% growth. Can it last? No. Are we smart enough to recognize that? Doubt it.
The policies of Venezuela and Argentina here can't have the results they had there because why?
We are the world's reserve currency. We are? The rest of the world can't even trade with each other without using the US$. They can't??
The party of spoken "sustainability" is giving us none.
The party of "put the adults back in charge" is behaving like economic infants.
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The stuff of Statist nightmares:
Samizdata quote of the day – economic dynamism
Samizdata Illuminatus (Arkham, Massachusetts) · Economics, Business & Globalization · Slogans & Quotations
Ah! A testable proposition. So, currently the UK government takes 45% of everything, 45% of all economic effort and GDP.
The US government – at all levels – consumes about 28% of GDP, the Indonesian about 11% (yes, 11%) and Singapore’s some 17% or so.
So it would seem that economic dynamism is indeed associated with less than the UK’s confiscatory tax rates. Even, that fructifying idea has some empirical legs.
As ever, all economics is either footnotes to Adam Smith or wrong.
– Tim Worstall
January 25th, 2024 |
https://www.samizdata.net/2024/01/samizdata-quote-of-the-day-economic-dynamism/
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"As ever, all economics is either footnotes to Adam Smith or wrong."
– BBG (Tim Worstall)
Love it!
And, "1984" was written as a warning, not a how-to guide.
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I would note that had the $5T "Build Back Better" program gone through we would be seriously fuct right now.
Senators Manchin and Sinema made the difference in a key moment.
I think this a pithy good point to use in conversation.
Also to be noted here is that advancing the Bidenomics sales pitch can now point to Kudlow and the WSJ in support.
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About that 3% growth...
Government expenditures have increased faster than consumer spending for the last 6 quarters in a row.
- economist EJ Antoni, Heritage, CTUP
https://www.heritage.org/staff/ej-antoni
Sustainable?
Democrats used to (falsely) tout the multiplier effect of their spending. Now what do they call it, subtraction effect?
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Digging into the jobs report. The big winners? Gigs that consume rather than produce, just what the economy needs:
The Black Cloud in Jobs Growth’s Silver Lining
The Beacon by William F. Shughart II / Feb 6, 2024 at 2:22 PM//keep unread//hide
“Jobs Growth Defies Expectations” blares a WSJ headline on the front page of the paper’s first-weekend edition of February 2024.
The story by reporter Sam Goldfarb goes on to say that “hiring is booming, defying [economists’] expectations [that] the economy would cool after going gangbusters last year.” Last month’s employment numbers, showing a gain of 353,000 jobs economywide (revised upwards from an initial estimate of 216,000), kept the U.S. unemployment rate “steady at 3.7%,” were correlated with a 4.5% seasonally adjusted increase in (presumably nominal) wages of 4.5% year over year, and generally signal that the economy is on track to avoid a once widely predicted recession (either a “soft” or “hard” landing).
The only flies in the ointment are that the rise in wages “may have reflected a big drop in hours worked—a possible result of bad winter weather, according to some analysts.” Moreover, the apparently strong U.S. labor market may justify the Fed deferring interest rate cuts to continue its “fight” against the inflation for which it is solely responsible. And the labor force participation rate remains at a miserably low 62.5%, meaning that many Americans live on the dole.
But is an economy that Fed Chair Jerome Powell characterizes as “good” something to cheer about? Turn to p. A2, on which the jobs growth numbers are disaggregated by sector. As has been true over the recent past, #1 on the list is health care, which is predictable with an aging U.S. population and substantial taxpayer-financed subsidies that lower patients’ out-of-pocket costs of seeking treatment.
Number 2 is (federal, state, and local) government, likewise a major contributor to jobs growth for years. Perhaps that is good news for the people who are hired by the public sector, but not for the rest of us. Most government “workers” do not produce anything of value; they shuffle paper (or electrons) from desk to desk, rob Peter’s pocket to pay Paul, rarely show up at their offices, and impose significant costs on private sector actors forced to comply with their mandates.
Increases in governmental employment frequently persist over the long run. Once a bureaucrat serves a brief probationary period (usually six months for a federal “civil servant”), he or she has a job for life. Compared to the private sector, total compensation, including health insurance options and pension benefits, is generous. Annual cost-of-living adjustments (“step” increases in pay) are built into the system, and it nearly is impossible for a tenured federal employee, even a grossly incompetent one, to be fired.
Do not be fooled by the rosy scenario painted by recent jobs growth numbers. Large increases in the number of Americans employed by government are nothing to celebrate. Just the reverse is true: more bureaucrats (and the spending necessary to finance their hiring and retention) are drags on, not boosts to economic growth, liberty, and prosperity.
The post The Black Cloud in Jobs Growth’s Silver Lining appeared first on The Beacon.
https://blog.independent.org/2024/02/06/black-cloud-in-jobs-growths-silver-lining/?utm_source=feedly&utm_medium=rss&utm_campaign=black-cloud-in-jobs-growths-silver-lining
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Recessions are tough but affect some more than others and generally have endings to them. Inflation OTOH confronts evveryone eryday, from now until election day and beyond.
[Yes we conflate "inflation" with prices and general price level.]
Jerome Powell said it to the nation Sunday, prices are not coming down [except for specific products that defy general trend].
This piece makes good political economic points,
Sean Trende: 'Why is Joe So Unpopular': https://www.realclearpolitics.com/articles/2024/02/07/why_is_joe_biden_so_unpopular_150455.html
First, inflation is never “transitory.” Even after it is over, price levels rarely fall appreciably (indeed, deflation has its own problems). Consumers don’t automatically reset their baseline. So even if prices are level (and there is still inflation in the U.S.; it is just the rate that has slowed), people are still surprised when they pay $2 per pound for chicken, comparing it to when chicken was $1.44 for a pound in 2021.
Second, inflation is constantly in our face. Every time a consumer goes to the store and makes a purchase, they’re reminded of the impact. This is true for gasoline, food, clothing – every commodity an individual consumes. That’s not to say other indicators don’t hurt; it’s just to say they are not felt as often.
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Third, the Biden inflation led to higher interest rates to fight it which also give us higher costs. There's no escaping it.
It can be measured different ways but generally prices are up 20% under Joe and wages are up 15%. A good test of that is credit card debt (and national debt).
Credit card debt passes a trillion:
https://www.washingtonpost.com/business/2024/02/07/credit-card-debt-new-record-pay-off/
Nobody runs up credit card debt with 20+% interest rates on purpose.
For a lot of people, we buy with credit cards and earn through direct deposit. There is a disconnect that catches up, especially if you only pay the minimum a couple of times. Expenses keep rising and income not so much.
Car insurance up is 26% and the law says you have to pay it or stop driving. The car needs gas and the fridge needs groceries so you keep buying. You keep the old car to avoid new debt and the repair costs go up and so on.
More people are working second jobs.
https://www.cbsnews.com/news/inflation-american-workers-are-taking-on-second-jobs/
Does Biden team think people don't notice losing the freedom of having an evening or weekend where you don't have to work to make ends meet? If they were 'getting ahead' with the second job, why the spiking credit card debt?
Why people don't see this is a great economy is because it isn't.
Here's another price level indicator not coming back down. Lumber price is indictor of the cost to build or remodel. It tripled under covid and came back down after interest rates jumped, but the new level is more than 40% higher than the pre-covid Trump level:
https://tradingeconomics.com/commodity/lumber Click 5 year chart and do the math. Window cost etc. are similarly not coming back down.
People are stuck in their homes because new ones, even old ones, are out of reach. But the cost of staying put includes homeowner insurance rising at double digit rates: https://money.com/home-insurance-rates-predictions-2024/
Biden intervening in the energy has only pushed prices up:
https://www.forbes.com/sites/adammillsap/2023/03/09/high-electricity-prices-will-go-even-higher-unless-we-change-course/?sh=598ed7a16a8b
Try putting lipstick on THAT pig.
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good post!
"Car insurance up is 26%"
I haven''t gotten my new insurance bill yet :cry:
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Yes.
I like the articulation that prices rarely come back down, hence the world "transitory" is inapplicable. I will be using this point.
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Book review re The Myth of American Inequality: How Government Biases Policy Debate that argues the War on Poverty has been won and asks why the left/Great Society types haven't taken a victory lap (Wait! I know! If they take that lap they can no longer claim wicked people using nefarious means to scoop up more of some zero sum pie are to blame for the plight of the poor as it poops all over their very simple formula: proclaim gross unfairness hurts poor people bigly hence The Feds need to ride to the rescue with regressive regulations they call "Progressive" approaches).
Setting the Record Straight on Income Inequality
Book Review of The Myth of American Inequality: How Government Biases Policy Debate by Phil Gramm, Robert Ekelund, and John Early.
February 8, 2024
By ART CARDEN
Also published in The Library of Economics and Liberty Mon. February 5, 2024
Everyone knows inequality is growing. As a trio of economists consisting of former senator Phil Gramm, economics professor Robert Ekelund, and economist and former assistant commissioner of the Bureau of Labor Statistics John Early demonstrate, however, everyone is wrong. The supposed rise in American inequality to unacceptable levels has been greatly overstated. Gramm, Ekelund, and Early help us get the facts straight.
In The Myth of American Inequality: How Government Biases Policy Debate by Gramm, Ekelund, and Early, their methodological message is simple: “The Census Bureau is accurately measuring what it has chosen to measure, but it is not measuring the right things” (p. 3). Their empirical message is also simple but a lot more controversial:
There are certainly people who are physically or mentally unable to care for themselves and have fallen through the cracks in the system that delivers transfer payments, but, for all practical purposes, poverty due to a lack of public or private support has been virtually eliminated in America. (p. 4)
The post-tax, post-transfer poverty rate, they argue, is not the 12.3% the Census Bureau reported in 2017, but about 3%. The enormous difference is because the Census Bureau is not measuring the right things.
As Gramm, Ekelund, and Early make their argument, they kick the legs out from under the conventional wisdom about inequality. Taxes in the United States are extremely progressive, and the rich pay a higher share of taxes than they earn in income. Income mobility is alive and well. “Tax cuts for the rich” made “the rich” reorganize their affairs so that, as they quote JFK, they spent less time and money on “avoidance of taxes” and more on “production of goods” (pp. 115-116). “Tax cuts for the rich,” they argue, in 1962 and 1986 actually led to the top 1 percent and the top 10 percent paying higher percentages of their incomes in taxes.
One of their most striking findings compares the real income distribution today to the real income distribution of the 1960s. After accounting for taxes and transfers, Gramm, Ekelund, and Early argue that the top three quintiles in the 2017 income distribution and two-thirds of the households in the second quintile from the bottom have incomes that would put them in the top quintile of the 1967 income distribution. They recount a series of facts that we take for granted about the diffusion of indoor plumbing, air conditioning, cars, and televisions. Half of households in the bottom two quintiles own homes (p. 28). Restaurant meals used to be the privilege of the rich, but in 2017, “the average bottom-quintile household spent 34 percent of its food budget away from home,” much more than the 27% of top-quintile households in 1967 (p. 146). For the modern rich, cooking is a hobby, not a necessity.
To get an idea of what this means, watch an episode from the first season of The Wonder Years, which ran from 1988-1993 and was set in 1968-1973. Would we call the solidly middle-class Arnold family of the late 1960s and early 1970s “poor”? Would we say they hadn’t achieved the American Dream? Their standard of living would have put them in the bottom 40% and maybe even the bottom 20% of the 2017 income distribution. To the extent that the American Dream is harder to achieve today, it is because we have redefined it to mean two (or three) cars rather than one, central heating and air conditioning, a microwave, a programmable coffee pot, multiple streaming subscriptions feeding to multiple giant flat-screen TVs, computers, mobile devices for everyone in the family, an Xbox, and multiple bathrooms (with toilets that would flush and showerheads that would work if they weren’t regulated to reduce water use).
In his book The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, Thomas Sowell referred to what he called “A-ha!” statistics that support left-wing narratives, at least superficially. A bit of further examination, however, causes things to come apart. Talking about what has happened to “the poor,” “the rich,” or “the middle class” across long periods is dangerous because the people at the bottom of the income distribution in 2023 are not the same people who were in the bottom of the income distribution in 1983.
First, there is the fact that income distribution statistics are comparing people at different life stages. I was at the bottom of the income distribution as a graduate student in 2002, but it would have been silly to say I was “poor.” I moved up after my wife and I married and created a new household that merged her income with mine. I was in another place in the income distribution in 2012 as an Assistant Professor with three young children, and I occupied yet another place in the income distribution as the Margaret Gage Bush Distinguished Professor of Economics in 2022. I will likely fall down into a lower income quintile should I ever decide to retire (not likely).
Second, there is the fact that the population is always changing. Suppose you have five people. One earns $25,000; one earns $48,000; one earns $50,000; one earns $90,000; one earns $100,000. Then two things happen simultaneously: everyone’s income rises by $1000 and four people enter the labor market. One earns $24,000, two earn $30,000, and another earns $200,000. This means we now have one person earning $24,000, one person earning $26,000, two earning $30,000, one earning $49,000, one earning $51,000, one earning $91,000, one earning $101,000, and one earning $200,000. You can expect a flood of headlines about how median earnings have fallen to $49,000 even as the average income in the top quintile has risen by about 50%. The ratio of top to median income has risen from 2:1 to about 4:1, the ratio of top to bottom income has risen from 4:1 to more than 8:1, and people with high incomes are “capturing” a larger share of the total income. The headlines paint a picture of an economy that is working for only the few at the top while everyone else suffers stagnation or decline even though everyone is better off. The real story—that people are earning higher incomes—disappears under the non-story that the median income has fallen not because any actual person’s income has fallen but because the population has changed.
The Myth of American Inequality answers the “what’s the point?” question people have about the arcane, minute details of academic research. Measurement is a lot harder than it appears at first. There are well-known problems of technological improvement—a car in 2023 and a car in 1993 or 1973 are very different things—and then there are questions about what to count as “income.” There are wages and salaries, but what about benefits? Should transfers like Medicaid and food stamps be counted as “income”? One of the book’s critics has pointed out that the payments Medicaid makes go to doctors rather than patients and therefore complicate the story, but the patients receive medical services that are, we hope, at least as valuable as what the doctors are being paid for them. Food stamps are not cash, but they spend like cash—at least on approved items (the political economy of how something gets and stays on that list is a dissertation waiting to be written). Do official measures overstate inflation? The answers change how we make policy, write op-eds, argue at the dinner table, and write textbooks.
Since the Census Bureau (and economists) are not measuring the right things, it’s hardly clear we are going to make the right policies. So what should we do in light of this new story about postwar inequality? First, Gramm, Ekelund, and Early argue, we must get the theory straight and do the math right. It is one thing to look at pre-tax, pre-transfer inequality and be horrified. It is something else to think you can get less pre-tax, pre-transfer inequality with taxes and transfers: you cannot, by definition. If we want to know the real story about actual, on-the-ground inequality for living, breathing people, we need to look at measures that account for those taxes and transfers. Once we do so, we get a very different story from what we read in the New York Times.
All this makes me wonder why the left does not embrace this book and take a victory lap on behalf of Lyndon Johnson’s Great Society. It seems like, “even Phil Gramm admits we won the war on poverty” would be cause for celebration. All I have seen from the left, however, is breathless indignation about how the authors are heartless because they say poverty has fallen and extol Ebenezer Scrooge’s thrift, and wrong because their approach jars with the claims of economists like Thomas Piketty that ignited the “Occupy” movement in the Great Recession’s aftermath.
Second, Gramm, Ekelund, and Early propose changes to how we do welfare with special attention to the work disincentives very high implicit marginal tax rates create. If the 70% marginal tax rates Alexandria Ocasio-Cortez proposed a few years ago would be disincentives to produce at the top of the income distribution, then surely similar implicit rates are disincentives to produce at the bottom of the income distribution. If slashing top marginal tax rates in the 1960s and 1980s unleashed forces of production, then slashing implicit marginal tax rates in 2023 would have a similar effect.
Third, the authors go after occupational licensing. When I teach about licensing in my classes, I talk about the medieval guilds and South African apartheid. The logic is the same in all these cases: an interest group enlists the state to protect itself and its members’ incomes from potential competitors. Lest one think these rules are about public safety, they write,
New York State recently added a new requirement that entry-level shampoo assistants in beauty parlors and barber shops must complete a five-hundred-hour training course at an average cost of $13,240 before they can practice this complex art that most of us perform daily without mishap. Of course, three of the four regulators issuing this requirement have economic interests in companies that sell the required training. (pp. 181-182)
Fortunately, occupational licensing has gotten at least some bipartisan attention—and perhaps more people will come to understand that the poor and downtrodden wouldn’t need so much of our “help” if we weren’t spending so much on trying to “protect” them.
I would add another, though I admit it is a pipe dream: we should stop caring so much about inequality per se. It’s reasonable to care about poverty. Having enough food, clothing, and shelter to lead a meaningful life matters, and I am pleased to see people’s possibilities expanding year after year. It’s unreasonable to care about inequality per se. In a commercial society, whether your neighbor has more does not mean you don’t have enough. The qualifier “in a commercial society” is very important. Capitalism is the greatest positive-sum game in history. Competition for admission to elite universities is fierce, but have you been robbed if the kids whose parents read to them every night and hired math tutors get into Stanford, Harvard, and Penn while your kids have to settle for Samford, Haverford, and Penn State? If the extra effort these families put into getting their children into an elite school means they have more skills and higher earnings capacity, then everyone wins. These kids have only been able to get into an elite school by equipping themselves with the tools they need to serve people better. It only becomes a problem when people use those tools to rule rather than serve—by, say, establishing licensing boards and commissions to micromanage the lives of the unshampooed masses.
“As a nation,” Gramm, Ekelund, and Early write, “we need to get our facts straight.” I agree, and I hope this book moves the policy needle. Resistance will be fierce, of course, given that many people’s careers, incomes, and self-images are inseparable from the “rising poverty and inequality” story and the welfare state we have built to deal with it. The Myth of American Inequality is an important contribution, however, that shows how the story is built on a foundation of theoretical and empirical sand.
ART CARDEN is a Research Fellow at the Independent Institute and an Associate Professor of Economics at Samford University.
https://www.independent.org/news/article.asp?id=14823
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https://finance.yahoo.com/news/us-inflation-tops-forecasts-likely-134729393.html
Let's see if they can put lipstick on this pig.
Same policy, expecting a different result. Insane.
My view, the "2% target" should be lowered to 0.2%. 2% inflation is theft. Above that is reckless criminal endangerment.
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PauL Krugman already did on MSLSD 2 nights ago.
Biden's memory not an issue.
He has accomplished SO many things to prove it.
Brought us out of a terrible economic mess more and yada yada.
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Household survey is the more accurate of the two main methods.
"According to that survey, employment actually fell by 31,000 workers from December to January, and by some 700,000 over the two-month period from November to January, compared to the 353,000 and the 686,000 increases respectively reported in the payroll survey. That adds up to a difference between the two surveys of some 1.4 million jobs between November and January. Over the past year, the household survey reported that the economy added 1 million new jobs—2 million fewer than the payroll survey’s estimate."
https://www.city-journal.org/article/employments-hidden-figures
Krugman can't read or is he lying to his faithful followers?
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https://dc.claremont.org/restoring-american-manufacturing-a-practical-guide/
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https://www.powerlineblog.com/ed-assets/2024/02/Screenshot-2024-02-09-at-5.24.00%E2%80%AFPM.png
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100% of net new jobs went to two groups:
Immigrants and illegals.
Further, the decline in full-time jobs with benefits in December and January was the largest decline since the pandemic.
The reported 'jobs growth' is in part-time jobs and since many hold two or more of those, 'jobs growth' doesn't mean more people working.
Similarly, with 5 million out of the workforce, the unemployment rate does not reflect the number of people out of work.
I did not make up the connection between people coming across our border and the bragging of "new jobs created".
Real wages for people already employed have dropped under Biden.
https://www.washingtontimes.com/news/2024/feb/20/bidens-low-marks-on-economy-reflect-reality/
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Yes, key points we need to hammer made there!
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Nvidia, AI and U.S. Innovation
The government didn’t build that $2 trillion share valuation.
By
The Editorial Board
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Feb. 22, 2024 6:26 pm ET
What a wild ride. Nvidia’s stock price soared another 16% on Thursday after a blowout earnings report, giving the Silicon Valley chip maker a $1.9 trillion market valuation. Markets can get over-exuberant, but Nvidia’s surge may reflect a rational optimism in the vast potential of artificial intelligence.
Five years ago Nvidia was mostly known as a graphics and video-game chip maker. Its roughly $100 billion market valuation was less than half as much as integrated chip-maker Intel’s. Few investors foresaw Nvidia’s transformation into the world’s leading chip firm—or the way artificial intelligence would emerge.
Nvidia designs about 80% of the chips that power a growing array of advanced AI applications—from chatbots to deep neural networks that can discern subtle patterns from data. OpenAI pioneered the technology with ChatGPT, and Microsoft, Amazon and Google rank among Nvidia’s biggest customers. But hardly an industry won’t be changed by AI.
Retailers are using AI to make logistics more efficient and improve the customer experience. Drug makers are using the technology to develop new treatments and determine which patients would benefit most from medicines. Healthcare systems are putting AI assistants to work filling out health records so doctors can focus on patients.
The AI boom may partly explain why business investment and economic growth haven’t crumbled under the Biden regulatory fusillade. President Biden loves to flog federally funded factories and public works, but software investment has contributed more to GDP growth in the last three years than structures or equipment—no thanks to government.
Some worry about AI’s impact on workers, and jobs will be lost. But others will be created and the U.S. has some nine million job openings. As the workforce ages, bigger productivity improvements will be needed to boost living standards. In any case, white-collar employees will probably face more disruption than workers who use their hands.
Mr. Biden is lucky that the AI revolution accelerated under his watch, just as Barack Obama was fortunate with the shale fracking boom. But AI advances are happening despite government, not because of it. Mr. Biden’s executive order last autumn has created new uncertainty about whether and how regulators will permit AI.
Silicon Valley startup accelerator Y Combinator is instructing founders in health care to “take the conservative approach” and “document everything, and know [evolving regulations are] a risk, and anyone who invests in you should know it’s a risk,” as StatNews reported this week. Regulatory risk is something ebullient Nvidia investors might keep in mind too.
Some Democrats are already threatening to suffocate AI with—what else?—climate regulation. Democratic Senators this month introduced a bill that would direct the National Institute of Standards and Technology to recommend administrative actions to mitigate AI’s environmental impact. Will ChatGPT soon need an Environmental Protection Agency permit?
Progressives fret that AI systems will generate as much CO2 emissions as entire countries. Possibly. An AI-driven web search consumes four to five times as much energy as a conventional one. Can the U.S. electric grid, already creaking under the force-fed green energy transition, handle the increasing demand? Is anyone in government thinking about this?
Nvidia’s nearly $2 trillion valuation is essentially a giant bet on U.S. private innovation. China has spent tens of billions of dollars trying to create a national chip-making champion to no avail. Note to Congress and President Biden: Industrial policy doesn’t make countries or businesses great.
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https://www.axios.com/2024/03/27/biden-democrats-ditch-bidenomics
Sorry that isn't their term to ditch. We started it, and there never was anything positive about it. The most neutral description you could give it is " cluelessness". But it is far worse than that.
Build back broker is the description that stuck.
But of course the term isn't neutral, it's negative, it's hurting people. What does it really mean?
No one knows how Democrats economic theories really work. They are designed to win elections, not grow , or make people better off. The common thread is that it is government-centric.
My question is, what is the name for the opposite? What's a new name for supply-side economics that can be used in the current political environment?
I'm going to name it private-sector-nomics.
Sounds cumbersome, but Trump has a way of slowing down and enunciating, what he wants to and it's time to put the focus on the private sector, not the government. It's as simple as that.
Recall the recent post about government workers making 40% more than private sector workers, and benefits 80% more than private sector workers , or didn't I post that? It won't be easy to turn that around, but that's an example of where things have gone astray.
Exhibit B is all the rich counties around Washington DC. That ties in very closely with Trump's war on the swamp. We don't want any harm to these people or to the incomes of their families. We just want those not needed in government to go out and get productive sector jobs with all their great talents.
Marco Rubio had a great line when he was running for president. I can't remember it verbatim but he said something like, I'm going to look at every bill comes across my desk and ask whether it helps to grow jobs and incomes or not.
Trump or someone needs to diffuse this politics of envy and now is the time. Biden is once again trying to punish the rich. Jack Kemp was questioned on that in the 1980s and said, what we need in America is more people rich.
Every tax on the rich, every tax on the corporations, every tax on the employers, every tax on the people, is a tax on the economy, a tax on everyone. We need taxes, and we need lots of them because we're falling further and further in debt. But the main problem is spending. We need our tax code to raisee the the most money and do the least damage as possible.
The central Focus must always be the health of the private sector economy. Driving a wedge between employers and employees or the rich and the poor isn't how you do that.
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https://www.thegatewaypundit.com/2024/03/dollar-tree-will-raises-prices-up-7-stores/
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Here in the South that is going to be one helluva talking point.
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Shocking. They otherwise seem so honest.
The jobs market is much worse than Biden and his mouthpieces claim.
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In February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Which is great… until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).
All the new jobs in the past year have been part-time jobs!
Not only has all job creation in the past 6 years – since May 2018 – has been exclusively for foreign-born workers, but there has been zero job-creation for native born workers since June 2018!
https://confoundedinterest.net/2024/03/29/the-cold-reality-of-bidenomics-and-the-jobs-market-philadelphia-fed-admits-us-payrolls-overstated-by-at-least-800000-all-new-jobs-over-past-year-were-part-time-jobs/
https://www.philadelphiafed.org/-/media/frbp/assets/surveys-and-data/benchmark-revisions/2023/early-benchmark-2023-q3-report.pdf?la=en&hash=47BC6E4331A5DDB9953B8E912C8B9B8E
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Data analysis of the “more comprehensive, accurate job estimates released by the BLS as part of its Quarterly Census of Employment and Wages (QCEW) program“, the Philadelphia Fed found that the BLS had overstated jobs to the tune of 1.1 million!
In the aggregate, 10,500 net new jobs were added during the period rather than the 1,121,500 jobs estimated by the sum of the states; the U.S. CES estimated net growth of 1,047,000 jobs for the period.
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For 2023 Q3, payroll jobs in the 50 states and the District of Columbia rose 0.5 percent, after adjusting for QCEW data.
Based on both the prebenchmark CES sum of states and the U.S. CES, payroll jobs grew 1.7 percent.
The revised CES sum-of-states growth rate is 0.5 percent
----------------
a little over a year after we, or rather the Philly Fed, found that the BLS had overstated payrolls in 2022 by 1.1 million, here we go again, only this time the BLS had overstated payrolls by 800,000 through Dec 2023 (and more if one were to extend the data series into 2024). It’s truly statistically remarkable how every time the data error is in favor of a stronger, if fake, economy.
Which is also why nobody in the mainstream media – which is now nothing more than the PR smokescreen for the Biden puppetmasters, the government and the deep state – will ever mention this report.
Anthony B. Sanders is Distinguished Professor of Real Estate Finance in the School of Business at George Mason University. He has previously taught at University of Chicago (Graduate School of Business), University of Texas at Austin (McCombs School of Business) and The Ohio State University (Fisher College of Business).
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The wealthiest one percent in President Joe Biden’s America set a record with a net worth of $44 trillion at the end of the fourth quarter, U.S. Federal Reserve data revealed.
https://www.breitbart.com/politics/2024/03/29/joe-bidens-america-wealthiest-1-set-record-44-trillion-total-net-worth/
Meanwhile, A majority of voters are “worse off financially” under Biden, up 25 points since he assumed office in 2021, a Fox News poll found Wednesday.
----------------------
A friend was trying to make the point Jay Powell at the Fed is doing an amazing job.
A short time ago we seemed headed into a recession and he seems to have navigated our way around that.
Doctored data tells us the jobs market is fine. We know the rich are getting richer and targeting them doesn't stop that.
We also see declining real wages and skyrocketing credit card debt, interest costs and bankruptcies.
Now imagine reversing the parties that are in and out of power with these data. What would the 'mainstream' take on this be?
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https://www.cbsnews.com/news/retirement-savings-how-much-americans-need-1-46-million/
Kitchen table issues.
If your savings is up 53% under Biden, you broke even.
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let them in - get them a job as soon as possible then add to the total job growth numbers!
nothing self serving or corrupt to see ( :roll: :wink:)
not to mention notice the image in the picture - full time and *part time*
https://www.cnbc.com/2024/04/05/job-growth-totaled-303000-in-march-better-than-expected-and-unemployment-was-3point8percent.html
we will see this blasted all over the msm airwaves now including C*NBC*
with Joe coming out and making a statement congratulating himself
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For Trump to deport large numbers of hard-working illegals (mostly Latinos) whom Biden has ill granted working papers is going to be a very explosive political fight.
I am reminded of a ballot initiative that Gov Wilson (R) of CA put through and won, and which then played a major role in turning CA into a one-party state (Dem of course).
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Seems the job growth has been smoke and mirrors.
More real world measures show that as interest rates have gone up, credit card debt has gone up, 3rd quarter in a row over a trillion and still going up. As credit card interest rates hit 29.99% (30%!) no one would choose more debt unless they were intending to default.
https://www.lendingtree.com/credit-cards/credit-card-debt-statistics/
Bankruptcies up double digits under Joe as well.
https://www.reuters.com/markets/us/us-bankruptcies-surged-18-2023-seen-rising-again-2024-report-2024-01-03/
Yet the rich are getting richer. Imagine this scenario happening under Trump or Republicans and hearing the MSM, MSNBC uproar!
The jobs reports CORRECTIONS don't get the same big headlines as the initial story. And the corrections are ALL DOWNWARD.
https://www.foxbusiness.com/economy/initial-us-employment-reports-overstated-jobs
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"For Trump to deport large numbers of hard-working illegals (mostly Latinos) whom Biden has ill granted working papers is going to be a very explosive political fight."
- Right, by design. Their intent is to make their policies irreversible, opposite of governing by 'we the people' with checks and balances. Obamacare, Social security, Medicare all woven into the fabric, like the National Health Service in Britain, not things the next Congress or Parliament can repeal.
These 5 year budgets, 10 year budgets, mandates that take effect in 2030, regulations that kick in after their term, it's all anti-democratic.
Laws passed by the 118th Congress should not be binding on the 119th Congress.
Same goes for debt. Borrow all you plan to pay back before your term ends. What gives you the power to put $36T debt and $2T/yr. interest on the next generation?
Government can only get bigger and bigger and bigger until everyone is riding and no one is pulling the wagon.
To the topic at hand, Trump needs to be creative. To those who produce and other than breaking our laws to come in, abide by our laws and invest in our country, maybe he can be the most generous president in history with citizenship. And for those who came for the free ride and or to wreak havoc, out they go on their asses, free ride home.
Simple test, in the time you've been here, did you (your family) pay in more than you took from us?
We always say THIS is the biggest election ever. But if we can't figure it out this time, when will we? And what will the country and the world look like when that happens?
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"Simple test, in the time you've been here, did you (your family) pay in more than you took from us?"
This intrigues me.
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https://www.breitbart.com/politics/2024/03/29/joe-bidens-america-wealthiest-1-set-record-44-trillion-total-net-worth/
Data from Federal Reserve, just documenting what I posted in other rants.
Real wages down for workers. Wealth up for the wealthy. Imagine if these results were from Republican policies.
Projection. They say these results will happen under R policies. And it's exactly ass-backwards.
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right.
The wealthy donors are needed by Dems to save Democracy so they will keep a blind eye for now.
Starting Jan 15th the theme will change if R wins.
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https://tippinsights.com/bidenflation-soars-to-18-8-squeezing-americans/
18.8% already rounds to 20% and we still have the rest of the year, still going up at twice the criminal theft targeted rate.
Inflation compounding trivia question, if every 4 year Dem President takes 24% of your wealth, how much do you have left in 10 years, 20 years, 30 years, etc.?
My answer, stop electing Dem Presidents and Dem policies.
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would people more economically knowledgeable than me agree that this inflation was due to bad Fed money policy?
too much spending and interest rates were kept too low for way too long?
that is my read.
We should hammer that home !!!!! if I have it understood correctly.
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True but to simplify, it's the excessive spending.
There is no possible Fed policy that accommodates this level of excess spending without doing damage.
Both parties spend too much, but Democrats in our lifetime are always on the side of spending more, way more, no matter how far past reasonable or affordable we have already gone.
To make things worse, their spending is harming the people it's allegedly intended to help. Small things called dependency and disincentives to work.
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Under current policies, government debt outstanding will grow from 100% to 200% of GDP.
https://www.gao.gov/americas-fiscal-future
Not mentioned in short term, rear view mirror reports of debt to gdp decreasing is that interest rates on the debt tripled.
Federal government spending $2 billion per day - on interest.
https://confoundedinterest.net/2023/08/12/bidenomics-the-good-the-bad-and-the-ugly-atlanta-fed-gdp-at-4-12-for-q2-bank-credit-growth-goes-negative-confernce-board-leading-indicator-goes-negative-real-gross-domestic-income-growth-0-82
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Policies that don't work.
This is deficit fueled inflation.
It's the spending stupid.
Anything that doesn't go after the excess spending is BS, counterproductive.
EVERYTHING Biden does involves more excess spending.
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https://www.grumpy-economist.com/p/inflation-confusion
" Biden’s advisers have reviewed polling that shows criticism of Republicans for cutting taxes on wealthy Americans and corporations resonates with voters, and they intend to step up such an attack in the coming days and weeks."
"Aha, now we see the central problem. Economic policy is being driven by what polling suggests “resonates with voters.” Not, for example, what basic economics suggests might actually work."
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Literally, they think we are small children and the policy is to hand out candy.
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https://tippinsights.com/bidenflation-soars-to-18-8-squeezing-americans/
Despite a decrease from the highs of mid-2022, many families continue to face significant inflationary pressures. Prices have increased by 18.8%, while real wages have declined by 2.5%. Average hourly earnings for all employees dropped 2.5% to $11.11 in March 2024 from $11.39 in January 2021 when Biden assumed office. According to Mark Zandi, the chief economist at Moody’s Analytics, the typical U.S. household now requires $1,069 more each month (equivalent to $12,828 annually) compared to three years ago, $784 more per month compared to two years ago, and an additional $227 per month compared to last year. The Allianz Life study found 67% are more concerned about paying bills now than their financial future.
Bidenflation and the Fed’s eleven rate hikes to reduce inflation have made housing unaffordable for many people and caused displacements. According to CBRE data, the average monthly payments on a new home soared to $3,322 in the third quarter of 2023. This marks a sharp 90% increase from late 2020, when it stood at just $1,746 before Biden took office. Rising rent and the end of pandemic-era protections are contributing to the homelessness crisis.
Therefore, it is unsurprising that inflation and food prices emerged as top economic issues among Americans in a recent nationwide TIPP Poll.
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Paraphrasing a meme:
'I've never understood why it is greed to want to keep more of your own money and not greed to want to take more from someone else.'
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https://www.wsj.com/economy/central-banking/us-gdp-economy-first-quarter-2024-1675df05
3+ years of chopping away at the foundations of growth and growth slows.
Did ANYONE see this coming.
Slow growth (or none) but inflation lives on, eating up all gains. 65% say we're on the wrong track. Majority prefer the challenger to better handle the economy.
Reminds me of another one term President.
Policies have consequences. EVERY policy of this administration is a hindrance to private sector growth. They choose policies that poll well, but the resulting stagflation does not poll well at all.
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https://www.cnbc.com/2024/04/25/gdp-q1-2024-increased-at-a-1point6percent-rate.html
The 'experts estimate for growth was 50% higher.
BIG disappointment.
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Previously in the Biden administration:
https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm
https://www.foxnews.com/media/biden-slammed-claiming-8-2-inflation-shows-progress-planet-guy
Oops that was a taxable "gain". Please send in 55% of it.
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ccp (paraphrase) They're telling us the economy is great.
Cut rate airline is dropping 4 airports, reducing its fleet, canceling flights and firing 2000 employees.
My rich friends don't fly Southwest. How does Biden get away with saying his policies, his taxes, his war on energy, his fascism level regulations will only hurt the rich, those making over 400k.
Wait. He didn't say that?
Do airlines shrink in a growing economy? And what did our Department of Transportation Secretary with parking meter experience say about airplane parts falling out of the sky? I haven't heard a report.
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ccp (paraphrase) They're telling us the economy is great
GDP at minuscule 1.6%
Biden :
we are doing better then all other countries in the world
no mentioned no we are not:
https://www.weforum.org/agenda/2022/01/oecd-gdp-growth-bounceback/
Ya,
Should I be buying India ETF
Wisdom Tree?
or one of these:
https://money.usnews.com/funds/etfs/rankings/india-equity
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ccp: we are doing better then all other countries in the world
not mentioned no we are not:
https://www.weforum.org/agenda/2022/01/oecd-gdp-growth-bounceback/
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Plus, that wasn't the bar. We're supposed to be leader of the free world.
Where are we leading them?
Global Debt was 226 trillion in Biden's first year, 2021.
https://www.imf.org/en/Blogs/Articles/2021/12/15/blog-global-debt-reaches-a-record-226-trillion
Global Debt hits record 307 trillion in Biden's 3rd year, Sept 2023.
https://www.reuters.com/markets/global-debt-hits-record-307-trillion-debt-ratios-climb-iif-2023-09-19/
This is while the world is climbing out of Covid shutdowns.
Global debt hits new record high of 313 trillion, Feb 2024.
https://www.reuters.com/business/global-debt-hits-new-record-high-313-trillion-iif-2024-02-21/
If we are leading the world, it is downward.
Bidenomics = Debt -onomics
Biden's going to pay off student loans? No he's not. He's not paying off anything. He's taking us further and further down a debt hole. Why do young people let him lie to them?
We used to joke the motto on our business card was: 'We're no worse than our competitors', to see if that would sell.
Biden's line is, 'you may be screwed by real wages falling for 4 years, but we're no worse than the rest of the world, Zimbabwe, Haiti and so on'.
'We're willing to pay out trillions of dollars of your future years' wages for your vote today.'
https://www.weforum.org/agenda/2023/12/what-is-global-debt-why-high/