Posts Tagged ‘Economic’

Today, the federal government finalized the finance reform bill.  From all that I have spoken to that have read through it, it does little to actually correct the isses we experienced over the past 10 years.  Hooray!  One more large monster federal bill that has little benefit but lots of impact.

Two quotes in the attached article unnerved me.  The first was from Mr.  Dodd (senator of CT) where he said;

“No one will know until this is actually in place how it works.”

And the other was from Mr. Frank (representative of MA) where he is quoted;

“We’ve put in the hands of the president a very powerful set of tools for him to reassert American leadership in the world”

Why would any sane person want these quotes attributable to themselves?  Let’s see, the first one says that we just made 2,000 pages of laws and have no clue what the impact will be for the one industry that touches every single citizen.  Or, the 2,000 pages of laws that we all just passed are so general and vague that one can assume that they will be deployed in ways that are completely arbitrary, ways that we can never fully grasp.

The second quote jives with it perfectly.  Mr. Frank essentially celebrates the fact that our representatives, those that we rely on to check and balance the president, have given enormous power to one person.  And to make it all the more exhilarating, a president that has no economic background and has demonstrated a complete lack of respect for free markets.  Oh joy!

And one more thing, please read towards the bottom where they mention that 18,000 auto dealers (actually, the number is closer to 16,000 after the government forced some to close down)(also, at least 20% of them are selling government made cars) are exempt from the consumer protection portion of the law.  Keep in mind, the second largest expense for most citizens is an automobile with the majority of them financed.

Corrupt and stupid make for a very bad combination.  Worse, when it’s mixed with power.

As of last night, it appears there is agreement on bailing out Greece.  Between Europe and IMF (which depends on the US for 25% of their funding), Greece will get about $150B worth of loans (paying a 5% interest rate)  in order for them to meet their current debt obligations (private investors demand an 8% interest rate given the risk) and internal needs.  In return for these loans, Greece has bitten the bullet and will dramatically cut salaries and pensions… temporarily.

I think it important to state a few facts about Greece.

• They rank second from the bottom on the Index of Economic Freedom (highly socialized economy).
• They import 3x more than they export (net users).
• Their government has overspent tax revenues by at least 15% each year for the past 5 years (spent more than produced).
• They have a debt level that is at least 125% of what they produce in a year in GDP .
• Public services account for 40% of their published GDP (so about half of their “GDP” is value productive).
• 42% of those between 55-64 are employed versus 52% in Europe and 62% in the US (few work).
• Tax rates on income are some of the highest in Europe (over 40%)
• Their fertility rate is below replacement rate (i.e. aging population that retires early).
• Their government spends over 12% of their GDP on pensions, double the US, second only to Italy at 15%.

So, with that little amount of information, what is the likelihood that Greece can pay off these loans?  Remember, in the agreement as formed last night, Greece only needs to get their spending down to 103% of their tax revenues by 2014.  In other words, they will still spend more than they make.

Now on to the dramatic cuts.  Riots were all the rage over the weekend as pensioners and union employees protested the expected cuts in entitlements and the anticipated rise in taxes.  The question that hit me was, who are they protesting against?  It’s a democracy from what I understand.  They are the ones benefiting from the large promises they made to themselves (early retirement, large pensions, free healthcare, etc) from which they are the sole providers of the funds for those promises.  Their government officials only act as the transfer agents; taking tax dollars from the few that work and place it into the hands of all in the form of entitlements.  Most likely, they are protesting that their guardians, their providers, are no longer able to borrow money to pay for promises that had no reasonable economic foundation supporting them.

I was struck by a quote in this article,

“These are the harshest, most unfair measures ever enacted. That is why our reaction will be decisive and dynamic. You can’t always make the workers pay for the results of failed policies,” Stathis Anestis, spokesman for Greece’s largest umbrella union, GSEE, told The Associated Press.

I find this to be very circular:  People are protesting because they cannot fund the promises they made to themselves.  (I just don’t see how this loan solves anything or how this ends well for anyone).

This is worth reading…

If you’re interested in knowing a little more about the Federal Reserve and the political mess that is about to happen with the Financial Reform Bill, I would suggest the post from John Mauldin.

All,

From yesterday’s WSJ.  You just can’t make this stuff up!

Former Enron adviser Paul Krugman takes note in his New York Times column of what he calls “the incredible gap that has opened up between the parties”:

Today, Democrats and Republicans live in different universes, both intellectually and morally.

“What Democrats believe,” he says “is what textbook economics says”:

But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

Krugman scoffs: “To me, that’s a bizarre point of view–but then, I don’t live in Mr. Kyl’s universe.”

What does textbook economics have to say about this question? Here is a passage from a textbook called “Macroeconomics“:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

So it turns out that what Krugman calls Sen. Kyl’s “bizarre point of view” is, in fact, textbook economics. The authors of that textbook are Paul Krugman and Robin Wells. Miss Wells is also known as Mrs. Paul Krugman.

You may think that, from the title above, I am recommending that we can solve the problem of greenhouse gas creation by having our congressmen shut their mouths.  That may be a good idea, but that’s not where I was going with it. 

According to the EPA’s most recent study,   70% of the CO2 gas emissions in the US come from generating electricity (utilities) and transportation (cars and trucks) with the utilities being the majority.  Fine, that makes sense since the burning of fossil fuels generates CO2 gas.  Since we knew all along that burning fossil fuels were potentially harmful, why did the government make it easier to commission new gas-fired power plants and nearly impossible to commission new nuclear plants?

According to the Nuclear Energy Institute, between 1992 and 2007, the US commissioned 123x more gas-fired energy capacity as it did nuclear capacity.  Never mind the fact that nuclear energy is also 10% less expensive compared to coal-fired and over 20% less expensive than gas-fired.  Why did this occur?  Regulatory hurdles is the short answer.  The long answer will have to wait until someone else with much more knowledge writes about it or I have more time. 

What really gets my goat (yes, goats also generate greenhouse gases) is that the congress’ proposed solution to the gas emission problem is called the Waxman-Markey bill.  This bill would place a whole new level of government burden on all industry and, according to their own estimates, raise each household’s energy bill by $1,600 per year.  If that wasn’t bad enough, our elected officials want to provide ‘free credits’ to some industries in order to get this legislation through.  These credits allow those that hold them to go on producing the pollution that the bill attempts to lessen.  Who would get these free credits?  Funny you should ask.  Those that create most of the problem in the first place, the electric utilities. 

So, to make this long, painful story shorter, our federal government has potentially created a climate problem (still up for discussion, of course) by favoring one form of electricity generation over a more efficient, cleaner form.  And to correct the problem, they propose to impose heavy regulation over all except for the one industry that represents the largest source.

At least we can say that our government is consistent…

To find my happy place, I usually pick up an Ayn Rand book. (No jokes please).  So, yesterday, I was in a really bad mood and picked up Ayn Rand’s Capitalism: The Unknown Ideal.

The book is a collection of essays by Ayn and a number of her followers (including the great Greenspan who, ironically, wrote about the need for a gold standard so that our nation didn’t go about printing money willy nilly). There are over 20 essays in this book with at least 18 of them pertinent to today’s discussion of expanding governmental powers.  This book alone will provide me with loads of blog content.  Lucky you!

In this post, I wanted to highlight her essay entitled “Let Us Alone” which starts with this:

“Since ‘economic growth’ is today’s great problem, and our present Administration is promising to ‘stimulate’ it – to achieve general prosperity by ever wider government controls, while spending an unproduced wealth – I wonder how many people know of the term laissez-faire?”

Interesting, no?  She could have written this yesterday (if she was alive, of course).  She opens the essay describing seventeenth century France under the rule of Louis XIV and then goes on with the following.

“Colbert, chief advisor of Louis XIV, was one of the early modern statists.  He believed that government regulations can create national prosperity and that higher tax revenues can be obtained only from the country’s ‘economic growth’; so he devoted himself to seeking ‘a general increase of wealth by the encouragement of industry.’  The encouragement consisted of imposing countless government controls and minute regulations that choked business activity; the result was dismal failure.

“Colbert was not an enemy of business; no more than is our present Administration.  Colbert was eager to help fatten the sacrificial victims – and on one historic occasion, he asked a group of manufacturers what he could do for industry.  A manufacturer named Legendre answered:  ‘Laissez-nous faire!’  (‘Let us alone!’)

“Apparently, the French businessmen of the seventeenth century had more courage than their American counterparts of the twentieth, and a better understanding of economics.  They knew that government ‘help’ to business is just as disasterous as government persecution, and that the only way a government can be of service to national prosperity is by keeping its hands off.”

Timeless observations.  Do you think the banks and auto companies are rethinking their pleas for help?

We don’t need to confine this to the past 6-9 months’ financial crisis we are currently experiencing.  It has been a trend of this country and its government for the past century.  I believe the current breaking of our banking system is the evidence of excess/improper/corrupt/whatever regulation and does not serve as an example of our need for more.  And yet we find ourselves asking for more.  Global Climate Regulation.  Universal Health Care.  More Social Security.  No Child Left Behind.  Prescription Drug Plans.  The list goes on and on.  I’m afraid it only stops when, as many have stated many times before, no one will take our promissory notes and we will be sitting there with “great ideas” and “great needs” and no money or skills to execute them.

But there may be a happy ending…  Refer back to the last paragraph of Ayn Rand’s that I presented above where she mentions government help is no better than government persecution.  The two are attached at the hip as we see in the current environment.  Bonuses for bailouts show how government help can quickly move to persecution, mostly of the innocent as the corrupt sit hand in hand with the politicians doing the persecution.  That, my friends, is what gives me hope that there is a light at the end of the tunnel.  The faster we can have individuals realize that the helping hand of government quickly turns into the heavy hand of coercion, the faster we will see individuals strive for self sustaining private solutions.

I have just returned from a weekend in our nation’s capitol, and can report that there is no recession in the district. Walking through much of the area around GW and Georgetown, I must have seen 25 cranes and over 30 houses undergoing renovation. A quick look at the state-by-state per capita GNP statistics shows a Washington DC that ranks first among all 50 states, over twice the next highest (Connecticut) and challenging oil producing nations if treated as its own nation. Remind me again what we produce in DC.

I plan to access that same statistical information to compare per capita GNP growth rates over the last 25 years. I suspect that I will find that our fastest growing product will be legislation and regulation.

I read an editorial in the Post bemoaning the difficulty of finding the 600,000 workers who will be needed to fill government jobs over the next few years. Not one of those workers will have to worry about producing revenue, selling a product, or making a payroll.

I was looking back through past George Will opinion pieces and came across this one.  He states a few facts that, on their own, are astonishing.  However, when you think about them in context to the stimuless plans offered by government, it makes you realize just how impressive private enterprises such as WalMart are.  And how important they are to the operation of our economy. 

Now, as you read his article, understand that he uses the term ‘liberal’ incorrectly.  He may be smart and well educated but he’s only human.  (As I will discuss in a future blog, the term has been stolen from us, the true liberals). 

For me, the astonishment comes from the two numbers he states in the article.  US productivity growth would have been 13% less in the second half of the 1990′s if it wasn’t for WalMart.  And, WalMart’s everyday low pricing has a more stimulative effect on the economy than most of the government programs currently in place. 

And they make money offering all these goodies!!!  Last time I checked, the government can’t balance its own budget, is filled with fraud, waste, and corruption.  And can only assist some by impeding on the rights of others.

Maybe a more stimulative program for the government to follow would be to lower the barriers to progress (letting WalMart provide it’s services to more people) rather than attempting to protect its legacies (i.e. the failed policies of the New Deal and LBJ’s Great Society).

Below, I have reprinted a wonderful story by Leonard E. Read. I believe this was first published in 1958 and is, surprisingly, still so relevant to today. If I were to suggest only one reading for a high school student pertaining to economics, it would be this piece. I hope all will enjoy it as much as I do…

I, Pencil:  My Family Tree as told to Leonard E. Read

Politicians are not economists and that is the biggest problem.  If you have time to read one long and boring financial piece, I suggest you choose John Mauldin’s Velocity of Money note.  If you choose to have a life and not be bothered with it, let me summarize a significant point within it.  The velocity of money is one of two variables that goes into determining our GDP, or our level of economic activity. 

The formula is GDP = M * V, which is the amount of money in the system times the number of times it trades hands (that’s the velocity of money).  In the article, he has a graph that charts the velocity of money through time.  It has averaged 1.67x (meaning money trades hands 1.67 times in a year) since 1900.  In the last decade, it was in the 2x range.  Currently, it has dropped to 1.72x.  Why the move up and then move down?  The biggest swing factor is the amount of leverage placed on money (either by banks, corporations, governments, or individuals).  The 1990s and early 2000s were years of increasing amount of leverage (debt).  In the past 18 months, we have seen people and enterprises lower their debt levels, preparing for a bad economy.  This naturally lowers the velocity.

Now, why do I say that the government wants to slow us down?  It comes down to the fact that government money velocity is thought to be lower than private sector activity.  The current administration puts the number at 1.5x.  I have heard others says that that is a best case number.  Whatever the real number, when the government spends money, it has less of an impact on our economy that when the private sector does since our velocity factor is greater than 1.5x (again, that may be putting a positive spin on the actual government influence).  For the government to spend this money, they are needing to take it from some place, and that my friends, is the private sector.  So, when the government spends $1, it has the best case scenario of making $1.5 of economic activity.  When you and I spend a $1, we make $1.7 of economic activity.  It’s just basic math.

A member of CIRCLE should get upset when we have government people (Greenspan, senators, etc) saying that the banking industry was self regulated. Over 10 government agencies overlook the banking system. The problem is that the government, through “regulation”, decided to push uneconomical policies through the system. The banking subcommittees mandated (through the Community Reinvestment Act) that Freddie and Fannie should buy loans from banks and mortgage originators that were way out of wack with what would have normally been done. It was George Bush, Barney Frank, and Maxine Waters that pushed for accelerating the “ownership society”, making people that couldn’t afford homes get into them at stupid rates and no money down. Let me break here to describe the process:

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