The Certainty of Bad Policy Makers

Do you know what your tax rates are going to be next year?  Will the Bush tax cuts expire as planned?  How will that affect you?  Will the payroll tax “holiday” be extended?  Will the debt ceiling be raised?  Will it be another temporary last minute deal that involves no real spending cuts but makes …

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Avenging Reality

The Euro’s value has been dropping this week, as have global stock markets based on a fear of a disintegrating Europe.  Apparently the Greek public has already tired of austerity.   Mind you, their austerity measures still entailed running large (though smaller than before) budget deficits.  It just doesn’t feel good to them to cut back …

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All Play and no Work Makes the US a Poor Country

Sometimes looks can be deceiving.  April’s unemployment rate fell from 8.2% to 8.1% which looks good.  On the other hand, the labor force participation rate continued to fall and hit a 30 plus year low.  Fewer people are in the labor force now than were there at the beginning of the economic recovery.  If the …

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All Play and No Work Makes Johnny a Poor Boy

I was eight years old when I began working six days a week, fifty two weeks a year delivering newspapers.  By age 13, I had two jobs.  I worked through high school and college. No, this isn’t the 1930’s I’m referring to but the 1980’s and 90’s.  Times, they are a changing – particularly for …

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Shooting the Moon, and the Economy: Washington’s Deadly Game of Hearts (and Thrones)

The object of hearts (the card game, not the muscle in your chest, or the object that the Tin Man lacks) is to score as few points as possible.  A player gains a point for each suited heart they win during a trick. (Click here for the rules for hearts).  A player gains thirteen points …

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The Certainty of Bad Policy Makers Avenging Reality All Play and no Work Makes the US a Poor Country All Play and No Work Makes Johnny a Poor Boy Shooting the Moon, and the Economy: Washington’s Deadly Game of Hearts (and Thrones)

May
16

The Certainty of Bad Policy Makers

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May 16, 2012

Do you know what your tax rates are going to be next year?  Will the Bush tax cuts expire as planned?  How will that affect you?  Will the payroll tax “holiday” be extended?  Will the debt ceiling be raised?  Will it be another temporary last minute deal that involves no real spending cuts but makes markets nervous?  Will the Keystone pipeline ever be approved?  Will The Affordable Health Care Act be found to be constitutional?  Will the Supreme Court find that Arizona can enforce immigration laws?

Will Greece remain in the Euro zone?  Is it any wonder there are runs on Greek banks as everyone is trying to pull their money out of Greece while they still can?  Can they even form a new government?  What happens when they physically run out of money?  What then happens to Italy, Spain, and Portugal?

If only policy uncertainty helped the economy.  It doesn’t, but policy makers seem to be acting like it does.  Policy uncertainty is how politicians pretend to be clever, often too clever by half.  They want to convince voters that voting for their party or candidate matters.  One way to do so is to create policy uncertainty.  Make tax cuts expire in an election year.  Postpone decisions on regulations and their enforcement until after the next election.  Suggest new government programs and aid to special interest groups to begin if and only if your party or candidate gets elected.

Are today’s politicians more concerned about growing the economy or getting and keeping their party in power?  Their actions suggest the latter.  This is one reason that economies do better under the rule of law than under the rule of arbitrary politicians.

The tax code needs to be simplified (with lower marginal rates and few to no deductions) and then left alone.  Temporary tax changes should be banned.  So should special interest carve outs in the tax code.  Whether it is a flat rate income tax or a national sales tax, the same marginal tax rate should apply to all.  That should be the rule that politicians are not allowed to deviate from.  They can raise the rate for all or lower it for all, but no selling special tax favors to special interest groups.

Combine a simple, stable tax code with a balanced budget rule and you dramatically lower the degrees of freedom policy makers have to provide policy uncertainty.  They can only spend what they collect in taxes.  They can only change taxes collected by varying the single tax rate on everyone.

With these two simple rules, Greece could have been a model community rather that the chaotic state waiting to collapse into an authoritarian regime. (Granted they are also badly in need of labor market reforms).  These same two rules would have prevented a debt crisis in the US and would keep policy uncertainty from squashing our current and future economic growth.

Good economic ideas are not hard to come by.  Politicians who act for the benefit of the country over the benefit of their party are.  What are the chances that the US enacts meaningful tax, entitlement, or debt reforms before the November election?  They are just as low as the likelihood that our economy is going to magically take off and grow under a cloud of policy uncertainty.  Of that, at least, I’m certain.

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May
09

Avenging Reality

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May 9, 2012

The Euro’s value has been dropping this week, as have global stock markets based on a fear of a disintegrating Europe.  Apparently the Greek public has already tired of austerity.   Mind you, their austerity measures still entailed running large (though smaller than before) budget deficits.  It just doesn’t feel good to them to cut back on their borrowing.  It is apparently more fun to spend other people’s money than it is to pay it back.

Some are claiming that Frances’ election this week also represents a populist pushback against austerity.  It is both funny and sad to watch electorates try to avoid reality.  Time Magazine points out that austerity isn’t really optional.  Broke is broke.  The Economist agrees. Who is going to lend more money to the likes of Greece, France, Spain, Italy, and Portugal?  Certainly not investors who think that politicians will push their governments to default on their debt.

Debtors always blame creditors for their problems.  Indebted 19th century US farmers created a large populist movement based on a crusade against banks and creditors.  They rallied behind William Jennings Bryan who advocated massive inflation to help lower the real indebtedness of borrowers.  Greek and French populists now blame German banks for their problems.  How dare the Germans impose rules on governments to insure that the governments will be in a position to make payments on their debts!

The Greek call to abandon the Euro comes from those who want to be able to inflate the Greek Drachma to ease the indebtedness of the Greek government – William Jennings Bryan style.  This would punish each and every person, Greek and non-Greek alike, who bothered to save their money in Greek banks or invest their savings in the Greek economy.  It will be hard for the Greek economy to grow when all investment leaves.

The same was true when countries, like Argentina, chose to borrow money from the IMF.  Money comes with strings attached.  The biggest string is always austerity.  Government debt problems, by their very nature, cannot be solved by allowing governments to pile up more debts.  Governments have to stop handing out money they don’t have.  This is not because creditors are jerks, it is because reality is real and yes, sometimes it bites.

The US Congress remains in its own state of denial.  Despite the  $33 million a day subsidy to the US Postal Service, they refuse to let the USPS to reform itself. The Senate voted to pump more taxpayer money into the Post Office rather than allow it to reform.  Now the USPS has called off a closing of rural post offices.  Why reform when someone else is paying for the deficits?

Few politicians called on European countries to reform their profligate ways until investors finally decided that lending even more money to irresponsible governments was, well, irresponsible.  These people are now called “bond vigilantes”.  In reality, it is the politicians who pile on debt knowing that it cannot be repaid who are the immoral ones.   If governments refuse to bring justice to their people and confront unsustainable borrowing, then by all means let the bond vigilantes enforce the truth.  After all, the number one movie opening record was just set by The Avengers.  Americans love to route for justice even if it has to come from vigilantes.

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May
04

All Play and no Work Makes the US a Poor Country

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May 4, 2012

Sometimes looks can be deceiving.  April’s unemployment rate fell from 8.2% to 8.1% which looks good.  On the other hand, the labor force participation rate continued to fall and hit a 30 plus year low.  Fewer people are in the labor force now than were there at the beginning of the economic recovery.  If the labor force participation rate had remained the same as it was in June 2009, Investor’s Business Daily calculates that the unemployment rate would now be 11%.

The US recovery has largely involved people giving up on the prospect of work.  Many of these people have chosen to file disability claims instead, as five million new workers and their families have been added to the Social Security disability program under President Obama.  Once they begin collecting disability, they are unlikely to ever return to the labor force.

Since 1992, the average real GDP growth rate (omitting quarters where the economy is contracting) has been 3.7%.  That is, when the economy has grown, it has grown at a pace to increase employment.  The average growth rate for the US economy since the end of the 2009 recession (since the last negative quarter) has been just 2.4%.  The average growth rate over the last five quarters has been a mere 1.74%.  Put another way, the anemic recovery has been losing steam rather than revving up.  This translates into even fewer people with jobs.

The WSJ pointed out today that young workers who enter the labor force in a recession suffer years of lower wages.  Last fall, The Economist noted that high youth unemployment will be felt for decades both by those affected and by society at large.  Even MSNBC is catching on, noting the trend of jobless young people.  Maybe the youth can raise sheep instead of being doctors. Happy graduation season!

The irony of the entitlement state is that the more that people feel entitled to free stuff, the less stuff they’ll actually receive.  Quebec’s students are on strike because they don’t want tuition to increase.  They think that a college education should be free.  In fact, if it is not going to be free, they apparently prefer not to go to class at all.

The weight of entitlements is crushing Europe and they are beginning to crush the American spirit.  Citizens’ desire for more free stuff is often inversely related to their desire to work.  People who work and produce can buy things they need.  There is no end to the “needs” of the freeloading masses.  More is never enough.  I want more stuff, but I am constrained by the fact that more stuff requires more work on my part.  When all rewards are separated from work, it should be no surprise that fewer people choose to work while the clamor for more free stuff accelerates.

The problem herein is simple math.  Wealth has to be produced before it can be redistributed or consumed.  As a larger and larger percentage of Americans produce nothing, they will demand ever larger handouts from the few suckers who are willing to keep working.  As those suckers wise up and quit working (think of the strike of productive men and women in Atlas Shrugged), there will be less wealth to redistribute. Note our slower growth rates pointed out above.  Soon there will be nothing left to redistribute because a nation of all consumers and no producers will eventually squander the last vestiges of wealth.  By then rioting or striking for more free stuff will be as pointless as it is silly today.

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Apr
24

All Play and No Work Makes Johnny a Poor Boy

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April 24, 2012

I was eight years old when I began working six days a week, fifty two weeks a year delivering newspapers.  By age 13, I had two jobs.  I worked through high school and college. No, this isn’t the 1930’s I’m referring to but the 1980’s and 90’s.  Times, they are a changing – particularly for our nation’s young men.

A couple big trends are emerging.  The first is that kids these days are working less than ever, and not just because they are attending college.  Fewer look for jobs, and fewer who do can find them than in the past.  The second trend is that young men are less likely to look for or find work than their female counterparts.  Young men also are less likely to attend college than their female peers.

The following statistics are from the Bureau of Labor Statistics’ data release last week regarding 2011 high school graduates.

-          68.3% of 2011 high school graduates were enrolled in colleges or universities (down from 70.1% in October 2009)

-          The unemployment rate for recent high school grads not in college is 33.6% compared to 21.1% for recent graduates attending college.

-          68.7% of high school graduates were in the work force compared to 38.8% of those enrolled in college

-          Female high school graduates are more likely than their male counterparts to go to college (72.3% to 64.6%).  Of those college attendees, women were also more likely to look for or have a job than their male counterparts (41% to 36.5%).

-          For high school dropouts, the labor force participation rate was only 55.5% along with a 38.4% unemployment rate.

The above data reveal that fewer than half of 2011 high school graduates who didn’t attend college actually have a job (only 68..3% want a job and of that a third don’t have one).  Only a third of high school dropouts have jobs.  What are these young people doing if they neither go to work nor go to school?

Fewer young people may want to work because their families have increased wealth over previous generations.  Why work if Mom and Dad will give you everything you want?  Fewer young people may be getting hired because of increases in state and federal minimum wages.  The Federal minimum wage has gone from $3.35 an hour in 1990 (when I began working at a local movie theater) to $7.25 an hour by 2009.  When wage increases outpace increases in worker productivity, unemployment increases.

Perhaps the expansion of government funded student loans has contributed to a decrease in work.  Surely student loan rates would not be so high if more students worked during high school or college to pay for college.  The President’s response has been to tour college campuses and promise cheaper loans with fewer penalties for defaulting (at taxpayer expense).  That will only depress young people’s desire to look for work.

When a generation of new college graduates has no work experience, it doesn’t bode well for their future employment.   Perhaps this is why half of new college graduates are jobless or underemployed. It is important to show perspective employers that one has a history of showing up for work and working hard.  Job prospects are even harder for recent graduates in the arts and humanities who face higher unemployment rates than those in business or health.  Whoever is telling students to not work, take out student loans, and major in fields that don’t prepare people for jobs that are in demand, is doing them a disservice.

The economic picture is even worse for young men.  In 2010, women aged 16-19 were more likely than their male counterparts to be in the labor force.  From 1990 through 2010, male labor force participation fell from 76.4% to 71.2% as female labor force participation rates increased from 57.5% to 58.6%.  Male unemployment for men over 20 years of age was  8.3% in March 2012 compared to 7.2% for women of the same age.  Young women are more likely than young men to look for jobs, have jobs, and attain a college degree.

If this pace holds, this will be the first generation of women in US history to outpace men in the labor force.  Women without children under the age of 30 now out earn their male counterparts.  For those women who choose to have children under the age of 30, most births occur outside of marriage.  Today’s young men are working less than women, going to school less than women, and not marrying the mothers of their children.  What happened that the US no long raises responsible young men?  Surely this has implications for the long run health (or lack thereof) of the US economy.  No wonder people like Peggy Noonan are questioning America’s crisis of character.

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Apr
20

Shooting the Moon, and the Economy: Washington’s Deadly Game of Hearts (and Thrones)

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April 20, 2012

The object of hearts (the card game, not the muscle in your chest, or the object that the Tin Man lacks) is to score as few points as possible.  A player gains a point for each suited heart they win during a trick. (Click here for the rules for hearts).  A player gains thirteen points if they win a trick containing the queen of spades. However, if a player collects all of the hearts in a round along with the queen of spades, then the player gets no points and all and his/her opponents each get 26 points.  The strategy of going for all 26 points is called “shooting the moon” (or running).

It is the beginning of election season and Washington’s politicians, while running for office, are attempting to shoot the moon (except for Newt Gingrich who actually wants a moon colony) by promising more free stuff which no one attempts to pay for.  Food stamp rolls are up 70%, as are disability claims, and Republicans passed a bill for temporary tax cuts for small businesses (temporary tax cuts don’t stimulate the economy – permanent reductions do).  Apparently politicians don’t mind saddling the American public with the queen of spades (the quickly rising national debt) as long as they capture all the hearts of the electorate so that they can get themselves re-elected.

On September 30, 2008, a month before Barack Obama’s election, the national debt stood at $10,024,724,896,912.49.  On April 18th, 2012 it stood at $15,660,736,663,887.96.  That is, more than a third of our entire national debt has been accumulated within the last three and a half years. Attempting to shoot the moon, but failing, sure does lead to the accumulation of points (and debt).

The Game of Thrones is an HBO TV Series where Medieval styled protagonists vie to be crowned King of the Seven Kingdoms.  The right to sit on the throne and direct the resources of the realm (often to their own benefit) comes from their ability to kill those who oppose them.  While we at the WKU BB&T Center for the Study of Capitalism do not advocate the use of force to resolve differences, at least the characters in the series are straightforward.  Those who aim to hold power over others make no bones about their need, or desire, to kill others to make it happen.

In South America, Argentina’s President Kirchner makes no bones about stealing private property to further her political goals.  Her purpose is very clear.  Oddly, the Obama administration has decided not to weigh in on the Argentine’s theft of YPF or YPF Gas.  I guess it isn’t obvious to him that stealing property is bad.  As a constitutional “scholar” maybe the President knows that in Kelo vs. New London, the US Supreme Court legalized theft as long as it increases tax receipts.  Therefore it would be hypocritical for the US to complain about other countries’ stealing of property.  After all, he worked to nationalize student loans and GM during his first term – the latter of which went against legal precedent in contract law.

When politicians position themselves for election season (to gain or maintain their thrones where they direct resources, often for their own benefit), they often try to convince the public about how much they care with all of their heart about the plight of others.  President Bill Clinton’s famous line was “I feel your pain”.  As a former politician, I can assure you that the size of my heart, in the minds of special interest groups, was directly related to my willingness to spend other people’s money on their particular pet project.

In Washington’s game of thrones, politicians promise people free stuff at no cost to them in exchange for political support.  A trillion dollar budget deficit reflects a rather substantial amount of goodies being handed out without making people pay today for them.  In the Seven Kingdoms, the battle for the throne is very bloody.  Here in reality, the battle for the hearts of the electorate appears to be equally bloody, at least for our economy.

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Apr
11

Fairest in the Land

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April 11, 2012

“Mirror, mirror upon the wall, Who is the fairest of all?”

The mirror answered – “Thou, O Queen, art the fairest of all,”

And the Queen was contented, because she knew the mirror could speak nothing but the truth,

Little Snow White – Grimm’s Fairy Tales

The queen in Snow White’s story got awfully upset when her magic mirror later noted that little Snow White was fairer than herself.  This week, President Obama willfully played the role of the queen.  He demanded of the American public, who is the fairest of all?  He hit the campaign trail lauding the Buffett rule, which would require higher income earners to pay more taxes.  As the WSJ noted, the administration claimed that taxation is about fairness, not growth or revenue.  The administration cannot run on its record of economic growth or balanced budgets.  Nor can it run on a platform of a plan to create economic growth or reduce budget deficits.  President Obama’s budget was defeated 414-0 in the US House of Representatives meaning that even members of his own party acknowledge he has no real economic plan.  Instead, he plans on claiming that he is the fairest in the land.

Fair is in the eye of the beholder.  Public employees earn more than their private sector counterparts.  Is that fair?  According to the BLS, women have accounted for 92% of job losses since President Obama took office.  Is that fair?  Mitt Romney used that statistic, but MSNBC and others didn’t think the use of the statistic (though correct) was fair.  Surveyors have found that over half of the American public believes that taxes on the wealthy need to be raised while simultaneously believing that lottery winners should pay no more than 10% of their winnings in tax.  Apparently, if they earn the money, they should hand it to the government but if they blindly fall into money as a matter of luck, it should be theirs’ to keep.  What’s not fair about that?

Fair seems to be forgiving student loan debt for those who didn’t major in a marketable degree.  Or forgiving home debt for those who buy a house they cannot afford.  Fair, as used by the administration, is almost always associated with forced income redistribution.  Unfair is almost always associated with people having to pay for their own consumption.  Medicare and Medicaid reforms, then are inherently unfair, and the President stated as much.  Remember that fair elections to a politician from Chicago don’t mean the same thing to them as they do to the average American, which is why the administration so strongly feels that requiring an ID to vote is an idea to be nipped in the bud.

Apple has been busy making money lately.   They are almost single handedly driving stock growth.  Back Apple out of the S&P 500, and earnings growth drops from 7.8% to a mere 2.7%.  Of course, in the President’s fair world, it wouldn’t be fair for one firm to make so much more than others.  So today, the Obama administration announced that it was suing Apple.   This from BBC News, “The lawsuit comes a day after Apple surpassed $600 billion in value.  The increase affirmed its position as the world’s most valuable firm”.  It doesn’t pay to stand out as superior in a fair world.

Maybe President Obama and I grew up singing different hymns.  I sang “fair are the meadows, fairer still the woodlands” and I didn’t feel the need to cut down all the trees to make the landscape equally fair.  One only wonders what will happen if the electorate doesn’t pronounce President Obama as the fairest in the land in the fall.  We know what the queen in Snow White’s story did.

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Apr
06

Government Health Careless

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April 6, 2012

When I packed for an academic conference last week, I neglected to pack my cholesterol medicine.  While the health benefits of statins can be debated, patients on statins are not supposed to abruptly stop taking them or miss taking them for multiple days.  In a world devoid of government intervention in health care, my doctor would suggest I take statins (once I assure him that I want to eat bacon cheeseburgers with impunity), and I would go to a pharmacy and purchase them.  If I forgot them for a trip, I would go to the store and buy more.  Yet, this is not what happened last weekend.

I went to a nationwide pharmacy chain and asked to purchase my statin of choice.  However, said statin cannot be found on the shelf because it requires a prescription.  Someone, somewhere, must believe that people left to their own irrational self would abuse cholesterol medicine.  I have never enjoyed taking cholesterol medicine, so I don’t know what the point would be of abusing it.  Nevertheless, the government says that I cannot be trusted to buy three cholesterol pills, even though my doctor has clearly instructed me not to miss taking my medicine for days at a time.

I asked the pharmacist if I could purchase three days’ worth of my statin medicine.  He looked into his computer and found that I have a prescription along with the correct dosage.  At this point he knew that A – I take statins, B – what my correct dosage is, and C – that unless he sells them to me, I won’t be able to take them.  Yet, he couldn’t fulfill my request.  When said pharmacy chain stopped accepting my insurance January 1st, I transferred my prescription to a local pharmacy.  Therefore, his computer, which held my prescription info, said my prescription was not active and could not be filled.  It was Sunday so I couldn’t contact my doctor or my local pharmacy.

To recap: my doctor told me to take a drug.  I agreed to take it.  Government rules prevented me from taking it.  In this case, the government actively enacted laws that could impair my health.  Is the FDA there to protect us or to harm us?  It is an open question.  Is this a government I want to put in charge of all of health care?  Will they serve my interests, the interests of insurance companies, taxpayers, government bureaucrats, all, or none of the above?

Under Obamacare, the federal government has decided to make sure that women won’t have any co-pays for contraception.  Contraception won’t be free, but it will be at no marginal cost to them.  That is, contraception that works by preventing implantation after fertilization, but doesn’t prevent the spread of STD’s, is mandated to be covered in the guise of health care, while other birth control methods which prevent fertilization (for those who actually believe that life begins at conception), or prevent the spread of STD’s, such as condoms, won’t be freely provided.  Maybe free condoms didn’t poll as well as free birth control pills.

That is, government health care is about politics, not health.  Private health care between doctors and patients, on the other hand, tends to be about health, not politics. When was the last time your doctor asked about your political views?  To suggest that the government can do anything without the influence of politics is to disregard all historical evidence.  There’s a reason they had to have bipartisan base closure committees.  Even national defense is politicized.  Therefore, it should be no surprise that government health care is more about politics than health.   The idea trust a government with everyone’s health care stems from a love of government more than a love of healthcare – that is, unless you thought I was better off skipping my cholesterol medicine whilst I ate schnitzel.

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Mar
27

Make Money not War

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March 27, 2012

Capitalism (free enterprise for those who like that phrase better) and war are polar opposites.  The former relies on voluntary exchanges made by free people without duress.  The latter relies on the use of force to coerce unwilling people to conform to the will of the most forceful.  It is therefore a bit confusing to have the Republican Party in the US be the party that, on the margin, prefers free enterprise (over governmental force) for most public exchanges while simultaneously being the party of war hawks.  Having just two major political parties for a country of 300 million plus people is bound to force alliances of differing ideologies.  Politics often does create strange bedfellows.

Perhaps the war hawks believe that free enterprise is great but that unless we have a strong national defense, other people around the world who are less enamored with voluntary exchanges  will invade and enslave our citizens to their will.  While not impossible, the odds that a foreign power would engage in a full scale invasion of the US are highly improbable.  If nothing else, two large oceans and prevalent private gun ownership would make it a difficult country to conquer.  The bigger threat comes from terrorists – which large, centralized militaries are not well equipped to defend against.

A brief review of American military involvement illustrates how war and free enterprise are juxtaposed.  To finance the American Revolution, colonial governments stole large amounts of money and encouraged other theft.  Property was confiscated from loyalists.  Over 60,000 loyalists fled the 13 rebellious colonies. Washington’s army stole food from farms in their path.  Patriot soldiers who voluntarily joined the Continental Army in exchange for pay were stolen from when they weren’t paid as promised.  Hyperinflation caused by the Continental Congress’s printing of money stole from those who trusted in the value of the Continental dollar.  Privateers (Congressionally legalize pirates) stole over $16 million worth of goods from private British citizens during the war.

The US Civil War resulted in over 600,000 American deaths, along with massive property loss in the South.  Both the Union and Confederate armies relied on military drafts forcing people to fight for wages they did now voluntarily agree to.  The military draft continued into the 1970’s.  The Union paid for the war through new income taxes, a doubling of the currency, higher tariffs, new excise taxes, and an exploding national debt which went from $65 million to $2.7 billion.

Twentieth century US wars proved no better for free enterprise.  WWI saw the nationalization of industries, price controls, higher taxes, and an exploding national debt.  So did WWII.  As bad as war has been on the US economy, it was worse in 20th century Europe.  This is why after WWII they decided to make money, not war.  Europeans learned that it was better to lower trade barriers and free up the movement of goods, services, and labor across borders.  People who make money by trading with each other are less likely to want to kill each other.  War is bad for business.

Rather than seeing people outside the US as our enemies, we should look at them as our potential trading partners.  Our voluminous trade with China virtually guarantees a peaceful relationship between the countries.  All China would have to do is declare war on the US and the US would immediately cancel payment on the trillion dollars of debt China has leant it.   Rather than use an us vs. them attitude towards foreigners, we should develop an us and them attitude.  How can we enter mutually beneficial relationships with others that create more wealth for everyone?

Wars are costly both monetarily and in the loss of liberty.  The use of force begets the use of force.  True wealth creation comes through voluntary transactions.  The US should immediately eliminate all trade restrictions we have on every country in the world.  Let’s make money, not war.  We can still have a well-equipped military just in case, but by turning our enemies into friends, we won’t need it.

Note: Catallaxy –  A term made popular by Friedrich Von Hayek which describes how voluntary exchange turns enemies into friends.

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Mar
19

Blind(er) Faith in the Government

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March 19, 2012

Alan Blinder was at it again in Monday’s WSJ, as he warned against a 2013 fiscal cliff.  One wonders if he is not too blind to tell the difference between a cliff and a mountain.  The cliff Professor Blinder worries about involves programmed tax increases and spending cuts set to take effect in January 2013.  His die hard Keynesian beliefs lead him to assume that if the government ever lowers government spending, the economy is doomed.  Never mind the mountain of debt the US government has accumulated, and continues to accumulate, at record pace.

At last look, the US was headed for another trillion dollar deficit this fiscal year.  Its budget deficit is 7.8% of GDP, and its debt/GDP ratio is over 100%.  Yet Professor Blinder worries that fiscal restraint will harm the economy.  This is the best Princeton economists can do?  No wonder politicians engage in so much bad policy.  The vast majority of official economic advisers are Ivy League knob twisters.  They believe themselves to be so smart that they know which knobs to turn when to maximize economic health.  The truth is they know little about the economy or the human action from which it materializes.

In Professor Blinder’s world, any cut in government spending, regardless of current debt levels, is bad for the economy.  It’s this kind of advice that caused Greece to think it could borrow and spend its way out of a debt crisis.  The reality is that the larger percentage of the economy that is controlled by the government, the slower economic growth will be.  Free individuals know more about making trades that make themselves better off than do government bureaucrats.  Government spending goes to the politically connected, not the economically efficient projects.  Cuts in government spending free up resources to be used by private firms for true economic wealth creation.

Should the temporary reduction in the payroll tax be allowed to expire?  Yes, by all means.  Temporary tax cuts don’t speed up the economy.  Furthermore, Social Security and Medicare, which are funded by the payroll tax, are both bankrupt.  They face trillions of dollars in unfunded liability.  That unfunded liability grows when the payroll tax is cut.  Making promises to people you knowingly can’t follow through on is deceitful.  It is also theft.  Taking money from people with a pledge to give it back when you know you can’t is robbing from Peter to give it to Paul.  Increasing Medicare and Social Security unfunded liability is not only immoral, it is bad long run economic growth policy.  This, of course, goes unnoticed by Professor Blinder.

Professor Blinder is stuck in a world where he believes that people can spend their way to wealth.  Governments and consumers just need to buy more and all will be well.  The truth is that saving and investment is the key to economic growth.  Large government debts compounded by even larger government backed unfunded liabilities suck saving out of the private sector and crowd out private investment.  Inflationary monetary policy caused by the need of the government to reduce the burden of their debt further lowers long term investment in the economy.

I do agree with Professor Blinder’s lack of confidence in politicians’ ability or desire to tackle serious problems in a serious manner.  He notes that Congress and the President keep kicking important decisions down the road and that each time they kick the can the can gets bigger and harder to kick.  Unfortunately, the can that Professor Blinder advocates opening, rather than kicking, is only full of worms.  It would be nice if politicians acted like responsible adults. However, if the alternative to kicking decisions down the road is the permanent implementation of economic policies that will destroy the long run health of the US economy, kick away.

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Mar
14

Free Lunches: Who will pay for my fondue?

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March 14, 2012

One has to appreciate any country which thinks that everything should be dipped in either cheese or chocolate.  There is a lot to appreciate about Switzerland’s economy as well.  Their unemployment rate is 3.1% compared to 8.3% in the US.  Their trade surplus is 13.4% of their GDP while the US trade deficit is 3% of US GDP.  Switzerland’s budget is almost balanced with a .5% budget deficit compared to a 7.8% budget deficit in the US.  Switzerland also ranks 5th to the US’s 10th in the Heritage Foundation’s ranking of economic freedom.

Why is the Swiss economy doing so well compared to the US?  This weekend provided a snapshot.  Swiss voters rejected in a referendum that employers be required to offer six weeks of paid vacation to workers.  When I asked my students if they would have voted for it, I got a class full of yeas and no nays.  It turns out the Swiss understand that there is no such thing as a free lunch (or free vacation).  They have known this for a while.  Their debt/GDP ratio is 51% compared to the US 105%.

Apparently, the average Swiss voter understands that if you mandate that employers give people free stuff, someone has to pay and that someone is workers.  In a globally competitive marketplace, employers have to compete with firms around the world.  Rules that make Swiss firms less competitive mean that jobs will flee to other countries.  The Swiss value work and saving.  As a result, their economy is doing well.

Compare that to what is going on in the US.  President Obama promised free birth control for all, which of course doesn’t mean that it is free.  Employers have to pay the extra costs.  When employers have religious objections, the insurance company has to pay for the birth control.  Either way, it is workers who pay.  Like corporate taxes, the burden of business regulations falls on employees.  More generous benefits mean lower salaries and more jobs moving overseas.

Recall that Obamacare was originally hailed as a deficit reducer.  It turns out it costs even more than expected.  Allysia Finley wondered this week, sarcastically, why the government doesn’t mandate free coffee and gym memberships as part of the health care overhaul.  If free stuff is good, and free health care saves money, shouldn’t more free health care save even more money?

It is campaign season, so politicians will continue to roll out their plans for more free lunches.  Government backed student loans and home loans are looking more and more like taxpayer gifts.  Twenty-seven percent of student loan recipients are behind on their repayments.  If politicians had their way, everything would be free: food (food stamps), clothing, health care, energy (energy subsidies), cars (cash for clunkers and the GM bailout), a college education, etc.  Politicians believe that voters can have free stuff as long as they vote for it with impunity.  Too many US voters agree with them.

Hollywood seems to agree as well.  I rented “In Time” this week (which proved to be a waste of my time). There were too many idiotic premises to explore them all, but the gist was that there is plenty of wealth to go around if we can just agree to share it all, everything will be fine.  The film suggests that all wealth that has been created was stolen, so stealing people’s wealth is just  (as long as the proceeds are shared with others).  If that represents the prevailing reasoning in America, the American economy is destined to collapse.  Philanthropy only comes before wealth in the dictionary and wealth has to be created.  Prevent wealth creation and we can all watch how fast philanthropy dries up.

To paraphrase Marx, Voters of the world unite and vote yourself free stuff.  You have nothing to lose but your brains (and your job, your sense of self-worth, your standard of living, and your liberty).  When you wreck your economy there will be a job waiting for you in Switzerland.

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