Normally, the Supreme Court's activities are irrelevant to the future direction of the economy. But, not this time.
The American economy is weighted down by historically unsustainable debt levels. This is not just a problem of federal debt. If you add in state and local debt, the situation is significantly worse than the European sovereign debt crisis. And, there is no good solution.
On top of the sovereign debt overhang, the American economy is beset with an onslaught of new regulations that threaten to overwhelm the fledgling recovery. Businesses have pulled in their horns. There is no real enthusiasm to expand employment or start new businesses. Meanwhile, there is a steady drumbeat of vitriol from the White House about how "unfair" business people are. This stuff takes its toll.
With Obamacare on the horizon and a massive tax increase slated for early 2013, the American economy is poised to go over the cliff and another important recession could well be underway by the second half of 2012.
Will it happen?
That depends. There is always the feeling the tax increases that will automatically take place in early 2013 might be postponed one more time. That won't help much because taxpayers will realize that this merely postpones the day when they will get bludgeoned by the tax man. But, it will help a little.
More threatening is Obamacare. Obamacare dramatically increases the national debt, expands the government's direct role in the economy in a historically unprecedented manner, and burdens businesses with the largest single cost mandate in history.
The combination of Obamacare and much, much higher tax rates and an Administration that wants even higher tax rates than those that are coming in early 2013 is deadly for an economy struggling to find it's way out of the 2008-09 crisis.
If the Court finds that Obamacare is constitutional (which may or may not be the correct constitutional decision...I'm no expert on that one), the economy will be in big, big trouble and a second recession is undoubtedly in the offing. Combined with inept policy in the Eurozone, things could get dicey, economically and politically throughout the developed world.
Pretty gloomy picture! But, it may not turn out that way. I am ever the optimist. Hopefully, Obamacare will not pass constitutional muster and the scheduled tax hikes in early 2013 can be cancelled (permanently). If those two items work out, then the economy should gradually work its way forward. If not, Katie bar the door.
For now, I would still own common stocks, but if Obamacare is constitutional then stocks will not be a good place to be. We will know by some date in June what lies ahead.
Rabu, 11 April 2012
Selasa, 10 April 2012
Irrelevant Economic Issues
Does it matter if a presidential candidate has a Swiss bank account? Will that impact economic growth for good or evil? Will raising tax rates on millionaires, which will mainly lower tax revenues (because income will simply be shifted or accrued), improve the economy or help the unemployed or reduce national debt? The answer to all of these questions is "no."
The real issues in the American economy are economic stagnation, exploding levels of state, local and federal debt, and the absence of public or private savings. These are the issues that matter. Assuming that a candidate has nothing to say about any of these issues, it only stands to reason that the candidate will begin to talk about other things like "tax fairness," "carbon footprints," "public investments," and so forth.
The interesting question is whether the public is interested in the real issues or the irrelevant issues. European countries have focused on irrelevant issues for the past three generations and now they are paying the price. Which direction will the US choose?
The real issues in the American economy are economic stagnation, exploding levels of state, local and federal debt, and the absence of public or private savings. These are the issues that matter. Assuming that a candidate has nothing to say about any of these issues, it only stands to reason that the candidate will begin to talk about other things like "tax fairness," "carbon footprints," "public investments," and so forth.
The interesting question is whether the public is interested in the real issues or the irrelevant issues. European countries have focused on irrelevant issues for the past three generations and now they are paying the price. Which direction will the US choose?
Senin, 09 April 2012
What would Keynes Say?
Mainstream economists continue to parrot the single equation naive "Keynesian" model of macroeconomics. This model says that increasing "G" will increase aggregate demand and lead to a higher GDP.
This "naive" model was developed by Richard Kahn, not Keynes, and was brought forward in a world where government spending was, by modern standards, relatively modest.
Today, in a world where government activity consumes nearly half of all resources in the US and close to two-thirds of the resources of the typical European economy, it is highly unlikely that more government spending would have any "Keynesian-like" effects. Why would giving public employees a ten percent pay raise improve the GDP? Keynes would turn over in his grave to see his work interpreted in this fashion.
Most economists don't read Keynes. What they read is the simplest mathematical versions of Keynes devised by other economists who also never read Keynes. But the name, "Keynes," is tacked onto these models to invoke the spirit of this great economist.
But, it was Keynes who first came up with the expression of "animal spirits." What are "animal spirits?" According to Keynes, capitalism is driven by the "animal spirits" of entrepreneurs. These animal spirits have nothing to do with increased government spending. Indeed, increased government spending may serve to reduce the animal spirits, so essential to economic prosperity.
But mainstream economists seem to have no interest in the animal spirits of entrepreneurs that Keynes found so important in his actual writings, as opposed to the modern caricatures of his work that appear so often in media and elementary economics courses offered in major American Universities.
If the actual writings of Keynes were assigned reading for students, they would learn that Keynes himself never subscribed to the simple-minded models that pass for modern Keynesianism. A simple perusal of "A Treatise on Money" written in the 1920s and "The General Theory of Employment, Interest and Prices" published in the mid 1930s" would be enough to convince the modern reader that Keynes would never support modern "Keynesian" policies.
Even on things like the European debt crisis, you will find Keynes useful reading. Try his first major work: "The Economic Consequences of the Treaty of Versailles." Keynes makes it clear in "Versailles" that huge debts facing weak economies will cause those countries trying to collect such debts more economic pain than if the debts were reduced dramatically. Keynes would clearly not support the Geithner-Merkel-Sarcozy program for Greece, Spain, Italy, Portugal and Ireland.
It should be obvious that capitalism works best when the environment values capitalists. If the environment is unfriendly to capitalists, then capitalism is not going to fare well. If capitalism doesn't fare well, then middle and lower income classes have no real chance for economic progress. Most observers, regardless of their training in Economics, understand this.
Keynes understood this better than his contemporaries. That's why it was Keynes and not someone else who surfaced the idea of entrepreneurial animal spirits. Keynes would not be supporting the current war on capitalists being waged by Washington policy makers if he were here today. He would be looking for ways to stoke animal spirits not dampen them.
This "naive" model was developed by Richard Kahn, not Keynes, and was brought forward in a world where government spending was, by modern standards, relatively modest.
Today, in a world where government activity consumes nearly half of all resources in the US and close to two-thirds of the resources of the typical European economy, it is highly unlikely that more government spending would have any "Keynesian-like" effects. Why would giving public employees a ten percent pay raise improve the GDP? Keynes would turn over in his grave to see his work interpreted in this fashion.
Most economists don't read Keynes. What they read is the simplest mathematical versions of Keynes devised by other economists who also never read Keynes. But the name, "Keynes," is tacked onto these models to invoke the spirit of this great economist.
But, it was Keynes who first came up with the expression of "animal spirits." What are "animal spirits?" According to Keynes, capitalism is driven by the "animal spirits" of entrepreneurs. These animal spirits have nothing to do with increased government spending. Indeed, increased government spending may serve to reduce the animal spirits, so essential to economic prosperity.
But mainstream economists seem to have no interest in the animal spirits of entrepreneurs that Keynes found so important in his actual writings, as opposed to the modern caricatures of his work that appear so often in media and elementary economics courses offered in major American Universities.
If the actual writings of Keynes were assigned reading for students, they would learn that Keynes himself never subscribed to the simple-minded models that pass for modern Keynesianism. A simple perusal of "A Treatise on Money" written in the 1920s and "The General Theory of Employment, Interest and Prices" published in the mid 1930s" would be enough to convince the modern reader that Keynes would never support modern "Keynesian" policies.
Even on things like the European debt crisis, you will find Keynes useful reading. Try his first major work: "The Economic Consequences of the Treaty of Versailles." Keynes makes it clear in "Versailles" that huge debts facing weak economies will cause those countries trying to collect such debts more economic pain than if the debts were reduced dramatically. Keynes would clearly not support the Geithner-Merkel-Sarcozy program for Greece, Spain, Italy, Portugal and Ireland.
It should be obvious that capitalism works best when the environment values capitalists. If the environment is unfriendly to capitalists, then capitalism is not going to fare well. If capitalism doesn't fare well, then middle and lower income classes have no real chance for economic progress. Most observers, regardless of their training in Economics, understand this.
Keynes understood this better than his contemporaries. That's why it was Keynes and not someone else who surfaced the idea of entrepreneurial animal spirits. Keynes would not be supporting the current war on capitalists being waged by Washington policy makers if he were here today. He would be looking for ways to stoke animal spirits not dampen them.
Minggu, 08 April 2012
Robert Reich Has It Right
Robert Reich, for Secretary of Labor in the Clinton Administration, penned an article today "For the rich, the recession is over." He's right.
The various policies put in place during the Fall of 2008 -- TARP, Federal Reserve activity, followed by the Stimulus Package of early 2009 and regulatory burdens of Dodd-Frank have all combined to rescue rich people, but promise to thwart any serious economic recovery. On top all of these misguided policies the Congress passed the "Affordable Care Act" which virtually guarantees no future economic growth for the US.
Absent a real economic recovery, poor folks really don't have a chance. The combination of laws that forbid hiring poor people (minimum wage laws) and laws that make it illegal for banks to loan money to poor folks (Dodd-Frank) and laws that make it virtually impossible to break the union monopoly of many construction jobs (Davis-Bacon, etc.), the deck is stacked against the poor and the middle class. As if this weren't enough, projects that could (eventually) lower gasoline prices and provide an immediate source of job creation (Keystone project as just one example) are blocked and taxpayer money is poured down ratholes of Administration supporters (Solyndra, etc.)
Politicians don't have to get jobs in the private sector, so they can blissfully claim that they are looking out for poor people as they pass laws that prevent the poor from having any real opportunities. The Congress and the Administration have combined to prevent the economy from having a chance of a normal economic rebound. This hurts poor people and middle class people. But, it has little or no effect on rich people.
Thus, Reich's conclusion. "For the rich, the recession is over." For middle class America, things will remain difficult.
The various policies put in place during the Fall of 2008 -- TARP, Federal Reserve activity, followed by the Stimulus Package of early 2009 and regulatory burdens of Dodd-Frank have all combined to rescue rich people, but promise to thwart any serious economic recovery. On top all of these misguided policies the Congress passed the "Affordable Care Act" which virtually guarantees no future economic growth for the US.
Absent a real economic recovery, poor folks really don't have a chance. The combination of laws that forbid hiring poor people (minimum wage laws) and laws that make it illegal for banks to loan money to poor folks (Dodd-Frank) and laws that make it virtually impossible to break the union monopoly of many construction jobs (Davis-Bacon, etc.), the deck is stacked against the poor and the middle class. As if this weren't enough, projects that could (eventually) lower gasoline prices and provide an immediate source of job creation (Keystone project as just one example) are blocked and taxpayer money is poured down ratholes of Administration supporters (Solyndra, etc.)
Politicians don't have to get jobs in the private sector, so they can blissfully claim that they are looking out for poor people as they pass laws that prevent the poor from having any real opportunities. The Congress and the Administration have combined to prevent the economy from having a chance of a normal economic rebound. This hurts poor people and middle class people. But, it has little or no effect on rich people.
Thus, Reich's conclusion. "For the rich, the recession is over." For middle class America, things will remain difficult.
Sabtu, 07 April 2012
"The Living Wage Campaign"
The left always gets attracted to ideas that sound good regardless of their real impact. The "living wage campaign" is just such an idea. This is essentially a minimum wage rule that advocates claim would help people pull themselves up out of poverty. In fact, it does just the opposite. Not an uncommon outcome for moral sounding initiatives put forward by wealthy, entitled college students designed to help the disadvantaged.
Even if one buys into the general idea, you have to wonder why the students and the advocates of the "living wage" don't simply dig into their own pockets and give money to workers who they think have inadequate income. The idea of making a personal wealth sacrifice never appeals to advocates of these schemes, who are invariably drawn from among America's wealthiest families. No, their idea of charity is to have someone who doesn't agree with them foot the bill for their ideas. Charity begins across the street for such advocates, it never begins at home.
A living wage is equivalent to putting up a sign saying "low skilled employees need not apply." All you are really doing is reducing the number of jobs available to poor folks and eliminating any shot of those at the bottom of the skill spectrum from getting a job. Imagine that the living wage was raised to $ 20 per hour. What would happen to the person now holding a $ 10 per hour job? He/she would have no chance of getting the $ 20 per hour job. First of all there would be many fewer such jobs simply because of costs. But, secondly, and more significantly, the new wage level would attract much higher skilled employees and eliminate from consideration the kinds of folks that now can compete for those jobs.
What the "living wage" people are really advocating is: 1) reducing the number of jobs available to low skilled employees; 2) upgrading the skill levels of those people that occupy those jobs by eliminating any real chance that low skilled employees can compete for such jobs. How noble! Why not simply put up a sign: "poor people need not apply here!" The living wage campaign amounts to the same thing.
Notice that the employees that currently hold these jobs are rarely in the vanguard of the "living wage movements." Instead wealthy and privileged college students, who are largely sheltered from the vicissitudes of the economy, are trying to show the world how caring they are. As the living wage campaign advocates bask in the mirror extolling their personal morality, low skilled Americans take one more step back into the economic morass.
Even if one buys into the general idea, you have to wonder why the students and the advocates of the "living wage" don't simply dig into their own pockets and give money to workers who they think have inadequate income. The idea of making a personal wealth sacrifice never appeals to advocates of these schemes, who are invariably drawn from among America's wealthiest families. No, their idea of charity is to have someone who doesn't agree with them foot the bill for their ideas. Charity begins across the street for such advocates, it never begins at home.
A living wage is equivalent to putting up a sign saying "low skilled employees need not apply." All you are really doing is reducing the number of jobs available to poor folks and eliminating any shot of those at the bottom of the skill spectrum from getting a job. Imagine that the living wage was raised to $ 20 per hour. What would happen to the person now holding a $ 10 per hour job? He/she would have no chance of getting the $ 20 per hour job. First of all there would be many fewer such jobs simply because of costs. But, secondly, and more significantly, the new wage level would attract much higher skilled employees and eliminate from consideration the kinds of folks that now can compete for those jobs.
What the "living wage" people are really advocating is: 1) reducing the number of jobs available to low skilled employees; 2) upgrading the skill levels of those people that occupy those jobs by eliminating any real chance that low skilled employees can compete for such jobs. How noble! Why not simply put up a sign: "poor people need not apply here!" The living wage campaign amounts to the same thing.
Notice that the employees that currently hold these jobs are rarely in the vanguard of the "living wage movements." Instead wealthy and privileged college students, who are largely sheltered from the vicissitudes of the economy, are trying to show the world how caring they are. As the living wage campaign advocates bask in the mirror extolling their personal morality, low skilled Americans take one more step back into the economic morass.
Jumat, 06 April 2012
The Eurozone Slips Back into Recession
No big surprise. Austerity and the absence of reform are not a good mix. Meanwhile, sovereign debt levels soar off into the stratosphere.
There will be a lot of finger-pointing and the blame-game in the future when the current European trajectory ends in disaster. All of this was easily avoidable.
Had Greece been permitted, just two short years ago, to do a default workout with its creditors, the Eurozone economy would probably be motoring along today. But, no.
The Geithner-Merkel-Sarcozy strategy, which is really just blindly putting one's head in the sand, has been adopted. The result: economic contraction and growing political chaos. As for reform, that is out the window, as recent developments in both Spain and Italy can attest.
Whenever economic conditions seem to be faltering, there is an outcry for politicians to "solve" the problem. Inevitably, politicians take a relatively minor problem and turn it into an economic disaster. This has happened over and over again in the history of modern, developed economies. Only when politicians did not have enough clout to interfere (19th century America, for example) were economic problems left to right themselves and economic growth permitted to triumph over foolish policy prescriptions.
Economies can heal themselves. People can learn. But, what never works is direct action by the government to "solve" the problem.
Piling debt upon debt and attempting to force austerity on Europe won't work and will end in disaster. By the time disaster strikes, Geither, Sarcozy, and Merkel will no longer be in power. So, they will be sitting on the sidelines pointing fingers at others. But, the coming disaster for Europe will be a direct result of the foolishness that now passes for policy.
The only way to deal with too much debt is to reduce it. The only way to achieve economic growth is to break the stranglehold of too much government and too much regulation. The Merkel-Sarcozy-Geithner policies take us in exactly the opposite direction.
The future for Europe is perfectly predictable.
There will be a lot of finger-pointing and the blame-game in the future when the current European trajectory ends in disaster. All of this was easily avoidable.
Had Greece been permitted, just two short years ago, to do a default workout with its creditors, the Eurozone economy would probably be motoring along today. But, no.
The Geithner-Merkel-Sarcozy strategy, which is really just blindly putting one's head in the sand, has been adopted. The result: economic contraction and growing political chaos. As for reform, that is out the window, as recent developments in both Spain and Italy can attest.
Whenever economic conditions seem to be faltering, there is an outcry for politicians to "solve" the problem. Inevitably, politicians take a relatively minor problem and turn it into an economic disaster. This has happened over and over again in the history of modern, developed economies. Only when politicians did not have enough clout to interfere (19th century America, for example) were economic problems left to right themselves and economic growth permitted to triumph over foolish policy prescriptions.
Economies can heal themselves. People can learn. But, what never works is direct action by the government to "solve" the problem.
Piling debt upon debt and attempting to force austerity on Europe won't work and will end in disaster. By the time disaster strikes, Geither, Sarcozy, and Merkel will no longer be in power. So, they will be sitting on the sidelines pointing fingers at others. But, the coming disaster for Europe will be a direct result of the foolishness that now passes for policy.
The only way to deal with too much debt is to reduce it. The only way to achieve economic growth is to break the stranglehold of too much government and too much regulation. The Merkel-Sarcozy-Geithner policies take us in exactly the opposite direction.
The future for Europe is perfectly predictable.
Minggu, 01 April 2012
Economic Inequality
Derek Jeter has made hundreds of millions of dollars. The sanitation worker who picks up the garbage at Jeter's home makes a fraction of that amount. What accounts for that discrepancy?
People are willing to pay high prices to watch Jeter play baseball and companies are willing to pay Jeter large amounts of money to speak favorably about their products. Is that wrong?
Why is there a problem here? It is not as if Jeter is the king and his garbage man is his serf. If the garbage man had Jeter's baseball skills and vice versa, then their positions might be reversed. In fact, in future generations that may well happen. Such is life in a free market.
Inequality of income and wealth by itself is of no signficance. It really does not matter. Poverty is a different story, but in the example above there is dramatic inequality of income but no poverty. These are different things and should not be confused.
Jeter is not wealthy because he compelled someone to give him money. He is wealthy because he has a skill and talent that people are willing to pay money to see. The system is working.
The attempt to create equality between Jeter and his garbage man may do nothing more than reduce both of them to poverty. Without a free market, there would be no Jeters and the garbage man would make little or no money because there would be scant tax resources from the Jeters of the world to fund the garbage man's job.
Today in the New York Times, Thomas Friedman has another mindless comment about income inequality that makes one wonder if he thinks before he writes. Those who wish to reduce inequality should address the talents, abilities, education and work ethic of the folks at the bottom of the economic pile. Wealth transfers won't help because they are soon dissipated through foolish behavior.
Free markets provide opportunity for the poorest amongst us. Every society has rich people, but the only societies in the history of mankind that have lifted the living standards of the average citizen are economies with free markets.
Dealing with poverty is an agenda worth working toward. Worry about inequality of income is a fool's game.
People are willing to pay high prices to watch Jeter play baseball and companies are willing to pay Jeter large amounts of money to speak favorably about their products. Is that wrong?
Why is there a problem here? It is not as if Jeter is the king and his garbage man is his serf. If the garbage man had Jeter's baseball skills and vice versa, then their positions might be reversed. In fact, in future generations that may well happen. Such is life in a free market.
Inequality of income and wealth by itself is of no signficance. It really does not matter. Poverty is a different story, but in the example above there is dramatic inequality of income but no poverty. These are different things and should not be confused.
Jeter is not wealthy because he compelled someone to give him money. He is wealthy because he has a skill and talent that people are willing to pay money to see. The system is working.
The attempt to create equality between Jeter and his garbage man may do nothing more than reduce both of them to poverty. Without a free market, there would be no Jeters and the garbage man would make little or no money because there would be scant tax resources from the Jeters of the world to fund the garbage man's job.
Today in the New York Times, Thomas Friedman has another mindless comment about income inequality that makes one wonder if he thinks before he writes. Those who wish to reduce inequality should address the talents, abilities, education and work ethic of the folks at the bottom of the economic pile. Wealth transfers won't help because they are soon dissipated through foolish behavior.
Free markets provide opportunity for the poorest amongst us. Every society has rich people, but the only societies in the history of mankind that have lifted the living standards of the average citizen are economies with free markets.
Dealing with poverty is an agenda worth working toward. Worry about inequality of income is a fool's game.
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