Tuesday, June 30, 2009

FDR and Obama

It is worth noting that FDR inherited a very bad economy. Upon taking office in March of 1993, FDR faced a 25 percent unemployment rate. Obama faced a 7 percent unemployment rate when he gave his inaugural speech in January of 2009. Real GDP had declined over a a third from its peak by March of 1933, when FDR was sworn in. When Obama assumed office real GDP was a little less than two percent below its peak. FDR faced a serious crisis; Obama faced a mild recession.

Both Obama and FDR were swept into office with large Congressional majorities which meant, that in the short run, they could get whatever legislation they wanted passed. The future would be determined by that legislation. FDR's effort to fight the depression failed. By the end of the decade, unemployment still remained at nearly twenty percent and the economy had little or no growth in FDR's first two terms. There were other FDR accomplishments, no doubt, but providing for economic recovery was not an FDR accomplishment, it was an FDR failure.

And now it's Obama's turn. The main difference is that Obama inherited a recession, not an economic catastrophe such as FDR was facing. The recession that Obama inherited was somewhat more serious than average for a postwar recession, but by no measure, is it the most severe....yet. Pundits that compare the current recession to the Great Depression are unfamiliar with the facts. This is, so far, at best, a fairly severe recession...no more, no less.

America recovers quickly from recessions and the US would, no doubt, be on the way to recovery in this recession were it not for the Obama program. Like FDR, Obama believes that recessions are caused by evil people ("greed and corruption" -- his favorite phrase). Therefore the cure is to purge those evil people. And, this, Obama intends to do. Like FDR, Obama see those in business as generally evil people. No doubt, there are some evil people in business (none in politics or government, thank goodness).

If you believe that recessions are caused by "bad actors," then by all means, root them out. In Obama's case, this means go after business folks -- tooth and nail. Run them out of town. Clamp down on them. Impose harsh new regulations. Tax them heavily and raise the cost of their employees. That ought to do the trick. Much of this, of course, was the FDR plan as well. FDR waged war, wherever and whenever he could, against businesses large and small. FDR succeeded. He crushed what remained of the spirit of business in the 1930s. The result was massive unemployment that persisted for nearly a full decade (while incidentally, the rest of the world was recovering). The US went it alone in the 1930s. The world came out of the depression by 1933 but not the FDR-lead USA.

So where is Obama taking us. Down the FDR trail? Are we condemned to relive the nightmare of the 1930s? It is possible that Obama can turn a 7 percent unemployment economy into a 25 percent unemployment economy. He's certainly off to a good start. A combination of "cap and trade" and "health care reform" might just do the trick. Toss in "card check" and five or six expensive new employer mandates and massive new taxes and Obama might just be able to follow FDR's path.

There is one key difference: FDR had no roadmap to follow. He tried every trick in the book to try to turn the economy around, but he made three huge mistakes and they mattered: 1) He raised taxes; 2) He had Congress enact the NRA; 3) He demonized business and businessmen throughout his presidency. These three mistakes destroyed any hope for economic recovery in the 1930s.

But, now we know better. We now understand that workers have to be hired by someone. Mere consumption spending alone won't do the trick. You can buy Chinese goods if you like. How do you get American companies to hire employees? Obama doesn't seem to understand that this is the sole issue. There is no other. Instead, the entire Obama economic program involves showing that business is evil and must be curbed, controlled and taxed -- especially if they make the mistake of having any employees. The Obama economic programs begin with the assumption that if you make employees more expensive, then employers will be more willing to hire them. FDR made that same assumption.

So, the future could be grim. Much depends upon whether Congress buys into the "toxify employees" solution to our economic woes. If you make employees and businesses toxic, then the economy has no real chance of recovery. FDR and Obama may truly end up with similar results. But FDR had a good excuse...no one knew any better. What's Obama's excuse?

Monday, June 29, 2009

Obama's Cap and Trade Dilemma

Barrack Obama has complained that the House of Representatives version of his "cap and trade" program, passed last Friday by a very narrow margin, has a feature that he disagrees with. The bill will be voted on by the US Senate in a few days. On this one, Obama is correct.

The feature that disturbs Obama is the provision that any country that does not enact a program similar to "cap and trade" will be subject to trade sanctions. In simplest terms, the House voted not to trade with countries who don't want to follow the US down the suicide path of "cap and trade." Since that includes most of the known world, excepting Western Europe, this means that the House vote, if it passes the Senate, will eliminate vast amounts of international trade, millions of jobs and dramatically increase world poverty.

Obama is right to object to this job-killing, trade-killing legislation. But, Congress is right to see that the "going it alone" Obama strategy implicit in the "cap and trade" legislation will have virtually no effect on world wide global carbon emissions. As long as the BRIC countries (Brazil, Russia, China and India) refuse to adopt some form of self-inflicted wound like "cap and trade" on themselves, global emissions will continue to rise, regardless of what the US does. Congress sees rightly the futility of the Obama plan. It only hurts us and has no impact on global carbon emissions or global warming.

Most of the Democrats in Congress would prefer not to trade with other countries anyway, so prohibiting trade with countries who don't want to follow us down the absurd path of "cap and trade" fits their agenda.

Regardless of his protestations, Obama will sign this bill once it passes the Senate. Before Obama is done, world trade will decline dramatically and the losers will be everyone. When economic recovery begins in Asia, the decline in world trade will keep that recovery from helping the US recover. This is just one more step in the Obama program of bringing permanent stagnation to the US economy.

Obama should veto the "cap and trade" legislation, if he wishes to combat world poverty. But, that really isn't his agenda. They didn't talk about that problem in the coffee houses at Harvard. Instead it was the coffee housers' great dream to reduce carbon emissions. Too bad, this program won't even accomplish that limited objective, while doing immense harm to people worldwide.

Sunday, June 28, 2009

"Make No Mistake"

"Make no mistake, this is a jobs bill." So said Barrack Obama earlier this week while talking about the job-destroying "cap and trade" legislation. Wonder what economist believes this novel idea? A massive tax increase, for no apparent reason, is now a job creator. Way to go, Barrack.

Why not get some more jobs? If the "cap and trade" bill is a job creator, why don't we expand it? Why not raise everyone's electrical bills by $ 1,000 per month (and every business's electrical bills by $ 2,000 per month) and see how many new jobs there would be? (Under the law passed by the House of Representatives on Friday,the average American's electric bills only go up by $ 100 per month instead of $ 1,000 (and business's face a mere $ 200 per month hike on average). Surely, by the Obama logic, we can get more jobs by doing more "cap and trade").

While we are at it, why not increase the minimum wage to $ 400 per hour and see how beneficial that would be to employees? Should make them rich, shouldn't it? $ 400 bucks an hour works out to about $ 800,000 per year. Why not let Americans make $ 800,000 per year. Isn't that better than they are doing now? "Make no mistake.." increasing the minimum wage to $ 400 will help families pay their bills.....

I think the Obama plan for ten days paid sick leave guaranteed for every employee doesn't go far enough. After all, some folks get sicker than that. Why not 200 paid sick days for every employee in America paid for by their employer? That would be really neat. Should, "make no mistake," create even more jobs.

What about the Obama plan to require all employers (with 10 or more employees) to provide 401-K plans for their employees? Another great "jobs bill." After all, employers would have to hire someone to administer the new plan at a tremendous new cost. Those hired (?) would have jobs wouldn't they. I have a better idea. Why not require all businesses to hire a minimum of 12 people to administer the plan? Wouldn't that create a lot of new jobs? Maybe, I should email that idea to Barrack and he can incorporate it into his proposal and then he can describe that, "make no mistake," as a jobs bill.

What about "card check?" Sounds like a jobs bill to me. Think of all the gang members who could moonlight getting reluctant employees to sign cards in a "card check" explosion across the country. Instead of having a government arbitrator decide future wage and benefits for all business unionized in this manner as called for in the Obama plan, why not just let Obama himself decide what everyone should make? He seems to be able to do that for the financial services industry and for the auto industry. Why not for all employees? "Make no mistake.." this should create many, more jobs.

How about mandated (employer paid) health care? I don't think Obama's plan goes far enough? Why not have the employer pay for a chauffeured limousine to take their employees to the doctor, whenever they need medical help? I can see how that would help. It also should create jobs -- we would need more chauffeurs, wouldn't we?

Barrack Obama is either a complete idiot or prefers fantasy to reality. I am not sure which of these is the case, but "make no mistake," the cap-and-trade bill will cost millions of American jobs (permanently, as these jobs will relocate to countries that do not adopt cap-and-trade strategies, which includes most of the known world).

The US is in the process of legislating its way into an economic morass, while the world watches in disbelief. There won't be many countries following US down these blind alleys.

Saturday, June 27, 2009

The Jobless Economy

The unemployment rate in the United States will probably not get a whole lot worse than it is now, but it has little chance of improvement. The President and the Congress seem intent on punishing businesses in every way that they can. A particular target of this administration is any business that has employees. If you don't have employees or can reduce dramatically your number of employees, then you might be able to survive this administration. But, if you have employees or were thinking about having any, watch out! You are and will be in big trouble.

First of all, "cap and trade" and "health care reform" are essentially massive new taxes on all businesses. So-called "health care reform" is only a tax if you have employees, so by all means figure out how to get out of that category. Secondly, a host of new Obama-mandates are floating through the Congress that require businesses to offer things like ten days of paid sick days (regardless of whether one is sick or not), substantial increases in the minimum wage, 401-K plans for all companies with ten or more employees, new rules on health and safety, and new litigation possibilities if a company happens to make the mistake of hiring any minorities or folks over the age of 50.

If all of this isn't enough to convince you not to have employees, then try this one: "card check." This employer's nightmare permits goons to coerce your lifelong employees into signing a card against their will and force a union onto your company (even if by voting in a secret ballot, the employees would vote unanimously against having a union...after all, Obama knows better than you do, if you should be represented by a union...your views don't count under "card check"). If the union doesn't like the collective bargaining results, they automatically get a government (Obama appointed) arbitrator to decided what you should pay your employees and what the new working conditions will be. That ought to give every business in America a reason to pause before hiring anyone. In fact, if you have employees, it might be time to rethink whether or not having employees makes any sense.

One way out is to relocate your business to Canada or to Mexico or even to China or India. The rules of the game are much more favorable to an employer in each of those countries and hiring employees is actually encouraged not discouraged. Europe is more like the US so there isn't much point moving anything there. They don't like employees there either. Unemployment, which is mostly double digit in Europe, will soon be mostly double digit, permanently, in the US as well.

Even if an employer decides to brave it out and continue in business and continue to have employees, there will be no chance of being competitive with similar businesses in other countries where businesses are not similarly burdened. We have already seen this happen with the financial service industry. The US has now lost its dominant position in the financial service industry due to the new President and the Congress. Foreign commercial banks and investment banks are having a field day taking over the businesses that once were dominated by US companies. There are no government imposed pay restrictions on HSBC, now the largest bank in the world (HSBC stands for Hong Kong Shanghai Bank). Young people still have a future in investment banking, but they will have to go to Asia to live that future...forget going to NYC. This administration is making certain tha there will be no future for the US investment banks. Remember "greed and corruption." That is what Obama thinks financial services are. Other countries don't agree and they are right. Asia is the future for financial services. Obama and the Congress are seeing to that.

The tragedy is that the days of sub seven percent unemployment are over. Even the government can't fill the void that will be left as employers face up to the fact that this President and this Congress are waging war on employees. Ten years from now they will still be blaming the economic malaise in America on the Bush administration, but this is an Obama disaster in the making. Bush, once relevant, is now irrelevant.

Friday, June 26, 2009

Climate Change? -- Not Really

The Chinese, who don't believe in climate change, are applauding today's House of Representatives vote to impose sweeping new taxes and regulations on major American industries and dramatically higher electric bills for all Americans. Sounds like such a great idea in the middle of a recession that the President thinks reminds him of the Great Depression. You know...he may end up being right. This might become the Great Depression. Stick around.

But, why are the Chinese happy? How does this help them? Well, for one thing, they don't plan any "cap and trade' foolishness, so that all the companies and plants that disappear in the US can simply reappear in China and produce in the same old way. Net effect...same level of carbon production...no different....just different people doing the producting. The Chinese don't mind taking over these industries. The Americans can do whatever they want and the Chinese can do whatever they want. They are adding, this year alone, as many coal producing electrical plants in China just this year, as exist in the entire United States. Within five years they will have double that amount. The Chinese aren't interested in reducing carbon emissions. They plan to increase future emissions by multiples of the current US emission levels. In a few years, it really won't matter from a climate change point of view, what the US does. It will only matter what China does.

But what is certain is that much of the industrial heartland of America will get shipped to China, leaving behind millions of workers and thousands of companies that no longer have a future. This will be the Obama legacy of climate change. The climate itself will move merrily along with ever increasing carbon emissions thanks to China, India, Brazil and Russia, who have absolutely no intention of walking the plank blindfolded as the US is doing.

The only effect of the Obama climate change bill is to reduce the United States to an impotent third-class economy with staggeringly high levels of unemployment while the rest of the world spurts ahead economically. There will certainly be no impact on carbon emissions globally.

Increased Savings Rate -- That's Bad?

The US savings rate reported today accelerated to 6.9 percent from slightly above zero in the recent past. Somehow this good news is being reported as bad news. As if what we really need is for consumers, drowning in a mountain of debt, to spend with abandon and run up more debt.

Is it true that countries with lower savings rates grow faster? No. Is it true that countries with higher savings rates grow slower? No. So, why is everyone cheering for lower savings rate and frowning when consumers finally begin to say no.

There is no reason why the US economy cannot adjust to a lower consumption rate out of income and achieve even higher growth rates than in the past. That won't happen, of course, because of "cap and trade," card check, government health care schemes, and significantly higher taxes courtesy of the Obama Administration and the Congress. But, if the economy were free to do what it would like to do, growth would be enhanced by a higher savings rate and the new, higher savings rate would be a subject of rejoicing instead of hand-wringing.

Somehow the new mantra is that waste and government are good things and free markets and prudence are bad things. That suggests our economic future will mirror that of other government dominated economies -- stagnation, no growth, and inflation -- nice package. It doesn't have to be that away, but, alas, it probably will be.

Is Deflation Really Something to Fear?

This morning the inflation numbers for Japan hit the tape showing a decline of 1.1 percent in Japan's Consumer Price Index for May -- the third straight month of decline. This news prompted the Japanese finance minister to express concerns about a significant slowdown in demand. Why should deflation imply a slowdown in demand?

If prices fall, does that mean consumers get less interested in buying? What economic theory suggests that?

When you pose a question like this, you often get silly answers like: "Well, that's what history tells us?" Oh, really!

What is the biggest period of deflation in US history? It was the period after the American civil war and up to the beginning of the twentieth century -- a span of more than forty years. This period was simultaneously: 1) the period of the fastest rate of growth of real GDP in American history; and 2) the period with most persistent and consistent deflation. (In fact, it is about the only period of deflation in American history). So, where was the economic catastrophe that is supposed to take place with deflation in this episode?

No doubt, someone can find, somewhere in history, an example of an economy struggling (Japan in the 1990s) where the price level is not rising. So what? The America of the 1970s was an example of rising inflation and a stagnant economy. So what?

It is a myth that a rise in the price of one's currency (which is the definition of deflation) must lead to bad economic times. The main evil of deflation, similar but opposite to inflation, is that there are unanticipated redistribution effects. If there is deflation, debtors are hurt and creditors are helped. If there is inflation, creditors are hurt and debtors are helped. And that's that.

The idea that deflation is some looming catastrophic event to be feared is ridiculous.

Monday, June 22, 2009

Eliminating Credit Spreads

The regulatory bill circulating through Congress would prohibit banks from charging different borrowers different interest rates. Bad creditors would pay the same rates as good creditors under the new world order proposed by the Obama Administration. How will banks react to this new rule?

If, as a lender, you cannot charge different rates to different folks why would you ever lend money to anyone but folks with very, very good credit. It wouldn't makes sense to lend money to anyone else, since you get no additional income from taking the additional risk.

Once again, the losers will be middle American borrowers without excellent credit standings. These folks will no longer be able to borrow from banks under the Administration's new rules. It would be a lot easier if the Administration would just pass a law saying that only rich people can borrow from banks. That is the effect of their proposed regulation. Why not just put it out there in bold print?

Eventually Congress will pass another law requiring banks to lend to poor credit risks, along the lines of the Community Reinvestment Act. Then banks will simply ration their loans to the politically favored groups and continue to eliminate all lending to politically disfavored groups.

As China moves toward capitalism, the Obama Administration moves capitalist America into state run banking, where only the rich and politically connected can obtain financing.

Political campaigns of the future will be campaigns directed at who will be favored by the lending policies of the state controlled (owned?) banks. As China moves away from state controlled bank lending and toward the free market allocation of lending, the US moves in the opposite direction. State managed commercial lending is the new Obama future for the US.

Sunday, June 21, 2009

Alan Blinder Wades In

The New York Times is going to become required reading for my economics classes at the University of Virginia. Hardly a week goes by without a major article on the economy that is replete with economic fantasies. Today's edition continues in that tradtion. This time, Alan Blinder, Economics Professor at Princeton, is the culprit in a bizarre article entitled "Why Inflation Isn't The Danger." This article is so full of mistakes and factual inaccuracies that I think Blinder ought to receive some kind of award for creative thinking.

Lets begin with the federal funds rate discussion. According to Blinder, "the central bank is holding the fed funds rate at nearly zero...." Actually, Alan, the Federal Reserve, contrary to your assertion, does not set the federal funds rate....the market sets the federal funds rate. The Fed sets a "target" for the federal funds rate. That target may or may not approximate the actual federal funds rate. On December 16th, 2008, the market, not the Fed, had already taken the federal funds rate to near zero. The Fed, at the time, with its head in the sand, had their target for the federal funds rate at one percent. What to do? The Fed could keep their target rate at one percent, ignoring the fact that the actual federal funds rate was trading at near zero. But that would make it obvious that setting a target for the federal funds rate is a stupid policy if the actual rate doesn't trade anywhere near the so-called "target." So, the Fed lowered its target rate from one percent to "near zero," basically catching up with the facts of the market place. Heck, maybe I should set a "target" rate. I could get it closer to the actual rate than the Fed does. The market set the federal funds rate at near zero because of a "flight to quality" that is still ongoing. When the flight to quality ends, the funds rate will begin to rise (even if the Fed has its head in the sand or some other place). The market is a more important determinant of the federal funds rate than the Fed. Who cares what the Fed's target for federal funds is? All that matters is what the federal funds rate actually is in the market place, not some irrelevant target number announced by the Fed.

Blinder goes on to correctly note that the implied inflation rates of TIP securities is about 1.6 percent. He concludes from this that the market has decided there will be no inflation. Good going Alan. I guess you bought stocks when the Dow traded at 14,000 in October of 2007 because the market was forecasting a good economy going forward. Right?

Wake up and smell the coffee, Alan. Not only is the Fed adding to its balance sheet by the bucketload, but it is also buying treasury securities and mortgage back securities outright in the market place and, surprise, surprise, all measures of the money supply are growing....a fact, you conveniently ignore in your article. While excess reserves have increased (a lot) in the commercial banking system, so also has every conceivable measure of money supply and liquidity.

Here's another laugher, Alan: "...history teaches us that weak economies drag down inflation." Are you joking, Alan. Let's begin with the most famous inflation in world history...the German hyperinflation of 1923 that accompanied the weakest German economy in history. If that's not a good enough counterexample, lets look at the good ole USA. The 1970's were known as the decade of "stagflation" -- high unemployment, sluggish economic growth, and the worst decade-long inflation spike in American history. What about the converse? Are their periods of deflation and strong economies? Yes. The fastest fifty years of economic growth in American history is the period between the American civil war and World War II. What was happening on the inflation front during this period of extraordinary economic growth? This was a period of deflation with price levels falling by over a third over most of this period with an average deflation rate of nearly two percent for much of the period (recall William Jennings Bryan's "cross of gold" speech). For another example, try the US of the 1980s and 1990s -- a period characterized by strong economic growth and low inflation. So where is this history that teaches us "weak economies drag down inflation."

Here's what history actually teaches us: There is no example in history...yes, no example in history...of an economy with rapidly growing money supply not followed in time with rapidly rising inflation. Yes, no example. Go find one...there are none.

So, Alan, I know you want to support your pal Ben. Heck, we all want to support Ben. But, Ben just isn't supportable, Alan.

Wednesday, June 17, 2009

It's Not Insurance

Insurance is about providing protection against low probability but financially painful events. You buy fire insurance because, even though it is unlikely that your house will burn to the ground, you want to be protected against the very large financial loss that you might incur if it did. Do you buy insurance for painting your house or cutting your grass or paying your electric bill? No. Why? Because those are predictable events. Insurance is not appropriate for predictable events.

Do you have insurance for your grocery bill? Why not? Isn't food a necessity? Food is certainly every bit as important as health care. So why not insure it? What would happen if your employer provided grocery bill insurance, so that whenever you went to the grocery store, you saved your receipts and sent them off to your insurance company for reimbursement. If lots of companies provided grocery bill insurance, what would happen to food prices? What would happen to the behavior of folks whose grocery bills were insured (and reimbursed)? Would they tend to economize at the grocery store, shop around? Why is it less important to shop around for health care?

True health care insurance is dirt cheap and it is unlikely that more than .01 of one percent of all Americans would have any trouble buying it. It costs less than a few beers per month (or a few packs of cigarettes per month). Such insurance has a very high deductible and is only designed to protect against large, unforeseen, health care costs. That's the kind of insurance that should be provided and people should pay for their own routine, predictable health care costs as they pay their own grocery bill. If you wish to provide food stamps for health care, then so be it. But call it what it is...relief...not insurance. If you want to provide health care for those who have "pre-existing" conditions, then do so with some kind of relief program, but don't call it insurance. It is not insurance. It is asking those who don't have pre-conditions to pay for those who do have pre-conditions. If you want to do that, fine. But, it has nothing whatever to do with insurance.

Insuring predictable events, the main characteristics of medicare, the prescription drug bill, and most employer provided "health insurance," is not insurance. It's just a way of someone else paying your health care bills. It means that, since you don't pay, you don't exercise any judgment about costs. That means costs rise without limit. There is simply no reason for health care costs to ever stop rising under this system and they haven't. If you wanted prices to get out of hand, start requiring companies to provide grocery bill insurance and soon food prices would begin to escalate without limit, following the pattern of health care costs.

Eventually, the Obama plan or some alternative will force the government, in the interests of controlling costs, to directly allocate health care. No one will be able to decide for themselves what health care they need. The government will decide. Too bad if you have a health problem that is politically out of favor or if your demographic is out of favor (both of these situations occur in virtually every country in Europe). Instead of the market and the citizen deciding their health care needs, the government decides it. The so-called insurance debate is not a debate about insurance. It is a debate about who decides who gets what health care -- individuals and their families or the government.

If the government wanted to provide true insurance -- so called "catastrophic" insurance, then health care costs could be brought under control, because individuals would pay their predictable expenses, as they should. Those with pre-existing catastrophic situations could be taken care by a government relief program if such situations are deemed to be the responsibility of government. A further step would be to cap punitive damages in medical lawsuits. With that combination, health care could be returned to the private sector where it belongs and Americans could continue to enjoy the best health care available anywhere in the world. But, with these reforms, such care would be much more affordable.

Tuesday, June 16, 2009

11 Million Down, 36 Million to Go

The Congressional Budget Office, controlled by the Democratic leadership in Congress, is once again raining on the President's parade. This time, the CBO angst centers on the Obama health care plan, which the CBO estimates to cost, on top of everything else, $ 1 Trillion over ten years. That assumes that an additional 11 million persons, who are not currently insured, will receive coverage under the Obama plan, leaving 36 million persons still without coverage. How's that?

Left unchecked, the Obama plan would soon have the American economy devoting most of its efforts to health care (and health care insurance). So, how do you get from here to there without a train wreck. That's easy. Cut the coverage. Once you get Americans to buy into the Obama program under that assumption that they need more health insurance coverage, the next step is to obliterate the heath care that is actually covered by the insurance.

Obama will soon discover numerous "unnecessary procedures" that will no longer be covered by health insurance and will discover numerous procedures that "cost too much" for which only fixed dollar reductions in payments will solve the problem. Too bad, if you get sick. You're illness might not be one of the "favored illnesses."

The goal of the Obama plan is insurance coverage, which is not the same thing as health care coverage. Medicare recipients are learning the cold hard facts about government reimbursement policies. The rest of the nation should be prepared for additional health insurance coverage, but dramatically declining levels of health care. Maybe now diet and exercise will take over to fill the void. Something will need to.

Sunday, June 14, 2009

Words Versus Actions

Once again the Obama Administration has said one thing and done another. Not surprisingly, the stimulus package ended up with a "Buy American" provision that is basically a retreat to protectionism. Our biggest trading partners are Canada and Mexico. 75 percent of Canadian exports go to the US, so they have an interest in the proceedings.

Here's Hillary"s view: "the Buy American provisions in the economic stimulus package will not interfere with US trade obligations." If they are as insignificant as Hillary thinks, wonder why they are in the package at all?

Here's what the Canadian Minister of Foreign Affairs, Lawrence Cannon, thinks: "Canadians are worried about a rising tide of protectionism in the United states, in various circles, and our government is very concerned in particular about the negative impact of the "Buy American" legislation being felt on Canadian businesses." Mr. Cannon made these remarks while standing next to Hillary Clinton on Saturday.

This is a typical example of Obamaisms. Just deny what everyone knows is true and just keep denying it. There will be no new taxes, there will be no interference with the private sector, no bailouts. We will balance the budget, etc., etc., etc., etc. The truth doesn't seem to matter to President Obama and his Secretary of State Hillary Clinton. But, it does matter to people of Canada and the people of Mexico and the people of the United States.

This Adminstration and its spokewomen have trouble telling the truth about economic matters. (Witness Larry Summer's embarrassing speech at the Council of Foreign Relations last Friday. He neglected to comment on the Administration's forecast in their budget that unemployment would never get higher than 8.5 percent in this downturn, an assumption critical to their rosy deficit forecasts. Does the Administration have any interest in revisiting the absurd assumptions that their budgets are based upon or should we just keep pretending that facts don't matter anymore?).

There is a rising tide of protectionism both in the law and in the Administration's actions. The world economy will suffer because of it and so will the United States, regardless of Obama and Hillary's efforts to distort the facts on the ground.

The incredible spending and deficit financing of this Administration has frightened the world and threatened the fiscal soundness of the US Government. Instead the Administration goes ahead as if our current fiscal situation requires more spending, more transfer payments, more mandates on business.

If the Obama Administration thinks its fooling anybody by calling an apple an orange, perhaps they should look at recent comments coming out of Canada, China, Germany, Russia, etc. regarding the absurd economic policies of the Obama Administration. No one is fooled. Watch the yields on treasuries....they are headed much, much higher.

Saturday, June 13, 2009

Perhaps, Recovery is not the Plan

The American economy typically rallies quickly from an economic slowdown with the 1930s being the great exception. Roughly every five or six years things slow down, go in reverse, unemployment ticks up and the stock market swoons. This is not new. With these occasional disturbances, Americans have learned to live.

The reward for enduring the ups and downs of the economy and the stock market is the highest standard of living in the world and economic wealth that earlier generations never dreamed possible. Not bad. American poor have a higher standard of living than the wealthiest citizens of most countries in the world. Not bad.

But our new President, fresh from Law School and community organizing sees its differently. Somehow it hasn't worked out, in his view. It needs re-engineering and he is determined to be that engineer.

Obama, himself, has never worked in the private sector and has no idea what the life of anyone involved in that sector is like. He knows (and likes) only government and only government solutions. He doesn't seem to realize that his policies and those of the Congress will virtually guarantee that small businesses will be very, very reluctant to take on employees if and when recovery gets underway. The enormous mandates, taxes, new regulations and restrictions, new rights to ever-expanded lists of minorities (fat people now are a new minority group who face discrimination according to some),card check are all new costs to be imposed on businesses who have the temerity to hire employees.

Businesses have gotten the message. They know they are the target of this Administration. Obama does not like business and business people. He likes lawyers, politicians, and government careerists. Who, among the Obama entourage, has ever spent any serious time in the private sector (other than to take advantage of a prior political career)? No one. Business folks are not welcome in the Obama White House.

Businesses will find ways to economize on employees -- outsourcing, temping, just going without. Many businesses that would have thrived will never get off the ground. This will be the Obama legacy -- stagnation, high unemployment, and the potential for a fiscal collapse. Maybe economy recovery isn't really the Obama agenda...perhaps, he has something else in mind.

Thursday, June 11, 2009

If the economy is in the tank, can there be inflation?

The short answer is yes! Inflation can occur whether unemployment is 4 percent or 9 percent. Inflation can also occur when economic growth is stagnant. The world is replete with historical examples. The US during the 1970s is a textbook case of a sluggish economy with ever rising inflation. (Try German hyperinflation in 1923 for a more well known example).

So, why are people saying that there is no threat of inflation? Curious. Imagine that peanut production doubled every two weeks. What would you think would happen to the price of peanuts? Would your answer depend upon the unemployment rate?

What, after all, is inflation? Inflation is the rate of growth of the decline in the price of money (by definition). If there is a tremendous increase in the supply of X, while supplies of other things are stagnant, what do you think will happen to the price of X? If you said the price would go up, then you are a candidate for the Obama economic team. If you said the price would fall (faster and faster as the growth of the supply of X surges higher and higher), then you are a rational being and do not qualify for the Obama economic team.

So keep on buying those treasuries, Ben.

What's Plan B, Larry?

With over $ 3 Trillion in treasury securities to fund in the market place this year, there are early signs that this is not going to work. Even with the Fed buying treasuries, this plan will not work. The Bernanke plan of buying treasuries simply makes matters worse because of the widely understood inflationary impact of the Bernanke actions. Ben seems to be gunning for the title of worst Fed Chairman in history. I personally think he's a shoo-in. But, what are the Obama folks thinking?

Ten year treasury yields are reaching for higher levels daily and thirty year bond rates are soaring as well. If and when commercial lending rebounds, it is likely to be a rebound with dramatically higher rates. So much for the rosy forecasts of the Obama administration. The deficits and the national debt are going to be much, much higher than current forecasts. It isn't clear that the US can get through 2009 without a major crisis in the treasury market. The planned deficit sales and the Bernanke monetization are frightening global holders of treasuries.

Brazil and Russia made a joint announcement yesterday that they intend to unload their treasury securities and buy IMF securities. China and India have indicated similar plans. No one but Geithner and Summers have any confidence in the US treasuries plans for the future and no one but Ben Bernanke thinks that massive purchases of treasuries by the Fed will do anything but cause further mischief with inflationary expectations. All of these folks (Geithner, Summers, Bernanke) deserve a dunce cap for their economic policies. Unfortunately, the average American citizen will get the bill....stagnation, unemployment, and inflation.

Not since Jimmy Carter has there been an administration so offbeat in economic policy. It isn't easy to create rising unemployment and inflation, but the Obama team has got the formula right. Frighten the business community with massive new mandates, impose dramatically higher tax rates (yes "cap and trade" is a tax no matter what the Obama folks call it) and have the Federal Reserve increase the money supply with growth rates unheard of in modern, developed economies. This combination will do the trick and it looks like the world is watching, getting the message, and heading for the exits (from the US Treasury market).

Well, Larry, what next? When treasury rates hit eight percent, can you find a way to blame the previous adminstration for that too? It's time to take a little credit here. Without the economy bashing of the Obama campaign (go back and read the speeches) and the frontal assault on the business community and financial sector in the early weeks of the Obama administration, this would have been a run-of-the mill recession with unemployment topping out at about 8 percent (the Obama forecast, incidentally). The economic recovery would normally be well under way by now, without any heroics from government. But business folks are frightened to death of the Obama team and are not hiring and will not be hiring. Global investors are now seeing the hand writing on the wall of the profligate plans of the Obama team and are deserting the US treasury market.

Meanwhile, the parties continue at the White House, with an occasional jaunt to pick up a Broadway show in the Big Apple. Life is fun. From a Harvard coffee shop to the White House in such a short time. Probably should have taken that Economics course, but it was offered at 9 AM and 9 AM is not cool. Why is the media suddenly asking about treasury rates? Why are my poll numbers falling over my handling of the economy? Oh, well. tonight, Barbara Streisand is coming over. She can sing me a song and make it all better. Did Larry call? Tell him I'll see him tomorrow.

Friday, June 5, 2009

Dear Mr. Thomas Friedman

I don't know whether or not you peruse my blog from time to time, but if so....my apologies. My May 26th blog critically discussed your "State of Paralysis" column in the Memorial Day edition of the NY Times. But, in fact, you didn't write that column. That was another of Paul Krugman's masterpieces.

Here's the problem, Tom. Your picture looks a heck of a lot like the picture of Paul Krugman. That is not a compliment. It's not an insult either, but simply a statement of fact. I have a suggestion. Get a new picture.

I am indebted to my faithful follower, FMalik, for correctly noting that Paul Krugman is indeed the author of "State of Paralysis," not Thomas Friedman.

Thursday, June 4, 2009

Health Care or Health Insurance?

Health insurance is not the same thing as health care. No American, under current law, is ever denied health care, although 47 million Americans are reputed to lack health insurance. Warren Buffett does not have health insurance, nor does Bill Gates. Should we have a government program to insure them. Among the 47 million uninsured, 10 million are estimated to be illegal aliens. Should these folks be insured under the new Obama program? Nearly one-third of those without health insurance have more than twice the average national income of the typical American. Do we need a new program to insure the rich?

America spends 17 percent of its GDP on health care-- far more than any other modern, developed country. Other developed countries, by and large, have some form of national medical system (some with private aspects, but mostly nationally controlled). These countries decide what and when an individual can have access to health care. In England, anyone over the age of 70 is effectively denied access to surgery (at any price). In the opinion of the British government, those over 70 aren't worth saving. In most countries the government decides who lives or dies. In America, Americans decide who lives or dies.

Why is such a large part of American GDP devoted to health care? Part of the answer to that question is demographics. We have a much larger percentage of our population born to teenagers than is the case in other countries. This has nothing to do with our health care system, but imposes dramatically higher costs on the system. Older Americans are much more overweight than their counterparts in France, England, Germany, Japan, etc. This is a cultural issue not a health care delivery issue. It is well known that excess weight dramatically increases health care costs. We permit multi-million dollar legal suits any time a patient or their family feels slighted by the medical system. This is a political issue and is not caused by our health care delivery system. This imposes massive costs on our system. No such similar costs are borne anywhere else in the world. Finally, America produces the best health care in the world and that is a true cost to the system.

Various levels of government in the US, both nationally and locally, impose numerous confusing and conflicting regulations on the health care industry and on the medical industry that raise costs and lower the efficiency of health care. One example is that insurance companies are often required to insure everyone regardless of pre-conditions. In states like Massachusetts where this absurd requirement is in place, it is irrational for anyone to buy health insurance until they are actually sick. Otherwise, they are simply throwing their own money away for no reason. Other regulations force insurance providers to provider certain coverages even if the insurance buyer doesn't want them. This forces people to pay for coverage that they neither want nor need.

Medicare and medicaid add further distortions to the medical system imposing signficantly higher costs by reducing incentives for individuals to monitor their own health and eliminating incentives for individuals to shop around for the best prices. Medicare and medicaid also involve doctors and their staffs in endless negotiations and bitterness regarding reimbursements. This problem is growing steadily. Medicare and medicaid are currently estimated, by the Congressional Budget Office, to be $ 30 Trillion underfunded. Hmmmm.

In essence, the problem in the health care industry is government interference. If the market were left to provide health care, it would do it in a very efficient manner. But, given the direction that the Obama Administration is headed toward, our local hospitals will soon degenerate to the lack of accountability that has become characteristic of American public schools. The time will come, after Obama has finished his handiwork, that American hospitals will be considered unsafe and Americans will be clamoring to get their health care from private providers or in foreign countries.