Monday, August 31, 2009

Foolishness from the Wall Street Journal

Is this a contest? To see which newspaper can get the most stuff wrong? The WSJ now has its own entry -- today's article on "Lessons of the Financial Crisis -- One Year Later."

Among other so-called lessons, are the following:

"Diversification doesn't always work." Really? How would a portfolio of 35 % stocks, 35 % corporate bonds and 30 percent treasuries have done in the past year? Only stocks, in this group, are down year to year. So, how did diversification fail? Only if diversification is taken to mean owning non US stocks or owning "alternative assets." Non US stocks and alternative assets give you almost no real diversification as compared, for example, to owning treasury bills. The idea behind diversification is to own different kinds of assets, not assets that are more or less all the same kind of asset but just have different names and countries of origin.

Here's another laughable lesson:

"Government works. The aggressive steps by the government seem to have helped avert an even deeper recession." Oh, really. One could make precisely the opposite argument. That government policy in September and October of 2008 created a climate of uncertainty and fear and led to the collapse of consumer confidence and spending.

I guess WSJ doesn't want the NY Times to own the only dunce cap for poor news coverage.

Sunday, August 30, 2009

Lets Face It -- David Walker is Right

"There's no question in my view that Bush was the most fiscally irresponsible president in the history of the republic." So said David Walker, Controller General of the United States during the Bush II Administration. The main villain was the infamous prescription drug bill. Walker, as he has been so often, is right on target. President George W. Bush could have vetoed the excessive spending of Congress and should never have pushed for the passage of the prescription drug bill. It is worth noting that then-Majority Leader of the Senate, Republican Senator Bill Frist of Tennessee, still touts the prescription drug bill as a great victory. I guess he likes reckless deficit spending too.

Don't be under the mistaken impression that Republicans are one whit better at fending off fiscal catastrophe than the Democrats. No party has a monopoly on virtue, when it comes to wasting taxpayer money and spiraling the US toward financial catastrophe.

NY Times (Intentionally?) Flubs Again

This morning's NY Times has an article that is so flagrantly wrong on the facts that one wonders if anyone is minding the store there. In an effort to show that the entire deficit expansion over the next ten years has nothing to do with Obama, the Times article asserts that the Obama Administration estimate of $ 9 Trillion in additional deficits over the next ten years includes "adjustments" that any president would make -- Democrat or Republican.

The article, written by Jackie Calmes, says that the $ 9 trillion estimate assumes the following:

1) extending the Bush tax cuts
2) adjusting the AMT for inflation
3) Blocking cuts mandated for doctor's Medicare reimbursements.

As usual, with NY Times articles, the truth is the exact opposite. Obama's $ 9 trillion number assumes that:

1) Bust tax cuts are eliminated
2) There will be no AMT adjustments
3) There will be huge cuts in doctor's medicare reimbursements

So, once again, when one reads the NY Times, whenever it says, "X is true," make the usual correction and assume that "X is not true." It works almost every time with the NY Times.

As if outright misstatements of facts are not sufficient, the article ends with the following (political) statement (in an ostensible news article):

"As for Obama's big-ticket proposals, notably health care and energy policy overhauls, those do not add to the deficits under the agencies analyses because he has proposed savings and tax increases to offset their costs."

Is the above statement taken directly from Democratic Party political manuals? It is completely absurd. Even the Congressional Budget Office (controlled by the Democratic Party) estimates that Obama's health care plan will cost $ 1.6 Trillion in additional deficits, even with Obama's ephemeral cost-savings ideas included. What "agencies analyses" is Jackie Calmes speaking about. She doesn't say (for good reason, one presumes).

The NY Times has hit a new low for inaccurate news reporting with this misleading article.

Saturday, August 29, 2009

The Democrats Problem is Medicare

Medicare was originally a modest subsidy for health insurance for the elderly. The enabling legislation that created medicare was signed into law by President Lyndon Johnson in 1965. At the time, the American economy was in good shape, elderly persons in America received good health care, and health care costs were reasonable, though rising faster than other costs. In the 1970s, the required contribution by seniors to medicare was lowered from one-half to one-fourth.

The prescription drug bill created Medicare Part D, which went into effect in January of 2006 and added greatly to the overall cost of Medicare.

The original version of medicare required seniors to pay one-half of the cost of the insurance. The projected cost of medicare, President Johnson warned, could be as high as $ 2 billion annually. (In 2007, the total bill for medicare was $ 440 billion). Medicare is funded partly by payroll taxes collected alongside social security payroll taxes from employees and employers. The remainder is either unfunded or brought in by ever increasing mandated payments from states (this is the main item leading to catastrophic deficits for state governments).

People who use medicare are paying only a small part of the true cost of their own medical care. Even at that, the current unfunded liability of medicare is $ 34 Trillion. Within two generations, most of our gross domestic product will be devoted to medicare, leaving very little for anyone under 65 years of age to consume -- medical or otherwise.

This is the Democrats idea of a great program. But, this is also their great problem. How can they spend money on all of their other projects if medicare sucks everything up?

The answer: why not expand it? It is going to go broke anyway. So who cares?

This appears to be the Obama philosophy. If only the public would pipe down, Obama could effectively expand medicare to the entire population.

If medicare were to expand to the entire population, which is the ultimate thrust of all of the Democratic reform bills, what then? First, wait about eight years until you-know-who is out of office. Then, when the nation is on the brink of insolvency because of health care "reform" passed in the first Obama Administration, bring in the efficiency experts.

The efficiency experts will realize, as the Brits have known for a couple of decades, that a government health care plan has to sacrifice some demographic, since the system is so incredibly inefficient. In Britain, they have decided to sacrifice those over 65, who are not a priority for any medical operations. Not many of that group die on the operating table. They die, instead, in the waiting room. The vast majority never make it to the operating table. The waits are simply too long.

No doubt, the plan -- long run, is to do a similar thing in the US. Once everyone is on medicare, the only way to cut costs is to eliminate health care for certain groups of the population. Who needs cancer and heart surgery anyway? That only applies to old people. Perhaps a bit of counseling will help these old folks see the light. This kind of thinking seems to be behind the Obama health care strategy for the long term.

Meanwhile, those who need abortions will have access to all the funding they need. Similarly, obese people should turn in their gym cards. They will be covered for everything they need, so long as they have not attained the age of 65. The money saved from eliminating most coverage for surgery and other operations for the the over 65 set can be devoted to aids sufferers, drug rehabilitation, alcohol rehabilitation, and psychological adjustment counseling (depression, etc.). After all, these are becoming pretty serious matters.

Unfortunately for Obama and the Democrats, the elderly aren't all completely senile and they can see clearly that Obama has them in their sights. Even doctors and hospitals are beginning to wake up to the implications of "cost cutting" in health care. Insurance companies, who have just about the lowest profitability of any industry in America and the lowest paid senior management, are beginning to wake up and listen to Obama and others decry their non-existent profitability. Finally, the average American can see where this is headed. Obama and Pelosi and their ilk will never be subject to these plans since government largesse and their own personal wealth will keep them from ever having to access this nightmare that Obama is creating (yes, Obama purchased a $ 2 million home three years before running for the presidency...not something a non-wealthy person could even dream about).

Obama had indeed fooled most all of the people for some of the time. Thank goodness, he cannot fool all of the people all of the time. Virtually every American is beginning to see through the health care reform charade.

Wednesday, August 26, 2009

Home Prices Increased in June!

The dire predictions that home prices would plunge another 25 percent look increasingly less likely. Home prices, according to the Case-Shiller index (that measures home prices in 20 cities) showed home prices increasing in 18 of the 20 cities that are included in the index. Combined with a National Association of Realtors announcement of a five percent increase in July home sales over the same period in 2008, strongly suggests that the worst is over for the housing market in the US.

This is more confirmation that the economy has hit bottom. If there were any stimulus at all in the so-called "Stimulus Act of 2009," we should be expecting a strong economic recovery this Fall. Don't count on it. Look for further increases in unemployment and secular stagnation as the economy improves sluggishly and fitfully, laboring under the enormous burden of the Obama Administration.

The announcement that the Obama folks grossly underestimated the fiscal impact of their spending program (now admitted to add at least $ 9 trillion more to the national debt by 2019) may be just enough confirmation of reality to block the Obama program in Congress. If that happens, recovery stands a chance. Keep your fingers crossed.

Look for unemployment to go above 10 percent, inflation to begin to show up, and economic growth to be anemic. Even with that background, stocks are still a reasonable bet from here.

Tuesday, August 25, 2009

Entitlements Must Go

The US budget problem is strictly a problem of entitlements. The growing disaster at the state level is a combination of federal entitlement matching and absurb state employee and teacher compensation packages -- especially health care and retirement packages. The hard cold truth is that these entitlement programs -- social security, medicare, medicaid and the Bush prescription drug act -- are not affordable. They will bankrupt the country. They are promises that cannot be kept.

These programs encourage Americans not to save for their old age and not to save for future medical contingencies. As a result, Americans do not save for these things. We have the lowest savings rate in the civilized world -- even now. But, we didn't have a relatively low savings rate before medicare came in the early 1960s and was expanded in the 1970s. Our low savings rate is a result of these entitlements.

The Obama answer is, of course, to ration medicare and medicaid benefits. (That is the ultimate end game of Obamacare). The right answer is to phase out medicare. Let people save for their own future medical needs. Obamacare would force the elderly to live in constant fear that their medical needs will not be met. And the truth is, they will not be met. The money is simply not there and they know it.

None of this should be any great surprise. Asking current workers to provide for twenty years of retirement and medical benefits for other people (the elderly) is ridiculous. People should pay for their own retirement and their own medical needs. That is the only affordable system that works.

The elderly are not poor. But, they are becoming poorer as private savings disappears because of the expectation of government largesse. That expectation will not be fulfilled.

This is a wealthy country, but that wealth can be destroyed by consuming now and paying later. That is what we are doing. Eventually, this shell game will fall apart. The end result is not in doubt. The only open question is how soon the end will come.

Every European country faces exactly the same problem that we do. They are going bankrupt as well and for the same reason. The demographic changes do not permit the ponzi schemes to continue. There is not an advanced economy in the world that is not on a course to bankruptcy. Interestingly, only the Asian countries have resisted the grandiose entitlement schemes of the West. The future for the Asian countries is bright. For the West, things look grim.

Sunday, August 23, 2009

Obama and the Economy -- Now What?

It is now very clear that the economy is far worse than the Obama crowd thought as recently as late January. Unemployment, which Obama economists forecasted to remain below 8.5 % is currently 9.4 %, headed north. Obama economists, last week, dramatically raised their estimates of the path of the national debt, increasing the national debt (increase) estimates for 2019 from $7.1 Trillion to $ 9 Trillion. This $ 9 Trillion is on top of the existing national debt of nearly $ 8 Trillion.

No doubt, these numbers are still underestimates. Other than Obama economists, no serious economists had subscribed to the Obama numbers in the first place. Certainly not the Democrat-controlled Congressional Budget Office economists. The CBO has been citing the $ 9 Trillion number since January, when the Obama economists were insisting on living in fantasy land. Now the dreams are over and the haunting reality is that we are soon to push through ten percent unemployment and the national debt is exploding.

What of the stimulus? There was never any real stimulus in the so-called "stimulus" package. So, don't count on that. The bill that passed Congress and was called "stimulus" was mostly a redistribution package benefitting friends of Obama and penalizing his enemies. That doesn't stimulate anything (especially since most people who provide jobs in American are viewed by Obama as his enemies). The economy has stabilized on its own, as economies always do. Nothing the government has done has been of any benefit whatsoever. The only people that believe that the government has helped are the folks in the media, who will believe anything.

The stark reality is that there has been no "recovery" package ever put on the table. Nothing in any of the Obama Administration proposals would ever encourage anyone to hire anyone. Without hiring, there can be no serious recovery. At what point is the Administration going to get that message? Cap and trade does for energy what burning this year's corn crop would do for household nutrition. All of the Obama plans are punitive (except those that provide money for Acorn to support pro-Obama demonstrators at the town halls).

Punitive measures design to punish businesses and business people are the main policy initiatives of this Administration. Is this likely to boost hiring?

So, now, here we are. What does Obama intend now that his polls have collapsed, his major policy proposals are in complete disarry, and the economy is getting worse? Maybe he can find some way to continue to pin his problems on "W" and the evil financial community.

Incidentally, commercial real estate is now suffering the same fate as residential real estate has been suffering for several years. Can you blame the collapse in commercial real estate on predatory lenders?

You wonder if Obama didn't have someone to blame for our economic troubles, then he wouldn't know how to proceed. Obama looks for enemies, someone to blame. There always has to be someone he can blame and then punish with legislation. How does that kind of policy stimulate anything?

When will this hubris end? It is past time for the Obama folks to put something rational on the table. Look for the economy to get worse not better as long as the Obama folks maintain this course.

Saturday, August 22, 2009

Obama's Health Care Reform Problem

It is very simple. More than 80 percent of Americans already have health insurance and more than three-quarters of those folks are happy with their existing health insurance. Virtually all of those people are voters.

But, the President says: "You can keep your existing health insurance." Really. Most health insurance is provided by employers. Employers make that call, not employees. So, how do you "keep your existing insurance," if your employer opts for somethings else. The answer is you don't .."keep your existing health insurance." Worse, all the bills before Congress fundamentally alter all health insurance plans that will be "legal" in the future. So your plan is going to be altered whether you like it or not and regardless of what your employer may or may not think. So, unequivocally and for certain: "You will not keep your existing health insurance." It won't and cannot happen under any of the bills now circulating through Congress.

The fact that Obama continues to say: "You can keep your existing health insurance" is puzzling. He certainly knows that that statement is patently false. So, why does Obama keep saying what he knows is completely untrue?

Why doesn't Obama try the truth for a change? Admit that the various bills fundamentally alter the health care plans that most folks have. It's in the bills! Not a single bill under consideration would leave any private health insurance plans unchanged. None. Why not own up to it and confront voters with the real truth.

The public knows the truth.

If Obamacare passes, the entire country will realize that the President of the United States lied to them repeatedly about health care reform. Why? Because they will receive a notice from their insurance company announcing major changes to their existing health insurance (together with a higher insurance bill). Everyone with private insurance will get such a notice. What is Obama going to say then?

Friday, August 21, 2009

Bernanke -- Half Right

Ben Bernanke says today, in Congressional testimony, that the economy "has stabilized" and that we have avoided catastrophe. Some would argue that catastrophe was never a possibility except in Bernanke's and Paulson's mind, but that aside. Now the question is will Obama's legislative agenda derail the recovery and derail job creation? Part of the answer depends upon whether Obama is successful in getting his agenda enacted into law. If Obama is successful, it is unlikely that the US will have any meaningful economic recovery. Worse, world attention will begin to focus on the credibility of the US Treasury market. The tremedous on and off balance sheet liabities of the US government are unsustainable even without the Obama agenda. But with the Obama agenda, the problems become much more serious much quicker.

If the Obama agenda collapses in the Congress, then things begin to look brighter. It would still require major surgery on medicare, medicaid and prescription drugs and some effort to return "free market" principles to the health care market. One wonders if there will ever be the political will to deal with these matters. But, sooner or later, either they will be dealt with or the US faces the inability to fund its ever-growing national debt.

But for now, don't expect much of a recovery in employment and not much in anything else. The US looks like the laggard in the world economy for now, absent sound economic policies from its government. Fortunately, some other other parts of the world aren't so foolish and there will be recovery elsewhere.

Thursday, August 20, 2009

Jobless Claims Rise Unexpectedly to 576K

Headline from the Associated Press today. What is instructive is the following text: "The number of first-time claims for unemployment benefits rose unexpectedly for the second straight week, a sign that jobs remain scarce even as other data show the economy is stabilizing." Hmmmmm.

Maybe it's time the Administration gave some thought to the puzzle as to why jobs keep disappearing, even though the economy is stabilizing. Perhaps, demonizing business and business folks and making employees more expensive is counter productive. Is anyone in the White House listening?

Wednesday, August 19, 2009

Another Predictable Outcome

On Thursday, the Credit Card Act of 2009 mandates will take force. The result of protecting consumers from "credit card abuse by lenders" is that much less lending will take place with higher interest rates and higher fees. Thank you, President Obama, for making life more and more difficult for middle class Americans.

The only demographic that is largely unaffected by the new Obama Administration credit card rules is the affluent. They can still get all the credit they want at very low rates. The victims, as usual, are middle class Americans. Many will no longer be able to get credit cards at all; many will have much lower credit lines on their cards (already being reduced in anticipation of the new law), and all will face higher interest rates on unpaid balances and higher fees.

None of this comes as a surprise, of course. Perfectly predictable. This is just one more Obama hurdle for the economy to climb. IT is difficult to see how any meaningful recovery can occur as long as this Administration is in power.

Monday, August 17, 2009

The Real Problem for the Economy

It is exactly the same issue that arose in 1933. Roosevelt had a clear mandate to "fix" the economy...whatever that meant. Obama had a similar mandate. So what did they do?

Both Roosevelt and Obama devoted the first few months of their presidency to bashing business leaders and bashing various industries. On the legislative front, both Roosevelt and Obama pushed new laws that would raise the cost of doing business, increase the costs of employees, and dramatically increase the regulations that businesses would face. What is the predictable result of these kinds of policies? Well there are a lot of results of this stuff, but none of them add up to economic recovery. Roosevelt presided over the worst US economy in modern times. Obama seems determined to try to match him.

Business folks were terrified of Roosevelt and rightly so. The result is that the depression never ended while Roosevelt held office. In his first eight years in the White House, Roosevelt never saw unemployment dip below 12 percent. Fortunately, Obama faces term limits.

Business folks are not the only ones terrified of Obama. The non-sensical and mis-named "health care reform" crusade of Obama has frightened the majority of Americans, if the Gallup Poll is to be believed. There is a big difference between angst with your insurance company and a two year wait for treatment for diagnosed cancer. Most Americans would prefer the former to the latter. It's one thing to be for combatting global warming and quite another thing to pay an estimated $ 3,000 per year in new taxes (in the form of higher electricity bills and product prices), in the name of global warming, but with no impact whatsoever on global warming (since China and India are completely opposed to any caps on their own carbon emissions).

People are frightened and when they are frightened, they don't spend money. Businesses are frightened and when they are frightened, they don't expand their business and they don't hire employees. Roosevelt never learned these simple truths. Obama seems determined to repeat Roosevelt's mistakes. The US economy will continue to limp along until the Obama crowd puts something on the table that encourages business (like tax reduction, less regulation, fewer employer mandates).

Saturday, August 15, 2009

China, Hong Kong, Japan Have Turned

Almost all of Asia has turned the economic corner with positive economic growth for the second quarter of 2009. The numbers are surprisingly strong, in fact. The Asian pattern is typical of recoveries that used to take place in (formerly) capitalistic countries in the West. China has avoided putting any obstacles in the way of recovery and the stimulus package adopted in China was, in fact, stimulus -- unlike the American redistribution package that had little or no stimulus in it.

Obama economists, like Paul Krugman, had roundly criticized China for not doing redistribution schemes to get the economy going again. There is absolutely no scientific support for the idea that redistribution schemes promote economic recovery. Redistribution schemes are purely political actions rewarding friends and punishing enemies. The China plan emphasized infrastructure spending not redistribution schemes. It's effect was almost immediate and Asia is benefitting from an intelligent approach to economic calamity.

Meanwhile the US is busily engaged in debating the merits of another redistribution scheme and government takeover of more of the American economy. The health care debate is a tribute to how misguided American politicians have become. Almost every proposal of the Obama White House has the effect of reducing employment and slowing the economy -- health care "reform" is no exception. Nothing in the Obama thinking would lead any employer to hire any anyone. In fact, the entire Obama program is an attack on business and on entrepreneurs and actively discourages hiring employees.

Thank goodness for China and the rest of Asia. They know enough economics to adopt sound policies that will lead their countries to early recoveries from the current recession. The US and Western Europe will continue to stagnate unless they reverse their job-destruction policies.

A recent NY Times article correctly portrayed the growing pattern of the top American college graduates leaving the US to go to China to seek employment. That trend will continue. The brain drain is now reversing. More results of the Obama team's "change you can believe in."

Friday, August 14, 2009

Cochrane on Health Care Reform

Today's Wall Street Journal features a fantastic editorial on health care reform by John Cochrane, finance professor at the University of Chicago Business School. Cochrane shows how the free market should and would deal with "pre-existing conditions." As well, Cochrane bravely comes out against the tax exempt status of employer-provided health insurance. Three cheers for Cochrane as he points out why government provided health plans won't work and why the free market will work and what policies will lead us out of the wildnerness.

Barrack Obama, Peter Orszag (White House Budget Director), Paul Krugman, and Howard Dean should read this article. A little economic enlightenment would do them some good.

Thursday, August 13, 2009

Cap-and-Trade Crushed Down Under

Today, the Australian Senate voted 42-30 to scrap Prime Minister Kevin Rudd's "Cap-and-Trade" plan today. That puts Australia in the camp with China and India of saying no to cap-and-trade. The Obama go-it-alone plan of economic suicide doesn't seem to have any willing followers. Maybe the US Senate will see the light and follow the lead of the Australian Senate.


Just imagine that that the cap-and-trade and health care bills died in Congressional committee. Just imagine that President Obama refocused his domestic priorities toward the problem of unemployment by temporarily suspending mandates on employers, abandoning his support for "card check," and applying the remaining dollars in the stimulus package to true infrastructure projects or returning the dollars that are unspent to taxpayers. Just imagine.....

The economy is bouncing along the bottom. What happens now depends upon the focus of the political powers that be. If they continue to make employees toxic, continue to push programs that imply historically high tax rates, and continue to try to micromanage the American economy, then this generation will see an economy that is characterized by high unemployment and little or no real economic growth.

There is another way. It is not too late for President Obama to think rationally. His future and our future hangs in the balance.

Monday, August 10, 2009

Zach Karabell Is a Good Read

My good friend Zachary Karabell has on op-ed piece in the Wall Street Journal today that raises the question: can the stock market do well, if the economy does badly? His answer: yes. The US faces "..the prospect of permanent change in the American economic landscape: high unemployment, moderate to weak growth and soaring corporate profits." Why? As Karabell notes, "...companies can grow by leaps and bounds - by double digits - and yet unemployment can skyrocket and remain high. There is nothing on the horizon that would lead one to expect a turnaround in the employment picture."

Karabell argues that the US is in a global economy and companies large and small can take advantage of cost-savings from using foreign sourcing and aiming their sales at foreign markets. What lies beneath this new "conundrum" is the increasing cost of US labor due to government (federal, state, and local) mandates providing various "benefits" to workers that ultimately make them far more expensive to employers. Unfortunately, the new administration is in a rush to add new mandates to the existing ones. This spells permanent stagnation and high levels of unemployment.

Sunday, August 9, 2009

Maybe Economic Recovery Is Not The Plan

It makes you wonder why the Obama Administration is spending all of its time with health care and carbon emissions. The immediate problem is that nearly 10 percent of Americans looking for work can't find a job. This should be the main focus of the Administration, but it isn't for some reason.

It's true that the Obama folks are spending money, but most of it is redistributive, taking from folks that they don't like and giving to folks that they like. Virtually none of the Obama spending creates any jobs in the private sector, which is what must be done if the economy is to improve.

Maybe getting back to full employment is not their real agenda. It is certainly beginning to look that way.

Friday, August 7, 2009

NY Times Has No Shame

Headline in NYTimes this morning: "Economists See a Limited Boost in Stimulus Package." What would you think if you saw that headline? Would you think that only two economists were the source of the headline? One of the sources is Christina Romer, head of the Obama Council of Economic Advisors, and the other is Allen Sinai, long a Democratic stalwart in the forecasting profession. Imagine that Christina Romer said something different, like: "Stimulus did no good, was a complete waste of money." That would be news. The fact that someone who receives a paycheck from this administration thinks the stimulus package is working is not news. Nor does Obama's lackey's statement justify the absurd headline that "Economists....." The NY Times should be embarassed. You have to wonder if there are any adults supervising these headlines.

The only other person quoted in the story, Donald Marron (not an economist, by the way), said "it's hard to believe the stimulus had that much effect."

Sorry, NYTimes. But, economists don't think the stimulus has done any good. It has raised the deficit by almost a trillion dollars and paid off a lot of political debts of the Obama team. But, for the economy, it has done zilch...worse than zilch.

Thursday, August 6, 2009

France in the Headlines

The Wall Street Journal has an excellent story today detailing the woes of the French health care system. This is the model upon which the Obama folks base their current "reforms." The system is awash in red ink and services are being slashed. This, even though the national health care system bargains directly with doctors and pharmaceutical firms over fees and prices. Doctors reputedly are not money-greedy in France and feel that being a physician is a calling. Even with all of this, the system is going bankrupt. It doesn't work. Nothing can keep prices low and services high but a free market in health care. As numerous examples in the US demonstrate and as the French national health care system is now demonstrating, government cannot provide good services for low prices. It is simply not one of the possible outcomes.

If you want to see how private-public partnerships work in government, look no further than Fannie and Freddie. Politically charged from their infancy, these two agencies are a disgraceful living tribute to the failure of the government to provide high service and low prices. The taxpayers have been annihilated by these two ridiculous quasi-governmental (now fully governmental institutions). Turning our medical care system over to the government will mean that only the well-to-do and politically connected will receive good health care in the future. This doesn't disturb Obama, Pelosi, Kennedy, Boxer, Feinstein, Kerry, Rangel, Dodd, Gore, Clinton for good reason. All of these folks are in the wealthiest one percent of the nation's population. They really don't care what gets enacted. Fannie and Freddie didn't lay a glove on them and health care reform won't either.

Only the average American gets hurt by health care reform. The very wealthy and the poorest among us will feel no effect at all.

Tuesday, August 4, 2009

Stocks and the Economy

If there s going to be a more or less permanently high level of unemployment, persistent deficits, and significantly higher energy (and health care costs)in the US going forward (thanks to Obama), can the stock market do well? That depends. If companies can buy from abroad products that use cheaper labor and cheaper energy, then they can fare okay. There is no need to hire US employees to make something, if you can simply buy it from other countries with more rational economic policies. Because the US chooses by policy to price itself out of certain markets does not mean that their public companies will not necessarily do well.

Europe over the past three decades is instructive. Europe has had double digit unemployment for two generations now because of absurd economic policies (that we seem intent on copying), but their stock market has done every bit as well as our own. Why? It's a global economy for one thing. For another, European companies just substituted against their own domestic labor force. Products that required labor could be purchased from countries that had more reasonable policies. I suspect we will follow the same pattern.

US companies will keep their work forces as lean as they possibly can and try to locate subsidiaries in countries with more rational economic policies than are being enacted in the US. American workers will suffer and the energy sector will likely be a disaster (along with health care), but that doesn't mean companies can't be well run, make profits and sell, if not to Americans, to the thriving countries around the world, who are not as foolish as we are. They are the economies of the future. They don't have Obama leading them to disaster.

Wealthy Americans will find new ways to shelter their income (or they will simply relocate), while the average American will find his/her take home pay drastically reduced (assuming he/she has any take home pay). Unless the government embarks on a wealth tax (and nothing is off the table with these folks), then the only real victims of the Obama plans will be the American middle class who will have a permanently reduced standard of living. They can't hide their income from the increasing tax rates that are on the way and they can't avoid picking up the new, enormous cost of health care, which will come right out of their pay.

It's the average American that loses and loses big in the Obama future. You can tell from the polls they sense the disaster coming, but with heavy Democratic majorities there seems little that can be done about it. Obama, himself, is enjoying the situation. Not burdened with knowledge of economics and totally ignorant of free markets or the private sector, Obama views the coming disaster as a utopia that emanates from his coffee-house dreams and discussions from his Harvard days. Obama himself will never have to experience the enormous burdens that he is in the process of placing on future generations of Americans. He has plenty of wealth (he bought a $ 2 million home six years ago) and he will get plenty more.

But, the average American can't hide. Having destroyed the public schools, the coffee-house crowd now intends to destroy the energy sector, the health care sector, the auto sector, and the financial sector. There won't be much left. As gloomy as this all sounds, stocks may do fine. They see what's coming and can take steps to avoid hiring employees and to move their energy consuming production offshore. Only the average American gets hurt in this deal.

Watch China and India and the economic policies they adopt. They know perfectly well that we are walking the plank. They will be happy to pick up where we leave off.

"Won't Cost the Middle Class a Dime"

That's right. Obama is not kidding. His plans will cost the middle class a fortune, not a dime. Even if "cap and trade" and "health care" go down in Congress, middle class marginal tax rates will soar above fifty percent by the end of the first (and hopefully last) Obama Administration. The alternative is that the US will default on its massively growing debt. This year's deficit, in the first year of the Obama madness, is moving toward $ 2 Trillion. American history has never seen a deficit one-fourth this size. This increases the total marketable debt outstanding by over twenty percent in a single year. (They plan to break that record in later years with their health care initiative). The Obama Administration is completely out of control.

The recklessness and cupidity of this Administration is without precedent in American history. The numbers are pretty obvious and available to any concerned citizen. Every week, the US Treasury has to go the market place and sell an increasingly astounding total of treasury securities. This alone will take available credit away from any potential economic expansion. The Obama regulatory regime is doing the rest. No bank wants to loan anyone money and no business, except those in desperate straights, wants to borrow. Any bank that tries to increase lending will be immediately slapped down by the Obama regulatory regime. (It is gradually dawning on many that this Administration is not hoping for an economic recovery...their main concern is economic power and control). No rational business plans to hire any employees. Again, apparently part of the Obama plan.

What Obama should have said is: "When I get through, the middle class won't have a dime left." He is certainly implementing that plan.

Monday, August 3, 2009

Cash for Clunkers -- A Teaching Moment

"Cash for clunkers" is working in the sense that auto sales are booming and auto inventories are dropping. Why does this work? Because people have an economic incentive to buy cars. Is anyone in the Obama Administration listening? Incentives work.

Of course, "cash for clunkers" is a stupid idea. There is simply no reason to subsidize the auto industry. The industry should fend for itself like every other industry. But, it does show that incentives work.

How about giving employers a tax incentive to hire workers? Why not try that? What about a $ 1,000 tax credit for every employee hired? Why not try that one? We spent $ 800 billion paying off Obama supporters in the package that passed Congress earlier this year (calling it a stimulus package). There was no stimulus in that package. It is instructive to note that "cash of clunkers" was not part of the so-called stimulus package. There are no incentives to hire anyone in the stimulus package.

Here's a "teaching moment" for our president. Try giving employers an incentive to hire someone instead of providing numerous incentives for employers to shed as many employees as possible. Incentives do work.

Sunday, August 2, 2009

Exempting the Middle Class

One of the Obama Administration themes has been that the "middle class will not be burdened" by the trillions of additional spending in the Obama legislative program. Larry Summers, who once laid claim to being an economist, repeated that silly mantra today. Geithner opined on Meet the Press that further tax increases, beyond the enormous mountain of those already in the agenda, are under consideration. Somehow, the "rich" will be the only ones effected.

Lets think about that for a moment: The 8 percent tax on business on total payroll to fund part of the "health care" bill...who pays that one? A $ 40,000 employee expense now costs another $ 3,200 per year. Who do you think pays that? Does the employer say: 'Oh, okay, it used to cost $ 40,000 and now its costs $ 43,200 but I am going to act as if it still costs $ 40,000." Is that what an employer thinks? (That's what Obama thinks he thinks. "After all, that's what all my law buddies at Starbucks think," says he.).

No. The employer says: "Hmm the cost of having employees has gone up by $ 3,200. If I am going to hire another employee I will have to adjust the new wage down to $ 36,800 so that the total cost remains at $ 40,000." That's what happens in the real world, as opposed to the Obama-Summers make believe world. The employee ends up, over time, absorbing the entire cost of the mandate. An employer does not give a whit about how the cost is distributed. All an employer cares about is the total cost per employee. Government mandates are always absorbed ultimately by the employee, not the employer.

So, when Summers says, the middle class will be unaffected, he must mean that no employees are in the middle class. Wonder how he defines the middle class?

It is not possible to raise any serious revenue by not taxing the middle class. Tax rates in the US on the middle class are already enormous. Don't forget the 15 percent payroll tax. That is paid by the employee not the employer because the employer simply reduces his offer to the employee to offset the cost of the payroll tax. The middle class is soaked by federal taxes on cigarettes on oil and gas that we consume on corporate income taxes on the stocks held in our retirement accounts. The taxes on the middle class are monstrous and heading higher.

You cannot provide cradle-to-grave entitlements without: 1) destroying individual incentives for people to provide for themselves; 2) creating a huge tax on future generations; 3) beggaring the middle class; 4) creating economic stagnation.

The middle class is not exempt from the Obama nightmare. They are its main victim.

Extending Unemployment Compensation

The NYTimes has two articles that discuss unemployment compensation, which pays an average of $ 300 per week to unemployed workers. The current maximum period to collect unemployment compensation, applicable in about half of the states, is 79 weeks. For many workers, upwards of 1.5 million, these benefits will run out in a few weeks. Now what? Congress, in its wisdom, will extend the period for collecting long term unemployment benefits, under the guise that these benefits are "temporary."

In the real world, US unemployment rates will continue to rise. Worse, there is little chance that unemployment will return to single digits for a generation, given the Obama legislative agenda. This will create a new, permanent entitlement -- unemployment compensation -- for more than ten percent of the workforce. Perhaps, "the rich" can pay for this along with health care and everything else.

The story in the NYTimes is instructive in other ways. They quote a woman currently collecting unemployment compensation, whose husband still has a job, as saying that she is concerned because her college-bound child can't afford a new laptop (and her other child can't go to the movies)! So, unemployment benefits are now a means to fund college-bound students and their needs (and movies for siblings)! That's a far cry from a family barely hanging on. What poverty means to the NYTimes is truly amazing!

Everything is becoming an entitlement. Less and less are people held to account for their own failure to save during the good times just in case there may be bad times. In the Obama world, bad times are a result of bad people doing bad things, though history shows that economic cycles are as old as history itself. Making everything an entitlement and holding no one accountable for their own foolishness is a prescription for economic disaster.

There is another NYTimes article discussing the saga of "John Galt" depicted in Ayn Rand's famous book "Atlas Shrugged." As noted in the NYTimes article (about BB&T), that book predicted the current political climate where government consumes the private sector, leading to permanent economic stagation. Probably, worth a read.

Saturday, August 1, 2009

Now Comes the Hard Part

Economies that crash eventually find a bottom. The American economy might have found a bottom. IF so, it will probably stay there. Without employment gains, no significant economic recovery is possible. Only the government is hiring. The government is not subject to the Obama-Congress rules on employees. As long as the public is willing to tolerate unlimited deficits, government hiring can continue. But, private sector hiring is in the deep freeze and unlikely to emerge.

Obama and his cohorts don't believe in free markets. They think somehow those who hire employees don't care what employees costs. They think employees just get hired by magic. They are wrong.

Obama and his cohorts do not understand profits and why people hire people in the first place. The entire Obama agenda aims at making employees more expensive to employers. While Obama celebrates increases in the minimum wage and more mandates and card check, employers cringe at the thought of hiring anyone.

At the end of the day, employers will make the decision as to whether there will be jobs and they are terrified of this administration and its "Employee Toxification" program.

The good news is that the US is almost alone in adopting anti-employee policies. Outside the US, there should be a reasonably normal economic recovery. Asian recovery is now well under way. Only the US and Europe will stagnate with high levels of unemployment and slow growth.

World economic leadership is shifting and it is shifting away from the US. In some ways, this change will be a positive change. There is no reason for the US to maintain economic hegemony over the world forever. On the other hand, for those who would like to see the US as a dominant economic power, the Obama crowd is making certain that that is a passing vision. Maybe that's what they intended all along. Obama does seem to be enjoying himself.