Friday, February 25, 2011

Can't Pretend Much Longer -- Inflation is Here

Noticed food prices lately? Or perhaps the price of gas at the pump has caught your attention. You probably didn't know that raw cotton is up 180 percent since a year ago. Guess where that will take clothing prices. Think deflation is our problem, think again. Inflation is here.

US monetary policy and US debt policy hinge on the assumption of deflation. So much for those policies. Be prepared for major increases in treasury rates which means a dramatic and unanticipated increased in annual federal fiscal deficits. Things are going to get a lot worse quickly.

Bernanke and Obama are going to reap the results that their policies have sowed. A return to the Carter days -- stagflation is back. The stock and bond markets will struggle from here.

Wednesday, February 23, 2011

What Happened to Robin Hood?

In Madison, thousands of high income folks are busy demonstrating in the hopes that lower and middle income taxpayers will pay higher taxes to keep these rich folks riding high. The average teacher in Wisconsin makes between two and three times the all-in compensation of the average Wisconsin taxpayer, so, by all means, lets raise taxes and make the gap even higher. To show their concern for their students, the Wisconsin teachers have taken to calling in sick while they are demonstrating in the state capital for even more money.

Meanwhile, the state faces an immediate $ 3.6 billion shortfall and will be forced to begin laying off teachers next week. Why don't the demonstrating teachers care about the pending layoffs? Because the ones demonstrating will not be the ones laid off. The ones laid off will be the most recently hired teachers with the least seniority and these teachers aren't paid as well or have as much seniority as the ones wreaking havoc in Madison. The rich teachers are protected by seniority rules.

Just imagine a couple both of whom have been school teachers in Wisconsin for twenty years and have a combined compensation exceeding $ 250,000 annually. These are the people demonstrating. These are the people that are not showing up in the classroom even though paid (handsomely) to do so.

Where is Robin Hood? He needs to ride in and support the taxpayer against these rich folks who are robbing the public treasury and not showing up for work.

Student demonstrators, as usual, are supporting the relatively affluent against the interests of the average citizen. No change there.

Wednesday, February 16, 2011

Bernanke is a Political Hack

Ben Bernanke is likely the worst Fed Chairman in US history and that's saying something. We have had some really bad ones, but none like this guy. He has now purchased nearly $ 400 billion of his $ 900 billion QE2 buying spree. If he doesn't buy, who will? That's a question that is getting asked a lot lately.

Now Ben has opined on the Dodd-Frank bill, probably the second worst piece of legislation in American history (Obamacare is the winner of the gold). Ben likes the Dodd-Frank bill, otherwise known as FinReg. FinReg is one of the key contributors to our high unemployment rates. So, I guess it is having an impact. It is certainly not irrelevant. The mountain of new rules, regulations and prohibitions have done their job. They have stifled credit creation and muzzled the financial system.

Ben and Obama have a lot in common. Their policies are both significant contributors to our current stagnation and high unemployment.

The Real Tragedy of State and Local Employees

State and local government employees face signficant layoffs and dramatic reductions in their benefit packages. Why? The unions claim that the reason is the stingy taxpayer, who, in most states, makes less average compensation than the employees that the taxpayer is funding. The real problem is excessive promises by the union leadership, encoded into law by governors, state legislatures and local governments. There has never been any realistic chance that these benefits could be paid for...never. This grand plan only worked as a ponzi scheme, providing benefits to the early recipients until the cold hard facts of demographics revealed the fraudulent nature of the promises.

The great tragedy is that all of this fooled the employees. They assumed that they would be provided abundant retirement income and medical benefits. Thus, there was no need to save. They could spend with abandon and they did. Now, the day of reckoning has arrived and there is no money to pay the promises of the past and no savings to make up for it. That is the real tragedy. People believed these false promises of government and thus did not save and prepare for the future. That is the main reason that the US has the lowest savings rate in the developed world. They think they will be bailed out. Now they are learning that there are no resources available to deal with this problem.

False promises abound in the entitlement arena. President Obama's refusal to address this problem in his recent budget demonstrates the cynicism of the modern American political leadership.

The Obama Budget

Apparently the Obama Administration has forgotten the results of the November election. The new Obama budget proposal unveiled this week brings back all of the same, tired, big government plans that the President has been pushing since the day he took office. It no longer matters to the President that the recovery is producing no jobs. He has grown used to that fact, apparently. Now, the President plans new spending initiatives to expand on policies that have few supporters even in his own party. The President is becoming more and more irrelevant. Perhaps that is the plan.

Meanwhile major budget cuts are being pushed by the President's opponents in the House of Representatives and even entitlement cuts are under consideration. While there may be zero presidential leadership, there are some good signs that the House of Representatives is not asleep and may supply the leadership that the White House seems incapable of providing.

The President seems bent on using today's fiscal crisis as an opportunity to force Republicans to make unpopular budget decisions. Then, I suppose, he will defend all of this spending and coast to a second term come next year. So much for Obama's view of "winning the future." His budget proposal is a sham.

Saturday, February 12, 2011

Egypt -- Politics and Economics

Now that Mubarak has left, the media is trumpeting that Egypt is now "free." That's not a likely result. The military, who has ousted Mubarek and assumed control, owns a huge share of Egyptian business and industry -- estimates range from one-third to to one-half of the entire Egyptian economy is directly owned by the group that now has power in Egypt. Will they give up that power? Not likely.

What this means is that economic freedom will remain in short supply in Egypt. New politicians will appear and there will be elections, but the things that can make a difference to the lives of ordinary Egyptians will not be on the ballot. Egyptians need economic development. They need the freedom to start new businesses, educate their children and live in an economy that produces jobs.

The fundamental need in Arab countries is economic freedom, not the right to vote themselves into an Iranian-like theocracy or a Venezuelan-like monocracy. This does not mean that Mubarak is better than democracy. Democracy is definitely better than Mubarak. Democracy, without economic freedom does not produce economic growth (even though economic freedom without democracy can produce economic growth -- check out Singapore and parts of modern day China).

The Arab lands need economic freedom for their citizenry. The curse of oil has robbed the Arab countries of a middle class and made every Arab country the land of the rich and poor. Education, economic freedom and economic opportunity are the ticket, not the right to choose between various opportunists looking to cash in on Egypt's new found freedom.

As long as the military is Egypt's savior, the Egyptian people cannot be saved.

Monday, February 7, 2011

Obama and the Middle Class

In his speech today before the US Chamber of Commerce, Obama lectured his audience that gains must be shared with the middle class. He points to the eroding take-home income of middle class Americans.

But, there is nothing business can do about the plight of the middle class. That is pretty much determined by Congressionally imposed mandates on businesses. Imagine that you pay an employee $ 40,000 per year and that productivity improves enough to pay that employee $ 50,000 per year. Why wouldn't you do it? Because, in the meantime, Congress has passed a law permitting that employee to sue you for millions of dollars if another employee makes an off-color comment to another employee at the water fountain (or for that matter, off company premises and after doesn't matter under the law). Now the employee isn't worth $ 50,000 to you. Business has to factor in the potential cost of litigation (and, of course, they do). In fact, the litigation threat may be so costly to your business that you may simply terminate the employee, even though, absent the litigation benefits enacted by Congress, you would have been more than happy to pay the employee $ 50,000 (and hire more of them to boot).

Congress has punished the middle class with employer mandates. Congress has made much of the middle class economically toxic to American business. Obama need look no further than into the mirror to see the group that is responsible for damaging the prospects of the American middle class.

Knocking Down Barriers

President Obama, speaking before the US Chamber of Commerce today, said that he would "knock down" barriers that hamper economic growth.

Well, for starters, how about repealing all of the enacted legislation from the 2009-2010 Congress. That would be a good beginning. In the process, away would go FinReg, Credit Card Reform, and Obamacare among other things.

If the president is serious, then the road is clear. All he needs to do is a complete about face. Anything else is just politics as usual.

Saturday, February 5, 2011

Unintended Consequences

The economic recovery in the US is stillborn. All the various "initiatives" enacted by the Congress since September of 2008 have virtually guaranteed that the economy cannot have a robust recovery, the kind of recovery that, from previous recessions brought the economy back to full strength. Instead, the new credit rules, the new financial regulations, the new health care mandates, the new tax gimmicks, and the business-demonizing atmosphere of the Obama Administration all serve to slow down economic recovery and to create long term stagnation in employment and economic growth.

The Administration seems truly puzzled by all of this. The lame duck session, extending the Bush tax cuts for two years, simply avoided disaster. The tax cut extension, since it is a temporary two year extension, cannot possibly stimulate the economy in any meaningful way. Changing the rhetoric in the White House is certainly an improvement but is totally inadequate given the enactment of legislation in 2009 and 2010 that shackles businesses and makes adding employees prohibitively expensive.

Businesses can be seen as growth engines and employment generators or they can be seen as purveyors of social causes. They can't do both. More and more,American business is expected to avoid profit maximizing behavior and be good citizens, promoting various social causes. Being good social citizens and promoting social causes inevitably means growing slower, hiring fewer employees and being less dynamic. That's where we are. The "green jobs" rhetoric is nothing more than rhetoric.

It is time to set aside "feel good" rhetoric and create a business environment favorable to jobs creation. So far, the President doesn't seem to get it. He seems genuinely surprised that American business, reeling from the blows of his policies and rhetoric, isn't racing to create jobs and rescue his presidency.

If your main economic banner is "no tax cuts for the rich," then economic stagnation is probably your future. What is needed is the elimination of the numerous barriers to economic prosperity that the Obama Administration and a compliant (and long gone) Congress put in place. What is needed is no less than a complete dismantling of the legislation passed in the last two years by the Congress. Then and only then can a truly vibrant economy take over.