Tuesday, January 31, 2012

So, Who Is the Free Market Candidate?

Who among the various candidates, Democratic or Republican, truly believes that economic scarcity is best solved by free markets? Indeed!

It is not clear that any of the candidates now running for the Republican nomination, other than Ron Paul, have any real faith in free market solutions to the problems of economic scarcity. No one is really proposing returning to free market principles. The battle ground seems much narrower -- personal and business tax rates, minor amendations to Obamacare, support for the Keystone project -- but not much else really.

The most likely outcome is a Romney candidacy. As much as that will be presented as the free market alternative to President Obama, in truth there is not much daylight between Romney and Obama. Neither seem to understand the fundamental economic malaise of modern America, nor to understand the root cause. One way you can tell that neither "get it" is the constant China-bashing that comes from the White House and the campaign trail.

Anybody that thinks China is at the heart of our economic stagnation believes in a fantasy. China is not the culprit. China is doing the right thing for its people by creating the largest expansion in free markets in the history of the world. The result -- economic prosperity for hundreds of millions of people who lived in subjection and poverty a mere generation ago.

What has the West accomplished in the last couple of generations? Growth of government mainly and a declining status of the middle class whose savings rate has collapsed to zero in the US and whose work ethic has slipped into the mud. Absent a savings rate and a work ethic, no amount of government waste will pull the US out of its malaise.

So, who speaks up for free markets. Sadly, no one except Ron Paul and he's not on a path to the White House, given his isolationist outlook on foreign policy.

Sunday, January 29, 2012

Obama Is Right on Tuition Levels

In his State of the Union address last week, the President put forth an idea that is a long time in coming. Federal government aid should be curtailed to schools whose tuition is going through the roof and redirected toward schools who are running a tight ship. Amen.

In the past, the answer to the surging costs of higher education was to throw more money at higher education through more federal dollars and increasing loan availability to students. All this did was feed the beast and have universities searching for ways to toss money down ratholes. Meanwhile, millions of our college graduates are now saddled with debts that they have no hope of ever coming out from under. All of this to fatten the ever bloated monstrosity that is known as higher education.

Higher education is one of the few areas of American life, where there has been no serious change in technology implementation. Most schools still run their classroom in the same old way -- blackboard, chalk and someone droning on in the front of a mostly empty classroom. While there is technology available in abundance, it lies mostly unused at the modern American university. Facebook gets more action from University students than any websites that provide serious educational offerings.

Obama is on the right track on this one. Higher education costs are completely out of control. The priorities in the modern American university are less about educating students and improving skills and more about advancing the narrow political agenda of university faculty and administrations. The losers are taxpayers and students.

Three cheers for the President.

Saturday, January 28, 2012

The New Normal in the Obama Economy

Peter Whoriskey's article in today's Washington Post gives a brief summary of the "Obama Recovery" and it's not pretty. The slowest economic recovery in post World War II history has left the economy, even at this late date, with 6 million fewer jobs than it had before Obama took office. This after the most incredible expansion in federal spending and the national debt in American history. Quite a record!

The article shows who are the winners and who are the losers. The winners are businesses, who no longer intend to carry the albatross of the American worker. Loaded up with government mandates, rights, privileges, benefits, and lawyers, the American worker is a luxury that American businesses are determined to wean themselves away from.

"Businesses are swiftly investing in equipment and software. Those investments were up 5 percent in the last quarter of 2011 and 16 percent the quarter before that...."

As for the middle class that Obama claims to be defending: " disposable personal income is slightly lower, in inflation-adjusted dollars, than it was a year earlier."

That's the report card for big government. The rich and powerful do fine in the Obama economy. But, everyone else is in big trouble.

Thursday, January 26, 2012

The Obama Plan to Lower Tax Revenues

The so-called "Buffett-Rule," which would impose a minimum tax on incomes above $ 1 million, would guarantee lower tax revenues for the US Treasury. Folks with high income would simply choose to lower their taxable income. That is a fairly simple thing to do and always happens when you raise tax rates on wealthy citizens. Short of confiscating folk's wealth, something Obama may get around to eventually, raising tax rates just encourages tax lawyers and leverage (the wealthy borrow more to live and let their assets grow unrealized...that solves the problem of lowering your taxable income without affecting your lifestyle).

Meanwhile, as tax revenues collapse, the Obama folks will find a way to tack on a tax increase for the middle class to offset the revenue loss from rich folks. This is always the route that tax rate increase advocates end up taking. The result: the middle class gets soaked with more taxation, while the no-nothings revel in the irrelevant higher rate structure that wealthy folks face, but do not pay. This is the kind of absurdity that Obama's class warfare will lead to. No wonderrich people support higher tax rates. Buffett knows he will pay less under Obama's soak-the-rich tax than he does now, so why worry? (Once the new rates are passed, Buffett will lob a call into his high priced tax attorney and get the advice he needs to pay less taxes under the Obama plan than he pays now. Don't think he won't make that call. He will).

Meanwhile, higher marginal rates will mean that money that would have flowed into the capital markets to create new businesses and new jobs will lie dormant in frozen assets. High levels of unemployment, economic stagnation and increasing misery for the poor, minorities and old folks will be the Obama legacy. This is what happens when economic policy is an outgrowth of coffee-house conversations at Harvard by people who have never held a real job.

Wednesday, January 25, 2012

More Politics from Obama

The state of the union speech revealed a complete lack of interest in the absence of growth in the US economy on the part of the President. This means that lower income folks can expect their misery to continue as long as this President remains in office.

Instead the President launched a variety of attacks against his coffee-house enemies -- "the rich." As Buffett knows, apparently better than Obama, the tax rate is completely irrelevant to the truly wealthy. The truly wealthy can arrange things so that they have zero income for tax purposes, so who cares whether the tax rate is 30 percent or 100 percent. 30 percent of zero is zero. That's math that the President and his crew don't seem to understand.

But, it all sounds good I guess, to the uninformed. There is no question that this is class warfare and shows a President of the United States several shades to the left of the most socialist leaders in Europe. Whether Obama gets his way on all of this economic nonsense is yet to be seen.

The rich have nothing to fear from this President and they know it. That's why most of the truly wealthy support Obama now and will continue to support him throughout his political career. Those with modest incomes and those among the youth, the aged and the minorities, whose futures are blighted by the economic mess that the Administration has created, have little to look forward to.

America's economic stagnation will continue and it's dwindling world economic stature will continue with the kind of policies advocated by President Obama. Only free markets and capitalism can provide a rebirth to the American economy. Overbearing government will simply lead to more and more economic decline for what once was the most vibrant economy in the world.

Tuesday, January 24, 2012

Podesta Needs a Reality Check

The op-ed in today's Wall Street Journal co-authored by John Podesta, life long Democratic Party strategist, suggests that the "clean energy" industry is soon to reduce America's dependence on foreign oil. That is so absurd as to be laughable.

One supposes that this article was trotted out to defend the indefensible -- the Obama decision not to give the go-ahead to the Keystone pipeline project that would have permitted the US to tap Canada as an oil source instead of Syria.

There is no "clean energy" industry out there, either in the US or China, that has any potential to reduce America's or anyone else' dependence on fossil fuels. To pretend that there is, is irresponsible.

Whatever there may or may not be to a "clean energy" industry is far into the distant future and will only come into existence when the free market wills it so. Governments will just continue to waste taxpayer money. Does anyone really think wasting money on the Solyndras of the world will be a substitute for entrepreneurship and the free market?

Podesta should be ashamed of this article.

Monday, January 23, 2012

Republicans In the Mud

It is hard to see either Mitt Romney or Newt Gingrich emerging with much of a claim to lead a major political party campaign after the absurd performance in Tampa tonight. Instead of discussing the economy and the important campaign issues, the main spotlight was on who was the biggest devil in the room. The President must have enjoyed this debate.

Sunday, January 22, 2012

State and Local Pension Reform

As everyone by now must know, state and local defined benefit pension funds are broke and are not sustainable in their present form. So, what should be done?

Most states are creating Rube Goldberg machines to "reform" their state pension systems. Virginia is a good example. The proposals by the McDonnell Administration recently unveiled have the potential to make a bad system even worse.

What should state pension funds look like?

If you lump defined benefit pension funds in with social security, it is easy to see the overall problem -- the absence of saving. Social security is a net dis-saver (that's really the meaning of the "social security trust fund") and defined benefit systems have the effect of encouraging state workers to dramatically reduce their personal savings because of the expectation of future benefits. The result is that the national savings rate plummets effectively to zero (except for the savings done by the wealthy and by the corporate sector).

If savings are negligible, then there are no assets to support retirees (or to support young folks either). That's the problem in the US. Our assets are declining (Mostly by being purchased by non-US entities). It is as if the squirrels quit gathering acorns to prepare for the winter. When the winter comes, there are no acorns. For a while, you might be able to borrow acorns from the squirrels down the road, but that will only postpone the inevitable disaster.

Retirement plans should be about accumulating savings. The rationale behind defined benefit plans was that states would do the accumulating (ditto with social security), but we know that didn't work. States, all of them, use various accounting tricks and political excuses to avoid providing the necessary accumulation of assets to support future retirees. Early retirees win, but later retirees have no hope of winning.

Here is what a state retirement system for employees should look like: Employees should be required to put away five percent of compensation. The state can kick in another 2 1/2 percent. The total 7 1/2 percent should be exempt from current taxation so that it would essentially be structured like an IRA. Individuals should not be permitted to withdraw anything until age 65. Period. Individuals should be permitted to invest the money however they choose.

On top of the 7 1/2 percent the state could provide a 1 for 3 match up to some maximum. For example, if the employee chooses they could save another three percent of income and the state would match that with an addition one percent contribution. Imagine that you capped this at 9 percent (with a 3 percent kick-in by the state). Adding it all up, an employee could potentially end up saving 7 1/2 plus 9 plus 3 for nearly 20 percent annual, tax-deferred saving.

Notice that system would cost the state, at most 5 1/2% (or a mere 2 1/2 % if no one opts to go for the match) of total payroll. The employee would end up with annual savings of between 7 1/2 percent and 19 1/2 percent depending upon how much they choose to take advantage of the "free-money" match).

People could then choose the lifestyle they want in retirement: minimal or maximal. The state could lock in its liability to current contributions. Unfunded liability would be impossible in this system.

Best of all, aggregate savings would increase without question. Thus, the acorns would be available when winter comes as opposed to the almost complete absence of acorns that the current system promises.

The only objection to this is the old and tired excuse that employees cannot competently invest their own money. TIAA-CREF is the largest pension fund in
America and the most successful. The employees choose their own investments in TIAA-CREF and I doubt that any participant has ever voiced any real complaint about this system. So, individual investing works, contrary to popular myth. People do learn.

A similar structure could be used for social security. Together these reforms would create adequate savings for comfortable retirements for all Americans and get government out of the "unfunded liability" business.

These are the reforms needed, not the half-baked measures that are currently under review.

Tuesday, January 17, 2012

Check Out Iceland

Faced with a banking system that was broke, Iceland simply let their major banks fail. This happened three years ago as the US and Western Europe were busily fashioning government rescue plans. No rescue plan for Iceland! Nope!

They just let them fail.

So, what happened? Did their civilization end? No. Iceland today is the one of the fastest growing countries on the globe. Business is booming, unemployment has cratered, and good times are back. This, in just three short years after Iceland let nature take its course. (A pattern very similar to what happened in Asia after the 1997 collapse of Asian financial institutions).

This story is laid out in detail in today's Washington Post in an article by Brady Dennis with the fetching title: "Could US and Europe Learn a Thing or Two from Iceland's Financial Collapse?"

All of those who say that the TARP and other government bailouts were essential should take note of what happened when governments stepped aside (which doesn't happen often, but it does happen occasionally). Take heed of the aftermath of the Asian crisis in 1997 and what happened in Iceland in the past three years.

Economic growth, prosperity and recovery are critically dependent upon government inaction. Activist policies just guarantee slow growth and massive economic dislocation. A generation of stagnation will be the reward for the US government activism in 2008 and 2009. Fortunately, for Iceland, they chose a rational road and are prospering mightily for their own government's inaction.

Romney Is The Only Adult in the Room

The debate in South Carolina last night revealed what everyone has long known and no one has been willing to say: Romney is the only truly viable candidate that the Republicans have. Gingrich and Perry have revealed themselves as attack dogs against capitalism, Santorum has a non-sensical tax plan that would create a distinction in tax law between manufacturing companies and all other companies, and Ron Paul is delightfully irrelevant. That leaves only Romney, who, admittedly from his resume, is Obama-lite.

It is interesting irony that in the day of the tea party, there is no real conservative alternative to Mitt Romney. Romney will be the Republican nominee. It is time for the other guys to admit reality and head home.

Friday, January 13, 2012

S&P Downgrade Is Not News

The S&P downgrade is simply a public statement of what everyone already knows -- Eurozone debt is unsustainable. That France was included in the downgrade should surprise no one. Sooner or later the French government will be forced to absorb the balance sheets of the major French banks. The French are in as much trouble as everyone else.

Really important news will come when sovereign debt auctions begin to falter. That will happen. That will be the beginning of the end.

Far better is to face reality now and begin the "workout" process. But, politicians are loath to face reality on their own watch. So, don't look for anything good on the European sovereign debt front anytime soon.

But, the markets surely know all of this.

Capitalism Under Siege

What do Warren Buffett and Newt Gingrich have in common? Actually, quite a lot. They both relish being in the spotlight and both dote on the sound of their own voice. Now, they have both joined the Rick Perry choir denouncing private equity as some kind of evil pursuit. Strange since all three -- Perry, Gingrich, and Buffett -- have all benefitted financially in a big way from private equity activities (or it's equivalents).

What next? Why not condemn LaBron James since his existence, no doubt, led to a basketball player losing his job.

Where does this absurdity end?

It's beginning to look like Romney may be an attractive candidate, if only because only he (and Ron Paul) seem to favor capitalism over the alternatives.

Monday, January 9, 2012

Conservative Economists' Foolishness

Today's Wall Street Journal shows that right wing economists are no better than their left wing brethren at separating economics from politics. Professor Robert Barro of Harvard University and the conservative Hoover Institution of Stanford University opines today for the Wall Street Journal that the Euro should be abandoned and outlines a gradual policy to convert the Euro back into the original currencies of the countries presently in the Eurozone.

Why does Barro reach this remarkable conclusion? "In light of the ongoing fiscal and currency crisis -- which is leaning strongly toward a centralized political entity that will likely be even more unpopular than the common currency -- I would suggest it would be better to reverse course and eliminate the Euro." Politics is the reason!

So, toss aside the enormous benefits of a single currency union simply because of the "ongoing fiscal and currency crisis." Nowhere does Barro propose any economic solution to the crisis, although there are several good candidates available. Instead, he simply throws up his hands and says "drop the Euro." If Illinois and California get in fiscal trouble, will Barro advocate a separate currency for Illinois and California to avoid their "ongoing fiscal and currency crisis?"

The common currency is a good idea and should not be abandoned. What should be abandoned is the idea that creditors and debtors cannot sit down and readjust their unrealistic contracts with one another. Going back to separate currencies, with the implicit idea that weaker countries will inflate their way out of their debtloads is a cop out.

On the same editorial page, the WSJ has another conservative economist arguing for a wealth tax. Why? Because income is hard to define, according to Professor Ronald MacKinnon of Stanford University. "The basic problem is that defining 'income' becomes progressively more difficult as income and wealth rise." So, is wealth any easier to define? What is a piece of land worth? or an old building? or anything that isn't trading on an exchange every day. McKinnon looks like a shill for the appraisal industry in this piece. His proposal would simply lead to an enormous incentive to hide wealth or distort its value in various ways, much as takes place today with reported income for tax purposes.

Professor McKinnon might raise the more relevant question: why is there such an enormous need for revenue? Answering that question might spares us more inefficiencies and distortions in our economy than McKinnon's proposed strategy of creating a new bonanza for tax lawyers.

Sunday, January 8, 2012

The Drag from Minimum Wage Laws

When the economy is struggling to create new jobs and pull itself back up by its bootstraps, it is not helpful to have laws that make it illegal to create jobs. Minimum wage laws are exactly those kinds of laws. Someone who would like to make $ 6 per hour, rather than remain among the unemployed cannot legally do so anywhere in the United States. In San Francisco, it is not legal to take a job that pays $ 10 per hour! In many states, it is illegal to take a job making $ 9 per hour. It is also unlawful to offer anyone a job at these various rates in these various localities. That is what minimum wage legislation mandates.

What these laws are saying is that until the economy has made a dramatic recovery, those of our citizens at the bottom of the pile will have the boot heel of big government on their necks. Once unemployment rates are small and the boom is on, if that day ever comes again, then and only then can folks at the bottom of the talent pool have the legal right to work. Because only at the peak of the boom will wage rates for many jobs began to exceed the minimum wage levels that various states and municipalities, not to mention the federal government, have imposed.

This is unfair and economically absurd. When will politicians remove this obstacle from the hopes, dreams and aspirations of our citizenry at the bottom of the economic pile?

Friday, January 6, 2012

200,000 New Jobs -- Nothing New Here

The unemployment report this morning showed the unemployment rate is down to 8.5 percent. This is being celebrated by the Obama Administration as stupendously good news.

Well, it's not bad news. It's just more of the same -- a slow, sluggish economic recovery consistent with 2 percent GDP growth continues to trudge along.

The only reason the unemployment rate is down to 8.5 percent, is that so many people (and this is the only real record that Obama has been able to set) have simply given up looking for work and have disappeared from both the numerator and denominator that makes up the unemployment rate. That's why Congress periodically extends unemployment benefits (also an Obama Administration record).

A good month would be 350,000 plus jobs. That's not going to happen with this Administration in the driving seat.

Another Academic Economist in Action

Today's example of absurd economics coming from academia is Professor Uwe Reinhardt's blog post in this morning's NY Times entitled "What Price Pluralism in Health Insurance?"

It is really hard to believe that Professor Reinhardt put pen to paper with this nonsense. Here is his argument: In the US, people have a tough time figuring out which health insurance plan to buy because there is such a diversity of plans. No such problem exists in some European countries through the simple expedient of requiring everyone to purchase identical plans. "Premium shopping among insurers is easy, because the standard benefit package is common to all."

Why not apply this logic to cars, television sets, fitness centers, etc? If the government would simply mandate that only one type of car, only one type of television set, only one type of fitness center, etc, can exist, think how easy it would be for consumers to comparison shop! Consumers would no longer have to make the difficult decision between a Chevrolet and a Ford. Now, the government would require that Chevys and Fords be identical. What a boon for consumers, according to Professor Reinhardt.

This is, of course, the identical system that Russia and China once had in place. Consumer choice is "inefficient' and "expensive," according to Professor Reinhardt, who teaches this stuff to young folks at Princeton University.

Your tax dollars and tuition dollars at work.

Monday, January 2, 2012

The Biggest Myth About The Euro

You hear it all the time. "They created a monetary union without a fiscal union." What complete nonsense that is. There is absolutely no need for a fiscal union in the Eurozone.

Those who push this notion: 1) completely ignore the US experience where, at least at the national level, there is a monetary union and fiscal union and, nonetheless, sovereign US debt is spiraling out of control; 2) if there was a "fiscal union," things would be far worse due to logrolling and moral hazard problems.

What is missing in the Eurozone is that those who owe money should sit down with their creditors and work out a repayment schedule that involves a substantial foregiveness of principal -- a partial (or perhaps nearly complete) default. Each country is and should be on its own.

If country A is profligate and spends money it doesn't have and if someone is foolish enough to lend them the money to do that, then why should country B be involved at all. Country B may have lived within its means and has no reason to bail out country A.

Markets will learn if country A defaults. Lenders will demand better behavior by country A and they will get it. It is the only way that country A will ever enact serious reforms. Country A will never bind itself to a serious austerity program for the sake of their creditors. It just will not happen, regardless of what Merkel-Sarcozy think.

The Eurozone is a great idea and should be preserved. A single currency union eliminates many of the bottlenecks of trade and finance and enhances economic growth. In the case of the Euro since 1997, lenders have blinded themselves to the differences between the credit-worthiness of the various countries that make up the Eurozone. Not any more. Thanks goodness. It is high time lenders woke up.

The very idea that somehow there is some political solution to this (using a bazooka to quote Hank Paulson) is ridiculous. The "print Euros" solution will destroy the European union as well as the Eurozone. Much simpler is to preserve the Euro and begin the process of writing down European sovereign debt -- country by country. Creditors deserve their fate in this one.