Wednesday, May 30, 2012

The Solution That Doesn't Exist

Europe's problems are simple: every country in Europe -- there are no exceptions, not even Germany -- borrows to pay for promises that their own economy hasn't got the resources to pay for. The same is true in the US, but it hasn't become front burner yet. It will. Ultimately, you run out of people willing to loan you the money to pay for things that you otherwise can't afford.

It's not as if the US and Europe are borrowing to build bridges. That might represent a legitimate reason to borrow. Instead the indebtedness is a result of current funding needs that will only escalate over time. When does social security and medicare get less expensive? This is the heart of the European problem. They are not borrowing to fund long term investments, they are borrowing to fund the welfare state.

Put another way, they are borrowing for current consumption. The consumption being funded is part and parcel of the way of life in Europe, as it is in the US. There is no real difference. When your economy does not produce enough resources to fund it's obligations, then borrowing from somewhere, anywhere for a while will postpone the day of reckoning. But, not forever. Sooner or later bondholders realize you have no way to pay them.

So, what is the Obama solution. Float more debt. How? Who's going to buy it? Even if Germany were to relent and agree to underwrite the rest of Europe, Germany doesn't have the resources to do so. Once you have a debt that's not payable and you know that it not ever going to be payable, the jig is up. The jig is up. It's just a matter of time until the default process begins. That can either be an orderly process of "restructuring" or it can just be pure chaos.

If Greece returns to the Drachma, how does that help them? Who's buying Drachma based debt? And will Drachmas fund their social welfare agenda? Who's kidding who?

Economists are partly to blame for this fiasco because they have been negligent in pointing attention to unrealistic sovereign debt levels that exist in every western economy. In fact, they've encouraged these absurd debt levels by arguing that higher and higher government expenditures and higher and higher debt levels are good for economies. Read Paul Krugman if you want a taste of this reasoning. If your debt levels are growing so that you fund consumption by transfer payments to "entitled" people, it can't be good for the economy.

There is no serious economic research out there that suggests that this has any beneficial economic effects. Yet most academic economists have remained silent. Many are in the forefront of the clamoring for Germany to underwrite the Eurozone. But, that doesn't work either. Has anybody looked at Germany's numbers? There just isn't anyone left out there to buy bonds to fund other people's retirement at 60. It's over for that. This is not about European unity or a fiscal union or any other nonsense. The is about raw numbers.

Sunday, May 27, 2012

A Journalistic Coup

John Isner, the top seeded American in the French Open which begins play today in Paris, found himself trapped when I discovered him with his entourage of trainers and coaches in his hotel in Paris yesterday. Isner had agreed to a 9 PM phone interview and made the serious mistake of providing me with the name of his hotel. I wandered over to his hotel and found him in the hotel lobby conversing with his tennis buddies and he graciously granted me the exclusive interview that I sought.

You can read the resulting article in Sunday's Daily Progress at I may not be a great sports writer, but I am doggedly persistent. I discovered, among other things, that tennis players at the top of the world rankings live much better than I do. Isner's hotel put my poor fleabag of a hotel to shame. His hotel was just off the Champs Elysee in a neighborood that I know I could never find a restaurant that I could afford. C'est la vie.

Today, the French newspapers were discussing the Spanish bank problems. They look insuperable. Combined with the fact that regional governmets are imploding financially, the latest in trouble is Catalonia, Spain looks like the next Greece. Spanish unemployment exceeds the levels the US reached in the Great Depression. Soon, the Spanish bond auctions will begin attracting more (negative) attention. This has pushed Italy to the back pages, but their problems will soon reassert themselves and gain better media coverage. The expectation now is that Greece is gone, but then what? There will be no good news out of Europe for a long while.

 I also read a review of another book on the problem of income inequality. I think I will write a book about the problem of tennis playing inequality. There is certainly a bigger gap than ever between the best players and the worst players. In fact, I suspect that is true in every sport. What to do? Why not forbid good athletes from training or competing? That might level the "playing" field some. Or just handicap all the good athletes. Make LeBron James carry an anchor around while he plays.

That seems to be the economic solution proposed by those that decry inequality. Isn't the real point to improve the economic position of the folks at the bottom? Why does it matter what the gap is between the top and the bottom? That is a ridiculous preoccupation and emphasizing inequality may preclude policies that improve outcomes for those at the bottom of the economic pile.

Of course, I am reading papers published in a country that just elected a socialist at its President. But, then, are his policies much different from those of Obama. The rhetoric seems identical. I guess I have to return to Asia to find a real interest in promoting free markets. Who would have guessed?

Saturday, May 26, 2012

May in Paris

Greetings from Paris. It is another beautiful day in Paris where I find myself covering the French Open tennis tournament. This is my other job. The French Open starts tomorrow morning on the courts of Roland Garros. One of my favorite trivia questions is "who was Roland Garros?" You will be surprised. Guess before you google it and see how well you do.

 I am staying at a small hotel a block from the Tuilierries and around the corner from the Place Vendome in the heart of Paris. Wandering around this morning I discovered a parka for sale in a storefront, the price of which is equivalent to my extending my stay in Paris for another three weeks. Wonder who buys things like that? For a clue, I stood outside the entrance to the Westin Hotel to watch how the other half lives. One thing for certain, the other half smokes a lot -- at least they do in Paris. For the convenience of the wealthy tourists and locals in the area, there are conveniently placed receptacles on the sides of buildings that say: "Etienez votre cigarette." How handy! They also say, in English, "Take Your Pill." Hmmm.

I wandered by the Hotel Meurice. I stayed there once many years ago, but it now costs somewhat more than my roundtrip flight to stay there for a single day. But then, Smith Barney was kind enough to pay the bills back then. Here in socialist France, things are quite expensive. A soft drink will run about six euros in any of the establishments within a two block walk of here and it is best not to eat too often or you may not have enough money left to sightsee. A five day metro pass is a mere 31 euros, so getting around is cheap and you see lots of bicycles and motorscooters in use. But the cost of eating is so high, it is not surprising that are few overweight people on view. Not many older people either. Small wonder.

The local French papers say that Angela Merkel is close to a compromise with Francois Hollande regarding Euro-wide guarantees of sovereign debts in member countries. I would doubt that. But, if true, it simply extends the agony and postpones any real resolution of the Eurozone's problems, which is that the current debt levels are not payable. Extending them doesn't really get at the real issue. So more pain ahead for Europe.

I must appear an obvious tourist. The same pickpocket team singled me out twice yesterday in the Place Vendome. The trick is that one of the team appears to find a gold ring on the ground. They pick up the ring and ask if it is yours. Then, as you try it on at their request, another member of the team, finding you distracted, lifts your wallet neatly from your pocket. Since I had no interest in acquiring a ring or trying one on for size, the scheme did not work on me, but it is interesting that the same team tried this on me twice in one day.

Today, I have an exclusive interview with John Isner, 10th seeded (highest American seed) in the tournament. He is one of the few college grads on the tour. Wonder if he will hit a few with me after the interview?

Thursday, May 24, 2012

The Jamie Dimon Saga

Jamie Dimon has made himself too visible.  He basked in the glow of a powerful Wall Street post and a left wing image.  Dimon was one of Obama's strongest supporters in 2008.  Like most of Wall Street, Dimon saw nothing wrong in loading up costs on employers, who had made the mistake of hiring workers.  After all, the workers that Dimon hires are high-end, highly skilled employees, who are largely unaffected by minimum wage laws, health care mandates, and a variety of worker protection schemes and union promotions (think "card check").  So Dimon, like Buffett, courted the media and made clear that he was a "caring" soul.  Now, Dimon is finding out, as Buffett will also, that this is not about "caring."  This is about a war on capitalism, waged from the White House.

Dimon had harsh words for Paul Volcker when the so-called "Volcker Rule" became part of the regulatory landscape.  Ouch!  Now, Dimon is getting blasted from the left.  See Simon Johnson's note in today's New York Times, where he quotes "Native-American" Elizabeth Warren and Socialist Bernie Sanders saying that Dimon should resign from the Board of Governors of the New York Fed.  Right!  And maybe put someone on the board that knows next to nothing about Fed Policy, like Elizabeth Warren or Bernie Sanders.

Ironically, J P Morgan should be praised, not villified, for owning up to a relatively minor trading loss that went awry.  J P Morgan weathered the 2008 crisis better than any other major investment bank and has been much more forthright than brethren banks.  But, no one cares about this.  All that matters is that Dimon and JPM stumbled and that is enough to bring forth the "no-nothings" demanding that something be done.  Whatever that something turns out to be, it will further damage the financial services industry and make it even tougher for a moribund economy to get off the mat and less likely that job seekers will find work.

But, who cares about the unemployed or the bad economy, when there is another rich guy to roast.

Monday, May 21, 2012

The Fixed Pie Theory

Modern public policy in Western countries seems to be based upon the assumption that the economy is a fixed pie, waiting to be divided up "fairly." How else to explain the economic utterances of President Obama and the leaders of Western Europe? It's all about who gets what. Now "economic growth" is on their mind. Where has that been? Who thought about economic growth when politicians were busy saddling their economies with regulations and mandates?

The political leaders of the Western world seem to think that the government spending is the cure for what ails us. If that were true, would we be ailing? When did government spending not exceed revenues in any country in the Western world in the last three decades? Now we need more of the same? This is like the drunk, awakening with a hangover, asking for another drink to cure a hangover. Except, there is no more booze available.

Back when, western economies grew and provided rising living standards for their citizens. But that was before noble minded politicians decided that workers needed protection from management. Now workers have that protection, but no new jobs to go along with it What good is worker protection, if there are no jobs?

All of this is based upon the idea that economies do not and cannot grow. If economies cannot grow then sitting down to divide up a fixed pie makes perfectly good sense. But, sitting down to divide up a fixed pie may mean that the pie can no longer grow. That's where we are.

 Labor and management are natural enemies, so say the modern polticians. Therefore, all political activity should be devoted to providing benefits for labor -- minimum wages, health care, litigation weapons, disability rights, and on and on. The modern politicians got their way and now the reality of a fixed pie is upon us. The western countries really cannot grow any more at any significan rate.

Double digit unemployment is the new reality, both in Europe and in the US. It isn't fiscal stimulus that is needed, as Obama thinks, it is reform of our labor laws, repeal of employer mandates and an unshackling of an oppressive regulatory climate. Absent these things, the pie will stay fixed and we can continue to argue about who gets what, as opposed to having the pie grow larger.

Sunday, May 20, 2012

The G-8 as an Ostrich

The G-8 communique this weekend is more of the same. The communique calls for "growth measures" for the Eurozone and is an implicit slap at the austerity measures that were imposed, by Merkel and Sarcozy, as the price of bailouts for Ireland and Greece. No mention of the over-regulation and labor laws that have made the Eurozone, even in the best of times, an impossible place for anyone under the age of 25 to find a job.

The G-8 politicians accepted the Obama Administration view that you can put an enormous tax on labor and still expect businesses to be enthusiastic about hiring workers. By piling mandate upon mandate upon employers who make the mistake of hiring anyone, the government has effectively put a huge tax on labor.

Is it any surprise no one wants to hire anyone, when it is effectively against the law to fire anyone in Spain? The 25 percent unemployment rate in Spain has nothing much to do with austerity measures, since so far there haven't really been any in Spain. Instead, the completely stifling labor laws are the main culprit for the plight of those in Spain looking for work.

So, what does the G-8 want? They want the US and Germany to fund the extravagant lifestyles of southern Europe and avoid making any of the tough choices about de-regulating their economies. Obama, of course, was the loudest trumpeter of the increased spending demands by the G-8. More infrastructure! Sounds great. But, where is the money going to come from for this? Obama pledges US funds. Really? From where?

The Eurozone countries look to Germany, but Germany will ultimately collapse if weighted down by the absorption of the debts of the rest of the Eurozone. So, what is the plan really? Avoid hard choices. Pretend that there is money from somewhere to continue to fund promises to the citizenry. Blame rich people. That's it. In other words, there is no plan, just rhetoric. That's the Obama way and is now the G-8 solution.

But, it doesn't really matter. The German public and the American public are out of chips. They can't fund this stuff, even if they wanted to. Which they don't. So put your head in the sand once more. Pretend like there is a way available for everyone to live high on the hog without anyone really working or saving. This is what I would call the "Ostrich policy." Pretend and pretend. It will not end well.

Saturday, May 19, 2012

The Stock Market Swoons

The US equity markets have given up more than half of their 2012 gains in the last two weeks as the market has plunged more than seven percent in that short space of time. Why? Fear of a weaker economy in the second half is the answer. The economy still seems to be barely moving forward and, with major tax increases on the immediate horizon (January is not far off), a weakish economy could potentially roll into another recession. The odds are probably fifty-fifty.

 But, there is no set of circumstances favorable to a strong recovery. An anti-business White House has put so many roadblocks in the way of economic recovery, that the best hope is a muddling through and that is getting increasingly less likely. JP Morgan's travails will strengthen the hands of those bent on straightjacketing the finance industry.

Who loses? The average American seeking credit and small business seeking financing. The enemies that Obama has on his radar screen are, unfortunately, the only people who can provide the jobs necessary to get the economy really going again. So, the war on rich people surges along out of the White House, while Americans search fruitlessly for the job creators. The government has run out of bullets and the entrepreneurial classes are frightened out of their wits by the White House. That's basically what ails the stock market.

But, stocks are cheap. But, they are cheap for a reason. With the steady drumbeat of bad news that will continue to pour out of Europe, it will be difficult for American stocks to mount much of a rally. There will certainly be big up days in brief spurts, but over the next few months, don't expect much out of the stock market. The politicians have given the equity markets too much to ponder over.

"Greece's Problems are Europe's Problems"

Alexis Tsipras is a 37 year old politician in Greece who is surging to the top of Greek political polls with the message that Greece should not be forced into austerity. I agree with that, but I don't agree with Mr. Tsipras's broader argument.

Tsipras believes that it is perfectly okay for the Greek government to make absurd promises to its citizens and provide no means of paying for those promises. He must have been watching the successful American politicians and following their lead. Tsipras believes that the rest of Europe should underwrite the lifestyle that Greece thinks it deserves and he intends to "call their bluff." Right.

 I suspect that German citizens do not share Tsipras's sanguine view of having other folks pick up the tab, since German citizens are the "other folks." So, what will happen? That's pretty easy to see by simply following the fortunes of Angela Merkel's party in the elections that are going on in various parts of Germany. German citizens are shouting a loud "no" to the bailout program that is basically funded by German citizens. "No more bailouts" is the message coming from the German electorate.

So Tsipras is simply setting the stage for a Greek default, which has been a long time in coming. The Eurozone member countries have wasted hundreds of billions of Euros in the delusion that Greece, given austerity and time, would be able to deal with its enormous indebtedness. We have Sarcocy and Merkel (and Obama and Geitner) to thank for this waste of resources.

 Now comes reality. Greece is not going to live with austerity and they are not going to pay their debts. So there. That's basically Tsipras's message. It has always been the case that Greece would ultimately have to default. There has never been a viable alternative to a Greek default. Never. The only question is whether the default will be an orderly one or a chaotic one, accompanied by civil and political unrest.

The Sarcozy-Merkel illusion has increased the odds that the outcome will be chaotic and Mr. Tsipras's rise to prominence virtually guarantees chaos. A "controlled bankruptcy" was always the right solution. Such a solution would have kept Greece in the Eurozone and likely kept Greece's far left and far right political parties in the closet. But, no. Politicians always think they have a fix for the unfixable.

So now, the worst of all outcomes is likely. Egged on by Obama and Geithner, the European leaders were convinced that there was a "European solution" to Greece's problems. There is no European solution. There is only a Greek solution.

The underlying problem is the unwillingness of political leaders to face reality and to tell their citizens the truth about the seriousness of the problems and the costs of the polticial programs that they are advancing. It is easy to promise things that can never be paid for. That's how you win elections in Europe and in the US. But, eventually the piper must be paid. California, Illinois, and New York are next. You will soon be hearing that "California's problems are America's problems." Don't buy into that one.

Monday, May 14, 2012

Clawbacks for Politicians

Pundits and politicians are loudly proclaiming that Wall Streeters whose firms lose money should "give back" earlier compensation.  Why not apply this reasoning to politicians?  Since Jerry Brown misguessed the California deficity by $ 16 billion, why not have him cough up all of his assets (but no more than $ 16 billion).  Similar for Obama and other politicians who proudly announce their fiscal discipline and then quietly let the truth seep its way into public view when no one is watching.

If politicians had to personally make up the shortfall for their promises versus their funding of those promises, maybe they would have second thoughts about their duplicitous behavior.

Deposit Insurance Is The Problem

Why do we have federal deposit insurance for banks?  Today's federally guaranteed checking accounts, FDIC guaranteed, have their origin in a 1934 banking law designed to prevent runs on banks.  In practice, FDIC has always paid off all bank creditors, not simply those creditors who qualified legally under FDIC protection.  This is why so many banks are now "too big to fail."

The FDIC exceeded its statutory authority and thwarted the clear design of the 1934 Act.  Now, Dodd-Frank has codified this into a blanket guarantee for all "large" banks.

This creates two problems: 1) the government now thinks it should run all aspects of commercial banking; 2) banks have an incentive to gamble since the government guarantee means they can lose money with impunity yet still get low cost financing.

Every time there is a problem, like the recently revealed $ 2 Billion hit by JP Morgan, there is a call for more government regulation and new laws and restrictions on (all) banking.  Ultimately, this means that commercial banking becomes merely a creature of the state and subject to political whim.  This is what China has and would like to be rid of.

The right answer is to roll back FDIC guarantees to what they were originally intended to be: protection for moderate size checking accounts.  It's supposed to protect the first $ 125,000 of an individual's checking account.  If the federal guarantee were rolled back to that, and if an individual could not have more than a single guaranteed account beneficially, then we wouldn't be concerned about taxpayer exposure, because exposure to this kind of guarantee would be modest.  That's what the framers of the 1934 FDIC Act assumed they were guaranteeing, not the current blanket guarantee that effectively covers all of the creditors of each and every commercial bank in the system.

Bank creditors, other than small depositors, do not need federal guarantees.  There is simply no reason for taxpayers to protect the bondholders of Citigroup or JP Morgan -- none at all.  Such guarantees entice Citigroup and JP Morgan to make bets that they would not make, absent such a blanket federal guarantee and the low financing rates that come with that guarantee.

Sunday, May 13, 2012

Show Me The Money

Now German Chancellor Merkel is in deep political trouble after the election results in North Rhine-Westphalia in Western Germany.  Merkel's party, the Christian Democrats, had their worst showing in NRW since World War Two ended.  They received just under 26 percent of the vote, having received 35 percent two years ago.

That pretty much completes the cycle.  No political leaders that stood in 2010 are going to survive the Merkel-Sarcozy bailout and austerity program, including Merkel.  She is up next year and it is obvious that her political day in the sun is over.  Germans aren't interested in underwriting the Greeco-Spano-Italo-Portugo-French welfare states.  They won't do it and no government will survive that promises to do it.

The problem for all of Europe and really all of the western advanced economies is that they are out of chips.  Some can play a few more hands before it is over, but all of them are in the same boat -- no money.

Neither side of the Eurozone crisis makes any sense:  There is no reason for Germans to bail out Greeks and there is no reason for Greeks to adopt austerity.  Neither position makes any sense and both Germans and Greeks will toss out any leaders that pursue such policies.  Plain old-fashioned honesty is the right solution.  The Greek debts cannot be paid.  End of subject.  It is time to face that fact.

What needs to be done is a "workout."  Greece needs to sit down with its creditors and offer them 15 cents on the dollar or whatever and get this done.  If that means some banks fail, they would fail anyway, since Greek debt probably isn't worth 15 cents on the dollar.  Governments can nationalize their banks and deal with the resulting financial crisis by reorganizing the bank balance sheets (bank bond holders become equity holders to some extent) and then putting them back into private hands.

This solution averts the abandonment of the Euro and is simply dealing with an unpayable obligation in the only way that is possible to deal with an unpayable obligation.  The politicians have been simply making things worse by pretending that there is some other solution that works.  There is no other solution that works.

California's Race to the Bottom

California's budget deficit is now estimated at $ 16 Billion, instead of the $ 9.2 Billion estimate that held sway as recently as January.  They kind of missed that one.  Maybe they "overestimated" the revenues they would get from the variety of new taxes that they have imposed.  So, what's the answer?  More taxes says Governor Jerry  Brown, referred to as Governor Moonbeam by most of his constituency.  According to the LA Times this morning, "...revenue in April ... fell far short of expectations, leading to a shortfall of at least $ 3 Billion in the current fiscal year.  The state has also spent $ 2.1 Billion more than expected..."

Huh?  Three months later, the deficit is $ 7 Billion higher than expected?  Was this an accident or the result of a calculated deception designed to fool the voters into believing that Governor Moonbeam and the Democratic Legislature had a balanced budget?  It increasingly doesn't matter whether Governor Brown is duplicitous or incompetent.  Either way, you reach the same destination -- the bankruptcy of the State of California.

I suspect that Governor Moonbeam's solution will be more of the same.  Why not?  Increased spending and increased tax rates.  Maybe they can get the deficit to $ 25 Billion before weary bond investors get the idea and join the Greek bond investors on the sidelines.

Expect Governor Moonbeam to begin the "fairness" discussion.  As unemployment soars past 10 percent in California and the deficit blows through the roof, the Governor can follow Obama's example and change the subject.  Maybe discussing gay marriage and demagoging tax fairness will solve the unemployment and fiscal problems of California, but not likely.  But, distractions often win elections, since voters all too often fail to do the math.

California citizens have the government they wanted and voted for.  Bankruptcy lies ahead and economic chaos for the Golden State -- not Golden any longer.

Saturday, May 12, 2012

Two More Wealthy Supporters of "Tax the Rich"

Facebook co-founder Eduardo Saverin, a staunch defender of the Buffett rule raising taxes on the rich, has renounced his American citizenship to become a citizen of Singapore.  That way, any tax increases on the rich won't apply to him.  I can't wait for his next "fairness" interview on why the rich should pay their fair share.

Meanwhile, Mark Zuckerberg, another advocate of Obama's "tax the rich" scheme has arranged a tax-avoidance trust to escape massive amounts of estate and gift taxes.  Zuckerberg's and a half dozen other Facebook "luminaries," according to today's Wall Street Journal's story, are all using "a perfectly legal maneuver" to avoid taxes.

So much for the various hypocrites like Warren Buffett, Mark Zuckerberg, Eduardo Saverin and others (including Bill and Hillary Clinton, by the way).  They know they won't have to pay the taxes that the "tax the rich" Obama crowd is pushing for, so they support, not only Obama, but the hypocritical "Buffett rule."

It must be easy to advocate that other people "pay their fair share," when you know you won't have to do the same.

Friday, May 11, 2012

Who Needs J P Morgan Anyway?

Another big loss in corporate America as Jamie Dimon announces a $ 2 billion loss at J P Morgan involving a trade that was designed to reduce risk not enhance it.  Interestingly, a loss like this becomes more of a political matter than a shareholder issue.  Even after a $ 2 billion hit, J P Morgan is still expected to earn more than $ 4 billion after tax this quarter.

The way the world should work is that JP Morgan announces the loss, it's stock falls briefly, changes are made at JPMorgan and life moves on.  But, in the modern world, don't expect such a simple and rational outcome.

Instead, we wait with baited breath for the Obama Administration to opine once more on how terrible capitalism is.  Surely, a mistake like this would never have been made by the ever frugal, watchdog folks in the Obama Administration.  So, expect more rules, more demonizing of Wall Street, more attacks by the Obama Adminstration on business.  That's their thing.

Meanwhile Americans are looking for jobs, not that anyone in the White House could notice.  By implementing the Volcker Rule and the Consumer Protection Act and Dodd-Frank, the White House will effectively be putting the financial system in a complete straight-jacket, preventing the system from providing the necessary financing for a traditional economic recovery.

Who needs J P Morgan anyway?  After all, consumers can learn to do without credit cards, home mortgages and business loans.  That's the message from the White House and Pelosi-Reid Democrats.  The frequent and vocal attacks from the White House and senior Democrats on Goldman Sachs and on the entire financial services industry have taken their toll.  Businesses and consumers cannot get loans in this bright new Obama world unless they are truly wealthy and don't need them.

From Obama's point of view, a financial services industry is merely a distraction.  As in the student loan arena, why not simply let the government make the loans.  Who needs a private financial services industry?  After all, a private industry seeks to make profit.  As China tries to extricate itself from a state run banking system, the US is busily adopting the same model that China is rapidly trying to discard.  As in other things, East and West are trading places.

So, who needs J P Morgan anyway?  Unemployed Americans -- that's who.

Tuesday, May 8, 2012

Next Stop -- Bond Auctions

Now that it is clear that political support for the Merkel-Sarcozy plan has disintegrated, the next step will be escalating bond yields across Europe.  For a while, Germany will be spared rising yields, but, in time, they will join their European neighbors.

Essentially, the political upheaval in France and Greece and earlier in Spain and Italy means there is no possibility of budget cuts and economic reform in these countries.  Their political leadership intends to sell the same discredited bill of goods to their fellow countryman that they have been selling them for decades.  You can have it all.  Essentially, the Obama plan.  Everyone can have everything and no one need put aside any funds to get it. 

But, the one group that isn't buying it anymore are bond buyers.  They will be departing in droves, which means declining bond prices and spiking bond yields across the Eurozone.  The one day reaction on Monday was the opposite -- bond yields actually dipped in Europe once the election outcomes in France and Greece seeped into the markets.  But that is a head fake.  The future is for dramatically higher bond yields, effectively eliminating any prospect of avoiding default.

This could have been limited to Greece had Greece been permitted two years ago to go down the structured bankruptcy route.  Since that time, Greece has received a massive amount of new funding from other countries in the Eurozone.  Now, 75 percent of the 270 billion euro Greek outstanding sovereign debt is owned by governments and banks in the rest of the Eurozone.  Now, the Greek disaster spreads automatically to the rest of the Eurozone, no matter what happens in Greece.

As debt yields rise in Spain and Italy, they too will join Greece in the disaster zone.  There now is no policy solution available.  It is too late.

So, it may no longer matter much for the economic future who wins what election.  The outcome of economic chaos is on the way regardless.

You reach a point where foolish policies can no longer be corrected and countries will descend into chaos and political radicalism.  We are at that point in Europe. 

Watch the rising bond yields across the European plain.  They are the smoke signals that will signal the end of a united Europe and the beginning of a new era of political and economic chaos.  This is the ultimate and predictable outcome of the entitlement state.  No country or collection of countries that make unlimited and unaffordable promises can escape this fate.  We are witnessing the breakup of modern civil society in Europe.

Monday, May 7, 2012

Elections in Europe are No Surprise

Why would voters support expanding debt levels combined with austerity?  Across Europe, voters tossed out the political parties that foisted the Merkel-Sarcozy plan upon them.  Now what?

Those replacing the bad guys in France and Greece are even worse.  This is the political nightmare to which the entitlement society ultimately leads. 

Francois Hollande promises to raise marginal tax rates to 75 percent and end the austerity being imposed in various European countries.  Raising marginal tax rates to 75 percent will lower tax revenues and make the French deficit even worse than it is.  Not to mention the chilling impact of 75 percent rates on business activity.  As for ending austerity, we are back to the same old question.  Who pays?

French citizens, on paper, have a great life.  Such are things in the entitlement society.  The only minor headache is who is out there willing to fund this great life?  Bond buyers have been the answer for the last two generations.  No longer.  So, who is out there to step up to the plate to provide the good life for French citizens?  We're waiting.

Hopefully, Hollande will reveal who the good samaritans are who will provide the funding to bankroll the French entitlement society, because it is certainly not apparent at this point.

Ditto in Greece.  No more austerity, keep entitlements in place, but how?  Who funds this?

I think we know where this is headed.  We have the German experience of the 1920s to see where this goes.

Meanwhile what will modern day Germany do?  By next year, it should be apparent that German citizens will toss out Merkel and her grand bailout and austerity schemes.  In time, Germany will be forced to abandon the Euro unless they want to be the funding source for the life of leisure that Hollande promises French citizens and the various groups trying to gain leadership in Greece promise Greek citizens.

By insisting on unfunded entitlement programs and labor laws that effectively outlaw hiring new employees, European politicians have succeeded in imposing the Obama Plan throughout Europe.  The outcome is no longer really in doubt -- economic catastrophe and political chaos.  Coming soon to your neighborhood.

Sunday, May 6, 2012

Greek Political Solution Unravels

Today's election in Greece seems to have created a majority for those opposing the austerity measures agreed to by Greek politicians in exchange for the bailout by the European Union.  Now what?

The real tragedy here is that if Greece abandons the austerity program, which frankly they should do, then they will be booted out of the Eurozone and forced back onto their own currency.  Some economists think this is great.  Now, Paul Krugman would say, Greece can simply deflate the heck out of their currency and prosperity will be just around the corner.  That, of course, is ridiculous.

The best solution would have been for Greece to do a structured bankruptcy while remaining in the Eurozone.  The Eurozone is a good thing not a bad thing.  The US has benefitted greatly from being a single currency union and the same beneficial effects have flowed to Europe.  Remaining in the Eurozone should be a completely separate issue from the question of dealing with Greek sovereign debt.  There is simply no reason that those issues seem to be joined at the hip by commentators and some economists.

Again the current fiscal problems in Illinois are a perfect analogy.  If Illinois does a structured bankruptcy (and it will be forced into some kind of bankruptcy unless Congress bails Illinois out), there would be no reason to create an Illinois currency and proceed down the road of deflation.  That would be absurd.  So, it is with Greece.

Had Greece done a structured bankruptcy refinancing two years ago, we wouldn't be where we are now.  But, we are where we are.  Difficult times lie ahead in the Eurozone.

The Big Corporations

The President continues to attack the "big corporations" and promotes his concern for the "middle class."  But who owns the big corporations?  When the big corporations make obscene profits, who gets them.  The answer -- middle class Americans.  Yes, middle class Americans own the big corporations, mostly through their pension funds.  So, an attack on "big corporations" is an attack on the retirement hopes and dreams of middle class Americans.

What the attack on "big corporations" doesn't do is reduce the excessive compensation of senior executives of the big corporations.  After all, these senior executives are mostly Democrats and support the President, so let them keep all the perks and obscene compensation that we can arrange for them.  Instead let's go after the big corporations' owners -- the middle class.  Let's chop them up.

This parallels the President and his allies approach to big financial institutions.  Let's make them too big to fail, so that their senior executives can be guaranteed a future.  Meanwhile, let's discourage them from making loans to lower and middle income Americans -- after all, that is "predatory" lending. But, it is okay to lend to rich people and business that are already prospering and to give tax dollars to businesses that promote intiatives the president likes (think Solyndra).

The rhetoric used by the President to promote the "middle class" is a mask to hide the daily assault on the future of middle and lower middle income Americans by this administration and its allies.  The rich have nothing to fear from Obama's attack on big corporations and financial institutions (that's why rich folks mostly support Obama), but the middle class will see their hopes and dreams for their future and the future of their children wither on the Obama vine, as he decries capitalism, big corporations and "the rich."

Sarcozy -- Another Conservative Flop

Nicolas Sarcozy was supposed to bring a return of free enterprise back to France.  To do this, you have to tackle two things: 1) the entitlements and the entitlement mentality; 2) the regulations that stifle commerce including the absurd laws that effectively prohibit the firing of employees.  Sarcozy did neither.

Sarcozy's strategy was to substitute smaller issues for the bigger issues and to join hands with Angela Merkel to promote an expansion of sovereign debt and force austerity on their fellow countries in the Eurozone.  In the waning moments of the campaign for the Presidency in France leading up to tomorrow's vote, Sarcozy has stooped to thinly-veiled anti-Muslim appeals to motivate far right voters.  Gone is any interest in free enterprise and promoting entrepreneurship.  All of that disappeared in Sarcozy's alliance with Angela Merkel, another conservative leader gone astray.

Meanwhile, the fruits of the Merkel-Sarcozy alliance are everywhere to see as the Eurozone economy collapses in a sea of hypocrisy, exploding debt, expanding unemployment, collapsing GDP, and growing anarchy.

Virtually every bad piece of legislation and regulation in the US in the past quarter century has a Conservative Republican stamp on it. In recent years both Bushes, Bob Dole, Newt Gingrich all penned their names to things that dramatically increased the role of government and reduced ever further the scope for free enterprise.  Granted the Republicans are not outright, vocal opponents of free markets -- an apt description of President Obama, who spent yesterday on the campaign trail decrying those who "maximize profits" -- but still.  Republicans are no friend of free markets.

So, Sarcozy's apostasy is not a new, unique episode in political history.  He is business as usual.  Elect a conservative and what you get is a wheeling, dealing big government statist.  That pretty much describes Sarcozy and Merkel.

Francois Hollande is, at least, more forthright about his opposition to free markets and not likely to deviate from Sarcozy's grand European vision.  Look for Merkel to follow Sarcozy to the sidelines in the next election in Germany and a re-emergence of the German Socialist party.

That's okay.  Let the socialists preside over the destruction of the European economies.  They largely created the problems in the first place, so why not let them have the throne as the kingdom collapses.

There are no Margaret Thatchers or Ronald Reagans available on the modern political landscape.  Instead, we have the "kindler, gentler" version and you can see where that leads.  Inevitably, when you promote free enterprise and reduce the size of government, someone, somewhere will produce an example of an inequity or a tragedy.  There are always such examples.

It is all about costs and benefits.  Nothing is perfect.  But, if you can't live with some inequities and tragedies, then you can't live with free enterprise and capitalism.  Asking the government to cure every ill is asking government to stamp out free markets.  Conservative Republicans and Liberal Democrats walk hand in hand in wringing their hands over inequities and tragedies and putting more and more obstacles in the way of free markets.

The problem with this is that free markets represent the only hope for middle class Americans and lower middle income Americans.  There is no other path to prosperity for these folks.  Expanded government means creating a large group of haves -- government employees, politicians and political workers, union workers -- and a large group of have nots -- average and below average income Americans seeking employment and opportunity in the private sector.   Big government picks winners and losers.

In time, of course, as we are now witnessing in the collapse of Europe, there are no funds to support the growing army of the haves.  The have nots run out of money and bond investors begin to see the light.   The end game of the liberal dream is economic chaos and political anarchy.  We are watching it unfold in Europe.

Free markets permit people to improve their situation through their own efforts in the process of supplying goods and services to their fellow citizens.  Big government emboldens those who think they should be telling everyone else what they should be doing and how they should be running their lives.  Big government views free enterprise, taking personal responsibility and trying to achieve personal prosperity essentially as crimes against the state.  Listen to President Obama for a while.  His message is pretty clear. Check out the "Julia" website.  It is all about depending upon big government and shirking personal responsibility. At least, Obama is upfront about his contempt for free market capitalism.

It is too bad that, in this critical juncture in history, there are no defenders of free markets.  Certainly, Sarcozy and Merkel are not defenders of free markets and they will both soon be on the dustbin of political history.

Saturday, May 5, 2012

The Real Issues in Europe versus The Smoke

The media pushes the notion that somehow there is a "political" problem in Europe.  The Euro, they say, was a bad idea in the first place and should be abandoned.  Conservative as well as liberal economists push this notion.  Why the Euro, they say?  That's what caused the current problem.

A parallel theme is the idea that if Germany would just "step up to the plate" and use government pump priming to get their economy going, all would be well and prosperity would return to Europe.

This is "smoke."  Abandoning the Euro is completely irrelevant to the problems in the Eurozone.  Switzerland is not doing well because it is not in the Eurozone.  Switzerland is not devaluing their currency as a pathway to prosperity.  Nope.  The Swiss Franc is doing just fine and so is Switzerland, other than the fact that the Swiss live in an economic neighborhood that is collapsing around them.

There is nothing virtuous about having your own currency.  If that idea made any sense, then the soon-to-be-bankrupt state of Illinois would simply abandon the US dollar, form their own currency zone based upon the Illinois dollar, and step forth into a new world of prosperity.

The path to prosperity for Greece is not the abandonment of the Euro.  That solves no problems and creates new problems for Greece.  The answer is not a "fiscal union."  The US has a "fiscal union" and the US sovereign debt problems are worse than those in the Eurozone.

All of these suggestions of  "rearranging the deck chairs on the Titanic" are nothing more than smoke.  They appeal to the Krugmans and Obamas and Geithners of the world because they do not involve any hard decisions.  It looks like all you have to do is tax a few rich folks and make some kind of political agreement and then people can have free and expansive retirements, health care, education and -- best yet -- no one really has to work to get these things.  Even better, once you have a job, you can "goldbrick" indefinitely with no fear of termination, because most European countries outlaw job terminations by employers.  Yes, that is the utopia that the Krugmans, Obamas, Geithners envision.  Would that it were so.  Wouldn't life be simple.

But, there is a problem.  There is the same, nagging problem that bedevils the US as well as Europe.  Who pays?  Where will the resources come from to pay for the free retirements, free health care, free education, free this, free that?  The one percenters?  Is that it?

The problem that Europe faces is identical to the problem that the US (and Japan) face.  There are no provisions made to pay for the promises that politicians have made to their citizenry.  Universal health care, huh?  Why pays?  Folks like Obama and Krugman and their allies in the media and academia think that question is irrelevant.

The answer to the question "who pays" in Europe has been the folks who buy European sovereign debt.  As we learn every single day, that solution is evaporating.  European sovereign debt buyers are losing interest in funding elaborate free retirements, health care, vacations, education, and on and on to Europeans who choose not to provide any funding themselves for these things.  Soon, bond buyers of US federal and state debt will arrive at the same conclusion.

There are no more "sleight of hand" strategies available for Europe.  Now comes the inevitable economic and political chaos when we reach the "Emperor has no clothes" stage of the European debacle.  Reality has arrived and disaster is the only outcome.  Older Europeans are going to live out their lives in relative poverty.  That is their future.  There is no other outcome really possible.  The next generation of Americans face pretty much the same future.  There is no available funding for social security recipients twenty years down the road.  Ditto for state and local municipal pension funds.

As the Mariana Island pension bankruptcy this week reveals, when you finally reach the end game and there is no money to pay those who came late in this shell game, there is just no money.  That's it.  The Mariana Island pensioners will be receiving about $ 500 per month in retirement.  That's all there is. Hope that gets the job done!  Good luck with that!  That is the inevitable and inescapable outcome of politicians promising benefits that they have no intention of funding.

So, talking about easy political solutions, such as abandonment of the Euro or having the German economy "step up to the plate," is a fools game.  Nothing short of owning up to the real problem -- promising what cannot be delivered -- can get Europe (and the US and Japan) back on track.  Meanwhile, latecomers to the party -- people expecting lush retirements and free health care in their old age -- are in for a rude shock.  By talking generations of Europeans and Americans into thinking they don't need to provide for themselves, now there is no one that can provide for them.

The political class has caused the problem, but they cannot solve the problem.  There is no easy solution.  Painful outcomes are ahead that cannot be avoided by soothing or strident rhetoric.

Friday, May 4, 2012

Lipstick on a Pig

Today's employment numbers were pathetic -- 115,000 new jobs.  After a revision upward of 50,000 for prior months, the net-net is about 165,000 new jobs.  That won't keep pace with population growth.  The rate of unemployment fell from 8.2 % to 8.1 % only because more than 300,000 people simply gave up looking for work in April, reducing both the numerator and the denominator, causing the ratio to drop.

The key to the drop in the unemployment rate over the past two years is mainly that an extraordinarily large number of people no longer believe they can find jobs in the Obama economy.  They are probably right.

These numbers are the predictable outcome of a misguided and punitive economic policy that seems to have as its goal the paralysis of the US economy.  They are succeeding.

Time to Take a Breather

The stock market is not overextended.  It will be much higher ten years from now than it is today.  But, for now, I am retreating to the sidelines.  It has been a good run since last August and now the economy faces the reality of dealing with an Administration bent on its destruction.  Even the American economy might buckle under the brutal pounding of current economic policy. 

The threat of surging medical costs mandated on business, a host of bureaucratic bludgeons aimed at the energy sector and the financial sector, increasing threats of liability to business that make the mistake of adding to their work force and looming, massive tax increases scheduled for next January, the Obama team has created the perfect storm.  The American economy will eventually recover, but it will never be its old self while this political team is in the driver's seat.

So, I would lighten my commitment to the stock market at this point and await developments.  If the markets do sell off, the news background is likely to be so gloomy as to make the financial markets swoon for a quarter or two.

The US economy has put in an admirable showing in the face of economic policy that is mainly punitive.  The roadblocks put in place by the Obama Administration are growing, not lessening, so there is a bumpy road ahead.  So, time for more treasury bills, less stocks for a while.


Paul Krugman is back at it.  He is plunking the strings of his "fairness" guitar.  Same old tune.

Krugman and his pal the President don't seem much interested that millions are out of work and that the US economy is virtually at a stand still.  That's okay.  What we need to focus on is not getting people back to work, but raising marginal tax rates.  The joke's on us as usual, since raising marginal tax rates will end up lowering rich folk's taxes.  Rich folks only pay taxes on taxable income, which they are free to raise or lower at will.  So, the higher marginal tax rates will simply reduce future tax revenues, future employment, continuing to beggar America's youth and the nation's unemployed and under-employed. 

Why not just announce 100% marginal tax rates for rich people and cut to the chase?  Rich folks aren't going to pay that rate anymore than they will pay the rates that Obama is dreaming about.  Neither will Obama.  These folks can borrow what they need to live on, deduct that from their estate when they die, and not bother to even file a tax return.  They know that and we know that and Obama and Krugman know that.

But, talking about fairness has the virtue of changing the subject.  What the President and Krugman do not want to discuss is the damage that the President's policies have done to the historically sluggish economic recovery that now threatens to slide back into recession.  I can see why they have lost interest in that discussion, especially in an election year.

If you want to see inequality grow while the economy slips back into the deep freeze, then join the chorus.  Tax the rich!   Even the rich have trouble avoiding a snicker at the "fairness" tom tom.  Buffett must love it.  As he admires himself in the mirror and basks in the adulation of the media, he knows that his pile of gold will grow untouched by the long arm of the IRS, even as marginal tax rates spiral off to infinity.

Thursday, May 3, 2012

More Unreality by an Academic Economist

Today's New York Times has an article by Simon Johnson, who is billed as "Professor of Entrepreneurship at MIT," complaining about the Paul Ryan budget and Mitt Romney's support of that budget.

What is especially interesting is "Professor" Johnson's attack on Paul Ryan's funding proposal for future medicare benefits.  Johnson argues basically that old folks need unlimited funds available for their medical needs, so that future promises should not be limited in any way.  That's an interesting argument for an economist to make.  It must make life fun for Professor Johnson to teach students that there is no economic scarcity after all.  We are free to promise whatever we want to future medicare recipients with no plans whatsoever to fund it.  That is what Johnson proposes in his article.

Nowhere in "Professor" Johnson's article is any hint of how he would propose to fund medicare promises for future beneficiaries.  I guess, to him, that is beside the point.  Why does it matter if future benefits are unfunded  That seems to be the main point of "Professor" Johnson's article.

If you look at my previous blog post, you can see where this leads.  The argument against funding benefits is always simply a recounting of how wonderful the benefits are.  How does that argument provide any funding?  Exactly how does "Professor" Johnson propose to explain to future medicare beneficiaries that there is no money to provide the benefits that they have long been promised.

Perhaps, "Professor" Johnson should pay close attention to how Mariana Island authorities and Greek authorities are explaining to their citizens how having no funds available to pay promised benefits is, in reality, a good thing.  "Professor" Johnson, like many of those advocating big promises for the future while opposing any funding for those promises is one of the "1 percenters."  It's really not a problem he will personally face, so what does he care?

Reality in the Mariana Islands

Contrary to years and years of promises from bureaucrats, the public pension fund in the Mariana Islands (a US territory) became the first American public pension to declare bankruptcy.  It won't be the last.  This is just the beginning.

According to this morning's Wall Street Journal story, "it's pension fund couldn't recover from the financial crisis."  Really?  The stock market has certainly recovered, now standing less than six percent below it's all time high.  So, you have to wonder, with better than 8 percent stock market returns over the last 30 years, why is the Mariana Islands Public Pension Fund suddenly going poof?

Let's look at the numbers: The fund has $ 256 million in assets to cover $ 1 billion in liabilities over the next 20 years.  Keep in mind that this is a very, very small place with 53,000 total residents.  Note the magnitude of this disaster.  This is essentially the same problem faced by California, Illinois, New Jersey, New York and every other state and municipality in the US except South Dakota.

Now, what?

Now, the employees that expected to receive juicy pensions will receive approximately 25 % of what they had been promised.  And these folks are not eligible for social security.  And, when do they find all of this out?  Now!

That's the fairness of the politicians who promise future benefits and preach fairness.  Do you think taxing the handful of rich people in the Mariana Islands will solve this problem?

No politicians in the US will find this troubling simply because it did not happen on their watch and, besides, most politicians in the US are in the "1 percent."  Facing old age penury is not a problem any US politician expects to face, so what do they care if the American public school teachers find out ten years from now that the long promised pension is not coming.

The real problem with all of this -- after all, anyone who has looked at the numbers knows these pensions won't be paid -- is the misinformation received by today's workers, thinking that at some future date they will receive pensions.  They aren't going to receive these pensions and they need to be told that now, so that they can be saving and storing up assets for the future.  By deliberately misleading America's public school teachers and public employees, the political class is fraudently setting up a disastrous situation for many Americans.

If you want a peek into the future for tens of millions of Americans, take a look at the situation for Mariana Island pensioners.  As in Greece, so also in the US.  The Mariana Islands are not in Greece; the Mariana Islands are in the United States.

The hypocrisy of politicians knows no bounds.

Wednesday, May 2, 2012

Stock Market Misinformation

Dodd-Frank, Sarbanes-Oxley, and Mary Schapiro are all three weapons aimed at bashing the financial sector.  Why?  The reason given is that the stock market is "rigged," they say, and doesn't produce for the little guy.  Really?  Could have fooled me.  We are now in one of the worst previous ten-year periods in US stock market history and what is the outcome?

The S&P 500 has averaged 4.71 percent per year for the past ten years, using May 1st, 2012 as the ending date of the ten year period.  That isn't great, but it certainly doesn't justify the hand-wringing of the political class, moaning about a rigged stock market.  It's worth noting that the Dow Jones has done even better, achieving a 5.4 percent annual return over the past ten years.  And these are the bad years!

So, why all of the hustle and bustle of the media and the political class demanding reform.  Is there something they don't like about five percent returns during the bad years?

Instead of bashing the financial sector and pretending that stocks are poor performers and that markets are rigged against small investors, why don't the media and the politicians simply stick to the facts.  The facts are that Americans are generally under-invested in stocks.  They aren't making the approximate five percent annual returns available to the public through the simple expedient of investing in index funds, because they have been scared out of the markets by the complete nonsense spouted by the media and the politicians.

If the markets are rigged, they are rigged in favor of the small investor.  What else earns five percent a year while you sleep in one of the worst stock market decades in history?

Why not just inject a bit of truth when describing financial markets?  It might help investors make better decisions.  Politicians should butt out and let markets work.  The US stock market produces great returns for investors, contrary to what you would believe listening to the misinformation pouring out in the media. These returns have been absurdly high for over one hundred years and remain startlingly high even in the most recent ten years on record, despite the media misinformation to the contrary.

More a Religion Than a Science

A study was released by Fitch and Oxford Economics today purporting to explain the "recovery" of the US economy.  According to Reuters, "Fitch and Oxford Economics said the policy response to the financial crisis in 2008 helped prevent a longer and deeper US recession."

Reports like this undermine the credibility of Economics as a discipline.  There are no available research methods in macroeconomics capable of making statements and drawing conclusions like this.  Instead, a report like this represent a neat "consensus summary" that mostly represents the political views of its authors.  This is not on the same par as asking "why did the ball that I threw up in the air come down," but economists, far too often, make it seem like it is.

The cold, hard facts are that economists really don't know much about macroeconomic policy.  The largest historical experiences involving the application of macroeconomic policy at the instruction of famous economists were notorious failures.  The 2008-2009 policies seem to fit that pattern more than what is suggested by the Fitch and Oxford Economics report.

There was a day when there was no macroeconomic response at all.  Yes.  We didn't always react to economic and financial crises by dramatically expanding the reach and activities of government.  Try the latter half of the nineteenth century for the most dramatic example of periodic, recurrent financial and economic crises coinciding with the largest growth in GDP in the history of the country!  When financial and economic crises, and there were many, exploded on the scene in the latter half of the nineteenth century, the US government took no role and watched from the sidelines.

How can this be?  How can a steady stream of financial and economic crises, unchecked by any government policy actions, coincide with the most incredible real output growth in our history?  One explanation worth pondering is that the absence of government activism was the beneficial salve that turned America from a mostly agrarian countryside into the strongest economic power in the world.  There was no Fed; indeed there was no central bank.  There certainly were no discussions of "taxing the rich."  There were no income taxes.  Government sat by and watched.  And, guess what, it worked.

Now, we have an activist government that thinks it can and should cure every ill.  All of this chuptzpah is buttressed by an admiring media and an applauding group of academic economists.  Yet, it never works.  The 1930s and the modern day are outstanding examples of how government can prevent economic recovery over a very long period of time and prolong the agonies of the folks at the bottom of the economic pile.

There is always a belief that when something "goes wrong," that something should be done about it.  In the case of financial and economic crises, that belief seems unfounded.  By letting the ebbs and flows of the economic system do their thing, even if that means major economic downturns from time to time, you may be providing the necessary impetus to true economic prosperity that lifts all boats.  Instead, using rhetoric, unsupported by facts or analysis, simply keeps most advanced economies mired in their bureaucratic mess.  As usual, the poorest amongst us are the principal victims of this rush to do something, do anything, even if it doesn't seem to work.

Tuesday, May 1, 2012

More On Your Tuition Dollars

Brown University is good-hearted.  So much so, that they announced today that they would donate $ 31.5 million to the city of Providence, Rhode Island.  In a Wall Street Journal story today, Brown's president, Ruth Simmon, was quoted as saying that "Brown is deeply concerned about Providence's financial situation."  And well they should be.  Providence's finances have gone down the chute as one might expect based upon a public employee pension fund that is, at best, 70 percent underfunded. 

The story in the Journal, goes on: "Providence has been negotiating with Brown and its six other largest tax-exempt nonprofits to make more voluntary payments in lieu of taxes."

So, now, when you ask: why do these Universities (and other worthy tax exempt institutions) need so much money?   Part of the answer is that they are funding bankrupt cities like Providence.  This is not the only absurd expenditure embarked upon by today's colleges and universities, but it is an expenditure, like a host of others, that has nothing whatsoever to do with providing anyone with a college education.