Thursday, July 29, 2010

Taxes and Spending

A short history lesson - during the 1970s when we had very short business cycles between boom and bust, it was noticed that government would raise taxes during the bad times to make up for lost revenue. Once the economy picked up again and the tax base recovered, government would use the additional revenue to grow further. The cycle would repeat with each economic cycle leading to ever-expanding government. This lead conservatives to adopt "starve the beast" policies. Instead of having ever-expanding taxes and government, taxes would be cut forcing government cuts.

This began in California with a taxpayers revolt best remembered for passing Proposition 13 which rolled back property taxes.

When Reagan became president he implemented a version of Starve the Beast - tax cuts accompanied by spending cuts. At the time Democrats insisted that the cuts were excessive but they mainly cut increases in spending. Democrats were still deriding Republican budget cuts in the 2000 election which led to Bush (43)'s "compassionate conservatism" which amounted to tax cuts without accompanying spending cuts.

The deficit under Reagan grew during the middle of his presidency and was shrinking again by the end. Under Bush, the deficit always grew.

Government today is much larger than when Reagan took office leading some people to declare Starve the Beast a failure. Fromma Harrop recently wrote an interesting column in which she proposed shrinking government by raising taxes. Basically, she is proposing a pay-as-you-go government in which taxes would be high enough to cover all spending. This would cause voters to reevaluate government services since they would be paying for them directly instead of borrowing to pay for them.

There is a certain logic to this. Currently the federal government borrows $0.41 out of every dollar spent. If we gave people the choice between major cuts or raising taxes 67% there would be a lot of cuts.

Unfortunately, Harrop undercuts her argument in several places. The first is how she characterized the Reagan administration:

"Well, if you've got a kid that's extravagant, you can lecture him all you want to about his extravagance," Reagan said in his 1980 campaign. "Or you can cut his allowance and achieve the same end much quicker."

No one turned the starving-beast theory into baloney faster than Reagan, who followed his tax cuts with a spending binge fueled by massive borrowing. What he did, in effect, was cut the extravagant kid's allowance and then hand him 10 credit cards.

This totally misstates Reagan's record. Government spending in real terms spiked around 1983 when the Reagan cuts went into effect. They then declined through the rest of Reagan's presidency. See this chart based on numbers form the CBO.

Harrop also ignores the Democrats' role in spending. They controlled one or both houses of Congress continuously until 1995 (they won both houses in the 1994 election). During all of those years, spending was always higher than revenue although the two came close during the Ford administration. Harrop also ignores the fact that the biggest and fastest-growing outlays in the budget are for Medicare and Medicaid - two entitlements passed by Democrats.

Harrop totally undercuts her argument in a couple of other places.

Are Democrats equally to blame? No. Deficit spending is warranted during an economic crisis. (By the way, their new health-care initiative was fully paid for.) What worries fiscal conservatives most about Democrats is that they might lack the guts to do what must be done, which is raise taxes.

This only makes sense if the Democrats suddenly sprang to life in 2008 with no history behind them. She also blithely ignores the budget trickery that went into the "fully paid for" health care initiative.

That's one place where the "raise taxes to shrink government" argument breaks down. Congress used shameless trickery to produce numbers that made health care seem to be paid for. Even if their figures were honest and accurate, they still delayed implementation of the most expensive parts of health care for years in order to offset the cost. Other parts were pushed to the states and not accounted for in the federal budget.

Does anyone really think that Obama and the Democrats would be willing raise taxes but forgo further spending? Simply requiring that extended unemployment benefits should be paid for from repaid TARP funds instead of through debt was unacceptable to them.

Then there is the question of where these increased taxes should come from. Any tax that caused pressure to reduce government would need to cover most of the population. Right now, slightly less than half of the population pays income tax. You could double the income tax and half the population would be unaffected. More likely, the Democrats would choose some arbitrary point and say that everyone above that made too much and should shoulder the entire increased tax burden.

This leads to another iron law of economics - the higher the taxes, the more effort people spend in avoiding taxes. Prior to Reagan, tax shelters (investments that were either untaxed or taxed at a lower rate) were a big business but this collapsed after Reagan lowered the tax rate.

While it is interesting, the idea of raising taxes to shrink government could only happen with major institutional changes - possibly a balanced budget amendment. Without that, increasing taxes would only led to increased spending.

The Democrats' Contract on Republicans

In 1994, the Republicans issued their "Contract With America" - a list of issues that they would bring to vote within their first 100 days if they gained control of Congress. President Clinton, a bad loser, insisted on calling it their "Contract on America."

So far, the Republicans have not issued a coherent statement of goals. The Democrats filled this void by making up their own list. Labeled the "Republican Tea Party Contract on America" it tries to put the Republicans in the worst possible light.

Let's take a closer look.

First there is the name. There is no such organization as the Republican Tea Party. This construction allows the Democrats to graft ideas from the Tea party onto the Republican mainstream.

Now, here are the actual points:

  1. Repeal the Affordable Care Act (Health Insurance Reform)
  2. Privatize Social Security or phase it out altogether
  3. End Medicare as it presently exists
  4. Extend the Bush tax breaks for the wealthy and big oil
  5. Repeal Wall Street Reform
  6. Protect those responsible for the oil spill and future environmental catastrophes
  7. Abolish the Department of Education
  8. Abolish the Department of Energy
  9. Abolish the Environmental Protection Agency
  10. Repeal the 17th Amendment which provides for the direct election of senators
Points 1 and 5 are pretty straightforward and are part of the Republican mainstream. Republicans feel that both of these bills are fatally flawed and are worse than no bill. Notice that they did not give the official name for the financial reform or even clarify it as financial reform. Instead they framed it as helping "Wall Street".

Point 4 is misleading. Everyone who paid income taxes in 2001 was included in the Bush tax breaks, not just the wealthy and big oil. Obama campaigned on extending the tax breaks for some people but not others. Republicans want to extend them for everyone. Allowing them to expire amounts could push the economy into a second recession. Many Democrats will admit this privately but will not say so in public.

Points 2 and 3 are very ingenuous. Democrats know that Social Security and Medicare have to be changed. They are unsustainable as currently structured. Even Bill Clinton when he was president proposed privatizing Social Security. Because President Bush proposed actual specifics, it has turned into a Democratic talking point against Republicans. The Democrats are being dishonest to imply that they will not change Social Security or Medicare (as it presently exists). It is unavoidable but scoring cheap campaign points like this makes it harder and the inevitable changes more painful.

Number 6 is another cheap shot. Some Republicans have complained that the Obama administration should follow the law.

The final four points have been tossed around be various conservatives but are not serious Republican proposals. The final one would require a constitutional amendment which means that it could not happen without widespread support. The Democrats know that none of these will happen if the Republicans regain control and only included them to scare people.

Wednesday, July 28, 2010

An Independent Media?

A common complaint from the left is that Fox News acts as an unofficial arm of the Republican Party. Keith Olbermann has complained about this, often throwing in references to the "KKK". A long an overwrought column by Eric Alterman postulated that this alliance is a threat to democracy itself.

So, you would think that the left is free from such entanglements, right? Wrong.

Let's start with Keith Olbermann's complaints. First, if Fox acts as an unofficial arm of the Republican Party then Keith's network, MSNBC, acts as an arm of the Democratic Party. For example, Rachel Maddow, Keith's fellow employee at MSNBC, introduced President Obama's taped remarks at a recent progressive convention. Keith would have had a fit if a Fox employee introduced a Republican President.

Maybe Keith's real complaint is that people actually watch Fox. Keith's ratings are at a seasonally-adjusted two-year low.

But that really just amounts to squabbling between two basic-cable networks. For a better picture of journalism in general we need to look at the "Journolist". This is an invitation-only newsgroup with 400+ members. Its members include well-known figures from all of the major news publications as well as some academics. It also has at least two political operatives from the Obama 2008 campaign.

I have no idea what goes on most days on the Journolist but the day that Sarah Palin was chosen as McCain's running mate, the list was full of ideas on how to minimize her and help Obama. Did you get that? Journalists who are supposed to be trained in objective reporting were working with Obama operatives on how to shape campaign coverage to help Obama.

And Eric Alterman who sees Fox News as a threat and who has written a book denying any liberal bias in the press - he's on the list, also.

Conservatives always knew that the left had a well-disciplined message machine. As far back as the Clinton impeachment, the White House would put out a message of the day that would be included that night in the opening monologues of Jon Stewart and Bill Mahar. Until now, it was always assumed that liberals had to listen to each other. Now we know that they are shaping their message behind the scenes.

Two final thoughts:

1) Imagine the outcry if the right was caught with such a list.

2) The sheer hatred involved. One poster wished that she could see Rush Limbaugh drop dead at her feet. I read a lot of writings on both sides and the left usually wins the "I hate them personally" race but these are journalists.

Friday, July 23, 2010

The Bush Tax Cuts

Actually there are a couple of problems with the Bush tax cuts. The first one is that the Republicans made them temporary. They did this as part of a budgetary slight of hand. The CBO has to score bills as they are written and writing the tax cuts as temporary reduced the projected costs. Of course, they were not intended to be temporary. The Republicans intended on waiting until they were about to expire and either extending them or making them permanent. This is the sort of trickery that soured fiscal conservatives on Bush.

So, here we are with the tax cut about to expire and Democrats in charge.

The other big problem is lingering Bush Derangement Syndrome. After years of propaganda, the Democrats are not able to discuss the issue rationally. You could go up to a random group of Democrats and shout, "Bush tax cuts..." and they would reply "... For the rich."

The tax cuts were pretty much a 3% across-the-board reduction in marginal rates with a big cut at the bottom from 15% to 10%. Because the rich make more money, they got more benefit and because a large portion of the workforce (something like 40% at the time) wasn't paying any federal income tax already, they did not see any reduction.

It was a matter of faith among Democrats that as soon as they regained power they would undo the tax cuts. When they took Congress in 2006, they pointed out that they did not have enough of a majority to survive the inevitable veto so they would have to wait.

During the 2008 campaign, Obama said that he would keep some of the tax cuts - those for people making less than $200,000 per year. Many Democrats don't agree with this and want to repeal all of the tax cuts. Left-wing pundits such as Paul Krugman have attacked the Republicans for insisting that the entire tax cut package should be extended.

Krugman should know better. After eight years under the  "temporary" tax cuts, reinstating the original rates would amount to a tax increase - a big one. Krugman is the champion of putting more money into the economy. Granted he wants to see it as a controlled stimulus rather than an uncontrolled tax cut but the point is that he sees the need for the government to put more money into the economy.

So why, in heaven's name, does he want to take a big chunk of money out of the economy?

The Democrats have boxed themselves in. A tax increase, even one in the form of an expiring tax cut, is the last thing the economy needs right now. Limiting it to the undeserving rich who make $200,000 or more a year isn't much of a comfort. That's like saying that they will only break one of your knees instead of both.

Fear and uncertainty are keeping people from spending which, in turn, is crippling the recovery. Telling a group of people that their taxes are about to be raised because they are too rich is not going to induce them to spend.

In a recent report, one of Obama's economic advisers calculated that a tax increase equal to 1% GDP can reduce the economy by 3%. 

The Democrats need to get past their dislike of the rich and extend the tax cuts, at least until the economy recovers.

Tuesday, July 20, 2010

The Law of Unintended Consequences

The biggest argument against increasing government involvement is the Law of Unintended Consequences. Basically, it states that changes to a complex system may result in different results than originally desired. Sometimes the changes make things worse than they were in the beginning. This tends to happen more often with government for several reasons. One is that Congress likes to be seen responding to problems. Election cycles being what they are, it doesn't matter if the problem is actually solved or not. The important thing it to be seen doing something. Problems big enough to warrant Congressional scrutiny are seldom easy to understand so Congress allows their staff to write the actual bill. The people voting on the bill seldom bother to read them and probably could not understand them anyway (I'm getting this part straight from a recent quote from a committee chair). Finally, bills are seldom pure. Lobbyists exist to make legislation more favorable to their clients and Congress is happy to oblige. The result is that legislation to solve a problem often makes things worse.

A few examples:

Credit reform caused most people's interest rate to rise. That's because banks offered low rates but would raise them in case of late payments or other infractions. Unable to raise rates on offenders, they raised everyone's rate instead.

Last year's popular Cash for Clunkers program raised the cost of used cars. Hundreds of thousands of low-end cars in drivable condition were destroyed. Just try to find one now. The environmental gains are also debatable since it takes a lot more energy to make a new car than will be saved by trashing existing low-mileage cars.

The most recent addition to this list - the three hour rule for airlines. This said that airlines could not keep people in planes sitting on the tarmac for more than three hours. While this sounds reasonable, a new report says that, in order to spare 110,000 passengers an average 3.26 hour wait, 400,000 people will have their flights canceled. This will cause more disruption.

The increase wasn't due to bad weather or air traffic control issues, says Marks, but the new rule and the airlines' reaction to it. "Hundreds of flights were canceled directly because of the rule and indirectly as airlines pulled back flights after as little as 60 minutes on the tarmac out of fear of the fines."

Friday, July 16, 2010

Obama and the Election

President Obama must have finally taken a look at the polls and realized that joblessness and the economy are people's top priorities. It is probably a lost cause for several reasons. The biggest is that this realization is a year too late. The economy and jobs have been a top priority for Obama's entire administration but they fell off of his radar after the stimulus bill passed. Instead the Obama administration focused on health care reform. This goes beyond being tune-deaf. The Democrats were actively ignoring the polls in favor of advancing their own agenda. The President can talk about how joblessness keeps him up late at night but it did not affect his priorities when he was awake. I pointed this out several times in 2009.

A year and a half into his administration, Obama continues to blame President Bush for the nation's problems. In a recent interview he said,

This is going to be a choice between the policies that got us into this mess and my policies that are getting us out of this mess. And I think if you look at the vast majority of Americans, even those who are dissatisfied with the pace of progress, they'll say that the policies that got us into this mess we can't go back to… What I'm prepared is to be held accountable for the policies that I've put in place. But they Americans don't have selective memory. They're gonna remember the policies that got us into this mess as well. And they sure as heck don't wanna go back to those.

The Democrats have taken this line since the economy started collapsing at the end of 2007. It is an over-simplification and they know it. So do the voters. Obama failed to mention which specific policies caused the problems with reason. Some of them date back to the Clinton administration. Others were pushed by Democrats. The financial reform bill that is supposed to prevent future melt-downs has racial quotas which will inevitably lead to further problems.

At the same time, Obama failed to say what policies he changed prior to the financial reform bill. It is true that banks have clamped down on credit. People with good credit ratings are being turned down for loans. This will prevent future melt-downs but the Obama administration is not responsible for this. They have been trying to increase the flow of credit at the risk of future inflation.

This blame-Bush attitude hurts Obama and the Democrats in other ways. They promised to end the partisan bickering that has dominated DC politics for a generation. If anything, they made it worse. Ont he economy, Obama is not willing to say that mistakes were made and leave it at that. He has to point fingers.

Broken campaign promises continue to haunt Obama and the Democrats. Between 2004 and 2008 they told us that deficits were bad and that they would balance the budget once they were back in power. They took back Congress in 2006 but continued to blame Bush for increasing deficits. Now that they control both Congress and the White House they reversed themselves, committing the country to increasing deficits as far as the eye can see. Granted, Obama's original budget projection planned on halving the deficit but that was to only last for a year before it began increasing again.

Obama made many promises about foreign relations. He was going to engage our enemies while regaining the respect of our friends. Instead he has been ignored by our enemies and has alienated our friends. His major success has been Russia but the cost of this was abandoning several strong allies including Poland and Turkey.

He was going to have the troops out of Iraq by now out of a stabilized Afghanistan in the near future. Gitmo was to have been closed and rendition ended. The Patriot Act was supposed to have been repealed. The best that can be said of these goals is that some of them are in the works.

Mid-term elections are always a problem for the party in power. Everyone knew that this one would be especially brutal. Frustration with Bush hurt Republicans in 2006 and 2008. Obama's name at the top of the ticket brought in millions of new voters who are unlikely to vote in an off year. Democrats currently hold nearly every swing seat in the country. It would be hard to hold on to these in any circumstance. Add in high unemployment, the possibility of a double-dip recession, and a general disappointment with Obama and his policies and you have the makings of a disaster for the Democrats.

Obama had planned on spending the summer convincing people that we are in an economic recovery that he engineered. With bad news coming weekly, this plan has to be discarded. That leaves the Democrats with a two-pronged strategy. The first part is to blame Bush for everything bad that happened. The second part is to personalize every race by demonizing the Republican candidate. We will not hear a single issue from Democrats. Instead we will hear about any tenuous ties between the Republican challengers and Wall Street.

Which brings us back to the negative campaigning that the Democrats promised to end.

Wednesday, July 14, 2010

Where Do Libertarians Belong?

Reason Magazine in hosting this debate. They lead off with a piece by Brink Lindsey calling for a complete split with the Right.

There is no question that the last decade has been a bad one for Libertarians. George W. Bush was a big-government Republican. Prior to 9/11, his two significant accomplishments were No Child Left Behind and the Medicare drug benefit - both significant expansions of government. Bush's two wars, especially the war in Iraq, also alienated many Libertarians. The Bush administration was a poor champion of individual rights, especially broadcast speech. This lead Libertarians like Lindsey to propose an alignment with the Left back in 2006. The theory was that the Left was the true protector of individual rights and as good a fit for Libertarians as the Right.

The problem with that theory is that Lindsey was looking back at the Liberals of his youth instead of the Progressives who have taken over the party. While it is true that some Progressive goals mirror Libertarian ones - things like gay rights, drug legalization, and anti-war - these are not major goals of the Democrats and the Democrats who endorse these tend to be Progressive on most other issues. On most issues, Progressives are the polar opposites of Libertarians. Progressives hate free markets and want to insinuate the government into as many aspects of life as possible.

You might think that Lindsey would propose an alliance with the Tea Party movement. After all, they share more values with Libertarians than Progressives do. Lindsey will have none of it. He finds them "authoritarian and unpopular" plus he despises Tea Party darlings like Sarah Palin and Glen Beck. After several hundred words savaging the Right, he does manage to throw in one sentence acknowledging that aligning with the Left is equally unappealing. Instead he suggests heading for the center. He wants to lower the importance of free markets and raise the importance of individual freedoms.

All of this reminds me of why I stopped subscribing to Reason Magazine. They changed their focus. The new editorial staff moved to DC and the new editorial focus seemed to concentrate more on being cool than anything else.

The Tea Party agrees with Lindsey on many more issues than the Left did in 2006 when he proposed allying with them, so, why won't he associate with the likes of Palin or Beck? Because they are not cool enough. He wants to be able to hang out with Liberals without the shame of consorting with Conservatives. If the Conservatives suddenly rediscover free markets and small government then the Libertarians need to deemphasize it and start talking about individual liberties.

If Lindsey wasn't trying to cozy up to the Left he would notice that they have their own problems with individual liberty. Yes, they are pro-abortion and pro-pot but they invented speech codes and hate speech laws. They think that the FDA and the EPA have not gone far enough.

For the first time since the Reagan years, the Right is taking Libertarian ideas seriously. Lindsey needs to try to embrace this shift and guide it rather than recoil from it because it isn't as cerebral as he is.

Tuesday, July 13, 2010

It's Hot - So What?

It is inevitable - there is a heat wave and someone starts claiming global warming. This time it was Washington Post columnist Eugene Robinson. He writes:

It's odd how little we've heard lately from the skeptics who deny that climate change is real. What's the matter, people? Heat stroke?The Venus-like heat that much of the country has been suffering this summer is almost enough to make anybody a believer in global warming. Almost, but not quite: Honesty compels me to acknowledge that a few weeks of record-setting temperatures do not constitute proof of anything. Climate scientists have to analyze data covering decades and centuries to discern what's really going on.

Of course, the unusually heavy snowstorms that buried Washington and other East Coast cities this past winter didn't prove anything, either. But that didn't deter the climate skeptics from gloating. Sen. James Inhofe (R-Okla.) and his family went so far as to build an igloo on Capitol Hill and label it "Al Gore's New Home." Care to apologize to the Nobel laureate, senator?

Actually, it was more like a few days of heat than a few weeks. Also, if you start looking at the temperature records for the 1930s, you see what a real heat wave was like. Our local weatherman showed the number of days over 90 degrees for the last couple of years and in the 1930s. While we have had a handful of hot days now, most of the summer had 90+ days in the 1930s.

But what about that snowstorm? Did it prove anything? After all, it was just another weather event.

But, and I pointed it out at the time, that was different. While it was just an isolated weather event, it was one that Al Gore said would never happen again because of warming that already happened. In science, that is called a prediction. When a prediction is proved to be false then your theory (in this case, global warming) has to be reevaluated.

In contrast, no one has predicted that we would stop having heat waves so an isolated heat wave is not as significant as a cold wave.

He also mentions that a panel exonerated the British Climate Research Unit (CRU) but failed to mention that the panel did not investigate the underlying science, only allegations of scientific malpractice.

Robinson closes with an important question:

It's time to end the silly "argument" over whether climate change is real. Here's a better question: Would it be more appropriate for humanity to spend, say, $1 trillion reducing carbon emissions, and thus save thousands or millions of lives that could be lost to drought or sea-level rise or whatever at the end of this century or the next, or to spend that money providing clean water in places such as Congo or Bangladesh, saving thousands or millions of lives right now?

This cuts to the heart of why the debate on climate change is not silly. Gore and others are taking worst case projections and asking for a total change of civilization based on it. If Gore is wrong or overstated the potential harm then we will have wasted money that could have done real good, right now.

Thursday, July 08, 2010

Obama and NASA

I was 14 when we landed on the moon. I consider this to be mankind's greatest achievement. The magnitude and complexity of it is incredible. Even more impressive is that we did it in so short a period.

Not only was the moon program a marvelous example of doing something because we could, it was also our nation's largest peace-time applied research project. The spin-offs from the moon program form all of the technologies that separate the 2010s from the 1960s.

But I'll tell you a secret - that isn't why Congress funded it or why three presidents supported it. The moon program existed so that we could show the world that a capitalist democracy is better than a communist dictatorship.

That's why we stopped going to the moon early and never returned. We showed that we could do it and the communists gave up. If they had announced that they were going to put a man on Mars, we would be there by now.

NASA's current head, Charles Bolden, caused a stir when he listed the priorities that President Obama gave him.

One, he wanted me to help re-inspire children to want to get into science and math; he wanted me to expand our international relationships; and third, and perhaps foremost, he wanted me to find a way to reach out to the Muslim world and engage much more with dominantly Muslim nations to help them feel good about their historic contribution to science and engineering -- science, math and engineering.

This sounds pretty dumb. What happened to manned spaceflight?

But, after thinking about it I realized that it does not matter. If inspiring Muslims helps fund NASA then that is fine. What matters is the funding.

Oops. NASA is already on an austerity budget. The space shuttle program is being retired after two more flights. Future flights have been outsourced. The return to the moon has been scrapped because we have already been there. The Mars program is underfunded and probably will never get off the ground. None of this is going to inspire anyone to do anything.

What's Wrong With the Economy?

The recovery continues to be weak. Why? Businesses have accumulated huge cash reserves, $1.8 trillion, but they refuse to spend them. What's going on?

Fareed Zakaria asked this question of a number of CEOs. While Zakaria did not come right out ans say it, there are some telling quotes in his column.

Economic uncertainty was the primary cause of their caution. "We've just been through a tsunami, and that produces caution," one said to me. But in addition to economics, they kept talking about politics, about the uncertainty surrounding regulations and taxes. Some have even begun to speak out publicly. Jeffrey Immelt, the CEO of General Electric, complained last Friday that government was not in sync with entrepreneurs. The Business Roundtable, which had supported the Obama administration, has begun to complain about the myriad new laws and regulations being cooked up in Washington.

One CEO said to me, "Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what's in store for us for the future." Another pointed out that between the new health-care bill, financial reform, and possibly cap-and-trade, his company had lawyers working day and night trying to figure out the implications of all these new regulations. Lobbyists in Washington have been delighted by all this new activity. "[Obama] exaggerates our power, but he increases demand for our services," the superlobbyist Tony Podesta told The New York Times.

Most of the business leaders I spoke to had voted for Barack Obama. They still admired him. Those who had met him thought he was unusually smart. But they all thought he was, at his core, anti business. When I would ask them for specifics, they pointed to the fact that Obama had no businessmen or women in his cabinet, that he rarely consulted with CEOs (except for photo ops), that he had almost no private-sector experience, that he'd made clear that he thought government and nonprofit work was superior to work in the private sector. It all added up to a profound sense of distrust.

So there is the real problem - President Obama. Business leaders are afraid of his administration and the growth of government. Because of this, they refuse to invest their cash reserves.

Think about this. Here is a sum of money more than twice Obama's stimulus. It is not borrowed so it can be spent any way that seems profitable. There's your recovery but it is just sitting there, unused - a hedge against future government action.

This is exactly what President Reagan warned of. The more government expands its power the more it slows business growth. That phrase, "Almost every agency we deal with has announced some expansion of its authority..." shows how Obama's progressive attitudes have permeated his administration. The Progressives see government intervention is every aspect of life as a good thing but there is a cost. The more government intrudes itself, the more it costs everyone else.

No one in the Obama administration realizes this. He stocked his cabinet with professors and lawyers. They have never had to deal with the government from the other side. They are theorists, not realists.

As long as business leaders distrust Obama the economy will continue to limp along. No amount of stimulus spending can change this.

Wednesday, July 07, 2010

The Democrats and Wall Street

For the last several years, Democrats have raised more money from Wall Street thanthe Republicans have. This has been true regardless of the party in charge. In 2006, when the Republicans still controlled both houses, the Democrats still got twice as much money from Wall Street.

That suddenly changed. The Democrats have been cut off. What happened?

Any relationship between Democrats and hard-core capitalists has to have some strain. The two reasons for donating to a candidate are because you support his positions in issues or because you expect to gain future influence. The Democrats have moved to the anti-capitalist, progressive left so you would not expect them to share many values with the kings of capitalism. Certainly that are some rich men like George Soros who are willing to pour money into candidates who, by all rights, should hate them, but even Soros has made it clear that he expects a return on his dollar.

This part gets interesting. Many corporations are quite willing to support measures that seem anti-capitalist as long as there is an advantage for them. Walmart was in favor of health care reform because they already provided it and were hoping that it would hurt their competitors. BP is one of many energy producers who expect to benefit from cap and trade. Apparently these companies felt that they could do business with the Democrats.

Then a funny thing happened - the Progressives, led by President Obama, started demonizing Wall Street. Obama started using the now-cliched "Wall Street vs Main Street" during his 2008 campaign. Suddenly everything that Wall Street does is held to scrutiny and assumed to be inherently wrong, if not outright evil. As an example, in the Ohio governor's race, Democrat Ted Strickland's campaign centers around his opponent, John Kaisich, having worked in the Ohio branch of Lehman Brothers. You would think that there would be something in Kaisich's 18 years in the House of Republicans worth mentioning but that seems to be nothing compared to a Wall Street connection.

So, after a year and a half of having their every move questioned, why would Wall Street executives continue to support Democrats?

Friday, July 02, 2010

Do We Want To Be Like the Germans?

A recent column by Robyn Blumner proposes that most Americans would be better off in a European-style socialist country than in the US. Her source for this is an advance copy of a new book:

Were You Born On The Wrong Continent?, a new book (available in stores later next month) by Chicago labor lawyer Thomas Geoghegan, makes those comparisons, and they are truly eye-opening.

The fact that the book is by a labor lawyer tells you that he has biases. Blumner shows her own biases in her second paragraph when she described President Obama's agenda as "mildly progressive". Keeping these biases in mind, let's see how her version of utopia stands up to close scrutiny.

Most of the book, and Blumner's column, focus on Germany which is presented as a worker's paradise.

Since 2003, Germany and its 82 million people have either beaten China in export sales or about tied China for first place. The country is arguably the world's leading industrial power, even as its workers enjoy high wages, six-week vacations and other benefits that an American worker only dreams about.

Keep that six week vacation figure in mind. I will get back to it.

Blumner points out that Germany's unemployment rate is lower than the US's. This is correct. Germany's unemployment rate is currently 7% while the US's rate is 9.5%. She insists that Germany's industrial policies make up the difference but it this is much more complicated than she makes out. Many economists believe that stimulus spending hurts employment and Germany spent less on stimulus than the US. Further, the unemployment rate in the US has been much lower than in Germany for most of the last decade.

Most arguments against European-style socialism point out that the population as a whole is poorer and that the GDP is lower. Blumner's book has an answer for that:

Critics of Germany can still point to the fact that German per capita GDP is lower than that in the United States, which is true. But a fascinating part of the book suggests that what drives our economy and inflates our GDP actually makes our lives less comfortable.

Part of America's higher per capita GDP is due to our lack of land-use planning. Americans spend huge sums on sprawl and the inefficiency it spawns. Without sprawl, traffic and all the wasteful spending they engender, our GDP can't keep ahead of France, Geoghegan writes.

Blumner does not elaborate and the book is not out so I will have to guess what she is talking about here. From the context, I am guessing that the point here is that we spend money on large private houses in the suburbs and that, if you subtract that spending, our economy would be smaller. This is an indirect way of saying that we should all be bottled up in high-density housing in the cities. With smaller houses and without cars and yards then we wouldn't need as large an economy.

What about the high tax rate?

Our lower taxes boost per capita GDP but also mean that we are on our own for collective-type goods like college education, retirement, health care, transportation and child care — things that are efficiently bought with taxes for everyone in European social democracies.

She is really splitting hairs here. This is not a yes/no equation. The US already spends significant amounts of tax money on everything on her list and entire books could (and have been) written on the supposed efficiencies of tax funding. Let's just say that she is making a lot of questionable statements here.

The next part is really interesting.

Americans work hundreds more hours per year than their European counterparts, and so burdened, have to outsource duties of life. We eat out more, because who has time to make dinner. We hire outside help to clean, provide lawn care and care for children. To make ourselves more essential so as not to be laid off, we buy computers to work at home.

A number of studies have shown that Americans, in general, are wealthier than their European counterparts and are able to use this wealth to pay for services that Europeans have to do themselves. By the time you factor in the extra time the Germans spend on tasks that most people would classify as household drudgery, they lose that time that they do not put in at work.

This is a vice-to-virtue argument. Blumner is arguing that Germans are better-off because they spend more time cooking and washing. She does not get into it and I doubt that her source material mentions it either, but many devices that we consider standard are unavailable in Europe. Dishwashers and clothes-driers are at the top of this list.

So, Blumner's eye-opening book says that we would all be happier if we lived in crowded apartments and spent more time doing household chores and less time at work. I am sure that many people do prefer this but the choice is not as sweepingly obvious as she makes out. Worse, by painting an incomplete pictures, she is presenting a false choice.

Thursday, July 01, 2010

Underwater House Values

I've seen several columns on Huffington saying that it is not your fault if you owe more on your house than it is worth, it is the fault of predatory banks who need regulating.

Let's go back several steps. Houses are durable. If you own a house, chances are, it will outlast you. What's more, the value of houses tends to go up faster than inflation. There are reasons for this. One is that the cost of new houses constantly rises due to rising labor costs. Another reason is competition for land. the old mantra: "Location! Location! Location!" is based on this. Growing cities and ones with legislation designed to slow or stop urban sprawl increase the competition for land and therefore prices.

Regardless, none of this constitutes a real bubble. That is when prices rise so fast that the price-rise starts becoming self-sustaining - people no longer care about the underlying item, they begin buying in order to profit from future price rises (think of flipping a house). Eventually the price increases become unsustainable and prices crash. Bubbles have been happening for centuries. In the 17th century in Holland, there was a tulip craze with the price for rare bulbs reaching astronomical heights. In the late 1990s, it was Beanie Babies. There is probably a bubble going on in gold prices right now.

The problem with the housing bubble is twofold. First, people can choose not to invest in Beanie Babies but they have to have someplace to live. The second problem is that the housing prices reached astronomical heights and the drop is more than many people can afford. Even though this was mainly limited to five states, it is still affecting the world economy.

But, back to the basic question - who is to blame?

Banks did a lot of things wrong but I have trouble assigning them primary blame. There are several reasons for this. A big one is that people paying inflated prices for houses should have known that they were paying too much. Let me give an example. Vancouver is in the middle of its own housing bubble. The price for modest houses is now over $1 million. Someone in Vancouver illustrated this by creating a quiz Crack Shack or Mansion? and its follow-up Crack Shack or Mansion II? None of these million-dollar mansions would be worth a fraction of that amount anywhere else. Eventually the prices on these over-priced houses will drop and pull down the value of all of the Vancouver properties.

So where should banks fit into this? Should they stop lending based on inflated prices? If so, who decides when a price becomes inflated? Keep in mind that this decision has its own costs. If banks stop accepting the appraised price on houses, that will hurt housing values all by itself, potentially cutting off all house sales.

One other factor is involved when looking at underwater house values - second mortgages. It is true that banks encouraged people to treat their house as a piggy bank and take out loans based on the increasing value. At the same time, the people who took them up on these loans acted as if they were getting something for nothing. that never works.