Thursday, June 30, 2011

President Obama and the Corporate Jets

In his first full press conference in three months, President Obama listed tax breaks for corporate jets as an unacceptable tax give-away for the rich. To make sure he got his message across, he mentioned them five more times. The current Democratic leadership hated corporate jets. The first time the CEOs of GM and Chrysler came to Washington for a bail-out they were turned away, partly because they used corporate jets.

So what is this horrible tax loophole? It is something called accelerated depreciation. When a corporation buys a piece of equipment it can deduct the cost from its taxable earnings but it has to spread the deduction across the equipment's expected lifespan. This is called depreciation. Accelerated depreciation means that a corporation can take a larger deduction up front making the equipment cheaper to buy, at least for the short-term.

The deduction was passed in order to make buying jets more attractive. The figuring was that this would give a boost to the corporate jet makers who are mainly domestic.

So, where did this deduction come from? Is it part of the hated Bush Tax Cuts For The Rich?

No. It was part of the stimulus which was passed by the Democrats and signed into law by President Obama.

Why is the President trash-talking his own deduction? Because it makes a convenient sound-bite.

The movement to repeal this tax break reminds me a little of the George H. W. Bush yacht tax. In an effort to reduce the deficit, Congress passed and Bush signed a luxury tax on yachts. The idea was that these are rich men's toys and billionaires can afford to pay a bit more to own them.

That isn't how it worked out. It turns out that most boat sales are to middle-class boat-lovers. These people save up a down payment and finance the rest. The tax doubled the down payment which either made the buyers switch to a cheaper boat or give up completely. The boat-making industry was hit hard and the tax ended up costing much more in lost income tax than it raised.

If the corporate jet deduction is actually effective then repealing it will hurt the domestic jet industry.

But that's ok because they are making toys for the rich.

Thursday, June 23, 2011

Solomon and Obama

Back when National Lampoon magazine was still around and funny, they had a cartoon on "Great moments in justice" with two women leaving Solomon's court, each carrying a half child. The joke was that this was the worst possible result.

In his desire to render Solomonic judgment on Afghanistan, President Obama did a similar split. One side wants the troops out as soon as possible. The other wants them to remain as long as the Taliban is active. The President compromised by promising to withdraw around a third of the troops by the next election.

Honestly, the President is in a tough position. There is no evidence that the Taliban will ever give up or be totally defeated. The war will be ten years old this Fall with no real end in sight. The President's strongest supporters are expecting him to wrap the war up quickly and the general public is tired of casualty reports and stories about separated families.

On the other hand, a quick pullout will likely throw away the gains of the last two years (when Obama, in an imitation of Solomon, sent half the troops that the Pentagon requested). After insisting that Afghanistan is the "good war", Obama does not want to be the president who lost it.

A stronger president would choose sides and make his case. He could point out that we were after al Qaeda, not the Taliban. With Osama dead and al Qaeda dispersed, there is nothing to gain by a lengthy conflict with the Taliban. This is the "declare victory and go home" option. Or he could insist that Islamic extremism cannot be allowed to regain a foothold and that we will stay until Afghanistan has a strong government, no matter how long that might take.

But, Obama is a "split the difference" president so we will pull out some troops but leave a substantial force behind.

I doubt that this will help him politically. Neither side is happy with his solution.

Wednesday, June 22, 2011

Obama, Libya, and the War Powers Act

In the wake of Viet Nam, it became obvious that World War II would be the last declared war. For political reasons, Korea and Viet Nam were never declared. In an effort to escape blame for an unpopular war, Congress pointed at the Presidency and essentially said, "He did it." The public was supposed to infer that Congress's hands were clean because they had not actually approved the war.

At the same time, they passed the War Powers Act in an effort to stop future Viet Nam's. The idea was that the President could not start a conflict and allow it to drag on indefinitely on his own authority. He had to get Congressional approval. To allow for emergencies, the President was allowed 60-90 days to get the approval.

President Nixon vetoed the act but it was passed over his veto. Since then, every president who engaged in protracted hostilities (Reagan, both Bushes, and Clinton) at least paid lip service to the act.

Depending on your reading of it, the law may infringe on the President's authority as commander in chief. Regardless, it provides convenient political cover in case a conflict turns sour. George W. Bush was able to point to leading Democrats' votes authorizing the invasion of Iraq.

We are passed the point in Libya where President Obama should have made his pitch to Congress and asked for authorization to continue the action. His reason for not doing this was that American servicemen are not actually in danger so this does not count as hostilities. In taking this stand, he ignored the advice of a team of lawyers.

This is the part that confuses me. It is pretty much a given that Obama could have a resolution supporting the action in Libya if he asked for one. So why didn't he? Why is he using twisted logic to justify going alone?

There are several ways that Libya could go wrong politically. The current stalemate could continue allowing Gaddafi to stay in power after Obama said that he must go. Gaddafi could mount a new offensive, suppressing the rebels and, again staying in power. Or the worst could happen and Gaddafi's government could disintegrate leaving us with yet another nation to rebuild. The ideal resolution, Gaddafi leaving office but leaving behind a strong enough government to assure honest elections, is unlikely.

Clearly it would be in President Obama's best interests to have some prominent Republicans vote in favor of continued operations. That could neutralize what could otherwise turn into a major issue in next year's campaign. It is also giving the Republicans a chance to distance themselves from the Bush-era image as a the party of war-mongers.

In the meantime, even Democrats and liberals are attacking Obama on his failure to comply with the War Powers Act. Unless he acts soon this will become a millstone around his neck.

Tuesday, June 21, 2011

How far right?

Possibly the most commonly heard phrase from the Democrats is about how far the Republicans have moved to the right. They often point out that Ronald Reagan would not be welcome in the party today. Is this correct or even fair? I don't think so.

Before I talk about the Republicans, let's look at the Democrats. They have not stood still. Ralph Nader entered the race in 2000 as a protest to the Clinton years. He insisted that there wasn't a dime's worth of different between the two parties. Despite Nader's pronouncement, Gore ran to the left of Clinton, launching a campaign based on class-warfare.

In 2004 John Edwards and Howard Dean energized the party's left. Kerry got the nomination but Dean chaired the party and made it his goal to move it to the left by recruiting progressive candidates.

In 2008 there was no doubt that the three leaders - Obama, Hillary Clinton, and Edwards - were the most radical candidates since McGovern. Obama had been a communist in college (he says so in Dreams From My Father). Hillary wrote her thesis on the communist community organiser, Sol Alinsky. Edwards continued his own version of class warfare.

With Obama's election along with Democratic majorities in both houses, Progressives vowed that a new age had come.

So, the middle moved substantially to the left between Clinton and Obama regardless of anything the Republicans did.

Then there was George W. Bush. I remember ten years ago progressive blogger Eric Alterman insisting that Bush was far more conservative than they expected - "even worse than Reagan!"

In fact, Bush was nothing of the sort. He was a big-government Republican. Prior to 9/11, his biggest accomplishments were expansions of government - the Medicare Drug Plan and No Child Left Behind (NCLB). Both passed with bi-partisan support. Ted Kennedy was a major supporter of NCLB. Other than pushing through some tax cuts, Bush's record was as a strong moderate. The size of government grew instead of shrunk under him.

So, if you define the middle as being between Bush and Obama then, yes, the Republicans have moved to the right. But by this measure, Bill Clinton comes out on the right.

So, what does it mean when Democrats complain about the Republicans moving to the right? They are not complaining about foreign affairs. Obama adopted most of Bush's foreign policy while the Republicans are growing tired of the cost of foreign wars. The Republican challengers sound more like Democrats than Obama when talking about Afghanistan or Libya. The Democrats have also upheld the Patriot Act and other measures they objected to under Bush.

What's left? The size of government and how to reduce debt. The big complaint is that the Republicans are not willing to raise taxes. More specifically, the complaint is that they are not willing to soak the rich.

This is not new. One of the things Reagan is remembered for is flattening the tax rates. Mondale ran on a platform of raising taxes in 1984 and lost. In 1988, George H. W. Bush ran on the platform "Read my lips. No new taxes." He won that election. After breaking that pledge he lost in 1992. Clinton raised taxes and won reelection with a plurality but more than half the country voted against him. The message the Republicans see in all of that is that voters do not want their taxes increased.

Shrinking government, or at least slowing its increase, has also been party mainstream since Reagan. Bush (43) was the exception to that but the Republicans have simply returned to a long-held position. Remember that after the Republicans took Congress in 1994, even Bill Clinton declared that "the era of big government is over".

What has changed is the nature of the nation's problems. The deficit is unsustainable. Programs like Social Security, Medicare, and Medicaid are growing so fast that they will crowd out all other non-military spending in the foreseeable future. The Republicans are offering solutions to these problems. Rather than engaging with them, the Democrats are ignoring the real problems and accusing the Republicans of wanting to throw seniors over a cliff (literally in one ad).

The truth is that the Republicans have returned to traditional positions but the Democrats have move so far to the left that the Republicans are now incomprehensible to them.

Monday, June 20, 2011

Voting and politics

E. J. Dionne has a new column that accuses Republicans of trying to rig elections through changes to voting laws. This is a very disingenuous column.

Election laws have to straddle the line between making sure that everyone who is qualified to vote can cast a ballot and preventing election fraud. For the last few decades, Democrats have been trying to make it easier to vote. They are not doing this out of magnanimity. They are convinced that this will give them an advantage at the polls.

Keep in mind that many Democrats see themselves as the protector of the common man. They are convinced that most voters should recognize this and vote in their own self-interest. Their preferred voter does not care about candidates or issues. He only goes to the polls to vote a straight party ticket. If you bring issues into it then voters get confused. That is what President Obama was talking about when he referred to poor people in Pennsylvania "clinging to guns and religion".

Democratic efforts have included "get out the vote" initiatives where non-voters are rounded up and bussed to the polls where they can register and vote Democratic.

But, the reforms that the Democrats have pushed to make it easier to get people to vote also make it easier to cheat. Once the new voters have been herded onto a bus there is little to stop the organizers from taking them to multiple polling places. There are reports of this happening although it has never been verified by an outside investigator.

The reforms that the Republicans are pushing are fairly simple. You can't just show up and vote. You have to have an official ID proving that you are who you way you are and some proof that you actually live in the precinct. Democrats insist that this is fixing a non-existent problem. They point out that convictions for voter fraud are almost non-existent. Their argument is not as solid as it appears. It is almost impossible to even find someone who voted under a false id. A few years ago NBC found that tens of thousands of people voting from both their summer and winter residences at the same time. This is fairly easy to track but the states don't bother to do even that much.

Note, Dionne complains that student IDs are not accepted in Texas. He sees it as an attempt to disenfranchise a group that votes Democrat. Since many students are also listed under their parents' address, I see this as a reasonable attempt at preventing double-voting.

This is the conflict in a nutshell. Dionne rails against any barriers to voting, calling up visions of racial discrimination. It is true that our nation erected barriers to keep women and minorities from voting. At the same time, we also have a long history of election fraud. There are still people who believe that Nixon won the vote but lost Illinois due to ballot-box stuffing in Chicago.

Ironically, the movement to clean up elections was part of the Progressive movement of a century ago. The Progressives believed that they would win in open, honest elections. The modern Progressives don't have the same faith in the honest elections as their predecessors.

Friday, June 17, 2011

Obama's Wars

It's kind of shocking when you realize how many conflicts we are currently engaged in. Although US service men are not always in harm's way, people are dying in these conflicts - mainly enemies of our nation but also some innocents.

Here's the list.

Iraq - President Obama inherited this one from Bush. It was covered by the War Powers Act although the various Democratic candidates who voted for it have spent the last seven years trying to backtrack from it. As conflicts go, this one is fairly good at the moment. The country is stable and US soldiers are more likely to die from a traffic accident than from enemy actions.

Afghanistan - "The good war". This is another one that Obama inherited but it is not going so well. After a surge of troops, Obama wants to draw down the troops. The Pentagon wants to keep them for another couple of years. Relations with the Afghanistan government have deteriorated. They don't trust Obama.

Pakistan - This is a continuation of the war in Afghanistan. Again, things are not going as well as they might. Relations with the Pakistani government have cooled quite a bit since we discovered bin Laden in a suburb. At the same time, the Pakistani government is growing tired of being treated as a client state.

Libya - Exactly what is our role in Libya and is it covered by the War Powers Act? That is being hotly debated between the White House and Congress. The Obama administration argues that, as long as Americans are not coming under fire, we are not engaged in hostilities. Congress counters by pointing out that the effort is commanded by an American officer (on loan to NATO) and we seem to be engaged in regime change. Some reports say that we have a more direct role than in being reported and our allies are asking for us to expand our role.

Yemen - We are engaged in a covert war in support of the government against Islamic extremists. We are mainly using unmanned drones so, again, no Americans are in harm's way.

Somalia - We have covert troops training and assisting a new government. We are also hunting down al Qeda operatives. This is mainly a "boots on the ground" action and I bet yuo didn't know about it.

That's the complete list that I know of but I only learned about Somalia from an article in Wired. This is considered to be the model for the future - an outsourced war that gets little press coverage, costs little, and does not require Congressional approval under the Obama definition of the War Powers Act. Expect this list to grow in the near future.

Thursday, June 16, 2011


Just a couple of days ago it was announced that the sun seems to be cooling. The speculation was that this could be similar to the "Maunder Minimum" of the 17th and 18th centuries. This is usually given as the cause for a period of global cooling known as the Little Ice Age.

Sounds like we should forget about carbon taxes doesn't it?

Not so, says Michael Mann. Mann insists that it was a total coincidence that the Little Ice Age coincided with the Maunder Minimum. Volcanoes were to blame instead.

What goes unsaid is that Mann has a conflict of interest. His professional career has been built on the proposition that the main driver of climate change is CO2. Never mind that the only source of light and heat in the solar system is the sun, it is irrelevant to climate, according to Mann. He can prove it, too. He cites an article in Science magazine. Although, he wrote the article so he is citing himself.

Actually it is a major concession for him to admit that there was a Little Ice Age. He first came to prominence when he presented his reconstruction of historic climate to the International Panel on Climate Change (IPCC). It showed a fairly steady climate until the start of the Industrial Revolution. After that the global temperature rose rapidly. The chart is known as the Hockey Stick which it vaguely resembles. At that time the Little Ice age was dismissed as a phenomenon local to Europe.

Since then research has shown that the Little Ice Age was global. The idea of decades-long volcanic eruptions altering the climate is Mann's attempt to allow for a terrestrial explanation for the Little Ice Age.

So, Mann is hardly an unbiased source to evaluate the meaning of new solar activity.

Wednesday, June 15, 2011

Greeen or Greenwash?

The Washington Post has a column by Stephen Stromberg asking "How to get Republicans to go green?" I'm going to challenge most of his assumptions. A lot of what is being proposed is not "green" in that it does not really reduce carbon dioxide emissions. It is "greenwashing" - something that does little good but makes us feel like we are doing something. An example of this is unplugging chargers when they are not being used. It is true that they continue to draw power but the total savings are almost unnoticeable.

Stromberg mentions green energy as a means for energy independence and as a jobs program. The jobs argument is easily dismissed. Spain, a leader in green energy, found that two jobs were destroyed for every green job created. Green jobs require high government subsidies in order to even exist.

Energy independence is a more complicated issue. Green energy usually means wind and solar. Both of these take up large amounts of land. They also have their own effect on the environment. The noise from windmills makes it impossible for humans to live near them and may also affect wildlife. Also, these technologies require rare earth metals which currently come from China and are being treated as a strategic resource. We don't want to exchange one dependency for another.

Wind and solar have other problems. Obviously solar power only works during the day. Wind power is less reliable. None of the wind farms built to date have produced the expected amount of power. There are too many days where the wind is too light or too strong. That means that we have to have traditional generators as backups for wind power. This is a huge expense.

If energy independence was the goal then we would be including everything - nuclear power, deep water drilling, oil sands, coal, and natural gas. The Green lobby objects to all of these. Even clean-burning natural gas has come under attack after an Oscar-winning documentary.

Electric cars, the darling of the Greens, are also suspect. Between the carbon plume for the batteries and the carbon emissions of power plants, they do not really reduce CO2 emissions.

Stromberg suggests a carbon tax to be offset by other corporate tax breaks. Previous efforts at negotiating cap and trade degenerated into corporate cronyism. This is likely to do the same. Favored companies and industries will get large tax breaks. Small businesses and companies with ineffective lobbyists will foot the bill.

All of this pales next to the big question, is the world warming? Forbes recently ran a column pointing out that temperatures flattened out over the last decade. More important, all of the global warming models predict a rise in upper air moisture which become the actual driving force for warming. This has not happened.

We might even be headed for global cooling instead of warming. Three different government bodies announced that the current solar cycle is not behaving as expected. The sun seems to be going into a cool phase. The last time this happened is associated with a period known as the Little Ice Age. We may want a nice warming blanket of CO2 to hold in what heat we have.

Tuesday, June 14, 2011

Weiner Should Go

Representative Weiner sent numerous photographs of himself to complete strangers. Some of them were suggestive. Others were explicit. Is that enough that he should resign from office? After all, President Clinton took phone calls while being serviced by an intern. Is Weiner worse than that?

Yes. Weiner is an exhibitionist. He exposes himself to strangers. If he was doing in person what he has been doing electronically he would be arrested and charged with a misdemeanor. In some states he would end up on a sex offender list. In contrast, Clinton had an affair. That is disgraceful but not illegal. Side note - Clinton was not impeached for having an affair. He was impeached for lying under oath.

But that is not the real reason that Weiner should go. He should resign for the good of his party. Following a win in a special election, the Democrats were planning a full assault on the Republicans over Medicare. They already have ads made talking about how the Republicans want to destroy Medicare. It doesn't matter that the various fact-checking organizations have ruled these ads outrageous.

But none of that has happened because no one is paying any attention to the Democrats when they talk about issues. All the press wants to talk about is Weiner. If Weiner resigned then the stories would stop. In the meantime, the Democrats cannot get a word in edgewise.

Monday, June 13, 2011

The Limits of Economics

Today's Washington Post has a column on the economy by Larry Summers, a former member of President Obama's economic team. In it he talks about how the President's policies saved the country from economic collapse and what is needed to continue the recovery.

The big question is why anyone would listen to a word that Summers or any of the President's other advisors says? A bit over two years ago they projected how bad the recession would be with and without a stimulus and what the recovery would look like. They got everything wrong. The measures they took to stimulate the economy also failed. The economy stalled after the so-called QE2 instead of picking up.

The problem is that no one really understands economics. It is one of those chaos systems where there are too many inputs to even be identified to say nothing of tracked.

Economists think that they understand the economy but, unlike the hard sciences, they cannot test their assumptions in a lab. They can only observe the economy and come up with a theory that attempts to explain what happened. Even there, economists often come to different conclusions.

In addition, social policy has become heavily intertwined with economics. Take the year 1937. Paul Krugman wants to see more government spending. When he looks at 1937 he sees that FDR became worried about the deficit and took measures to reduce it, causing a recession. According to Krugman, the Great Depression would have ended if FDR had just kept spending.

But, a recent column by Amity Shales points out that other things also happened in 1937. The Social Security tax started and the Wagner Act was implemented which caused the number of strikes nationwide to more than double. This caused millions of lost hours of work. Could these have been a stronger factor in the recession than FDR's deficit reduction?

Several years ago, Christina Romer, another of Obama's former advisers, wrote a paper saying that government stimulus programs never worked. They either arrive too late or they are targeted at the wrong parts of the economy. After joining Team Obama, she reversed herself, justifying Obama's stimulus program. Would she have reversed herself if she had not joined the government?

Everyone agrees that government spending has an effect on the economy but there is a lot of disagreement on what that effect is. Obama's advisers believe that the effect is around 160%. Every dollar spent causes $1.60 in increased spending in the economy. Other economists believe that the effect is 60%. Every dollar spent caused $0.60 in economic activity. This is an important issue. Does government spending cause the economy to grow by 60% or to shrink by 40%? No one can say for certain.

I have been seeing a drumbeat of columnists insisting the the stimulus worked and that we need a new one, bigger if possible. Again, none of these people can really say if a new stimulus will work. I'm sure that they really think so but that is not the same thing as proving it.

The one thing that we know for certain - we will have to pay interest on every dollar borrowed to pay for new stimulus spending.

Thursday, June 09, 2011


We're at war in Yemen? According to a wire service report the US is intensifying drone attacks in Yemen. That's in addition to Bush's two wars, Afghanistan and Iraq, and Obama's war in Libya. Granted, we are drawing down troops in Iraq and plan to draw them down in Afghanistan. Still, we are making 1/4 of the air strikes in Libya and our allies are pushing for us to increase that. Our involvement there has gone far beyond establishing a no-fly zone. Instead we are trying to overthrow the Libyan government.

In Yemen we seem to be trying to prop up a crumbling government against rebels allied with al-Qaeda.

I thought that the Democrats were the party of peace. Or at least the party of the War Powers Act.

Wednesday, June 08, 2011

Is there a right to buy a home that you cannot afford?

It has been a long time since I bought a house. When I did there were fairly tight standards about how large the down-payment had to be and how large the monthly payment could be in relation to your monthly income. The housing bubble and the corresponding mortgage crisis were direct results of waiving those standards.

In the wake of that crisis new standards have been proposed. To get a premium loan you will have to put down 20% down-payment and payments cannot exceed 1/3 of your income. These are important.

The down-payment is to keep people from walking away from their loans. It is one thing to default on a zero-down home because is it worth less than your loan. You are not losing anything. If you had to put up a big down-payment then you would be leaving that behind. It also reduces the amount of your loan so that your house could lose 20% of its value and still be worth the amount of the loan.

The requirement that payments cannot exceed 1/3 of income is even more basic. This makes sure that you can afford the payments.

If you don't qualify for a premium loan then you still might be able to get one but it would not be as attractive to you or the bank. On your end you would probably have to pay higher interest. The bank would have more trouble selling the loan so they would have an incentive to be selective about who they grant loans to.

These regulations should be obvious but there are objections.

If this rule goes through as it stands, the demographic of borrowers who get (favorable rates) will be white and wealthy," said David Stevens, chief executive officer of the Mortgage Bankers Association and former commissioner of the Federal Housing Administration. "African-American, Latino and first-time home buyers will be charged higher prices.

This raises the question, is it a right (or even desirable) to get a mortgage that you cannot afford? The Clinton administration seemed to think that there is such a right which is why the loan requirements were waived in the first place. The Bush administration continued this practice.

So, why is this a good thing? I know that "the American Dream" is supposed to include owning a house but historically more than a third of the nation rented. We got into trouble when we tried to change that proportion. Why keep encouraging people in self-destructive behavior?

Friday, June 03, 2011

The President and the Economy

The economy continues to slump. President Obama has around a year to turn it around. That will give people enough time to recognize a robust economy and for him to campaign on it. If things do not improve by the Summer of 2012 then he will be in the same position as George H. W. Bush. The mild recession of 1992 actually ended before the election but economists didn't announce that until early 1993. That let Clinton take credit for the recovery.

Obama will not be able to renew his "Hope and Change" campaign. Sitting president have to run on their record. Obama's foreign policy is too close to Bush's to win an election. Rather than removing troops from Iraq as fast as they could march, he continued Bush's policies. He escalated Afghanistan without much to show for it. the excitement over killing bin Laden has already faded. His promise to make America popular again never panned out. Obamacare continues to be divisive. That leaves the economy as the issue that will decide the election.

The current economy is in much worse shape than the one in 1992. Policies were put in place by Clinton and continued by George W. Bush to encourage home ownership. As a result, the percentage of families owning their home rose from an average in the low 60 percentage range to the high 60s. In addition, a lot of other people bought houses that were more expensive than they could afford. That created the housing bubble and caused a host of other problems. Things will not improve until housing values and ownership work back to where they would have been without the bubble. This process is still going on and will continue.

A big portion of the economy in the 2000s depended on new housing. This started with the actual home builders and mortgage companies but included every business that makes or sells the things needed to outfit a new home. So that portion of the economy will not recover in time to help Obama.

Obama has spent the last two and a half years blaming the Bush administration for the recession. Unfortunately the man in the Oval Office is held responsible for the economy. That allowed Clinton to take credit for a recovery that predated him but it also means that Obama will be held responsible for economic problems in 2012.

It doesn't help that his policies have probably hurt the economy. His stimulus package didn't stimulate. A large portion of it went for tax breaks that were so small, most people didn't notice them. Most of the rest went to keep cities and states from laying off government workers.

Obamacare has probably hurt employment although it is hard to tell. Most of it has not gone into effect and thousands of waivers have been issued. Still, it increases the future cost of employing someone so it is unlikely to have helped.

The Obama administration has pursued a weak dollar policy. This is another continuation of the Bush administration but there is a difference. The idea is to reduce the value of the dollar overseas. This makes imported goods more expensive and encourages people to buy American. It also makes American products cheaper overseas and encourages exports. This might work in a strong economy but the rest of the world has its own problems. There are no strong markets to sell to. The main result of the weak dollar is to make imports cost more. That is one big reason the price of gasoline has gone up. It hurts food prices, also.

The Administration was counting on pent-up consumer demand to drive a the recovery. It worked for a while but rising costs, especially on gasoline, are causing consumers to cut back. This represents a failure of Obama policies.

The rest of Obama's economic plans are closer to crony capitalism than anything else. Businesses and industries that the President favors are given advantages or even direct subsidies. Others are left to fend for themselves.

The automotive industry is a perfect example of this. There are only two US-owned large car-makers - GM and Ford. Chrysler went from being German-owned to American-owned before Obama sold it to the Italians. Honda and Toyota are Japanese-owned but most of the cars sold in the US are made here by American workers. Of these five companies, GM and Chrysler were given billions in grants and loans (they paid the loans back but not the grants). Ford was offered assistance but refused it. Toyota was hit with a major recall.

Even allowing for the fact that the two Japanese companies were in better financial shape, it still looks like the Obama administration was favoring unionized manufacturers over non-unionized ones.

This example holds true in general. The Obama administration has given huge subsidies to industries like trains, wind and solar power that are unlikely to ever show any return. At the same time, it has crippled the oil industry.

The Obama Administration's love of picking winners and losers means that only a few parts of the economy are able to grow and even this is distorted by government money. In the 1970s and 1980s, Britain and the US reviewed regulations and rewrote the ones that kept businesses from hiring. The Obama administration would never even think of doing something like that. Their answer for everything is more government, not less.

While big pieces of the economy are beyond the Administration's control, the Obama administration has failed to properly manage the pieces that it does control.

Thursday, June 02, 2011

A Debt-based Economy?

Reading columns by Paul Krugman is always an education. It's not what he says that is illuminating, it is what you learn from picking apart his arguments.

He has written several columns against the austerity measures being undertaken by several countries. His reasoning is that none of the measures enacted so far have brought prosperity so austerity is discredited.

Where to start with this one? Austerity is needed because of previous excesses. Countries such as Greece have run up such a debt that they cannot keep borrowing. There is a real danger that they will default on their current debt so no one wants to give them any further loans except with unaffordable interest rates. For these countries, austerity will not make things better. Services and social programs will have to be cut. This will be painful but not as painful as the crash that will occur if they don't make these cuts now.

Think of a family budget. You have been spending more than you earn for some time. You can stop eating out and switch to Hamburger Helper or you can keep on spending until you have to declare bankruptcy and loose your house and car. And are still stuck eating Hamburger Helper. Neither choice is desirable but one is less painful.

Krugman insists that the road to prosperity is paved with government spending. Since forty cents of every dollar the government spends is borrowed, he is trying to base the economy on ever-expanding debt.

A quick aside here - some government debt is a good thing. If the government needs to build a bridge it can either set aside money for years until enough is accumulated to pay cash for the bridge or it can borrow enough money to build it now and pay off the loan over time. If the economy grows then the amount of money the government can borrow also grows. The problem comes when the government starts borrowing faster than the economy is growing and interest payments get out of hand.

Krugman would brush off this argument saying that we can worry about the debt after the economy recovers. The problem is that we are two years into a recovery and economic growth has been sluggish at best. A major school of economics says that government spending slows an economy instead of accelerating it so Krugman's prescription might be doing ore harm than good.

More recently Krugman called for a jobs program comparable to the WPA. He proposed that it be sent to patch potholes. How many potholes can I find in Krugman's proposal?

First, this is an echo of the "shovel ready" jobs of a couple of years ago - the ones that President Obama admitted do not exist. Big infrastructure program take years to plan and get approval for. For immediate jobs, things have to be scaled back to something that takes no planning or approval. That means the simplest jobs like patching potholes.

Even there, there are problems. During the Depression a worker might be issued a shovel and told to get to work. Modern roads need heavy equipment. If a city has cut back on patching then it might have some excess capacity but otherwise some of the money will have to go for buying the required equipment. That caused delays and diverts money from a straight jobs program into a stimulus for heavy equipment manufacturers.

But, assuming that there is a large excess capacity, there is the matter of hiring the workers. Krugman treats the unemployed as an amorphous mass, willing and able to take any job offered. Will unemployed office workers be willing to take a job that requires them to work outdoors in the hot sun with dangerous equipment and hard manual labor? If my wife was unemployed she would never consider such a job.

How much will Krugman pay his patching crew?  A large percentage of the unemployed are getting unemployment benefits. They would lose these if they took one of Krugman's jobs. Will they break even? How many people would be willing to make this trade?

If the patching jobs pay more than unemployment benefits then they will cause other distortions in the job market. People who are already employed in lower paying jobs will be tempted to switch. This would create new openings but in low-paying jobs that would not interest people on unemployment.

Then there is the seasonal nature of his proposal. Around here you can only patch part of the year.

Part of the reason that unemployment has stayed to high for so long is that the new jobs that are being created are specialized and the majority of the unemployed do nto have the right skill set. Krugman would do nothing to solve that problem.

And then there is the problem of paying for these workers which brings us back to the national debt. He wants to borrow money to employ people to do essentially meaningless work. Any economic expansion will have to be repaid with interest at a later date.

Krugman's arguments boil down to one simple idea - cuts are painful so don't make them. Instead keep believing in the power of state spending state to solve all problems and keep borrowing.

Wednesday, June 01, 2011

Medicare and the Democrats

Medicare as we know it cannot continue. The trustees in charge of the trust fund say so. The Congressional Budget Office says so. The Republicans say so.

But, thanks to a special election held in New York last week, the Democrats will spend the next year and a half insisting that any attempts to change Medicare amount to throwing seniors off a cliff. They even ran an ad during the New York election that literally had a Republican pushing people over a cliff.

The Democrats are overestimating the meaning of the election. It was a three-way race between a Democrat, a Republican, and a Tea Party candidate who had previously been both a Republican and a Democrat. The district had been comfortably Republican and carried by McCain but the Democrat won after running a campaign focusing exclusively on the Republican plan for Medicare.

Because a Democrat won a Republican district, the party decided that they will run the same campaign nationally. The problem with this reasoning is that it was a three-way race and the winner's percentage of the vote was comparable to Obama's.

This is a problem because the Democrats have sacrificed real discussions about the nation's future for short-term tactical advantage.

The Republican plan as advanced by Paul Ryan would move Medicare from being a pure government program to one that includes insurance pools with government assistance. If the idea of insurance pools sounds familiar, it is because they are included in Obamacare.

Medicare will run out of money in the 2020s, partly because of rising medical costs. The Ryan plan hopes to contain costs by passing some of them on to seniors. The hope is that they will shop around. There are problems with these assumptions and the entire issue needs a real debate. Instead we have people like the new DNC chair, Debbie Wasserman Schultz saying

They would take the people who are younger than 55 years old today and tell them, 'You know what? You're on your own. Go and find private health insurance in … the health care insurance market. We're going to throw you to the wolves and allow insurance companies to deny you coverage and drop you for pre-existing conditions. We're going to give you X amount of dollars, and you figure it out.' And these are people who have paid for their whole life into the system, are counting on that safety net.

This statement has been ruled false by sites such as PolitiFact. The Democrats should be advancing their own proposal with will likely involve tax hikes and cuts in services. Instead they pretend that Medicare is sustainable and that the Republicans are trying to destroy it in order to satisfy the radical Tea Party.

It is easy to understand why the Democrats are taking this tactic. It allows them to score cheap points against the Republicans. It also allows them to hold off on the wrenching admission that their crown jewels (Medicare, Medicaid, and Social Security) have to be reformed.

But it puts the entire nation's future at risk.