Wednesday, August 31, 2011

Spend it or Lose it

In a recent column, Paul Krugman described what policies the Fed should have taken (which, coincidentally, he prescribed for Japan a decade ago). The Fed should promise to keep short-term interest rates near zero. At the same time it should buy up long-term debt in the hope of igniting inflation. Krugman never gets around to explaining what he hopes to accomplish with this so I will. He wants to take your savings.

For the last couple of years it has been a matter of faith that the only thing hindering the recovery is a lack of spending. Businesses are "hoarding" cash and individuals have been saving and paying down debt instead of spending. Krugman's solution is to penalize people for not spending.

The idea is to raise the rate of inflation enough that money left unspent will lose value. He may be hoping to force businesses to spend more of their cash holdings but they have investment options available that regular people do not. So the ones who will be hit the hardest are the ones who behave responsibly. If you are trying to save money you will see its buying power decline. If you put $100 in the bank, it will only be worth $96 this time next year. Given this, the only way you can get anything out of your savings is to spend it as fast as possible. In fact, with inflation running above interest rates, you might as well borrow as much money as possible since the cost of borrowing will be less than zero. Krugman hopes that this will provide the spark that the economy needs.

There are problems with the strategy. The first is that it discourages responsibility. You should be saving for retirement and emergencies. Our nation's long-term fiscal health depends on a majority of people behaving this way. If we force people to spend rather than saving then we will make them more dependent on the government in the future (which might please Krugman).

A second problem is that once you start up inflation it can easily get out of control. Inflation changes people's spending habits. Krugman is counting on this to stimulate the economy but the expectation of further inflation can turn into a self-fulfilling prophecy.

But the biggest problem is that this has been tried before. In 1933, FDR decided that the problem with the economy was that people were hoarding gold. He did away with gold coinage and had all existing gold coins melted into bars and shipped to Fort Knox. Then he inflated the currency. Obviously, that did not end the Great Depression.

In the late 1970s the country suffered from stagflation - stagnant economy and high inflation. Krugman's suggestions will likely bring a return to those times rather than lead to a recovery.

Tuesday, August 30, 2011

Katrina, Irene, and Big Government

Hurricanes Katrina and Irene both hit the US around the same dates. In addition, six years, later, Katrina is the hurricane that most people remember and, of course, Irene was the most recent hurricane. Because of this, many people are comparing the damage from the two. Washington Post columnist Dana Milbank asks if we want a Katrina government or an Irene government? He is arguing that bigger government led to a better hurricane response.

Just how apt is this comparison? At its height, Katrina was a strong category 5 hurricane. It lost strength but was still a category 3 when it hit the Gulf coast. It went on to kill 1,464 deaths and cause $122 billion in damage. Irene peaked as a category 2 hurricane and was a category 1 when it hit the coast. By the time it hit New York it had been downgraded to tropical storm. It killed 40 (and counting) and caused something like $10 billion in damages. Unless Milbank thinks that the spending in Washington sucked the energy from Irene, larger government had little to do with comparative damage.

Milbank does have a point that improved weather forecasting kept Florida from being included in the evacuation order. From there he launches into a general defense of big government, missing a point or two.

Under President Obama and the Democratic Congress, government in general grew to the point that we, as a nation, cannot afford it. Cuts have to be made. Milbank can argue that cutting NOAA's budget for satellites will hurt future forecasts but he ignores the rejoinder - if we restore that money then what should we cut instead? (I suspect that his response would be that we should just tax the rich.)

The destruction of Katrina was not caused by President Bush and the lesser strength of Irene was not caused by President Obama. Using the difference between these events to justify big government is a stretch.

Monday, August 29, 2011

Economic Truisms from the Left

There are two economic truisms being repeated from the left. The first one is that high government spending ended the Great Depression. The second is that unions were responsible for the rise of the middle class in the 1950s and 1960s and unions' decline since then had led to the decline of the middle class and a great redistribution of wealth. These are examples of the rule that correlation does not equal causation - just because two things happened does not mean that the first caused the second. These truisms are linked by what goes unsaid - World War II.

I've written about spending during World War II before so I will just give the short version here. While it is true that the government spent record amounts during the war, the ways it was being spent were nothing like today's stimulus goals. Instead of spending money on infrastructure, schools, green jobs, etc. we spent it on weapons. Then we used those weapons to demolish the industrial capabilities of Germany, Italy, and Japan. Those countries, in turn, had already spent enormous energy destroying the industries of the rest of Europe and Asia.

By the end of the war the United States was the only major power with its industrial base intact. It took decades for the rest of the world to rebuild. England was on the winning side but rationing continued there until 1954. Germany was worse off.

So, on one hand you have widespread destruction and on the other hand you have a country looking for post-war markets. Basic economics says that this would cause a boom for the United States. Organized labor didn't cause this boom, it simply benefited from it.

Remember, collective bargaining does not create jobs. If anything, it destroys them by raising labor costs. This happens in both the short-term and the long term. The short-term effect is obvious. If the costs of hiring or retaining a worker are higher then the benefit, that position will be eliminated.

For the long-term effects, just look at the manufacturing jobs over the last half-century. As labor costs went up, so did the potential savings of automation and off-shoring. The United States still manufactures more than any other nation but does it with a fraction of the workforce from 50 years ago. Unions cannot reverse this trend because they are devoted to increasing the cost of labor.

Aircraft manufacturer Boeing is an example of this. They have been repeatedly hurt by union strikes so they choose to build a new plant in a non-unionized states. This is being fought by the unions through the NLRB (National Labor Relations Board) on the basis that Boeing admitted that getting away from unions was a factor in their decision. Boeing is likely to win this. Even if they do not, smaller companies are making the same decision regularly, either moving away from unions or leaving the US completely.

While it is unrelated to the rest of my argument, I should point out that the union's ultimate weapon, the strike, seldom helps the worker. That is because every week that a worker is on strike represents 2% annual income. A union member who gets a 5% increase after a three week strike will have to work over a year just to break even. Averaged over two years, this increase will only raise the worker's cumulative pay by 2% (5% times two years minus 6% wages lost during the strike). As workers have figured this out they have become reluctant to unionize which is the real reason for declining union membership and influence.

Saturday, August 27, 2011

Forgiving the Cool Guys

From all the outpouring of praise for Steve Jobs, you would never know that he is a Grade-A jerk. This article is one of the few that says anything bad about him and it forgives him everything.

Want some examples? He denied paternity for his first child. He even swore that he was sterile and couldn't have fathered a child. He cheated his partner, Steve Wozniak back in the 1970s. They created the game Breakout and were to split the profits. Jobs got $5,000 but told Wozniak that it was $700. He does not give to charity and, because of him, neither does Apple.

How about some decisions that affect customers? Apples first computer with a GUI, the Lisa, was a flop. In order to try to save it, developers for the original Mac had to buy a Lisa. The Apple mouse only had one button for decades because Jobs insisted that two buttons was confusing. The original Mac could not have an internal hard drive because hard drives need an internal fan and Jobs forbid the design team from putting one in. Apple's control over the Mac was so tight that you violated your warranty if you attached a non-Apple printer.

Jobs was originally fired from Apple because he was doing a poor job as CEO. From there he founded two companies - Pixar and Next. Pixar prospered but Next flopped. Their original computer was only supposed to be sold to students but cost far too much for them. It also featured an optical drive that never worked. By the time Apple bought Next, it was down to selling an operating system tat no one seemed to want (except Apple which needed an upgraded operating system).

Jobs has been rumored to wander the offices after hours looking for people working late. When he found one he would demand to see what the programmer was working on. If it was not sufficiently awesome, Jobs would berate the programmer.

Jobs created a corporate culture of secrecy and control. If a leak is traced to a section, the conduct a lock-down. Everyone's phone is confiscated and searched for evidence of a leak. If it is found or a worker refuses to submit he is fired on the spot. Even low-level Genius Bar employees can be fired simply for speculating on new products.

There are no set guidelines for what is and is not allowed in the app store. Some classes of app have been removed because Jobs threw a temper tantrum. While Jobs insists that the IPhone and IPad will not play Flash because it is flawed, most outsiders think it is to block off alternate sources of content like Hulu. The IPad does not accept external memory for the same reason - control.

The IPhone and IPad are made in China in a factory with a high suicide rate. These products generate very few jobs in the US.

Given all of this, why are people saying such wonderful things about Jobs? Because he is cool. You don't run down cool people it makes you seem uncool. They could forgive Jobs nearly anything as long as he kept giving them awesome products.

That is also how Barack Obama got elected. People overlooked his partisan voting record, his racist preacher, and his complete lack of resume. It was more important to have a cool president than a competent one.

Compare Jobs with Bill Gates. Gates pulled his share of strong-arm tactics but he also built an ecosystem that allowed others to profit alongside him. Then he decided that he had enough and retired to fight malaria. Gates was never cool the way that Jobs is but he is more likeable.

Thursday, August 25, 2011

Credit Where Credit Is Due

E. J. Dionne complains that President Obama is not getting enough credit for the overthrow of Gaddafi.

The question comes to mind in the wake of the Libyan rebels' successes against Moammar Gaddafi. It's remarkable how reluctant Obama's opponents are to acknowledge that despite all the predictions that his policy of limited engagement could never work, it actually did.
So, what did Obama do? The actual fighting was done by the rebels. Dionne does admit this in passing. But, they were aided by NATO who provided air support, weapons, and training. And NATO acted because of the urgings of... French President Sarkozy. The US was involved in the initial conflict but, as President Obama told Congress, operational control was passed of to NATO after the first few days and the US limited its role to providing supplies and tactical data. Also we sent some Predators in to hunt Gaddafy.

Dionne admits that, also:

The military action by the West that was crucial to the rebels was a genuine coalition effort led by Britain and France. This was not a made-by-America revolution, and both we and the Middle East are better for that.

Yes, we probably provided more support than the President admitted but we would never have been there if France and the UK hadn't shamed us into it. So why is Dionne giving Obama so much credit?

Wednesday, August 24, 2011

History and Elections

Primaries do not start until next year. The political conventions are still a year away. The "real" presidential campaign traditionally starts the Labor Day weekend prior to the election. The further away the election is, the harder it is to predict. That said, what can we say about the next election based on prior ones?

First, President Obama's poll numbers may be down but they will rise closer to the election. Hundreds of millions of dollars of campaign spending does that and Obama is rumored to be planning on spending an even billion dollars on his reelection. That means that polls showing his disapproval rate as being unelectable are premature.

The polls do show some real problems for Obama. This far out, it is not unusual for him to poll below a generic candidate. It is the specific matches that mean something. Voters have a tendency to imagine the generic candidate as being perfect but, when faced with real people, pull away (Anyone but Obama... except that guy). Obama's problem is that he is polling around even with specific candidates. Worse, they are real candidates who have a shot at the nomination.

History tells us that Perry is a bigger threat to Obama than he is given credit for. Many dismiss him as being too far-right to be electable. In 1979 Reagan was dismissed the same way. Clinton was dismissed as being too flawed in 1991. Both went on to unseat incumbent presidents.

Obama's reelection hinges partly on the economy and partly on foreign affairs. He has a year for the economy to recover. If we are in a robust recovery a year from now then all will be forgiven. He will be the next Reagan. If we still have unemployment in the 8%-9% range and high inflation then he will be the next Carter. Given the economic problems in Europe, chances of a robust recovery are slim.

So far, Obama's mark on foreign affairs has been minimal. He continued many of Bush's policies, especially in Iraq and Gitmo. He managed to turn Afghanistan from the "good war" into a "bad war". Yes, Bin Laudin was executed during his watch but that is already old news. Ghaddafi's overthrow may be good news but the election will not hinge on it. In fact, it is hard to think of anything overseas that can help Obama but many things could drag him down.

So far, Obama has involved us in multiple foreign conflicts on various levels. All of these are conflicts of choice - the sort of thing that the Democrats are supposed to be against. This will hurt Obama's base. They may not vote Republican but they can sit the election out.

A successful terrorist attack would be a disaster for Obama. So would something like the Iranian Hostage Crisis.

None of this looks good for Obama. Instead of being the candidate of Hope and Change, he will be "the guy who got us into this mess". The plans that have leaked out of his campaign reflect this. Instead of running on his accomplishments, he hopes to pull the other side down. He will propose an ineffective jobs program that cannot pass Congress so that he can run against that. His campaign already started a whisper campaign against Romney because he's "weird" (i.e. Mormon).

Tuesday, August 23, 2011

Obama and Libya

I've already seen columnists giving virtual back-slaps to President Obama on toppling Ghadaffy. I hope that the President has sense not to take an early victory lap for several reasons.

First, after informing Congress that the US was not involved in hostilities in Libya, he would make a total mockery of the War Powers Act to turn around and claim that we overthrew a dictator without any hostilities.

More important, we have no idea what will come next. Iraq looked good for the first few weeks after Saddam was overthrown. When Iran overthrew the Shaw, they set up a free and democratic government. Afghanistan looked like a major success in December, 2011.

There are many things that could go wrong. These include the establishment of a strict Islamic government that is more sympathetic to our enemies than to the US and its allies. Or the country could collapse into a series of ethnic feuds leading to an Iraq-style civil war or a Somalia-style failed state. We could easily end up with a semi-permanent peacekeeping force in Libya.

Or everyone could embrace and forget about 42 years of dictatorship.

The CIA must have some idea about the direction Libya is headed in. I hope that they shared it with the President and that he made the right choice in supporting the overthrow, even if he did limit our participation to "leading from the rear."

Monday, August 22, 2011

What Ails the Economy

Amid calls for Obama to "go big" on a new jobs bill, we need to understand what caused the Great Recession in the first place and why these efforts will not work.

It all started with real estate. For decades, house prices have been growing faster than inflation. During the 2000s, that trend kicked into overdrive as a result of several factors. The first is the traditional market reaction to scarcity. As cities grew, their more desirable sections became more valuable.

A new factor entered the market when the Clinton administration decided to increase minority home ownership. There were allegations that banks "red lined" minorities - drawing red lines on a map marking areas that they would not give loans to regardless of the potential borrower's finances. As a result, banks loosened up traditional requirements for down payments and monthly payment to monthly earnings ratio. The Bush administration continued these policies.

The Fed kept interest rates at historic lows in order to promote economic growth.

All of these factors together combined. People who previously would not have been able to qualify for a home load suddenly could. Low interest disguised rising house prices. These fed back into loans as people were encouraged to refinance in order to get lower loans. At the same time, they financed the new value of their house, treating their homes as low-interest credit cards. To keep monthly payments low, these loans were variable-rate interest. A lot of consumer spending was generated by these loans. Event the Obamas engaged in it.

Some Wall Street geniuses noticed that high-risk borrowers (AKA sub-prime borrowers) weren't really that high a risk. They paid higher interest rates and, if you bundled them together and added a little mortgage insurance, they were almost as safe as AAA bonds but they paid much better return.

The thread that held all of this together was rising home values. If anyone got in trouble, they could sell their house at a profit.

Then oil and food prices rose. The Fed worried about inflation and raised interest rates to try to slow things down. Suddenly, all of those people with variable-rate loans had to pay more. Many people could not afford the new payments and had to dump their homes. The bottom dropped out of the market. Millions found themselves "under water" where they owed more on their house than it was worth. Many walked away from their loans, turning their houses over to the bank (or whoever currently owned their loan). That put more downward pressure on house values as banks tried to dump seized houses.

At the upper financial level, the income from mortgages turned into a drag. At the lower level, people could no longer borrow against the rising value of their house. In its final months, the Bush administration bailed out some of the top banks but failed to do anything about real estate values in general. Enter the Obama administration.

In the book A Connecticut Yankee in King Arther's Court, the main character has advance knowledge of a natural event which will occur (a solar eclipse) and takes advantage of it. On his fourth voyage, Christopher Columbus did this in real life with a lunar eclipse. The idea was to make people think that you ended the eclipse when it actually happened on its own.

The Obama Administration tried to do something like this. They predicted that the recession would end during the Summer of 2009 and be followed by a steep recovery. They mainly based this on the recession from the early 1980s. Accordingly, they figured that they could do almost anything, call it a stimulus, and claim credit for the natural recovery.

Unfortunately, as Japan showed in the 1990s, a recession generated by a real estate bubble takes a long time to recover from. The only solution is to wait until the economy grows naturally to the point where land values match the inflated ones. That means that Obama should have focused his efforts on rebuilding land value.

He didn't. A small part of the stimulus was focused on first-time buyers. It helped a bit but not much.

Obama also announced a program to help people who were in danger of losing their home. This was worse than useless. Only a small fraction of possible beneficiaries actually had their homes saved. Others found themselves worse off after applying for the program and being rejected. Worse for Obama, the impression that this was one more bail-out of people who acted irresponsibly led to the first Tea Party protests. A program that fails to help people and galvanizes the opposition sets the bar for an epic fail. In the meantime, real estate prices are still falling and home seizures are rising again.

So where does that leave us? We know some things that will not work. Japan tried traditional stimulus packages. They failed and left Japan with the highest debt ratio in the world. Keynesian insist that Japan needed a much greater stimulus and urges President Obama to "go big". This is playing with fire. If it fails then the additional debt will ruin the US economy for decades and possibly pull down the rest of the world with it.

One thing that we should not do is eliminate the mortgage deduction from the income tax. That would just make things worse. If anything the government should be offering tax incentives to make home ownership more desirable.

Something like the Cash For Clunkers could be done with the government buying and demolishing some of the surplus housing. Otherwise, the flood of seized property will continue to depress the real estate market and the economy in general. Or there could be something like the programs that pay farmers for not planting crops. The government could pay people to leave houses vacant.

Until the real estate market is shored up, the economy will not improve.

Friday, August 19, 2011

Obama 2012

Normally the Presidential campaign begins in earnest after the Labor Day preceding the election. President Obama is starting a year early and has already outlined his early campaign.

First, he plans on introducing a jobs bill. This will be a package of proposals which will sound reasonable but probably would not help the economy, even if they were enacted. They will not be because they will be carefully salted with provisions that the Republicans will not pass. Tax increases on the "rich" will almost certainly be part of the package as will an "infrastructure bank". The merits of an infrastructure bank can be debated on their own but it will not help the general economy nor will it provide any immediate relief (there are no shovel-ready jobs).

Obama does not actually intend for this to pass. He wants it to fail so that he can beat up on Republicans for not passing it. Probably the worst thing that could happen to Obama would be having his bill pass since that will lead voters to expect a reduction in unemployment by election day.

The second part of Team Obama's plan is temporarily on hold. They had assumed that Romney would be the nominee and were already planning on painting him as the "weird" candidate. They would never mention his religion outright but it would always be there. They have been using he word for weeks already. Team Obama does not have a plan ready for Perry but rest assured that they will and it will be personal.

The third part is a reversal of Obama's illegal immigrant policy. During his first two and a half years, the Obama administration came down hard on illegal immigrants. Enforcement was much stricter than under Bush. Over one million were deported and the administration made it more difficult for illegals to get a job. Now the Obama is doing an about face on the issue. By executive order, deportations will now be prioritized. Criminals will go first. College students will go last and may never even be deported. Obama has essentially implemented the DREAM Act by executive order.

There may be a repeat of his "listening tour" but don't count on it. Making a campaign trip in a million-dollar bus at taxpayer expense did not give him any boost. Obama would love to recreate the 2008 campaign but he is already running into the problem that a president cannot take off weeks to campaign the way that a senator can.

Thursday, August 18, 2011

Perry and Warming

Governor Perry made a stir yesterday when he made a statement about global warming. Here's what Perry actually said:

I do believe that the issue of global warming has been politicized. I think there are a substantial number of scientists who have manipulated data so that they will have dollars rolling into their projects. I think we're seeing, almost weekly or daily, scientists are coming forward and questioning the original idea that man-made global warming is what is causing the climate to change. Yes, our climate has changed. They've been changing ever since the earth was formed. But I do not buy into a group of scientists who have in some cases [been] found to be manipulating this information. ...
The initial wire story that I saw skipped the first couple of sentences. This changes the statement.

Of course, the left is up in arms. The real question is if Perry's statement is justifiable?

First, has global warming become politicized? All you have to do is look at Perry's supporters and detractors to prove that statement.

So, has the data been manipulated? That is much harder to answer, mainly because a good portion of the data is is the keeping of global warming evangelists. We know that the raw data from ground sensors is altered to account for urban heat island effect but the exact mechanism for this is a closely guarded secret. We also know that the record for pre-1970 readings has been altered downward. Again, the reason for this is a secret. Part of the ClimateGate emails was a discussion on how to refuse freedom of information requests so that this data could be reviewed.

There are three bodies that monitor global temperature. One of them is NASA's Jet Propulsion Laboratory which is run by Dr. James Hansen. Hansen is also a leading voice in the debate and a dedicated believer. He once compared coal cars to the Holocaust. His own record on predictions is rather poor. In 2000 he was asked what the climate in New York City would be like in 2010. He predicted that part of the island would be underwater and that high rise buildings would have covered their windows because of the increase in high-speed wind. Given that nothing remotely like this happened, why would anyone believe further predictions? Hansen has also made large sums in speaking fees. I can give other examples but you get the idea.

So, Perry is on firm ground in making this statement.

Wednesday, August 17, 2011

Texas Trade-offs

Rick Perry is running on the platform that Texas has been out-performing the rest of the country economically. If he is elected president then he will do for the country what he did for Texas. This is a winning platform in a bad economy. Reagan and Clinton used variations of it to unseat incumbent presidents. Dukakis tried to use it in 1988 against George H. W. Bush.

The best defense is to puncture the challenger's claim. Bush did this with Dukakis, portraying the "Massachusetts Miracle" as the "Massachusetts Mirage". Ross Perot tried to do this with Clinton by pointing out that Arkansas was one of the worst states economically. Had Bush taken the same approach he might have stayed in office. Instead, Clinton ran ads pushing "My little state" as an example of economic rebirth.

In the few days since Perry announced, the left has started portraying Texas as a problem child. Harold Meyerson's Washington Post column is typical. Entitled "The sad facts behind Rick Perry's Texas miracle", Meyerson portrays Texas as a third world country that somehow manage to sneak into the US.

Rick Perry's Texas is Ross Perot's Mexico come north. Through a range of enticements we more commonly associate with Third World nations — low wages, no benefits, high rates of poverty, scant taxes, few regulations and generous corporate subsidies — the state has produced its own"giant sucking sound," attracting businesses from other states to a place where workers come cheap. 

[...] What Perry touts in his stump speech, however, isn't the oil boom but, rather, the low-tax, low-reg, handouts-to-business climate that prevails in Texas. It's the kind of spiel that businesses hear every day from leaders of developing nations — Mexico and, even more, China.

[...] Perry's economic vision is the kind of race-to-the-bottom mercantilism we've come to expect from developing nations in the globalized economy, although, as China, Brazil and India illustrate, many such nations have begun to provide citizens with more schooling and better jobs as they grow wealthier. No comparable developments can be seen in Rick Perry's Texas.

He goes on to list all of Texas's shortcomings which mainly consist of insurance (which he restates three different ways as if they were unrelated) and education.

What we have here is really a debate on trade-offs. Would you prefer to have a job that does not include insurance or no job at all? Can our society exist solely on a highly educated workforce (with crushing college debt) or do we still need people with less formal education? At what point do regulations become burdensome (keeping in mind that federal safety standards apply regardless of state regulations)? Is zoning worth higher real estate costs and housing shortages?

Meyerson is arguing that we can have it all. The Texas model says that we cannot and we have to decide what is most important. Meyerson indirectly cedes this point in his closing paragraph:

Perry wants to unravel the national social contract and once again have us go state by state, with the low-wage, low-reg states dragging down the others, much as Chinese mercantilism has dragged down wages and living standards across the United States. He is the 21st-century, homegrown version of the Manchurian candidate.
If the low-wage, low-reg states were so undesirable then they would be losing population instead of growing. Obviously they are offering something that people want.

I'll note in passing Paul Krugman's novel explanation for Texas's relative prosperity. He says that it is entirely caused by its population surge. The new influx of people creates new demand and jobs. This is only true if the new population can find jobs in the first place. If hoards of unemployed entered most states the only thing that would grow would be the welfare rolls. These people are going to Texas for good-paying jobs which let them spend money, creating the demand that Krugman sees.

Tuesday, August 16, 2011

A Bold Jobs Program?

I lost track of how many voices on the left are calling for a jobs program. Most seem to refer to it as a "bold" jobs plan. Apparently "bold" means big or expensive since they also complain that the last stimulus was not big enough. So we are talking about at least $2 trillion in new spending. There is no chance of this going through the current Congress but even if it did, it wouldn't work.

The heart of the problem is that the government cannot create jobs because its only source of income is to take it from other people. If you work for the government you are being paid with other people's money. At best, the government redistributes jobs rather than creating them.

That doesn't stop the left. For some reason, they only see half of equations. They see the government hiring people but they don't see the hardships caused by increased taxes. In fact, they celebrate paying taxes. Remember Biden's statement about taxes being patriotic?

This is the same debate that we keep having about Social Security, Medicare, and Medicaid. They have trust funds but these funds have to be paid from the general fund which is currently borrowing $0.40 out of every dollar spent.

There is also the question of what these jobs would be. "Infrastructure" keeps being tossed around but President Obama already admitted that there is no such thing as a "shovel ready" job. An major investment in infrastructure now would not see any real job creation for years. It might not help unemployment much, either. A big problem in the current economy is the mismatch between job openings and job seekers. An unemployed real estate seller might not take a construction job, even if one was offered. This is especially true when unemployment benefits go for almost two years.

Government can also "create" jobs through regulation. A requirement that every restaurant have an in-house health inspector would create a lot of jobs but it would also put a lot of marginal restaurants out of business. This is a variation of the "broken window fallacy". If someone breaks all of the windows in a village it will create work for the glaziers but repairing the windows would divert money that would have been spent elsewhere, depriving all other parts of the economy.

The most that government can do is to try to get out of the way. It needs to keep regulations and taxes down to the minimum and provide certainty. Currently the EPA is increasing regulations and Obamacare has created uncertainty about the cost of future employees.

In the 1980s, Reagan cut taxes on everyone and slowed the growth of government. The economy soared. In contrast, Obama has temporarily cut taxes on the non-rich while increasing the cost of doing business and openly calling for more taxes. Then he wonders why businesses are hoarding money.


Related mini-post: How Government Gets Its Money

As I said, the government's only source of income is other people. The most direct source is taxation. This is often combined with social policy. That is why half the country pays no income tax while Obama desperately wants to raise taxes on "the rich", AKA "Millionaires and billionaires." Obviously, money paid to the government in taxes cannot be used elsewhere.

The government can borrow money. In theory this will be paid back (with other people's money). In practice, the government pays current amounts due by borrowing more. It also pays interest on the debt. There is a very real danger that the interest on the debt will swallow the rest of the budget within a decade. Any new jobs bills would probably be paid for with borrowed money.

Finally, the government can print money. This still takes other people's money but it does it indirectly. Every dollar that the government adds to the money supply reduces the total value by that much. This shows up as inflation which is currently increasing and declining exchange rates. Even if the government does not take your money, it does not go buy as much as before so your total buying power is reduced.

Monday, August 15, 2011

Presidential Vacations

President Obama is getting some flak about going on vacation to Martha's Vinyard. His press secretary had to defend the trip last week.

...yes, the President does plan to travel with his family at the end of August to Martha's Vineyard as he has in the past. And I don't think Americans out there would begrudge that notion that the President would spend some time with his family. It is also, as I think anyone who has covered in the past, either in this administration or others, there is no such thing as a presidential vacation. The Presidency travels with you. He will be in constant communication and get regular briefings from his national security team as well as his economic team. And he will of course be fully capable, if necessary, of traveling back if that were required.

Time away from the White House does not always reflect well on a president. Two damaging reports undercut the Clinton administration. The first was him collapsing during a race. After that people started talking about how much he had aged in office. The second one was worse. While fishing, a rabbit swam in the general direction of the President's boat so the Secret Service took steps, driving it off with a paddle. The White House refused to release photos of the incident prompting CBS to run a clip from Monty Python and the Holy Grail where the knights attacked a killer rabbit.

Reagan was a master at public relations. He vacationed on his ranch and pictures of him usually showed him riding a horse or clearing brush. The message was that even though Reagan was one of the oldest men ever elected president, he was still healthy.

George H. W. Bush (41) was on vacation when Iraq invaded Kuwait and gas prices soared. He spent the day driving his cigarette boat which burned several gallons of gas per hour. This image was part of the general impression of him as being out of touch with regular people.

The Clintons went to Martha's Vinyard. Like Obama, they were criticized. Clinton's answer was that he was not a rich man with his own estate so he had to stay with friends (in their expensive homes on exclusive islands) for vacation.

George W. Bush (43) learned from both Reagan and his father. He bought a ranch and spent his vacations clearing brush. This also kept the press at arm's length since the closest hotel was a long distance away. The ranch did not protect Bush from war-protester, Cindy Sheehan who set up camp at the other end of the road. This expanded into Camp Casey (named after her son who had been killed in Iraq). This was the real start of the anti-Iraq war movement. (While the Democrats supported Sheehan at the time, they split with her after taking control of Congress but allowing the war to continue. Sheehan later admitted that she had been used by the Democrats.)

Early in his administration Bush was criticized for the amount of time be spent on vacation. Michael Moore even included clips of Bush with the song "Vacation." This was misleading. It turned out that the list of time Bush spent on vacation included weekends, state dinners, time spent at Camp David entertaining visiting heads of state, and time spent on official trips abroad. Remember this when the Press Secretary talks about the American people knowing that the presidency travels with you.

Which brings us back to the Obamas. Last year Michelle was heavily criticized for the number of vacations she took at taxpayer expense. They also spend Christmas in Hawaii. They do not seem to have learned much from previous criticism. Presidents can get a big boost from symbolism. Obama could have announced that it was wrong to go on an expensive trip in a down economy and spent the time at Camp David. It would have given him a needed public relations boost.

Wednesday, August 10, 2011

Tea Party Downgrade?

Standard and Poor (S&P) downgraded the US's credit rating from AAA to AA+. The initial reaction from Democrats was "Who are you to do this? It was your AAA rating of junk bonds that caused the recession." They followed this up by naming it the Tea Party Downgrade. Is this accurate?

While S&P did have some bad things to say about the recent brinkmanship over raising the credit ceiling, they made it clear that their long-term worry is the size of the deficit. They said all along that they wanted to see a reduction of $4 trillion. Instead Congress reduced it by $1 trillion immediately with another $1 trillion to be named later. These cuts will not take place until after the next election.

S&P felt that this was inadequate because 1) Within ten years interest on the national debt will be unmanageable and 2) The real growth in the debt over the next decade will be in entitlements which were considered untouchable in the current negotiations.

The President's reaction to this was to say, "The fact is, we didn't need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction."

Actually, we do need a rating agency to tell us this. The Tea Party was formed over deficit reduction but has not been taken seriously. The President has not proposed any sort of deficit reduction. To the contrary, his proposed budget called for greater deficits and he asked for a "clean" debt ceiling increase (one with no conditions). The only solution he ever proposed was raising taxes on the "rich" and on corporations and even this seems to be motivated by ideology rather than concern over the deficit.

The biggest proof that S&P's rating has little to do with the Tea Party is that they are also threatening to reduce France's rating for the same reason - because it owes too much money.

Trying to Overturn Elections

Wisconsin just had a recall election for six state senators who voted in favor of anti-collective bargaining legislation. The Democrats needed to win three seats to take control of the State Senate. They won two.

Prior to that the legislation was held up for weeks by Democrats who fled the state in order to prevent a quorum.

Here in Ohio, the anti-union SB5 bill is up for referendum.

In both states the bills had major protests prior to being passed. I heard Ohio protestors complaining that the will of the people was being ignored.

None of this is part of a healthy democracy. I am especially disturbed by the movement to recall elected officials.

To be fair, the Republicans are fighting a similar fight against Obamacare. The difference there is that there are real constitutional questions involved.

President Obama was quoted telling the Republicans that elections matter back in 2009. This is a lesson that both sides should accept.

Friday, August 05, 2011

The Left's Favorite Economist (and it's not Paul Krugman)

Would you buy a car designed by Henry Ford? Or fly in a plane that Lindbergh might have flown? Was your doctor trained by someone born in the 19th century? The answer to these is probably 'no'. So why do economists swear by John Meynard Keynes?

After yesterday's stock market crash the left is calling for more stimulus spending. They justify this using Keynesian economics.

Keynes believes that markets were imperfect and that government can improve on them in maximizing employment and minimizing economic downturns. He saw a recession as being caused by people saving too much of their money. His prescription was for the government to take up the slack by spending more, particularly on infrastructure projects.

This is a seductive idea for politicians in general and even more so for the ones who are convinced in the powers of government to do good. It lets them be seen doing something during an economic downturn and, to politicians, being seen working on problems is more important than solving them, even if they are actually making things worse.

While the left uses Keynes as justification, they don't actually believe in him. He not only suggested government spending, he also felt that the government should cut taxes during downturns. Try selling that to today's Progressives.

Keynes saw government as a moderating force. It should spend more during hard times but during the good times, it should slow the economy by cutting back on spending and raising taxes. This would help to balance the spending and tax cuts from the bad times. No one ever followed through on that part so Keynes became an excuse for ever-expanding government.

There were always problems with Keynes. It was long assumed that there was a direct inverse relationship between inflation and unemployment. Raising one causes the other to drop. Government's job was to find the optimal balance point. The stagflation of the 1970s discredited this theory and threw Keynes into disrepute until the Great Recession.

In the meantime, the problems with Keynes's policies have multiplied over the decades. In the 1930s most labor was unskilled or semi-skilled. If there was widespread unemployment in one sector of the economy it was fairly easy for workers to move to another sector. Today's workforce is much more skilled. An unemployed web designer is unlikely to take a job running a bulldozer. Moreover, with up to two years unemployment benefits, office workers do not have an incentive to take a construction job. This means that infrastructure jobs will not help the economy as a whole.

Then there is the lag in starting infrastructure work. President Obama already found out that there are no "shovel ready" jobs. He's even joked about it. In the 1930s, if the government wanted a bridge, it bought the land, hired an engineer, and started work. These days, before work can start the government has to do a traffic study and an environmental impact study. There may be legal challenges to eminent domain. The contracts for designing and building the bridge have to be bid out. All of this adds years to a project and makes immediate economic relief impossible.

There is also the problem that the government does not actually create jobs because it does not have any income of its own. What it spends comes from others as taxes and loans. Taxes take money from one part of the economy and put it into another. Economists sometimes claim that there is a multiplier effect where the money the government spends generates additional economic activity, offsetting the taxes. This is controversial and almost impossible to prove one way or the other. This can be offset somewhat by financing the projects with bonds as long as the deficit is eventually addressed and as long as the downturn does not go on too long. This is where we are now. We have spent three years trying to offset a downturn with high deficits and our debt is rapidly getting out of control.

Which is where we are now - two years into a flat recovery with our quiver of Keynesian tools exhausted.

The modern Keynesians have an answer for this, of course - more of the same. Much more. Keynes didn't fail, it was the scope of the stimulus that failed. We need to spend trillions more in order to get the economy to take off. It doesn't matter if we can afford it. It has to be done.

But what if we continue to spend and nothing happens? That's what happened in the Great Depression (Yes, I know that FDR tried to cut the deficit in 1937 and brought on a new downturn. He also raised taxes and implemented Social Security early.) The sad truth is that the Keynesian's first instinct will probably make things worse.

Wednesday, August 03, 2011

The New Incivility

After the Giffords shooting the left rushed to blame the right's "hate speech" for inspiring it. At the same time then sprained their collective arms patting themselves on the back for their own tolerance. Of course it was all a crock. Just a few weeks before the shooting President Obama set the tone by calling Congressional Republicans "hostage-takers". Now that they lost the debt ceiling show-down, the left, starting with Vice President Biden, has taken to calling the Tea Party "terrorists". Do these guys even listen to themselves? But, why are they so angry? Why are they using such hostile terms? There are three factors.

Many of them are simply venting. They are angry. Not only did their man, Obama, fold again, but this was supposed to be a big win for them. The plan was to force the Republicans to pass some sort of tax increase, even a symbolic one. That would open a split between the moderate Republicans and the Tea Party that the Democrats could exploit. It was a promising tactic but it failed and they are frustrated because it did.

The next factor is how to explain their failure to their base. The left is using the excuse, "We couldn't help it, the other side is crazy."

The final factor is the set-up for the next battle. All along the left has insisted that the Tea Party is a fringe element and that the Democrats represent the mainstream. This is the classic "big lie". It doesn't matter if it is true or not. The idea is to keep repeating it until the general populous believes it. Many Democrats already believe it. The Tea Party has always been incomprehensible to people who see big government as the solution to all problems.

Put it all together and we get an incredible wave of vindictiveness.

Tuesday, August 02, 2011

The Debt Deal

The debt deal is a moderate change. It reduces the projected ten-year deficit from $10 trillion to $7.5 trillion with most of the cuts starting more than two years from now. It is mainly notable because Congress normally raises the debt ceiling without condition. The deal does not change the long-term deficit from unsustainable to sustainable, it does not fix the long-term problems with Social Security, Medicare, or Medicaid. It does not even cut spending noticeably before the next election. It was a triumph for the Tea Party mainly because it included some sort of cuts without an accompanying tax increase. Assuming that Congress follows through on its promises, it will slow the growth of government slightly over the next decade.

You would never know this after listening to the left. Democratic senators and Vice President Biden are alleged to have referred to their opponents as terrorists. Rep. Steve Cohen didn't mince words, he called it "evil". Paul Krugman compares the deal with a banana republic. His fellow NYT columnist, Joe Nocera, followed the Democrats' example and used "terrorists".

The main message from the fight is that the Tea Party has the momentum and discipline that the left was hoping Obama's election would provide the left. After the bruising and fruitless fight over health care, they have no more big issues. In his State of the Union address, President Obama listed liberal accomplishments and called for more of the same.

While many on the left mourn the days of great liberal advances and want to bring them back again, they have to face a truth. They have already won most of their battles and we are now struggling to pay the bills that they ran up. The fight to make the US more like  Europe looks a lot worse when you look at the state that Europe is currently in.

The real reason for the anguish from the left is that they see this as the first of many declines. The days of Hope and Change passed.