Monthly Archives: August 2012

Government Market Intervention European Style

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From The Wall Street Journal we learn that that the European Central Bank wants to “manage” the interest rates on member nations’ sovereign debt instruments, and it wants to do so by entering the market for government bonds—announcing its buys and sells in a manner intended to “influence” the market’s interest rates imposed on those governments’ borrowings.  The WSJ quotes the ubiquitous “person familiar with the matter” as saying

ECB would guide investors toward a target, or range, for government bond yields of Spain and others by publicly communicating specifics about the amount of the bond purchases it conducts, as well as the details on the types of bonds it buys. For instance, if the central bank says it bought €1 billion ($1.26 billion) worth of shorter-dated Spanish bonds, it could move investors toward the yields it deems appropriate by raising or lowering purchases in subsequent weeks.

But the real thinking was revealed by the ECB’s President, Mario Draghi.  “Exceptionally high” risks are embedded in many government bonds markets, the WSJ cites him as saying, and to the extent to which these “risk premia” include a euro breakup scenario, they are “unacceptable.”  Thus, the market should sit down, shut up, and do what its betters tell them to do.  Investors’ pricings on exploding debt will not be tolerated.  Their duty is to simply keep lending at rates their Betters dictate.

Never mind that, as the Bundesbank’s Jens Weidmann puts it,

In democracies, Parliaments, not central banks, should decide about such comprehensive sharing of risks[.]

He’s not one of the Know Betters, so he’s just whispering in the wind.

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Then we have this from Spain, in particular.  The government says it expects the Spanish economy to contract 1.7% this year, despite growing exports (from the declining euro more than any real productivity-related effects), and it will contract next year by an additional 0.5%.  Yet that same Spanish government fully intends to impose “billions of euros” in tax increases over these next two years (along with allegedly large spending cuts).  You read that right.  In a contracting economy, the government fully intends to take a ton of money out of the private sector: it intends to defund the very part of the economy that is the engine of economic prosperity—and here, of economic recovery.

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And then there’s this.  The Obamacare Independent Payment Advisory Board, consisting of “15 philosopher kings,” is starting to be set up, although we don’t get to know who these kadi are until after the election this fall.  This Board will have the power to dictate prices to all participants in the health care industry: hospitals, doctors, insurers, patients alike.  No market forces at all here.  And yes, there will be plenty of patients: customer participation is mandatory.  Of course there’ll be fewer and fewer providers as these are driven out of business by the Board’s price controls; this will turn the Board into a Death Panel.  A third example of government market intervention European style.

Extremes

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Democratic Presidential Candidate Barack Obama gave an interview to the AP in which he described Republican Presidential Candidate Mitt Romney’s positions as “extreme.”  Yet both Obama’s descriptions and his countervailing positions demonstrate pretty conclusively which of the two is extreme.

Obama had this non sequitur in his remarks about what he has “learned about [Romney] this campaign:

What we’ve also seen is Gov. Romney has not been willing to, I think, own up to some of the responsibilities that are required if you’re president of the United States. So there’s been obviously a lot of discussion about his unwillingness to release his tax returns.

Apparently honoring the law (here, concerning the required releasability of personal tax returns) is “not willing to own up to some of the responsibilities that are required if you’re president of the United States.”  But ignoring the law (vis., DOMA) is such a responsibility.  Ignoring the will of the Congress and implementing carbon cap-and-trade by Executive fiat is such a responsibility.  Ignoring the will of the Congress (the failed DREAM ACT) and implementing immigration parameters by Executive fiat is such a responsibility.  Refusing to enforce our borders while attacking states that do attempt to enforce them, using laws that ape Federal law, is such a responsibility.

Obama made this argument about Romney being short on facts in his campaign.

[T]he most prominent argument that he’s been making for why voters should vote for him is this notion that Obama took the work requirement out of welfare, and he’ll put it back.

Never mind that the explicit requirement for actual work has been withdrawn, and the states’ “flexibility” includes the option to not require work or work training.

And without a trace of irony, Obama had this to say:

Well, I think that if you don’t have a good argument for how you’re going to make things better, then you stay focused on how you can discredit the incumbent.

After accusing Romney of being responsible for the cancer death of a woman (he did say in a separate interview that he didn’t really believe that, but in that same interview, he refused to repudiate the ad that made the accusation, or to call out the SuperPAC (run by his ex-Deputy Press Secretary) for having run it).  And after accusing Romney of being a felon over Romney’s position at Bain while rescuing the Olympics—stemming from Obama’s own “misunderstanding” of SEC filings.

On those extreme positions themselves, Obama had this:

[Romney] has signed up for positions, extreme positions that are very consistent with positions that a number of House Republicans have taken.

Obama then listed the Republicans’ $5 trillion tax cut proposal, the elimination of tax credits for wind energy, and an amorphous objection to the Republicans’ Medicare proposals as those “extreme” positions.

If I understand Obama aright, then, it’s extreme to cut taxes, especially in a recession: it’s extreme to leave more of private citizens’ money in the hands of the original private citizens instead of those of whom Obama favors.

It’s extreme, in a time of enormous government spending and debt buildup, to cut spending—especially to fringe energy sources like wind power.  Obama proudly pointed out that he’s doubled the output of wind-generated electricity with his tax credits.  Let’s see: total electricity generated in the US in 2008 was nearly 3.5 Terawatts.  Wind-generated electricity in 2011 was nearly 47 Megawatts.  Obama has pushed wind energy from nearly nothing to twice nearly nothing.  And that doubling came, as he so proudly said, only with the aid of government subsidy.  Wind-generated electricity is fringe not because it’s an idiotic idea, but because it cannot compete in the free market on its own; it needs a constant propping up.

Finally, it’s extreme to take steps to reform Medicare so as to preserve it for tomorrow’s seniors, while leaving it alone for today’s seniors and near-seniors (who have no chance of adjusting to any changes).

But what are Obama’s plans?  He’s carefully nebulous about those, but we can look to his record and see his plans.

Obama intends to ratchet up the taxes on Americans of whom he disapproves.  He intends to ratchet up his spendinginvesting in his favored companies and in his favored unions.  He already has taken the (not at all extreme, he says) measure of removing $700 billion from the present form of Medicare in putting it into his Obamacare to pay for that.

Who’s extreme?

Government Spending

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Much of this originated as a comment to a Gay Patriot post.  I strongly recommend the post and then the accumulating commentary.

It’s important to note at the outset that government has no money of its own.  It only can act as intermediary in the (forced) process of transferring money from one group of private citizens to another.

Now a few remarks on government spending.  First, much of the money taken from private individuals and/or their businesses (which are just agencies of private individuals) to pay for government spending is lost to friction, including outright waste (I won’t get into losses to graft.  Could the graft be identified, it’d be rooted out.  Right?).  The waste includes money spent on government middlemen, money spent on government contractors hired to oversee the transfers and transferees, time and money spent schmoozing with lobbyists (both the good ones who are only identifying constituent needs—Congressmen generally fit this bill, for instance—and the bad ones, who are sure to take a taste of their own as the money flows, or to provide some vig in return for future consideration), and so on.

Second, money taken from private individuals to pay for government spending—whether through current taxes, current borrowing (future taxes), or printing money (future inflation)—is money that is not spent in the private sector, or husbanded against future spending in the private sector.  Thus, the multiplier effect of government spending, such as it is, is cancelled, if not exceeded, by the known, and fairly large, multiplier effect of private spending that is lost.  In many sequences of private spending, for instance, that multiplier effect runs out to 1.7x.  The best Keynesian estimate for the government spending multiplier is 1.5x.

Third, those husbanded funds generally are deposited in financial institutions as savings, and these deposits then are loaned to borrowers: these deposits are the primary source of loanable funds.  Taxes, then, reduce the amount of private money available for saving and so reduce the amount of lending that can occur.  This effect isn’t enough to cause a credit crunch like the one coming out of the Panic of 2008, but it hasn’t helped.  Further, that future inflation from printing to support excessive public borrowing devalues the funds that are saved.

There’s more.  As government debt grows, more private funds become husbanded, not against future spending goals in the private sector, but against those future taxes.  And even more borrowing is encouraged by that inflation (in the period before the recession that is the inevitable result of that high inflation)—in both the private and government sectors—since the repayment will be with inflation-devalued dollars.  Then that inevitable recession hits, and payback becomes, as they say, a bitch.

In sum, government spending isn’t zero-sum, it’s negative sum.

Update: clarified the second point.

Household Income

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How are we doing in the post-recession “recovery” under the Progressive policies of the Democratic Presidential Candidate Barack Obama?  One indication comes from Sentier Research and a report produced by their Gordon Green and John Coder, Changes in Household Income During the Economic Recovery: June 2009 to June 2012. (normally, I provide links to the documents from which I quote, but the folks at Sentier charge for their reports; I’ll not defeat their purpose. The report can be found at their site, here.)

The following graph from the report shows the policies’ impact on incomes of various household types in the period since 2009.  It hasn’t been good for anyone.  Green and Coder normalized household incomes, setting per cent changes to 0.0% as of January 2000 (as in the graph) and to a Household Income Index with the income levels of January 2000 being 100.0.

Moreover, they noted that household income has remained poor and relatively static after the recession “ended.”  Having fallen from a start-of-recession HII peak of a shade over 100 to 96 at the “end,” household incomes continued to fall over the following year to roughly 92 and have remained static there for the last two years.  In other words, at the official end of the recession, incomes were roughly 96% of their pre-recession levels, and since 2010 have remained static at a lower 92% of pre-recession.

The authors pointed out a number of factors related to the drop in HII, including this one:

Another important factor contributing to the steep decline of the HII is the sharp increase in the median duration of unemployment not only during the recession but also during the economic recovery, and its tendency to remain at a very high level.  During the recession, from December 2007 to June 2009, the median duration of unemployment increased from 8.4 weeks to 17.4 weeks.  During the economic recovery, the median duration of unemployment increased from 17.4 weeks in June 2009 to 25.5 weeks in June 2010, and then fell to 19.8 weeks in June 2012.

Notice that unemployment duration after the recession “ended” remains above the in-recession rate.

Meanwhile, over 20 House-passed jobs related bills have continued to languish in the Democrat-controlled Senate in the period since 2010, when unemployment remains above in-recession levels and household income remains depressed compared even to its in- and immediately post-recession levels.

A Thought on Our Economy These Last Few Years

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Both the Pew Research Center and the Congressional Budget Office have published reports in the last week that talk about the condition of our economy and the fiscal cliff that awaits us in a few short months.  Others have commented extensively on the reports themselves; I want to talk about some of the information that lies between the reports’ lines.

The Pew report focuses on the plight of the middle class, referring to “The Lost Decade of the Middle Class ” in its own headline.  The report points out, among other things, that middle class annual income has shrunk from $73k in 2001 (and 2008) to $69.5k in 2010, their most recent data.  Pew notes, also, that median middle class household net worth has fallen from $153k in 2008 to $93k in 2010.

The CBO report, on the other hand, has the following to say: if the Obama tax increases and the sequester spending cuts are allowed to go through at the start of 2013, the deficit will be cut roughly in half as a per cent of GDP, but at a cost of economic contraction of 0.5% on the year.  On the other hand, if the tax increases and spending cuts are put off for another year, the deficit will remain a damaging 6.5% of GDP, unemployment still will be at 8%, and the economy will grow an anemic 1.7%.  This is the fiscal conundrum the present administration’s Keynesian policies have created.

Plainly, the administration’s policies have been an utter failure; they have not produced economic recovery.  Indeed, the middle class, whom Progressives pretend to favor so much, have been devastated by those policies.  Still, Democratic Presidential Candidate Barack Obama wants four more years in which to do more of the same—or more so, since he’d have “more flexibility” after re-election, when he’d be beholden to no one.

After all, Obama says

The private sector is doing fine.

Hmm….