Category Archives: Economics

Miscellaneous economy stuff

Artificially Low Interest Rates

Posted on by
1

When the financial markets aren’t allowed to influence interest rates in accordance with market forces, there are wide-ranging consequences.  Here‘s one.

Ford Motor Co expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.

The nation’s second-largest auto maker is one of a who’s who of US companies pouring cash into pension plans now being battered by record low interest rates.  Verizon Communications Inc contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies’ sensitivity to this issue—Boeing Co now reports “core earnings” to separate out pension expenses.

Leaving aside the wisdom of defined benefit plans like pensions vs defined contribution plans like 401(k)s, and even assuming that interest rate assumptions underlying pension contributions in normal times are reasonable, this is money that would be better spent on capital plant, product development (both existing and new), hiring more workers, and so on.

Sort of like Ford did last year, but cannot use for this year’s priorities.

We’re Capable of So Much More

Posted on by
Reply

In a related article, I described how even Progressive Europe recognizes the retreat of the US from the global stage and from our responsibilities as a major power.  Yet we have the economic and resource capacity to do so much better, as Spiegel International Online notices.  Fracking provides an example of both our capacity and of our willful impotence.

The United States is sitting on massive natural gas and oil reserves that have the potential to shift the geopolitical balance in its favor.  Worries are increasing in Russia and the Arab states of waning influence and falling market prices.

And

American drilling experts began using a method called “fracking,” with which oil and gas molecules can be extracted from dense shale rock formations.  The International Energy Agency (IEA) estimates that the United States will replace Russia as the world’s largest producer of natural gas in only two years.  The Americans could also become the world’s top petroleum producers by 2017.

And

…the boom could generate 600,000 new jobs, and some experts even believe that up to 3 million new jobs could be created in the coming years.

And

…the United States will benefit the most from the development of shale gas and oil resources.  …the political threat potential of oil producers like Iran will decline. Optimists assume that, in about 15 years, the United States will no longer have to send any aircraft carriers to the Persian Gulf to guarantee that oil tankers can pass unhindered through the Strait of Hormuz….

However.  There’s always a however.

President Barack Obama’s EPA continues to manufacture “investigations” of ground water pollution from fracking where none exists—their Wyoming fiasco, for instance.  His EPA continues its war on oil, gas, and coal by instituting output regulations that Congress already had rejected.

Obama continues to slow-walk oil and gas drilling permits on Federal lands and at offshore sites.  He has moved to cancel unused oil leases, never caring that the lessees had been reluctant to act on their leases due to uncertainty over Obama’s handling of hydrocarbons generally.

Obama even is slow-walking approval (and that approval is not a foregone conclusion, even now) of the Keystone XL Pipeline project, now that all environmental objections have been cleared with Nebraska’s approval of an alternate route.  This pipeline doesn’t directly address the resource explosion that fracking provides, but it remains symptomatic of his administration’s disdain for practical energy self-sufficiency.

It’s very unclear whether we will be allowed to realize the fruits of this technology and to bring into use these vast energy resources.

A Blow for Responsibility

Posted on by
Reply

The Wall Street Journal described one.

The court of the European Free Trade Association on Monday said Iceland didn’t breach European Economic Area directives on deposit guarantees by not compensating UK and Dutch depositors in Landsbanki’s online savings accounts, known as Icesave accounts.

The beef was this:

The EFTA Surveillance Authority, or ESA, which brought the case against Iceland, had claimed that Iceland should have made sure UK and Dutch savers who lost money on Icesave got repaid from deposit insurance.

UK and Dutch authorities compensated their own savers.

The EFTA ruled that EEA directives don’t

lay down an obligation on the State and its authorities to ensure compensation if a deposit guarantee scheme is unable to cope with its obligations in the event of a systemic crisis[.]

And that’s entirely appropriate.  A nation’s taxpayers should not be held liable for the failure of foreigners’ investment decisions, whether those failures stem from poor judgment, bad luck, or anything else.  A nation’s taxpayers should not be held liable for the failure of its own citizens’ investment decisions, come to that.

Investing is a risk, and it’s the degree of that risk that prices the return on the investment.  To destroy that pricing mechanism is both immoral and fiscally unsound.

Charles Duxbury and Charles Forelle do put up an interesting question in their article at the link above.

If deposit-guarantee programs don’t protect everyone, are they really effective?  That issue was raised by the European Commission, the EU’s executive arm, which joined the case against Iceland.  European deposit-guarantee programs, if they have any funds at all, hold a tiny fraction of the insured deposits in the system.

The interest, though, is in the lack of understanding of the nature of insurance and of the distinction between insurance and welfare that the existence of the question exposes.  Insurance is a risk-transfer for a fee proposition, and nothing else.  The insurer agrees to assume a part of the risk surrounding an event (a decision to place funds with an external agency, in this case), and in return for that assumption, the insured pays the insurer a fee commensurate with the risk being assumed: how much of the value is to be repaid in the event of a loss and the likelihood of that loss.  Of course, the fee to be paid varies with that risk.  Want more protection—want to be made completely whole in the event of a loss?  Pay a higher fee.

Welfare is the function of dinging taxpayers to make whole an individual who suffered a loss, regardless of the amount placed with an external agency (in this case) and regardless of the likelihood of any such loss.  Welfare in this sort of case is nothing more than a “I hurt, and you have money—pay me” government-enforced demand.

Some Remarks on Budget Negotiations

Posted on by
Reply

Can the Progressives in this Congress and White House really be this…lacking in understanding?

The White House had suggested GOP willingness to let sweeping defense cuts take effect was the culprit [for the fourth quarter economic contraction just reported].

However, House Speaker John Boehner (R, OH) spokesman Brendan Buck had this:

These arbitrary, automatic cuts were a creation and demand of the White House in 2011.  Twice the House has passed legislation to replace them with common sense cuts and reforms.  If there was any uncertainty late last year about the sequester, it was because the Democratic-controlled Senate, per usual, never lifted a finger to pass a plan to replace it.

House Minority Leader Nancy Pelosi (D, CA) chimed in:

…today’s disappointing GDP report [of fourth quarter 2012 contraction] is a direct result of the economic uncertainty created by House Republicans’ strategy of obstruction and manufactured crises.

An exploding deficit, a destructive debt, stagnant and too-high unemployment, and a failed recovery from the Panic of 2008 aren’t crises at all—these are normal.  Congressman Sam Graves (R, MO), Chairman of the House Small Business Committee, noted

Is this stunt in economic growth really a surprise?  Anti-growth policies and an anti-business White House produce just that—a lack of growth[.]

Congressman Kevin Brady (R, TX), incoming Chairman of the Joint Economic Committee added

The bottom line is that America’s economy continues to struggle primarily due to President Obama’s penchant for political brinkmanship and the pervasive uncertainty caused by his focus on higher taxes, regulation and ObamaCare.

Unfortunately, yes.  And that’s to the severe detriment of our country.

Taxes and Spending

Posted on by
Reply

…and how badly they’re misunderstood.  Texas Governor Rick Perry (R)

has for weeks called on the Legislature to cut taxes and continue to hold down government spending—even though Texas’ economy is booming.

The AP hasn’t a clue.  That should be “because,” not “even though” Texas’ economy is booming.  The anonymous reporter apparently thinks government owns our money, and when we have more, it should relieve us of it and spend it themselves….