Category Archives: Economics

Miscellaneous economy stuff

When Greed Meets Tinker Bell

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State pension funds are another time bomb of malaise (to the tune of a $1.4 trillion shortfall) waiting to explode, and Rhode Island provides an example of the difficulty we each, in our own state, face in defusing it.

Rhode Island passed a massive overhaul (as such things go; they have a long way, yet, before they’ve completely cured their problem) of their state retirement system last year, including such unheard-ofs as raising the retirement age, suspending pension increases for several years, and generating a hybrid retirement plan that combines traditional pensions with 401(k)-like accounts.  Rhode Island’s General Treasurer, Gina Raimondo, says that this reform will save Rhode Islanders $4 billion over the next 20 years (compared to a 2013 budget that proposes spending $8 billion in that year alone, small potatoes, indeed, but a critical start).  This minor reform also seeks to redress astonishing conditions that include 58 percent of retired teachers and 48 percent of state retirees receiving more in their pensions than in their final years of work.

But it’s too much change for some.  The public “service” unions (service: you service me) object: it’s somehow wrong for their members to be responsible for their own retirement funding.  Even a little bit.  Instead, these public “service” unions protest that it’s all unfair.  Rhode Island is reneging on promises to workers, they say.  Bob Walsh, Executive Director of the National Education Association of Rhode Island, goes so far as to insist

What they did was illegal.  We’re deep into a real assault on labor.  It worries me that people who purport themselves as Democrats do this.

Never mind that there’s nothing at all illegal about these changes.  It’s a well-established principle in American jurisprudence that when the conditions extant when a contract was agreed (stipulating arguendo that the agreement was made in good faith by all parties) no longer exist, or have so radically changed that the terms can no longer be met, the contract can be abrogated and either a new one negotiated or the parties involved go their separate ways.  In extreme cases, this is what bankruptcy achieves; although, when the conditions have changed as radically as these have, bankruptcy isn’t necessary.

Never mind, also, these are promises that couldn’t be kept in any event, and both the state government and the public “service” unions at the time knew they could not be kept.  Or they blindly believed real hard in government’s ability to keep collecting funds from…somewhere.  Tinker Bell is alive and well in Public Service Land.

Never mind, finally, that this public “service” union greed at the expense of taxpayers makes “labor” a valid target.

One tear-jerker that the unions are trotting out is this:

North Providence retiree Jamie Reilly left her job as a secretary at age 50 [remember that raising of the retirement age?], thinking her 30 years of state employment would mean good benefits during her later years.  But now she said she may be forced to re-enter the workforce at age 55 because the state has put off pension increases.

“I counted on that money,” Reilly said….  “You work all your life and you plan, and they take it away from you.”

Worked all her life?  She worked 30 years and wanted to be retired for 40.  Workers in the private sector don’t get it that easy; they work until they’re in their mid-60s—a working life 50% longer.

And this one:

Cranston firefighter Dean Brockway said higher retirement ages mean he will have to work several years longer than he expected, and he wonders how he’ll climb stairs in heavy gear in his 60s.

“Could I do something else? I don’t know,” he said. “A lot of us chose to dedicate our lives to public service because to us it’s an honor.  Could I be a carpenter?  I don’t think so. This is what I do.”

Brockway has a legitimate concern, but it’s no different from the concerns of a private sector employee whose work is primarily physical labor.  But if he’s not going to look for alternatives, if he’s not going to try to retrain into something less physically demanding (certainly no stroll in the park for a middle-aged or older person, but assuredly not impossible), he loses sympathy for his plight, which begins to be self-imposed.  Certainly, there’s no more obligation for Rhode Island’s citizens to indemnify him against the outcomes of his choices than there is for them to indemnify similarly situated private sector employees.

Raimondo understands this in all its practicalities—how affordable are the existing programs:

These problems won’t go away.  The longer you wait, the bigger the problems get.  People looking for easy, short-term solutions. … Well, there are none.

Raimondo doesn’t believe in Tinker Bell.

Some Thoughts on the Fed’s Latest Guess at Monetary Policy

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The good folks at Sober Look have a good post on this.  Basically, the Fed’s latest scheme is to buy $40 billion of mortgage debt from lenders every month until the labor market improves.  That’s nearly a trillion dollars every two years.  And its purpose is to hold down mortgage interest rates in particular, rather than interest rates in general, which have already been artificially lowered to near zero (to negative values in some cases in real, inflation-adjusted terms) for several years.

Those nearly non-existent interest rates generally, though, are associated with 43 months of unemployment above 8% (notwithstanding last week’s Labor Department claim of 7.8% unemployment).  Here’s what Sober Look thinks of this latest…idea…from the Fed.  Follow the links, too.

  1. It is not clear what impact asset purchases will have on consumer confidence.
  2. We’ve had extraordinarily low interest rates for quite some time now, yet improvements in job growth have been limited.
  3. Lowering mortgage rates from 3.5% to 3% is not going to have a significant impact on home affordability or materially reduce consumers’ interest expense (see this discussion).
  4. Raising bank excess reserves is not going to accelerate credit expansion.
  5. Fed’s unemployment targets are unrealistic – it’s going to be an exercise in “squeezing blood from a stone” (see discussion).
  6. US real median household income has basically been unchanged since 1994. The Fed’ program is unlikely to improve this metric and could actually impair incomes further by elevating inflation levels.
  7. The market “euphoria” effect is fleeting.

What will restore employment is less government interference—by the Fed and the Congress and the Executive—in our economy so that free market forces can start an actual recovery.  Which will lead to increased hiring; leading to more savings (in absolute terms, if not relatively), which are funds that can be loaned to support home purchases or business expansion (each of which is jobs) and to more spending, which supports business expansion (which is jobs); leading to increased hiring; leading to….

Blasts from the Past

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This is what FDR’s Treasury Secretary Henry Morgenthau wrote in his diary in the depths of the Great Depression after years of explosive spending, rapidly increasing debt, enormously high unemployment, rising taxes and tax rates, and drastic intrusion of government controls into our economy:

We have tried spending money.  We are spending more than we have ever spent before and it does not work.  I want to see this country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot.

Although slow to (re)learn the lesson, Morgenthau wasn’t the first to articulate the failure of government spending to accomplish much of anything good.  Ludwig von Mises had some remarks on the matter, too.

When the government spends more, the public spends less.  Public works are not accomplished by the miraculous power of a magic wand.  They are paid for by funds taken away from the citizens.

And

It is obviously futile to attempt to eliminate unemployment by embarking upon a program of public works that would otherwise not have been undertaken.  The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found.  Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another.

And

Government spending cannot create additional jobs.  If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other.

And

A policy of deficit spending saps the very foundation of all interpersonal relations and contracts.  It frustrates all kinds of savings, social security benefits and pensions.

Now contrast that with what the present administration has done, and the wonderful effects that explosive spending, rapidly increasing debt, enormously high unemployment, the constant threat of rising taxes and tax rates, and drastic intrusion of government controls into our economy have had on our economy and on jobs for Americans.

Unemployment Numbers and Jobs

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In the aftermath of last week’s reported headline number of 7.8% unemployment, Democratic Presidential Candidate Barack Obama was out on the hustings bragging about how his policies had created some 5,000,000 jobs since the end of the Panic in 2009.  Like that’s a good performance.

Let’s look at that.  He promised in 2009 a 5.5% unemployment rate by now.  How many new jobs would have been created had we actually reached his promised number?  In December 2009 (some six months after the nominal end of the Panic of 2009), the civilian labor force was 153,059,000, of which 137,792,000 Americans were employed, a 10% unemployment rate, according to BLS statistics, and using round numbers.

In September 2012, again using BLS numbers, the civilian labor force was larger, at 155,063,000 (and it had a smaller participation rate than in 2009, but we’ll gloss over that).  There were some 142,974,000 Americans actually employed—that increase of 5,000,000 of which Obama is so proud.

However, a 5.5% unemployment rate corresponds, if my 1st grade arithmetic serves me well, to 94.5% of the civilian labor force actually employed: 146,535,000 Americans.  Again consulting my 1st grade arithmetic book, there are some 3,561,000 Americans that should be employed but aren’t—because Obama’s proudly proclaimed policies have come up short, and we aren’t anywhere near 5.5% unemployment.

Let’s look at this another way.  It’s been widely reported that this “recovery” is the weakest, most anemic post-recession recovery in our nation’s history.  Those reports aren’t far wrong.  A normal recovery coming out of a downturn as deep and steep as was the Panic of 2009 typically sees growth rates of 5%-6% per year, or more.  This Obama recovery has been 6.7% over the entirety of his term in office—nearly four years.  Had we seen a normal recovery (and using a pessimistic 5%/year growth rate), we would have reached today’s unemployment rate after a shade over one year—in 2010—and we would have been back to full employment (in the range of 4.8%-5.5%) in just under 2 years—by last year.

Obama says his policies are working.  Sure.

A Tax for a Health Fiscal Cliff

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It joins Democratic Presidential Candidate Barack Obama’s enormous tax hike he has taking place at the start of the new year, and it also creates a health cliff for the nearby future as it actively stifles medical innovation in the US.  “It” is the 2.3% tax that will be charged to American medical device manufacturers—on top line revenue—sales—not on profit.  Former Governor and US Senator from Indiana, Evan Bayh (D, IN), offered some thoughts on this problem in a recent Wall Street Journal op-ed.

As a result of this problem,

For a typical company, a 2.3% tax on revenues equals a 15% tax on profits.  When combined with a 35% corporate tax and state corporate taxes, the tax rate for the medical-device industry will exceed 50% in most jurisdictions.

[This inflicts an] added cost of $30 billion—according to the Congressional Budget Office—to the industry.  This tax comes straight out of a company’s bottom line.  Because many devices are sold to hospitals, physicians and other providers through multiyear contracts, the prices are already locked in, so the tax cannot be passed on to the buyer.

Think about the effects this will have on medical innovation.  Governor Bayh did:

America is a global leader in medical-device production and sales.  Last year the US device industry earned $5.4 billion more in exports than we spent on imports of such devices.

Even more important to the average American is the industry’s role in saving and sustaining life.  Medical devices have contributed to remarkable advances in numerous areas: artificial hips and knees, and devices used in the treatment of cancer, and for angioplasty, vascular surgery and in-vitro fertilization, to name a few.  Many of these devices have not only improved the quality of life for patients, but also produced health-care cost savings—for instance, each time an angioplastic balloon made open-heart surgery unnecessary.

and

Especially hard hit could be the hundreds of small companies developing medical software applications. These apps promise to revolutionize the practice of medicine—for instance, by delivering blood-sugar test results for diabetics.

But now

Thirty billion dollars must be taken out of operations or R&D.  Who knows what lifesaving devices that might have been developed will fall victim to this tax?

What about jobs?

Many US device companies, in response, have already announced layoffs, canceled plans for domestic expansion and slashed research-and-development budgets.  This month, Welch Allyn—a maker of stethoscopes and blood-pressure cuffs—announced that it will lay off 10% of its global workforce over the next three years, but all of the jobs being cut are in the US[]

and

In my state of Indiana alone, Cook Medical has canceled plans to build one new US facility annually in each of the next several years, and Zimmer plans to lay off 450 workers, while Hill-Rom expects to lay off 200.  Stryker, based in Michigan, anticipates having to lay off 1,000 workers[]

and

[P]roduction is moving overseas, good jobs are going to Europe and Asia, and cutting-edge medical devices will now be produced elsewhere for import into the US.

Of course Obama and his Progressive Congressmen knew this when they wrote the tax; it’s part of why the entire bill was written behind closed doors in the back of Harry Reid’s office suite, and why Nancy Pelosi was so anxious to get the bill passed before “we can find out what is in it.”  So much for Obama’s concern for the little guy.  So much for Obama’s concern for the health of Americans.  So much for Obama’s concern for America’s innovation leadership.

Update: added the actual name of the man in the first paragraph.