Category Archives: markets

Republicans and Talking to Folks

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Neil King and Victoria McGrane have some thoughts.  They cite various conservatives, for instance:

[A]ctivists—including tea-party activists but also some mainline Republicans—say the party should adopt a more populist tone, one that places more emphasis on ways Republican policies would help the middle class.

And

The critique from these Republicans suggests that the party should change some policies—such as adopting a more skeptical posture toward big banks—as well as the way it talks about economic issues.

And

Mr. Romney’s lopsided loss among the country’s expanding universe of minority voters has fanned fears within the party that its main challenge is demographic, though others dismiss that worry as secondary.

But these are short-sighted and outright wrong.  The “others” are right; the problem is Republicans’ and conservatives’ general failure to talk to all Americans, regardless of ethnicity.  Republicans and conservative need to get out and talk to people in the neighborhoods in which they live—all of those neighborhoods—as I pointed out here and here.

Ex-Mississippi Governor and erstwhile GOP Chairman Haley Barbour has the right of it.  He understands that conservative policies aren’t the problem.

We do very well when our policies for economic growth and job creation are put in place.  But we often don’t talk about those policies in ways that the middle class and working class see as in their interest.

And they don’t talk at all about those policies where Americans physically live.

The other critiquers, though (the ones who are concerned with the content of the message as well as where it’s delivered), also have a point—apart from attempts to change those policies.

The Republicans’ approach to dealing with the nation’s largest financial firms illustrates the tension.  GOP leaders oppose the Dodd-Frank financial-overhaul law as regulatory overreach and want it scrapped, partly because they say it codifies certain institutions as being too big to fail.  But so far, they haven’t rallied around an alternative means to reining in the big banks.

Or establishing the need for government to “rein in” the big banks.  Which points up another aspect of message content.  In addition to their failure clearly to articulate what they would do differently vis-à-vis Dodd-Frank, their mantra concerning Obamacare is woefully inadequate:  “Repeal and replace.”  Replace with what?

An Empirical Demonstration

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Investor’s Business Daily provides one.

Renting a 20-foot truck one-way from San Francisco to San Antonio, for example, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983.

Hmm….

This figure compares, across just a few parameters, the outcome of big government, high taxes, and profligate spending—California—with the outcome of limited government, low taxes, and (more) disciplined spending—Texas.  Texas has many faults, but the routine of government interference with its citizens’ wallets and businesses isn’t among them.

California has become a state that people are increasingly trying to escape, and Texas a state people are increasingly migrating to.

…

A study by the Manhattan Institute found that Californians have been leaving for states with better job prospects, lower taxes and better business climates.

In other words, states that are pursuing the kind of low-tax, limited government, free market policies [President Barack] Obama typically rejects.

The public may have voted to give Obama a second term.  But many people in California are voting with their feet, leaving the state that’s already put in place policies Obama has promised to keep pushing for four more years.

Obamanomics, as California demonstrates—its economy actually shrank sharply in the last four years—are an utter failure.  RTWT.

Pick One

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David Wessel, writing in a recent Wall Street Journal, reports that

Chief executives of more than 80 big-name US corporations…in a statement to be released on Thursday, say any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

Then Wessel himself makes this remark [emphasis added]:

The declaration differs sharply from those of several other business groups, which urge Washington to deal with the deficit and avoid across-the-board spending cuts and tax increases set for year-end—but avoid any stance on the politically charged issue of raising taxes.

This is an all too common conflation of two separate questions, but it’s amazing to see it coming from a Pulitzer Prize-winning economics journalist.

Of course raising tax revenue is different from raising taxes: the latter is merely one way to achieve the former.  But Wessel compounds his confusion by repeating it:

The CEOs who signed the manifesto deem tax increases inevitable no matter which party succeeds at the polls in November. “There is no possible way; you can do the arithmetic a million different ways” to avoid raising taxes, said Mark Bertolini, CEO of Aetna.

Notice that: Wessel directly contradicts the CEOs in their statement, which he quoted above.  And then he carefully provides his confused “paraphrase” of raising taxes outside another direct quote.  Yet Wessel then notes the following:

The executives didn’t endorse Mr. Obama’s proposal to raise the marginal income-tax rates for the top 2% of taxpayers or any other proposal.  Rather, they called for an overhaul of the tax code that, among things, would eliminate or reduce deductions, credits and loopholes (known as “broadening the base”), and one that also would bring the Treasury more revenue than the existing code does.

It’s no wonder Americans are having trouble sorting through the question of tax reform when the so-called experts can’t even trouble themselves to keep matters straight in their own writings.

Monetary Policy

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This week’s print version of Der Spiegel has a cover depicting a slowly melting €1 coin captioned Vorsicht, Inflation! Die schleichende Enteignung der Deutschen, or roughly, “Caution, inflation! The creeping expropriation of Germans.”  Inflation erodes the value of (German) wealth.  An English translation of an article summarizing this cover theme can be found here.

Andrew Bosworth, chief portfolio manager for PIMCO in Germany (PIMCO is a global investment management firm of serious proportion), describes the underlying problem:

The industrialized world is stuck in a severe debt and growth crisis.  The central banks are fighting the disease with monetary infusions of previously unknown proportions[.]

Then he notes the problem this “cure” is generating:

[T]he side effect is a slow but dangerous devaluation of money.

And

Gradual inflation has a numbing effect.  It impoverishes the lower and middle class, but they don’t notice[.]

Indeed, paraphrases Spiegel Online,

For the past five years, governments from Berlin to London and from Brussels to Washington have been in crisis mode.  They rescued the banks in 2007 and 2008, then they stimulated the economy and, since 2010, have threatened to drown in their own debts.  The burdens are being pushed up the line, from private investors to central banks and government bailout funds.  But this doesn’t make the debts any smaller.

Despite this, though,

[T]he central banks of the United States, the euro zone, Great Britain and Japan jointly announced their intention to pump even more cheap money into the financial markets…. [The banks and the populations, both] recognize that governments seem to be willing to accept higher inflation if it facilitates debt reduction.

Especially since inflation, devaluing the relevant currencies, devalues the debts measured in those currencies.

What has a German portfolio manager to do with our situation in the US?  The inflation threat from throwing money at the problems of an economic dislocation is a basic principle of economics; it’s not unique to Germany.  Banks aren’t lending, or borrowers aren’t borrowing: throw money at the banks.  Folks aren’t spending because…pick a reason: throw money at the banks.  There’s too little economic activity, generally, because…pick a reason: throw (“stimulus”) money at the economy.  Whatever the mechanism, the response (I do not say “answer”) has been to increase the money supply.

But the outcome, whatever the path, is an enormous increase in the amount of money chasing a supply of goods and services that is not increasing at all in a stagnant economy, or one that’s growing more slowly than the population.  Or, at present, isn’t chasing at all because the recipients of all that money are sitting on it in some way: banks are chary of lending because, for instance, they’ll get hammered by our government for making bad loans, even as they’re currently yelled at by our government for not lending.  Citizens aren’t spending, preferring instead to pay down current debt or to save, husbanding their small wealth against a too uncertain future.  This is the textbook condition for enormous inflation when the dam breaks.

What are the Fed and the Obama administration doing in the US?  Throwing money at the banks (the Fed’s artificially suppressed—to essentially zero—interest rates and QE1, QE2, QE3,…,QE∞(?)) and the administration’s throwing money at our economy (stimulus “investing” nearly annually since winter 2009, sweetheart loans, and loan guarantees).

We have an increasingly vast supply of money chasing a supply of goods and services that is not expanding.

As I mentioned at the top, when inflation does strike, it will hit the poor and middle-income folks much harder than the wealthy: the former already spend the vast majority of their wealth on the necessities of life: food, fuel, clothing, and shelter.  Yes, more personal financial discipline would help—and folks should be exercising this discipline as a matter of course.  They are, too: the trend in savings rates, especially relative to income rates, has been to increase savings since the Panic of 2008 struck.  But the coming inflation explosion can easily overwhelm those efforts.

Heads up.

Solar and Wind Energy Subsidies

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There was sort of a debate presented in The Wall Street Journal a few days ago concerning the efficacy of Federal subsidies for solar and wind energy companies.  I say “sort of” because the Mark Muro’s arguments in favor of the subsidies demonstrate an utter cluelessness of the basics of economics as well as of how well the subsidies have already performed.

For instance, the WSJ‘s lede cites generic proponents as saying in all seriousness,

There is widespread agreement that pulling the plug on the subsidy at this point could hobble the wind-power industry.  Meanwhile, the biggest federal subsidy for solar power, a tax credit for 30% of the cost of installed equipment, is set to drop to 10% at the end of 2016.  A cash grant for up to 30% of solar equipment costs expired at the end of last year.

Proponents say wind and solar subsidies are needed for a few more years to allow these clean, renewable sources of energy to develop to the point where they can compete on price with electricity produced from coal and natural gas.

Yet, if the technology can’t compete in a free market on its own, if it needs the subsidy to survive, the technology is not ready for commercial use or sale.  Spending taxpayer money—private citizen money—on such a thing is a textbook example of Fraud, Waste, and Abuse.  As the proponents admit without realizing it in that second paragraph: “…wind and solar subsidies are needed for a few more years to allow these clean, renewable sources of energy to develop….”

Muro then says in his argument,

Let’s remember the point of these temporary subsidies: to help emerging clean-energy technologies gain toeholds in challenging markets and advance toward unsubsidized price-competitiveness.

And

The ultimate reward is cheaper, cleaner energy and greater energy diversity, which will help guard against price shocks, keep energy costs down through competition and lessen the damage our energy consumption does to the environment….

Except that it isn’t cheaper if it needs subsidies coupled with coal, oil, gas (hydrocarbon) prices that are artificially elevated by government mandates to include “green” additives as the Feds do, or to buy electric power from solar and wind generators, as California does, in order to compete.  Moreover, diversity is reduced, not expanded by limiting us to solar and wind—or even by demanding that we buy a certain amount of solar and wind, regardless of market forces—and actively blocking access to hydrocarbon energy.  And finally, if these really are viable technologies that will deliver cheap energy easily, private investors will flock to invest, and no taxpayer subsidy will be even in the picture.

On top of that, there’s no case for environmental “damage,” given the great amount of cleanup already done, and the falsified “damage” attributed, for instance, to fracking by the EPA.

Muro goes on:

Wind and solar need the help because the barriers for new technologies in the energy industry are tougher than those in any other industry in this country.  Fossil fuels, with the help of their own government subsidies over the years, are thoroughly entrenched, with trillions of dollars’ worth of infrastructure in place.

Never mind that that entrenched infrastructure sits on top of centuries’ worth of economical, unsubsidized hydrocarbon deposits in the ground right here in the US and Canada, and the infrastructure easily can be extended to reach into the deposits in our respective territorial and economic zone waters, as the People’s Republic of China already is doing, filling the vacuum left by the present administration’s slow-walking of drilling permits for American companies.

Additionally, the beef that “the barriers for new technologies in the energy industry” are tough is just a cynical red herring.  Those technical barriers existed for the hydrocarbon industries, also, as they were developing.  Why should solar and wind get special treatment?  Muro has no answer; he merely asserts the “need.”

Muro concludes with this long-standing “promise:”

In sum, onshore wind is likely just a few years away from true subsidy independence, while several forms of solar aren’t far beyond.

Like commercial fusion, we’ve been “just a few years away” for decades.  It’s an empty promise.

As Dr David Kreutzer points out in his argument against these subsidies, though,

Surely some alternatives to fossil fuels will be developed, but they will only work if they are affordable.  Wind and solar aren’t, and that isn’t changed by shifting the costs from consumers and producers to the taxpayers.

Bureaucrats and politicians shouldn’t be the ones deciding which technologies are the most promising or what timeline is too long or what losses are too deep.  The market will do a much better job of answering the question: are wind and solar power really viable?

Let’s get rid of the subsidies and find out.