Category Archives: political economy

Hypocrisy

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For some time, President Obama has been demanding that the payroll tax cut, due to expire at the end of this year, be extended for another year—the whole year, together with a blanket extension of the unemployment subsidy.  Leaving aside the wisdom of defunding Social Security as a means of providing a tax cut, or of paying the unemployed for not working, let’s explore what’s happened with Obama’s demand.

Obama and Senate Majority Leader Harry Reid have refused to pay for a one-year payroll tax cut and the unemployment subsidy extension with any means that doesn’t include a parallel tax increase elsewhere, as they demand a continuation of their class war programs.  Failing to get agreement for that for a complete year’s extension, the Senate passed a two month extension of the tax cut and subsidy—with, I’m embarrassed to say, the complicity of Senate RINOs who lack the character or courage required to fight this class war.  Certainly, at the end of those two months, the Progressive demand for tax increases on Americans of whom they disapprove will resume, even more loudly.

The House had passed, some time prior, a bill that would have extended the payroll tax cut for the entire year, extended the unemployment subsidy on a gradually decreasing schedule, and paid for all of it without tax increases anywhere else, but with spending cuts only.

When the Senate passed their two-month bill, they ran for the exits to start their precious month-long vacation, their personal welfare being more important to these Senators than the welfare of us Americans.  On the way out the door, they ordered the House to pass the Senate bill with no further argument.

The House rejected the Senate’s failure and voted, instead, to send the two bills to a House-Senate conference committee to resolve the differences, as is the normal way of doing business in the Congress.  “Let’s get this done today,” House Speaker John Boehner told Obama in an effort to enlist the President’s help to get the bill which Obama has been demanding passed.  However.

Reid is actively refusing to negotiate.  He’s actively refusing to bring the Senate back—or to send any Senators back to take part in the conference committee.  He demands that his two-month bill be passed by the House as a precondition to any negotiations.  And he’s castigated those evil Republicans for holding out for Obama’s year-long extension.

Obama is actively refusing to negotiate on the passage of his own bill.  He says:

Now let’s be clear.  The bipartisan compromise that was reached on Saturday is the only viable way to prevent a tax hike on January 1. The only one.

So, Obama, who has been demanding a year-long extension of the payroll tax cut for Americans, doesn’t really mean it.  The only bill he wants is his pet Harry Reid’s two-month extension.  And an opportunity to fight again for divisive tax increases on Americans whom he doesn’t like.

The Euro and the Economists

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Spiegel Online International interviewed two German economists on the future of the euro.  One has an (incomplete) approach to a solution, the other still can’t see the problem.  The split between the two mirrors the split among politicians (although along different dimensions than the politicians), and the existence of the split is a demonstration of the lack of coherence in reaching a solution.  Which bodes ill for the euro and for the European Union.

The interview opens with this; I’ll cite one economist’s response, as the other is saying substantially the same thing I’ve been writing, and so he’s to a large extent preaching to the choir.

SPIEGEL: Mr. [Joachim] Starbatty, Mr. [Peter] Bofinger, can the euro still be saved?

Bofinger: …The highly indebted countries must be able to borrow at moderate interest rates so they don’t go bankrupt. This could be achieved with euro bonds. And if they can’t be implemented that quickly, the ECB has to stabilize the system. In doing so, it would not create inflation but would in fact avoid deflation.

Mr Bofinger is wrong on two counts, and his first error demonstrates his plain lack of understanding of the nature of the problem.  Disastrously indebted countries do not need to “be able to borrow at moderate interest rates.”  They’ll never be able to borrow their way out of a debt-based bankruptcy.  Disastrously indebted nations instead must stop borrowing altogether and reduce their debt through annual budget surpluses.  Moreover, budget surpluses achieved by taking money away from their citizens and so out of their economies in the form of higher taxes will only guarantee continued economic failure.  The borrowing must stop and the debt reduced through reduced government spending.  Secondly, throwing money at the problem via the ECB certainly will avoid deflation—by leading to explosive inflation from too much money chasing too few goods from too little production.

Bofinger goes on in response to another question:

German politicians have not acknowledged that these countries have already reduced their deficits significantly. Compared to 2009, deficits have declined in all of the crisis-ridden countries…. The markets haven’t even noticed this.

It’s true that the deficits have shrunk.  What the markets have noticed, though, is that reduced deficits means continued deficits which means still increasing debt for nations with too much debt already.

On Spiegel‘s question of EU-wide increasing yields on sovereign debt (which means it’s getting ever more expensive for governments to borrow), the two economists had this:

Starbatty: Because the trouble spots in the euro zone are not being isolated, the sparks are jumping over to the healthy countries. Everyone knows that if the weaker countries are to be rescued, two countries — Germany and France — will ultimately be doing all the heavy lifting. So the most important question is: How long are the Germans willing to pay? And how long are the French in a position to pay?

Bofinger: You correctly describe how the euro zone behaves today, with 17 different countries trying to address the problems individually. In fact, the real question is whether Germany can be everyone’s guarantor in the end. That’s why we have to turn things around and say: We will now act as a unit. If Italy can go into debt through euro bonds, it will always be able to raise money, even it has to refinance €300 billion ($400 billion) in debt next year.

Mr. Starbatty exposes the false premise of the fiscal union on offer: that the “weaker countries” should be rescued at all, and if so, by whom.  The German citizens are tired of being everyone else’s piggy bank, and the French, while slower to the realization, are rapidly losing their capacity, even as they remain (sort of) willing.  Bofinger, on the other hand, misses the problem altogether: the fiscal union both allows an Italy (or a Spain, or a…) to continue to borrow profligately, rather than bringing its debt under control, and it traps Germany (and France) into being the union’s piggy banks.

Here’s this exchange, also:

SPIEGEL: So are the euro countries too different to be welded together in a single currency, as euro critics have claimed from the start?

Bofinger: There are also big differences in productive capacity in the United States. The problem is that we in Germany have tried to become even stronger by holding back wages….

Starbatty: The mistake lies in the fact that the weak countries in the monetary union have not changed their policies. They have used the low interest rates to have a party….  …which is why we now have a large divide in the monetary union. Some are overly competitive, while others can’t keep up anymore.

Both economists have it wrong.  The variability in productive capacity isn’t the problem for cohesiveness.  The lack of common social and philosophical imperatives and the vastly differing views of the purpose of money are what make a cohesive fiscal union of all 17 nations impossible and that are pulling the 27-nation EU apart.  Separately, “overly competitive!?”  Only in the fantasy world of too big to fail does this contradiction make sense.

The interview goes on in this vein.  Without even an understanding of the nature of the problem, there can be no hope of a solution.  But let’s expand government (here in the form of more power to the ECB and a fiscal union layered on top of national governments), as one economist and a gaggle of politicians insist, anyway.

Read the whole thing.

Expanding Government

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Fox News had a report about another move by Big Government to “guide” us for our own good.  It seems the EPA has a Green Book (called “Sustainability and the U.S. EPA,” commissioned in 2010 for $700 thousand, and published last August) that it wants to use sub rosa (EPA representatives were reluctant to discuss the principles espoused in this document in public) to

integrate sustainability “as one of the key drivers within the regulatory responsibilities of EPA.” The panel who wrote the study declares part of its job to be “providing guidance to EPA on how it might implement its existing statutory authority to contribute more fully to a more sustainable-development trajectory for the United States.”

Or, in other words, how to use existing laws to new ends.

EPA Administrator Lisa Jackson insists that the EPA’s “sustainability” approach represents

“a new opportunity to show how environmentally protective and sustainable we can be,” and would affect “every aspect” of EPA’s work.

Using this approach, the EPA can become even more pre-emptive“anticipatory” in how it instructs our businesses in how they must conduct themselves.  Indeed, the study itself urges the EPA to change its already activist culture even further:

“create a new culture among all EPA employees,” and hire an array of new experts in order to bring the sustainability focus to every corner of the agency and its operations. Changes will move faster “as EPA’s intentions and goals in sustainability become clear to employees[.]”

So what’s the big deal here?  It’s in that “sustainability” bit that is the point of the study.  The Green Book says that sustainability is

gaining increasing recognition as a useful framework for addressing otherwise intractable problems. The framework can be applied at any scale of governance, in nearly any situation, and anywhere in the world.

“[A]ny scale of governance, in nearly any situation….”  This is as naked as it gets: the Green Book advises the EPA that, under the guise of sustainability, it can exercise even more control—through sustainability regulations—over our businesses.

By the way, sustainability itself remains carefully undefined.  The Green Book takes for a working definition the one carried in President Obama’s 2009 Executive Order 13514, “Federal Leadership in Environmental, Energy and Economic Performance:”

to create and maintain conditions, under which humans and nature can exist in productive harmony, that permit fulfilling the social, economic, and other requirements of present and future generations.

This is a carefully generic definition that can be given any meaning at all, and so bent to any purpose at all.

We already see one goal of this Green Book, and of the EPA that bought it, as the EPA takes its advice in this “advance” in capability.

Environmental impact assessment tends to focus primarily on the projected environmental effects of a particular action and alternatives to that action[.]

But

[Sustainability impact assessment examines] the probable effects of a particular project or proposal on the social, environmental, and economic pillars of sustainability…[.]  The culture change being proposed here will require EPA to conduct an expanding number of assessments.

Plainly, all that’s being sustained here is Federal power.

More on Too Much Law

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A quick note on how our government’s regulatory overreach is affecting even the EU’s banking system, courtesy of Spiegel On Line International.

It’s been noticed that American money is rapidly departing European banks, and one reason for this is fear for the safety of those banks and, from that, fear for our money in those banks.

There’s another reason for that concern, and the departure of American money, though.  American money is being kicked out of the European banks by those banks.  It seems that, due to stricter tax reporting requirements pushed through by the Obama administration and the Progressive Congress in 2010, EU banks are reluctant to accept or retain our business.  The Foreign Account Tax Compliance Act (FATCA) was passed in 2010, and it takes effect January 2013.  FATCA requires all foreign banks to identify and report all US citizens who have accounts greater than $50,000, all in an effort to clamp down on tax evasion.  If the banks refuse to comply, they face a punitive 30 per cent withholding tax on all payments from the US.  Never mind that under German (and many other nations’) laws, it’s illegal to give up much of the information FATCA demands.

It gets better.  FATCA also hits foreign banks that have investments in the US or that are part of an expanded affiliated group that includes e participating foreign financial institutions doing business in the US—even if those banks have no US customers.

DWPBank, which handles securities transactions for 1,600 German banks—the primary type of account that would be affected given that minimum account size—estimates the total cost of compliance in Germany alone to be as much as €10 billion ($13 billion).  A senior manager with JPMorgan Asset Management in Germany also notes that all the benefits, an estimated $8 billion in increased tax revenue over 10 years, accruing from this cost go entirely to the US.

Already, HypoVereinsbank has decided to stop many of its services for American customers as of 1 January 2012, while Duetsche Bank cancelled its accounts of its type last summer.  Commerzbank (already in trouble from the debt crisis, and at risk of being nationalized by the German government) is “considering a similar move.”  The cancellations aren’t limited to German financial institutions: HSBC, of Great Britain, will no longer service such large American accounts, and Credit Suisse, of Switzerland, has made the same decision.  The latter’s move, though, also could be related to US pressure on the Swiss government to alter Swiss banking laws to allow Swiss banks to report on US account holders.

Of course there’s another result to all this, also.  Americans in Europe may have trouble finding banks who want our business.

Government and Innovation

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Government’s role is to create an environment within which men can prosper in accordance with their own efforts and the degree of those efforts.  Thus, legitimate government sets laws that prevent one from cheating another and laws that require each to honor the contracts to which they agreed.  Legitimate governments do very little more than that.  Government does not have, for instance, a legitimate role in determining what those contracts must accomplish, or how they must be structured.  Nor does government have a legitimate role in inuring any of us from the failure of our efforts: it is, in fact, from those failures that our enterprises grow stronger for the next effort.  It is in the fermentation vats of competition, unconstrained by government, that innovation occurs.

Why, then, is what used to be a uniquely American skill of innovation moving apace overseas and no longer occurring here?  Here’s an example of this failure, and it illustrates an answer.  Despite our need to become energy independent, for a range of reasons I’ll not go into here, and despite our Progressives’ push to move away from coal, oil, and gas as the primary source of our energy, nuclear power innovation is moving to the People’s Republic of China, at the behest of American innovators.  In this illustration, I’ll leave aside the question of helping the PRC obtain technological superiority over us (which is troubling in itself).

The Washington Post reports that a startup called TerraPower has developed a nuclear power breakthrough that involves traveling wave reactor technology and this technology’s ability to use depleted uranium to power a nuclear plant for decades without need of refueling or waste removal.  However, instead of looking to deploy this technology in the US, TerraPower, heavily backed by Bill Gates of Microsoft fame, is talking to the PRC government about selling its technology there.  How does this work?

For one thing—for the driving thing—innovators still are human, and humans still can go anywhere they like.  And humans, being humans, are going to go where it’s easiest to follow their dream, easiest to satisfy their own drives and imperatives.  With business, and especially high-tech business, those places are where the conditions conducive to development and growth are most available.

The US’ rules for permitting and environmental studies, especially for nuclear power, and the US’ litigation environment that encourages lawsuits over any perceived slight, whether environmental, social, or something else all serve to drive the costs of bringing innovation from the laboratory into the market to astronomical heights.  Although, in TerraPower’s case, this might be irrelevant: “Current U.S. rules don’t even cover the type of technology TerraPower hopes to use.”

Additionally, the US’ visa rules are outright stupid.  We educate highly talented and motivated engineers and scientists, and then, because they’re aliens, we send them back to their home countries, even if they want to stay—the quotas are too low and for the few allowed, it takes too long for the converted visas to be issued.  Then, getting talented, motivated, already educated—and experienced—foreign engineers and scientists (back) into the US also is a Herculean task, made worse by not having allowed those freshly trained to stay: the quotas are set too low, and the few authorized visas are slow to be issued.  In either case, why should we have quotas at all?  We should welcome these people with open arms, as we did with the German scientists after WWII, who built our space program.

On the other hand, the PRC has programs like “Thousand Foreign Talents” to attract the world’s best and brightest into China.  And they have an active, empirically visible interest in tech and in having an environment conducive to development—and deployment.  While the US is shrinking its satellite and exploration programs and withdrawing from manned space efforts, while hoping for small change from companies like SpaceX (which NASA is in the process of stiffing due to budgetary problems), China is accelerating its programs, including intending to put a man on the moon by 2020—a feat we’ve been too timid to think about trying for 40 years.

As the WaPo concludes

The lesson is clear: The U.S. government needs to be just as aggressive as the Chinese in creating incentives for entrepreneurs and technology start-ups to grow and mature. At a time when the U.S. is downplaying efforts to attract and retain foreign entrepreneurs and flirting with legislation that could slow the pace of digital innovation, it is strangely China that is proving to be more proactive in creating the conditions for innovators to thrive. Bill Gates is one of America’s great entrepreneurial legends. Something feels wrong about seeing him launch a new chapter in his tech career in China and not the U.S.

Hmm….