Tag Archives: economics

Oil in a Free Market Economy

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When oil prices began to plunge two years ago due to a global glut of crude, experts predicted US shale producers would be the losers of the resulting shakeout.

But the American companies that revolutionized the oil and gas business with hydraulic fracturing and horizontal drilling are surviving the carnage largely unbowed.

Though the collapse in prices caused a wave of bankruptcies, total US oil production has only fallen by about 535,000 barrels a day so far this year compared with 2015, when it averaged 9.4 million barrels, according to the latest federal data.

And

As the oil markets ponder where production will resume when prices pick back up, one clear answer has emerged: America. Goldman Sachs forecasts the US will be pumping an additional 600,000 to 700,000 barrels of oil a day by the end of next year—making up for every drop lost in the bust.

RT Dukes, of Wood Mackenzie:

The US isn’t the marginal barrel but the most flexible.  We’ll be the fastest to snap back.

Among other reasons,

Even as banks and other traditional lenders tighten their purse strings, alternative sources of money are cropping up, from private-equity funds to distressed-debt specialists.

“The very existence of that capital means prices are likely to be lower for longer, because it compounds the supply problem,” [Senior Vice President of Corporate Advisory and Banking for Brown Brothers Harriman, Lewis] Hart said.

Alternate sources of capital are willing to provide those funds and take these risks because American producers always find ways to cut costs and enhance efficiencies when things get tough.  The underlying innovativeness that competition encourages, here fracking, produces technologies that also drive toward cheaper, more efficient ways of doing things.

This is the agility that the oil business, that businesses in general, can have in a free market economy.  It’s an agility that government, however well meaning, cannot have, whether in a free market economy or a government planned (or even just government led) economy.

See, for instance, the last eight years of our economy under government regulation.  Oil is succeeding despite that because our economy remains largely free market, although government intrusion is starting to threaten that freedom.

Government Needs to just Butt Out

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A bipartisan group of senators is pushing to include municipal bonds in bank-safety rules, the latest wrinkle in a continuing fight over how safe—and salable—the debt of states and localities would be in another financial crisis.

The proposed regulation would “allow” banks to include municipal bonds on their balance sheets in the category—mandated by existing rules requiring banks to have sufficient (government’s definition) cash to fund operations for 30 days in the next “financial crisis.”  The proposed regulation also specifies the safety rating for those munis: the banking rules’ “high quality liquid assets” category, albeit at the lowest level of “high quality.”

So Chicago’s bonds should be on a par with Dallas’.

No.  These are decisions—every single one of them, the definition of “sufficient,” of “crisis,” whether to include munis as high quality assets, even whether to count munis as assets at all—are best made by banks and by businesses generally in a free market, not made by Government from the center of a government-managed economy.

Rules

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And only some people have to follow them.

Recall the febrile howling by Senator Elizabeth Warren (D, MA) as she applied her inquisition to Wells Fargo CEO John Stumpf over Wells’ customer service failure that led to the firings of several thousand (now ex-) employees over their falsely creating customer accounts in order to meet sales quotas.  “You belong in jail,” she shouted, and she demanded further that Wells claw back over this corporate failure any and all bonuses that Wells executives had received.

At a subsequent House Financial Services Committee hearing on the matter, Congressman Scott Garrett (R, NJ) also put the question.  Recall that Treasury Secretary Jack Lew (D), before becoming Treasury Secretary, was COO for two Citigroup units that participated in the enormous failures that were at the core of the Panic of 2008’s beginnings.  Lew was called to testify at this House hearing, and Garrett impertinently asked him whether Citigroup had clawed back any of his compensation.

Lew hemmed and hawed and refused to answer.

Hmm….

Discretionary Spending

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Much is made of the limits imposed on the Federal government’s discretionary spending by such “mandatory” spending items as Social Security, Medicare and Medicaid, and interest on the national debt.  Indeed, after mandatory items—these three major items and a few others—discretionary spending amounts to only 33% of total Federal spending as of 2015.

This dichotomy, though, isn’t only misleading, it’s entirely wrong.  The fact is, nearly all of Federal spending is discretionary: Congress sets the spending levels everywhere, and it decides the things on which to spend nearly everywhere.  There are only three categories of spending that our Constitution requires of Congress: to pay the Debts and provide for the common Defence and general Welfare of the United States.  Even in these three mandatory areas, though, the amounts to be spent are left to the discretion of Congress, even if the requirement to pay the Debts implies a requirement to spend at least enough to keep the debts current if not actually to move the size toward zero, and even if the requirement to provide for the common Defence implies a requirement to spend at least enough to keep our defense establishment superior to all threats.  Even the requirement to spend for the general Welfare is limited to the 16 items enumerated in Article I, Section 8; here, too, the amounts actually to be spent are left to Congress’ discretion.

There is, then, no requirement for Congress to spend Federal monies—citizens’ tax money—on Social Security or Medicare and Medicaid.  And no Federal money should be spent on these items, which as of 2015, comprised 49%, or $1.8 trillion of the total $3.7 trillion in Federal spending.

Think about the uses to which that money could be put were Social Security and Medicare privatized and Americans allowed to be responsible for their own health and futures, rather than being required to spend their money on others’ current retirement and health costs.  Think about the effects of block granting Medicaid payments to the individual States and then annually reducing the size of those grants to zero, so that the States would be allowed to be responsible for their own budgets and their citizens could spend that money on themselves.

Think about how $1.8 trillion could be redirected: lower tax rates and less government spending, so that Americans could keep more of their own money to spend on their own imperatives, needs, and wants, and the effect of their being able to spend in a market in which the Federal government isn’t crowding out private enterprises, private buyers and sellers with government competition for the same goods and services.

Think about other redirections of those $1.8 trillion: keeping lowered spending less than lowered tax revenues and so eliminating Federal deficits: budget surpluses and a significant fraction of those $1.8 trillion could be redirected toward paying down our nation’s exploding debt.  Another significant fraction of those $1.8 trillion could be redirected toward rebuilding and then vastly improving our national defense establishment, so that we can, not merely match, but exceed and defeat the threats against us, defeat our enemies and friends’ and allies’ enemies acting on those threats.

Congress has the discretion to do all of these things; its spending decisions—its revenue decisions generally—are not limited to those $1.2 trillion misnamed “discretionary.”

Unfortunately, the present Government doesn’t trust its employers, We the People, collectively and individually, to see to our own needs and wants; Government insists on determining these for us.  This Government, too, doesn’t believe we need a very large defense establishment at all.  It prefers, instead, to retreat from the world stage, to talk to Russia about its aggressions in eastern Europe and the Middle East, to talk to the People’s Republic of China about its aggressions in the East and South China Seas.  This Government doesn’t even recognize the Islamic terrorist threat and their war actively being prosecuted against us.

This needs to change.  Every single bit of it.

Another Thought on Clinton’s Death Tax

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This one by Brad Anderson, ex-Best Buy CEO.

This is a devastatingly stupid idea…. I worked for a guy who was a high school graduate, created a company—it didn’t make money for 20-years. And after 20 years it finally starts to build up. He has a dream that he’s trying to build, that includes passing some of it along to his family and if you take that away, why does he pay the price?

And why does that man’s family pay an even bigger price?

Enterprises that are left to heirs with value above Clinton’s death tax threshold very often have insufficient cash from the nature of the business—a farm, for example, or a physical plant-heavy enterprise—to pay up.  As a result, the heirs must sell their inherited business to raise the money for her vig.  And so the heirs are left without their inheritance—and so too often destitute.

Never mind this insult added to that injury: this wealth has already been taxed in real time, and often several times, as it was being created, earned, and distributed.