Tag Archives: economics

Economic Incompetence Continues

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We must increase our debt limit so that we can pay our bills.

This is the thrust of President Barack Obama’s insistent demand that our debt ceiling be raised, and that it be done with no strings attached.  The graph below, via Zero Hedge, however, illustrates the foolishness of continually expanding our country’s debt.  It shows government debt as a percentage of GDP compared to the annualized rate of change in economic growth.

It’s hard to get any clearer than this demonstration of the inverse relationship between government debt growth and economic growth.  It’s not just that growing debt impedes economic growth; the reverse is true, also: reducing government debt (not just reducing debt growth rate) allows the economy to grow.

If you borrow money to pay your bills, you aren’t paying your bills, you’re just changing creditors.  I’ve said it before, and I’ll say it again: it isn’t sufficient simply to raise our debt ceiling.  Any raise must be coupled with commensurate real spending cuts—that is, cuts in current year spending, not pseudo-cuts in the out years.  It’s only by reducing current spending below current revenues that the current deficit can be reduced—which by itself still isn’t enough.  The current deficit must be reduced to the point it disappears, and a current surplus is generated.  Year after year.

Current deficits, after all, are current borrowings, and these only add to existing debt.  The only way we can reduce our country’s debt, and so to eliminate the need to raise the debt ceiling—the only way—is to cut current spending to levels below current income.  Any junior high student on an allowance understands that.

Naïve?

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Brian Spegele wrote in The Wall Street Journal about an accord between Great Britain and the People’s Republic of China concerning the role of the yuan in the world, or at least in the British economy.

The UK and China unveiled plans to further bolster China’s long-restricted currency on the world stage, amid a number of other deals that signal that the two countries have reset relations following a visit to London by the Dalai Lama last year, which upset Beijing.

The deals unveiled Tuesday—which include allowing British investors to plow up to 80 billion yuan ($13.1 billion) in China’s heavily restricted capital markets—demonstrate how China’s wealth and its desire to go abroad often trump political differences and Beijing’s resentment of criticism over its human-rights record.

The deals are part of a series of steps China has taken with a number of countries to increase the yuan’s role.

And

…state-controlled Industrial & Commercial Bank of China Ltd planned to issue a yuan-denominated bond in London, which would further encourage yuan use there.

This will be all well and good—until the PRC decides to “adjust,” again, the value of its yuan to match its convenience, as it’s done all along.  Keep in mind that the PRC tightly controls the exchange rate for—the value of—its yuan, the government’s rhetoric about “increasing flexibility,” or “setting more flexible exchange rate bands,” or … notwithstanding.

Food Stamps and Farm Support

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Why do we even have food stamps and farm support?  Here’s a brief, over-simplified history.  During the Great Depression, with unemployment at historic levels and mom-and-pop farms failing at a high rate (not enough income from not enough sales of produce to an unemployed population), Franklin Roosevelt pushed through Congress a pair of bills that had negative impacts on the unemployed and on those farms (and that prolonged the Depression, but that’s for a different post).

Those two bills were wage controls in the form of a mandated minimum wage that an employer could pay—or that a prospective employee could accept—and a mandated minimum price at which a farmer was allowed to sell his produce (thus, farm supports).  Think about that: in a time of enormous unemployment (Obama’s 10% unemployment in 2009 was full employment, and today’s 7.2% is Phat City compared to Depression levels), Americans were priced out of the labor market.  And at the time those Americans couldn’t get work, they had no income from which to pay those artificially inflated farm prices.

Roosevelt thought about that, and the light went off in his head: he pushed through Congress a mechanism for giving subsidies to the poor (read: unemployed) so they could afford to buy food (thus, food stamps). (It didn’t occur to this Progressive to rescind his minimum wage and price support programs so the markets could clear, folks could get work, and they could buy their own food.)

That’s the long and short of it: food stamps and farm supports are Depression-era attempts fix a failing economy.  Today, Americans pay over $14 billion annually in the form of farm support tax money transfers, and we pay nearly $80 billion per year in the form of food stamp tax money transfers (to a near-record 47 million Americans).

What to do about this?  Much has been made, especially by conservatives and by Conservatives, of States’ Rights—the 10th Amendment, and all that.  What too often gets overlooked, though, is the dual of that: States’ Obligations.  The States should be taking care of themselves on this, not taking money from the taxpayers of other States’ citizens.

My solution is in two parts.  One part is to take all money the Feds currently send to the States for farm support and food stamps and convert the funds to block grants, making the year of conversion the baseline year.  Every year after that, reduce the size of each block grant by 10% (let’s say) of the baseline amount until the money being sent to each state for each program is $0.  This gradual, but steady, forced reduction gives the States time to break their addiction to OPM and to adapt to relying solely on internal State funds for what are essentially internal State problems.  Aside from that, the good citizens of nearly bankrupt New York or nearly bankrupt Illinois have no business being forced to send their tax money to a nearly bankrupt California or a flush Texas.

The other part is to get rid of the ethanol mandates.  American refineries are required by the EPA to blend over 18 billion gallons of ethanol into their gasoline.  The primary source of that ethanol is corn, and as recently as 2011, 40% of US corn production went to ethanol rather than to food.  That elevates the price of a broad range of food, and not just corn-based food, at that.  Food that eats corn—beef and chickens, for instance, and the eggs from corn-fed chickens, get elevated prices from that diversion.  It spreads further: the prices of corn substitutes, like wheat, soya beans, and so on, are also elevated by this diversion.  The States’ problems funding their own food stamp programs (to the extent any of these programs persist when the States discover they can’t fund them with OPM) will be greatly reduced by the increase in food affordability due to the elimination of this pernicious mandate.

Mentalities: Engineering or Liberal Arts?

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Purdue University President Mitch Daniels (and ex-Governor of Indiana) had a thought on STEM graduates and gluts.  He spoke about this at his keynote address to the National Academy of Engineering a week or so ago.

Engineers, unlike, for instance, lawyers or financial experts, frequently generate through their innovation new work for themselves and others.  Somewhere in any potential “glut” will be new Watts and Edisons and Noyces who give birth to entire new industries that require the services of engineers and non-engineers alike.

But even if we were to somehow outrun the market’s need for engineering talent, we will be a far stronger country if the engineering mentality takes a more prominent place in our national conversations.

The Liberal Arts mentality (those lawyers and financial experts, and history and philosophy majors), on the other hand, worries too much about “what might go wrong” and not enough about “what is the problem, and how do we fix it” that is the STEM’s approach to life.  The Liberal Arts mentality worries too much about “we have to do all of this for the less fortunate” and not enough about “how do we help the less fortunate help themselves, and how do we pay for that” that is the STEM’s approach to life.

There’s nothing wrong with Liberal Arts approach; it provides an important alternative way of looking at the world.  But for a burgeoning, prosperous economy in which everyone, regardless of their individual situations, can participate, we need the engineer’s problem scoping and solving mentality.

Jobs and a Policy

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There are conflicting reports concerning the impact of Obamacare on job creation.  The President’s Council of Economic Advisors says, for instance, that since Obamacare’s enactment in 2010, 9 out of every 10 jobs created have been full time jobs—that is, by the Obamacare definition, jobs that required 30 or more hours of work each week.  Other economists disagree and talk about stunted job creation due to Obamacare.

Who’s right?  The answer depends on more than whom you ask; it hinges on the time period covered by the answer.  CEA is right when the time frame runs from the end of March, 2010, when Obamacare formally became law.

Andrew Puzder, Chief Executive Officer of CKE Restaurants, essayed a different answer, based on a different time frame, in a recent Wall Street Journal op-ed.  He suggested that (paraphrasing here), instead of spring 2010 to now, the relevant time frame is January to July 2013.  Why those six months?  For most of the preceding three years, the content of Obamacare was ill-understood, with clarity only trickling out over the time.  Businesses aren’t going to make major changes, including in employment, when they know they have only a poor understanding of the future.  They’re going to stick with their status quo, including the types of jobs for which they hire.

Two bits of clarity that did emerge over those three years were the definition of “full-time employment” (that 30 hours per week bit) and the full-time employment baseline to be used in determining a business’ insurance requirements under Obamacare—what the look back period would be.  The look back period turned out to extend as far back as 12 months prior to the date the employer mandate was to take effect.

With an effective date of 1 Jan 14, that starts our period of interest at 1 Jan 13.  On 2 July, President Barack Obama decided he wouldn’t do his Constitutional duty of law enforcement as it applied to the employer mandate: he announced he would not enforce that mandate for a year.  1 July 13 thus marks the end of the two quarters of employment data that exist prior to Obama’s decision diluting the mandate’s effects on hiring.

What was the effect of the employer mandate on hiring during the time employers thought the look back period was operational?

Between Jan 1 and June 30, according to the Bureau of Labor Statistics, the economy added 833,000 part-time jobs and lost 97,000 full-time jobs, for net creation of 736,000 jobs.  In reality, the economy overall added no full-time jobs.  Rather, it lost them.

And

In July and August [the two months following the announced delay in enforcement and so after the look back period], the economy lost 20,000 part-time jobs and added 132,000 full-time jobs.

That’s pretty unequivocal.