Tag Archives: markets

Supports and Consequences

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Rep. Collin Peterson (D, MN) has proposed a Dairy Market Stabilization Program to replace existing Dairy Product Price Support and Milk Income Loss Contract Programs, but the debates surrounding the proposal misses a key point.

“The Dairy Market Stabilization Program [proposed by Peterson] is specifically designed to increase milk prices,” the Consumer Federation of America says.  “As milk and dairy prices increase, low-income consumers are hit especially hard.”  National Taxpayers Union, Americans for Tax Reform, and Citizens Against Government Waste warn of other results.  Artificially propping up milk prices “will ratchet up budgetary pressures on the government’s food and nutrition programs.”  Further, the DMSP, if passed, would empower government to limit how much milk is to be produced given falling profits; this is intended to strengthen a “safety net” for a government-favored group.

While these are valid arguments; they don’t go far enough.  The key point is the long list of unintended consequences of this sort of program and of subsidies in general.  One narrow consequence has to do with this: the CBO estimates that the DMSP would save us taxpayers $167 million over five years.  How much would we save if we didn’t have any of these three subsidies?

Another consequence comes from this effort to “help strengthen a vulnerable dairy sector.”  Dairy wouldn’t be a vulnerable sector except that government subsidies have protected it from the strengthening and hardening that competition produces.  The sector is soft and “vulnerable” as a direct result of its having become dependent on government for its “protected” profits and its protection from the risk of failure.

This stems from another unintended consequence.  The bailouts of 2008 and 2009 have simply fostered an environment wherein everyone feels entitled to a bailout; no one should have to suffer the consequences of their own decision-making, or even of plain bad luck (and note carefully that a hand up is not a bailout).  All of us are entitled, goes the new plaint, to having taxpayers indemnify us from life.  However, something that was a mistake the first time is not made correct by repeating it.  It remains a mistake.

Yet another consequence is that ratcheting up of budgetary pressures on the government’s food and nutrition programs that was warned of above.  The NTU, ATR, and CAGW are right as far as they go, but they miss the larger point, one hinted at by the CFA: the subsidies, including other subsidies that would be cascade victims of particular subsidies’ budget pressure, all drive up—by design—prices that consumers, including poor consumers, must pay.  (And so we have food stamp programs, and other food and nutrition programs, to help those poorer consumers pay those artificially inflated prices….)

There’s another unintended consequence.  Consumers—taxpayers—in return for our tax money being taken away from us to pay these supports, have even more of our money taken away from us by our having to pay those artificially high prices that are the goal of these supports.  We’re forced to pay twice for the same milk.

There’s the unintended consequence of the moral hazard involved.  Industries that are protected from failure, government-favored small businesses that are protected from failure, have no incentive to control their own costs, have no incentive actually to compete.  They get high prices (which we must pay, both through those high prices and through the epicycles of subsidies on top of subsidies to prop up those prices and then to help others pay those propped up prices), and they have high costs with which to “justify” those high prices.  This is related to those original mistakes of the 2008 and 2009 bailouts.  How can a businessman, or an investor in that business, or a lender to that business, assess his risk accurately when there is no downside from risk?  Another aspect of the moral hazard question is this: one justification for the supports is that dairy farmers would go out of business without them.  But if they can’t compete, why should they be in business?  Why does any particular business or industry have an inherent right to exist, regardless of market competition forces?  Who decides which business or industry should be artificially continued?

Finally, here is a consequence almost as bad as the moral hazard one, a consequence with more concrete and immediate impact on our pocketbooks.  Supporters of the DMSP worry that were there a repeat of 2009’s economic dislocation (we’re out of that one?), a repeat of the problem of falling milk prices coupled with abruptly rising input prices, “I fear we could lose half our dairies,” as Congressman Peterson puts it.  But why did those input prices rise?  One (but not the only) reason is ethanol subsidies.  These diverted food corn away from the dairy herds (and other cattle herds, and people): nearly 30% of corn went to fuel production in 2009; that expanded to 35% in 2010.  The effect from seemingly unrelated subsidies on those input prices for milk production is apparent.  This diversion, in cascading unintended consequence, reduced our supply of food, raised the price of that food that we must pay, and drove cost increases in those food stamp subsidies.

Who is Serious about Solutions?

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Let’s look at the offers.  The Democratic Party Senate hasn’t offered a budget in nearly three years.  The last budget proposal proposed by President Obama, last winter, was laughed out of the Senate 97-0.  Not even the do-nothing Democrats took it seriously.

On the other hand, the newly elected Republican House of Representatives, flush with modern Conservatives, passed a budget largely developed by Budget Committee Chairman Paul Ryan (R, WI) in their first month in office.  It’s lain dormant in that Democrat’s Senate, where the Senate Majority Leader, Harry Reid (D, NV), has steadfastly refused even to let it come to the floor for debate, much less be voted up or down—or a counter proposal made.

What have the President and his fellow ProgressivesDemocrats offered in response?  Straw men attempting to deflect the discussion away from the issues: “We should not be in a race to the bottom where we take pride in having the cheapest labor and the most polluted air and the least protected consumers,” President Obama said from the campaign trail at a recent San Francisco fund raiser.  Of course, modern Conservatives, and Republicans, agree with him.  Who, indeed, has proposed such a thing?  This is simply an attempt to change the subject, driven by the fact that the Obama team has nothing to offer beyond their mantra of more spendinginvestment and more taxes.

Another straw man is this chestnut: “Despite what some Republicans have argued, I believe that we have to ask the wealthiest Americans and biggest corporations to pay their fair share by giving up tax breaks and special deductions.”  He doesn’t consider that the top 10% paying 70% of the nation’s income taxes to be their fair share.  He also carefully elides the fact that his proposals go far beyond eliminating deductions and loopholes—they include outright rate increases.  He does consider the bottom 50% paying 3% to be paying their fair share.

On the other hand, President Obama did offer, last month, a $447 billion Jobs Bill, and he insisted “Pass this bill now.”  Never minding that the proposal had little that would generate jobs, but it did have considerable spending and the requisite tax increase, Senate Minority Leader Mitch McConnell (R, KY) agreed that it should be debated and voted on, and he attempted to honor Obama’s “request.”  The White House, though, promptly objected, claiming that an actual vote was just a “political stunt,” followed by Reid refusing to allow the vote.  Only later did Reid bring the bill to the floor, and it was promptly voted down, with Democrats agreeing with the Republicans that the bill was a bad idea.

The Democrats also insist, especially in the aftermath of their “Jobs” Bill failure, that the Republicans are the Party of No, and they have no ideas—only obstruction.  But this ignores the fact that the (Republican) House of Representatives has already passed at least seven jobs and jobs-related bills, of which exactly zero have been taken up by Reid’s Democratic Party Senate.  This also ignores the fact mentioned above that that same Senate hasn’t even troubled itself to propose any kind of budget, much less one that might do some jobs creation good.

And there’s the simply inane.  We have Reid, in a speech on the Senate floor saying with an absolutely straight face, “it’s very clear that private sector jobs are doing just fine. It’s the public sector jobs where we’ve lost huge numbers.”  Reid said this after the August jobs report had come in with zero private sector jobs created for that month, and with a national unemployment rate over 9% and 14 million Americans without any employment, much less in the private sector.  Additionally, from the start the Obama administration has been more interested in fixing blame (it’s all Bush’s fault, even now, three years later) than they have been in fixing the problem.

And there are the plain ad hominem attacks, which aside from their dishonesty, simply demonstrate the lack of solutions, the absence even of ideas.  For instance, members of the Congressional Black Caucus have called black conservatives like Herman Cain and Allen West (R, FL) oreos, they have accused the Tea Party of being racist, and one member consistently referred to the Tea Partiers as tea baggers. And there’s the plain race-baiting of the Progressives: Rep Elijah Cummings (D, MD) said in a recent Press Pass interview, “I think when [Tea Party members] can vote for a Herman Cain and hear him say the things that he says they feel like, ‘Well, you know, I can, I support this guy and… so it shows that I’m not racist and I’m supportive.'”

In sum, one of these groups emphasizes class warfare divisiveness and evasion of the problems facing us, and the other group offers unification and solutions.  For one group, it’s the rich vs. the rest of us.  Only the definition of “rich” floats at convenience: it’s those who make more than $250 thousand one day, it’s the fat cat millionaires and billionaires another.  For another group, it’s a matter of all of us being in this together, with solutions that affect all of us and that benefit us all.  One example of this is in Ryan’s speech on “Saving The American Idea” at The Heritage Foundation: “Rather than raising taxes and making it more difficult for Americans to become wealthy, let’s lower the amount of government spending the wealthy now receive[,]” and “…true sources of inequity in this country – corporate welfare that enriches the powerful, and empty promises that betray the powerless.”  And this is that budget bill and those jobs bills that have been passed out of the House of Representatives and that the Senate refuses to consider.

Chinese Danegeld

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Once you pay the Danegeld, you never get rid of the Dane, goes the saying.  It’s appropriate that this European saying, originating in an ancient attempt to buy off (Danish) Vikings—which, of course, kept the Vikings coming—is being demonstrated today in Europe.

In the aftermath of the European Union’s massive bailout of the Greeks on the backs of European taxpayers and banks, EU leadership is going hat in hand to China asking for funding for the European Financial Stability Fund (EFSF).  China is insisting, though, on far more than just the usual concrete guarantees of a decent return that any investor will demand of a potential business partner who is unreliable.  China is demanding a muzzle on European speech.  If China agrees to participate, apparently, the EU must, in return, abjectly surrender its right to criticize Chinese manipulative monetary policy.

It remains to be seen whether the EU will knuckle under on this.  However, their respect for free speech never has been strong.  Just ask Geert Wilders, the Dutch Parliamentarian who was hailed into court over a four-year period for the heinous crime of criticizing Muslims, and in the height of irony, banned for several months from entry into Great Britain, his presence representing a “threat to one of the fundamental interests of [British] society.”

The Chinese are demonstrating yet another price, an unintended price, of bail outs.  And what price will they demand next?

The Campaign and My Choice

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With this post, I conclude my short series consisting of my analyses of the Republican candidates for the nomination for President.  To recap, I limited my discussions to three candidates: Mitt Romney, Herman Cain, and Rick Perry.  The structure of this series consisted of a collection of posts concerning what I didn’t like about the candidates and then a series of what I did like about them.  This is my endorsement of a single candidate.

None of the candidates have adequately addressed the matter of illegal immigration and of illegal aliens.  Some have taken a hard line toward sealing and controlling our borders, and this is entirely appropriate.  However, controlled borders are only half the problem.  The vast majority of the illegal aliens are present in the United States because they want a chance to participate in the American dream, to avail themselves of the benefits of America’s exceptional culture.  They would be highly productive and valuable citizens were they given the chance.  Yet we throw up roadblocks after barriers after obstacles to impede them.  It can take a couple of months to get a non-immigrant visa; B-1 visas can take a month, H-1B visas as long as six months, and the H-1Bs have very low annual quotas. It shouldn’t be that hard to enter the United States legally.  There should be border crossing stations every mile along our border (which, just incidentally, would put the human traffickers—the mules, and worse—immediately out of business).  Visa approval should occur in days, not months (in today’s computerized world, it shouldn’t take months to run a background check), and there should be no quotas.  With none of the candidates addressing this aspect of illegal immigration, their handling of immigration generally is, in this context, I think a wash.

Perry: Perry’s attack ad campaign is tactically foolish and so calls in to question his judgment.  The Republican candidates should be running against Obama and touting their own superior qualities for that task; they should not be attacking each other and giving the Progressives ammunition for the Presidential campaign.

When asked, in Tuesday’s Dartmouth University debate, to be specific about his economic plan, Perry repeatedly said he’d unroll his plan “over the next three days.”  When Romney asked him directly, he responded that Romney had been developing his plan over the last five years, whereas Perry had been developing his only over the last 6 weeks.  This was pretty weak and smacked of excuse-making, especially since Perry has been governor of the second largest state for the last 11 years (and he’s not yet passed up a chance to remind us all of that), and so he has considerable experience at developing economic plans.

Finally, Perry doesn’t communicate well in a fluid environment.  A man who can’t think on his feet isn’t Presidential material.  A Texan who can’t is disappointing.

Romney: Romney’s responses concerning Romneycare and Obamacare in the Dartmouth debate increased my confidence both in his willingness and his ability to repeal Obamacare were he to be elected President, and it showed an ability to respond to Democrats’ attempts at assimilation of Romneycare into Obamacare.

He also has a 160 page Economic Plan, with 59 policy proposals in it.  However, it isn’t that hard to fix our economy and government’s interference with it by limiting spending to less than revenues.  This isn’t rocket science.  This is a Technocrat is overcomplexifying things.

His evasive generalities in response to other economic questions, though (Cain: “can you name some points in your 59-point complex economic plan?”  Romney: <mumble>), indicate to me that he still hasn’t very many specifics fully developed.  And he doesn’t seem willing to get specific; would he take a stand on specifics in dealing with Congress?  Yeah, yeah, I said he’d take a stand here, but his Dartmouth performance makes me wonder about his constancy.  His campaign has been one of avoiding mistakes rather than of advancing concrete ideas.

Finally, at a campaign stop the day before the Dartmouth debate, The Daily Caller asked Romney whether current AG Eric Holder should resign over his performance with DoJ’s Fast and Furious.  Romney’s answer was lengthy and evasive—it took him 35 seconds to say he wasn’t going to say.  When the question was repeated later to Romney’s aide, Eric Ferhnstrom, the aide said Romney “prefers [press] availabilities like this, where his thinking is more organized, as opposed…answering questions on the fly. He doesn’t think that’s conducive to a good conversation.”  See my remarks above about thinking on one’s feet.

Romney is no Eric Cantor, or Paul Ryan.  Or Newt Gingrich.

Cain: Cain’s up from the ranks experience in small businesses and large are a serious plus: in a free market, the entrepreneurs, small businesses, and large businesses are in a positive feedback loop, and that’s a strong economy with a plethora of opportunity.  Cain understands the limits to government effectiveness in that environment, and he understands the necessary fixes, simple fixes.

I like his view of making every section of government justify its budget in detail.  That’s not zero-based budgeting, but it’s close enough, and it’ll work well if not done too often.  He’ll never pull it off, but the threat of it will have its own benefit.

In the Dartmouth debate, he faced serious criticism for the first time: now he’s one of the front-runners, and so a target.  His ability to keep his humor, while providing specifics (he was subject to an “insider” cheap shot when he refused to violate a confidence concerning a couple of possible nominees for his administration) rather than evasion or generalities was refreshing.  And he was able to defend those specifics.  On the other hand, he wasn’t often seriously challenged: “turn 9-9-9 upside down; the Devil is in the details?”  How cute.

His consumption tax is a serious problem, but that can be worked.  Overall, his tax proposal represents a lower set of rates for individuals and businesses, and that’s all to the good: the more of our money left in our hands, under our judgment, the better off our country will be.

In the end, my preference is Herman Cain.  He has the best ideas, and he does, if not the best job, at least a very solid job of presenting and selling them.  And, crassly, it’ll be difficult for the Progressives to keep playing their race card on anyone who disagrees with Obama.  Although we might hear mutterings of Uncle Tom, or Oreo.

Rational Expectations and Jobs and Progressives

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Rational Expectations is the economic theory that people act rationally, by and large and in their aggregate, in their decisions in the market place.  That is, even in the face of incomplete information, people generally form logical predictions about their future, and they act in a logical manner within the framework of their predictions.  Of course, information used in those logical predictions includes government’s actions in the market and people’s own view of what those actions will produce, independently of what government officials might aver.  And of course, in the face of incomplete information, mistakes are inevitable, both individually and across the economy.

The Progressives in government, despite the empirical evidence to the contrary from FDR’s failed Keynesian spending and Obama’s Keynesian Stimulus Act in 2009, instead insist that government spending is stimulative in and of itself, and government taxing is irrelevant to Americans: we will make no predictions from government spending, and we’ll simply accept the taxes as part of our environment; we’ll form no rational expectations of the future from these actions.

Against this backdrop, what are we to make of the Obama Jobs Bill just defeated in the Senate?  Here are the essential components of the Obama proposal:

  • $175 billion in new spending,
  • included in this was $44 billion to cover an extension of unemployment insurance even beyond the present 99 weeks of paying people for not working,
  • a further reduction in the employee’s payroll tax, a parallel reduction in the payroll tax of employers whose payrolls are $5 million per year or less, with this payroll tax reduction set to expire in 15 months, and
  • a permanent surtax of 5.6% on millionaires.

In the Progressive fantasy economics world, employers were to rush right out and hire workers, knowing that just having them on the payroll 15 months from now, their payroll tax cost of these new employees will double.  Never mind that it takes that long in a modern economy for an employer to begin to recoup the hiring and training costs of a new employee and for the employee to become productive.

Also in this world, the new employees in their temporary jobs, and existing employees with their temporary increase in take-home pay, will run right out and spend that money on everything they’ve ever wanted, and the stimulus is carried through.

Finally, in this fantasy world, the millionaires will simply not respond to their new tax: they’ll keep right on doing whatever it is they so nefariously do with their ill-gotten gains.

Here’s what rational expectations says Americans will do, and what we already did, for instance, with Stimulus I in 2009 and with the prior temporary payroll tax reduction (and the one time payments from the Economic Recovery Payment program and the Making Work Pay tax credit).  The fourteen people nationwide who actually got jobs out of Stimulus I did increase their spending, but not by much: they used as much of their windfall as they could to cut into their debts, which had increased sharply as they tried to cover necessary expenses while having no income.  We didn’t spend those payroll tax reductions, knowing they were impermanent—knowing, even, how short-lived they were.  We didn’t spend those one-time payments, either.  Instead, we saved them against future needs, trying to rebuild our savings, or we paid down our debt.  Employers didn’t hire, accurately predicting into the future that those temporary reductions would expire and their costs would expand suddenly and sharply.

The 99 weeks of unemployment payments already have led to a level of extended unemployment duration unmatched in decades: nearly 45% of those currently out of work have been in that state for more than 6 months.  As any freshman Econ student understands, when government subsidizes a thing, government gets more of that thing.  And so it would have been with the proposed extension in unemployment insurance beyond those 99 weeks.

And those millionaires with their shiny, new tax?  They were going to do what any rational human being does: adjust their incomes and investments so as to mitigate the effect of that tax: these job producers, these owners of businesses, were going to reduce their exposures—and not hire more workers in the process.  Those would have been permanent adjustments to their permanent new tax.

These rational responses to temporary government actions were such a complete shock to the Progressives since Stimulus I and those one-time “stimulative” payments that they simply denied the responses occurred.  This is why the Obama jobs bill, thankfully defeated in yesterday’s vote, was proposed in the first place, and why it was structured as nothing more than Stimulus I Reduced.

This Progressive move is part and parcel with their attitude toward the intelligence of the workaday American: we’re just too stupid to think for ourselves.  We’re not capable of behaving rationally.  This is also demonstrated by their mantra that our problem, the reason we don’t just blithely follow them over the cliff, is that we’re too stupid to understand their message.  They must keep adjusting how they communicate with us because we just didn’t get it the first time.  Or the second.  Or the umpteenth.  And so, since we’re too dumb to form rational expectations, their interminable Keynesian spending is perfectly sound economics.

Progressives actually argue, with a straight face, that their programs have saved or created millions of jobs.  Here’s one example of how well that’s actually worked, in the Progressives’ precious “green jobs” milieu, and how honestly their accounting has been done.

Finally, no Progressive (or modern Conservative, come to that) has been able to show that the “recovery” currently in “progress” is due to the “stimulus” bill passed in 2009, or due to the stupendous Federal spending and even more stupendous Federal borrowing, generally, or to some combination of these.  They cannot offer any evidence that whatever anemic recovery might be in progress is due, instead, to an ordinary, normal business cycle recovery.  A recovery that has, in fact, been held back by all of that spending and borrowing, just as the nascent economic recovery in 1937 died shortly after birth from the Federal spending and borrowing and free market interference of FDR.