Tag Archives: political economy

The Coming Economic Situation

Posted on by
Reply

Doug Elmendorf, the CBO Director, was talking to the House of Representatives’ Budget Committee the other day.  What he presented was a demonstration of the level of understanding of economics possessed by the present administration.

Congressman Tom McClintock (R, CA) asked Elmendorf whether more or fewer people were working today than at the start of 2009.    Elmendorf’s answer was unequivocal:

I believe the answer to that is there are fewer people, Congressman.

That was just one item.  The CBO director had lots more to say:

The pace of the recovery has been slow since the recession ended two and a half years ago.  And we project that it will continue to be slow for the next two years.

Elmendorf went on:

[E]conomic growth will be only 2 percent this year — and 1.1 percent next year. … [T]hat will leave the unemployment rate at 8.9 percent at the end of this year, well above current the current rate of 8.5 percent….  [I]n 2013, CBO estimates unemployment will be even higher — at 9.2 percent.

And

“…the fundamental fiscal challenge during this decade and beyond remains the aging of the population and rising costs for health care.  The number of people aged 65 or older will increase by one-third in the coming decade, substantially raising the costs of Social Security, Medicare and Medicaid.”

In addition, he said, the new federal health care overhaul will significantly increase the number of non-elderly people receiving assistance through federal health care programs, such as Medicaid.

All of that is likely to balloon current levels of debt.

Despite this, though, Progressives refuse to allow Social Security, Medicare and Medicaid to be fixed, or altered in any way.  President Obama, for instance, has said through his Press Secretary Jay Carney, the Republican effort to reform Medicare contained in the House-passed budget would “end Medicare as we know it,” as if that’s a bad thing.

The CBO did forecast a shrinking budget deficit over the coming years “under existing law.”  But existing law has the Bush tax cuts ending next year—for everyone, including those of us and small businesses with incomes under $250 thousand per year.  Existing law also has the that required 30% reduction in doctor reimbursement under Medicare reimbursement schedules.

And the Progressives are attempting to spin this coming disaster with distortion.  Congressman Bill Pascrell (D, NJ) insists

…there are people here that want to destroy the government, that it has no responsibility and it can’t live up to the obligations….

Of course, this elides the destructiveness toward our individual liberties from an ever expanding, ever intruding government.  This elides the destructiveness of government’s arrogating to itself responsibilities that ought to be ours, decisions that ought to be ours.  And it ignores the fact that among those obligations that government “can’t live up to” are those Social Security, Medicare and Medicaid programs that the Progressives won’t allow to be altered.

Congressman Chris Van Hollen (D, MD) has his distortion, also.  He insists that absent Progressive policies and President Obama’s “stimulus” plan, things would have been much worse.

The Recovery Act did serve its purpose.  It’s kind of like when you’re walking up an escalator that’s going down very quickly.  If you take no action you will go down very fast[.]

This would be amusing under other circumstances.  It ignores the fact that our economy now would be much better off had it not been for Big Government’s interference with it.  Indeed, in Van Hollen’s terms, if you’re walking up the down escalator, it might actually be better to get off that one and get on the up escalator.

No wonder the Progressives are running away from their records, away from our country’s future.

Economic Growth: Tax Cuts or Taxing and Spending Increases?

Posted on by
Reply

President Obama made his position clear in his State of the Union address (as if it wasn’t clear from his performance these last three years, already).  He wants more spending, and he wants to “pay” for it by increasing taxes on the hated rich.  He couldn’t find the energy to spend more than a sentence or two on spending cuts in his SOTUS; although he did find plenty of “green” energy for spending and tax hikes.

Indeed, when it comes to actually reining in government’s use of our money, Obama has been the czar of chimeras and false flags.  As the House Budget Committee Chairman, Congressman Paul Ryan (R, WI) has put it:

We have learned already that the president who’s had three years to try and propose real solutions to fix our fiscal crisis is ducking it….  He formed commissions and super committees, so he sort of outsourced the leadership only to decry their results.

Indeed.  Obama’s committees and study groups (I don’t share Ryan’s disdain for Obama’s use of them, per se; when one is ignorant of a subject, asking experts for advice is entirely appropriate) actually did generate some ideas worth serious discussion and which could have served as points of departure for real reform.  But for Obama, they were merely cynical tools of distraction; he blew off their recommendations without so much as a fare-thee-well.  And he’s been clear about how seriously he takes his own ideas.  Obama yukked it up over his “shovel ready jobs” chant:

…shovel-ready was not as shovel-ready as we expected.

Obama does have his apologists.  Third Way think tank’s Jim Kessler insists:

[W]hen you’re in the middle of a recession it’s very dangerous to stop priming the pump.  You know, you need to get escape velocity, get out of the atmospheric pull of recession, break loose and then let the economy go loose.

But what Kessler, et al., don’t understand is that that “atmospheric pull” actually is government interference in our economy.  We can’t “get escape velocity,” to mix metaphors, with the government’s enormous sea anchor dragging us back.

How has Obama’s Progressive policies of higher taxes and more spending been working out?

His first installment, nearly a trillion dollars’ worth, failed to reduce unemployment or deliver the shovel-ready jobs he promised.  Of course he’s demonstrated how seriously he took his “shovel-ready” claim, even as he was making it.  His profligate spending, while succeeding in exploding the Federal deficit and the Federal debt—which now our grandchildren will have trouble paying down—beyond anyone’s worst nightmare at the start of the Panic of 2008, have done nothing else but hold back a normal cyclic recovery that has been struggling since the official end of that recession in the spring of 2009—nearly two years ago—just as similar Keynesian foolishness did for the Depression.

For his second try, he wanted to spend even more, and now he wants to raise taxes on a narrow group of Americans of whom he disapproves.  Ryan suggests checking the numbers.  Doing so exposes the depth of Obama’s cynicism in continuing to push for higher taxes.

All these tax increases that the president is talking about, they only cover 8 percent of his proposed spending increases. The other 92 percent of the president’s spending increases are borrowed money.

Ryan is being polite.  Those 92% are actually fantasy money—that’s the level of seriousness with which Progressives take other people’s money.

Here’s an alternative: reform our tax structure, including reducing rates, closing loopholes, and ending subsidies and credits.  To paraphrase Ryan’s argument, with Progressive tax increases hitting small businesses disproportionately (and hitting all of us—individuals and businesses of any size—too hard, simply by existing), comprehensive tax reform is far better than arbitrarily and capriciously raising taxes.

And then cut government spending to below the tax revenue generated.

One step currently under consideration, with both Republican and Demoncrat support, is the continuation of the temporary payroll tax holiday.  But this is a chimera; it will produce no effect on our economy.  It will, though, continue defunding an already dysfunctional Social Security system.  With the Progressives already having agreed that a 2 percentage point cut in taxes is good (and with Obama originally calling for a 3 percentage point cut in payroll taxes for both individuals and businesses), Republicans are blowing an excellent opportunity to begin serious reform.  The better place to put these cuts is as permanent income tax cuts for individuals and businesses, and as a first step toward larger income tax cuts and tax reform, generally.

Arthur Laffer suggests a more specific tax reform in a column in The Wall Street Journal.  As Laffer points out, and as thinking Americans have understood for a long time,

Jobs and wealth are created by those who are taxed, not by those who do the taxing. Government, by its very nature, doesn’t create resources but redistributes resources.

Laffer goes on to suggest that a flat tax is the optimum reform.  Although he uses Newt Gingrich’s version (an optional 15% flat tax for individuals, with the option being to continue paying under the present system, and a 12.5% flat tax for business) as his example for discussion, Laffer’s point is generally valid.

Laffer argues

Fairness in taxation means that people and businesses in like circumstances have similar tax burdens.  A flat tax, whether on business or individuals, achieves fairness in spades.*  A person who makes 10 times as much as another person should pay 10 times more in taxes.  It is also patently obvious that it is unfair to tax some people’s income twice, three times or more after it has been earned, as is the case with the death tax.

The current administration’s notion of fairness—taxing high-income earners at high rates and not taxing other income earners at all—is totally unfair.

Progressives—led by Obama—argue that it’s the rates that have to be progressive in a fair tax system, not just the amounts actually paid.  But concern with rates paid rather than amounts paid fails to achieve equal treatment at the start—at the point of equal opportunity; “progressive” tax rates only look to create equal outcomes, after the differing levels of ability, work ethic, and so on have been applied by the people involved, folks who behaved voluntarily according to their own imperatives.  Progressive rates punish hard work and success while subsidizing lesser effort.  There’s no fairness in this.

Finally, as Laffer points out,

[A] flat tax proposal is not revenue-neutral, nor should it be.  If there’s one truism in fiscal policy, it’s this: Wasteful spending will always rise to the level of revenues.  Whether you’re in Greece, Washington, D.C., or California, overspending is a prosperity killer of the first order. [A] flat tax…would put a quick stop to overspending and return America to fiscal soundness.

 

*I fully anticipate that Laffer will be called racist for using this term, and I’ll be similarly accused for repeating it.  Understand, though: only a racist will actively look to create racism where none exists, so he can cry, “Racist!”

Greek Bailout, More

Posted on by
Reply

I wrote last fall on this subject.  Even though a new round of bailout funding is being discussed, my argument hasn’t changed.  Now, though, Spiegel Online International reports that it appears that European leaders are beginning to recognize the folly, as well: it’s best to cut the Greeks loose to find their own way, and to find their freedom from the fiscal bondage that ever-increasing debt and continued Greek resistance to making serious spending cuts are creating.  Yet the majority continue to cling to their asserted need for bailouts.

Everyone knows that Greece cannot repay its massive pile of debts, now at more than €350 billion ($459 billion).  But instead of effectively reducing the financial burden, European politicians intend to approve new loans for the government in Athens and go on fighting debt with new debt.  “If the country wants to remain in the euro zone, we should support it,” says Austrian Chancellor Werner Faymann.

And

If there are no other options, says Luxembourg Finance Minister Luc Frieden, “the public sector may have to provide more money.”

And

The representatives of the so-called troika, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), estimate the shortfall [for the second round of bailout payouts] to be about €15 billion, meaning that Greece needs €145 billion instead of €130 billion.

The only other option is to redistribute the burden. Under the current program, the IMF is responsible for about one-third, and the Europeans for two-thirds of the costs.

But these illustrate the depth of the Greek problem, and the inability of additional borrowing, of additional bailouts to solve the problem.

 

 

With the Greek debt exploding and its economic output shrinking, if not actually collapsing, there is no hope of repayment—or of growth at all.  Furthermore, this leadership school assumes, erroneously, that the “burden” should exist in the first place.  And it demonstrates their confusion of who it is that bears this burden.  It’s not the EU piggy bank owners from whom the bailout funds are intended to be collected.  It’s the Greeks, who are being burdened with even greater debt that they cannot repay, and so with even greater servitude, onto whom this burden is being loaded.  It has even been proposed that an external “budget commissioner,” with authority to veto Greek tax and spending decisions, be imposed on Athens.

But others of the political class are beginning to object to continuing the bailout.

[I]n Germany, the main donor country, leading politicians within the two coalition parties, the CDU and the business-friendly Free Democratic Party (FDP), do not believe that a majority of parliamentarians will vote for additional aid to Greece.

More generally,

The German government feels that the financial sector should bear much of the additional burden. If additional funds were needed, the banks would simply have to contribute more, the Germans argue.

This attitude is spreading beyond Germany, too; although without the economic powerhouse of Europe, the future of any more bailing out is highly questionable.

Moreover, the reasons for the growing reluctance, beyond a growing understanding of the folly of bailing out a debt crisis by increasing debt, are becoming more apparent.

The Greek economy is not productive enough to generate growth. Aside from olive oil, textiles and a few chemicals, there are hardly any Greek products suitable for export. On the contrary, Greece is dependent on food imports to feed its population.

“Greece has been living beyond its means for years,” an unpublished study by the German Institute for Economic Research (DIW) concludes. “The consumption of goods has exceeded economic output by far.”

And this [emphasis added]:

…lack of progress on austerity measures long-since passed.  Attempts to privatize state-owned enterprises, for example, have met with limited success at best.  The Greek government initially announced it intended to raise €50 billion in four years by selling state-owned companies and property—a sum that was calculated into the country’s financing needs.

But lack of interest has crippled the program.  In 2011, the government’s privatization program brought in just €1.7 billion instead of the €5 billion planned.  In 2012, expectations have been reduced from €11 billion to just €4.7 billion. Government-owned enterprises in Greece are simply not competitive enough to attract investors.

A solution is being offered.

Instead, economists recommend finally doing what is already unavoidable: sending the country into an orderly insolvency. Greece’s government creditors, which include the ECB and, most of all, the partner countries that have lent the country money until now, would have to abandon about half of their claims so that the country’s mountain of debt could be reduced to a tolerable level.  Then the measures that can return the Greek economy to growth on its own can become more effective: reforms in the labor market, more competition in the service industries and foreign investment.

I’ve insisted all along that Greek bankruptcy is necessary to free the Greeks and give them a new start.  If the Europeans think an “orderly bankruptcy” can be arranged, more power to them.  However, the success of this, with its continued Greek membership of Greece in the EU and in the euro zone, depends on those follow-on reforms actually be implemented—particularly labor reforms, and one not mentioned: getting all Greeks to pay all of their taxes.  I’m not sanguine about either, but especially about the reforms.  Nevertheless, bankruptcy is the only way out for Greece, the only way back to freedom and solvency.

Success Criteria

Posted on by
Reply

President Obama is actually bragging about this.

President Barack Obama wears his decision to rescue General Motors and Chrysler three years ago as a badge of honor, a move to save jobs in an industry that helped create the backbone of the middle class more than a half-century ago.

…pointing to GM’s reemergence as the world’s largest automaker and job growth and profitability in the U.S. auto industry.

But Obama disingenuously argues from a false premise.  The American auto industry was—and is—in sound health.  Two auto companies, GM and Chrysler, were in trouble.  One of those, courtesy of the Obama “bailout,” now is no longer an American car company.  Chrysler is owned by the Italian company, Fiat.  And both companies still owe significant amounts of money to the government.

The American auto industry, though, consisted—and consists—of GM, Chrysler, Ford, Toyota, Honda, Kia, Nissan, and a number of other companies, all of whom assemble cars at plants in the US, and none of whom build cars from the ground up in the US.  All but two of these never were in serious trouble, and all but two are very sound companies today.  Without bailouts.

Furthermore, if GM is so profitable, why is this administration reluctant to sell the shares of government ownership—oh, wait, that would result in an enormous loss.  GM stock currently sells for $24; it needs to reach $53 to recoup the bailout money poured in.  This highly “profitable” company began 2011 selling at $36, and it’s been downhill all year.  We taxpayers have $23 billion in the wind as GM stock falls away from that break-even point.  On the other hand, why won’t Obama’s administration issue the government’s shares to its rightful owners—us, whose tax money funded the bailouts and paid for those shares—and let us retain or sell our shares according to our own decision criteria?

Chrysler is privately owned, so its valuation is harder to determine, but we Americans, through the Obama administration, own a significant fraction of this private company.  The same questions apply here.

Governor Mitt Romney pointed out at the time, and he repeats it today,

[C]apital markets and bankruptcy—it works in the U.S.  The idea of billions of dollars being wasted initially, then finally they adopted the managed bankruptcy.

Indeed, Obama’s “bailout” abused the bankruptcy system already in place, and it abused the companies’ creditors: GM’s senior creditors got a tiny fraction of what they were owed—and were denounced by Obama as “greedy speculators,” and threatened with getting nothing at all if they didn’t shut up—while the union was handed a 17.5% ownership.

Today, Obama, Vice President Joe Biden, et al., claim the decision saved an estimated 1 million jobs throughout the Midwest.  Former Governor Ted Strickland (D, OH) even says,

I don’t know how any reasonable person can fail to acknowledge that this rescue plan worked and the country has benefited.

However, they cynically refuse to offer any concrete, objective evidence to substantiate these claims.

They provide, instead, only anecdotes of union assertions and claims by those beholden to the Obama administration for having received government paymentshandouts from it.]

Notice that.  It doesn’t get any plainer.  This administration ignored bankruptcy law, ignored bankruptcy courts, pushed senior creditors to the back and gave the companies to the unions and to the government.  We’re still owed $30 billion on the “bailout” that we’ll never get back, and the fiasco resulted in two companies being owned by the US government, the Canadian government, the auto unions, and the foreign car company, Fiat.  The unions and Fiat remain the primary owners, the US government still owns significant portions.

Think about this administration’s definition of success and its view of the law as it implements its definition as you go to the polls this fall.

On Creative Destruction in a Free Market

Posted on by
Reply

Here is an example of the creative destruction that a free market, especially one free of government interference, can generate [emphasis added].

In 2011, auto makers sold fewer than 13 million cars and light trucks in the U.S., and this year’s sales are expected to approach 14 million, levels that once would have been considered catastrophic for the U.S. auto industry.

Instead, the industry’s major players are steaming ahead.  A much leaner Chrysler Group LLC next week is expected to report $2 billion in operating profit for 2011.

“Not too many years ago, the U.S. industry looked at [sales of] 16 million [vehicles a year] as a permanent fixture in the landscape,” Chrysler CEO Sergio Marchionne said earlier this month at a conference sponsored by Automotive News.

“We can survive at 10 million” a year, he said. “The U.S. recession provided critical impetus to address the critical issues that the industry had dragged behind it for years.”  Last year Chrysler sold 1.37 million vehicles in the U.S., 26% more than in 2010 but again well below the 2.14 million it sold in 2006.

Peter Nesvold, a financial analyst at Jeffries & Co. in New York, said the turning point for the industry was closing and downsizing plants, which took out about 30% of its production capacity and eased the pressure to keep making cars even when customers aren’t buying.

“Supply and demand are roughly equal, and that’s healthy,” he said.

Notice that.  Excess production was eliminated, and while in this case there was a net job loss, because the company is now competitive, it has a chance of surviving, and the majority of the company’s employees are able to stay in their jobs.  Furthermore, today’s Fords, GMs, and Chryslers are better cars with more gee-gaws, like GPS navigation and touch screen dashboards; hybrid versions exist today, too, that were not available before the recession forced a sorting out, and were not going to be available any time soon before that sorting.