The Obama administration is taking directions straight from the playbook, "How to Turn a Recession Into a Depression." It was written about 80 years ago and has recently resurfaced at the White House. Step one is protectionism.
The U.S. fired the first shot, rescinding the ability of Mexican truckers to operate here. The retaliatory strike was received yesterday - higher tariffs on American goods exported down South. The result is that everyone loses.
There is no more universally accepted concept in economics than the benefits of free trade (and, of course, the harmful effects of protectionism). Though there might be some isolated beneficiaries of a protectionist agenda, both economies are worse off. Resources are distributed less efficiently, and perhaps more importantly, consumers pay more for goods. Real wages go down. Yes, the poor are generally hurt most by barriers to free trade.
The United States should be moving in the opposite direction. We need more free trade, not less. Congress has already inexplicably stalled free trade agreements, such as the one with Colombia. What should be done is a unilateral free trade agreement, whereby the United States assumes the role of leader of the free (market) world and drops all of its barriers to free trade.
While protectionism provides a siren song, it is free trade that promotes economic growth and job creation. It is free trade that benefits consumers and increases real wages. A vociferous free trade policy will be enormously helpful in facilitating this economy out of recession.
Tuesday, March 17, 2009
Friday, March 13, 2009
Congratulations, You’re Broke: Down 20% and $11 Trillion Vastly Underestimate Wealth Destruction
The Federal Reserve released data yesterday showing a 20% drop in household wealth from a peak in the second quarter of 2007. The wealth loss for the year of 2008 was $11.2 trillion, $5.1 trillion of which came in the fourth quarter. As astounding as the numbers are, they almost certainly vastly underestimate the magnitude of wealth destruction the country is experiencing.
Part of the differential is obvious – the markets have continued to plummet in the first quarter of 2009. One estimate, given the decline in stocks and housing prices, lops another $2.5 trillion, or 5%, off of household wealth. Leaving all prediction of future stock and housing market movements aside, the Fed number still likely comes under the reality. Given the leveraged nature of home ownership, the actual wealth decline from an absolute drop in price is magnified.
Much more importantly, though, the Fed calculation misses a vital side of the wealth ledger – liabilities. The “New Era of Responsibility” budget entails a deficit for next year that is greater than the previous eight years combined. It also projects similar deficits as far as the eye can see. The estimates of GDP growth are suspect, but the spending bonanza is certain, and gargantuan. Trillions upon trillions of new debt to finance the spending is slated for the next several years. A household’s credit card debt represents a net reduction in overall wealth. The government’s debt represents a net reduction in the country’s collective wealth. The massive projected increase in government spending is essentially a repugnantly awe-inspiring obliteration of household wealth.
Yet it gets worse. There are several aspects of household wealth that are difficult to put a number on, but are nonetheless a vital aspect in the calculation, even if the amount itself is theoretical. A household’s wealth includes the present value of its projected future income stream. To the extent that potential future income has been squashed, there is a corresponding reduction in household wealth. Unemployment is on the rise, millions of jobs are being lost, and wages and bonuses are being suppressed. Exacerbating the loss of potential future income is the decreasing value of what little money households have left. As the government prints more and more dollars to satisfy its corpulent spending habits, the value of that money decreases.
From the theoretical to the abstract, the picture gets even uglier. There is a wealth value associated with simply being an American. Sadly, this value is diminishing. Again, while the computation of the number is vague, the logic is clear. The American way of life has intrinsic economic value. It comes from the rule of law, the natural resources, the technology and infrastructure, and our core fundamental values. It is a major part of what causes millions to flock to our borders and seek entry. The level of economic freedom we enjoy is a vital component of household wealth. But it is on the wane, and headed down a terrifying path.
Thankfully, all of the above aspects of wealth destruction can be reversed. To do so, we must get government to about-face from socialistic tendencies to pro-growth fiscal sanity. And we must right the ship towards economic freedom. We must drastically change the course we are on, lest the phrase cometh, “Congratulations, you’re broke!”
Part of the differential is obvious – the markets have continued to plummet in the first quarter of 2009. One estimate, given the decline in stocks and housing prices, lops another $2.5 trillion, or 5%, off of household wealth. Leaving all prediction of future stock and housing market movements aside, the Fed number still likely comes under the reality. Given the leveraged nature of home ownership, the actual wealth decline from an absolute drop in price is magnified.
Much more importantly, though, the Fed calculation misses a vital side of the wealth ledger – liabilities. The “New Era of Responsibility” budget entails a deficit for next year that is greater than the previous eight years combined. It also projects similar deficits as far as the eye can see. The estimates of GDP growth are suspect, but the spending bonanza is certain, and gargantuan. Trillions upon trillions of new debt to finance the spending is slated for the next several years. A household’s credit card debt represents a net reduction in overall wealth. The government’s debt represents a net reduction in the country’s collective wealth. The massive projected increase in government spending is essentially a repugnantly awe-inspiring obliteration of household wealth.
Yet it gets worse. There are several aspects of household wealth that are difficult to put a number on, but are nonetheless a vital aspect in the calculation, even if the amount itself is theoretical. A household’s wealth includes the present value of its projected future income stream. To the extent that potential future income has been squashed, there is a corresponding reduction in household wealth. Unemployment is on the rise, millions of jobs are being lost, and wages and bonuses are being suppressed. Exacerbating the loss of potential future income is the decreasing value of what little money households have left. As the government prints more and more dollars to satisfy its corpulent spending habits, the value of that money decreases.
From the theoretical to the abstract, the picture gets even uglier. There is a wealth value associated with simply being an American. Sadly, this value is diminishing. Again, while the computation of the number is vague, the logic is clear. The American way of life has intrinsic economic value. It comes from the rule of law, the natural resources, the technology and infrastructure, and our core fundamental values. It is a major part of what causes millions to flock to our borders and seek entry. The level of economic freedom we enjoy is a vital component of household wealth. But it is on the wane, and headed down a terrifying path.
Thankfully, all of the above aspects of wealth destruction can be reversed. To do so, we must get government to about-face from socialistic tendencies to pro-growth fiscal sanity. And we must right the ship towards economic freedom. We must drastically change the course we are on, lest the phrase cometh, “Congratulations, you’re broke!”
Tuesday, March 3, 2009
The Good News: Rich-Poor Gap Has Been Obliterated
Is there a light amidst the economic darkness? Those who have for years been excoriating the widening of a rich-poor gap should now be ecstatic. As countless trillions of dollars of wealth has been wiped out in the bursting of the housing bubble and the ensuing financial market meltdown, there can be no question the difference in wealth between rich and poor has shrunk considerably. Be careful what you wish for.
Nobel Laureate Paul Krugman is one such cheerleader. Back in the day, Professor Krugman was expounding on the technicalities of comparative advantage, and how free trade is one rising tide that lifts all boats. Since then he has become unhinged. Krugman has borrowed with enthusiasm the phrase Great Compression to describe the period from 1933 to 1945. Many have been and currently are enamored with the concept of economic woes leading to higher equality of wealth - or lack thereof.
This obsession with the rich-poor gap should seemingly be satiated by the massive destruction of wealth in the present. No need to worry anymore about private jet travel – that mode of transportation is now reserved for only government officials. Are Wall Street bonuses a thorn in the side? No longer – modern finance has one foot in the grave (the cemetery being lower Manhattan). The dreaded McMansions are becoming a novelty of a previous way of life. Got 401(k) envy? Now it must be only half the jealousy.
Yes, the economic meltdown and present march towards socialism is evening the playing field. As unemployment rises, by definition more people are earning similar wages (a number that trends towards zero). While the stock market continues to free fall, the collective lack of wealth increases. As economic growth disappears, the dimming of prospects becomes more universal.
The debate over trickle-up or trickle-down economics also diminishes. The slowing of economic activity means there is no trickling in any direction. The real bright side is that hopefully we can dispel the notion that getting rich is bad and that it is desirable to have as narrow a rich/poor gap as possible. The means certainly do not justify the ends, but actually create a self-fulfilling prophecy whereby all get poorer. The desire might be good-hearted, but it is simply wrong-headed. Everyone suffers. Only sound economic principles will lead to economic growth and enhanced prosperity for all.
Nobel Laureate Paul Krugman is one such cheerleader. Back in the day, Professor Krugman was expounding on the technicalities of comparative advantage, and how free trade is one rising tide that lifts all boats. Since then he has become unhinged. Krugman has borrowed with enthusiasm the phrase Great Compression to describe the period from 1933 to 1945. Many have been and currently are enamored with the concept of economic woes leading to higher equality of wealth - or lack thereof.
This obsession with the rich-poor gap should seemingly be satiated by the massive destruction of wealth in the present. No need to worry anymore about private jet travel – that mode of transportation is now reserved for only government officials. Are Wall Street bonuses a thorn in the side? No longer – modern finance has one foot in the grave (the cemetery being lower Manhattan). The dreaded McMansions are becoming a novelty of a previous way of life. Got 401(k) envy? Now it must be only half the jealousy.
Yes, the economic meltdown and present march towards socialism is evening the playing field. As unemployment rises, by definition more people are earning similar wages (a number that trends towards zero). While the stock market continues to free fall, the collective lack of wealth increases. As economic growth disappears, the dimming of prospects becomes more universal.
The debate over trickle-up or trickle-down economics also diminishes. The slowing of economic activity means there is no trickling in any direction. The real bright side is that hopefully we can dispel the notion that getting rich is bad and that it is desirable to have as narrow a rich/poor gap as possible. The means certainly do not justify the ends, but actually create a self-fulfilling prophecy whereby all get poorer. The desire might be good-hearted, but it is simply wrong-headed. Everyone suffers. Only sound economic principles will lead to economic growth and enhanced prosperity for all.
Wednesday, January 28, 2009
The "Stimulus" is an Abomination of Rational Thought
The House is set to vote today on the now infamous "stimulus" bill. Yesterday, President Obama cruised down the block to make his pitch to Congress. He pleaded to "keep politics to a minimum." Unfortunately, the President has it backwards. The "stimulus" bill is maximum politics - it is logic and reason that are kept to an absolute minimum.
Has the President, or any Congressman for that matter, even attempted to put forth a rational argument as to how the "stimulus" will actually accomplish its stated mission of stimulating the economy? Of course there have been claims as to what the results will be: According to Congressional Budget Office Director Doug Elmendorf the “stimulus” will provide a substantial boost to the economy - an increase of GDP between 1.2 and 3.5 percent by Q42010 and a boost in employment of between 1.2 and 3.6 million jobs. President Obama said that the American people "want us to put together a recovery package that puts people back to work." He cited recent announcements by companies like Caterpillar and Home Depot regarding job cuts nearing 100,000. But there has been nary a whisper about how increasing government spending has even the chance of achieving that.
The reason for the silence is simple: There is no plausible explanation. As Thomas Sowell stated, "Facts are the only real antidote to a seductive vision." And the fact is that the government cannot create economic growth by spending money. If it could, then there would be no reason to limit the size and scope of the “stimulus”. The seduction lies in a simple equation to calculate GDP which includes G (government spending) as one of its terms. Increase G on one side, and GDP must increase on the other. The logic flaw is that G must be increased at the expense of the other terms. A dollar spent by the government is a dollar less to be spent or invested by the people. Private investment will fall more than government spending will increase. Further, “stimulus” proponents are expecting some kind of Keynesian multiplier effect that simply does not exist (both empirically and logically). The last 100 years can be examined, and there will be no evidence to support the irrational theory that increased government spending leads to economic growth and job creation. Common sense will tell the same thing.
Not that such a link has even really been attempted. The President and a majority in Congress are simply expecting the people to go along with it. They are playing on fear, on the assumption that something must be done. They make no pretense that the people deserve at least a cursory explanation of just how economic growth will be spurred. The reality is that the “stimulus” bill is an excuse bill. As in, the economy is being used as an excuse to push a particular agenda. White House Chief of Staff Rahm Emanuel at least had the decency to express this view by referring to the crisis as “an opportunity to do the things you couldn’t do before.” Would the people normally tolerate a massive increase in government spending on an unprecedented scale? A debate about the desired size and role of government would be welcome – that would be an honest discussion. To claim, however, that an increase in government spending and economic growth go hand in hand is mind-bogglingly ridiculous.
A member of Congress who votes in favor of the stimulus is saying one of two things: “I have abandoned all sense of rational thought” or “I am using the current economic woes as a guise to ludicrously increase government spending.” Voting in favor of the “stimulus” is simply irresponsible and signals a departure from any sense of obligation to represent the people. The Constitution compels the government to promote the general welfare of the people. The “stimulus” does the opposite.
As always, an entry that is critical of the “stimulus” should include an alternative. There is only one way the government can stimulate the economy to grow and create jobs (empirically and logically): reduce taxes and spending. A pure flat tax which eliminates the taxation on investment (capital gains, dividends, and interest) will spur economic growth and job creation the instant it is signed into law.
Has the President, or any Congressman for that matter, even attempted to put forth a rational argument as to how the "stimulus" will actually accomplish its stated mission of stimulating the economy? Of course there have been claims as to what the results will be: According to Congressional Budget Office Director Doug Elmendorf the “stimulus” will provide a substantial boost to the economy - an increase of GDP between 1.2 and 3.5 percent by Q42010 and a boost in employment of between 1.2 and 3.6 million jobs. President Obama said that the American people "want us to put together a recovery package that puts people back to work." He cited recent announcements by companies like Caterpillar and Home Depot regarding job cuts nearing 100,000. But there has been nary a whisper about how increasing government spending has even the chance of achieving that.
The reason for the silence is simple: There is no plausible explanation. As Thomas Sowell stated, "Facts are the only real antidote to a seductive vision." And the fact is that the government cannot create economic growth by spending money. If it could, then there would be no reason to limit the size and scope of the “stimulus”. The seduction lies in a simple equation to calculate GDP which includes G (government spending) as one of its terms. Increase G on one side, and GDP must increase on the other. The logic flaw is that G must be increased at the expense of the other terms. A dollar spent by the government is a dollar less to be spent or invested by the people. Private investment will fall more than government spending will increase. Further, “stimulus” proponents are expecting some kind of Keynesian multiplier effect that simply does not exist (both empirically and logically). The last 100 years can be examined, and there will be no evidence to support the irrational theory that increased government spending leads to economic growth and job creation. Common sense will tell the same thing.
Not that such a link has even really been attempted. The President and a majority in Congress are simply expecting the people to go along with it. They are playing on fear, on the assumption that something must be done. They make no pretense that the people deserve at least a cursory explanation of just how economic growth will be spurred. The reality is that the “stimulus” bill is an excuse bill. As in, the economy is being used as an excuse to push a particular agenda. White House Chief of Staff Rahm Emanuel at least had the decency to express this view by referring to the crisis as “an opportunity to do the things you couldn’t do before.” Would the people normally tolerate a massive increase in government spending on an unprecedented scale? A debate about the desired size and role of government would be welcome – that would be an honest discussion. To claim, however, that an increase in government spending and economic growth go hand in hand is mind-bogglingly ridiculous.
A member of Congress who votes in favor of the stimulus is saying one of two things: “I have abandoned all sense of rational thought” or “I am using the current economic woes as a guise to ludicrously increase government spending.” Voting in favor of the “stimulus” is simply irresponsible and signals a departure from any sense of obligation to represent the people. The Constitution compels the government to promote the general welfare of the people. The “stimulus” does the opposite.
As always, an entry that is critical of the “stimulus” should include an alternative. There is only one way the government can stimulate the economy to grow and create jobs (empirically and logically): reduce taxes and spending. A pure flat tax which eliminates the taxation on investment (capital gains, dividends, and interest) will spur economic growth and job creation the instant it is signed into law.
Friday, January 2, 2009
Instead Spend the Trillion To Privatize Social Security
As the new year begins, Congress is looking to ram through a trillion dollar "stimulus" package. Obviously the concept is ridiculous: Extract money from the private sector and have the public sector spend it. The goal, though, is correct: Increase economic growth.
If a trillion dollars is on the table, why not use it correctly? The government should issue a trillion dollars of Treasuries - which are currently trading at low yields/high prices. Deposit them into private savings accounts for each taxpayer, based on current age and projected social security liability. Replace the payroll tax with a compulsion to contribute to the newly created retirement account. Three birds are killed with the same stone.
First, the Ponzi scheme known as social security is fixed.
Second, a real lock box is created for the taxpayer: an account with their name on it.
Third, economic growth will be greatly stimulated.
If for whatever illogical reason privatizing social security is too much for Congress to stomach, there is another simple alternative stimulus package: flat tax.
If a trillion dollars is on the table, why not use it correctly? The government should issue a trillion dollars of Treasuries - which are currently trading at low yields/high prices. Deposit them into private savings accounts for each taxpayer, based on current age and projected social security liability. Replace the payroll tax with a compulsion to contribute to the newly created retirement account. Three birds are killed with the same stone.
First, the Ponzi scheme known as social security is fixed.
Second, a real lock box is created for the taxpayer: an account with their name on it.
Third, economic growth will be greatly stimulated.
If for whatever illogical reason privatizing social security is too much for Congress to stomach, there is another simple alternative stimulus package: flat tax.
Monday, December 29, 2008
Simple Math From the Other Half
Every once in a while, it is interesting (scary?) to peek over and see how the other half thinks (well, hopefully it is not quite half).
Somehow, this post was recently stumbled upon. It defines seeing is believing, and other concepts such as the pot calling the kettle black ("idiot", "dolt", etc.).
Okay, there is some semblance of an intelligent point: There is hypocrisy in a Republican leader of the 2001-2006 era calling for spending restraint.
But from there it loses all semblance of rational thought. The post claims a simple formula for GDP: C+I+E+G = GDP. It is seemingly discernable from the text that a higher GDP is a desirable goal - an assumption that this site will always make. The post continues to cross off terms from the equation. To paraphrase: C(onsumption) is in the tank, I(nvestment) is weak, E(xports) are out. That leaves G. Thus, if GDP is to rise, the only way to do it is to increase G. If you do not want a depression, you must make G stand for ginormous.
If the teachers' union were really interested in increasing school funding, they need merely present the post to the taxpayers (this half). In all fairness, the simple math is correct, the logic (or lack thereof) is what boggles the mind.
G cannot be created out of thin air. Dollars added to G are taken from C and I. So what, pray tell, are those in control of G to do to increase GDP? Lower taxes and C + I will increase! Even if one thought that the change in G would be equal to the change in C + I (which empirically and logically it would not), which is preferred: a dollar of G, or a dollar of C + I???
Scary...
Somehow, this post was recently stumbled upon. It defines seeing is believing, and other concepts such as the pot calling the kettle black ("idiot", "dolt", etc.).
Okay, there is some semblance of an intelligent point: There is hypocrisy in a Republican leader of the 2001-2006 era calling for spending restraint.
But from there it loses all semblance of rational thought. The post claims a simple formula for GDP: C+I+E+G = GDP. It is seemingly discernable from the text that a higher GDP is a desirable goal - an assumption that this site will always make. The post continues to cross off terms from the equation. To paraphrase: C(onsumption) is in the tank, I(nvestment) is weak, E(xports) are out. That leaves G. Thus, if GDP is to rise, the only way to do it is to increase G. If you do not want a depression, you must make G stand for ginormous.
If the teachers' union were really interested in increasing school funding, they need merely present the post to the taxpayers (this half). In all fairness, the simple math is correct, the logic (or lack thereof) is what boggles the mind.
G cannot be created out of thin air. Dollars added to G are taken from C and I. So what, pray tell, are those in control of G to do to increase GDP? Lower taxes and C + I will increase! Even if one thought that the change in G would be equal to the change in C + I (which empirically and logically it would not), which is preferred: a dollar of G, or a dollar of C + I???
Scary...
Wednesday, December 10, 2008
Where in the Constitution is a Bailout of the Auto Industry Described?
An astute reader might have expected an economic attack of the proposed automotive industry bailout. Though the truly shrewd would also understand that some issues are actually precepts, needing little in the way of explanation. Congressman Jared Polis (D, CO) stated in today's Wall Street Journal, "Any pretension of a government bailout being a good deal for taxpayers should be abandoned for the insincere (or perhaps ignorant) rhetoric that it is." Really, what more needs to be said?
Nonetheless, even sans a team of legal experts, it is somewhat interesting to delve into the Constitutionality of the bailout. One might argue the Preamble says it all ("in order to...promote the general welfare"). Perhaps more explicitly, Article 1, Section 8 spells out the powers of the Congress ("The Congress shall have the power to...provide for the...general welfare of the United States"). These two references seem to be the closest the Constitution comes to touching on the auto industry. The definition of "welfare" is vague at best, and open to wild interpretation at worst (with the current Congress clearer in the latter camp).
This, of course, begs the question of how exactly bailing out the auto industry promotes the general welfare of the United States. It is barely debatable whether it even promotes the welfare of the auto industry itself. The answer is that it simply does not.
As a side note (though of great importance nonetheless), Congressman Polis' piece was a suggestion to cut capital gains taxes on investments in the auto industry. He is correct in theory, but wrong in practice. Government should not be determinative in the allocation of capital. Thus, the solution is to simply eliminate all capital gains taxes.
Nonetheless, even sans a team of legal experts, it is somewhat interesting to delve into the Constitutionality of the bailout. One might argue the Preamble says it all ("in order to...promote the general welfare"). Perhaps more explicitly, Article 1, Section 8 spells out the powers of the Congress ("The Congress shall have the power to...provide for the...general welfare of the United States"). These two references seem to be the closest the Constitution comes to touching on the auto industry. The definition of "welfare" is vague at best, and open to wild interpretation at worst (with the current Congress clearer in the latter camp).
This, of course, begs the question of how exactly bailing out the auto industry promotes the general welfare of the United States. It is barely debatable whether it even promotes the welfare of the auto industry itself. The answer is that it simply does not.
As a side note (though of great importance nonetheless), Congressman Polis' piece was a suggestion to cut capital gains taxes on investments in the auto industry. He is correct in theory, but wrong in practice. Government should not be determinative in the allocation of capital. Thus, the solution is to simply eliminate all capital gains taxes.
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