Wednesday, August 24, 2016

The Air Slowly Slips Out of the Balloon

The idea that you can regulate your way to prosperity is absurd. Nevertheless, that is the current American economic policy.  Economists spend their time discussing non-issues, such as when will the Fed make a move.  Nothing could be less important than what the Fed will do next.  It really doesn't make any difference for good or evil, at this point.

The regulatory overkill has done it's damage and the perceived, possibly real, threat of massively higher taxes is enough to kill off the entrepreurial spirit necessary for growth.  Better to start a foundation and join the coming Clinton regime.  That seems to work well and apparently the majority of Americans don't seem to care.  So, why not.

This is not your grandfather's economy.  It's not your father's either.  The enemies of economic growth have captured the high ground and have no plans to retreat.

It takes time to destroy an economy.  Ask the Chavez crowd in Venezuela.  They managed it in less than a generation.  The US path is slower, but the direction is clear.

The stock and bond markets have figured this out as well.   This is probably a time when uncertainty is probably better than certainty.  But, unfortunately, certainty is setting in.  We may be facing a generation of no real prosperity in financial markets. Incredible debt levels by various levels of government stand as a huge roadblock on the path to prosperity and an overbearing government has stamped out much of the economic dynamism of what once was the most dynamic economic engine in the world.

The chances of rolling back the American bureaucracy, bent on stifling US economic growth, is diminishing.  Low income Americans will be the biggest loser in what is coming.  The powerless always lose when economic growth disappears and the bureaucrats are riding high....and they are riding high.

It's been slow coming, but the air is coming out of the balloon.

Monday, August 22, 2016

The Pension Reform Battle in Virgina

Once again, the effort has been joined to reform the state retirement system in the Commonwealth of Virginia.  According to the current VRS (Virginia Retirement System) Board, the system had an unfunded liability of $ 22 billion as of June 30th, 2015.  This number, $ 22 billion, assumes that the system will reap a rate of return on its investments that no serious person believes -- 7 percent annually.  While the S&P 500 may well achieve 7 percent annually and has in the past, the VRS asset allocation, loaded up with high fee and low performance investments has no chance of achieving these kinds of returns.

The fiscal year for VRS is July 1 to June 30.  For the year ending 2015, VRS clocked in at a 4.7 percent return, while the S&P 500 was up 7.5 percent.  For the year ending 2016, VRS clocked in at a 1.9 percent return, while the S&P 500 earned just under 4 percent. 

So, at least there is some consistency in VRS results -- VRS investment returns dramatically fail to come close to either the 7 percent assumption or the S&P 500.

S&P 500 returns are almost trivial to achieve in practice, with almost no fees, thanks to Vanguard Mutual Funds.  Elmer Fudd could get the S&P 500 returns without breaking a sweat.  But, the VRS spends more than $ 300 million annually in investment fees and expenses to accomplish its dismal investment performance.

Meanwhile, the benefits to employees accrue only to those who stay until full retirement.  If you leave early, through no fault of your own (to take care of a sick relative, for example), the system strips you of more than half of your benefits and, in most cases, leaves you with 25 percent of what was coming to you.  Public school teachers are the main victims of this punitive system.

The simple solution is to let employees choose what they want to do.  Let them decide whether defined benefit is what they need or whether they might prefer to enroll in defined contribution.  That would put employees in the driver seat about their future, instead of being routinely punished for things beyond their control and about which they are inadequately informed.

But the nanny state may not go along.  Instead, Republicans and Democrats alike favor the Detroit system, where you promise, promise and promise, and then leave the employees and taxpayers with little or nothing.  The theme seems to be: as long as disaster doesn't happen on my watch, who cares.  Pretty cynical view about folks who need to prepare for their future.

Today is the second meeting of the Reform Commission in Richmond, Virginia to tackle these issues.  Maybe, something good will come of it, but, if past is prologue, don't hold your breath.

Wednesday, August 17, 2016

Stiglitz on the Eurozone

Joe Stiglitz, Nobel prize winnning economist, was a guest on CNBC this morning.  He seems to have checked his economics at the door before going on.  He believes, now, that Euro taxpayers should simply bail everyone out and that what Europe needs is a more dictatorial Eurozone political regime.  Not much room for economic or political freedom in the Stiglitz view.

His bizarre view on bankruptcy is that you should only permit bankruptcy to occur only when the holders of the debt are people that you approve of.  That is truly bizarre.  Before permitting bankruptcy, you have to check to see who the latest debt holders are.  Joe strongly supported bailing out Greece, without any austerity requirements.  That must have been a comforting view to Joe's hedge fund buddies who owned a significant amount of Greek debt.

Stiglitz, if you can believe it, is even more polemical than Paul Krugman and that takes some doing. 

All of this is part of the modern era in the discipline of Economics.  It isn't about Economics anymore, it's about who your political and economic buddies are.  Stiglitz and Krugman are now left wing idealogues, not economists in the normal sense of that word.

Tuesday, August 16, 2016

The Age of the Toxic Employee

Hardly a week goes by when politicians think of new ways to make employees more toxic to business.  The recent NLRB decision regarding franchise employees means that within five years fast food operations will be completely automated.  Don't have to worry about employee rights if there are no employees!

By providing more and more employee benefits, you guarantee that there will be fewer and fewer employees.  Small business, once the main employer of the American workforce are retrenching.  They are automating, outsourcing, doing whatever they can to avoid the toxicity (to their bottom line) of employees.

This is the new age. 

The privileged bureaucrats and the elite love this because now the welfare-receiving class is expanded.  Not able to find a job they now become wards of the ever-increasing state.

Thursday, August 11, 2016

America's Future Playing Out in Illinois

"So high-tax Illinois will continue bleeding the population and businesses, but with one contented cohort -- the Democratic political class, for whom the system is working quite well."  This comment is from George Will's editorial today carried in many of the nation's newspapers.

Will's column chronicles the tragic history of Illinois and is a preview of the future for California, New Jersey, New York, Michigan, and most of the 50 states.  These states are either broke or are on their way to being broke.  As long as they have any money left, the Democratic Party stalwarts, who run these states (veto proof majorities in the both houses of the Illinois legislature), will pretend that their is no problem.  Exactly what Detroit officials said five years before they went bust.

What is happening is the systematic looting of the state taxpayer in Illinois and all of these other states.  Money is being transferred from wealth producers and workers to state and local bureaucracies to do with as they please.  And they mainly please to give it to themselves.  It is not about providing services to their citizenry; it is about getting more and more money and benefits for themselves.  And they are winning and will win until these states run out of money.  Then everyone loses.

Wednesday, August 10, 2016

We Should Celebrate Risk-Taking

There is a reason why the US and Western Europe grew out of historical economic slumber in the seventeenth century and eventually created the most prosperous societies that the world had ever seen.  The reason is "risk-taking." Prior to the 17th century, there really was no platform for risk-taking. Capitalism provided that platform.

Along the way, these economies experienced numerous booms and busts, perhaps essential requirements for true economic growth.  "Creative destruction" would be the term that Joseph Schumpeter would famously apply.

Then along came 1929 and then later 2008. These downturns convinced the body politic that capitalism was flawed and that having government intervene was the answer.  Much of the government bureaucracy put in place in the 1930s was overturned later in the 1950s and the US and Europe flourished.

But, at the turn of millenium, things began to change dramatically. The idea that government should run things displaced the view that consumers should make the larger decisions.

One of the casualties in the new millenium was the idea of risk-taking.  Corporate leaders who now take risk are courting criminal prosecution, often whether they succeed or fail.  This is the old Soviet system where arbitrary and autocratic decisions replace the rule of law.  Risk-taking disappears in this kind of world.  But, this means economic growth disappears as well.

Until risk-taking is once again celebrated and not criminalized, there will be no economic growth in the US or Western Europe.  No pain, no gain.

Tuesday, August 9, 2016

Trump Economics Reflects Kudlow Influence

Donald Trump's call for lower taxes, less regulation and the abolition of the estate tax reflects the beneficial influence of Larry Kudlow, who is mostly a supporter of free markets.  I say mostly, because Kudlow was a cheerleader for the government bailouts of 2008 and is a frequent supporter of policies that he thinks will boost the value of the dollar.

While Trump's views on international trade are not helpful, they are popular.  Hopefully, these new economic strategies of lower taxes and less regulation will move to center stage.  If adopted, the regime promoted in Trump's speech would go a long way toward an American renewal.

If economic growth became a priority once more, many of the economic problems of inequality, poverty, and lack of opportunity could be tackled.  Absent economic growth, the future will be more division, more class warfare and more extreme political rhetoric.