Wednesday, January 29, 2014

Obama Message: "Free Markets are Irrelevant"

Obama's message in the State of the Union was pretty much the same message that he has put forth for six years:  the free market is irrelevant.  Once again, government was seen as the answer to all problems.  The economy is not growing, according to Obama, because the government is not active enough.

That is not only a tired message, it is completely fallacious.  Obama had a compliant House and Senate for the first two years of his first term.  He seized the opportunity to waste trillions of tax payer dollars, reward friends, toss money onto the Solyndra-style bonfire.  The wasted trillions and the ramped up regulations guaranteed the economy that we have today -- stagnant with pitiful employment numbers.  The only thing going up dramatically is the number of folks on food stamps and the number of people leaving the work force.

Obama and the economists that surround him do not believe in free markets and capitalism.  Their views more closely resemble that late Hugo Chavez than the views of Adam Smith.  How's Venezuela doing?

Tuesday, January 28, 2014

Why Stop at $ 10.10?

Middle class Americans can't make it on $ 50,000 annual salaries.  I would think they need twice that to really live the American dream.  Why not make that happen?

What if the minimum salary for a working American became $ 100,000 per year?  That way people now making a mere $ 20,000 would make $ 100,000.  Wouldn't that do something to reduce inequality?

This could be just the beginning.  Why not index that number to the rate of inflation?  Had we simply done that 50 years ago, the minimum salary would now be $ 250,000?  Wouldn't the average American be much better off making $ 250,000 than $ 50,000?

The argument is compelling.

Waging War on Poor People

Tonight, Obama will give his State of the Union address in another installment in his ongoing "war on poor people."  I guess big government would lose its purpose if there weren't sufficient poor people for the President to exhibit on a big stage.  Thus, the President's continuing interest in creating more poor people.  That's the one thing that he is good at.

We know that the ticket to prosperity, for anyone, is a combination of skills and work habits.  The President's agenda is mainly aimed at undermining the development of skills and undermining good work habits.  The result, predictably, will be more poor people.

To make certain that the least skilled among us can no longer work on federal projects, the President, without benefit of Congress, will unilaterally mandate a $ 10.10 minimum wage for low-skilled employees working on federal projects.  This is a throwback to the old Davis-Bacon legislation in the 1930s engineered by southern racists designed to keep blacks from working on public projects.  Racism was the real reason that racist southern senators backed minimum wage legislation in the 1930s in the first place.  It is a great irony to see the first black President join hands with southern racists of old to create rules that mainly deprive poor people of opportunity.

On the Davis-Bacon Act and its sordid history, read:
Demonizing success creates the political fervor necessary to strangle free enterprise.  Poor people have never benefitted in an economy that strangled free enterprise.  They won't have much hope in the Obama economy, either.

Sunday, January 26, 2014

Emerging Markets Take a Dive

Leading the global selloff last week were the emerging markets.  A strong dollar (meaning weak other currencies) will actually prove helpful in some ways, making emerging market products cheaper.  But, generally, the situation in emerging markets has deteriorated.

Mostly, bad economic policy is the culprit.  This is exactly the same culprit that has produced economic stagnation in the developed world.   Too much government hubris.

Venezuela and Argentina are the poster children for bad government policy and their economies are collapsing -- a well deserved outcome.  Brazil, Turkey, and Russia are weakening as well from pretty much the same problem -- too much government.

No economy has ever prospered with too much government.  There are no examples of sustained economic growth in world history that were not "free market" examples -- even China owes its growth in the last thirty years to an unleashing of free market forces.

Inevitably, politicians enter the picture with the idea that they know better than the market what consumers should be consuming and at what price.   This hubris extends to every aspect of the market place.  Minimum wage laws and the "Affordable Care" Act are examples of how government deliberately tries to distort free market outcomes, because they think know best.  The result - economic hardship for the poor and the middle class.  But, success for the politicians until reality sets in.

This seems to be a natural historical tendency.  Free markets deliver economic growth and high living standards.  The average citizen prospers.  But, the elites can't stand this, because they want power.  So, they begin to attack free markets.  This is where much of the extreme rhetoric on inequality of income and environmentalism comes from.

The Eurozone is now trying to dial back their extreme environmental laws with the belated recognition that their economies are stuck in the mud and will stay there with the current regulatory regime.  The US has not come to that realization yet, but it will in time.

Meanwhile, emerging markets are getting hammered.  But, they are very cheap by historical standards and I remain optimistic that emerging markets are a better bet than the developed world -- at least for now. Even their politicians will be forced to face reality and return to free market policies if they are to have any hope of improved economic performance.

Saturday, January 25, 2014

Why the Market Swoon?

Stocks cratered this week -- down more than 3.5 percent.  The decline was global and more pronounced in less developed countries than in developed countries.  Why?  And, what's next?

According to the media there were two possible reasons for the debacle:  (1) evidence of a slowdown in China; and (2) fear of the Fed's plan to taper.  Those two are related since (2) is quietly suggested to imply (1).

The truth is that no one has any idea why the market chose this past week to roll over.  This is one of the many stock market moves for which there is no obvious explanation.  Those interviewed by the media cannot respond truthfully: "Who knows?"   So, they come up with simple minded explanations that cannot possibly be causative.

Actually, there was no important or significant news regarding China or the Fed last week -- zero.  The truth is that markets seem to do whatever they want to do whenever they want to do it.

Long run, stocks go up.  That's about all we know.

Wednesday, January 22, 2014

Academic Macroeconomics is Useless

It is a great irony that John Maynard Keynes is the father of modern macroeconomics.  Keynes was a very practical man and his economics was informed by his real-world experiences.  Modern practitioners of macroeconomics think real-world experience is useless.  That's probably one, among many, reasons that modern macroeconomics is useless.

Which brings us to the American economy and its historically sluggish recovery from the 2008 recession.   Keynes would never have assumed that massive increases in regulation would have zero impact upon the economy.  But, in modern macroeconomics, even a law that outlawed private enterprise would have no effect on model predictions -- it's all about government spending, deficits, and other aggregates.  Employment is treated in the same way.  If Congress suddenly passed a law that taxed employers $ 1 million for every employee that they hired, such a law would have zero impact on the kinds of models that the Fed uses to predict employment.  Krugman's predictions would be unfazed by such irrelevancies as well.

Thus, sledge hammer regulations crushing the banks and other financial institutions, regulations intended to eliminate entire industries (think about the coal industry), massive mandates that penalize employer's with the temerity to hire anyone are assumed to have zero effect on the economic recovery.  Indeed, the Obama administration is now proposing to make it a crime for an employer to offer a low skilled employee a job that pays less than $ 9 per hour.  And, administration economists think that this won't effect aggregate employment!  This suggests that taxing cigarettes will not effect cigarette consumption -- but administration economists argue just the opposite on that one.

Modern macroeconomics of the Bernanke, Yellen, Krugman variety is really little more than a religion, not to be confused by the facts on the grounds.  John Maynard Keynes focused on the facts on the ground and wrote eloquently about the everyday facts of the economy.  He would never have ignored the economy-crushing policies of the Obama administration in an analysis of where the economy might go.

Wednesday, January 15, 2014

Economic Stagnation is Deliberate Government Policy

“The people being left out right now are those whose credit scores are average,” said Julia Gordon, a director at the Center for American Progress. “It’s just your typical American family with a credit score in the high 600s or low 700s.”


"....the banks are wary of taking on risk and are skittish about exposing themselves to litigation related to any questionable mortgages. "

Ring a bell!  This is the impact of all the government litigation against the commercial banks including the recent huge settlements with JP Morgan.

This story is straight from the front page of the business section of this morning's NY Times.

Since the government is penalizing banks who made loans to homeowners of average credit, banks are no longer making loans to such people.

Read on:

"Much is riding on the appetite of large banks to make mortgages, both for the broader economic recovery and for Americans looking to own a home — long considered a way of obtaining a firm financial foothold.

The results .... reflect a deep timidity that persists among the banks, which have focused their lending almost exclusively on borrowers with pristine credit."

This is the predictable outcome of the government's war on the banks.  Obama has succeeded.  Only the one percenters can get loans in the Obama world.  Forget it, if you are a member of the American middle class.  Those looking for a strong economic recovery and job creation can forget it as well.

Saturday, January 11, 2014

The Real Problem -- No Jobs for the Unskilled

The jobs report on Friday trumpeted 74,000 new jobs for the American economy in December of 2013.  250,000 would be a mediocre result; 300,000 would be a good result; 1,100,000 in September, 1982 (in the Reagan recovery) was a great result; 74,000 is embarrassingly pitiful.  But, this is as good as it gets in the new Obama world.

More than 300,000 more Americans gave up looking for work, so the unemployment rate dipped to 6.7 percent.  If everyone gives up looking for work, the unemployment rate could go to zero.  That seems to be the predictable direction of Obama policy.

Meanwhile the move to raise the minimum wage -- which effectively outlaws job creation for the unskilled -- marches on.  Recurrent (and permanent) extension of unemployment benefits are at the forefront of the Obama agenda in a frank admission that job creation is simply not part of the Obama agenda.

Businesses are making rational decisions.  They are not hiring.  They are not investing in their businesses.  Banks are making rational decisions.  They are not lending.  Potential workers are making rational decisions.  They are leaving the work force in droves and taking advantage of the numerous welfare schemes in place that provide massive financial support for the unemployed. So the system is working and responding properly to the incentives that are in place.  That's a good thing.

What is isn't so good is that the majority of Americans will no longer be able to pursue the American dream thanks to big government.  The good news is that if government ever gets out of the way, there is a strong possibility that the American economy could regain its historic vigor.  But, don't count on any real economic progress in the US until the incentives at the micro level are changed to support job creation, business expansion, and the development of a work force with improved skill levels.

The simple minded views of the Krugmans, Bernankes, and Yellens, that higher budget deficits are the ticket to prosperity are ridiculous and a public testament to the bankruptcy of modern macroeconomics.  The incentives in place discourage hiring, discourage business expansion and discourage workers from adding to their skills or seeking new employment.  No amount of fiscal deficits will change that picture.

Thursday, January 9, 2014

The Economics of Inequality

Imagine that two families, otherwise identical, have substantially different savings rates.  One family saves twenty percent of their income annually and invests that money in a stock market index fund.  How do they save?  They buy used cars, shop at discount stores, and take fewer and less expensive vacations.  The other family settles for nothing but the best.  They buy the latest fashions in cars, clothes, electronics, and they take very expensive vacations in posh resorts.

What happens thirty years later?  The frugal family, assuming they make $ 50,000 per year in income, will have millions of dollars in wealth accumulated from their thirty years of thrift. They have joined the "one-percenters" through thrift and abstinence. What about the other family?  They will have nothing, except what government entitlement programs provide. 

We now have substantial wealth and income inequality that arises because of the difference in thrift habits of two, otherwise identical, families.  Is this unfair?  Should the profligate family now be given half of the wealth accumulated by the thrifty family to "balance things out" and "restore fairness?"

People make decisions and those decisions have outcomes.

The fact that there is income and wealth inequality tells us very little.

Imagine the poorest citizens in America had an income of $ 1 million per year and a net worth of $ 10 million, while the richest had 1,000 times these numbers (in 2014 dollars).  Is this a cause for alarm?

Would it be an improvement if the poorest Americans had $ 10,000 in income and no net worth, so long as the richest Americans had only $ 11,000 in income and $ 100 in net worth?  Is this a better outcome?

What really is the goal of economic policy?  Is it better to impoverish everyone to achieve a more equal distribution of wealth and income?  That seems to be the current mantra of the Obama Administration.

Helping the poor achieve success is not what Obama has in mind.  Instead, reducing the wealth and income of the one-percenters is the Obama grand plan, even if the ultimate effect of such a policy is to make the poor worse off than they are now.  The new mayor of New York seems to follow this playbook as well.

Wednesday, January 8, 2014

Eurozone Unemployment Remains 12.1 Percent

So much for a recovery in the Eurozone.  The numbers released this morning for November of 2013 show that unemployment has not budged in the Eurozone throughout 2013 (things are so bad there that even employment data is lagged several months -- in Greece, the numbers are lagged even longer).

As in the US, regulatory overkill has stifled any real chance of a serious economic recovery for Europe.  Investment is still virtually non-existent in the Eurozone, which is also the case in the US.  Businesses are not optimistic, not hiring, and the economy is going nowhere -- both in Europe and in the US.

Tuesday, January 7, 2014

Summers vs Taylor -- Who's Right

Larry Summers and John Taylor, both academic economists, recently duked it out at the annual meetings of the American Economics Association.  What was the fight about?

Why is this recovery so feeble?

Summers took the crude Keynesian view, espoused on a napkin by Keynes' student Richard Kahn in 1926.  Larger deficits!  According to this view, inadequate consumer demand is the problem.  Increasing government deficit spending is the answer.  Somehow, Summers is of the opinion that this has not been tried yet, even though the accumulated deficits since 2008 are the largest in any five year period in American history.  Wonder what level of deficits would fit the Summers recovery plan?

Taylor took a microeconomic point of view:  the increased burden of taxes and regulation have strangled the economy's normal tendency to snap back quickly from a recession.  Dodd-Frank, EPA, Obamacare, etc., etc. represent the largest bureaucratic expansion in American history.  The year-end tax deal at the end of 2011 represented the single largest personal income tax increase in American history.  Do you really need to look for much else?

Meanwhile, the Administration plans to morph "emergency" unemployment benefits into the status of a permanent entitlement for millions of Americans.  If that wasn't enough to keep people off job rolls, try increasing the minimum wage by 40 percent, prohibiting the poorest and least skilled Americans from any hope of achieving the skillset necessary for a modern economy.

No point in elaborating on the damage that the implementation of Obamacare is doing to the economy.  Suffice it to say that unless reversed, American health care will soon resemble our worst public schools and for the same set of reasons -- too much government.

Meanwhile, back to Professor Summers:  again, what level of government spending and deficit spending would suffice for the modern "macroeconomist?"  Does Summers think that quantitative easing didn't go far enough?  In Summers worldview, entrepreneurs and incentives are irrelevant.  What matters is what Richard Kahn scribbled out hurriedly on a napkin in 1926.  That's pretty much the worldview of Janet Yellen as well.

In a world where economists think that raising the price of something increases the demand for it (think minimum wage), I guess anything is possible.

Friday, January 3, 2014

Minimum Wage -- Once More

Taxing cigarettes is supposed to reduce cigarette consumption.  Why?  Because making things more expensive reduces the demand.

So, what about labor?  If we mandate an increase in it's price, what do we expect to happen?  Reduced demand.

Why is this a tough message to understand?

If you want to severely damage the life prospects for low-skilled and low-income folks, then punish them by making them more expensive to employers.  That is exactly what the minimum wage does.

What is the best way to learn a skill and improve your life chances?  Get a job.  Very few professions are learned anywhere else but....on the job.  Throughout history -- remember apprenticeships -- workers learned the necessary skills to prosper, by taking a low paying job (or even paying the employer) while learning a skill.  This is now outlawed in the US for folks at the bottom of the economic ladder.

What does Obama want to do?  Raise the minimum wage -- expanding the number of low-skilled Americans who will never have a shot at a decent job.

But, where are conservatives and Republicans on this issue?  Charles Krauthammer has weighed in.  He supports raising the minimum wage.   Watch the Republicans cave on this fundamental issue.

One thing conservatives and Republicans never seem able to do is stand on principle.

Raising the minimum wage is a terrible idea and damages the prospects of those least able to defend themselves.  It doesn't hurt the 1 percenters.  It hurts the folks trying to reach the bottom rung of the ladder so that can climb aboard.

One reason Democrats succeed is that they fight for the principles they believe in.  Obamacare has never had majority support among the American population.  Yet, Democrats believe in it and passed it into law.  They still defend it, even though it is an absurd program.

Republicans, on the other hand, run from positions that a majority of Americans support just because the media trumpets the opposite view.

Watch Republicans fold on minimum wage legislation (and another extension to "temporary and emergency" unemployment benefits) in the New Year.

Why not make the minimum wage $ 1,000 per hour so that almost all Americans can experience the benefits of the minimum wage?  Why not simply make unemployment benefits permanent so the leisure class can find security?  Why bother with job creation at all?

Wednesday, January 1, 2014

Welcome to 2014

Happy New Year!

What's in store?

Last year I fearlessly predicted stocks would have a poor year in 2013.  Since that prediction didn't work out for 2013, I may as well simply repeat it for 2014.  The US stock market gained almost 30 percent this past year with Japan topping the leader board with over 50 percent gains for the year. 

So, which of my 2013 predictions actually came true?  The economy.  The US economy continued it's subpar performance and should come in under 3 percent growth once more.  Europe continued to be mired in a deep recession despite monthly announcements that Europe is recovering.  Interest rates went up (I make that prediction every year, but finally that one came true).  Obamacare is well on its way to becoming the biggest government fiasco in US history (for Republicans, Obamacare is a dream come true).

So, whither 2014?

First, on Obamacare: look for continued nightmares with the actual details of implementation and the absence of young and healthy signees.  But, the larger issue is cost and availability.  Americans will be stunned when they find out how expensive the "Affordable Care Act" is for them personally.  Not just high premiums.  The deductibles for the previously insured are skyrocketing and the availability of doctors and hospitals is dwindling.  The quality of health care is definitely headed south in the US and that trend will accelerate in 2014..  For the vast majority of Americans (and voters), Obamacare is a big, big negative.  (That's why Republicans are licking their chops).

Second, the weak economies in the west will remain weak.  The US and Europe are not on the brink of an economic takeoff.  You can forget that.  Government policies in the US and Europe are prohibitive.  The main trend is moving people from the workplace to various forms of public assistance.  That trend will continue.

Third, technology and energy will continue to be the strong points of the US economy until government finds a way to shut them down.

Fourth, Republicans will retake the Senate in 2014 and improve their numbers in the House -- mainly thanks to the "Affordable Care Act," which, by year-end will be hated by everyone -- Democrats and Republicans alike.

Fifth, the University of Virginia Cavaliers and the Houston Texans will have improved records in football in 2014 (they couldn't get worse).

Sixth, Republicans will cave on minimum wage legislation, helping to move the federal minimum wage to above nine dollars.  The war on the poor continues with bi-partisan support.

Seventh, Obama will break his previous record for most hours playing golf in a single year for a sitting president.