Wednesday, April 30, 2014

The 0.00025 Economy

0.1 % growth in the first quarter for the US was the number announced today.  Since that is an annualized number, the actual increase was 0.025%.  As an actual number the GDP increase was, mathematically, 0.00025 times the GDP at the beginning of the quarter!  The President's chief economist, Jason Furman celebrated the number as evidence of the strengthening economy.

The truth is that this number is so pitiful that it is just about as likely that the economy contracted in the first quarter as it is that it expanded. 

This is the zero growth economy that Obama policies have been designed to achieve.

Thursday, April 24, 2014

Goolsbee is Puzzled

Austin Goolsbee, a University of Chicago economics professor, who has lugged a lot of water for the Obama Adminstration, was on TV this morning on CNBC wondering out loud why there is so little capital expenditure in the US economy.  Unlike prior economic recoveries, this one is anemic and one rightly can look at the attitude of businesses toward expanding plant and equipment (and hiring employees) as the main culprit. But why?

To Goolsbee, it is simple irrationality.  Businesses just don't get it, according to Goolsbee.  He knows best, I guess. That seems to be a consistent theme of the Obama Administration and their economists.  Businesses don't know what they are doing.  They should be excited by Obamacare, massive new taxes and regulation, and constant demonizing from the White House.  That businesses don't appreciate all of these daggers to the heart comes as a huge surprise to Goolsbee.

You have to wonder why ideology so clouds the judgment of these economists.

Businesses are interested in making money.  Their shareholders are interested in making returns -- dividends, capital gains.  Government is interested in squashing all of this and has been successful beyond their wildest dreams.

If the Obama folks had even a minimal interest in the economic welfare of Americans, they would immediately approve the Keystone pipeline project.  That this project has once more been put on hold speaks volumes about the economic sanity of the Obama Administration and its economists like Goolsbee.

Wednesday, April 23, 2014

Killing the Goose

The WSJ today carries a story today about summer internships for students.  According to the story, there has been rampant litigation by students, after the fact, suing their employers for the "unpaid" aspect of their internships.

When a student obtains an "unpaid" internship, they normally displace many other students who would have liked to have had that internship.  So, the winner gets the internship.  They know full well that it is unpaid and they take the internship with that knowledge.  No deception.

Then what?  After taking advantage of the internship and taking a position that many others would liked to have, the winners go hire a lawyer and sue because they weren't paid, even though they knew from beginning to end that they would not be paid. That was the deal.

So, now what?  Companies are simply eliminating these "unpaid" internships and replacing them, mostly with nothing.  This is how the entitled student of modern times makes sure that the students that come after them have less opportunity than they have.  The arrogance, hypocricy and selfishness of these litigant students is astounding.

A free internship used to be a free market outcome for a student (or anyone) who wishes to learn and is willing to pay an implicit tuition by accepting an "unpaid" internship.  The labor department went a long way towards outlawing this free market contract when it required such internships to meet college course standards.  Now, lawsuits by the entitled are likely to kill off these internships permanently.

Who wins?  Lawyers and a handful of entitled, selfish students.  Who loses?  The free market and everyone who wishes to make their own decisions without the nanny state prohibiting the right of free contract.

Solving Inequality By Increasing Poverty

The mantra used to be: how do we increase the standard of living for lower and middle income Americans.  That no longer seems to be of any interest or concern to the "inequality" crowd.  Now, what is important is reducing income differentials

The goal of reducing income differentials is consistent with inpoverishing the nation and reducing the American middle class to poverty.  This game plan has been tried, successfully, before in the old Soviet Union, modern day Cuba, the old China and in much of the underdeveloped world.

Other than the political class, all other citizens are simply reduced to slavery.  That way, if you don't count the political class, the old Soviet Union was the type of society that produced an income distribution that would satisfy the most radical of the "Occupy Wall Street" crowd.

If reducing inequality is the primary goal, as opposed to trying to improve living standards for the poor and the lower income population, then economic growth need no longer be an objective. Indeed, economic growth is no longer necessary.  Economic growth may as well be negative -- and likely will be.

I like to sing country and western songs.  Perhaps George Straight and I should have the same income. That would certainly reduce inequality.  One way to achieve that objective is to simply legislate that George and I have the exact same income from our singing career.  I'm for that!

Similary, I like to play golf.  Perhaps Tiger and I should have the same income at that activity as well.

One way to accomplish this is to make George and Tiger get paid exactly what I get paid for singing and playing golf.  Then we would have the same income from such activities.   The amount wouldn't be much, but at least it would be the same for all three of us.

I wonder if George and Tiger would still sing and play golf if they were paid what I am paid for singing and playing golf.  Oh well, does it matter anyway.  At least we would all have same income -- nothing -- and the problem of inequality would be eliminated -- at least between the three of us.

Monday, April 21, 2014

The Economy Viewed as a Lottery

Imagine that economic outcomes were the result of simple chance.  If you ended up rich, it was because you drew the right card out of a randomly shuffled deck of cards and if you ended up poor, it was a result of drawing the "wrong" card.

If the economy was really a simple lottery, so that where one ended up in the income and wealth distribution was simply a matter of chance, then redistribution schemes would make a lot of sense.  It is hard to see why anyone would be opposed to redistributing the wealth and income generated by a lottery to achieve an outcome of complete equality.

But, things don't work that way in a real economy.

In a real economy, chance plays a role -- no question about that.  You can get lucky and you can get unlucky.  That's true.  But, that is only a small part of the story.

Some folks take advantage of their luck and others squander it.  Some folks overcome their bad luck and some sink into the quagmire of defeat and disappointment.  Luck is not distributed fairly, but taking advantage of good luck and overcoming the effects of bad luck is where work ethic, talent, and skill enter the picture.

Simply ignoring work ethic, skill and talent, which is what redistribution schemes presuppose, means that these things aren't valued.  Policies of redistribution are essentially assigning little or no value to effort and skill.  In time, folks see this.  Having a strong work ethic and developing skills puts one in a position to take advantage of good luck and in a position to overcome bad luck.

But, if redistribution policies assign no value at all to effort and skill, then, in time, large numbers of people will quit trying.  Many Americans already have.

Once your society decides that economic outcomes arise in the same manner as the outcomes in a lottery, then work ethic and skill development gradually lose their grip.  This means lower or even non-existent economic growth.

The western economies seem to have been moving inexorably in this direction over the past few decades.  But, in truth, economic outcomes bear very little resemblance to a lottery.  Work ethic and skill development do matter.  You often make your own luck or, at the very least, put yourself in the position to take advantage of luck when it comes your way.

Redistribution policies and excessive regulation gradually throttle work ethic and skill development eliminating the prospect of a strong, growing economy.

Sunday, April 20, 2014

Defining Income

Recent discussions of income inequality are based upon some kind of implicit definition of what is meant by income.  You often hear that worker income has declined in real terms over the past couple of decades.  Is that true?  Well, it depends upon how you define income.

Increasingly workers have been empowered by Congress to sue their employers for a variety of things -- often things that the employer has absolutely no control over.  (For example, offsite incidents between employees, unrelated to work).

If an employee has a new, Congressionally-granted, right to sue the employer, it should be completely clear that such a right imposes a cost upon the employer.  The employer recognizes that litigation rights make that employee more expensive.  It might not involve cash this very minute, but there is an immediate expectation that the employee is now more costly to the employer.  Shouldn't this cost be included as part of the employee's income?

If your answer is no, then that suggests that the right to sue is of no benefit to the employee.  If the right to sue is of no benefit, then why have it?  Since, clearly the right to sue by an employee implies a cost to the employer.

If litigation rights have value to employees, then estimates of worker income should include the costs of these litigation rights.  It would be easy to enough to come up with such a calculation based upon the known costs of such litigation.  Adding in these costs will increase worker income growth over the past two decades and reduce the inequality calculations, since litigation rights for wealthy people are rarely used in the same context as employee litigation rights.

Litigation rights are not the only source of worker income.  What about mandated days off, sick leave rights, occupation and safety rules, employer social security contributions, etc.  All of these items have been subject to ever increasing government mandates.  If they are of value to employees, then they should be included in worker income.  This should prompt a fresh look at the inequality debate as well as a revision in the incorrect view that worker real income has declined over the past few decades.

What has declined is "real" money income.  No question.  And, if more and more mandates are loaded upon employers who have the temerity to hire anyone, then real money income can be reduced even further.  Employers don't care about money income, they care about the total cost to them of employing someone.  Mandates raise that cost and, by simple arithmetic, lower worker income.  It's that simple.

Friday, April 18, 2014

Economists as Politicians

These days, it is not unusual to see an economist on television or read an economist in the print media and see zero economics.  Increasingly, economists talk only politics often completely devoid of economic content.  Austin Goolsbee is one example.  Paul Krugman is another.

Simon Johnson is the most obvious example of this in the NY Times.  His article today in the NY Times essentially advocates state run banking, more or less along the lines of the old Chinese and Soviet models.  If adopted, his proposals for banking reform would eliminate any free market role for commercial banks.  Instead, Washington would dictate where banks get their funds and how they spend them.

These kind of reforms make politicians powerful.  Putin is a good example of a leader who doesn't have to put up with free market banking.  Now, Johnson and other economists want to adopt the Putin model for the US.

They are already half way there with Dodd-Frank legislation gradually eviscerating the role of the free market in banking.

What is interesting is that economists are increasingly abandoning economic arguments in their analysis as they discuss policy issues.  The most blatant example, of course, shows up in the discourse on the minimum wage.  But, minimum wage analysis is not the only arena where economists discuss policy issues by turning economics on its head.  Read Simon Johnson regularly and you will be treated to economic analysis without any economics.

That certainly makes it easier to prove your point.  Just assert it and don't worry about the economic logic that underlies your argument.  Raise the minimum wage to $ 1,000 per hour.  That should eliminate poverty according to the line of reasoning now employed by Simon Johnson, Paul Krugman and Austin Goolsbee.

Gone are the days, for these folks, that economic analysis was used to buttress economic policy arguments.  The Fed is probably the most notorious locale where economics no longer seems to matter.  Witness Janet Yellen's recent emotional discussion of the plight of two unemployed people that she knows about.  That drives policy, not economics.

Tuesday, April 15, 2014

HFT- A Scapegoat for Poor Asset Management

There is no shortage of money managers who would like to find someone to blame for their poor results.  Then along comes Michael Lewis with "Flash Boys."

Here it is -- an explanation for why hedge funds and money managers generally have such dismal results.  Naturally, this book is immediately popular with humbled hedge fund managers and money managers.  But, is there anything really going on here?

Lewis's book consists of interviews with a handful of Wall Street wannabies whose main contribution seems to be the use of the f-word in any and all contexts.  While this is entertaining to some, it is not clear what the point is.  So, High Frequency Trading (HFT) can be -- sometimes -- profitable.  Though, even here Lewis presents absolutely no evidence that HFT is profitable to anyone, ever, at any time.  Lewis provides anecdotal commentary from minor, disgruntled, Wall Street employees.  These employees, in virtually all cases, have lost their jobs in ways that Lewis does not tell us.  Do employees who lose their jobs grumble, use the f-word, and find someone to blame?  Well, yes, normally.

Where are the HFT winners?  If this is such a scam, where are the folks who benefitted from this scam?  They should be pretty obvious, but Lewis doesn't identify them other than innuendo and sidebar comments.  No real facts show up in this book.

According to Lewis, the stock market is rigged.  Really? Investors have made over ten percent per year on average over the past 80 years and they made that or more during time period dominated by HFT.  So, why is this bad?  Should investors really be encouraged to give up stock market returns and join Lewis in his crusade?

This book is much ado about nothing.  I am a big fan of Michael Lewis.  I consider Money Ball the best book written in my lifetime about market imperfections, even though the topic is baseball not finance.  But "Flash Boys" is an embarrassing, over-hyped book about nothing.

Sunday, April 13, 2014

The Economist on Bank Regulation

This week's Economist has a remarkable article on the state of commercial banking in the United States.  Here is their conclusion:

"State subsidies and guarantees are once again corroding the financial sector and creating new dangers."

The article cites two problems: 1) Problems arising from the FDIC deposit guarantees; 2) Problems arising from excessive regulation of lending.  Combined, the article concludes that the American banking system is:

" of the most regulated industries in the world, funded by taxpayer subsidies with lending decisions taken by the state."

If you were wondering why the American economy is going nowhere and why a future financial collapse is still possible even in a lackluster economy, go no further than this article.  While China is feverishly working to move their banking system to free market banking, the US has turned a free market system into an appendage of government.

Banking in American is no longer a contributor to US economic growth.  It is an arm of the US government that is instructed to lend in ways that government approves, not in ways that the free market would encourage.  Deposit insurance puts the taxpayer on the hook and eliminates any free market control of asset flows into the banks since all such are guaranteed.  In modern USA, the capital markets, as reflected in the commercial banking system, are no longer free.

The Economist has it right.  Check it out.

Saturday, April 12, 2014


Have you ever noticed that when Congress passes a law that forces Americans to do something in a specific way, there are always exceptions.  Why?  Because even the Congress sees limits to the "one size fits all" mode of modern legislation.

In truth, people should be free to do whatever they want to do as long as some unrelated third party is not injured.  But, Congress often decides that people are not intelligent enough (or not powerful enough) to think or decide for themselves.  Most "prohibition" laws regarding drinking and drugs have this underlying premise -- individuals aren't smart enough to decide for themselves what to eat and drink and thus government must restrict their access.

France, this week, toyed with restricting emails that employers may send to their employees.  Of course such a plan had exceptions.  Why?  Because they are many jobs (physicians, back up ambulance drivers, various types of emergency workers, etc. ) where notification in the middle of the night might be important to their jobs.  Fortunately, saner heads prevailed and France backed away from the proposed ban on emails.

But, you have to wonder?  Why is it the government's business when X sends an email to Y.  Isn't this really a decision for and X and Y to make, not the government.

That there are always exceptions shows clearly that rules and laws restricting human behavior are often arbitrary and completely unnecessary.  It also shows that freedom and liberty are losing their grip in western culture.  In 15th century England, no one would suggest that even the King had a right to disturb late night communication between any two of his subjects.  But in modern America and Europe, governments routinely intrude on private communication and activities between consenting adults, even when there is no third party that could conceivably be injured by such activities.

Friday, April 4, 2014

The Fruits of Bad Economic Policy

For all the huffing and puffing of the Obama Administration, the economic record grows increasingly dismal.  For five years, the Obama folks had said that economic liftoff was coming soon -- but it never came.  Instead an economy that used to bounce back from even the worst recessions (1981 comes to mind), now has entered a period of secular stagnation. 

Who loses?  Young folks looking for a job are probably the biggest losers.  Their futures are permanently blighted by the stranglehold that the Obama Administration has placed on job creation. 

The rich get richer, the bureaucracy flourishes, and those willing to spend their idle time bankrolled by food stamps and government welfare payments thrive.  But, traditional middle class American families, who ultimately finance the government largesse, increasingly find their hopes for a better life dashed by the predictable outcome of stifling government policy.

Today's employment number showed, once again, less than 200,000 monthly job creation.  These are pitiful numbers and they guarantee more pain for folks looking for employment.  But, these numbers are cheered by the bureaucracy.  They don't face layoffs or unemployment.  What do they care?  Jason Furman, Obama's head of his Council of Economic Advisors, thinks these are good numbers.  They probably are for Jason, whose future and whose job prospects are assured.

After all Bernanke and Yellen and Furman will not suffer in this economy.  Now will Obama or Buffett or Mark Warner.  These folks are on top of the stagecoach and even if the stagecoach has slowed to a crawl, they are not about to let anyone else climb aboard.

Thursday, April 3, 2014

The New Reality -- World Wide Stagnation

The world is gradually adjusting to a new reality -- dramatically lower levels of global economic growth.  Modern economic policy, whether in the US, Europe, Russia or Venezuela, presupposes that arbitrary government policy can "stimulate" economic growth and that policies that reduce the return on investment and policies that make employees significantly more expensive have no economic impact at the margin. 

Economists, by and large, have supported this notion.  Economic incentives, according to most present day economists, are irrelevant.  Government, by expanding excess demand can convince business to invest and hire, even while government takes an increasing share of business income, expands costly business regulations, and dramatically increases the cost of employees.  Why economists believe this is an interesting question.

Today's economists believe that if you pass a law that imposes a minimum price on something and then raise that minimum price, there will be no effect on demand.  That's why most economists support the minimum wage and minimum wage increases.  Today's economists seem to believe that if you pass a law making it a capital crime to hire an employee, it will have no effect on employment.  The models that most economists use believe employment is simply a result of aggregate demand and that microeconomic  considerations are irrelevant.  Thus, tax rates, regulations, mandates cannot possibly effect economic behavior.

The problem with all of this is that economists are dead wrong.  Today's economy provides ample evidence that all of this is wrong.  The policies advocated by these economists are in place -- higher taxes, massive government debt, huge government spending levels, ever-tightening regulation of business.  What have they produced?  The worst economy in the history of the US -- ditto for Europe.

Pundits now cheer when economic growth reaches 2 percent -- a level that Europe would die for.  As opportunities dwindle for youth and the elderly are slowly finding the old promises don't fit the new reality, the economists argue for more of the same.

Free markets could easily deliver us from all of this, but free markets don't have too many defenders these days.  Maybe, the western world simply got too rich to be rational.  Unless free markets find a way to break through this morass, the future of the US and Europe is predictably dim.

Tuesday, April 1, 2014

Much Ado About Nothing

Michael Lewis is a great writer and a man with remarkable insights.  That said, Lewis seems to have gone off the rails with his charge that the stock market is "rigged" by high frequency traders.  What is wrong with seeing the order entered on exchange one, then buying on exchange two?  If that happened in real estate or the auto market, no one would care?  Why are stocks so different.

All market participants have the right to see that order entered on exchange one -- not just high frequency traders.  Their effort to provide arbitrage should be applauded not condemned.  Is this just one more example of sour grapes because some one used publicly available information to make a buck?

My mother bought the Vanguard S&P 500 in the early 1990s and her account at Vanguard has yet to sell anything.  She has earned the S&P 500 return over the years.  The Dow Jones was in the 2000s when she made her purchase and is the 16000s now -- an eight-fold increase.  If the market is rigged, it seems, in retrospect, like it was rigged in her favor.  Note that she was not a high frequency trader.

So how, exactly, are long term investors injured anyway by the practices outlined by Lewis in his book.  I can see how some insane day trader might get wacked now and then, but it isn't clear to me that the SEC's role is to protect short term traders -- whose goal and methods, by the way, are exactly the same goals and (slightly slower) methods used by high frequency traders.  What difference is there (other than speed)?

This is just one more effort to destroy the one source of investment returns that has produced over ten percent annually for the last 86 years for the average investor who has no inside track.  Why would Lewis want to take that away by encouraging excessive regulation that could be brought on by the bogeyman of high frequency trading.  Is ten percent per year over the past 80 years proof that the market is rigged?