Friday, May 16, 2014

Haven't They Done Enough?

Today's WSJournal has an article penned by Brian Blackstone, Jon Hilsenrath, and Marcus Walker with the following comment:

"Five years after the financial crisis ended, soft growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have policy makers groping for what to do next."

As if they haven't already done enough damage.  Perhaps, the policy makers should simply get out of the way and let the economy do what it does naturally.  Then and only then will economic growth return to the western world.

From this morning's NYTimes:

"The growth is so feeble that it could be years before Europe truly recovers.  The overall euro zone economy is still more than 2 percent smaller than it was before the crisis hit.  And the pace of recovery, economists say, is even slower than it was after the Great Depression of the 1930s."

Thank you Mario Draghi.

So much for the role of government in paving the way to economic prosperity.  Why not try free markets for a change?

Thursday, May 15, 2014

Great Expectations -- More Disappointment

Eurostat released first quarter growth numbers for Europe today and they were "disappointing."  They are always "disappointing."  Eurozone growth was eight times that of US 1st quarter growth, which was also "disappointing."

Anemic or non-existent economic growth is the reality in the US and Europe.  "Great expectations," though, constantly present a completely different story.  Prognosticators continually predict surging growth for the US and Europe.  "The economic recovery is finally here!"  That is the battle cry of the soothsayers.  And they are always "disappointed."

Europe is growing at 0.8 percent annually and the US is growing at 0.1 percent annually.  Both of these numbers are within the margin of error of revisions, common to GDP growth data.   Europe is supposedly in the early stages of recovery.  The US is still "recovering."  But 1st quarter 2014 data shows that there is a good probability, not quite 50 percent, that both Europe and the US are actually contracting, not expanding.

Both Europe and the US are stagnant economies and have been for quite a long time.  They aren't recovering; they are sputtering along.  The results are predictable.  Incredibly bad economic policies in Europe and the US are reaping their ultimate and predictable rewards -- economic stagnation.  This is the predictable price of high taxation, increased regulation, and a culture war against wealth accumulation.

Unless economic policies change, we will get more of the same, regardless of the Great Expectations of economists who think that all is well.

Wednesday, May 14, 2014

Piketty the Economist

Thomas Piketty's book "Capital in the 21st Century" has taken the world by storm.  The book is devoted to the subject of global inequality.  His principal recommendation involves wealth confiscation.

Piketty doesn't believe in incentives, a view that he shares with most modern economists.  Here is a sample of Piketty's thinking on incentives:

"Of course, everyone can also understand that if all the company's earnings from its output went to paying wages and nothing to profits, it would probably be difficult to attract the capital needed to finance new investments."

"....probably be difficult...."      no kidding

This absurd statement is to be found on page 40-41 of the Piketty book.

This is the kind of thinking that permeates this book and much of modern research in macroeconomics.

Monday, May 12, 2014

Freeman Reviews Geithner's New Book

In today's WSJournal, James Freeman reviews Tim Geithner's new book, "Stress Test."  I find Freeman's review interesting and not surprising.

First, Freeman establishes what has long been obvious.  Geithner knew virtually nothing about economics when he was thrust into the spotlight as a career bureaucrat.  In fact, by his own admission, Geithner had little or no interest in economics as a student and did not find his sole economics course of any interest.  That fits.

Second, from his post as chief (Federal Reserve) regulator of Citibank, before the crisis, Geithner saw no problems developing and was comfortable with bank risk levels.  After the collapse of Bear Stearns, Geithner testified (this is not in his book) that the economy was not at risk.  So, Geithner confirms what we all knew at the time.  Geithner was asleep at the switch.

But, when the crisis hit, what was Geithner's answer: blow up the taxpayer to defend bank bond holders.  That policy, according to Geithner "saved" the American economy.  Or did it?  How would Geithner possible know?

Tragically, folks like Geithner, largely untutored in economics, made major decisions about the future of the US.  The results are now obvious for all to see.

Geithner's actions, along with Congressional blunders and Obama Administration overregulation and hostility, have reduced the American economy to a shadow of itself.

What did they save exactly?

Sunday, May 11, 2014

Monetary Policy and Theory

Fifty years ago monetary policy seemed such a simple matter.  All one needed to do was track "M2" carefully.  Growth in M2 typically preceeded growth in GDP and, in time, produced inflation.  The simple predictability of this relationship was a triumph for Milton Friedman and the Chicago monetarists.  Alas, this simple story is no longer true.

No one really knows how to define the money supply anymore, even conceptually.  If a Martian landed on earth tomorrow and asked what one meant by the word "money," it is by no means obvious what response to make to the Martian.  Who uses coin and currency, or even checks, to make purchases anymore?  Overdraft facilities are becoming ubiquitious, so a negative money balance for a growing number of people simply means paying a modest interest rate on overdrawn balances.  Do you really need to hold money in the old fashioned way?  Purchases on the internet and the adventures of bitcoin make all of this talk of money supply talk seem old fashioned.

So, what are Bernanke and Yellen up to.  Bernanke always claimed Friedman as his mentor (in spirit, if not in fact).  So Bernanke dramatically expanded member bank reserves by the various QEs that the Fed embarked upon after 2008. The idea was that M2, or some monetary aggregate, would grow because loans would grow.  But, loan growth remained dormant as the slowest economic recovery in American history gradually unfolded.

Why didn't the usual money multiplier work? Why didn't loans expand and the monetary aggregates expand with them?  Interestingly, both supply and demand increases failed to materialize.  Excessive regulation and demonizing of financial institutions put a brake on bank's willingness to make loans, except to folks who didn't want them or need them.  So, what happened.  Tepid loan growth and a sluggish economy. 

Now in the sixth year of the economic recovery, not much has changed.  The war on financial institutions continues unabated.  Attorney General Holder looks on the financial system as a piggy bank for him to plunder as he sees fit.  Banks are hunkered down, hoping desperately for a change in the political and regulatory environment.

So, what is Yellen up to.  Not much.  She enters the picture in time to survey the landscape of a failed monetary policy and a failed fiscal policy.  As an advocate of much that has happened in the past five years, Yellen is, no doubt, somewhat surprised by the weakness of the American economy, as well as that of Europe.  Yellen is a partisan of the majority group of economists who no longer believe that incentives make any difference.

Raising the minimum wage, for example, is a policy that Yellen supports.  Usually, the Yellen types argue that small increases in the minimum wage have small effects.  That's like saying that smoking only five cigarettes a day is not as harmful as a pack a day.  It's still addictive and it can still kill you.  And how do you kick the habit?

Similarly, Yellen gives no credence to the idea that making employees much more expensive by expanding worker rights and protections and employer mandates (think health care) reduces the demand for labor.  Somehow to Yellen-like economists, the employee costs (non wage costs, especially) to an employer are largely irrelevant to the decision to hire.  Somehow, employers are expected to maximize profits without taking into consideration the costs of employees.  Is this what Yellen teachers her students?

Non-wage costs have exploded in America.  This means that employees, especially at the lowest wage levels, cost multiples of the wage they receive.  The employee often gets almost nothing, while the costs to the employer are staggering. This is the obvious result of government-imposed mandates on employers.  Who gets hurt?  Employees at the bottom of the skill and wage ladder. The rich and prosperous are largely unaffected by all of this.

So, Yellen muses outloud about what to do.  Well, really nothing is available to people that believe government is the answer.  Yellen and Bernanke decided long ago that free markets are largely irrelevant to economic prosperity and that monetary tricks can make GDP grow.  They are wrong and the data show it.  The last five years are a painful testament to the failure of the kind of macroeconomics and monetary policy that are routinely taught throughout the American university system.

The problem with the American economy is a microeconomics problem.  It is irrational for most employers to add employees.   It makes a lot more business sense to keep employment levels low, outsource where you can, and keep your head down.  That is the rational and predictable response of intelligent business folks to the Yellen-Bernanke-Geither-Obama policies.  No real surprises here -- just a lot of misery for middle and lower income Americans.

Real economic growth will never return to the US and western Europe until free markets are permitted to work.  Excessive government intrusion has always stifled economic growth.  What we are witnessing now will continue until the governments relax their assault on free markets.

Monday, May 5, 2014

Buffett is a Rich, Arrogant Hypocrite

Joe Kernan of CNBC today made Warren Buffett look like exactly what he is -- a rich, arrogant hypocrite.  Buffett defended his own tax breaks while criticizing tax breaks for others.  Buffett came out four square for benefits that benefit him personally while complaining about others.

This is the same guy, Buffett, who has long and publicly criticized the hedge fund industry for using compensation structures that are precisely identical in principal to the compensation structures that created his early fortune, that ultimately resulted in his becoming the richest American.

Over and over again, Warren Buffett has paraded himself forward as a low key, modest man who built his fortune the old fashioned way.  Wrong.  This guy has taken advantage of the most heinous compensation schemes that exist and lined his pockets by taking advantage of tax loophole after tax loophole.  Meanwhile, he criticizes others for the same practices that he indulges in.

Three cheers to Joe Kernan for exposing this amazing hypocrite.

Sunday, May 4, 2014

Jobs Aplenty - If Markets Were Free

To see the pernicious effects of minimum wage laws and other big-government restrictions on free markets, look no further than the article by Kris Hudson in the Wall Street Journal on May 1st entitled "Labor Shortage Besets Home Builders."  This article lays out the details of a severe labor shortage in the home construction area.  The article focuses on Denver but applies across the country.

Why a labor shortage when so many people cannot find employment?

Easy answer:  these jobs require skills -- skills that can only be learned on the job.

How does someone learn skills on the job?  Traditionally, job skills were learned by some form of apprenticeship where an employee settles temporarily for a low wage or no wage at all in exchange for learning a skill that can lead to high wages and a successful future.  That is now illegal in America.  (It is not illegal in China).

The only folks that are legally permitted to learn a skill in the US are folks with money.  Folks with money (or who can borrow it) can go to college or trade schools and learn a skill).  It is illegal to trade hard work, the only currency the poor may possess, in exchange for skill development because of minimum wage laws (should be renamed the minimum skills laws, since such laws effectively make it illegal to have a job if you possess limited skills).

Who gets hurt?  As usual, in the big-government world, the poor and lowly skilled are victimized by righteous rich folks who think poor people should not be legally permitted to learn a skill unless their employer also pays them a minimum wage and provides various other mandated employee rights.

Again, who is hurt?  The folks at the bottom of the economic pile.

Read the article.  It's all there.

Saturday, May 3, 2014

Washington Post on the Middle Class

Today's Washington Post tells a story that I suspect it's authors and the Post's editorial board wishes it had not told.  It's penned by Carol Morello and Scott Clement.

The article bemoans the financial difficulties of a couple earning more than $ 90,000 per year. That figure is nearly twice the average income of a typical American family.  If the article is correct, then what this suggests is that the vast majority of Americans, even those with six figure incomes, are living hand to mouth.

What the article doesn't do is tell us where the $ 90,000 goes.  Why is it that these folks, described in the article, can't make it?  The answer is not in the article, but it is obvious.  Government is the reason that these folks are suffering on $ 90,000 per year. 

A family with this level of real income, corrected for inflation, in the 1960s, lived well (very well), saved for their retirement, and were part of a happy generation of folks. 

What happened?

Big government stepped in.

Where to begin?   How about social security and medicare.  Those two items alone cost these folks nearly $ 15,000 annually.  How about property taxes?  That's probably another $4,000 to $ 5,000 annually -- who knows, the article doesn't say.  Next comes sale taxes.  That's probably another $3,000 to $ 4,000 annually.  Personal income taxes -- another $ 15,000 to $ 20,000 per year.

Add the additional income they would earn -- probably about $ 20,000 to $ 25,000 annually -- if their employers weren't required to satisfy multiple mandates and provide them with the right to sue for a blithering variety of reasons.

The gas and oil to run their cars probably costs about $ 3,000 more per year than would be the case, if the free market reigned in oil and gas production (think Keystone Project) and not constrained by a harsh and bureaucratic government.

So, big government is the most prominent source of the trauma described by Morello and Clement, although the authors are scrupulously careful to avoid laying out the family budget and where the money goes.  Instead, the authors focus on what these folks aren't able to buy as opposed to what they are actually buying......with some exceptions.  Interestingly, the family of five pays almost $ 4,000 annually on cell phones, has multiple ipads , TV sets, cable, and on and on.  They make interesting choices, I suppose, on the limited funds left after big government takes its cut.

If, as the authors suggest, a family with $ 90,000 annual income (roughly 40 times the average family income in China) can't make it in the USA these days, that is a clear statement that big government is gradually impoverishing the middle class.

This process is not over.  Watch the future of medical care in the US.  It will become unaffordable and unavailable for the kind of folks described in this article, thanks to Obamacare.  Big government is not through punishing middle America.

Friday, May 2, 2014

Cheering 288,000

The Labor Department announcement of 288,000 new jobs in April was cheered as a sign of an economy in break-out mode.   What would have been denounced as a pitifully weak month in the 1982-83 recovery is hailed as a triumph in 2014.

By comparison to other months in this recovery, April looks great.  But by comparison to past economic recoveries, April is just one more mediocre month amidst a string of terrible months.

If you look at a breakdown of who is employed and who isn't, it is clear that minorities and youth are the main victims of the Obama economic program.  Black unemployment rates are twice that of whites while youth unemployment rates exceed 25 percent.  So much for the great economic game plan of the current administration.

Why not try free markets?  They made American the economic powerhouse that it used to be.  It could happen again. 

Expanding government just means more pain for those at the bottom of the economic pile.  Wealthy liberals need have no fear.  They will remain in fine economic shape and can continue to loudly proclaim their support of the poor and their concern about inequality. 

The only hope for the poor and the economically disadvantaged is for a return to free market economic policies.  Expanding government only helps the entrenched and the powerful.