Wednesday, June 25, 2014

First Quarter 2014 Worse Than Fourth Quarter 2008

Revised GDP in the 1st quarter was down 2.9 percent, worse than the fourth quarter of 2008.  Is this still George Bush's fault?

Is there anyone left out there who thinks America's economic policies make any sense?  The President and the Congress have managed the impossible.  They have shut down the great American economic engine.

And what does Obama have to say?  Mandate more paid leaves for American employees.  Translation: raise the costs to employers that have the temerity to hire anyone.  More of the same from the President.

A free market economy would solve our ills, but Obama, Yellen and company have no interest in the free market and what we have is a direct consequence of their policies.

Saturday, June 21, 2014

Abolish the IMF

The IMF has now weighed in on the minimum wage issue.  They are now "instructing" the US to raise its minimum wage.  If anyone was short of compelling evidence that the IMF is a waste of US taxpayer money, this most recent pronouncement seals the deal.

This is a typical elitist policy call reflecting disdain for the truly poor of the world, who need the right to work for a minimal amount cash income in order to learn a skill.  The world's poor aren't rich college kids, like the staffers and bosses at the IMF.  The world consists mostly of poor people who would love to have the chance to improve their situation.

What is the IMF saying?  Make it against the law to work for skill development pay.  Instead, unless you have a certain skill level to begin with, you should just go on welfare or give up.  Thanks IMF.

Defund the IMF.  Is there anyone out there that thinks that this organization has served a useful purpose, while draining the American taxpayer.

Wednesday, June 18, 2014

A Clueless Federal Reserve

There is a silly discussion going on now between the Janet Yellen folks and the Alan Krueger folks.  It's worth noting that both Fed Chairman Yellen and former head of the Council of Economic Advisors Alan Krueger are Obama acolytes.  The debate between Yellen and Krueger is whether or not the 6 million workers who have bailed out of the work force in the Obama era are lost for good or can be coaxed back into the labor force.  Krueger thinks they may be gone for good while Yellen thinks they are lurking nearby and may return to the work force.

You might wonder why this discussion is going on.  It reflects the idea that if the long term unemployed are leaving the work force for good, then wage pressures may hit the economy sooner than expected and inflation could tick up.  While both Yellen and Krueger are doves (meaning that they are not too worried about inflation),  Yellen is clearly the more dovish of the two.

The problem with this discussion is that it is largely irrelevant.  Inflation is not caused by tightness in the labor market.  Recall the 1970s?  Both inflation and unemployment rose over the decade substantially.  So much for the idea that tightness in the labor market causes inflation.  Facts overwhelm naive theories in this case.

The issue of solving the unemployment problem has nothing to do with Fed policy.  Fed policy is most likely going to lead to an unstoppable rise in inflation at some point.  The fact that it hasn't happened yet will not prove to be much comfort when it does happen. 

Solving unemployment is relatively straight forward.  Eliminate the roadblocks government has put up that makes hiring an employee an irrational decision for many businesses.  Until these roadblocks are removed, job creation will remain a twentieth century phenomenon.  The Obama era will continue to be the new "jobless" economy, regardless of what Yellen and Krueger think.

Sunday, June 8, 2014

The Student Loan Fiasco

Government policy seems designed to impoverish young people.  One big nail in the coffin of the hopes of the 18-35 age group is the government's policy on student loans.  Loans should be left to the free market.  The government should have no role.  Unfortunately, the government sees things differently.

The result is that loans are automatically granted to teenagers who are contemplating attending college.  Colleges lobby hard to get the government to expand such loan programs and they have been successful.  As usual, government loan programs are expanded in a bi-partisan manner.  There are precious few defenders of free market economics, when it comes to student loan programs.

These same prospective students, desperate for job training, are forbidden by law from receiving that training on the job (think minimum wage laws), so they turn to community colleges and vocational training schools.  Enter the government. 

The government provides the loans, colleges then jack up tuition and embark on absurd expenditures having nothing to do with education.  Have you visited a college campus lately?  It is ridiculous where the money goes.  Since government makes money available through government loans to impoverished students, the colleges find a way to spend it and jack up tuition ever higher.

So, then what?  Students either drop out or graduate, but the loans remain, a blot on their future.  In today's NYTimes Natalie Kitroeff chronicles in detail what happens to some of these students in "Young and In Debt in NY City."  This is an American tragedy and millions of young Americans are caught in this government-created trap.

As usual, government policies like this mainly affect youngsters in the bottom half of the country's wealth and income profile.  This is part of an apparently determined government effort to eliminate opportunity for those who are born in modest circumstances.  That's why folks like Warren Buffett support this.  It doesn't affect him or anyone that he is ever likely to meet.

Saturday, June 7, 2014

The Retirement Question

The global surprise, no surprise at all, is that public retirement systems will not provide the retirements that workers are expecting.  In the US, social security is the most obvious example.  Anyone under the age of 45 in the US will get a reduced social security benefit or, perhaps, no benefit at all.  State and local government employees are in for a rude shock as well.  Almost all of the state and local government employee pension plans that fall in the "defined benefit" category are woefully underfunded.  So, when "covered" workers, globally, reach their retirement ages in the next generation they are in for a big, big surprise.  No money.

All of this is well known and thoroughly documented.  There isn't really a debate going on here, except for those who simply want to hide from the truth.  Numbers are numbers.

Defined benefit retirement systems are based upon two incorrect premises: 1) Everyone needs to retire; 2) The sponsor (government, whatever) will properly fund these systems.  Both of these premises are false.  Retirement is a modern concept.  No one retired in the 17th century, unless forced by disability.  In the modern western countries, most folks of independent means do not retire.  Is Warren Buffett retired?

Politicians dreamed up the idea of retirement so they could put in place defined benefit systems and garner votes.  Of course, as usual, these same politicians opposed proper funding for these systems, so that the notion of paid retirement was a dream but not a reality.  This was bi-partisan cynicism.  In the US, politicians of every stripe still defend defined benefit systems without owning up to the fact that they are a dream for everyone, but a reality only for the lucky few who get their money before the system runs out of money, which the system is guaranteed to do.

What people really need, as they grow older, is security.  But the "social" part is a cruel hoax.  The way to get security is to grow assets.  "Defined contribution" systems grow assets.  Defined benefit systems consume assets.  The largest pension system in America is 100 percent funded - TIAA-CREF.  This is the "defined contribution" system that academics use to fund their retirement.  These same academics who support social security and publicly funded pension systems, are not in the system that they defend.  By definition, a "defined contribution" system cannot be underfunded.  So academics are safe.  Their retirements are assured, though most do not really retire.

The cruelest hoax of all is that these "defined benefit" plans, even when funded, provide zero (other than spousal or minor children) benefits at death.  There is nothing to leave to the next generation.  Whereas, defined contribution plans can be preserved for future generations.

But, why is retirement a good plan?  Retirees get herded into communities of other retirees and hidden away from the rest of society.  Why is this a good idea?  People with means rarely do this.  They keep right on working.  Some folks cannot work indefinitely for health reasons, but aside from health issues, why should anyone retire?  People should do what they want to do and defined contribution plans, by building wealth, provide older folks with options -- to retire or not to retire as they choose.

Friday, June 6, 2014

Draghi Dreams While the US Fiddles

The European Central Bank (the ECB) announced yesterday a policy that essentially loans money to banks at a negative interest rate.  That's right!  They pay banks to take their money.  Why would they do this? (A better question is, perhaps, why is there an ECB?   There is not a shred of evidence that the ECB, or any other central bank since the Bank of England, has had a favorable impact upon their own domestic economy).

What the ECB is up to, of course, is one more bureaucratic effort to get an economy going in a land where free markets are almost illegal.  So many completely voluntary economic transactions in Europe are either illegal, absurdly regulated, or taxed beyond reason, that the free market struggles for its very existence.  So, now, borrowing rates are lower.  So what?  Borrowing rates are not the problem, so Mario Draghi of the ECB is just puffing smoke....once again.

In the US, the Michigan Republican Party has seen fit to pass an increase in the minimum wage and index it to inflation.  Michigan's Republican Governor Rick Snyder signed this atrocious legislation and praised it.  That simply adds to the list of voluntary transactions that are now illegal in Michigan.  Does this give you a hint as to why the Republican party is always and forever the minority party in the US. 

The national Republicans brought us ruinous social security and medicare expansions in the 1970s (remember Dick Nixon!), the ADA in the 1990s (remember Bob Dole) and the prescription drug bill in the early 2000s (remember George Bush).   In the US, it is a race to see which party can add more regulations, more income and wealth transfers, more taxes, and more restrictions on voluntary transactions.  I'm not sure who's winning.

Free markets currently have no defenders -- none in Europe and few in the US.  This means no economic growth.  The absence of incentives translates into stagnant economies. The stock market will figure this out in time.