Wednesday, October 29, 2014

Riding the Stagecoach

Increasingly, the US is divided into two groups: those riding atop the stagecoach and those running along beside, trying desperately to climb aboard.  Government employees of all stripes, including public school teachers and university professors, are happily on top of the stagecoach driving the horses forward.  "Higher pay, more benefits," they cry as they look with contempt upon those trying to muscle their way on board. 

Listen to Elizabeth Warren, Harvard University's version of a "Native American," as she exhorts her followers to pour more and more money into the privileged folks that ride in the comfortable seats on top of the stagecoach. (Warren had noted early in life that a possible ticket to the top of the stagecoach was to pretend to be something that she was not -- a Native American.  With that pretense, she launched her Harvard and then, later, her political career.  She's not stupid.  At least Ms. Warren had the good grace, years later, to own up to the falsehood, but only after riding atop the stagecoach for a number of years).

Those in the private sector, running alongside the stagecoach, trying to provide for themselves and their families by competing in the what is left of the free market, are increasingly falling further and further behind.  This is the real inequality story.  Those on the stagecoach have the political muscle to extract rents from the rest of the population and they do so. Earning between two and five times as much as the average income in the US, government employees clamor for more -- and get it.

Meanwhile by promoting increases in minimum wage laws, which will never affect those riding atop the stagecoach, the elite effectively toss obstacles in the way of those running alongside.  Too bad if your skill set isn't sufficient to make the minimum that we, the elite, think you should be paid.  There is no place on this stagecoach for you.

As the free market plays a decreasing role in the US, more and more goods and services are allocated by government decree, often without any consideration by the Congress.  The executive branch increasing feels that it is its right to decide who gets what.  This is a far cry from a free and independent people.  Instead it becomes who you know and who you lobby.  Stand in line for your benefits.  Wait in line for your health care.  The government will take care of you.

In a free market, all would have the opportunity to climb aboard the stagecoach, but in the brave new world, it's who you know and how much political muscle you can bring to bear.

Monday, October 27, 2014

Global Trouble Ahead

Almost anywhere you look, economies are weakening and anti-capitalism rhetoric is increasing.  The election results in Brazil are one clear example of both.  Even the American elections are dominated by issues that are unrelated to economic growth and more focused on government competence issues.  Regardless of who wins on November 4th, the steady march away from free market capitalism in the US is likely to continue, even if the big government gas pedal is not completely pressed to the floor.

Asia is weaker, Europe is moribund and the BRIC nations are much, much weaker than a year ago.  Global sovereign debt is, if anything, more out of control than ever, expecially in the US, Europe and Japan.  The perennial optimist Larry Kudlow pointed out that a mere 12 1/2 percent of American exports go to Europe.  True.  But, 30 percent of corporate profits of US corporations are generated outside of the US.  A weaker world means weaker corporate profits.  Earnings announcement this quarter featured gloomy guidance for the future, confirming the weaker outlook.

In almost every case, government is strangling economic growth -- in the US, in Europe, and across the globe.  Capitalism had a renaissance in the 1980s and 1990s, but the 2008 financial crisis destroyed the consensus that promoted capitalism and has led to strangling government intervention pretty much across the globe.  The world is now paying the price for that strangling government intervention.

As is always the case, stagnant economic growth hits the poorest among us the hardest.  In the US, the poor, the minorities are losing ground.  This feeds the "inequality" battle cry, that only serves to make matters worse.  Only the rich and protected prosper when government becomes more active.  We can see that now in the US and in Europe.  While breathing heavily about their support of the middle class, the big government advocates have put in place policies that protect their own privileged status and reduce the economic opportunities of the poor and the middle class.

The stagnant economic climate will only grow worse as long as growth in the power of government continues apace.

Friday, October 24, 2014

Nudging Toward Chaos

Increasingly, the elite Universities in America are becoming known for drunken and loutish behavior, that is not necessarily confined to any one demographic.  Both female and male students, in growing numbers, devote more hours to sex, drugs and alcohol than to more traditional academic pursuits.  The results of this type of behavior are making the headlines across the country in a manner that is becoming commonplace, if not shocking.


One culprit is the imposition of laws forbidding "minors'" access to alcohol.  These laws are no more effective than laws banning drug use.  They simply make alcohol more attractive to young folks, determined to show their elders that they are free and independent.  Abolishing alcohol and drug prohibitions would be a good first step toward removing the "rebellion" motive from the equation.  But, these laws have been in place for a long time and surely cannot account for the dramatic trends that we see today on most college campuses.

More important are changes at "academic" institutions that almost guarantee the pursuit of bad behavior.  High on the list would be the modern academic calendar, which no longer lists any courses that meet on Saturdays and, increasingly, finds few, if any, courses that meet on Fridays as well.

This means that most college students, looking around at 4 PM on a Thursday afternoon, realize that they are not required to be in a classroom at any time over the next three days.  So, what to do, with three available days off every single week?  Well, guess what.  They are finding things to do and it is no surprise that sex, alcohol, and drugs are rapidly becoming the main attractions.

Merely shifting the calendar back to require classes on Fridays would eliminate the automatic three day weekend, that for most students at elite schools, now begins on Thursday afternoon.  It is not clear why Saturdays should not be used as well.  Empty classrooms can be found at every elite school in the country for the vast majority of time that most folks would normally count as the "workday," a word that increasingly is losing any meaning in the academic world.

Both faculty and students have a vested personal interest in reducing the hours and the days which they must set aside for classroom activity.  But, this means that these hours can and will be filled by other pursuits, not all of which serve to advance the educational goals of these institutions.

Simply changing the academic calendar to once more include Friday classes could promote more responsible behavior on today's campuses.

Saturday, October 18, 2014

Solving Inequality the Venezuela Way

The constant drumbeat about inequality coming from the Obama Administration and, more recently, echoed by Hillary Clinton and Janet Yellen will produce more calls for direct government intervention to redistribute income and wealth.  They have a blueprint to follow -- Venezuela.

To see how that's working out, just stayed glued to your armchair.  Venezuela is self destructing as an economy. Once the pride of South America, helped by a booming oil industry, Venezuela is now degenerating into economic chaos.

Venezuela's Hugo Chavez was "democratically" elected to deal with inequality.  His message was, in most respects, the same message that we hear from Obama, Clinton, Yellen and others who find capitalism and free markets unseemly.  Chavez followed the earlier examples of Cuba, the Soviet Union and other enemies of "inequality."  The leaders of these countries lived in luxury while the average citizen descended into a political prison and a life of economic deprivation.

Under Chavez, Venezuela embarked upon an expanded version of the Obama agenda -- increasing government control of the economy, massive subsidies to large (politically friendly) sections of the population and an unceasing, unrelenting war of words (and arbitrary new rules) against the business community.  The rule of law became a thing of the past and civil liberties disappeared in the interest of reducing economic inequality (as always happens).

In some measure, Chavez succeeded.  If you ignore the extreme wealth of the political class in Venezuela, the rest of the country is showing less and less inequality, as gradually the entire populace moves in the direction of poverty.  This follows both the Soviet model and the Cuban model closely.

The big government approach to reducing inequality always and in every case leads to reducing the vast bulk of the citizenry to penury, while the political leaders bask in their palaces and pat themselves on the back for their anti-inequality accomplishments.

Meanwhile, what does capitalism do for you.  Check out modern China to see.  Today, the only place on the globe that shows economic growth is China and its periphery.  Capitalism is the order of the day along the eastern seaboard in China and result is over 300 million people have moved from dire poverty to middle class economic status.  Not bad.

There are no examples in the history of the globe where waging war on inequality and abandoning capitalism has succeeded in improving the lives of the average person. But, there are plenty of examples of the Hugo Chavez experiment in Venezuela.  Obama, Clinton and Yellen would like to bring the Venezuela experiment to the US.

Wednesday, October 15, 2014

The Return of the Luddites

William Galston's editorial in the Wall Street Journal exhibits ever-more confusion about why the middle class has lost so much ground in the US in the last five decades.  Galston, like the Luddites of 19th century fame, blames the plight of the middle class on technology.  Here is the ultimate statement of Galston's confusion:

"It is easy to conclude total compensation has been rising briskly even if wages have stalled.  But the facts don't bear out this conjecture.

Between 1981 aand 2014, according to calculations based on the Bureau of Labor Statistics, wages corrected for inflation rose at the anemic rate of 0.3% a year.  But total compensation -- wages plus benefits - hasn't done much better, rising at only 0.6 % a year."

First, it is worth noting that the "total compensation" that Galston cites is rising twice as fast as wages, even if both growth rates are small.  The absolute difference between wages and total compensation over time is huge, given these growth rates.

Second, the issue is not "total compensation," but the price of labor.  It's what employers have to pay, not what employees get that determines the price of labor.  The price of labor has gone through the roof, even if total compensation has risen more slowly (albeit twice as fast as the employee wage).

Why?  There are so many reasons, it's hard to know where to begin.  Think about lawsuits concerning workplace issues -- discrimination, pay equity, family leave, safety issues (real and imagined) and on and on.  These things cost and they cost a lot.  Unfortunately, the brunt of these costs often fall most heavily on those who these kinds of lawsuits are intended to help.  Regardless, such things all raise the cost of labor, but do not show up in "total compensation."

If you passed a law saying that an employer must throw $ 50,000 per year in the ocean for every employee they have, that would be an addition to the price of labor, but it would not show up in Galston's "total compensation."

It is surprising that the idea that increases in the price of labor lower the demand for labor is so hard for economists to fathom.  Equally surprising is the failure to understand that so-called "benefits" and mandates inevitably fall back on employees and serve to directly reduce wages for any given level of the price of labor. 

How can the middle class improve their lot in this situation?  Banning technological growth is not the answer.  How about letting free markets work and eliminate all the government-imposed costs that are added to the price of labor.

Saturday, October 11, 2014

The Alternative to Big Government

The only environment that has ever produced real economic growth is an environment of free markets.  The most recent historical example is that taking place in China in their easternmost provinces.  True, China is far from a free market economy overall, but in the few spots where free markets have been permitted to do their thing, an economic revolution has occurred.  While there have been a growing number of billionaires sprouting up during the economic boom, the real change is the movement of hundreds of millions of Chinese from dire poverty into the middle class.  Government cannot accomplish a change like this, but free markets can and have.

During the heyday of the old Soviet Union, Americans were constantly regaled by stories of successful five year economic plans in the Soviet Union, while economic growth in the US, then about 3 percent, was seen as pitifully low.  That was then, this is now.  Now, we know that over more than six decades of Soviet rule, there was no economic growth at all in the Soviet Union and agricultural output, in particular, declined for the first five decades of Soviet rule.  So much for the glories of centrally planned economies.  Meanwhile, 3 percent growth seems an elusive goal in modern America, beset by central planner dominance of government.

The difference between government planning and free markets lies in the unleashing of human initiative and effort.  Academic equations cannot capture this.  Academic economics assumes a robotic world that only government policy can impact.  But, the real world is not like that.  Ideas and human beings, left free to do their thing, do their thing and the world is a better place for it.  Idealistic reformers pave the way for the Stalins, the Hugo Chavez's, the Fidel Castro's and, yes, the Ayatollah's. 

When has a radical reform movement, centering upon the concept of improving the lot of poor people, ever led to an outcome that is anything but abhorrent?  There are no historical examples.  All of these movements end up with a Hitler or a Stalin or a Hugo Chavez, no matter how well meaning the activists that began this trail to disaster. (Note that the American revolution was not a radical reform movement centered upon improving the lot of the poor, though the revolution certainly had that effect; ditto for the British and their Glorious Revolution).

If you want to help poor people, give them economic freedom.  Then they can help themselves.  Government policies simply create an ever strangling prison that the poor, eventually, can never escape.

If you really want to help poor people, then give them the right to choose where their children go to school, the right to work whereever they want to work and for whatever wage or other arrangement they choose.  Let people provide the health care they need in whatever way they wish. Allow people to provide for their own retirement, assuming they have any interest in retiring.  In short, break the chains that bind poor people to an economic life with little promise or hope.

It's worth noting that "activist" leaders that promote big government are almost, without exception, individuals that are drawn from the wealthiest economic backgrounds of society.  Folks like George Clooney, Sean Penn, Warren Buffett, George Soros, Mark Warner, Bill Gates, and, yes Gwyneth Paltrow have no ties whatever to the poor. These wealthy elitists are in the Vanguard of strangling the hopes and dreams of the folks at the bottom of the economic pile and thereby promote their own sense of personal nobility.  They can smile knowingly and check themselves out in the mirror, while the poor struggle in the prison that these folks continue to promote.

Friday, October 10, 2014

So How is Draghi Doing So Far?

Mario Draghi, who heads up the European Central Bank(ECB), has been following the Bernanke lead and expanding, dramatically, the role of the ECB.  Over the mild and muted objections of German finance officials, Draghi has gradually but ominously pushed Germany increasingly into the role of backstopping the profligate economies of Greece, Spain, Italy, and, yes, France.

The Ukraine sanctions are probably the trigger that has turned the once-strong German economy in a downward direction.

Europe is an economic basket case because of taxes and regulations. That's not changing.

Today's WSJ article by Giada Zampona and Marcus Walker had this to say about what ails the Eurozone:

"Rigid market regulations, onerous taxes on jobs, and other long-standing labor practices have contributed to a long-term decline in economic dynamism in many parts of Europe, a trend exacerbated by the long financial crisis.

A lack of demand in Europe's economy, which shows up in stubbornly high unemployment and very weak inflation, is compounding the region's supply-side problems.

A feeble economic recovery since 2013 is at risk of petering out, economic data in recent weeks have shown, putting increasing pressure on euro-zone governments to act."

Note that commentators always look to government to lead the way out.  Perhaps a less active government with fewer regulations, lower taxes, and more reliance on free markets might help.  After all, the highest economic growth in the history of Europe and the US occurred when governments were relatively small and unobtrusive.

In the current political environment, governments are involved in every nook and cranny of American and European life.  No wonder there is a declining role for individual initiative and economic dynamism.  Europe and the US continue to move toward the old Soviet model.  That means, increasingly, stagnant economies that pit rich against poor, since the poor have few opportunities in a stagnant economic environment. 

Thursday, October 9, 2014

Russia is an Economic Mess

It is interesting that the Western countries have blinked in the face of Russian policy toward the Ukraine.  Fearing a shutdown of oil and gas from Russia to both the Ukraine and to Western Europe, the NATO alliance essentially backed down in the face of Russia's aggressive actions toward the Ukraine.

What would Russia do without it's oil and gas exports?  They have to sell it.  If not to Western Europe, then they would have to scramble to sell it elsewhere.  If that happens, since oil and gas is pretty much fungible globally, there would be plenty of oil and gas for Western Europe and for the Ukraine in time.  The "in time" is simply a reflection that temporarily oil and gas might have to be brought in from other sources.  These sources are available in abundance at the present time.  The world is overflowing with available oil and gas and the global market prices for oil and gas have been plunging for quite a while, reflective of that relative surplus.

Russia actually is an economic pigmy.  Capital imports into Russia have ground to a halt as Putin has, more or less, annihilated what little free-market activity occurs in Russia. Russia is gradually headed back to the old Soviet model -- the government dictates and the people suffer.   The winners are those in power and the oligarchs that Putin favors.  This is not a recipe for economic strength.  It is a recipe for weakness.

Anytime you see folks claiming to be fighting for the working classes, watch out.  The end result is, in every case, a pure dictatorship where the spoils are dished out to family and friends.  Think about that when you hear the current cries about inequality in the US.  Those who shout the loudest are likely hopeful that they and their allies will be able to decide who gets what.  Once you replace the free market, then it just becomes a power game and the winner puts his family and his friends in the drivers seat.  Putin probably laughs at our current concerns with inequality.  He knows where that is headed.

Wednesday, October 8, 2014

Europe Slips Into The Abyss

The data released on German manufacturing just adds to the gloom in the Eurozone.  No growth looks like it is turning into negative growth.  So much for aggressive actions by the European Central Bank over the past six years.

The answer to the horrendous debt problems of Greece, Italy, Spain, and France was more debt.  The politicians resisted dealing with the root cause of the problem -- the absurd, anti-free market regulatory and labor law environment prevalent almost everywhere in Europe.

Instead, the politicians, including conservative Angela Merkel, looked for big government solutions with dramatically higher levels of sovereign debt.  It's not working.  The US can't be far behind.

The Real Pricetag for Obamacare

Now the employer mandate kicks in.

Massive increases in health insurance are now hitting companies and employees thanks to Obamacare.  The Wall Street Journal story on WalMart lays out the truth as opposed to the Obama Administration fictions.  30,000 part time employees lost their health care coverage this week at WalMart and the remaining employees faced a 20 percent increase in premiums.

It will get worse, much worse.

Not only will Obamacare cost the vast majority of working Americans massive amounts of increased costs in increased health care insurance premiums and dramatically higher deductibles, but, for almost everyone (who is not wealthy), there will be very few doctors and hospitals available, especially for the millions of Americans pushed onto the exchanges as Obamacare implementation unfolds.

The result: dramatically higher costs for the average American and declining availability of actual health care.  Same old story -- now you have insurance, but you no longer have health care.

The worst part is: employees are footing the bill, not employers, even though employers appear to be the payers.  They aren't.  The employees pay in fewer jobs and lower wages.

Meanwhile, Warren Buffett has it made.  He will never be forced onto the exchanges, nor will Obama, Hillary, George Soros, Mark Warner, Bill deBlasio, Harry Reid, Nancy Pelosi, etc., etc.  These folks are wealthy and will never be forced to face the indignities that are being forced upon lower and middle income Americans by the implementation of Obamacare.

The wealthy liberals really don't care about the disaster that is Obamacare because they personally will never: (1) pay for it; (2) be subject to it.  They are destroying the finest health care system in the world, but preserving their little ocean of prosperity and excellent health care for themselves.  Meanwhile, they condemn the poor and the middle class to the nightmare that is Obamacare.

Sunday, October 5, 2014

The Wage Growth Puzzle --What Puzzle?

The NY Times is a great source for articles about economic facts that seem to be written by folks who don't have any real understanding of economics. Today's article by Justin Wolfers, "Jobs Report Highlights the Wage Growth Puzzle" is only the latest illustration of these bizarre articles.

The "puzzle," according to Wolfers, is why wages are not growing even though the demand for labor seems to be growing.  The confusion is that Wolfers doesn't seem to understand that the price of labor is not the wage rate.  The price of labor is the wage rate plus all the other costs associated with hiring an additional employee.

The price of labor has, in fact, skyrocketed.  But wages are, increasingly, only a fraction of the price of labor.

The economics is simple: as the demand for labor goes up, it's price rises.  What could be simpler than that?  And that is true.  Look at the data.

If you require mandates on employers, those become part of the price of labor whether the employee receives any benefit or not.  Things as simple as "family leave" mandates raise the price of labor, but they do not raise wages.  In fact, all things the same, they lower wages.

No session of Congress goes by without a proposal to impose additional mandates on employers who have employees.  Many of these pass -- unnoticed, by and large, by folks who write newspaper articles about the lack of wage growth.

Big enchiladas, like mandated health care coverage, directly impact the price of labor and substantially reduce wage rates.  Employers aren't really paying for these mandates.  Employees pay for these mandates with wages becoming a decreasing fraction of the price of labor.

Why is this hard to understand?  An employer could care less what the wage rate is.  It is the price of labor that matters to an employer.  Mandates raise that price.  Absent a growth in labor productivity, then wages have to be lowered to maintain the same price of labor.

Surprise! Surprise.  The price of labor is rising, but wages are going nowhere.  That's not going to get any better in the future, because mandates like health care costs are going to become increasingly more expensive.

Puzzle resolved.

Saturday, October 4, 2014

Unemployment at 5.9 Percent

Hip Hip Hooray!  Six years later, the economy has achieved permanent mediocrity.  These are exactly the pitiful kinds of numbers that propelled Bill Clinton into the White House against the first George Bush.  Remember James Carville's line: "it's the economy stupid."

Now, the Obama folks cheer economic numbers that the Clinton folks derided as inadequate, which tells you how low are the expectations of the Obama advisors.

When economic growth muddles along, the folks at the bottom of the economic pile suffer the most.  This was the only correct assertion made in Piketty's book, "Capitalism in the Twenty First Century." 

If you want poor people to gain some traction, get economic growth up.  The poor gain the most when the economy is super strong.  A weak economy doesn't really hurt the rich, but it can be devastating to the prospects of the poor.

Free markets provide opportunities.  Big government closes down opportunities, perpetuates inequities and enables rich folks to keep their thumb on the scales.  This is why the Buffetts and Warners and Gateses and Soros's of the world support big government.  It keeps them in the driver's seat, closing the door to the aspirations of the folks with little income or wealth.

An unemployment rate of 5.9 percent is pitiful.  Job growth of 250,000 per month is mediocre.  It's better than Europe, but no match for Asian economies, who seem to understand the value of economic growth.  That Obama acolytes can celebrate this kind of economic performance is telling.

Friday, October 3, 2014

The Fed and Low Rates

Everyone seems to agree that the Federal Reserve is responsible for our very low interest rates.  Maybe they're not.

In the 1930s, the yield on 3 month treasury bills never exceeded 1/4 of one percent....ever for the ten year period starting in 1929.

What was the Fed doing then?  Random stuff.  From 1929-1933, the money supply fell and then later rose and fell with no particular pattern.  Yet, rates stayed on the floor.  So, what role did the Fed play then?

Maybe, it's not the Fed.  True, the Fed balance sheet is out of control, but rates may be low for the usual supply and demand reasons.

Thursday, October 2, 2014

The Unwinding of CALPERS

CALPERS, shorthand for California Public Employee Retirement System, is fighting in Federal bankruptcy court to demand that payments to the fund be protected against the bankruptcy of the city of Stockton, California.  CALPERS wants to be treated differently than all other creditors of Stockton.  They want full repayment, not some haircut, of the future moneys to be paid into the fund to provide for the retirement of future Stockton retirees.

A Federal judge on Wednesday opined that it wasn't even clear that CALPERS was owed anything by the city of Stockton, since the amount of future payments is not currently known, even if Stockton were solvent.  In any event, the judge ruled that CALPERS had no right to be treated separately in bankruptcy.  Given the looming bankruptcy of numerous cities in California, not to mention the state itself, CALPERS is in deep, deep trouble.  This threatens the future pension payments for state employees in California.

An article in today's NY Times by Mary Williams Walsh  lays out the court's opinion on the plight of CALPERS.

Quoting the judge: " bankruptcy, Stockton could legally refuse to pay the bill because it arose from the city's contract with CALPERS, and contracts are broken routinely in bankruptcy.  The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim," Judge Klein said.

This is the beginning of the end for CALPERS, long the most underfunded public pension fund in the United States.  Not far behing CALPERS is CALSTERS, which is California's pension fund for public school teachers.  That one is a mess as well.

For years, politicians and board trustees of public pension funds, have buried their heads in the sand while their pension funds' unfunded liabilities have soared into the stratosphere.  Now the day of reckoning is here.  The pensions that public employees and public school teachers expect to be waiting for them are not going to be there.

Meanwhile, the largest pension fund in America, TIAA-CREF is fully funded and then some.  This is the pension fund that applies to academics.  It is a defined contribution fund, which, by definition cannot be underfunded.  These same academics, who have a comfortable retirement future ahead of them, have been part of the problem with the unfunded nature of public pension funds.  They have been in the vanguard of resisting reform in the public pension world.

The looming disaster in California that will spread to almost every state in the US has been a bi-partisan affair.  Republicans and Democrats alike have swept the growing problems of public pension funds under the rug for generations.  The grandaddy of them all -- social security -- has the same problems ahead for the same reasons.

Wednesday, October 1, 2014

The Poor Take Another Punch in New York City

Mayor de Blasio of New York City has issued an executive order raising the minimum wage in the city from $ 11.90 to $ 13.13.  This will not effect many New Yorkers. The upper middle incomes and the affluent will hardly be affected at all, which is probably why they support the increase.

I am reminded of Marie Antoinette's comment: "Let Them Eat Cake."

The people that will be affected are mainly people at the bottom of the economic pile.  For many of them, the minimum wage law is a "prohibition law."  It prohibts the low-skilled person from being employed.  Minimum wage laws make it a crime to have a job unless your skill set reaches a particular minimum.  New York City's deBlasio just raised that minimum.

To be fair to all, deBlasio ought to raise the minimum wage to $ 200 per hour so that well-off New Yorkers can be prohibited by law from working as well.  Why are just the folks at the bottom of the pile deemed criminals for taking a job.  Why not apply the same reasoning to everyone?

Why are laws criminalizing employment thought by the left to be good ideas?  I think the only way to get the left to appreciate the harmful impact of such laws is to raise the minimum wage to $ 200, so that such laws will affect the affluent left, like deBlasio, as well.