Saturday, January 31, 2015

Accepting A Mediocre Economy

The Obama Administration is touting the US economic recovery as a job well done.  Data made public yesterday shows that 2014 produced 2.4 percent GDP growth.  Such low levels of growth were considered cause for alarm in the years before Barrack Obama became President.  Now, such mediocrity is extolled as acceptable, even worthy of praise.  How far expectations have fallen!

As the Wall Street Journal points out in an editorial today, it is impossible to find an economic recovery this mediocre at any time in American history.  This is a new record for economic sluggishness.

Don't expect this to change as long as the "war on the economy" continues, waged by the Obama Administration and it's army of bureaucrats.  While this won't hamper the "1 percenters" like Obama, Soros, Pelosi, Kerry and Buffett, it will damage the hopes and dreams of the middle class and the poor, who have no chance of prospering with the damaging economic policies of the Obama Administration.

But, if you listen to the President, he thinks these policies have been a success -- I wonder, who for?

Tuesday, January 27, 2015

Greece Election Exposes the Great European Disease

The sweeping electoral victory of Alexis Tsipras in Greece-- one vote shy of a majority in the Greek Parliament -- means that European economic policy is finally having to face up to reality.  There is no more money to provide for leftist dreams and schemes.

In Greece, starting a business is next to impossible, corruption is endemic at all levels of government, and work ethic in everyday life is almost non-existent.  To some extent, this is simply the most extreme version of what affects all of Europe.  Laws that "protect labor" mainly serve to freeze out free markets and deny opportunities to young people.  These laws create the "haves" and the "have-nots."  If you already have one of these protected jobs -- great!  Otherwise, you're screwed.

So, what happens next.  Obviously, Greece is going to walk away from it's debts -- sovereign debt is now 175 percent of a stagnant GDP in Greece.  Greece cannot pay that, so walking away is the only available answer.  When Greece walks, the left wing political parties in Ireland, Portugal, Spain, Italy and France will take heart.  Most, if not all, of Europe will walk away from their debt obligations in time.  That is where we are headed.

Meanwhile, the Obama Administration has patterned itself after the very policies that are rapidly destroying the European Union.  Instead of economic growth, the mantra is "fairness."  "Fairness" slogans line the pathway to the Greek solution -- economic stagnation and decline.

Only free markets deliver hope for the middle class.   Watch Greece descend into chaos, as it doubles down on "fairness" solutions.

Monday, January 26, 2015

Greece Turns a Corner

The election Sunday in Greece with Syriza taking 36 percent of the vote will create a new Greek government, unwilling to play ball with the existing agreements with the ECB.  The Greeks voted against economic stagnation and voted against repaying in full their obligations to the ECB.  Syriza is linking up with a right wing party to form the new government with Alexis Tsipras, head of the Syriza party, as the next prime minister.

All of this was inevitable.

A similar pattern will play out in the rest of southern Europe in time.

Unpayable debts need to be "worked out."  Partial defaults are in order.  The "extend and pretend" policies of the ECB have just made Europe weaker, debts higher, and the citizenry more furious.

When debts are unpayable, there are two parties at fault -- the borrower and the lender.  The lender needs to take a hit -- a big hit -- to put Greece back into play.  Greece, itself, needs to reform its economic policies -- especially business regulation and labor laws.  Greece cannot do that at the behest of German bankers, but it can reform as a means to return to the sovereign debt market.

It is still possible for Greek to remain in the Eurozone, but only if it walks away from much of its indebtedness.  That is the irony.  This should have been done four years ago.

Thursday, January 22, 2015

A New Round of Bad Policy

Today, the ECB (European Central Bank) will pursue its own version of QE (Quantitative Easing).  For those who might have been living in a cave the last few years, QE is simply printing money.  What happens is the government sells bonds to the public and then buys them back.  That, of course, represents two transactions that really amount to only one transaction -- the government spends money it doesn't have -- it prints it.

Of course, the modern printing press is digital. Central banks can simply credit your account with money and you have money -- voila!  But the underlying economics is exactly the same as running the printing presses.

For Europe, the purpose of QE is clearly to accomplish currency devaluation for the purpose of making their exports cheaper to foreign buyers.

Such policies, like America's earlier version of QE, are mostly designed to change the subject.  Real economic growth can never come from policies like QE.  What is needed is less government, more of the private sector and truly free markets.  None of this is in the cards for Europe, so expect further stagnation.

Tuesday, January 20, 2015

How About Some Volunteers?

We seem back to focusing on inequality, forgetting that, absent the political class, the countries with the least inequality are those, like North Korea, where everyone borders on starvation. Is that what those who decry inequality would prefer?

Lets face it: world inequality began to grow when the industrial revolution began.  If everyone is near starvation and one person does better, inequality grows.  Why is this considered a problem?

Isn't the world better off if all are prosperous, but a few are absurdly rich?  If having a few rich folks is the price of middle class prosperity, why not pay that price?  To impoverish everyone seems a rather foolish policy, regardless of what grand idea is behind it.

But, there are those like Warren Buffet, George Soros, Michael Moore and George Clooney who argue that taxes should go up.  So, what's holding them back?  Why don't Buffet, Soros, Moore and Clooney pay higher taxes voluntarily?   Why not?  If they think it's a good idea, why let others spoil their fun?

Buffet, Soros, Moore and Clooney live far, far better than Queen Victoria or John D. Rockefeller ever dreamed of living, so why don't they poney up?  There is no law against paying more in taxes than you owe under current law.

Friday, January 16, 2015

Stagnation of Western Living Standards?

David Leonhardt (NY Times) has written another article musing about why middle class disposable income has not increased in two decades.  Like other authors he misses the key reason.

Costs of labor have gone through the roof in the last two decades, but what workers receive in take home pay has hardly budged.  Perhaps, Leonhardt should explore why the huge and growing gap between what employers pay and what workers receive.

Remember that employers only care about one number -- the costs per employee.  What they don't care about is what part of that cost represents health care costs, paid sick leave costs, legal costs for defending lawsuits or potential lawsuits, complying with government regulation costs, etc.  Any increase in these costs will directly, one for one, reduce disposable income for employees.

So when Elizabeth Warren and Barrack Obama push for more paid leave sick days, be aware that employees will directly pay the cost for this benefit as they pay for Obamacare as well.  The idea that employers pay for employee health care is ridiculous.  Employee health care costs that are ostensibly paid for by employers are, in reality, paid by the employees in reduced disposable income.  These mandates aren't free for employees.  Employees are paying for them and cannot opt out.

All of these employer mandates simply take money from employees and give it, inefficiently, to whatever cause that big government advocates are pushing.   Employees have no choice in the matter and are forced to settle for stagnant real income.

You wonder why Leonhardt and others can't see the obvious.  Why, if this is the fault of capitalism is the cost of labor going through the roof, while what workers actually receive is going nowhere?  Is Leonhardt, like all the others, simply pushing a political agenda as opposed to doing the obvious arithmetic?  The government is the problem not the solution to stagnant living standards.

Thursday, January 15, 2015

How to Reduce Middle Class Income -- 7 Days of Paid Sick Leave

Valerie Jarrett, Obama's main advisor, has proposed, on Obama's behalf, mandating a minimum seven days of paid sick leave for US companies.

Who pays for this?  The answer should be obvious -- the employees themselves pay for this.  Employers will simply offer a lower wage and salary package to employees, if forced by law to provide this benefit.

This proposal would in no way increase overall compensation for the middle class.  It would, in fact, reduce worker compensation dollar for dollar by whatever the costs of providing 7 days of mandatory paid sick leave amount to.

If enough mandates like this are forced onto unwitting employees, their overall money wage and salary will continue to drift lower -- thereby exaggerating the so-called inequality of income.  These mandates cannot increase labor costs, instead they simply force the costs of these mandates onto the backs of working Americans and reduce their money income.

"Banks Are Under Assault"

Jamie Dimon, Chairman of JP Morgan, lashed out at regulators and legislators yesterday as JP Morgan reported earnings.  Dimon launched into a tirade against regulators who have repeatedly fined JPM for alleged improprieties.

It is hard to shed a tear for Dimon who vigorously supported the very political forces that have ground the vitality of JPM to a halt.  Dimon, who thought JPM was immune to criticism, was quick to criticize other banks in the 2008 debacle.  What Dimon has discovered is that big government eventually gets around to everyone, including him.

The Harvard University faculty is enduring a similar fate.  Obamacare, largely cooked up at Harvard, is now the source of major discontent at Harvard, as the provisions of Obamacare have reached the Harvard faculty health insurance plans.  Surprise, surprise, the Harvard faculty are now complaining about the very plans that they supported without equivocation four years ago.

The far left eventually eat their own.  It's good to see Jamie Dimon and the Harvard faculty in the cross hairs of policies that they were in the forefront of creating.

Monday, January 12, 2015

Why Should Greece Need to Leave the Euro?

When Detroit defaulted (for the second time the past hundred years), it did not start trading its own currency.  Detroit still uses the dollar (as does Stockton, California and other cities that have declared bankruptcy).  So why does Greece need to leave the Euro?  What is the great virtue of having your own currency?

What Greece (and Spain and Italy and France) needs (need) is a "workout."  They need to default on some or all of their government debt.  Then start anew.  There is no reason, at all, to even consider reintroducing the Drachma or any other currency.  It is absolutely absurd for Greece to leave the Eurozone simply because it is defaulting on its government debt.

The single currency union is a good idea, not a bad idea.  Stupid levels of debt is a bad idea, but why throw a way a good idea simply because politicians cannot control themselves. 

Is Illinois going to start trading an Illinois dollar when the inevitable -- an Illinois default of state obligations -- occurs?

Friday, January 9, 2015

Worry About the Wrong Things

The financial media is constantly abuzz about fears of deflation and/or inflation -- sometimes both at the same time.  Can it really matter whether the value of the currency is going up slightly or going down slightly? 

The current concern about Europe is the fear of deflation.  This is surprising since deflation has historically never impeded economic growth, though recovering from bouts of inflation provides many historical examples of economic trouble.  Why the fear of deflation?  How can it possibly matter?

The real problem in Europe is over regulation.  This shows up in labor laws, taxes, business regulation.  The free market has been strangled in Europe.  Whether there is 2 percent inflation or minus 1 percent inflation is totally irrelevant to the fate of Europe.  So, why the concern?

Because no one wants to face up to the fact that politically popular laws are destroying the economic prosperity of Europe.  That it is basically illegal to fire anyone in most of Europe means no one wants to hire anyone -- the level of inflation or deflation does not factor into the equation -- at all.

Neither Draghi or Merkel or any other political figure can save Europe from economic stagnation and possibly economic collapse. Only the return of free markets can rescue Europe and that is not in prospect.