Monday, August 29, 2016

A Circus Performance at Jackson Hole

Economists are intellectually and morally bankrupt as a profession.  Nothing could be clearer, watching the proceedings at the Federal Reserve retreat this week at Jackson Hole.

Finally, acknowledging that the Federal Reserve is largely irrelevant to the modern world, left wing economists, by far the majority of academic economists these days, pushed the view that Fed officials should begin urging Congress to increase government spending as a cure for what ails us.

Nothing, apparently, happens at the margin any more, according to the modern economist.  Instead, the old standby -- more government spending -- is the rallying cry.  I suppose that the massive government spending that we are witnessing daily is not enough.

Remember that the highest levels of US economic growth in its history occurred when there was little or no government spending.  The government once took a back seat and let private, free market forces produce the highest economic growth levels the world has ever seen.

Now, we live in the days of the bureaucrats.  No amount of government regulation is too much, according to today's economists.  No one at Jackson Hole suggested that over-bearing government regulation is stifling the economy.  Instead, it was all about too little government spending!

No wonder no one pays any attention to economists these days.   Anyone not living in a cave knows that the Fed is completely irrelevant.  It is just a bunch of wealthy, pampered left wingers with time on their hands and not much to do.

Sunday, August 28, 2016

Surprise, Surprise! Obamacare Unraveling

All the left wing newspapers including the NYTimes and WAPO are running front page stories about the dramatic failures of Obamacare.  Where to begin?

How about cost to consumers.   Insurance premiums have gone through the roof with no end in site.  Meanwhile, deductibles are running several thousand dollars per year higher than before Obamacare came into existence.  For the middle class, this is a complete disaster.

How about insuring everyone?  Less than half of those projected by the CBO have actually been signing up.  We have increased, not decreased, the number of uninsured middle class Americans by enacting Obamacare.

How about health care results?  Increasingly, middle class Americans forego routine checkups and health care preventive maintenance because they cannot afford Obama insurance deductibles.

Net result:  most Americans have seen a dramatic fall off in access to health care and a dramatic drop in health care affordability.  The worst of both worlds.

All of this was easily predictable. 

Lesson:  only free markets can deliver affordable high quality health care.  End of story.

The Predictions of Economists

Today's Wall Street Journal has an interesting piece by Market Watch about the predictions made by economists regarding Brexit.  The predictions were overwhelmingly catastrophic.  Predictions from academics, from economists working for financial institutions, and the predictions from government economists were uniformly wrong and by a lot.

Market Watch concludes that economists are letting their political feelings influence their economic predictions.  The dismal science has become increasingly irrelevant since what they say and predict is increasingly wrong and irrelevant.

Predictions of higher economic growth in the US and Europe that have been pushed forward since 2009 have been ridiculously inept.  Growth has been non-existent in Europe and feeble in the US, contrary to the exuberant expectations of the economics profession.

There are a combination of factors to blame for the growing irrelevance of professional economists when dealing with macro economies.  First and foremost is the poor science that permeates most of modern macro-economics.

Undergraduates are taught material that hasn't been updated since the 1930s. Most undergraduate macro courses use IS-LM analysis, which is not much improved since JR Hicks introduced it in 1936.  That was a while ago.

Graduate courses are not much better.  Sloppy applied mathematics passes for economic theory at the graduate level with conclusions of such theory built in to the assumptions.  Try reading some of this stuff and you will come away amazed with how poor this theory and modern macro research really is.

Meanwhile, the use of statistics and econometrics is abused in situations where random sampling really isn't possible.  The researchers approach their limited historical data with strong political views to guide them.  The idea that this research is objective and free of politics is absurd.

Lets face it: the vast majority of economists are left wing idealogues. They want bigger government.  They see nothing wrong with minimum wages and other price fixing vehicles.  80 percent or higher tax rates don't bother these folks as long as it doesn't apply to them.  The live in a cloistered world where the idea of competing in a free market is an anathema.

Thus economists always predict that big government is the ticket to prosperity.  The only problem is that they are always wrong.

So, when virtually all of these left wing idealogues, masquerading as economists, forecasted that Brexit would destroy European prosperity and, in particular, British prosperity, they were substituting their own personal hopes and dreams for objective forecasts.  Both came crashing down.

Brexit was a non-event, as anyone with common sense would have predicted.

The irrelevance of economists is not new.

Wednesday, August 24, 2016

The Air Slowly Slips Out of the Balloon

The idea that you can regulate your way to prosperity is absurd. Nevertheless, that is the current American economic policy.  Economists spend their time discussing non-issues, such as when will the Fed make a move.  Nothing could be less important than what the Fed will do next.  It really doesn't make any difference for good or evil, at this point.

The regulatory overkill has done it's damage and the perceived, possibly real, threat of massively higher taxes is enough to kill off the entrepreurial spirit necessary for growth.  Better to start a foundation and join the coming Clinton regime.  That seems to work well and apparently the majority of Americans don't seem to care.  So, why not.

This is not your grandfather's economy.  It's not your father's either.  The enemies of economic growth have captured the high ground and have no plans to retreat.

It takes time to destroy an economy.  Ask the Chavez crowd in Venezuela.  They managed it in less than a generation.  The US path is slower, but the direction is clear.

The stock and bond markets have figured this out as well.   This is probably a time when uncertainty is probably better than certainty.  But, unfortunately, certainty is setting in.  We may be facing a generation of no real prosperity in financial markets. Incredible debt levels by various levels of government stand as a huge roadblock on the path to prosperity and an overbearing government has stamped out much of the economic dynamism of what once was the most dynamic economic engine in the world.

The chances of rolling back the American bureaucracy, bent on stifling US economic growth, is diminishing.  Low income Americans will be the biggest loser in what is coming.  The powerless always lose when economic growth disappears and the bureaucrats are riding high....and they are riding high.

It's been slow coming, but the air is coming out of the balloon.

Monday, August 22, 2016

The Pension Reform Battle in Virgina

Once again, the effort has been joined to reform the state retirement system in the Commonwealth of Virginia.  According to the current VRS (Virginia Retirement System) Board, the system had an unfunded liability of $ 22 billion as of June 30th, 2015.  This number, $ 22 billion, assumes that the system will reap a rate of return on its investments that no serious person believes -- 7 percent annually.  While the S&P 500 may well achieve 7 percent annually and has in the past, the VRS asset allocation, loaded up with high fee and low performance investments has no chance of achieving these kinds of returns.

The fiscal year for VRS is July 1 to June 30.  For the year ending 2015, VRS clocked in at a 4.7 percent return, while the S&P 500 was up 7.5 percent.  For the year ending 2016, VRS clocked in at a 1.9 percent return, while the S&P 500 earned just under 4 percent. 

So, at least there is some consistency in VRS results -- VRS investment returns dramatically fail to come close to either the 7 percent assumption or the S&P 500.

S&P 500 returns are almost trivial to achieve in practice, with almost no fees, thanks to Vanguard Mutual Funds.  Elmer Fudd could get the S&P 500 returns without breaking a sweat.  But, the VRS spends more than $ 300 million annually in investment fees and expenses to accomplish its dismal investment performance.

Meanwhile, the benefits to employees accrue only to those who stay until full retirement.  If you leave early, through no fault of your own (to take care of a sick relative, for example), the system strips you of more than half of your benefits and, in most cases, leaves you with 25 percent of what was coming to you.  Public school teachers are the main victims of this punitive system.

The simple solution is to let employees choose what they want to do.  Let them decide whether defined benefit is what they need or whether they might prefer to enroll in defined contribution.  That would put employees in the driver seat about their future, instead of being routinely punished for things beyond their control and about which they are inadequately informed.

But the nanny state may not go along.  Instead, Republicans and Democrats alike favor the Detroit system, where you promise, promise and promise, and then leave the employees and taxpayers with little or nothing.  The theme seems to be: as long as disaster doesn't happen on my watch, who cares.  Pretty cynical view about folks who need to prepare for their future.

Today is the second meeting of the Reform Commission in Richmond, Virginia to tackle these issues.  Maybe, something good will come of it, but, if past is prologue, don't hold your breath.

Wednesday, August 17, 2016

Stiglitz on the Eurozone

Joe Stiglitz, Nobel prize winnning economist, was a guest on CNBC this morning.  He seems to have checked his economics at the door before going on.  He believes, now, that Euro taxpayers should simply bail everyone out and that what Europe needs is a more dictatorial Eurozone political regime.  Not much room for economic or political freedom in the Stiglitz view.

His bizarre view on bankruptcy is that you should permit bankruptcy to occur only when the holders of the debt are people that you approve of.  That is truly bizarre.  Before permitting bankruptcy, you have to check to see who the latest debt holders are.  Joe strongly supported bailing out Greece, without any austerity requirements.  That must have been a comforting view to Joe's hedge fund buddies who owned a significant amount of Greek debt.

Stiglitz, if you can believe it, is even more polemical than Paul Krugman and that takes some doing.

All of this is part of the modern era in the discipline of Economics.  It isn't about Economics anymore, it's about who your political and economic buddies are.  Stiglitz and Krugman are now left wing idealogues, not economists in the normal sense of that word.

Tuesday, August 16, 2016

The Age of the Toxic Employee

Hardly a week goes by when politicians think of new ways to make employees more toxic to business.  The recent NLRB decision regarding franchise employees means that within five years fast food operations will be completely automated.  Don't have to worry about employee rights if there are no employees!

By providing more and more employee benefits, you guarantee that there will be fewer and fewer employees.  Small business, once the main employer of the American workforce are retrenching.  They are automating, outsourcing, doing whatever they can to avoid the toxicity (to their bottom line) of employees.

This is the new age. 

The privileged bureaucrats and the elite love this because now the welfare-receiving class is expanded.  Not able to find a job they now become wards of the ever-increasing state.

Thursday, August 11, 2016

America's Future Playing Out in Illinois

"So high-tax Illinois will continue bleeding the population and businesses, but with one contented cohort -- the Democratic political class, for whom the system is working quite well."  This comment is from George Will's editorial today carried in many of the nation's newspapers.

Will's column chronicles the tragic history of Illinois and is a preview of the future for California, New Jersey, New York, Michigan, and most of the 50 states.  These states are either broke or are on their way to being broke.  As long as they have any money left, the Democratic Party stalwarts, who run these states (veto proof majorities in the both houses of the Illinois legislature), will pretend that their is no problem.  Exactly what Detroit officials said five years before they went bust.

What is happening is the systematic looting of the state taxpayer in Illinois and all of these other states.  Money is being transferred from wealth producers and workers to state and local bureaucracies to do with as they please.  And they mainly please to give it to themselves.  It is not about providing services to their citizenry; it is about getting more and more money and benefits for themselves.  And they are winning and will win until these states run out of money.  Then everyone loses.

Wednesday, August 10, 2016

We Should Celebrate Risk-Taking

There is a reason why the US and Western Europe grew out of historical economic slumber in the seventeenth century and eventually created the most prosperous societies that the world had ever seen.  The reason is "risk-taking." Prior to the 17th century, there really was no platform for risk-taking. Capitalism provided that platform.

Along the way, these economies experienced numerous booms and busts, perhaps essential requirements for true economic growth.  "Creative destruction" would be the term that Joseph Schumpeter would famously apply.

Then along came 1929 and then later 2008. These downturns convinced the body politic that capitalism was flawed and that having government intervene was the answer.  Much of the government bureaucracy put in place in the 1930s was overturned later in the 1950s and the US and Europe flourished.

But, at the turn of millenium, things began to change dramatically. The idea that government should run things displaced the view that consumers should make the larger decisions.

One of the casualties in the new millenium was the idea of risk-taking.  Corporate leaders who now take risk are courting criminal prosecution, often whether they succeed or fail.  This is the old Soviet system where arbitrary and autocratic decisions replace the rule of law.  Risk-taking disappears in this kind of world.  But, this means economic growth disappears as well.

Until risk-taking is once again celebrated and not criminalized, there will be no economic growth in the US or Western Europe.  No pain, no gain.

Tuesday, August 9, 2016

Trump Economics Reflects Kudlow Influence

Donald Trump's call for lower taxes, less regulation and the abolition of the estate tax reflects the beneficial influence of Larry Kudlow, who is mostly a supporter of free markets.  I say mostly, because Kudlow was a cheerleader for the government bailouts of 2008 and is a frequent supporter of policies that he thinks will boost the value of the dollar.

While Trump's views on international trade are not helpful, they are popular.  Hopefully, these new economic strategies of lower taxes and less regulation will move to center stage.  If adopted, the regime promoted in Trump's speech would go a long way toward an American renewal.

If economic growth became a priority once more, many of the economic problems of inequality, poverty, and lack of opportunity could be tackled.  Absent economic growth, the future will be more division, more class warfare and more extreme political rhetoric.

Thursday, August 4, 2016

Big Banks Taking on Less Risk -- Why is That Good?

It's been US economic policy since 2009 to regulate banks to force banks to "take on less risk."  That is an absurd idea.

Banks should take on risk -- lots of it.  That is what fuels economic growth.  If banks fail, then their shareholders should suffer.  That's how markets are supposed to work.

The false narrative is the idea that bank failures involve systemic risk to the economy -- whatever that means.  Business failures should be handle routinely by bankruptcy.  That's what should have happened in 2008.  But it didn't. 

Instead, the bailout crowd took over.  And look at the result:  an anemic American economy.  That won't change as long as US economic policy is to reduce risk. 

In fact, you won't even get reduced risk.  Running a moribund bank to satisfy regulators just guarantees that banks will become increasing smaller and less relevant.  That's what has happened.

Meanwhile the price paid for this ridiculous policy is an economy that punishes people who have the fewest opportunities and resources.  The bureaucrats and the rich are thriving.  Everyone else is suffering.  That's the future as well, until such a thing becomes politically unsustainable.

The most chaotic banking regime in American history occurred during the "wildcat banking" days of the latter half of the nineteenth century.  That is also the period of the most rapid economic growth in American history (in fact, in world history).  There was no Fed, no regulators, no nothing.  But, the average American flourished.  That was the period that created the great American middle class.

This is the period that destroys the great American middle class.

Monday, August 1, 2016

The Puzzle of Low Rates and Low Inflation

Why, with the world awash in sovereign debt, do we have near zero rates most places and negative rates here and there?   Presumably, the answer must depend upon supply and demand.  But supply is absurdly high and rising. 

If supply is high and rising, then price should fall.  Falling debt prices mean higher interest rates not lower interest rates.  So, what, exactly, is going on?

The only answer that remains is that demand is so high for sovereign debt that rates cannot get off the ground.  There really is no other available answer to this conundrum.

So, why is demand for sovereign debt so high? A lot of the demand is completely artificial, based on government required collateral requirements.  But much of it, especially at the margin, is the government itself, through the actions of central banks.

Both the ECB and the Federal Reserve have purchased an absurd amount of sovereign debt in recent years.  At the margin, this boosts the prices of treasuries and sovereign debt and lowers the yields on sovereign debt.

Another important set of buyers of sovereign debt are frightened investors and businesses who see an increasingly threatening political landscape that views profit-making activities as immoral and potentially illegal. 

If you listen carefully to the Bernie Sanders speeches, you would never, ever invest your money in anything that produces a product in the US. Sanders' supporters say that they would take any profits you might make and distribute it to their friends and allies.  Hillary Clinton has signed onto this plan of confiscating business profits.  So why not park your assets in US treasuries, rather than risk money that cannot possibly produce profits that you can keep?

Having wealth and income in the US and Europe makes you a target of politicians and engenders hatred among the electorate, unless you inherited or used political influence, not business acumen, to gain your income and wealth.  It's okay to amass $150 million as the Clintons have done, without working or risking anything.  But it's not okay to amass the same amount of money by working in the financial services industry, putting in long hours and sacrificing family life to amass the money.  Better to gain your wealth by fleecing the public than by working.

Thus the demand for sovereign debt is essentially unlimited as the interest in actually investing in productive economic concerns has become a boomerang that an intelligent person wishes to avoid.

The problem of declining economic activity is showing up in GDP growth in both the US and the Europe.  Only very large businesses with massive political influence can survive in this environment.  This new "corporate state" will have little or no economic growth and increasing regulations and control of the lives of ordinary citizens.  How soon this becomes the old Soviet Union or today's Venezuela is anybody's guess.  But, that is the end game.