Tuesday, May 31, 2011

Don't Buy It

The rumor that the German government is considering endorsing a new bailout package for Greece has sent world stock markets soaring. Don't buy it. All this means is that Germany is willing to throw good money after bad. Along with the German government's ridiculous decision to abandon nuclear energy by 2012 (why not get rid of electricity as well?), the German government continues to live in it's own island of self delusion. Stocks should have a nice run today, but, after that, watch out.

Monday, May 30, 2011

Dionne in Dreamland

E. J. Dionne, the columnist for the Washington Post must not be reading his own employer's newspaper. Dionne devotes his column today to praising "other countries," who have, in his view, successfully overcome the challenges of health care, budget deficits, and unemployment. Dionne is careful not to list these countries or mention any specific country by name. Which countries is he referring to?

Europe? Japan? He must mean China and India where there are no entitlement programs and not much in the way of a tax system. If somehow Dionne thinks that Europe and Japan are doing well in regard to the various items he ticked off in his article, he must have been living in a cave the last few years. Europe and Japan cannot afford any of the things that Dionne is talking about and their economies are on life support. He complains about US unemployment. Most of Europe would trade for our unemployment rate (now, or in the past four decades). Europe is busy trying to dismantle all the things that Dionne talks about. Where has Dionne been?

Dionne is typical of folks who memorize a position and then repeat it ad nauseum no matter how untrue it happens to be. Enjoy his silly article in today's Washington Post. You have to admire how he doesn't let the real world intrude on his views.

Friday, May 27, 2011

Even If There Were No Debt

The current discussion of Western European sovereign debt problems are ridiculous. So, too, are the discussions of American sovereign debt problems (state, local and federal). If you spend a multiple of your income every year, would it matter, long run, how much you owed on day one? Eventually, you would go broke regardless of the initial level of debt. In fact, if anyone bails you out now, you will just take a little longer to go broke and the debt will be much, much larger when you eventually do go under.

There are not enough assets in the Eurozone to prop up Greece, forget about Portugal, Ireland, Italy and Spain. For that matter, there is no real hope for ultimately paying off the national debts of Germany, France and the UK. They all spend too much relative to their income. Ditto for the US.

The Great Experiment, promising future old folks a guaranteed income and free or inexpensive health care cannot work. It's simply a matter of numbers. Debt can postpone the bankruptcy of these systems, but, in time, they will fail. The problem is that someone needs to be setting aside acorns for the winter...no one is doing that in the US and western countries. The irony is that Asians don't have the same worry (except Japan which has the same habits as the US and Western Europe). Asian countries don't have safety (sic) nets; what they have is high personal savings rates, which is, frankly, all you need to provide for retirement and old age health care. You really don't need anything else but that. But, that is precisely what the US and Europe lack.

These continual discussions of bailouts and debt restructuring will continue until they can't continue any longer. Anyone foolish enough to buy the sovereign debt of these countries deserves their fate. Even US treasuries cannot hide from the cold hard numbers. There is no serious political activity to halt the steady march to bankruptcy in every major western country, including the US.

Is this bad, necessarily? No, not really. As long as the productive resources of the economy are in play and incentives remain in place. The problem is that governments will seek to find ways out of their problem through higher taxes and broken promises. That changes the game. Bankruptcy is much better, though that, too, involves broken promises.

The only way to provide for income and health care in old age is to save during the working and productive years. If a society doesn't do that, then there is nothing around to consume when the old folks need it. Is there anything else worth saying about this topic? If you want health costs to quit spiraling out of control, then get government out of the health care business entirely, except in the provision of "charity" hospitals and medical care for the truly indigent (which is a very tiny fraction of any modern industrialized country). Free market health care would provide choice, low prices, and excellent care. Any other solution condemns the citizenry to long lines and poor health care.

Friday, May 13, 2011

Protecting GM Products

Suppose the government decided that GM cars are so great that consumers should take much better care of them than they do. So, to protect GM cars, henceforth all GM owners will be required by law to have them washed and waxed once a week. Surely their owners can afford that...that would only be about $ 35 per week for the wash and wax. Definitely affordable.

Would that affect the sale of GM cars?

Apparently, the answer, according to the government is no. Since owners can afford to wash and wax their GM cars every week then they should be required to do so.

What about Ford cars? Let's suppose the government doesn't like them, so it doesn't care whether Ford cars get washed or waxed, so they decide not to "protect" them with legislation requiring a weekly wash and wax. Why "help" those guys?

How would all of this effect the sale of GM cars? Ford cars? Who wins with this kind of legislation GM or Ford?

The answer is obvious: Ford wins. Consumers can afford the wash and wax, but if they simply buy Ford they need not bother with the wash and wax. That was easy.

So, it is with American low-skilled labor. Congress has loaded American labor up with various "protections." Unemployment compensation, medicare, social security, the right to sue for real or imagined indignities, and so forth. Think of American low-skilled labor as GM cars. The government is protecting them and business can afford it. But will they do it?

Nope. Why hire American low-skilled labor when you can outsource or simply buy labor-saving equipment? Labor saving equipment requires no unemployment comp taxes, no social security taxes, no medicare taxes, no health care benefits and, best of all, the machine can't sue you!

Cutting taxes, raising spending, conservative schemes, liberal schemes.....none of this really matters. The government is "protecting" low-skilled employees by making them much more expensive than outsourcing or capital equipment. The market response is the same as in our GM/Ford example. If you protect GM cars, then Ford will be the winner. If you protect low-skilled labor, low-skilled labor will be the loser.

That, in a nutshell, is why we are now entering a "new-normal" for unemployment among the relatively unskilled part of our labor force. They have been artifically priced out of the market by overt government policy. Highly skilled employees need not fear -- they are less likely to sue and all of these add-on costs are a relatively smaller fraction of their overall compensation.

Once again government welfare schemes hurt the poorest among us.

Thursday, May 12, 2011

Tax Big Oil? Who Pays

The new solution to high energy prices proposed by the Administration is to increase taxes on oil companies. An interesting energy policy! Forbid drilling and exploration of new energy sources and tax existing production. Is the plan to eliminate energy supplies?

Who pays the tax on oil companies that Obama is proposing? Who owns the oil companies? The answer: the average middle class American in their pension funds and college endowments and foundations. They are, by far, the biggest owner. So, the plan is to tax middle American pension funds through their holdings in stocks. There isn't some unseemly rich guy out there owning American oil companies. It is the average American. He is the greedy oil guy. So, by all means, lets tax him.

So another "soak the middle American" scheme proposed by Obama -- this time as a solution to higher energy prices.

You can't make this stuff up,

Saturday, May 7, 2011

Finally, Some Job Growth

Friday's unemployment numbers were undeniably good news, even though the headline unemployment rate increased from 8.8 percent to 9.0 percent. The important news is not the unemployment rate but the number of new jobs created in the private sector of the economy. That number, nearly 300,000 after including revisions to earlier reports, is a very, very good number. Lets hope future months continue at that pace. Such growth would make my forecasts too pessimistic, but, heck, I've been wrong many times before. Lets hope that this month is the start of something big.

Sunday, May 1, 2011

A Glimpse of Sanity in Massachusetts

Massachusetts, a state on the brink of financial disaster, has removed the right of collective bargaining by public employees over health care issues. Massachusetts' overwhelmingly Democratic legislature acted for the same motives the state of Wisconsin legislature acted earlier this year -- to reign in the exhorbitant "deal" provided to public employees that taxpayers cannot afford.

The public employee unions cannot demonize the Massachusetts action as a Republican attack on unionism since the Republicans were not in the forefront of the effort in Massachusetts to strip the public employee unions of bargaining rights -- it was done by the Democrats!

Wonder why the President didn't weigh in on the Massachusetts action?

Pump Prices

One way to discourage energy production is to raise taxes on energy producers. That idea is at the center of Obama's energy strategy. Four bucks a gallon for gas is cheap, I suppose, to the Obama crowd, so why not remove the tax incentives in current law to increase oil production?

This continues the Obama Administration's strategy of punishing those who make good decisions -- in this case the oil industry.

On the Obama Administration logic, why not have a special tax for Apple? Apple created products that consumers wanted -- the Iphone, the Ipad. Why not go after them with a special tax increase? Apple, like oil companies, guessed right. Why not punish them too?

Imagine you know a way to increase oil production at lower cost. Would you consider investing in such a process knowing that Obama is waiting in the wings to raise your taxes if you are successful?

One more example of absurd government policy designed to make a serious problem -- higher oil prices -- even worse.