Friday, April 27, 2012

Who Should Pay for Higher Education?

It seems so easy to say that states should provide more support for public universities, but should they?  Who pays if the states pay more?  The answer is: the average taxpayer.  Why shouldn't the student attending the university foot their own bill.  Why should a taxpayer who is not attending and who may or may not have children attending pay to subsidize college students?

"We all benefit" is the usual refrain.  But, is that correct?  Does the average taxpayer benefit when Joe Dough gets a sociology degree from Alabama Polytechnic Institute, while sudsing his way through four years of school?  Certainly, the local bars in every college town would like to see higher subsidies by taxpayers for higher education.  They know where the poor college student likes to spend his/her own money.  Visit any major university and check out the attendance records in a typical class these days and you might wonder why taxpayers are subsidizing a lot of empty seats.

The usual principle is that if you want something bad enough you should pay for it yourself.  Why doesn't that rule apply to higher education?  I can understand the case for public funding for elementary school and secondary schools but the case for public funding for higher education seems to me to be no stronger than the case for public funding for iphones, ipads and tv sets. 

Study after study has demonstrated that college degrees are worth it to the student enrolled.  I point you to the most recent edition of the Journal of Economic Perspectives (Winter, 2012) for some observations on the "private value" of higher education in an article by academics Christopher Avery and Sarah Turner: "On the other side, the earnings premium for a college degree relative to a high school degree nearly doubled in the last three decades."  Earnings premium means how much more in earnings a student will earn with a college degree as opposed to a high school degree.  So, why should the taxpayer subsidize and make the premium even larger by transferring wealth from those without to those with?

In an otherwise excellent survey, the article by Avery and Turner does not raise the question: why does higher education cost so much more than it used to cost?  Are we doing something different in higher education that escalates the costs without limit?  That is really the much more interesting question than posing the endless pursuit of "how to feed the beast" exercises that involve more loans and more taxpayer funding.

So often you hear the refrain that state funding has been reduced or that big donor contributors are down this year.  Fine.  But, that does not explain why costs are exploding.  The fact that revenues are not growing as fast as one might like is irrelevant to the issue of why costs are exploding.  Higher education is not simply looking for more funding because existing sources are drying up, which is what college bureaucrats would have you believe.  Costs of higher education have been and are exploding.  Why?  Doesn't anyone care?

Tuitions this year rose once more at most major universities.  You have to wonder what expenses are rising so much in the midst of a still faltering global economy and a moribund US economy.  What is straining the budget?  Simply expanding student loans to an already overburdened student loan market adding to the mountain of debt that overhangs our citizenry and forcing taxpayers to cough up more and more  does not address the question of cost.  This is one more example, paralleling the health care debacle, that once you decide someone else should foot the bill, the bill explodes to infinity.

Wednesday, April 25, 2012

The Cradle of Civilization?

Civil society is breaking down in Greece.  Riots, civil anarchy, violence and a rapidly descending respect for the rule of law is being played out on the streets of Athens daily.  What once was the "cradle of civilization" is now a country descending into barbarism.  The road to anarchy is often paved with good intentions.

Left wing governments for three generations, originally inspired by the American-trained economist Georges Papandreou, have fought the fairness battle -- the same battle that Obama is engaged in today -- and Papandreou emerged the winner in Greece.  They got what they wanted -- a bloated government, a massive government bureaucracy, and promises of fat government retirements and free health care for their citizenry.  They got it all.  They had the same dream that the Obama folks have in the US.

Now we can see clearly where that dream takes you -- the modern nightmare that is Greece and will soon expand to Portugal, Italy, Spain, France and, yes, even Germany.  Slowly but surely civil society is unraveling in Europe and economic collapse is unfolding.  This is the inevitable outcome of a society that believes that no one is responsible for providing for their own health care, their own retirement, their own housing and for their own family.  As the government, whatever "government" means in this context, gradually assumes responsibility for all of the basic necessities of life, there is no one left to produce the goods and services to provide those necessities.  That's where we are in Greece.

One can only guess the ultimate outcome of the Eurozone collapse, but one thing for certain, it won't be freedom and democracy.  When the respect for law and personal responsibility have disappeared from society, that society becomes fair game for demagogues and that's most likely where this is headed.  If you think twentieth century Europe was a continual warzone, watch the unfolding drama now taking place in Europe.  Finger pointing is now the major government policy in every European country.  There are no political solutions to what ails Europe.

The roadmap to Greece is plainly in front of the US.  If Americans want to travel down this road, it is pretty easy to see where it leads.

Tuesday, April 24, 2012

So, What's the Deal With Corzine?

Just because Corzine is an Obama supporter, is he going to get a free pass?  Madoff should have thought of this: "hey, it was just an accident!"  Or, perhaps: "I never intended to mislead anyone."  Would that have gotten Bernie Madoff a free pass?  I don't get why Madoff is in jail and Corzine is free as a breeze.

It looks like Corzine is getting a free pass on the $ 1.2 billion of customer money that disappeared on his watch at MFGlobal.  If there is a difference between what Corzine did (presiding over the looting of customer accounts, protected by law as segregated from firm accounts) and what Madoff did (running a ponzi scheme with customer money), I fail to see the distinction.  Why is one guy behind bars and the other guy still the President's best buddy and on the loose?

Why Not Just Make It Against the Law to Hire Anyone?

The Obama Administration seems bound and determined to eliminate job opportunities in the American economy.  The latest salvo in the war on jobs by the Obama folks is the new set of rules and regulations coming out of the EEOC (the mis-named "Equal Employment Opportunity Commission").  The new rules would force more and more mandates on companies who have the temerity to hire a handicapped worker.  The new rules force dramatically higher "reasonable accomodation" standards on firms that hire handicapped workers.

The Wall Street Journal highlights the new rules in their opinion piece today entitled (appropriately): "Disabling Common Sense."

So, what is the predicable effect of the new EEOC rules?  For certain, employers will be less willing to hire the handicapped.  For another, since the definition of the handicapped is ever-shifting and will in time encompass virtually every American, employers will be less willing to hire anyone.

The Obama plan for jobs seems to be to make it as difficult and costly as possible for employers to hire employees.  Employers aren't stupid.  They read the memos.  This is a jobless recovery by design.

Monday, April 23, 2012

So Long Sarcozy

Nicolas Sarcozy, President of France, is in deep political trouble.  He should be.  Along with Angela Merkel of Germany, Sarcozy has orchestrated the absurd policies that have been pursued in the Eurozone over the past 36 months.  The answer to too much debt, if you believe Merkel and Sarcozy, is more and more debt.  Together with half-hearted pleas for budgeting austerity, the Merkel-Sarcozy is a "more of the same" plan that simply makes a bad situation potentially catastrophic.

Tim Geithner and Barrack Obama have openly advocated even more ridiculous policies for the Eurozone, patterned after their own US policies, that make the Merkel-Sarcozy absurdities look mild by comparison.

It is amazing how often the Merkel-Sarcozy formula is used in countries throughout the western, developed world.  All of these countries, without exception, have made promises to their citizenry that cannot be kept.  So, now, all of these countries have a combination of out of control sovereign debt, declining GDP (or soon to be declining GDP), and a dawning awareness that their old folks of the future are doomed to live in penury.  Thanks for nothing.

Because debt financing is becoming hopeless in the Eurozone in country after country, there is a movement to cut government expenses.  This is not a plan, it is a necessity.  They have no funds to pay the bills anymore.  The result: political chaos.  That is the ultimate destination of the Merkel-Sarcozy path and we are moving rapidly along.

America should take note.  We will soon be on that path as well.  Other than Scott Walker and Chris Christie, no American elected politicians have successfully challenged the fiscal problems that are in front of them.  Indeed, the Obama Administration follows the "Ostrich" policy.  See no problem, hear no problem, speak no problem.  But the problem is there and it is simply a matter of time.

Sadly, Francois Hollande, who will replace Sarcozy as President of France advocates even more absurd policies than Sarcozy, if that can be imagined.  The end game of the Eurozone political posturing is economic and political chaos.

There is a much, much easier solution.  Owning up to their true fiscal situation, admitting that there is no way to finance the health care and entitlement plans in place, and sitting down with borrowers and restructuring loans is the right set of policies that could lead to European prosperity.  But, it looks like no European politicians have what it takes to get there.  So, look for increasing chaos ahead for the Eurozone.

One wonders if US policy makers will see the light before the US follows Europe down this tragic path.  The problems in the US are exactly the same as the problems in the Eurozone and, if anything, of a larger magnitude.

Sunday, April 22, 2012

Suing Bank of America

Bank of America has recently settled a lawsuit with two public pension funds for $ 160 million.  The case involved BofA's purchase of Merrill Lynch.   Who pays for this?

As in many things, no one seems to ever ask the question: who pays?  Instead, folks bask in the view that the bad guys got their due.  But, did the bad guys get their due in the BofA case?

BofA is a public company.  The biggest single owner of BofA are American workers of slightly above average income.  How do they own it?  In their pension funds.

The next largest owner is another set of average Americans -- folks who own mutual funds either in their IRA accounts or in the brokerage accounts.  These folks have saved this money, invested it, and have ended up as a major owner of BofA.

So, when you ask who pays, look in the mirror.  The two public pension funds who won $ 160 million in the case will be paid essentially by the owners of BofA, the single biggest group being other public pension funds.  So, to make it clearer: in effect, the public pension plans of Louisiana have successfully sued the public pension plans of Arizona, New York, California, etc.  One public pension plan is dipping its hands into the pockets of another pension plan.  Does that sound like "getting the bad guys" to you?

If all that is going on is one group of average Americans are suing another group of average Americans (who are, by and large, unaware that they are being sued), who really wins?

That's easy.  The lawyers.  They are the ones who loudly trumpet these lawsuits and lobby hard to see to it that damage awards and other financial penalties are not limited by state and federal law.  It's great to see those average Americans who own BofA get what they are due.  "Sock it to the little guy."  That's the message of the BofA lawsuit.

Meanwhile, the perpretators of whatever went wrong are completely unaffected by the outcome of this lawsuit.  They are highly paid executives of BofA, that bear no penalty whatsoever from the outcome of this lawsuit.  Even if they own stock, the company typically simply grants them more stock if the value of the their holdings have fallen.

So, as in other things, rich folks roll merrily along unscathed, while middle class Americans are crushed once more.

Anytime you read about a public corporation being sued for some malfeasance -- think Enron, Exxon, World Com, whoever -- and you wonder who pays if the lawsuit is successful, look in the mirror.  It's the little guy that pays for all of this litigation.  The Enrons of the world aren't owned by some rich bad guy.  The Enrons of the world are owned by average Americans, mostly trying to save for their old age.  These lawsuits make it tougher for these folks to retire.  But, the media seems to think that bludgeoning the retirement hopes and dreams of the average American with these kinds of lawsuits is "getting the bad guys."  I guess that tells us who the media really thinks the bad guys are.

Meanwhile the Wall Street Journal reported yesterday that Bank of America was planning more layoffs.  Maybe BofA needed to produce some cost cutting to pay off the recent victory by the plaintif lawyers.  That should get the bad guys!  Sock it to them!

Saturday, April 21, 2012

The Public Pension Saga

State and local governments in the United States have a major fiscal disaster on their hands.  The obligations of these governments embodied in their pension plans for government employees are not funded and there are no serious plans to fund them.  The result: a combination of looming state bankruptcies and drastically reduced pension benefits for covered employees.  The biggest single group of pensioners threatened by this looming disaster are public school teachers.

Yesterday, Democratic Governor Pat Quinn of Illinois made a last ditch desperate effort to avoid disaster in Illinois by urging state employees to "voluntarily" accept a shift in the retirement age to 67 and to contribute an additional three percent of salary to their pension funds.  This is not a reform, this is an emergency and Quinn is a Democrat elected with strong union support in a traditionally Democratic state.  Even if Quinn's suggestion is taken up by public employees, which it won't be, it is only a drop in the bucket compared to the real problem that Illinois' pension fund faces. That tells you how bad things have become.

Illinois is in the vanguard of this coming catastrophe.  New York, California, New Jersey are waiting in the wings.  South Dakota may be the only state of the 50 states in the US that has a real shot at delivering on their public employee retirement promises.  No one else is coming anywhere near close to properly funding their systems.  Some states, Virginia is an example, have recently enacted "reforms" that will have minimal impact on the massive funding deficits of their public pension plans.  These reforms are notable in their inadequacy.

Inevitably, the younger members of the work force will find little or nothing waiting for them when the time for retirement comes.  This parallels the outcome of social security for this same work force demographic.  There is simply nothing out there to fund the promises that politicians continue to make and continue to pretend will be there when the time comes.

On this score, the coming retirement disaster is a bi-partisan affair.  Republicans as well as Democrats are both complicit in confusing the public as to where this situation is headed.  Ultimately, Democrats like Governor Quinn of Illinois and Republicans yet to be named will be forced to tell the truth to their employees, well past the date that these employees could increase their personal savings to offset the abandoned promises of the politicians.  Government and politics at its worst.

Friday, April 20, 2012

Slowdown Ahead?

Some regions and sectors of the US economy are moving right along.  In the aggregate, though, the economy may be slowing and slipping back into recession.  It is not just housing.

The current prosperity has limits.  Economic expansion depends upon aggressive entrepreneurial activity and, except in technology, we're not seeing much on the entrepreneurial front.  Why?

Some roadblocks to prosperity are "hard" obstacles and some are "soft" obstacles.  The "hard" obstacles are excessive government regulation, the government-imposed cost of labor, and sharply rising energy costs.  Most of these "hard" obstacles are self-imposed problems for the US economy.  We have put these restrictions on our economy and they are now a serious impediment to an economic recovery.

The "soft" obstacles are the almost daily attacks by the White House and its supporters on the business community.  These attacks have created a gloomy background that clouds and dampens the American entrepreneurial spirit.  Business folks are discouraged.  They feel that they are being singled out for political reasons by the current administration.   The White House seems to believe that American society is an "unfair" society dominated by greedy and rapacious businesses and the White House trumpets the "unfairness" theme at every opportunity.

These things matter.  Both the "hard" and "soft" obstacles are weighing heavily on the economic recovery and dampening the prospects for Americans in the bottom half of the wealth and income pool.  The comfortable and the wealthy, who by and large support the policies that have created these obstacles, are largely unaffected and can preoccupy themselves with "fairness" discussions and other irrelevant topics.

What could kick the American economy into a more sustained downturn is the fear of the future.  There has been no progress on reducing the fiscal footprint of the various levels of American government.  This means that a chaotic fiscal future is becoming inevitable.  Politicians have quit discussing the level of government debt in the US, which suggests they have become resigned to this chaotic future.  Debt problems in the US are far, far more significant than those currently plaguing the Eurozone and we all watch daily how the Eurozone countries are faring.

The Eurozone is now in recession and things are getting worse.  America may not be far behind.  If the "Affordable Care Act" is sustained by the courts, which I suspect is more likely than not, and if nothing is done regarding the tax increases due to automatically take place next January, then the US economy will likely fall back into recession in the second half of 2012.

There are bits and pieces of evidence that are beginning to accumulate to suggest that the probability of a second half economic slide in the US is increasingly much more likely.  There is almost no shot that real economic prosperity is on the way.  With current economic policies, the 3 percent growth days of America's past are a fading memory.  The best that we can hope for, and it is growing increasing unlikely, is that the economy can limp through the balance of 2012 at a 2 percent real GDP growth pace.  It is a sad state of affairs that 2 percent economic growth is now an "optimistic" scenario.

Thursday, April 19, 2012

Why Is This a Conundrum?

A conundrum is something that is surprising and unusual and difficult to explain. Sometimes a conundrum is described as a "riddle." Today's conundrum, according to the media, is the "jobless recovery." Really?

Is it truly difficult to find the reasons why employers have scant interest in adding to their work force? The only folks that find that this is a "conundrum" are folks that are not employers. American employers know perfectly well why hiring new employees is of little interest and could pose a major threat to their company's financial security.

The future of the US is to use labor from outside the country. Why? Is it because wages are low? If that were the case the US would have always "imported" it's labor through outsourcing. Why is "outsourcing" a modern phenomenon? Is this really a conundrum, as the media is fond of asserting? Or, is it simply the logical and predictable outcome of the dramatically increased labor costs imposed by various levels of government on employers that have the temerity to have a work force?

A machine can't sue you. An employee in China or India can't sue you if they don't work for you, but work instead for your subcontractor. You don't have to provide various benefits to an employee in Vietnam or Poland who is providing labor services to a company that provides you with a product. So, why should American companies have any "local" employees at all. That is probably the real "conundrum."

It is not a surprise that we have a jobless recovery. The real surprise would be if American employers got enthusiastic about hiring American workers. Based upon current government policies and existing law, that's not likely to happen.

Wednesday, April 18, 2012

Why Jobs are Few and Far Between?

Americans are generous people. They believe in helping others. The Americans for Disability Act, passed by overwhelming bi-partisan Republican and Democratic support, championed both by then Senate Majority Leader Robert Dole and then President Bill Clinton, must have seemed like a good idea at the time. Why not help people with disabilities? Isn't that the right thing to do?

Most Americans would answer the above question in the affirmative. Why not?

But, the reality is the ADA, as the act is known, has a definition of disability that the vast majority of Americans would never agree with. For just one example, chronic alcoholism is a "disabililty" under the ADA. If an employer refuses to hire someone because they are obviously inebriated in the interview and they confess to a severe drinking problem during the job interview, then that employer can be prosecuted under the ADA. Is that what a bi-partisan group of Democrats and Republicans thought they were singing up for? Funny! Neither Bob Dole nor President Clinton brought up the plight of alcoholics as reasons for their support of the ADA when they spoke eloquently for the Disabilities Act.

In the modern University, professors are required to "accomodate" students with disabilities. You might think that would mean students with speech impairments or other physical disabilities. Nope, such accomodations to students with physical disabilities are rare. The vast majority of the "accomodations" in the classroom are for students with "learning disabilities." Such learning disabilities often give such students three to four times as much time to take an examination as the time provided for students without such disabilities. One wonders what future careers this time of "accomodation" is preparing the student for? What are these "learning disabilities?" That's a pretty murky topic. "Inability to focus or concentrate" for lengthy periods of time is one such disability. Did the sponsors of ADA envision this application of the notion of a "protected disability?"

No wonder employers shy away from hiring employees when lawsuits can quickly emerge if a potential job candidate shows up drunk for the interview. Worse, the target of the lawsuit is the potential employer! There are so many reasons not to hire anyone and to economize on the work force. This is just one of many.

Outsourcing looks very attractive when you stop to think that employers in other countries don't face these kinds of lawsuits from the mere act of attempting to give someone a job. America has put itself in a position where offering a job is, more often than not, a prelude to a civil suit or a violation of the criminal code. So, why bother? Employees are toxic and best avoided. That's the message from the US government.

Monday, April 16, 2012

The Cost of Higher Education

One of the predictable outcomes of the technology revolution is that the cost of providing education should gradually fall to zero. In time, the marginal cost of providing most aspects of education, especially "higher education," should be negligible.


First of all, the body of knowledge that is imparted in higher education grows only glacially. From year to year, you can think of it as almost constant. We also know a lot about how people learn and we know that people can learn from using computers, ebooks, and the like. These things are cheap and getting cheaper.

Does it help to have classrooms? Yes, but only marginally. Often computer programs and well crafted films can provide better instruction than the classroom. Businesses, like the Teaching Company, have exploited the idea that courses on CDs can teach as effectively, perhaps more effectively, than herding students into classrooms.

We know that the really great teachers spend less and less time in the classroom of American higher education institutions. This is a blanket recognition that the classroom may not be a high priority for American higher education institutions. Indeed, we know that classroom instruction has not been a major priority of the so-called elite higher education institutions for many years.

We know that one-on-one mentorship can help in higher education. But, over time, there is less and less one-on-one mentorship in American higher education, especially at elite schools. The more "elite" the school, the less likely a student will ever receive any educational mentoring in the school.

So, if you think about the higher education that students actually receive in the modern American institutions of higher education, the vast bulk of that education can be produced at virtually no cost and made available to the masses. Indeed, some of this is already being done -- is just such an example.

Why, then, is the cost of higher education spiraling out of control in America? This is a question that is rarely asked. Most of the discussion of the economics of higher education focuses on how to generate more taxpayer funding for higher education or how to provide more loan funding for students who face the massive costs of modern American higher education. But, the really interesting question is why, if providing the actual education costs little or nothing, is the cost of higher education exploding beyond the cost of producing anything else in the economy?

The answer is that modern higher education is increasingly about providing three things:

1) an active social environment that students can really enjoy -- including fitness centers, semesters in exotic foreign locations, elimination of hard, core curriculum in favor of "relevant" topics, almost complete abandonment of science and mathematics, dramatic expansion in semi-professional and pre-professional athletic programs, and the ascendancy of "soft" business majors and "inter-disciplinary curricula." This means that higher education has become more fun, less demanding, and less effective;

2) political education -- provided through centers for this and centers for that focusing on race, ethnic, gender, environment. These centers, which are extremely costly, often provide misinformation as opposed to education and are usually staffed by people whose academic credentials would make them ineligible to be faculty members in any normal academic department, even at non-elite schools. A strong pro-government orientation toward attacking alleged ills of society dovetails neatly with higher education's support for more taxpayer funding. It may not be educational, but it is useful to those who run these institutions, who spend enormous hours and dollars lobbying various levels of government for more funding;

3) certification -- the idea that a degree conveys the message that a student possessing the degree has a minimum level of education. This idea is gradually losing traction as businesses across America have discovered that degrees even from elite institutions do not mean literacy, competency or work ethic. Businesses have become much more skeptical about the qualifications possessed by the graduates of the American higher education system.

So, while American higher education institutions do a bang up job of providing the first two items above, the "certification" is increasingly seen as a hollow shell.

In short, higher education is less and less about education. It is about social and political indoctrination and unlike education, social and political indoctrination is a very expensive proposition. It is not cheap to provide a "Club-Med" environment on a University campus and to constantly update it with more and more expensive features. As the "education model" is supplanted by the "resort model" in higher education, it becomes increasingly expensive to compete with other "resorts."

If you want to develop your social skills and learn networking skills, find your way to an elite higher education institution. But, if you want an education, go online. The former path is absurdly expensive, while the latter path is almost costless.

Given these dynamics, the future is pretty easy to read. Education, real education, will ultimately be provided in an inexpensive fashion by modern technology and what currently passes for higher education will continue to morph into an elaborate, expensive, four year form of a summer vacation with mostly political content.

Employers will eventually ignore the "certification" conveyed by higher education institutions, as the value of such certification withers away. Instead employers will find other ways to ascertain the skills and qualifications of "educated" employees. Higher education will never lose its charm, but it will, in time, lose its relevance as the costs continue to explode beyond its value.

Thursday, April 12, 2012

Politics Masquerading as Economics

The NY Times strikes again!

In today's times,MIT's Simon Johnson, has put his name on one of the most absurd articles about the modern economy that has yet to find its way into print. It's worth reading, if only for its absurdity.

Johnson has decided that America's banks are responsible for Medicare's funding problems. Medicare has a $ 66 trillion unfunded liability. The entire US GDP is slightly more than $ 15 trillion and the bank sector is a small fraction of that number. So, how did the mouse fell the elephant?

You would have to read the argument to believe it. Johnson teaches entrepreneurship at MIT, so I guess he can be forgiven. If you want to be treated to a good laugh, read Johnson's "perspective" in today's NY Times.

The NY Times must roam the world looking for folks that will say these kinds of things in print.

Walker versus McDonnell

Republicans often do the work of their opponents. Virginia's Bob McDonnell is a case in point. When McDonnell was sworn into office as Virginia's new governor in early 2010 his very first action was to undermine the state's public employee retirement system. The prior governor, Democrat Tim Kaine, had put in the 2010 budget, that McDonnell inherited, a provision that would begin the process of employees contributing to their own pension funds. All McDonnell had to do was accept this provision and a bi-partisan beginning to reforming public pension funding would have begun, at zero cost to taxpayers. But, no.

McDonnell could not wait to strike the employee contributions, amounting to a meagre one percent of compensation (an amount that would be increased to two percent in year two), from his budget. Loudly proclaiming his desire not to raise taxes, his actions guaranteed massively higher taxes on future generations of Virginia taxpayers.

In his second year, McDonnell seemed to begin to see the error of his ways but by that time the funding status of the state's retirement system was beginning to spin out of control. Belatedly, McDonnell proposed a bizarre, Rube Goldberg set of reforms, that fail to deliver either adequate retirement income for public employees or a reasonable method of financing such income. The crazy, convoluted set of reforms was mainly designed to appease every possible interest group and anger no one. This is not an uncommon path for Republicans, regardless of rhetoric.

Wisconsin Governor Scott Walker, on the other hand, risked the wrath of the public employee unions by going right to the heart of the problem and making serious, major, and easy to understand reforms. And they work. Now, Walker, is battling a recall movement. Why? Because Walker's reforms are for real. When real reforms take place, there is opposition. McDonnell's program is not real reform. It is simply another example of Republicans expanding the role of government and adding more obligations for future taxpayers, while striking a pose for fiscal restraint. But, it is only a pose.

Wednesday, April 11, 2012

Court Decision is Pivotal

Normally, the Supreme Court's activities are irrelevant to the future direction of the economy. But, not this time.

The American economy is weighted down by historically unsustainable debt levels. This is not just a problem of federal debt. If you add in state and local debt, the situation is significantly worse than the European sovereign debt crisis. And, there is no good solution.

On top of the sovereign debt overhang, the American economy is beset with an onslaught of new regulations that threaten to overwhelm the fledgling recovery. Businesses have pulled in their horns. There is no real enthusiasm to expand employment or start new businesses. Meanwhile, there is a steady drumbeat of vitriol from the White House about how "unfair" business people are. This stuff takes its toll.

With Obamacare on the horizon and a massive tax increase slated for early 2013, the American economy is poised to go over the cliff and another important recession could well be underway by the second half of 2012.

Will it happen?

That depends. There is always the feeling the tax increases that will automatically take place in early 2013 might be postponed one more time. That won't help much because taxpayers will realize that this merely postpones the day when they will get bludgeoned by the tax man. But, it will help a little.

More threatening is Obamacare. Obamacare dramatically increases the national debt, expands the government's direct role in the economy in a historically unprecedented manner, and burdens businesses with the largest single cost mandate in history.

The combination of Obamacare and much, much higher tax rates and an Administration that wants even higher tax rates than those that are coming in early 2013 is deadly for an economy struggling to find it's way out of the 2008-09 crisis.

If the Court finds that Obamacare is constitutional (which may or may not be the correct constitutional decision...I'm no expert on that one), the economy will be in big, big trouble and a second recession is undoubtedly in the offing. Combined with inept policy in the Eurozone, things could get dicey, economically and politically throughout the developed world.

Pretty gloomy picture! But, it may not turn out that way. I am ever the optimist. Hopefully, Obamacare will not pass constitutional muster and the scheduled tax hikes in early 2013 can be cancelled (permanently). If those two items work out, then the economy should gradually work its way forward. If not, Katie bar the door.

For now, I would still own common stocks, but if Obamacare is constitutional then stocks will not be a good place to be. We will know by some date in June what lies ahead.

Tuesday, April 10, 2012

Irrelevant Economic Issues

Does it matter if a presidential candidate has a Swiss bank account? Will that impact economic growth for good or evil? Will raising tax rates on millionaires, which will mainly lower tax revenues (because income will simply be shifted or accrued), improve the economy or help the unemployed or reduce national debt? The answer to all of these questions is "no."

The real issues in the American economy are economic stagnation, exploding levels of state, local and federal debt, and the absence of public or private savings. These are the issues that matter. Assuming that a candidate has nothing to say about any of these issues, it only stands to reason that the candidate will begin to talk about other things like "tax fairness," "carbon footprints," "public investments," and so forth.

The interesting question is whether the public is interested in the real issues or the irrelevant issues. European countries have focused on irrelevant issues for the past three generations and now they are paying the price. Which direction will the US choose?

Monday, April 9, 2012

What would Keynes Say?

Mainstream economists continue to parrot the single equation naive "Keynesian" model of macroeconomics. This model says that increasing "G" will increase aggregate demand and lead to a higher GDP.

This "naive" model was developed by Richard Kahn, not Keynes, and was brought forward in a world where government spending was, by modern standards, relatively modest.

Today, in a world where government activity consumes nearly half of all resources in the US and close to two-thirds of the resources of the typical European economy, it is highly unlikely that more government spending would have any "Keynesian-like" effects. Why would giving public employees a ten percent pay raise improve the GDP? Keynes would turn over in his grave to see his work interpreted in this fashion.

Most economists don't read Keynes. What they read is the simplest mathematical versions of Keynes devised by other economists who also never read Keynes. But the name, "Keynes," is tacked onto these models to invoke the spirit of this great economist.

But, it was Keynes who first came up with the expression of "animal spirits." What are "animal spirits?" According to Keynes, capitalism is driven by the "animal spirits" of entrepreneurs. These animal spirits have nothing to do with increased government spending. Indeed, increased government spending may serve to reduce the animal spirits, so essential to economic prosperity.

But mainstream economists seem to have no interest in the animal spirits of entrepreneurs that Keynes found so important in his actual writings, as opposed to the modern caricatures of his work that appear so often in media and elementary economics courses offered in major American Universities.

If the actual writings of Keynes were assigned reading for students, they would learn that Keynes himself never subscribed to the simple-minded models that pass for modern Keynesianism. A simple perusal of "A Treatise on Money" written in the 1920s and "The General Theory of Employment, Interest and Prices" published in the mid 1930s" would be enough to convince the modern reader that Keynes would never support modern "Keynesian" policies.

Even on things like the European debt crisis, you will find Keynes useful reading. Try his first major work: "The Economic Consequences of the Treaty of Versailles." Keynes makes it clear in "Versailles" that huge debts facing weak economies will cause those countries trying to collect such debts more economic pain than if the debts were reduced dramatically. Keynes would clearly not support the Geithner-Merkel-Sarcozy program for Greece, Spain, Italy, Portugal and Ireland.

It should be obvious that capitalism works best when the environment values capitalists. If the environment is unfriendly to capitalists, then capitalism is not going to fare well. If capitalism doesn't fare well, then middle and lower income classes have no real chance for economic progress. Most observers, regardless of their training in Economics, understand this.

Keynes understood this better than his contemporaries. That's why it was Keynes and not someone else who surfaced the idea of entrepreneurial animal spirits. Keynes would not be supporting the current war on capitalists being waged by Washington policy makers if he were here today. He would be looking for ways to stoke animal spirits not dampen them.

Sunday, April 8, 2012

Robert Reich Has It Right

Robert Reich, for Secretary of Labor in the Clinton Administration, penned an article today "For the rich, the recession is over." He's right.

The various policies put in place during the Fall of 2008 -- TARP, Federal Reserve activity, followed by the Stimulus Package of early 2009 and regulatory burdens of Dodd-Frank have all combined to rescue rich people, but promise to thwart any serious economic recovery. On top all of these misguided policies the Congress passed the "Affordable Care Act" which virtually guarantees no future economic growth for the US.

Absent a real economic recovery, poor folks really don't have a chance. The combination of laws that forbid hiring poor people (minimum wage laws) and laws that make it illegal for banks to loan money to poor folks (Dodd-Frank) and laws that make it virtually impossible to break the union monopoly of many construction jobs (Davis-Bacon, etc.), the deck is stacked against the poor and the middle class. As if this weren't enough, projects that could (eventually) lower gasoline prices and provide an immediate source of job creation (Keystone project as just one example) are blocked and taxpayer money is poured down ratholes of Administration supporters (Solyndra, etc.)

Politicians don't have to get jobs in the private sector, so they can blissfully claim that they are looking out for poor people as they pass laws that prevent the poor from having any real opportunities. The Congress and the Administration have combined to prevent the economy from having a chance of a normal economic rebound. This hurts poor people and middle class people. But, it has little or no effect on rich people.

Thus, Reich's conclusion. "For the rich, the recession is over." For middle class America, things will remain difficult.

Saturday, April 7, 2012

"The Living Wage Campaign"

The left always gets attracted to ideas that sound good regardless of their real impact. The "living wage campaign" is just such an idea. This is essentially a minimum wage rule that advocates claim would help people pull themselves up out of poverty. In fact, it does just the opposite. Not an uncommon outcome for moral sounding initiatives put forward by wealthy, entitled college students designed to help the disadvantaged.

Even if one buys into the general idea, you have to wonder why the students and the advocates of the "living wage" don't simply dig into their own pockets and give money to workers who they think have inadequate income. The idea of making a personal wealth sacrifice never appeals to advocates of these schemes, who are invariably drawn from among America's wealthiest families. No, their idea of charity is to have someone who doesn't agree with them foot the bill for their ideas. Charity begins across the street for such advocates, it never begins at home.

A living wage is equivalent to putting up a sign saying "low skilled employees need not apply." All you are really doing is reducing the number of jobs available to poor folks and eliminating any shot of those at the bottom of the skill spectrum from getting a job. Imagine that the living wage was raised to $ 20 per hour. What would happen to the person now holding a $ 10 per hour job? He/she would have no chance of getting the $ 20 per hour job. First of all there would be many fewer such jobs simply because of costs. But, secondly, and more significantly, the new wage level would attract much higher skilled employees and eliminate from consideration the kinds of folks that now can compete for those jobs.

What the "living wage" people are really advocating is: 1) reducing the number of jobs available to low skilled employees; 2) upgrading the skill levels of those people that occupy those jobs by eliminating any real chance that low skilled employees can compete for such jobs. How noble! Why not simply put up a sign: "poor people need not apply here!" The living wage campaign amounts to the same thing.

Notice that the employees that currently hold these jobs are rarely in the vanguard of the "living wage movements." Instead wealthy and privileged college students, who are largely sheltered from the vicissitudes of the economy, are trying to show the world how caring they are. As the living wage campaign advocates bask in the mirror extolling their personal morality, low skilled Americans take one more step back into the economic morass.

Friday, April 6, 2012

The Eurozone Slips Back into Recession

No big surprise. Austerity and the absence of reform are not a good mix. Meanwhile, sovereign debt levels soar off into the stratosphere.

There will be a lot of finger-pointing and the blame-game in the future when the current European trajectory ends in disaster. All of this was easily avoidable.

Had Greece been permitted, just two short years ago, to do a default workout with its creditors, the Eurozone economy would probably be motoring along today. But, no.

The Geithner-Merkel-Sarcozy strategy, which is really just blindly putting one's head in the sand, has been adopted. The result: economic contraction and growing political chaos. As for reform, that is out the window, as recent developments in both Spain and Italy can attest.

Whenever economic conditions seem to be faltering, there is an outcry for politicians to "solve" the problem. Inevitably, politicians take a relatively minor problem and turn it into an economic disaster. This has happened over and over again in the history of modern, developed economies. Only when politicians did not have enough clout to interfere (19th century America, for example) were economic problems left to right themselves and economic growth permitted to triumph over foolish policy prescriptions.

Economies can heal themselves. People can learn. But, what never works is direct action by the government to "solve" the problem.

Piling debt upon debt and attempting to force austerity on Europe won't work and will end in disaster. By the time disaster strikes, Geither, Sarcozy, and Merkel will no longer be in power. So, they will be sitting on the sidelines pointing fingers at others. But, the coming disaster for Europe will be a direct result of the foolishness that now passes for policy.

The only way to deal with too much debt is to reduce it. The only way to achieve economic growth is to break the stranglehold of too much government and too much regulation. The Merkel-Sarcozy-Geithner policies take us in exactly the opposite direction.

The future for Europe is perfectly predictable.

Sunday, April 1, 2012

Economic Inequality

Derek Jeter has made hundreds of millions of dollars. The sanitation worker who picks up the garbage at Jeter's home makes a fraction of that amount. What accounts for that discrepancy?

People are willing to pay high prices to watch Jeter play baseball and companies are willing to pay Jeter large amounts of money to speak favorably about their products. Is that wrong?

Why is there a problem here? It is not as if Jeter is the king and his garbage man is his serf. If the garbage man had Jeter's baseball skills and vice versa, then their positions might be reversed. In fact, in future generations that may well happen. Such is life in a free market.

Inequality of income and wealth by itself is of no signficance. It really does not matter. Poverty is a different story, but in the example above there is dramatic inequality of income but no poverty. These are different things and should not be confused.

Jeter is not wealthy because he compelled someone to give him money. He is wealthy because he has a skill and talent that people are willing to pay money to see. The system is working.

The attempt to create equality between Jeter and his garbage man may do nothing more than reduce both of them to poverty. Without a free market, there would be no Jeters and the garbage man would make little or no money because there would be scant tax resources from the Jeters of the world to fund the garbage man's job.

Today in the New York Times, Thomas Friedman has another mindless comment about income inequality that makes one wonder if he thinks before he writes. Those who wish to reduce inequality should address the talents, abilities, education and work ethic of the folks at the bottom of the economic pile. Wealth transfers won't help because they are soon dissipated through foolish behavior.

Free markets provide opportunity for the poorest amongst us. Every society has rich people, but the only societies in the history of mankind that have lifted the living standards of the average citizen are economies with free markets.

Dealing with poverty is an agenda worth working toward. Worry about inequality of income is a fool's game.