The stock market is not overextended. It will be much higher ten years from now than it is today. But, for now, I am retreating to the sidelines. It has been a good run since last August and now the economy faces the reality of dealing with an Administration bent on its destruction. Even the American economy might buckle under the brutal pounding of current economic policy.
The threat of surging medical costs mandated on business, a host of bureaucratic bludgeons aimed at the energy sector and the financial sector, increasing threats of liability to business that make the mistake of adding to their work force and looming, massive tax increases scheduled for next January, the Obama team has created the perfect storm. The American economy will eventually recover, but it will never be its old self while this political team is in the driver's seat.
So, I would lighten my commitment to the stock market at this point and await developments. If the markets do sell off, the news background is likely to be so gloomy as to make the financial markets swoon for a quarter or two.
The US economy has put in an admirable showing in the face of economic policy that is mainly punitive. The roadblocks put in place by the Obama Administration are growing, not lessening, so there is a bumpy road ahead. So, time for more treasury bills, less stocks for a while.
Friday, May 4, 2012
Fairness?
Paul Krugman is back at it. He is plunking the strings of his "fairness" guitar. Same old tune.
Krugman and his pal the President don't seem much interested that millions are out of work and that the US economy is virtually at a stand still. That's okay. What we need to focus on is not getting people back to work, but raising marginal tax rates. The joke's on us as usual, since raising marginal tax rates will end up lowering rich folk's taxes. Rich folks only pay taxes on taxable income, which they are free to raise or lower at will. So, the higher marginal tax rates will simply reduce future tax revenues, future employment, continuing to beggar America's youth and the nation's unemployed and under-employed.
Why not just announce 100% marginal tax rates for rich people and cut to the chase? Rich folks aren't going to pay that rate anymore than they will pay the rates that Obama is dreaming about. Neither will Obama. These folks can borrow what they need to live on, deduct that from their estate when they die, and not bother to even file a tax return. They know that and we know that and Obama and Krugman know that.
But, talking about fairness has the virtue of changing the subject. What the President and Krugman do not want to discuss is the damage that the President's policies have done to the historically sluggish economic recovery that now threatens to slide back into recession. I can see why they have lost interest in that discussion, especially in an election year.
If you want to see inequality grow while the economy slips back into the deep freeze, then join the chorus. Tax the rich! Even the rich have trouble avoiding a snicker at the "fairness" tom tom. Buffett must love it. As he admires himself in the mirror and basks in the adulation of the media, he knows that his pile of gold will grow untouched by the long arm of the IRS, even as marginal tax rates spiral off to infinity.
Krugman and his pal the President don't seem much interested that millions are out of work and that the US economy is virtually at a stand still. That's okay. What we need to focus on is not getting people back to work, but raising marginal tax rates. The joke's on us as usual, since raising marginal tax rates will end up lowering rich folk's taxes. Rich folks only pay taxes on taxable income, which they are free to raise or lower at will. So, the higher marginal tax rates will simply reduce future tax revenues, future employment, continuing to beggar America's youth and the nation's unemployed and under-employed.
Why not just announce 100% marginal tax rates for rich people and cut to the chase? Rich folks aren't going to pay that rate anymore than they will pay the rates that Obama is dreaming about. Neither will Obama. These folks can borrow what they need to live on, deduct that from their estate when they die, and not bother to even file a tax return. They know that and we know that and Obama and Krugman know that.
But, talking about fairness has the virtue of changing the subject. What the President and Krugman do not want to discuss is the damage that the President's policies have done to the historically sluggish economic recovery that now threatens to slide back into recession. I can see why they have lost interest in that discussion, especially in an election year.
If you want to see inequality grow while the economy slips back into the deep freeze, then join the chorus. Tax the rich! Even the rich have trouble avoiding a snicker at the "fairness" tom tom. Buffett must love it. As he admires himself in the mirror and basks in the adulation of the media, he knows that his pile of gold will grow untouched by the long arm of the IRS, even as marginal tax rates spiral off to infinity.
Thursday, May 3, 2012
More Unreality by an Academic Economist
Today's New York Times has an article by Simon Johnson, who is billed as "Professor of Entrepreneurship at MIT," complaining about the Paul Ryan budget and Mitt Romney's support of that budget.
What is especially interesting is "Professor" Johnson's attack on Paul Ryan's funding proposal for future medicare benefits. Johnson argues basically that old folks need unlimited funds available for their medical needs, so that future promises should not be limited in any way. That's an interesting argument for an economist to make. It must make life fun for Professor Johnson to teach students that there is no economic scarcity after all. We are free to promise whatever we want to future medicare recipients with no plans whatsoever to fund it. That is what Johnson proposes in his article.
Nowhere in "Professor" Johnson's article is any hint of how he would propose to fund medicare promises for future beneficiaries. I guess, to him, that is beside the point. Why does it matter if future benefits are unfunded That seems to be the main point of "Professor" Johnson's article.
If you look at my previous blog post, you can see where this leads. The argument against funding benefits is always simply a recounting of how wonderful the benefits are. How does that argument provide any funding? Exactly how does "Professor" Johnson propose to explain to future medicare beneficiaries that there is no money to provide the benefits that they have long been promised.
Perhaps, "Professor" Johnson should pay close attention to how Mariana Island authorities and Greek authorities are explaining to their citizens how having no funds available to pay promised benefits is, in reality, a good thing. "Professor" Johnson, like many of those advocating big promises for the future while opposing any funding for those promises is one of the "1 percenters." It's really not a problem he will personally face, so what does he care?
What is especially interesting is "Professor" Johnson's attack on Paul Ryan's funding proposal for future medicare benefits. Johnson argues basically that old folks need unlimited funds available for their medical needs, so that future promises should not be limited in any way. That's an interesting argument for an economist to make. It must make life fun for Professor Johnson to teach students that there is no economic scarcity after all. We are free to promise whatever we want to future medicare recipients with no plans whatsoever to fund it. That is what Johnson proposes in his article.
Nowhere in "Professor" Johnson's article is any hint of how he would propose to fund medicare promises for future beneficiaries. I guess, to him, that is beside the point. Why does it matter if future benefits are unfunded That seems to be the main point of "Professor" Johnson's article.
If you look at my previous blog post, you can see where this leads. The argument against funding benefits is always simply a recounting of how wonderful the benefits are. How does that argument provide any funding? Exactly how does "Professor" Johnson propose to explain to future medicare beneficiaries that there is no money to provide the benefits that they have long been promised.
Perhaps, "Professor" Johnson should pay close attention to how Mariana Island authorities and Greek authorities are explaining to their citizens how having no funds available to pay promised benefits is, in reality, a good thing. "Professor" Johnson, like many of those advocating big promises for the future while opposing any funding for those promises is one of the "1 percenters." It's really not a problem he will personally face, so what does he care?
Reality in the Mariana Islands
Contrary to years and years of promises from bureaucrats, the public pension fund in the Mariana Islands (a US territory) became the first American public pension to declare bankruptcy. It won't be the last. This is just the beginning.
According to this morning's Wall Street Journal story, "it's pension fund couldn't recover from the financial crisis." Really? The stock market has certainly recovered, now standing less than six percent below it's all time high. So, you have to wonder, with better than 8 percent stock market returns over the last 30 years, why is the Mariana Islands Public Pension Fund suddenly going poof?
Let's look at the numbers: The fund has $ 256 million in assets to cover $ 1 billion in liabilities over the next 20 years. Keep in mind that this is a very, very small place with 53,000 total residents. Note the magnitude of this disaster. This is essentially the same problem faced by California, Illinois, New Jersey, New York and every other state and municipality in the US except South Dakota.
Now, what?
Now, the employees that expected to receive juicy pensions will receive approximately 25 % of what they had been promised. And these folks are not eligible for social security. And, when do they find all of this out? Now!
That's the fairness of the politicians who promise future benefits and preach fairness. Do you think taxing the handful of rich people in the Mariana Islands will solve this problem?
No politicians in the US will find this troubling simply because it did not happen on their watch and, besides, most politicians in the US are in the "1 percent." Facing old age penury is not a problem any US politician expects to face, so what do they care if the American public school teachers find out ten years from now that the long promised pension is not coming.
The real problem with all of this -- after all, anyone who has looked at the numbers knows these pensions won't be paid -- is the misinformation received by today's workers, thinking that at some future date they will receive pensions. They aren't going to receive these pensions and they need to be told that now, so that they can be saving and storing up assets for the future. By deliberately misleading America's public school teachers and public employees, the political class is fraudently setting up a disastrous situation for many Americans.
If you want a peek into the future for tens of millions of Americans, take a look at the situation for Mariana Island pensioners. As in Greece, so also in the US. The Mariana Islands are not in Greece; the Mariana Islands are in the United States.
The hypocrisy of politicians knows no bounds.
According to this morning's Wall Street Journal story, "it's pension fund couldn't recover from the financial crisis." Really? The stock market has certainly recovered, now standing less than six percent below it's all time high. So, you have to wonder, with better than 8 percent stock market returns over the last 30 years, why is the Mariana Islands Public Pension Fund suddenly going poof?
Let's look at the numbers: The fund has $ 256 million in assets to cover $ 1 billion in liabilities over the next 20 years. Keep in mind that this is a very, very small place with 53,000 total residents. Note the magnitude of this disaster. This is essentially the same problem faced by California, Illinois, New Jersey, New York and every other state and municipality in the US except South Dakota.
Now, what?
Now, the employees that expected to receive juicy pensions will receive approximately 25 % of what they had been promised. And these folks are not eligible for social security. And, when do they find all of this out? Now!
That's the fairness of the politicians who promise future benefits and preach fairness. Do you think taxing the handful of rich people in the Mariana Islands will solve this problem?
No politicians in the US will find this troubling simply because it did not happen on their watch and, besides, most politicians in the US are in the "1 percent." Facing old age penury is not a problem any US politician expects to face, so what do they care if the American public school teachers find out ten years from now that the long promised pension is not coming.
The real problem with all of this -- after all, anyone who has looked at the numbers knows these pensions won't be paid -- is the misinformation received by today's workers, thinking that at some future date they will receive pensions. They aren't going to receive these pensions and they need to be told that now, so that they can be saving and storing up assets for the future. By deliberately misleading America's public school teachers and public employees, the political class is fraudently setting up a disastrous situation for many Americans.
If you want a peek into the future for tens of millions of Americans, take a look at the situation for Mariana Island pensioners. As in Greece, so also in the US. The Mariana Islands are not in Greece; the Mariana Islands are in the United States.
The hypocrisy of politicians knows no bounds.
Wednesday, May 2, 2012
Stock Market Misinformation
Dodd-Frank, Sarbanes-Oxley, and Mary Schapiro are all three weapons aimed at bashing the financial sector. Why? The reason given is that the stock market is "rigged," they say, and doesn't produce for the little guy. Really? Could have fooled me. We are now in one of the worst previous ten-year periods in US stock market history and what is the outcome?
The S&P 500 has averaged 4.71 percent per year for the past ten years, using May 1st, 2012 as the ending date of the ten year period. That isn't great, but it certainly doesn't justify the hand-wringing of the political class, moaning about a rigged stock market. It's worth noting that the Dow Jones has done even better, achieving a 5.4 percent annual return over the past ten years. And these are the bad years!
So, why all of the hustle and bustle of the media and the political class demanding reform. Is there something they don't like about five percent returns during the bad years?
Instead of bashing the financial sector and pretending that stocks are poor performers and that markets are rigged against small investors, why don't the media and the politicians simply stick to the facts. The facts are that Americans are generally under-invested in stocks. They aren't making the approximate five percent annual returns available to the public through the simple expedient of investing in index funds, because they have been scared out of the markets by the complete nonsense spouted by the media and the politicians.
If the markets are rigged, they are rigged in favor of the small investor. What else earns five percent a year while you sleep in one of the worst stock market decades in history?
Why not just inject a bit of truth when describing financial markets? It might help investors make better decisions. Politicians should butt out and let markets work. The US stock market produces great returns for investors, contrary to what you would believe listening to the misinformation pouring out in the media. These returns have been absurdly high for over one hundred years and remain startlingly high even in the most recent ten years on record, despite the media misinformation to the contrary.
The S&P 500 has averaged 4.71 percent per year for the past ten years, using May 1st, 2012 as the ending date of the ten year period. That isn't great, but it certainly doesn't justify the hand-wringing of the political class, moaning about a rigged stock market. It's worth noting that the Dow Jones has done even better, achieving a 5.4 percent annual return over the past ten years. And these are the bad years!
So, why all of the hustle and bustle of the media and the political class demanding reform. Is there something they don't like about five percent returns during the bad years?
Instead of bashing the financial sector and pretending that stocks are poor performers and that markets are rigged against small investors, why don't the media and the politicians simply stick to the facts. The facts are that Americans are generally under-invested in stocks. They aren't making the approximate five percent annual returns available to the public through the simple expedient of investing in index funds, because they have been scared out of the markets by the complete nonsense spouted by the media and the politicians.
If the markets are rigged, they are rigged in favor of the small investor. What else earns five percent a year while you sleep in one of the worst stock market decades in history?
Why not just inject a bit of truth when describing financial markets? It might help investors make better decisions. Politicians should butt out and let markets work. The US stock market produces great returns for investors, contrary to what you would believe listening to the misinformation pouring out in the media. These returns have been absurdly high for over one hundred years and remain startlingly high even in the most recent ten years on record, despite the media misinformation to the contrary.
More a Religion Than a Science
A study was released by Fitch and Oxford Economics today purporting to explain the "recovery" of the US economy. According to Reuters, "Fitch and Oxford Economics said the policy response to the financial crisis in 2008 helped prevent a longer and deeper US recession."
Reports like this undermine the credibility of Economics as a discipline. There are no available research methods in macroeconomics capable of making statements and drawing conclusions like this. Instead, a report like this represent a neat "consensus summary" that mostly represents the political views of its authors. This is not on the same par as asking "why did the ball that I threw up in the air come down," but economists, far too often, make it seem like it is.
The cold, hard facts are that economists really don't know much about macroeconomic policy. The largest historical experiences involving the application of macroeconomic policy at the instruction of famous economists were notorious failures. The 2008-2009 policies seem to fit that pattern more than what is suggested by the Fitch and Oxford Economics report.
There was a day when there was no macroeconomic response at all. Yes. We didn't always react to economic and financial crises by dramatically expanding the reach and activities of government. Try the latter half of the nineteenth century for the most dramatic example of periodic, recurrent financial and economic crises coinciding with the largest growth in GDP in the history of the country! When financial and economic crises, and there were many, exploded on the scene in the latter half of the nineteenth century, the US government took no role and watched from the sidelines.
How can this be? How can a steady stream of financial and economic crises, unchecked by any government policy actions, coincide with the most incredible real output growth in our history? One explanation worth pondering is that the absence of government activism was the beneficial salve that turned America from a mostly agrarian countryside into the strongest economic power in the world. There was no Fed; indeed there was no central bank. There certainly were no discussions of "taxing the rich." There were no income taxes. Government sat by and watched. And, guess what, it worked.
Now, we have an activist government that thinks it can and should cure every ill. All of this chuptzpah is buttressed by an admiring media and an applauding group of academic economists. Yet, it never works. The 1930s and the modern day are outstanding examples of how government can prevent economic recovery over a very long period of time and prolong the agonies of the folks at the bottom of the economic pile.
There is always a belief that when something "goes wrong," that something should be done about it. In the case of financial and economic crises, that belief seems unfounded. By letting the ebbs and flows of the economic system do their thing, even if that means major economic downturns from time to time, you may be providing the necessary impetus to true economic prosperity that lifts all boats. Instead, using rhetoric, unsupported by facts or analysis, simply keeps most advanced economies mired in their bureaucratic mess. As usual, the poorest amongst us are the principal victims of this rush to do something, do anything, even if it doesn't seem to work.
Reports like this undermine the credibility of Economics as a discipline. There are no available research methods in macroeconomics capable of making statements and drawing conclusions like this. Instead, a report like this represent a neat "consensus summary" that mostly represents the political views of its authors. This is not on the same par as asking "why did the ball that I threw up in the air come down," but economists, far too often, make it seem like it is.
The cold, hard facts are that economists really don't know much about macroeconomic policy. The largest historical experiences involving the application of macroeconomic policy at the instruction of famous economists were notorious failures. The 2008-2009 policies seem to fit that pattern more than what is suggested by the Fitch and Oxford Economics report.
There was a day when there was no macroeconomic response at all. Yes. We didn't always react to economic and financial crises by dramatically expanding the reach and activities of government. Try the latter half of the nineteenth century for the most dramatic example of periodic, recurrent financial and economic crises coinciding with the largest growth in GDP in the history of the country! When financial and economic crises, and there were many, exploded on the scene in the latter half of the nineteenth century, the US government took no role and watched from the sidelines.
How can this be? How can a steady stream of financial and economic crises, unchecked by any government policy actions, coincide with the most incredible real output growth in our history? One explanation worth pondering is that the absence of government activism was the beneficial salve that turned America from a mostly agrarian countryside into the strongest economic power in the world. There was no Fed; indeed there was no central bank. There certainly were no discussions of "taxing the rich." There were no income taxes. Government sat by and watched. And, guess what, it worked.
Now, we have an activist government that thinks it can and should cure every ill. All of this chuptzpah is buttressed by an admiring media and an applauding group of academic economists. Yet, it never works. The 1930s and the modern day are outstanding examples of how government can prevent economic recovery over a very long period of time and prolong the agonies of the folks at the bottom of the economic pile.
There is always a belief that when something "goes wrong," that something should be done about it. In the case of financial and economic crises, that belief seems unfounded. By letting the ebbs and flows of the economic system do their thing, even if that means major economic downturns from time to time, you may be providing the necessary impetus to true economic prosperity that lifts all boats. Instead, using rhetoric, unsupported by facts or analysis, simply keeps most advanced economies mired in their bureaucratic mess. As usual, the poorest amongst us are the principal victims of this rush to do something, do anything, even if it doesn't seem to work.
Tuesday, May 1, 2012
More On Your Tuition Dollars
Brown University is good-hearted. So much so, that they announced today that they would donate $ 31.5 million to the city of Providence, Rhode Island. In a Wall Street Journal story today, Brown's president, Ruth Simmon, was quoted as saying that "Brown is deeply concerned about Providence's financial situation." And well they should be. Providence's finances have gone down the chute as one might expect based upon a public employee pension fund that is, at best, 70 percent underfunded.
The story in the Journal, goes on: "Providence has been negotiating with Brown and its six other largest tax-exempt nonprofits to make more voluntary payments in lieu of taxes."
So, now, when you ask: why do these Universities (and other worthy tax exempt institutions) need so much money? Part of the answer is that they are funding bankrupt cities like Providence. This is not the only absurd expenditure embarked upon by today's colleges and universities, but it is an expenditure, like a host of others, that has nothing whatsoever to do with providing anyone with a college education.
The story in the Journal, goes on: "Providence has been negotiating with Brown and its six other largest tax-exempt nonprofits to make more voluntary payments in lieu of taxes."
So, now, when you ask: why do these Universities (and other worthy tax exempt institutions) need so much money? Part of the answer is that they are funding bankrupt cities like Providence. This is not the only absurd expenditure embarked upon by today's colleges and universities, but it is an expenditure, like a host of others, that has nothing whatsoever to do with providing anyone with a college education.
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