I am not normally a fan of plugging NYTimes stories, but this one has to be read. Danny Hakim has written a terrific article laying out the plight of cities and counties in the state of New York. He recounts one story after another of impending municipal bankruptcies. In every case, the cause is the same -- bloated public employee expenses -- mostly public employee retirement and health care.
Normally in recessions, the costs of running government agencies slows down since there isn't any reason for employment costs to rise. But, not so with pension and health benefits. They rise astronomically regardless of the economy.
This problem is not confined to cities and municipalities in New York. California faces the same situation for almost all of its large cities and counties. Many other states are in the same boat, especially where unions have major political clout -- Illinois, for example.
So, for those who think Europe has problems, just relax. European debt problems are coming to your neighborhood soon and for pretty much the same reason -- absurd expenditures on retirement and health care programs.
Saturday, March 10, 2012
Friday, March 9, 2012
Spain Says: "No Way, Jose"
The new Spanish government has announced that it plans to flaunt Eurozone rules regarding it's fiscal deficit. The 4.4 % promised by the previous government in its deal last year with the European Commission has been tossed aside by the new Spanish Prime Minister Mariano Rajoy. So much for fiscal austerity. Spain now has the worst of both worlds -- expanding debt and no real spending curbs. The Spanish economy has the highest unemployment rate in Europe, pushing it's way toward 25 percent. Not surprisingly, the new Spanish government cannot survive politically if it fully implements the austerity program that it agreed to just twelve months ago.
This will be the continuing tale. European countries will not live up to the austerity agreements that they forge with the ECB and the European Commission. Merkel and Sarcozy are wasting a lot of people's time with this. It is not going to happen.
Meanwhile, interest rates on Spanish debt surged upward. The beat goes on. Sooner or later the Eurozone "solutions" will collapse in tatters and reality will set in. The sooner the better.
This will be the continuing tale. European countries will not live up to the austerity agreements that they forge with the ECB and the European Commission. Merkel and Sarcozy are wasting a lot of people's time with this. It is not going to happen.
Meanwhile, interest rates on Spanish debt surged upward. The beat goes on. Sooner or later the Eurozone "solutions" will collapse in tatters and reality will set in. The sooner the better.
Thursday, March 8, 2012
More Nonsense from the NY Times
Nicholas Kristof has a piece in today's NY Times depicting the plight of present day Athens. He concludes that the economic collapse of Athens is the result of "Republican-like" policies enacted by the Greek government. Really?
According to Kristof, the problem in Greece is the result of "austerity" imposed by Germany and France. I'll buy that. But, the question is why is the austerity being imposed. The answer, which Kristof seems blissfully unaware of, is that Greece is broke and cannot borrow any more money from anywhere. Thus, on their knees, they have gone to the ECB for funding. Should the ECB simply write them a blank check. That seems to be the view of Kristof.
Kristof joins a long list of commentators that cannot seems to add and subtract. Where is the money to come from to continue to support Greek profligacy? Kristof, like most far left commentators, seems unconcerned about who pays for all of this. But, at some point, someone must pay for all of this. Who is that to be?
Greece is suffering from living way beyond it's means. Nothing more, nothing less. They should default on their indebtedness and start anew. That way, Greece could avoid most of the most pernicious effects of austerity. But, no. We are still in the "pretend and extend" mode. So that, for now (but not for long), we think we have forged together a "Greek solution." But, we haven't really.
As Kristof notes, austerity is disastrous. But, the right answer is not to blame some outside party for removing the punch bowl. The right answer is honesty. Admit that Greece cannot pay its debts and start anew. Just doing debt swaps with private creditors is not enough . Greece needs a total debt workout with all of its creditors, not just with the private ones.
Meanwhile, Kristof needs a lesson in arithmetic. No one can afford what goes on in Europe or the US. Eventually, those funding this kind of nonsense will quite funding it. That's where we are with Greece.
According to Kristof, the problem in Greece is the result of "austerity" imposed by Germany and France. I'll buy that. But, the question is why is the austerity being imposed. The answer, which Kristof seems blissfully unaware of, is that Greece is broke and cannot borrow any more money from anywhere. Thus, on their knees, they have gone to the ECB for funding. Should the ECB simply write them a blank check. That seems to be the view of Kristof.
Kristof joins a long list of commentators that cannot seems to add and subtract. Where is the money to come from to continue to support Greek profligacy? Kristof, like most far left commentators, seems unconcerned about who pays for all of this. But, at some point, someone must pay for all of this. Who is that to be?
Greece is suffering from living way beyond it's means. Nothing more, nothing less. They should default on their indebtedness and start anew. That way, Greece could avoid most of the most pernicious effects of austerity. But, no. We are still in the "pretend and extend" mode. So that, for now (but not for long), we think we have forged together a "Greek solution." But, we haven't really.
As Kristof notes, austerity is disastrous. But, the right answer is not to blame some outside party for removing the punch bowl. The right answer is honesty. Admit that Greece cannot pay its debts and start anew. Just doing debt swaps with private creditors is not enough . Greece needs a total debt workout with all of its creditors, not just with the private ones.
Meanwhile, Kristof needs a lesson in arithmetic. No one can afford what goes on in Europe or the US. Eventually, those funding this kind of nonsense will quite funding it. That's where we are with Greece.
The Right Energy Policy
Why does the US government need an "energy policy?" The free market is available. Oil companies, owned mostly by average Americans through their pension investments, will develop whatever is needed. Recent natural gas discoveries and production have blunted the environmental argument against the use of fossil fuels. So, why doesn't government just get out of the way?
The Obama crowd seems to believe that if they legislate a drop in demand that will solve the energy problem. I guess, in the extreme, if they were to outlaw the use of cars, fossil fuel consumption would drop precipitously. Outlawing cars probably seems extreme even to the Obama crowd, so they have taken the half way step -- tell everyone what car to buy -- the Volt. Since Americans don't want to buy the volt, the Obama folks sweeten the pie with a $ 7,500 tax subsidy per car (now, urging that the subsidy be raised to $ 10,000 per car).
But Americans don't like the Volt and it's sales are moribund. Americans like the big SUVs and that's what they are willing to pay for. So, why not let them? Why does government know better than individuals?
Obama says that "big oil" gets $ 4 billion per year in subsidies. Is that true? What he calls subsidies are "intangible drilling expenses," which is nothing more than the depreciation scheme available to natural resource producers of all stripes. Should you be able to deduct the wearing out of plant and equipment? Most people would say yes. Should you be able to deduct the wearing out of an oil field? Most people would say yes. In any event, it is the average American who mostly owns big oil, so Obama should say "we are subsidizing average Americans with $ 4 billion a year in depletion write offs....let's stop doing that and raise the taxes on average Americans by $ 4 billion." That is what he is really advocating. Soak the middle class by pretending to go after "big oil."
But, at the end of the day, why not let capitalism do its thing. By tinkering, by restricting the ability of the oil industry to develop oil and natural gas to meet domestic demand, the Obama policy leads to volatile energy prices and US dependence on the good wishes of countries like Russia, Iran, and Venezuela. Why is this a good idea?
What free markets do best is to allocate scarce resources and provide for alternatives when some resources become too expensive. That would be the correct energy policy -- no energy policy at all.
The Obama crowd seems to believe that if they legislate a drop in demand that will solve the energy problem. I guess, in the extreme, if they were to outlaw the use of cars, fossil fuel consumption would drop precipitously. Outlawing cars probably seems extreme even to the Obama crowd, so they have taken the half way step -- tell everyone what car to buy -- the Volt. Since Americans don't want to buy the volt, the Obama folks sweeten the pie with a $ 7,500 tax subsidy per car (now, urging that the subsidy be raised to $ 10,000 per car).
But Americans don't like the Volt and it's sales are moribund. Americans like the big SUVs and that's what they are willing to pay for. So, why not let them? Why does government know better than individuals?
Obama says that "big oil" gets $ 4 billion per year in subsidies. Is that true? What he calls subsidies are "intangible drilling expenses," which is nothing more than the depreciation scheme available to natural resource producers of all stripes. Should you be able to deduct the wearing out of plant and equipment? Most people would say yes. Should you be able to deduct the wearing out of an oil field? Most people would say yes. In any event, it is the average American who mostly owns big oil, so Obama should say "we are subsidizing average Americans with $ 4 billion a year in depletion write offs....let's stop doing that and raise the taxes on average Americans by $ 4 billion." That is what he is really advocating. Soak the middle class by pretending to go after "big oil."
But, at the end of the day, why not let capitalism do its thing. By tinkering, by restricting the ability of the oil industry to develop oil and natural gas to meet domestic demand, the Obama policy leads to volatile energy prices and US dependence on the good wishes of countries like Russia, Iran, and Venezuela. Why is this a good idea?
What free markets do best is to allocate scarce resources and provide for alternatives when some resources become too expensive. That would be the correct energy policy -- no energy policy at all.
Wednesday, March 7, 2012
Austerity as the Welfare State Unravels
We are treated daily to news accounts of families suffering from removal of government benefits that such families had come to expect. Today's NYTimes features a community in England facing the loss of a government-provided day-care center. These stories describe the often desperate plight of families suddenly deprived of something that they had come to depend upon. This is the cruel downside of the modern welfare state.
Inevitably, the welfare state, in every country, expands it's reach into every aspect of life. Eventually, with the elimination of private saving and a sense of personal responsibility, the welfare state becomes wildly unaffordable. That's where we are now in most of the Western world. Now comes the painful, but inevitable, process of dismantling the welfare state as the promises run up against reality.
The money has to come from somewhere. No matter how loudly welfare proponents proclaim the existence of this economic right or that economic right (now proclaiming, for example, the right to publicly provided contraception!). Europe now and the US soon will unravel their welfare states, since there is no one out there willing to fund ithem. No doubt the NYTimes will treat us to more stories of families who, having abandoned earlier habits of thrift and self reliance to accept government welfare, now face the withdrawal of those benefits.
There is no limit to the expansion of the welfare state short of catastrophe because those who are it's proponents are unmoved by arguments about incentives and affordability. But, numbers are numbers, so more and more families in the West will be forced to face the harsh realities that the welfare state and it's ultimate dissolution will impose.
Inevitably, the welfare state, in every country, expands it's reach into every aspect of life. Eventually, with the elimination of private saving and a sense of personal responsibility, the welfare state becomes wildly unaffordable. That's where we are now in most of the Western world. Now comes the painful, but inevitable, process of dismantling the welfare state as the promises run up against reality.
The money has to come from somewhere. No matter how loudly welfare proponents proclaim the existence of this economic right or that economic right (now proclaiming, for example, the right to publicly provided contraception!). Europe now and the US soon will unravel their welfare states, since there is no one out there willing to fund ithem. No doubt the NYTimes will treat us to more stories of families who, having abandoned earlier habits of thrift and self reliance to accept government welfare, now face the withdrawal of those benefits.
There is no limit to the expansion of the welfare state short of catastrophe because those who are it's proponents are unmoved by arguments about incentives and affordability. But, numbers are numbers, so more and more families in the West will be forced to face the harsh realities that the welfare state and it's ultimate dissolution will impose.
Tuesday, March 6, 2012
Valuing Common Stocks
The smart money is still bearish. With the Dow Jones hovering just below the 13,000 level, the financial pundits are almost unanimous in their bearish outlook. The exception to the gloom is the optimistic view of the sell side -- the brokers. They like the market here, but then, they pretty much always like the market. It comes with the territory (that is, the job).
So, are the bears right? Is the party over? Is it time to take a pause?
First a caveat. The only honest answer is that no one really knows, no matter how convincing one's argument may be.
That said, my guess is that the pundits are wrong. Common stocks will likely be much higher in value ten years from now than they are now. It would not be a surprise to see stock performance exceed historical levels over the next ten years, which would mean a Dow Jones of over 30,000 by 2022.
But what of the next twelve months? Will the market conveniently sell off or pause to give the late-comers an opportunity to climb aboard? I doubt it.
That doesn't mean that the economy is set to take off. It isn't The economy will continue to plod along with high levels of unemployment and very slow economic growth. Businesses will continue to find ways to avoid employees and taxpayers will look for ways to avoid the tax hikes that everyone knows are likely to be in our future. This means continued economic stagnation, albeit a slowly expanding economy.
This is not an economy that provides opportunity for those with limited economic means. That has been effectively precluded by government policy. But, it is an economy that benefits those who ride on top of the stagecoach. Their ride will get better, stocks will go higher. The Warren Buffetts will do well (and they won't pay higher taxes, even if they face higher tax rates).
So, are the bears right? Is the party over? Is it time to take a pause?
First a caveat. The only honest answer is that no one really knows, no matter how convincing one's argument may be.
That said, my guess is that the pundits are wrong. Common stocks will likely be much higher in value ten years from now than they are now. It would not be a surprise to see stock performance exceed historical levels over the next ten years, which would mean a Dow Jones of over 30,000 by 2022.
But what of the next twelve months? Will the market conveniently sell off or pause to give the late-comers an opportunity to climb aboard? I doubt it.
That doesn't mean that the economy is set to take off. It isn't The economy will continue to plod along with high levels of unemployment and very slow economic growth. Businesses will continue to find ways to avoid employees and taxpayers will look for ways to avoid the tax hikes that everyone knows are likely to be in our future. This means continued economic stagnation, albeit a slowly expanding economy.
This is not an economy that provides opportunity for those with limited economic means. That has been effectively precluded by government policy. But, it is an economy that benefits those who ride on top of the stagecoach. Their ride will get better, stocks will go higher. The Warren Buffetts will do well (and they won't pay higher taxes, even if they face higher tax rates).
Thursday, March 1, 2012
Another Economist Off the Rails
Maybe he is being misquoted! In today's NY Times Professor Ronald Kurtz of MIT's Sloan School of Management is described as believing, in his new book, that tax policy is the reason we have an out of control debt situation. If Kurtz believes this, he must have some serious trouble with arithmetic. Taxes are really irrelevant to our long run debt situation -- whether high or low. The entitlements cannot be afforded if we were able to grab 100 percent of everyone's income -- rich and poor.
So what difference does the tax rate make? There are, of course, two debates going on. One is the "fairness" debate which is a bit misleading, since those who advocate "higher taxes on the rich" are well aware that higher tax rates may end up reducing what rich people will show as taxable income and reduce revenues, potentially dramatically reduce revenues. So "fairness" may come at the price of lowered federal revenues. Is that fair?
The other part of the debate is that higher marginal tax rates reduce incentives for business expansion and employment. Those who deny this point to earlier periods when marginal rates were higher. But, no one paid those higher rates of yesteryear. There were far too many loopholes.
When John Kennedy was first sworn in, he asked for a report on all the taxpayers paying the 91 percent rate, which was the highest rate at the time. Guess what? There were a whopping total of seven taxpayers paying that rate. No one willingly pays rates like that. You wouldn't either (neither would Warren Buffett). The rich simply shift assets around so that no income shows up. One of the wealthy taxpayers in 1961, Mrs. Dodge, a General Motors heiress from Grosse Point, didn't even file a tax return. Her assets were all in tax free municipal bonds. So, do you think Mrs. Dodge cared a whit whether rates were 30 %, 70 %, 91 %, or 100 %.
So, what did John Kennedy do? He sent a bill over to Congress to lower the highest marginal tax rate from 91 % to 70%. His purpose? To increase tax revenues. President Kennedy got the point, that seems lost on Professor Kurtz.
Anyway, here we go again. Another economist who thinks that a $ 66 trillion unfunded liability can be dealt with by taxing a hand full of wealthy Americans.
So what difference does the tax rate make? There are, of course, two debates going on. One is the "fairness" debate which is a bit misleading, since those who advocate "higher taxes on the rich" are well aware that higher tax rates may end up reducing what rich people will show as taxable income and reduce revenues, potentially dramatically reduce revenues. So "fairness" may come at the price of lowered federal revenues. Is that fair?
The other part of the debate is that higher marginal tax rates reduce incentives for business expansion and employment. Those who deny this point to earlier periods when marginal rates were higher. But, no one paid those higher rates of yesteryear. There were far too many loopholes.
When John Kennedy was first sworn in, he asked for a report on all the taxpayers paying the 91 percent rate, which was the highest rate at the time. Guess what? There were a whopping total of seven taxpayers paying that rate. No one willingly pays rates like that. You wouldn't either (neither would Warren Buffett). The rich simply shift assets around so that no income shows up. One of the wealthy taxpayers in 1961, Mrs. Dodge, a General Motors heiress from Grosse Point, didn't even file a tax return. Her assets were all in tax free municipal bonds. So, do you think Mrs. Dodge cared a whit whether rates were 30 %, 70 %, 91 %, or 100 %.
So, what did John Kennedy do? He sent a bill over to Congress to lower the highest marginal tax rate from 91 % to 70%. His purpose? To increase tax revenues. President Kennedy got the point, that seems lost on Professor Kurtz.
Anyway, here we go again. Another economist who thinks that a $ 66 trillion unfunded liability can be dealt with by taxing a hand full of wealthy Americans.
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