A Liberal Opines on things Economic, Confirms why they Suck at Creating Jobs

Posted by PITHOCRATES - January 16th, 2011

Liberals don’t know Business or Jobs but they have their Big Keynesian Words

If you want to know why liberals are so bad at stimulating economic activity just read Paul Krugman’s Wages and Employment, Again (Wonkish) posted 1/16/2011 on The New York Times.  He pontificates with an erudite air of all-knowing condescension.  He’s smart.  And he wants to make sure you get this.  So he writes with big words and references big demand-side macroeconomic theories that he and his kind accept as undisputed fact.  Despite what the lessons of history say. 

Krugman is a Keynesian.  So, as a Keynesian, he knows nothing about business.  But, like a Keynesian, that doesn’t stop him from opining on the subject of business.

Here’s a fundamental truth (FT) about business.  FT 1:  If you make the cost of doing business high, you will reduce the amount of business a business does.  Here’s another.  FT 2:  If the people are NOT buying whatever they’re selling, this will also reduce the amount of business a business does.  A couple of key things a business needs here.  To have the cost of doing business kept low enough so they can sell at a price that makes them competitive in the market place.  And they need people to have jobs so they can buy their competitively priced goods or services they place into the market place.

Liberals never seem to get either of these points.

High Wages have never Stimulated Economic Activity

Keynesians believe if you give money to people that fixes everything.  When Krugman says:

…I’ve also argued a number of times that cutting wages now would probably make the slump worse, not better.

That’s Keynesian.  You cut wages and the people have less money spend.  So that’s why Keynesians are all about high wages.  Of course, they miss the other side of high wages.  High wages mean fewer jobs.  Because high wages limit the number of employees a business can hire and still sell at prices that are competitive in the market place.

High wages have never stimulated economic activity.  They just raise costs.  This let the Japanese take huge chunks of market share away from the Big Three.  And it’s bankrupting our big blue cities and states that are drowning in debt because of their public sector union contracts.  If Krugman was right, these cities would be booming in economic activity because of those fat public sector pay and benefits.  But they’re not.  The only thing those high wages are doing is bankrupting these cities and states.

Liberals never seem to get this point.  So they trade off economic activity for votes, blissfully unaware of the extent of economic damage they’re doing.  Or they’re aware and they just don’t care.

Easy Money begets Irrational Exuberance which begets Asset Bubbles which begets Recessions

Another favorite of the Keynesians is manipulating interest rates.

…a rise in the real money supply reduces interest rates, leading to a rise in demand.

Read ‘a rise in real money supply‘ as printing money.  The idea here is to make money cheap and plentiful so people will borrow it to buy things.  Like houses.  Like they did during Bill Clinton’s and George W Bush’s presidencies.  And, boy, did they.  Times were good.  Real good.  Only one problem.  Irrational exuberance.

Clinton and Bush thought they found the magical economic elixir.  Home ownership.  So they did everything in their power to extend homeownership.  Even to the people who couldn’t afford it.

Easy money.  Monetary policy that keeps money cheap and plentiful.  To entice people to borrow.  And they were.  Borrowing.  And buying houses.  So much so that they bid up the prices into a huge asset bubble.  Meanwhile, people who couldn’t afford to buy a house were buying houses, too.  The federal government pushed lenders to lend. Or face the consequences.  Be investigated for discriminatory lending.  Or, worse, suffer the public spectacle of having Jesse Jackson or an Al Sharpton publically calling them racist (a lot of the inner city poor were black).  So they came up with some creative ways to qualify unqualified people for mortgages.  We call them subprime mortgages.  And we know how those came back to bite us in the ass.

The problem with bubbles is that they burst.  And when they do, the life blows out of the economy like the air out of a popped balloon.  Deflationary spirals often follow.  And nasty, horrible and painfully long recessions.

Liberals never seem to get this point, either.  You’d think that they would as it has happened so often.

For Narcissists, it’s not the economy.  It’s their Egos, Stupid.

Krugman’s column really shows the problems with liberals.  They’re a bunch of narcissists.  Who love their superior minds.  They love to hear themselves talk.  And love to read what they write.  They write to impress.  And to stimulate themselves.  If you know what I mean.  Only those in his elite circle can understand what the hell he is writing about.  Not us.  The sloped-brow, knuckle-dragging, Neanderthals who didn’t go to the Ivy League schools.  We just work and live in the real world.  Raise our families.  And pay our taxes.

Liberals like to complicate things.  And to try to control the complex.  The economy will work fine on its own.  And when it does we experience some of the greatest economic expansions.   But when they tinker with their Ivy League knowledge, bad things typically happen.  Such as the subprime mortgage crisis.  The Great Recession.  Even the Great Depression.  All of which resulted from liberal tinkering.

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LESSONS LEARNED #48: “Government benefits aren’t from the government. They’re from the taxpayers.” -Old Pithy

Posted by PITHOCRATES - January 13th, 2011

Defense Spending is in the Constitution, Entitlements Aren’t – And it’s Entitlement Spending that’s Growing

People like to bitch about defense spending.  And I can understand why.  It’s a lot of money.  Just to kill people and break things.  People would rather see that money spent on education.  Health care.  Food assistance for the poor.  Entitlements.  Those nice, generous, government benefits.  The kinder, gentler side of government spending. 

People like the free stuff.  They want to get something for all those taxes other people are paying.  And it just kills them to see it spent on the military.  Because they’d rather see that money spent on them.  Of course if you read the Constitution, you’ll find defense spending in there.  It’s in the preamble (provide for the common defense).  You’ll find it in Article I.  In Article II, too.  Defense spending is pretty conspicuous in the Constitution.  Conspicuous by their absence, though, are entitlements.  Did the Founding Fathers overlook this?  No.  It was the whole point of federalism.  They designed the central government to do only those things that the states couldn’t.  To establish credit for the new nation, to treat with foreign nations, to coin money, etc.  And, of course, to provide and maintain a military force.  Alexander Hamilton wanted it to do more.  And he stretched the “necessary and proper” clause in Article I for some of the things he wanted the central government to do (to try and make the nation rich and powerful like Great Britain).  Pity, too.  For the Left has been stretching that clause ever since.

All right, defense spending is a constitutional requirement of the federal government.  Entitlements aren’t.  So how much are we spending on these?   In 1962, defense spending was 49% of all federal spending (see Federal Spending by the Numbers 2010).  Social Security and Medicare (the two biggest entitlements) were 13%.  Current baseline projections show that, in 2020, defense spending will drop to 14%.  And Social Security and Medicare will rise to 36%.  Medicare is the real cost driver here.  In the decade from 2000 to 2010, Medicare spending has jumped 81%.  It is outgrowing Social Security and Medicaid.  The runaway costs of Social Security, Medicare and Medicaid (the Big Three) are projected to equal total current tax revenues in the year 2020.  That means the total federal budget today will only pay for the Big Three in 2020.  Concerned?  You should be.  Especially if you’re a taxpayer.

You can pay Uncle Sam with the Overtime.  And will.

Taxpayer, beware.  The government is feeling especially generous.  With your money.  By 2020, Washington will be spending $35,604 per household.  That’ll take almost $5,000 in additional taxes per household for the Big Three alone.  That is projected to jump to $12,636 in 2050.  And that doesn’t include Obamacare.  When that is factored in, it’ll cost you as much as paying cash for a new car each and every year.  And a nice one, not a subcompact with a sewing machine for an engine.  Can you afford that?  I hope so.  Because you won’t have a choice.  You’ll be buying it.  But not for yourself.  No.  That nice beautiful car you’ll be buying each and every year?  You don’t get to drive it.  It will be for someone else.

The entitlement spending is getting so out of hand that we have record deficits.  Compounding this problem is the 2008 recession corresponding with a huge jump in entitlement spending.  It’s opened a rather large gap between revenue and spending.  And that gap isn’t going anywhere soon.  Unless they cut entitlements.  Or raise taxes.  And you know they won’t be cutting entitlements.  So, guess what?  You can pay Uncle Sam with the overtime.  Because that’s all you’ll get for your money (borrowed from Billy Joel’s Movin’ Out (Anthony’s Song)).  So get used to it.  Paying Uncle Sam.  Because Sam is going to raise your taxes.  He has no choice.  Because he won’t cut entitlements.

And they’ll have to raise taxes.  Because we’re running out of creditors to borrow from.  I mean, the Chinese only have so much money to lend.  And we can’t keep printing money.  They’ve been doing that.  Quantitative easing, they call it.  But they can’t keep doing it.  Anyone alive during the Seventies will know why.  Or anyone who has done some reading outside the public school curriculum.  In a word, stagflation.  That’s a phenomenon where you have both high inflation and high unemployment.  It’s usually one or the other.  The normal rules of economics don’t allow both to happen at the same time.  Unless you’re printing money like there’s no tomorrow.  Which they were in the late Sixties and Early Seventies.  To pay for the Vietnam War.  NASA’s Apollo program (to the moon and back).  And, of course, entitlement spending.  The biggest to date was a group of programs we called the Great Society.  Inflation was so bad that they joked about it on Saturday Night Live.  Dan Aykroyd played President Jimmy Carter, joking about the pleasure of owning a $400 suit.  And how easy it was to just call the treasury to have them print off another sheet of hundred dollar bills.  (Or something like that.)

The Reagan Deficits were Bad, but they Make the Obama Deficits look Good

The Seventies were a bad time.  Economically speaking.  Printing money was bad.  Quantitative easing was bad.  Easy money was bad.  So Paul Volcker started tightening monetary policy.  And Ronald Reagan cut taxes. And the Eighties were like a glorious spring following the bleakest of winters.  But you can’t teach an old dog new tricks.  The liberal Democrats weren’t going to roll over and cry ‘uncle’.  For they knew there was more spending left that they could do. 

So the spending continued.  Reagan had a Democrat Congress.  They fought him tooth and nail.  But he spoke directly to the American people and got his tax cuts.  And Reagan’s tax cuts resulted in a windfall of revenue.  And the Dems in Congress couldn’t spend the money fast enough.  Actually, they could.  They spent it so fast that surpluses soon turned into deficits.  They blamed Reagan’s defense spending.  So he made a deal.  He agreed to increase taxes.  If they would cut some of their entitlement spending.  To get the deficits under control.  So they did.  Increased taxes.  But they never cut spending.  Which just goes to show you that you can’t trust liberal Democrats.

You youngsters probably have no memory of these times.  But Ronald Reagan was attacked more than George W. Bush.  Hell, he was attacked almost as much as Abraham Lincoln.  The Seventies were the high-water mark of liberalism.  Then it went head to head with Reagan’s limited government supply-side economics in the Eighties.  And lost.  The hatred for Reagan knew no bounds.  For he was the man that repudiated liberalism.  So they attacked him ruthlessly. Screamed about his defense spending.  And yet his deficits were only around $200 billion.  Obama’s, on the other hand, are around $1,500 billion.  But they’re okay with that.  It’s no big deal, they say.  Just raise the debt ceiling.

It’s Spending, not Tax Cuts, that’s Causing those Record Deficits

But they can’t just raise the debt ceiling to keep spending.  Because spending is the problem.  Our debt is approaching 100% of our GDP.  When you’re borrowing money at record levels, you’re doing this because you just can’t raise taxes anymore.  You put the two together and it’s destroying the economy.  Taxes kill economic activity.  And the interest on the debt is soaring.  It’s projected to be approximately $760 billion in 2020.   That’s more than 70% of the projected budget deficit.  That means that most of the money we’ll be borrowing will go to pay the interest on the money we’ll be borrowing.  At that rate we’ll never pay down our debt.

Revenue averaged 18.0% of GDP from 1960-2009.  During the same period, spending averaged 20.3% of GDP from 1960-2009.  Not good.  But not too bad.  That’s a small, somewhat manageable deficit.  But spending takes off in 2010.  It’s projected to rise to 26.5% of GDP.  Meanwhile, revenue is projected to rise only to 18.2% of GDP.  That’s a projected deficit of 8.3% of GDP.  That’s fricking huge.  And that’s all runaway spending causing this mammoth deficit.  It ain’t tax cuts causing this.  It’s those entitlements.  Those fat, generous government benefits.

By this time there won’t be anything left to cut from the defense budget.  So they will have to turn to the generosity of the taxpayers.  And hope they enjoy personal sacrifice.  Because they’re going to be doing a lot of that.  To pay for these generous benefits.  These benefits for other people.

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Asset Bubbles and Deflationary Spirals in Japan, the United States and China

Posted by PITHOCRATES - December 25th, 2010

The Japanese Asset Bubble and their Lost Decade

During the eighties the Japanese government worked with Japanese business.  And the eighties in Japan were booming.  The Japanese went on an American buying spree.  They gobbled up American landmark buildings and business.  It was an economic Pearl Harbor.  Some people wringed their hands in distress, fearing the Japanese ascendancy.  Presidential candidates said we were fools for not following the Japanese model.

Easy money created excess liquidity.  Which created inflationary pressure on prices.  Real estate values soared.  And irrational exuberance bid up prices further, creating an asset bubble.  Times were good while they lasted.  But the bubble popped.  Real estate values tumbled.  And the Japanese suffered a deflationary spiral that would last a decade.  They call their 1990s the ‘lost decade’.  They still haven’t fully recovered.  And this was a direct consequence of government working with business.

The Subprime Mortgage Crisis and the Beginning of our Lost Decade

Totally ignoring the lessons of the Japanese, the Americans went down the same road.  Easy money created excess liquidity.  And like in Japan, this created inflationary pressure on prices.  And like the Japanese, real estate values soared.  Alan Greenspan warned us about our irrational exuberance.  But we didn’t listen.  We bid prices higher still.  Created the mother of all asset bubbles.  Times were good in the 1990s.  But the bubble popped.  As history has shown bubbles to do.  And real estate values tumbled.  But with a twist.

In America, government pressured bankers to approve mortgages for people who couldn’t qualify for a mortgage.  So bankers had to come up with some creative ways to make the unqualified qualified.  The weapon of choice was the subprime mortgage.  And everything worked as plan.  Until interest rates went up.  And then the whole deck of cards came crashing down. 

Fannie Mae and Freddie Mac (government sponsored enterprises) guaranteed those risky loans.  Then, to encourage bankers to make more of these risky loans, they bought them from the banks.  They chopped them up and created investment instruments.  We called them derivatives.  High yield (because of the ‘subprime’ in subprime mortgage).  And safe (because of the ‘mortgage’ in subprime mortgage).  So when interest rates rose and the unqualified couldn’t pay their mortgage payments anymore, we got the subprime mortgage crisis that reverberated throughout the world thanks to those derivatives.  All because government worked with business.

The Chinese are Working on an Asset Bubble of their Own

In the 2000s, it’s the Chinese that everyone fears.  Economically speaking.  (For now at least.)  Over the past decade or two, China has become more capitalistic than communist.  It’s not pure capitalism.  It’s more government partnering with business.  Sort of a throwback to mercantilism.  They have tariffs and monetary policies to protect their domestic industries.  And they subsidize their export industries in an export-driven economy.  And it’s been working.  So far.

It worked in Japan for awhile.  But we saw what happened there.  It worked in the United States for awhile.  But we saw what happened there.  Government partnering with business has, historically, been a train wreck.  Now China is trying her hand.  Will history repeat itself there?  Perhaps (see China Raises Interest Rates Again to Cool Inflation by Edward Wong posted 12/25/2010 on The New York Times).

China’s central bank announced on Saturday that it was raising interest rates for the second time in about two months in what appears to be a long-term campaign to suppress inflation as many ordinary Chinese express discontent with rising consumer prices.

Oh my.  Inflationary pressures are raising prices.  And to tamp those prices back down, they raised interest rates.  This is giving me a strange feeling of déjà vu.    

The Chinese economy has been awash in liquidity due to government stimulus money and generous lending by state banks. Chinese officials are now concerned about an overheated economy and the inflationary pressures that come with that.

Awash in liquidity?  Government stimulus money?  Generous state bank lending?  It feels like we went through this before.  Odd.  This feeling of déjà vu.

But investment in large capital-intensive projects has also been fueling the economic engine and driving up prices.

Capital-intensive projects?  That requires financing.  Lots of it.  Lots of bank loans.  Lots of liquidity.  And a lot of liability on bank’s balance sheets.  Shouldn’t be a problem.  As long as those are safe loans.  Backed by safe assets.  Just like in the United States.  Before we started putting people into houses who couldn’t afford to buy a house.

Officials have signaled throughout the month that moves will be taken to better control spending across the country. China announced on Dec. 3 that it would tighten monetary policy next year, shifting it from “relatively loose to prudent.” That was a clear sign that Chinese officials were intensely concerned about inflation.

The Chinese get a little Alan Greenspan.  They’re getting a little nervous about their irrational exuberance.

The property market in China has been booming. Rising property prices, along with the government stimulus money and loose bank lending, have spurred new developments across the country. Even long-term residents on the tropical southern island of Hainan have had to grapple with soaring real estate prices from outsiders coming in to buy up land.

Some analysts say this growth has resulted in a gargantuan bubble in the real estate market, while others argue that the capacity will be put to good use.

And for good reason.  Real estate bubbles aren’t good.  Things can get really ugly when they burst.  If you doubt me, ask the Japanese.  Or the Americans.

Until now, low wages have helped to hold down inflation and keep China’s export industry competitive. But those wages in the context of soaring real estate prices mean that migrant workers from the interior of China are becoming less tolerant of poor work conditions on the coasts, where many of China’s export manufacturing factories are located. Many workers are now choosing to stay closer to home in the interior provinces, and some companies are moving their manufacturing centers inland.

They took our jobs.  But now they don’t want them.  Those people who worked dirt cheap (by our standards, not theirs) have learned from the West.  They want more.  And, in a booming economy, they probably have choices out there.  It could add huge inflationary pressures on wages.  Or force a government crackdown on individual liberty.  Neither will probably be good for the economy.  Or those balance sheets.  At the banks financing those capital-intensive projects.

History Repeats – Ignore her at your Own Risk

One thing history shows us over and over is that free markets work.  Managed markets don’t.  Government partnering with business doesn’t work.  It didn’t work for the Japanese.  And it didn’t work for the United States.  When you intervene into market forces you disrupt market forces.  And often have unintended consequences.  Such as runaway inflation.  Asset bubbles.  And deflationary spirals.

The Japanese lost a decade.  The United States is looking like they will lose a decade.  Will the Chinese be next?  If history repeats, as history has a penchant for doing, they may be the next to lose a decade.  Of course, that could be a bit of a problem for us.  They hold a lot of our debt.  And if they want their money back to save themselves, guess what that will do to us.  Suffice it to say that the historians will then be able to write about the rise and fall of the United States.

History can be such a bitch when we ignore her.

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Financial Crises: The Fed Giveth and the Fed Taketh Away

Posted by PITHOCRATES - December 3rd, 2010

Great Depression vs. Great Recession

Ben Bernanke is a genius.  I guess.  That’s what they keep saying at least. 

The chairman of the Federal Reserve is a student of the Great Depression, that great lesson of how NOT to implement monetary policy.  And because of his knowledge of this past great Federal Reserve boondoggle, who better to fix the present great Federal Reserve boondoggle?  What we affectionately call the Great Recession.

There are similarities between the two.  Government caused both.  But there are differences.  Bad fiscal policy brought on a recession in the 1920s.  Then bad monetary policy exasperated the problem into the Great Depression. 

Bad monetary policy played a more prominent role in the present crisis.  It was a combination of cheap money and aggressive government policy to put people into houses they couldn’t afford that set off an international debt bomb.  Thanks to Fannie Mae and Freddie Mac buying highly risky mortgages and selling them as ‘safe’ yet high-yield investments.  Those rascally things we call derivatives.

The Great Depression suffered massive bank failures because the lender of last resort (the Fed) didn’t lend.  In fact, they made it more difficult to borrow money when banks needed money most.  Why did they do this?  They thought rich people were using cheap money to invest in the stock market.  So they made money more expensive to borrow to prevent this ‘speculation’.

The Great Recession suffered massive bank failures because people took on great debt in ideal times (low interest rates and increasing home values).  When the ‘ideal’ became real (rising interest rates and falling home values), surprise surprise, these people couldn’t pay their mortgages anymore.  And all those derivatives became worthless. 

The Great Depression:  Lessons Learned.  And not Learned.

Warren G. Harding appointed Andrew Mellon as his Secretary of the Treasury.  A brilliant appointment.  The Harding administration cut taxes.  The economy surged.  Lesson learned?  Lower taxes stimulate the economy.  And brings more money into the treasury.

The Progressives in Washington, though, needed to buy votes.  So they tinkered.  They tried to protect American farmers from their own productivity.  And American manufacturers.  Also from their own productivity.  Their protectionist policies led to tariffs and an international trade war.  Lesson not learned?  When government tinkers bad things happen to the economy.

Then the Fed stepped in.  They saw economic activity.  And a weakening dollar (low interest rates were feeding the economic expansion).  So they strengthened the dollar.  To keep people from ‘speculating’ in the stock money with borrowed money.  And to meet international exchange rate requirements.  This led to bank failures and the Great Depression.  Lesson not learned?   When government tinkers bad things happen to the economy.

Easy Money Begets Bad Debt which Begets Financial Crisis

It would appear that Ben Bernanke et al learned only some of the lessons of the Great Depression.  In particular, the one about the Fed’s huge mistake in tightening the money supply.  No.  They would never do that again.  Next time, they would open the flood gates (see Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms by Jia Lynn Yang, Neil Irwin and David S. Hilzenrath posted 12/2/2010 on The Washington Post).

The financial crisis stretched even farther across the economy than many had realized, as new disclosures show the Federal Reserve rushed trillions of dollars in emergency aid not just to Wall Street but also to motorcycle makers, telecom firms and foreign-owned banks in 2008 and 2009.

The Fed’s efforts to prop up the financial sector reached across a broad spectrum of the economy, benefiting stalwarts of American industry including General Electric and Caterpillar and household-name companies such as Verizon, Harley-Davidson and Toyota. The central bank’s aid programs also supported U.S. subsidiaries of banks based in East Asia, Europe and Canada while rescuing money-market mutual funds held by millions of Americans.

The Fed learned its lesson.  Their easy money gave us all that bad debt.  And we all learned just how bad ‘bad debt’ can be.  They wouldn’t make that mistake again.

The data also demonstrate how the Fed, in its scramble to keep the financial system afloat, eventually lowered its standards for the kind of collateral it allowed participating banks to post. From Citigroup, for instance, it accepted $156 million in triple-C collateral or lower – grades that indicate that the assets carried the greatest risk of default.

Well, maybe next time.

You Don’t Stop a Run by Starting a Run

With the cat out of the bag, people want to know who got these loans.  And how much each got.  But the Fed is not telling (see Fed ID’s companies that used crisis aid programs by Jeannine Aversa, AP Economics Writer, posted 12/1/2010 on Yahoo! News).

The Fed didn’t take part in that appeal. What the court case could require — but the Fed isn’t providing Wednesday — are the names of commercial banks that got low-cost emergency loans from the Fed’s “discount window” during the crisis.

The Fed has long acted as a lender of last resort, offering commercial banks loans through its discount window when they couldn’t obtain financing elsewhere. The Fed has kept secret the identities of such borrowers. It’s expressed fear that naming such a bank could cause a run on it, defeating the purpose of the program.

I can’t argue with that.  For this was an important lesson of the Great Depression.  When you’re trying to stop bank runs, you don’t advertise which banks are having financial problems.  A bank can survive a run.  If everyone doesn’t try to withdraw their money at the same time.  Which they may if the Fed advertises that a bank is going through difficult times.

When Fiscal Responsibility Fails, Try Extortion

Why does government always tinker and get themselves into trouble?  Because they like to spend money.  And control things.  No matter what the lessons of history have taught us.

Cutting taxes stimulate the economy.  But it doesn’t buy votes.  You need people to be dependent on government for that.  So no matter what mess government makes, they NEVER fix their mess by shrinking government or cutting taxes.  Even at the city level. 

When over budget what does a city do?  Why, they go to a favored tactic.  Threaten our personal safety (see Camden City Council Approves Massive Police And Fire Layoffs Reported by David Madden, KYW Newsradio 1060, posted 12/2/2010 on philadelphia.cbslocal.com).

Camden City Council, as expected, voted Thursday to lay off almost 400 workers, half of them police officers and firefighters, to bridge a $26.5 million deficit.

There’s a word for this.  And it’s not fiscal responsibility.  Some would call it extortion.

It’s never the pay and benefits of the other city workers.  It’s always the cops and firefighters.  Why?  Because cutting the pay and benefits of a bloated bureaucracy doesn’t put the fear of God into anyone.

Here we go Again

We never learn.  And you know what George Santayana said.  “Those who cannot remember the past are condemned to repeat it.”  And here we are.  Living in the past.  Again.

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Obama to Small Business: Take the Money. Please.

Posted by PITHOCRATES - September 27th, 2010

Smart Dumb People

Imagine you’re a business owner.  Let’s say you manufacture and sell fancy, high-end, architectural lighting for high-end homes.  Business was good during the housing bubble.  So good you expanded production.  Built a new factory.  Then, with the subprime mortgage crisis, sales took a nosedive.  You had to shutter the new plant you built during the bubble.  And you had to cut a shift at your other factory.  Because with the new home market in the crapper, high unemployment and a general lack of optimism in the future, few people are buying fancy, high-end, architectural lighting.  So what do you do?  Borrow money so you can expand production and hire more people?  If you’re an idiot, perhaps.  But you’re not.  So you won’t.

Business people are smart.  They understand business.  The people in the Obama administration, on the other hand, are a bunch of idiots.  When it comes to business.  They may have their Ivy degrees and their smug condescending arrogance, but they are some of the dumbest smart people that ever were.  To them all business owners are thieves who exploit their employees.  They don’t like them but they understand they need them.  To provide the jobs.  Because everyone can’t work in government.  Someone has to work in the private sector so the government has someone to tax.

With their simplistic understanding of business, they believe business just needs more money.  That’s their answer to everything.  More money.  A business owner can hire more people if only he or she had more money.  Ergo, get them more money.  Hire the people.  Create jobs.  Build stuff.  Just do it already.  What’s the problem?

“Ah, Mr. President, what am I going to do with all this stuff if no one buys it?”

“Huh?  What?”

“That’s what I thought.”

Spend Baby Spend

The economy is a complex thing.  But it’s simple to operate.  All you have to do is get the hell out of the way.  But there are those who just can’t.  They need to tinker.  Because they are smarter than you.  And every other consumer.

Economists are like weather forecasters.  They’re wrong more than they’re right.  Let’s face it; if these people could figure out the economy, they wouldn’t need a day job.  But they do.  They need to offer ‘expert’ commentary.  And advise presidents.  To feel important.  To feel better about themselves.  For being such abject failures that they need a day job.

And, of course, the ones who find favor with those in power are the ones who favor the use of that power.  Keynesians.  Unemployment, Mr. President?  Why you fix that by spending money.  Inflation, Mr. President?  That’s just too much money chasing too few goods.  So you need to spend more.  To stimulate the economy to build more goods.  Inflation is good.  It stimulates.  And it helps to pay off the debt you’re building with your deficit spending.  A trillion dollars today may only be a few hundred billion, say, 10 years from now.  Billions are easier to repay than trillions.  And the more we inflate, the easier it will be to pay off that debt.  See?  Deficit spending and inflation are good things.  So keep spending.

It’s a load of crap.  But it’s doesn’t take much to sell it to a president.  Especially if they want to spend.  As the current president does.  And, boy, does he.

Failed Policies of the Past

Easy money and irrational exuberance created the housing bubble.  People borrowed money and bought over-priced houses.  Then the bubble burst.  The huge inventory of unsold homes corrected the market.  Prices plummeted.  Interest rates went up.  Adjustable Rate Mortgages (ARMs) reset at higher rates.  Subprime mortgages defaulted.  Foreclosures.  More houses thrown on the market, pushing prices down further.  People still paying their mortgages found they owed more than their houses were worth.  Some walked away.  More houses thrown on the market, further depressing housing prices.  That’s what easy money and excess capacity gives you.  A bubble.  Then a deflationary spiral.

And now the Obama administration wants to return to these failed policies of the past.  Obama wants business to borrow money to increase capacity to build stuff no one will buy.  (See AP article Small biz, banks may spurn Obama’s $30B program by Pallavi Gogoi on My Way.)  It’s not housing.  But it’s still the same.  Irrational exuberance.

It’s the Government, Stupid

It’s not a tight credit market that’s hurting this economy.  It’s the Obama administration.  Just like it was the FDR administration.  There’s just too much uncertainty.  Too many anti-business policies.  When you see government dissolve a legal obligation (screwing the bond holders) in favor of helping a political constituency (the UAW), business owners take notice.  And get nervous. 

If you want to help the economy, you got to stop scaring business owners.  You got to stop running roughshod over the rule of law.  If people enter into legal contracts, they need to have some assurance that the government will honor those contracts.  And, to date, the Obama administration’s actions don’t give much assurance.

Until they stop scaring business, what idiot is going to expand and hire people?  That doesn’t work for the government?

www.PITHOCRATES.com

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LESSONS LEARNED #28: “Politicians love failure because no one ever asked government to fix something that was working.” -Old Pithy

Posted by PITHOCRATES - August 26th, 2010

THE TELEVISION SHOW Gomer Pyle, U.S.M.C. aired from 1964-1969.  It was a spinoff from the Andy Griffith Show.  Gomer, a naive country bumpkin who worked at Wally’s filling station, joined the Marines Corps.  And there was much mirth and merriment.  To the chagrin of Sergeant Carter, Pyle’s drill instructor (DI).  Think of Gunny Sergeant R. Lee Ermey’s Sergeant Hartman in the movie Full Metal Jacket only with no profanity or mature subject matter.  Sergeant Carter was a tough DI like Sergeant Hartman.  But more suitable for the family hour on prime time television.

Gunny sergeants are tough as nails.  And good leaders.  They take pride in this.  But sometimes a gunny starts to feel that he’s not himself anymore.  This was the subject of an episode.  And Gomer, seeing that Sergeant Carter was feeling down, wanted to help.  So he stuffed Sergeant Carter’s backpack with hay before a long march.  While the platoon was worn and tired, Sergeant Carter was not.  He was feeling good.  Like his old self.  Until he found out he was not carrying the same load his men were.  He asked Pyle, “why hay?”  He could understand rocks, but hay?  Because if he outlasted his men while carrying a heavier load, he would feel strong.  But knowing he had carried a lighter load only made him feel weak.

This is human nature.  People take pride in their achievements.  They don’t take pride in any achievement attained by an unfair advantage.  Self-esteem matters.  And you can’t feel good about yourself if you need help to do what others can do without help. 

AN OLD CHINESE proverb goes, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”  Let’s say I am a fisherman in a small village.  I catch fish to feed my family and sell/trade for other family needs.  There’s a man in my village who asks me for a fish each day so he can eat.  I’m a caring person.  So I give him a fish each day.  So a pattern develops.  Each day he shows up when I come in from my fishing.  He takes the fish and goes away.  It works out well for him.  He doesn’t have to work.  He can live off of my kind charity.  Then I move.  Without me being there to give him a fish each day, he no longer can eat.  And dies.  If I only had taught that man to fish. 

Kindness can lead to dependency.  And once dependent, you become lazy.  Why develop marketable skills to provide for yourself when someone else will provide for you?  The problem is, of course, what happens when that charity ends?  If you’re unable to provide for yourself and there is no longer someone providing for you, what do you do?  Steal?

Dependency and a lack of self-esteem are a dangerous combination.  And they feed off of each other.  This combination can lead to depression.  Behavioral problems.  Resentment.  Bitterness.  Envy.  Or a defeatist attitude.

These are often unintended consequences of government programs.  A failed program, then, has far reaching consequences beyond the initial economic costs of a program.

LIQUIDITY CRISES CAUSE a lot of economic damage.  If capital is not available for businesses to borrow, businesses can’t grow.  Or create jobs.  And we need jobs.  People have to work.  To support themselves.  And to pay taxes to fund the government.  So everyone is in favor of businesses growing to create jobs.  We all would like to see money being easy and cheap to borrow if it creates jobs.

But there is a downside to easy money.  Inflation.  Too much borrowing can create inflation.  By increasing the money supply (via fractional reserve banking).  More money means higher prices.  Because each additional dollar is worth a little less. This can lead to overvalued assets as prices are ‘bid’ up with less valuable dollars.  And higher prices can inflate business profits.  Looks good on paper.  But too much of this creates a bubble.  Because those high asset values and business profits are not real.  They’re inflated.  Like a bubble.  And just as fragile.  When bubbles burst, asset values and business profits drop.  To real values.  People are no longer ‘bidding’ up prices.  They stop buying until they think prices have sunk to their lowest.  We call this deflation.  A little bit of inflation or deflation is normal.  Too much can be painful economically.  Like in the Panic of 1907.

Without going into details, there was a speculative bubble that burst in 1907.  This led to a liquidity crisis as banks failed.  Defaults on loans left banks owing more money than they had (i.e., they became illiquid).  They tried to borrow money and recall loans to restore their liquidity.  Borrowers grew concerned that their bank may fail.  So they withdrew their money.  This compounded the banks problems.  This caused deflation.  Money was unavailable.  Causing bank runs.  And bank failures.  Business failures.  And unemployment grew. So government passed the Federal Reserve Act of 1913 to prevent a crisis like this from ever happening again.  The government gave the Federal Reserve System (the Fed) great powers to tweak the monetary system.  The smartest people at the time had figured out what had gone wrong in 1907.  And they created a system that made it impossible for it to happen again.

The worst liquidity crisis of all time happened from 1929-1933.  It’s part of what we call the Great Depression.  The 1920s had a booming economy.  Real income was rising.  Until the Fed took action.  Concerned that people were borrowing money for speculative purposes (in paper investments instead of labor, plant and material), they put on the brakes.  Made it harder and more expensive to borrow money.  Then a whole series of things happened along the way that turned a recession into a depression.  When people needed money, they made it harder to get it, causing a deflationary spiral.  The Great Depression was the result of bad decisions made by too few men with too much power.  It made a crisis far worse than the one in 1907.  And the Roosevelt administration made good use of this new crisis.  FDR exploded the size of government to respond to the unprecedented crisis they found themselves in.  The New Deal changed America from a nation of limited government to a country where Big Government reigns supreme.

ONE PROGRAM OF the New Deal was Social Security.  Unemployment in the 1930s ran at or above 14%.  This is for one whole decade.  Never before nor since has this happened.  Older workers generally earn more than younger ones.  Their experience commands a higher pay rate.  Which allows them to buy more things.  Resulting in more bills.  Therefore, the Great Depression hit older workers especially hard.  A decade of unemployment would have eaten through any life savings of even the most prudent savers.  And what does this get you?  A great crisis.

The government took a very atypical moment of history and changed the life of every American.  The government forced people to save for retirement.  In a very poor savings plan.  That paid poorly by comparison to private pensions or annuities.  And gave the government control over vast amounts of money.  It was a pervasive program.  They say FDR quipped, “Let them try to undo this.” 

With government taking care of you in retirement, more people stopped providing for themselves.  When they retired, they scrimped by on their ‘fixed’ incomes.  And because Social Security became law before widespread use of birth control and abortion, the actuaries of the day were very optimistic.  They used the birth rate then throughout their projections.  But with birth control and abortion came a huge baby bust.  The bottom fell out of the birth rate.  A baby bust generation followed a baby boom generation.  Actually, all succeeding generations were of the bust kind.  The trend is growing where fewer and fewer people pay for more and more people collecting benefits.  And these people were living longer.  To stay solvent, the system has to raise taxes on those working and reduce benefits on those who are not.  Or raise the retirement age.  All these factors have made it more difficult on our aged population.  Making them working longer than they planned.  Or by making that fixed income grow smaller.

FDR used a crisis to create Social Security.  Now our elderly people are dependent on that system.  It may suck when they compare it to private pensions or annuities, but it may be all they have.  If so, they’ll quake in their shoes anytime anyone mentions reforming Social Security.  Because of this it has become the 3rd rail of politics.  A politician does not touch it lest he or she wishes to die politically.  But it’s not all bad.  For the politician.  Because government forced the elderly to rely on them for their retirement, it has made the Social Security recipient dependent on government.  In particular, the party of government who favors Big Government.  The Democrats.  And with a declining birth rate and growing aged population, this has turned into a large and loyal voting bloc indeed.  Out of fear.

A PROGRAM THAT straddled the New Deal and LBJ’s Great Society was Aid to Families with Dependent Children (AFDC).  Its original New Deal purpose was to help widows take care of their children.  When program outlays peaked in the 1970s, the majority of recipients were unmarried women and divorced women.  Because this was a program based on need, the more need you had the more you got.  Hence more children meant more money.  It also reduced the importance of marriage as the government could replace the support typically provided by a husband/father.  Noted economist Dr. Thomas Sowell blames AFDC as greatly contributing to the breakdown of the black family (which has the highest incidence of single-parent households).

With the women’s liberation movement, women have come to depend less on men.  Some affluent women conceive and raise children without a husband.  Or they adopt.  And the affluent no doubt can provide all the material needs their children will ever need.  Without a husband.  Or a father for their children.  But is that enough?

The existence of ‘big brother’ programs would appear to prove otherwise.  Troubled children are often the products of broken families.  Mothers search for big brothers to mentor these fatherless sons.  To be role models.  To show an interest in these children’s lives.  To care.  When no such role models are available, some of these troubled children turn to other sources of acceptance and guidance.  Like gangs.

AFDC has compounded this problem by providing the environment that fosters fatherless children.  And another government program compounds that problem.  Public housing.

POOR HOUSING CONDITIONS hurt families.  They especially hurt broken families.  Without a working husband, these families are destined to live in the cheapest housing available.  These are often in the worst of neighborhoods.  This is an unfair advantage to the children raised in those families.  For it wasn’t their fault they were born into those conditions.  So, to solve that problem, government would build good public housing for these poorest of the poor to move into.  Problem solved.

Well, not exactly.  Public housing concentrates these broken families together.  Usually in large apartment buildings.  This, then, concentrates large numbers of troubled children together.  So, instead of having these children dispersed in a community, public housing gathers them together.  Where bad behavior reinforces bad behavior.  It becomes the rule, not the exception.  Making a mother’s job that much more difficult.  And because these children live together, they also go to school together.  And this extends the bad behavior problem to the school.  Is it any wonder that public housing (i.e., the projects) have the worst living conditions?  And some of the highest gang activity? 

Government didn’t plan it this way.  It’s just the unintended consequences of their actions.  And those consequences are devastating.  To the poor in general.  To the black family in particular.  AFDC and public housing enabled irresponsible/bad behavior.  That behavior destroyed families.  As well as a generation or two.  But it wasn’t all bad.  For the politicians.  It made a very large constituency dependent on government.

THERE ARE SO many more examples.  But the story is almost always the same.  Dependency and a lack of self-esteem will beat down a person’s will.  Like an addict, it will make the dependent accept poorer and poorer living standards in exchange for their fix of dependency.  Eventually, the dependency will reach the point where they will not know how to provide for themselves.  The dependency will become permanent.  As will the lack of self-esteem.  Conscious or not of their actions, Big Government benefits from the wretched state they give these constituencies.  With no choice but continued dependence, they vote for the party that promises to give the most.  Which is typically the Democrat Party.

But how can you fault these politicians?  They acted with the best of intentions.  And they can fix these new problems.  They’ll gather the brightest minds.  They’ll study these problems.  And they will produce the best programs to solve these problems.  All it will take is more government spending.  And how can you refuse?  When people are hungry.  Or homeless.  Or have children that they can’t care for.  How can anyone not want to help the children?  How can anyone not have compassion?

Well, compassion is one thing.  When the innocent suffer.  But when government manufactures that suffering, it’s a different story.  Planned or not the result is the same whenever government tries to fix things.  The cost is high.  The solution is typically worse than the original problem.  And the poorest of the poor are pawns.  To be used by Big Government in the name of compassion. 

Of course, if Big Government were successful in fixing these problems, they would fix themselves right out of existence.  So as long as they want to run Big Government programs, they’ll need a stock of wretched, suffering masses that need their help.  And, of course, lots of crises.

www.PITHOCRATES.com

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