Rand Paul says Milton Friedman would oppose the Fed’s Bond Buying Program

Posted by PITHOCRATES - August 17th, 2013

Week in Review

What’s the difference between hard money (gold, silver, etc.) and paper money?  You can’t print hard money.  Which is why big-spending governments hate hard money.  And love paper money.  They use lofty economic explanations like having the money supply grow at a rate to support an expanding economy.  But the real reason they love paper money is because there is no limit on what they can spend.

This is why some people would prefer bringing back the gold standard.  To make the government as responsible as the rest of us.  Governments and their liberal friends hate this kind of talk.  And try to dismiss it with all-knowing condescension.  Because they sound so learned in their defense of their monetary policies despite a long record of failure they get to keep trying the same failed policies of the past.

Now it’s Rand Paul talking about the gold standard.  Invoking the name of Milton Friedman.  A monetarist.  And receiving the expected criticism (see Rand Paul is dead wrong about Milton Friedman by James Pethokoukis posted 8/13/2013 on the guardian).

Friedman understood the power of monetary policy, for both good and ill. He would almost certainly have been aghast that the Fed blew it again in 2008 by its tight money policies that possibly turned a modest downturn into the Great Recession. And he almost certainly would have been appalled at Republicans pushing for tight money – or, heaven help us, a return to the gold standard – with the economy barely growing and inflation low. It is certainly inconvenient for Paul that Friedman – a libertarian, Nobel-laureate economist – would have little use for the senator’s supposedly Hayekian take on the Fed or monetary policy.

Although the Bernanke Fed has imperfectly executed its QE programs, they are a big reason why the US is growing and adding jobs – despite President’s Obama’s regulatory onslaught and tax hikes – and the EU (and the inflation hawk ECB) is back in recession. Paul is wrong on Friedman and wrong on the Fed. It’s not even close.

One of Friedman’s criticisms of the gold standard is that to maintain the international price of gold—and price stability—governments would have to give up control of their domestic policies.  As a gold standard would prevent them from expanding the money supply at will.  So they couldn’t print money and devalue their currency to increase government spending.  To give themselves an unfair trade advantage.  And to monetize their debt from past irresponsible government spending.  But governments being governments they will do these things even with a gold standard.  As Richard Nixon and the US government did in the 1970s.  Rapidly devaluing the dollar.  Causing a great outflow of gold from the US as our trading partners preferred to hold onto gold instead of devalued US dollars.

The idea of monetarism was to have something similar like a gold standard while having the ability to expand the money supply to keep up with the growth in GDP.  And this would work if responsible people were in charge.  Who would resist the urge to print money.  Like Ronald Reagan.  Under the advice from none other than Milton Friedman.  Who served on the President Reagan’s Economic Policy Advisory Board.  Reagan shared Friedman’s economic views.  Believed in a limited government that left the free market alone.  So Reagan cut taxes, reduced government spending (other than defense) and deregulated an overregulated free market wherever he could.  All things Friedman endorsed.

It is unlikely that Friedman would endorse any quantitative easing.  Because a lack of credit is not causing our economic woes.  It’s a complicated tax code.  High tax rates.  And way too much governmental regulation and interference into the free market.  Especially Obamacare.  That has frozen all new hiring.  And pushed full-time workers into part-time positions.  Or out of a job entirely.  More money in the economy is not going to fix this anti-business climate of the Obama administration.  In fact, the only people making any money now are rich people.  Who are using all that new money to make more money in the stock market.  And when the government shuts off the quantitative easing tap those rich people are going to bail out of the stock market.  To lock in their profits.  Causing the stock market to crash.  And putting an end to the phony illusion of an economic recovery.  And the worst economic recovery since that following the Great Depression will get worse.

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Wall Street Cheers a Dismal Jobs Report

Posted by PITHOCRATES - May 5th, 2013

Week in Review

The markets reacted positively to the new jobs report.  The unemployment rate changed little.  But what really got them excited was that the economy created 165,000 new jobs.  More than last month.  But not really good.  But you wouldn’t know that from reading the report (see Employment Situation Summary posted 5/3/2013 on Bureau of Labor Statistics).

The unemployment rate, at 7.5 percent, changed little in April but has declined by 0.4 percentage point since January. The number of unemployed persons, at 11.7 million, was also little changed over the month; however, unemployment has decreased by 673,000 since January. (See table A-1.)…

The civilian labor force participation rate was 63.3 percent in April, unchanged over the month but down from 63.6 percent in January. The employment-population ratio, 58.6 percent, was about unchanged over the month and has shown little movement, on net, over the past year.(See table A-1.)

When you read this it sounds good.  But it’s not.  The labor force participation rate holding at 63.3% is horrible.  It wasn’t this bad since the Seventies.  That’s a lot of people who have just disappeared from the labor force.  Who just gave up trying to find a job.  Because they just aren’t out there.  And because they’ve disappeared the government doesn’t count them anymore.  Which is the only reason why the unemployment rate has fallen during the Obama presidency.

When President Obama entered office the labor force participation rate was at 65.8%.  Which means it has fallen 3.8% in little over four years.  This is a huge fall.  The steepest decline ever.  And the fact that it is holding at 63.3% means there are a lot of people out of work that have to reenter the workforce.  Also, the current number is the lowest it has been since President Obama entered office.  Which means we haven’t even begun the economic recovery yet.   So these jobs numbers couldn’t be worse.  Yet Wall Street celebrates.  Why?  Probably because they’re suffering from irrational exuberance.

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Keynesians blame Austerity not Anti-Business Policies for Poor Economic Growth

Posted by PITHOCRATES - March 24th, 2013

Week in Review

Keynesian economics puts the government into the economy.  This is why politicians love Keynesian economics.  It sanctions government spending.  And government investments to help stimulate economic activity.  No matter how bad the investment is.  For Keynesians have argued that paying people to dig a ditch and to fill it back in with the dirt they just removed will have a positive effect on the economy.  Because these ditch-diggers will spend their earnings in the private sector economy.  Thus stimulating economic activity.  So pulling money out of the economy to pay people to dig worthless ditches has only a positive effect on the economy.

But it doesn’t.  For they don’t see the money in the private sector that people can no longer spend because it was taxed away from them to pay people to dig worthless ditches.  So at best it’s a wash.  But it is never ‘at best’.  Because before people spend their ditch-digging earnings it passes through many hands and many government departments.  All of which take a little off the top to cover their overhead costs.  So government spending is always less than what the private sector would have spent.  But Keynesians conveniently ignore this fact.  Because they like the validation they receive from the government.  And they know they will continue to receive that as long as they tell the government what they want to hear.  The government should spend more money (see WBI: More on the Chicken-and-Egg Deficit-and-Jobs Issue by Michael Tomasky posted 3/22/2013 on The Daily Beast).

Our first WBI [Wonky But Important] is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen–my very own Mongtomery County Md. representative, I am happy to say–finding that half of this year’s expected budget deficit of around $800 billion–half!–can be laid at the door of the struggling economy.

In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures–there’s no need for stimulus spending or lots of unemployment benefits during a humming economy)…

CBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law. That tightening includes the reduction in federal spending resulting from the sequestration that went into effect on March 1; the expiration of the payroll tax cut that was in place in 2011 and 2012; and the increase in tax rates on income above certain thresholds starting in 2013.

Can’t get much clearer than that. Austerity. Increases. The. Deficit. Asuterity. Increases. The. Deficit.

This relates to and supports the post I wrote Tuesday about that poll showing a horrifying percentage of Americans thinking balanced budgets lead to jobs. No. It’s the other way around. Now you have the CBO saying it, not just me. The Democrats, as van Hollen made clear at this breakfast I attended at Third Way, are banking on people to grasp this. I hope so.

It is amazing how Keynesians can filter through facts and figures and come to conclusions that always support their position.  Everything is always better when the government spends more money.  And nothing bad happens when government spends more money.  In fact only bad things happen when governments spend less money.  And they still believe this despite the European sovereign debt crisis.  Caused by governments spending too much money.

No Keynesian ever supported this position that prosperous economic times caused by government spending money during the Eighties would reduce the deficit.  That defense spending was nothing but bad.  Giving the government dangerous levels of debt.  But that was then.  Now that the Democrats are spending far greater sums than Ronald Reagan did and are running greater deficits than Reagan ever did deficits are now nothing to worry about.  Funny how that changed.

If today’s deficit spending is good than Reagan’s deficit spending was good.  If Reagan’s deficit spending was bad than today’s deficit spending is bad.  You can’t have it both ways.

If we can grow ourselves out of these deficits with expanding economic activity the question is how do we increase economic activity?  We need to let businesses do what they do without hindering them.  And how do we hinder business?  By increasing the cost of business.  And lowering the rate of return on investment.  Higher regulatory costs increase the cost of business.  Higher taxes lower rates of return on investment capital.  They pass these higher costs on to consumers via higher prices.  Which consumes more of their disposable income.  Reducing the amount of stuff they can buy.  Thus lowering business revenues.  All of which reduces economic activity.  It doesn’t increase it.

The reason why we are in the worse economic recovery since that following the Great Depression is the president’s economic policies.  More government spending won’t change that.  It’s not austerity that is increasing the deficit.  It’s the foolhardy policies of Keynesians who believe that government spending generates real economic activity.  It doesn’t.  It didn’t pull us out of the Great Depression.  It didn’t pull us out of the stagflation of the Seventies.  And it didn’t pull us out of the Great Recession.  But reversing anti-business policies did pull us out of the Great Depression.  It pulled us out of the stagflation of the Seventies.  And it would pull us out of the Great Recession.  If we would only try them.

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U-3, U-6 and the Labor Force Participation Rate 2004 through February 2013

Posted by PITHOCRATES - March 12th, 2013

History 101

During Obama’s First Term the U-3 and U-6 Unemployment Rates moved Further Apart

The latest employment data showed the official unemployment rate fell in February to 7.7% from 7.9% in January.  The Labor Department also reported the addition of 227,000 new jobs.  Proof, the economists say, that the economy is improving.  But when you dig deeper into the data you find otherwise.  For the economy may have added 227,000 new jobs but 296,000 jobs left the labor market.  And they didn’t count these people as unemployed.  So there was a net loss of jobs.  Despite the fall in the official unemployment rate.

We keep saying official unemployment rate for a reason.  For the government has six different unemployment rates.  The ‘official’ rate is what they call U-3.  Which doesn’t count a lot of people who can’t find full time work.  A more inclusive rate is the U-6 number (see Labor Force Participation Rate for an explanation of the U-3, U-6 and the labor force participation rate).  The U-6 rate counts pretty much everyone who can’t find a full-time job.  Including discouraged workers, the marginally attached and those working part-time because they can’t find a full-time job.  Before the Great Recession (during the George W. Bush administration) the U-3 and U-6 unemployment rates tracked closer together than they do now (during the Barack Obama administration).  As we can see in the following chart (see Data Retrieval: Labor Force Statistics (CPS) for data source).

Unemployment Rates U3 U6 2004-2013

During Bush’s second term U-3 was between 4% & 6%.  And U-6 was between 8% and 10%.  But during Obama’s first term U-3 shot above Bush’s U-6.  And Obama’s U-6 soared to twice Bush’s U-6.  Most of this was due to the subprime mortgage crisis.  And the resulting Great Recession.  But that doesn’t explain why the graphs moved further apart.  And why did they do this?  Was it because they were overstating U-6?  Were they understating U-3?  Or is there some other explanation?  It has to be something.  And it’s likely not good.

The Official Unemployment Rate has been Understated by at least 2.9 Points during the Obama Presidency

During President Bush’s second term there was on average a 4-point spread between U-3 and U-6.  During President Obama’s first term this point spread increased to 6.9.  A difference of 2.9 points.  Which if we subtract to U-6 or add to U-3 the graphs will move closer together.  So they track each other at the same distance apart from each other they did during Bush’s second term.  When you look at the labor participation factor and the lost jobs one can only assume we’re understating U-3.  And not overstating U-6.  So if we add 2.9 points to U-3 after December 2008 the graphs look like this.

Unemployment Rates U3 Adjusted U6 2004-2013

We can ignore the sharp rise in U-3 adjusted.  As the loss 2.9 points of the U-3 unemployment rate would not have been instantaneous once January 2009 hit.  But once we get to the new highs the graphs maintain the same distance from each other as they did during Bush’s second term.  Which means the official unemployment rate didn’t fall from approximately 10% to 8% during Obama’s first term.  It actually fell from 12.9% to 10.6%.  And that the current official unemployment rate is not 7.7%.  But 10.6%.  Which is, of course, 2.9 points higher.

So the official unemployment rate is higher than they report.  With the official unemployment being understated by at least 2.9 points.  And the economy is not improving like they say.  Anyone reading the jobs data can see this.  But the Obama administration and their friends in the media, as well as mainstream economists, all say everything is getting better.  Or they say it is just the new normal.  To provide some cover for their failed Keynesian economic policies.  Which failed to pull the economy out of the Great Depression.  They failed to pull the economy out of the stagflation of the Seventies.  And they are now failing to pull the economy out of the Great Recession.

The ‘New Normal’ under President Obama has been a Steadily Declining Labor Force Participation Rate

Keynesian economics calls for the government to have control of interest rates.  They keep interest rates artificially low.  To expand the money supply.  They also increase taxes.  And borrow money.  Just so they can spend.  A lot.  For Keynesian theory says when the economy falls into recession the government should spend.  Even if it requires running a deficit.  To generate economic activity.  But expanding the money supply only causes inflation.  And higher prices.  Which dampens economic activity.  Which is why we have never spent our way out of a recession.  And never will.

President Obama is a Keynesian.  His Keynesian policies have hindered, not helped, the economic recovery.  And his excessive regulations have further hindered the economic recovery.  He shut down the domestic oil industry on public lands.  His war on coal has laid off swaths of coal miners and others in the coal industry. His rejection of the Keystone XL Pipeline has prevented the creation of thousands of new jobs.  His environmental regulations have increased the cost of doing business.  As has Obamacare.  Which has put a freeze on new hiring.  And pushed lot of full time people to part time.  Nothing this administration has done has helped the economy.  While most everything it has done has hurt the economy.  And we can see that when we look at the labor force participation rate.  When we graph it along with U-3 (the official rate not the adjusted rate) and U-6 (see Employment Situation Archived News Releases for data source).

Unemployment Rates U3 U6 Labor Participation Rate 2004-2013

And here we see what caused U-3 and U-6 to move further apart.  U-3 is understated because people are continually leaving the labor force.  Unable to find a job.  This is why we have a net loss of jobs even when they report a gain of 227,000 new jobs in February.  Or a gain in any other month.  This is why the economy hasn’t improved under President Obama.  Despite what the official unemployment rate is.  And despite all of the new jobs they’ve created.  Because the ‘new normal’ under President Obama has been a steadily declining labor force participation rate.  Meaning he is a job destroyer.  And the only reason why the unemployment rate falls is because these people disappear from the labor force and they just don’t count them anymore.  Sort of how the European employment picture improved after the plague.  So many people left the labor force by dying that it created a labor shortage.  And low unemployment.  The problem here is that these people didn’t die.  They’re still out there waiting to rejoin the labor force.  To hire into jobs that are just not there.  And it’s going to take a long, long time for the economy to absorb these people.  Meaning the economy won’t be getting better anytime soon.  Because it’s a lot worse than they’re reporting.

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President Obama has given us the Worst Economic Recovery since the Great Depression

Posted by PITHOCRATES - March 10th, 2013

Week in Review

The president’s economic policies have done nothing to improve the economy.  The labor participation rate continues to fall.  As more people give up finding a job.  Because there are none to be found.  And it makes one wonder.  Why?  Why are things so bad in the economy?  The last 4 years have been the worst economic recovery since the Great Depression.  And what has been the common denominator these past 4 years?  President Obama.  And his anti-business policies (see The Cruel Things President Obama Is Doing To The Labor Market by John Goodman posted 3/7/2013 on Forbes).

President Obama’s proposal to increase the minimum wage and the health insurance employer mandate will combine to destroy job opportunities for young, unskilled workers in cities and towns across the country.

With respect to the new health law, the Congressional Budget Office estimates the cost of the minimum benefit package that everyone will be required to have will be $4,750 for individuals and $12,250 for families. That translates into a minimum health benefit of $2.28 an hour for full time single workers and about $3 an hour for someone working 30 hour a week. For family coverage, the cost is $5.89 an hour for a 40-hour-a week employee and $7.85 an hour for a 30-hour-a-week employee.

These are not small changes. They can double the cost of labor in some cases…

Employers have four ways to reduce this burden: (1) the mandate doesn’t apply to firms with fewer than 50 workers, (2) the mandate doesn’t apply to employees who work fewer than 30 hours, (3) the employer doesn’t have to offer or subsidize family coverage and (4) rather than provide health insurance, the employer can pay a $2,000 per (full-time) worker fine.

There are going to be lots of firms that fail to grow beyond 49 employees. But be warned: If an individual owns, say, two or three fast food franchises, the IRS has signaled that it will treat their combined operations as a single business. Also, in calculating the number of full time workers, the IRS is going to count “full-time equivalents.” That means that two workers, each working 15 hours a week, will count as the equivalent of one full-time (30 hour) worker.

As noted, employers are already reacting to ObamaCare. In fact, there was a huge shift to part-time employment in the fast food industry beginning in January. The reason: ObamaCare will employ a 12 month “look back.” That is, in deciding whether a worker is full-time or part-time next January (when the mandate becomes effective) the government will look at the average weekly hours worked in the previous year…

Bottom line: employment opportunities are being curtailed by the imposition of ObamaCare. Things will be even worse if a 24 percent increase in the cash minimum wage is heaped on top of it.

Economists have traditionally believed that an increase in the minimum wage (as well as mandated benefits) causes unemployment. However, a study by David Card and Alan Krueger found very little employment effect in the fast food industry in Pennsylvania and New Jersey.

You wonder if economists ever talk to employers when they do these studies…

If government imposes higher labor costs on this industry, the restaurants will try to make it up by raising their prices. However, if the customers won’t pay the higher price — as may be the case in poorer neighborhoods — the restaurant will have to close.

Moreover, in order for prices to rise in one market there must be a corresponding decline in other markets. For the economy as a whole, employers can’t raise prices on the average with no change in the money supply.

Anyone with a rudimentary understanding of economics knows these policies don’t help business.  They don’t create jobs.  And if they aren’t helping to create jobs is it any wonder we’re in the worst economic recovery since the Great Depression?  Of course not.  And we’re back at that question.  Why?

Well, we have two possible answers.  Because the Obama administration is just incompetent and doesn’t understand economics.  Or they know exactly what they’re doing.  And if they do there would be but one explanation for their anti-business policies.  They are purposely trying to make businesses drop their health insurance as paying the fine is less costly.  Leaving the door open for the federal government to step in.  And be the insurer of last resort.  A backdoor way to national health care.  The Holy Grail of the Left.

So is the Obama administration incompetent?  Or devious?  It is one or the other.  And neither choice bodes well for the country.

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The Poor and Middle Class see their Incomes Still Falling in the Obama Recovery

Posted by PITHOCRATES - March 3rd, 2013

Week in Review

If you listen to the president, his press secretary, the mainstream media and just about anyone on the political left the economy is doing super.  Sure, we can make improvements.  But over all everything is just swell.  If you’re rich, that is. People with money are doing very well in the Obama recovery.  Those who aren’t as rich aren’t.  No.  All they see is high unemployment, rising prices and falling incomes (see Americans see biggest monthly income drop in 20 years by Annalyn Kurtz posted 3/1/2013 on CNNMoney).

Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That’s the most dramatic decline since January 1993, according to the Commerce Department.

It’s something of a combination of one-time events, though.

Monthly income was unusually high in December because companies paid out early dividends to avoid upcoming tax hikes.

Further proof that people change their behavior when the government increases taxes.  The surge in December that made January look so bad was due to one-time distributions of profits to avoid higher taxes.  So December wasn’t that good, either.  Just an aberration as people tried to avoid the higher taxes coming their way.

The payroll tax cut’s expiration also played a role in January’s drop, because most workers have to pay 2 percentage points more in taxes this year…

Meanwhile, economists are closely watching consumer spending, which accounts for about two-thirds of the U.S. economy…

Economists think that rising gas prices in February could cut into consumer spending temporarily. Gas prices rose 10% in February, according to AAA, but are expected to fall in coming weeks…

The Social Security tax break helped consumers at the 2012 election.  Allowing them more disposable income in the year before the election.  And helping them feel things weren’t that bad.  Of course this Social Security tax holiday drew down the Social Security surplus to a dangerous low.  Something they will have to make up for with even higher taxes than the 2% temporary cut used to help the president’s reelection.

Regulatory costs, environmental policies that have shut down oil drilling on public lands and inflation (the incessant quantitative easing of the Fed putting more and more dollars into circulation) are keeping gas prices high.  For you can hide inflation in some consumer goods by reducing package sizes but you can’t do that with gasoline.  Because you sell gas by the gallon.  So the full cost of the Fed’s inflationary policies hit gas prices hard.  And, of course, high gas prices increases prices for everything else that uses fuel.  A large factor in the rise in our grocery bills.  Taking a bigger bite out of family budgets.  Leaving little for other consumer spending.

All of that said, consumers are benefiting from a housing recovery and rising stock prices…

They’re not able to save much, though. On average, people saved about 2.4% of their disposable income in January, down from 6.4% in December. That marks the smallest saving rate since November 2007.

Rich people are benefitting from the housing ‘recovery’ and stock prices.  Those who have a lot of money left over after meeting the living expenses.  Who can save a lot of money.  And invest it into housing.  Or stocks.  In fact, that’s why the stock market does well on news of the Fed continuing their quantitative easing.  For the rich are taking advantage of that cheap money to borrow it.  So they can invest it.  Trading on the interest.  Borrowing at low interest rates.  And investing in something that earns a higher rate of return.  People struggling to make their paycheck buy everything it once did as prices rise everywhere aren’t enjoying any benefits from that cheap money.  As they have no money left over to even save up a down payment on a house.  So they can take advantage of those low housing prices.  No.  The poor and middle class are not reaping anything in the current economic ‘recovery’.  Only the rich are.

Under President Obama the rich are getting richer.  And the poor are getting poorer.  Because of his economic policies.  Especially the Keynesian policies.  Keynesians look at personal savings as leaks out of the economy.  For if people aren’t spending money they are wasting money.  Which is the point of low interest rates.  To get people to borrow money to buy things.  Thus stimulating economic activity.  And generating more consumer spending.  But all that quantitative easing has raised prices so much that consumers are left with less and less money to spend.  The poor and middle class aren’t borrowing money to buy new houses.  They’re just trying to get by on what little they have.  Hoping for good economic times to return when their personal incomes rise once again.

Keynesian economics don’t work.  Just as Keynesian stimulus does not stimulate.  If it did we wouldn’t still have fewer jobs in the U.S. economy than when President Obama took office.  And he spent about $8000 billion on a stimulus bill.  The American Recovery and Reinvestment Act of 2009.  Some critics said it failed as an $8000 billion stimulus wasn’t big enough.  Even though the Obama administration declared the summer of 2010 the Recovery Summer.  Proof that the American Recovery and Reinvestment Act of 2009 restored economic prosperity.  Even though it didn’t.  For things still haven’t returned to where they were under George W. Bush.  Despite 4 years of Keynesian policies.  That haven’t raised personal incomes.  The true measure of any economic recovery.  And when personal incomes are the lowest they’ve been in 20 years, there hasn’t been any economic recovery.  Despite $800 billion in stimulus.  And 4 years of President Obama’s Keynesian economic policies.

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Four Trillion Yuan of Keynesian Stimulus Spending provided an Economic Recovery in China that lasted about 2 Years

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

Before the early 20th century we looked at economics differently.  We looked at it correctly.  We understand the importance of savings to capital formation.  And we understood the stages of production.  How economic recovery didn’t happen until it reached the higher stages.  Those stages the farthest away from retail sales.  The raw material industry.  The manufacturing industry.  Who make the components the assembly plants use to build consumer goods.  When these higher stages businesses recover then there is an economic recovery.  Because it takes time for those higher stages goods to make it down to the retail level.  So they don’t invest until they know there is a real economic recovery.

This is why Keynesian stimulus spending doesn’t work.  When central banks increase the monetary base it can create a surge of economic activity.  But it also depreciates the currency.  And raises prices.  Higher prices lead to an economic slowdown.  It’s just a matter of time.  Which is why the higher stages of production don’t respond to economic stimulus because by the time their new goods reach the retail level the higher prices will already be slowing down economic activity.  Meaning there will be no demand for their expanded production.  So they will have to lay off employees and shutter facilities.  Resulting in another recession.  Or just a resumption of the previous one.  Only worse.  Because the depreciated currency leaves consumers with less purchasing power.  So they can’t buy as much as they once did.  Creating further excess capacity.  Further layoffs.  And a worsening of the recession they tried to end with that Keynesian stimulus spending.

The Chinese are all Keynesians when it comes to economic policy.  So when their economic activity slowed they went to the go-to Keynesian solution.  Expand the monetary base (see China Slowdown Seen Longer Than 2009 by Government Researcher by Bloomberg News posted 9/20/2012 on Bloomberg).

With the 2008 crisis, China enacted a 4 trillion yuan ($586 billion at the time) stimulus and opened up bank lending to revive expansion. Year-over-year growth, after decelerating for seven quarters, bottomed at 6.2 percent in the first quarter of 2009 and accelerated to 11.9 percent a year later…

Chinese Premier Wen Jiabao, who pledged last week to employ monetary and fiscal policies to spur growth, has accelerated infrastructure-project approvals while refraining from introducing a stimulus package on the scale of the one during the financial crisis.

There was a burst of economic activity following the stimulus.  Something all Keynesians in the United States point to.  Saying the reason why the American stimulus didn’t work was because it wasn’t big enough.  Like it was in China.  (They say this even though the Chinese spent less than the Americans.)  Where it worked so well that they need to spur growth with new monetary and fiscal policies this year.  After the new economic growth that began about 2 years ago fizzled out.  Which was far better than the American stimulus that provided no economic growth.  Even though they spent more.  Proving that Keynesian stimulus policies don’t end recessions.  They just offer false hope.

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As the Brazilian Economy cools Rousseff looks to Tax Cuts and Privatization to Restore Economic Momentum

Posted by PITHOCRATES - July 29th, 2012

Week in Review

The president of Brazil is Dilma Rousseff.  She belongs to the Workers’ Party.  A party that enjoys strong support from the labor unions.  Because it leans towards socialism.  At least in state-ownership of some state assets.  In particular those that employ a lot of people.  But the great Brazilian economic growth is sputtering.  Like an engine no longer firing on all cylinders.  Because of her party affiliation one would expect Rousseff to adopt Keynesian policies.  To stimulate their economy with some government spending.  But no.  She’s talking about doing something completely different (see UPDATE 1-Rousseff ‘very worried’ about Brazil economy by Alonso Soto and Brian Winter posted 7/23/2012 on Reuters).

President Dilma Rousseff is pessimistic about Brazil’s chances for a meaningful economic recovery this year and is pushing ahead with new measures aimed at lowering taxes and increasing investment, hoping they might give the economy a lift by 2013, government officials told Reuters.

The measures include a consolidation of some overlapping federal taxes; a new round of concessions that would allow the private sector to manage more of the country’s congested airports and seaports; and a more aggressive effort to reduce electricity costs for manufacturers and others, the officials said on condition of anonymity because they were discussing private policy discussions…

Rousseff, a trained economist, has reacted with several targeted tax cuts and more than half a dozen packages aimed at stimulating consumption and investment. However, many business leaders and foreign investors have complained that her policies have been too ad hoc and narrow in scope, citing forecasts that now see growth as low as 1.5 percent this year…

Some business leaders have called for Rousseff to take even more dramatic measures, such as an omnibus reform package that could substantially reduce or simplify Brazil’s tax load. Rousseff has opted instead to pursue more targeted reforms to help struggling sectors on a case-by-case basis, believing that Congress would block a more ambitious, organized effort.

So Rousseff would have been a more aggressive tax cutter if it weren’t for Congress.  So one can hardly blame her for her ad hoc ways.  You have to do the best you can with the cards you’re dealt.  Especially when your party tends to favor state ownership of industry and higher taxation to pay for the labor in those state-owned industries.

Lowering taxes and electricity costs?  Privatization?  Other than that part about consumption one would think that Rousseff’s economic training was of the Austrian school variety rather than the Keynesian brand.  Whatever her economic roots with policies like these Brazil should rebound well from this momentary interruption in their economic growth.

The move most likely to stir investors, for both practical and symbolic reasons, is the new round of port concessions. Airports and seaports are routinely cited as some of the country’s most crippling bottlenecks, slowing everything from commodities exports to business travel, as public investment failed to keep up with the boom in the economy over the past decade…

The officials declined to say which additional airports Rousseff was considering, but one of the targets could be Rio de Janeiro’s international airport, which needs renovations ahead of the 2014 World Cup and 2016 Olympics. Rio’s governor, Sergio Cabral, described the airport in an interview with Reuters last year as being like “a third-rate bus station…”

The Brazilian economy had been roaring thanks to the private sector.  What wasn’t keeping up with the private sector was the public sector.  While people were doing remarkable things in the private sector the best the government could do was make Rio de Janeiro’s international airport “a third-rate bus station.”  Which just goes to show you that for the best economic activity you have to release the human capital of the people.  When you let these people think.  When you let them create.  When you let them create the things they thought about you get the kind of explosive economic activity that put Brazil in the BRICS emerging economies.  While running ‘third-rate bus stations’ just doesn’t quite do it.

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Hiring Prospects Improving despite no one Hiring Anyone unless they Absolutely have To

Posted by PITHOCRATES - June 17th, 2012

Week in Review

The economy is horrible.  And it has been horrible for the last three and a half years.  Despite the Recovery Summer.  And all the reporting of an economic recovery that has never materialized yet other than in the wishful thinking of government planners and their economic advisors whispering sweet-nothings in their ears.  Telling them more Keynesian economic policies can fix the previous Keynesian economic policies that have failed to do anything but make things worse.  Despite everything they have done the past three and a half years no one is hiring yet (see Around world, companies loath to add jobs: survey by Nick Zieminski posted 6/12/2012 on Reuters).

Hiring prospects have improved slightly in the United States and other major economies but companies are only adding workers when they have to, according to a survey by Manpower Group (MAN.N), the global employment services giant.

Manpower in a quarterly survey describes a vicious circle in which stronger consumer spending is being reined in by weak hiring, and vice versa. Spooked by Europe’s ongoing debt crisis and a slowdown in China, hiring managers in large economies are reluctant to invest in staff until they see a rebound in demand for their goods and services.

“Companies are in tune with their demand and surroundings,” Manpower Chief Executive Jeff Joerres said. “Hiring has been put into only-if-necessary mode. They can spring back, but there were too many times in the last 36 months when they thought it was safe to go in the water and only found out it wasn’t…”

Its poll of 18,000 U.S. hiring managers follows two months of disappointing U.S. jobs growth. The U.S. economy added just 69,000 jobs last month, less than half what was expected, and the unemployment rate ticked back up to 8.2 percent.

Two months of disappointing U.S. job growth?  Try three and a half years.  The official unemployment number (U3) was under 8% for only a short part of President Obama’s first year in office.  It was below 8% when he promised that if we passed his stimulus plan it would never go above 8%.  For the year or so after Congress passed his stimulus plan the official unemployment rate (U3) flirted with 10%.  Which if you’re keeping score is above 8%.  The U6 unemployment rate (which counts the underemployed and those who gave up looking for work) has been north of 16% for about 2 years of his administration.  Again, if you’re keeping score, that’s above 8%.  And closer to Great Depression unemployment.  The U6 rate is still north of 14%.  So, no, it hasn’t been 2 months of disappointing job growth.  It’s been three and a half years of disappointment in the Obama economic recovery.  Or lack thereof.

This is why no one is hiring unless they absolutely have to.  Because no one has any faith in the economy.  And everyone is expecting things to get worse when Obamacare goes into full effect.  At 2,000+ plus pages and a lot of ‘as the secretary directs’ included in that law leaves business owners with nothing but apprehension.  They have no idea how to plan with these kinds of unpredictable variables.  These are just not days to be hiring employees if you’re a business owner. 

This is part of the reason the employment picture is so horrible in America.  The other reason is the anti-business Keynesian economic policies of the Obama administration.  Which lead to high taxes, high spending and high debt.  Which has killed job creation in America.  And throughout the Keynesian world.  Because Keynesian policies do not favor business.  They favor activist, interventionist, tax and spend government.  Who intervene actively in the private sector to raise money via taxes to spend in the public sector.  And yet the government’s economists are always surprised by the poor economic data their Keynesian policies produce.  Which begs the question if they are so blind to the obvious should they really be advising the government?

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Gallop Poll says Big Government is the Threat, not Big Business

Posted by PITHOCRATES - December 24th, 2011

Week in Review

Apparently the people aren’t buying the lie anymore (see Gallup: Under Obama, Growing Percentage See Big Government as ‘Biggest Threat’ by Terence P. Jeffrey posted 12/18/2011 on cnsnews.com).

While President Barack Obama has focused his rhetoric in recent weeks on depicting a reckless Wall Street and insufficiently taxed “millionaires and billionaires” as threats to the American middle class, a newly released Gallup poll indicates that Americans apparently have been coming to a different conclusion during Obama’s presidency, with fewer people now seeing big business as the “biggest threat” to the country in the future and more seeing big government as the “biggest threat.”

The people see Big Government as the biggest threat.  Because it’s been the Obama policies that have been strangling the economic recovery.  So much so that there is no economic recovery.  Regulatory and tax policy are just so anti-business.  Obamacare being the big one.  Putting a hold on hiring and expansion across the board.  Because businesses just don’t know the full cost of compliance yet.

The Obama administration has made million Americans safe from the oppressive employment policies of businesses, though.  Simply by extending their unemployment.  As nice as that may be to some most of the American people would prefer gainful employment.  They dream of returning to the days when there was gainful employment.  And less government interfering with the economy.  Far less government.

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