Inventory to Sales Ratio and Labor Force Participation Rate (1992-2013)

Posted by PITHOCRATES - November 12th, 2013

History 101

Just-in-Time Delivery lowers Inventory Costs but risks Manufacturing Interruptions

Carrying a large inventory is costly.  And risky.  First of all you have to warehouse it.  In a secured heated (and sometimes cooled) building.  With a fire alarm system.  A fire suppression (i.e., sprinkler) system.  A security alarm system.  You need lighting.  And people.  Safety training.  Safety equipment.  Forklifts.  Loading docks.  Delivery trucks.  Insurances.  Property taxes (real and personal).  Utilities.  Telephone and Internet.  A computer inventory system.  Etc.  It adds up.  And the larger the inventory the larger the cost.

Then there are the risks.  Fire damage.  Theft.  Water damage (say from a fire suppression line that freezes during the winter because some kid broke a window to let freezing air in that froze the water inside the sprinkler line with the expanding ice breaking the pipe and allowing water to flow out of the pipe onto your inventory).  Shrinkage (things that disappear but weren’t sold).  Damaged goods (say a forklift operator accidentally backed into a shelve full of plasma displays).  Shifts in consumer demand (what was once hot may not be hot anymore which is a costly problem when you have a warehouse full of that stuff).  Etc.  And the larger the inventory the greater the risks.

In the latter half of the 20th century a new term entered the business lexicon.  Just-in-time delivery.  Or JIT for short.  Instead of warehousing material needed for manufacturing manufacturers turned to JIT.  And tight schedules.  They bought what they needed as they needed it.  Having it arrive just as it was needed in the manufacturing process.  JIT greatly cut costs.  But it allowed any interruption in those just-in-time deliveries shut down manufacturing.  As there was no inventory to feed manufacturing if a delivery did not arrive just in time.

A Rising Inventory to Sales Ratio means Inventory is Growing Larger or Sales are Falling

There are many financial ratios we use to judge how well a business is performing.  One of them is the inventory to sales ratio.  Which is the inventory on hand divided by the sales that inventory generated.  If this number equals ‘1’ then the inventory on hand for a given period is sold before that period is up.  Which would be very efficient inventory management.  Unless a lot of sales were lost because some things were out of stock because so few of them were in inventory.

Ideally managers would like this number to be ‘1’.  For that would have the lowest cost of carrying inventory.  If you sold one item 4 times a month you could add one to inventory each week to replace the one sold that week.  That would be very efficient.  Unless four people want to buy this item in the same week.  Which means instead of selling 4 of these items you will probably only sell one.  For the other three people may just go to a different store that does have it in stock.  So it is a judgment call.  You have to carry more than you may sell because people don’t come in at evenly spaced intervals to buy things.

We can look at the inventory to sales ratio for the general economy over time to note trends.  A falling ratio is generally good.  For it shows inventories growing as a lesser rate than sales.  Meaning that businesses are getting more sales out of reduced inventory levels.  Which means more profits.  A flat trend could mean that businesses are operating at peak efficiency.  Or they are treading water due to uncertainty in the business climate. Doing the minimum to meet their current demand.  But not growing because there is too much uncertainty in the air.  A rising ratio is not good.  For the only way for that to happen is if inventory is growing larger.  Sales are falling.  Or both.

The Labor Force Participation Rate has been in a Freefall since President Obama took Office

When inventories start rising it is typically because sales are falling.  Businesses are making their usually buys to restock inventory.  Only people aren’t buying as much as they once were.  So with people buying less sales fall and inventories grow.  Rising inventories are often an indicator of a recession.  As unemployment rises there are fewer people going to stores to buy things.  So sales fall.  After a period or two of this when businesses see that falling sales was not just an aberration for one period but a sign of worse economic times to come they cut back their buying.  Draw down their inventories.  And lay off some workers to adjust for the weaker demand.  As they do their suppliers see a fall in their sales and do likewise.  All the way up the stages of production to raw material extraction. 

Retailers typically carry larger inventories than wholesalers or manufacturers.  To try and accommodate their diverse customer base.  So when their sales fall and their inventories rise they are left with bulging inventories that are costly to store in a warehouse.  They may start cutting prices to move this inventory.  Or pray for some government help.  Such as low interest rates to get people to buy things even when it may not be in their best interest (for people tend to get laid off in a recession and having a new car payment while unemployed takes a lot of joy out of having a new car).  Or a government stimulus program.  Make-work for the unemployed.  Or even cash benefits the unemployed can spend.  Which will provide a surge in economic activity at the consumer level as retailers and wholesalers unload backed up inventory.  But it rarely creates any new jobs.  Because government stimulus eventually runs out.  And once it does the people will leave the stores again.  So retailers may benefit and to a certain degree wholesalers as they can clear out their inventories.  But manufacturers and raw material extractors adjust to the new reality.  As retail sales fall retailers and wholesalers will need less inventory.  Which means manufacturers and raw material extractors ramp down to adjust to the lower demand.  Cutting their costs so their reduced revenue can cover them.  Which means laying off workers.  We can see this when we look at inventory to sales ratio and the labor force participation rate over time.

(There appears to be a problem with the latest version of this blogging software that is preventing the insertion of this chart into this post.  Please click on this link to see the chart.)

(Sources: Inventories/Sales Ratio, Archived News Releases

Cheap money gave us irrational exuberance and the dot-com bubble in the Nineties.  And a recession in the early 2000s.   Note that the trend during the Nineties was a falling inventory to sales ratio as advanced computer inventory systems tied in over the Internet took inventory management to new heights.  But as the dot-com irrational exuberance came to a head we had a huge dot-com economy that had yet to start selling anything.  As their start-up capital ran out the dot-coms began to go belly-up.  And all those programmers who flooded our colleges in the Nineties to get their computer degrees lost their high paying jobs.  Stock prices fell out of the sky as companies went bankrupt.  Resulting in a bad recession.  The fall in spending can be seen in the uptick in the inventory to sales ratio.  This fall in spending (and rise in inventories) led to a lot of people losing their jobs.  As we can see in the falling labor force participation rate.  The ensuing recession was compounded by the terrorist attacks on 9/11.

Things eventually stabilized but there was more irrational exuberance in the air.  Thanks to a housing policy that put people into houses they couldn’t afford with subprime mortgages.  Which lenders did under threat from the Clinton administration (see Bill Clinton created the Subprime Mortgage Crisis with his Policy Statement on Discrimination in Lending posted 11/6/2011 on Pithocrates).  Note the huge spike in the inventory to sales ratio.  And the free-fall of the labor force participation rate.  Which hasn’t stopped falling since President Obama took office.  Even though the inventory to sales ratio returned to pre-Great Recession levels.  But there is so much uncertainty in the economic outlook that no one is hiring.  They’re just shedding jobs.  Making the Obama economic recovery the worst since that following the Great Depression.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , ,

Obamacare freezes Hiring and robs the Healthy and Young to pay for the Old and Sick

Posted by PITHOCRATES - October 20th, 2013

Week in Review

President Obama has scolded Republicans over and over during the recent government shutdown.  Saying their actions have hurt the American economy.  Just at a time when it was gaining traction.  Even business leaders appear to agree with the president (see Obamacare Delaying Hiring, Debt Ceiling Debate And Shutdown Hurt The Economy: Beige Book by Agustino Fontevecchia posted 10/16/2013 on Forbes).

The Fed released its beige book for late September to early October on Wednesday, where business leaders blamed the government shutdown and debt ceiling debate for “increased uncertainty…”

Business leaders hate uncertainty.  Because you can’t plan your cash flow or your capital budget when you are uncertain about the future.  So the president may be right there.  But you know what else business leaders hate?  Obamacare.

…while employers remained reluctant to expand payrolls because of Obamacare.

Talk about your uncertainty.  Of course, President Obama doesn’t care about what this uncertainty does to the economy.  Or what Obamacare does to a part of his liberal base.  The youth vote (see Premiums for young healthy people will jump in 45 states under Obamacare by JOEL GEHRKE posted 10/19/2013 on the Washington Examiner).

Young people in 45 states will see their health insurance premiums increase under Obamacare because the law relies on the money they pay into the system to offset the cost of caring for older enrollees, according to a new study.

Virginia leads the pack, as individuals aged 27 and under will see their health insurance premiums jump by 252.5 percent — $416.55 — according to the Heritage Foundation’s Center for Data Analysis.

Virginians under the age of 50 will see their premiums jump by an even greater percentage, rising from $228 to $991.03.

During the hippy movement the mantra was to never trust anyone over thirty.  Now those hippies are in the government.  Who are the architects of Obamacare.  And they’re taking money from those under 30 to pay for the health care of those over thirty.  Including those old hippies who are now racking up huge medical bills.  And don’t want to pay for their own costly health care.

Guess the hippies were right.  You should never trust anyone over 30.  Especially if they’re liberal Democrats.

www.PITHOCRATES.com

Share

Tags: , , , , , , , ,

Men tend to get Paid More than Women because of the High Cost of Maternity Leave

Posted by PITHOCRATES - August 31st, 2013

Week in Review

There was a movie in 1985 called Head Office.  It lampooned corporate America.  In it there was this one character who was dying from heart disease or something.  But he refused to take time off from work.  Because if he did someone else would get his job.  He’d rather take a chance on dying than risk losing his job.  Because the corporate world was that cutthroat.  There was always someone waiting in the wings to take your job.  Which is why you never wanted to miss work.  Because if someone else did your job for you when you were away and they did it better than you they might just keep your job.  Leaving you to start your corporate career all over again.  And often with less pay and fewer benefits.

That’s the way it used to be.  Today, it’s a bit different.  Especially if you’re a woman (see As a boss, maternity leave is a nightmare for employers by Josephine Fairley posted 8/28/2013 on The Telegraph).

There’s no denying, of course, that for companies – especially really small companies – maternity leave presents challenges. Suddenly, a key team member isn’t there. And even more challengingly, there’s no way to know if she’s coming back – which makes it hard to plan for the future…

Right now, it isn’t legal to ask a pregnant woman whether she’s even thinking of coming back to work. There’s no imperative for her proactively to tell you proactively – never mind before the birth, but right up to the time that the 52 weeks of maternity leave are up. And my observation is that’s partly what makes it so hard to plan, and accommodate, a woman who’s on maternity leave…

I know several women who’ve returned to work after a few months, never mind a year of maternity leave, feeling like they’d landed on Mars because so much had changed while they were away.

52 weeks of maternity leave?  And they don’t have to say whether they’re coming back to work?  The boss can come in one day and find a key employee will leave for an extended absence in 6 months time?  And not know if she will ever return to work?

So they have to hire someone temporarily.  Who they will have to let go if she comes back from maternity leave.  Even if this temporary person turns out to be better in that position.  So a person that they hired and trained so well that they are better than the person they filled in for must lose his or her job.  Someone who may have taken that position because they didn’t expect that person to return from maternity leave.  And because it was the best job available at the time they took that chance.  Only to find the year they invested there was a year out of their life that they could have spent somewhere else.  Building a career where their hard work was rewarded.  Then spend time and resources training the woman returning from maternity leave.  So she can understand all the changes that happened in her absence.

This is why men tend to get paid more when they compare salaries.  First of all, with a lot of women taking maternity leave it does bring down the women’s average income when they take a year or two of income earning years out of their career.  And secondly, who do you think an employer will want to hire?  Someone that they have to accommodate for up to a year in maternity leave?  Or someone that isn’t going to walk in and say “I’m going to have a baby in 6 months”?  If they are working on a 2 year project they don’t want to worry about a key team member leaving in the middle of it.  It may be unfair.  But men can’t get pregnant.  They can do a lot of stupid things to ruin a big project just as women can.  But women have that one other variable.  That a business owner can’t have a contingency for.  What are they going to do?  Have two people doing the job of one in case one of them goes on maternity leave?  What if it’s two women and they go on maternity leave at the same time?  Do you have to make sure that one of the two people doing the job of one person is a man?  So he will always be available if the woman goes on maternity leave?  Of course, you know where that will take you.  Why not just hire a man and have one person do the job of one person?  And remove the need for any contingency in the first place?

Business owners hate uncertainty.  Pregnancy creates uncertainty.  This isn’t a man versus a woman issue.  A battle of the sexes.  For women own businesses, too.  And hate uncertainty just as any other business owner.  Some may make a stand for women in the workplace.  Hire women into key positions then deal with their maternity leave.  But they, too, would probably prefer hiring a man in some key positions.  So they can just worry about the usual things.  Like losing a key employee who leaves for a better paying job.  Of course if they do they at least can immediately start interviewing a replacement.  Without waiting 52 weeks.

www.PITHOCRATES.com

Share

Tags: , , , , , , ,

Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - November 6th, 2012

History 101

(Originally published March 20, 2012)

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth.

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends.

So much for super smart government bureaucrats.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - March 20th, 2012

History 101

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth. 

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends. 

So much for super smart government bureaucrats.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Incentive and Competition

Posted by PITHOCRATES - December 19th, 2011

Economics 101

Prices set by the Free Market make Competitors Think and Innovate

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  Free labor sustained economic growth by increasing the number of people making economic exchanges.  Prices automated the process of assigning value and allocating scarce resources (that have alternative uses).  But that’s not all.  Prices also provide incentive and competition.

High prices signal high profits.  Or the potential for high profits.  Which encourages other people to enter the market to get their piece of these high profits.  People who think they can do a better job.  Make something better.  And sell it for less.  That’s right, to get rich they will sell it for less.  That’s key.  That’s how you gain market share.  The ultimate goal of all businesses.  Because with market share comes profit.  And often times this happens even with a price below that of the competition.

Prices set by the market allow this amazing phenomenon to happen.  It stimulates the creative juices.  It makes competitors think.  And innovate.  Providing incentive.  To improve on an existing idea.  Or replace an existing idea with a better idea.  All the while being guided by market prices.  Which tell them the current value a buyer places on a product or service.  And the final cost they have to remain below to bring their innovation to market.  If they do both they will gain market share.  By giving customers better value at a lower price.  And they will make themselves rich in the process.  The proverbial win-win of the free market.  The hallmark of capitalism.  Incentive and competition.

With Crony Capitalism Government Increases the Cost of Competition, Squelching any Incentive to Innovate

Free market prices are essential for free market capitalism.  If the market is not free to determine prices this amazing phenomenon will not occur.  Consumers will not get more value for less.  And business people and entrepreneurs will not take chances and create more value for less.  Because if there are outside forces influencing prices these forces also create uncertainty.  They throw unknowns into business calculations.  Things businesses have no power over.  Which makes them cautious.  And less prone to risk-taking.

We can see examples of this every time there is unrest in the Middle East.  Which tends to threaten the oil supply.  Everything in a modern economy uses energy.  Nothing comes to market without energy.  So anything that affects energy prices affects all prices.  Another example is government’s regulatory cost.  Such as Obamacare.  Which has caused great uncertainty.  And a lot of unknowns.  For entrepreneurs.  And business owners.  Who don’t know the ultimate regulatory compliance cost.  Freezing hiring.  And business expansion.  Extending the Great Recession.  Causing the economy to spit and sputter along.  Like an engine that just won’t restart.

Typically when government over regulates it’s to reward their friends and cronies.  Hence the term crony capitalism.  Which isn’t even capitalism.  Crony capitalism is about getting rich by who you know in government.  Not by creating more value for less.  The government fixes the game by keeping prices high for their cronies.  By enacting regulations that increase the cost of competition.  Squelching any incentive to innovate.  Leaving consumers stuck paying more for less value.

When Government Interfered with Market Prices they gave us the Great Depression and the Great Recession

Free market prices assign value.  Allocate scarce resources that have alternative uses.  Provide incentive to innovate.  Encourage competition.  Incentive and competition.  The hallmark of capitalism.  Which ultimately provides consumers with more value at lower prices.  And it does all of this automatically.  As long as government doesn’t interfere with this automatic pricing mechanism.

But government often does.  They interfere with this automatic pricing mechanism to reward friends and cronies far too often.  When they do the economy suffers.  And often goes into recession.  And when they really interfere, they cause Great Depressions.  And Great Recessions.

Government regulatory policy turned an ordinary recession into the Great Depression.  One of their greatest anti-business regulations being the Smoot–Hawley Tariff Act.  Which launched an all out trade war.  Killing the economy.  And government regulatory policy in the mortgage industry caused the Great Recession.    First by creating a housing bubble by forcing lenders to qualify the unqualified.  And then enabling this bad policy on a grand scale by having Fannie Mae and Freddie Mac buy the resulting bad subprime mortgages.  Which removed all risk from the lenders so they kept on approving bad subprime mortgages.

Say what you will about the Great Depression and the Great Recession.  But what you can’t say is that they were market failures.  Because they weren’t.  Both were government-made.  Because it was government that interfered with market prices.  Not the free market.  And the consumers paid the price for their crony capitalism.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Keynesian Tax and Spend Monetary Policy will Never Overcome Ruinous Fiscal and Regulatory Policy

Posted by PITHOCRATES - September 23rd, 2011

No Theory is Sacrosanct in the Scientific Method, Even if it’s Albert Einstein’s Theory

Albert Einstein‘s Theory of Relativity has held in the scientific community for some 106 years.  It hasn’t been accepted as a matter of faith, though.  It has been tested thousands of times in attempts to debunk it.  Right up to today.  Where it now appears we may be close to debunking it (see “Faster than light” particles may be physics revolution by Robert Evans posted 9/23/2011 on Reuters).

“It is premature to comment on this,” Professor Stephen Hawking, the world’s most well-known physicist, told Reuters. “Further experiments and clarifications are needed…”

“When an experiment finds an apparently unbelievable result and can find no artifact of the measurement to account for it, it is normal to invite broader scrutiny….it is good scientific practice,” he said…

Einstein’s theory has been tested thousands of times over the past 106 years and only recently have there been just slight hints that the behavior of some elementary particles of matter might not fit into it…

Ereditato, a physicist who also works at the Einstein Institute in the University of Berne, said the potential impact on science “is too large to draw any immediate conclusions or attempt physics interpretations…”

“Only when the dust finally settles should we dare draw any firm conclusions,” said Professor Forshaw. “It is in the nature of science that for every new and important discovery there will be hundreds of false alarms.”

This is the scientific method.  No theory is sacrosanct.  Even one by the great Albert Einstein.  Even if it’s been around for 106 years.

Quite the contrast to the theory of global warming.  Accepted by government scientists as indisputable fact.  Even though it has never been given serious scientific scrutiny like that given to one of the world’s greatest scientist.  Albert Einstein.

Considering the Economics, Only a Fool would Bet Against the Chinese in the area of Solar Panels

But Al Gore is smarter than Albert Einstein.  For he says that global warming is a scientific fact.  Even though we still call Einstein’s Theory of Relativity a theory after 106 years.  But not the theory of global warming.  No.  That theory is not a theory.  It’s fact.  So certain a fact that world governments have been killing economic activity everywhere to stop the ravishes of global warming.  Even investing in companies that promise to give us renewable green energy of the future.  Like that one that just ripped off the American taxpayer to the tune of half a billion dollars (see Solyndra haunts other government-backed solar firms by Steve Hargreaves posted 9/23/2011 on CNN Money).

At least three other government-backed solar firms face the same challenging market conditions that brought down Solyndra, the now bankrupt solar panel maker that could cost taxpayers over $500 million…

The company’s downfall is generally thought to have been caused by the declining price of silicon.

Solyndra didn’t use silicon. But many of its competitors did — traditional solar firms like Sunpower (SPWRA), Trina Solar (TSL), Yingli (YGE) and Jinkosolar (JKS). Solyndra was banking that high silicon prices would give it a competitive advantage…

Are they also doomed? Experts say that if they can further develop their technology they may have a fighting chance but market conditions in the near-term are working against them…

An Energy Department spokesman said the agency was not worried about these companies failing, saying it conducts rigorous reviews of all the ventures it funds.

Of course.  There’s nothing to worry about these other companies failing.  Because the Energy Department conducts a rigorous review of all the ventures they fund.  Except Solyndra apparently.  Or they did review them rigorously.  And the Energy Department just sucks at its job.

China’s investment in silicon as well as its huge investments in solar panel makers, combined with weaker demand worldwide as subsidies expire in Europe, caused the price of traditional solar panels to plummet.

In the last year alone they fell some 40%.

All across the globe, solar panel makers, especially ones that were developing more advanced technology, are finding it hard to compete with the Chinese as the price of solar panels drops.

I guess the Energy Department just sucks at its job.  I mean, imagine you’re an investor for a moment.  And you want to invest in a store that sells home improvement stuff.  Do you invest in the Home Depot?  Or the mom and pop hardware store?  The Home Depot is much bigger.  Has a greater variety of stuff.  And sells that stuff for 40% less than Mom and Pop.  Which store would you invest in?  Of course, you would invest in the Home Depot.  But the Energy Department, the geniuses that they are, would invest in Mom and Pop.  And then act shocked when they go belly up in the face of that fierce competition.

Considering the economics, only a fool would bet against the Chinese in the area of solar panels.  Then again, no one in Washington seems to understand economics in the least.

Cheaper panels mean more people will switch to the clean technology. Work has been booming for solar installers, project developers, and financiers. Just this week the industry said solar power capacity in the United States jumped 69% in the second quarter compared to the same time last year.

The Energy Department, as part of its plan to fund R&D and commercialization of renewable and clean energy technology, has backed or is considering backing loans to 42 firms across the sector totaling $39 billion in funding.

The manufacturers are taking it on the chin.  But the installers are installing these cheap Chinese solar panels like there’s no tomorrow.  You’d think the Energy Department would be happy that these silly things are being installed and get out of the investment business.  But no.  They’re going to piss away another $39 billion to fund firms that won’t be able to compete against the Chinese either.

By a show of hands who wants the Republican president to abolish the Energy Department in 2013?

One Gets the Feeling that Government Likes Wasteful Spending as it Adds to the Deficit

We really need to cut the government off.  They just aren’t responsible with our money.  If it ain’t throwing money away on solar panels, they’re throwing it away on dead people (see Gov’t paid $600 million in benefits to dead people by Sam Hananel posted 9/23/2011 on the Associated Press).

The federal government has doled out more than $600 million in benefit payments to dead people over the past five years, a watchdog report says.

Such payments are meant for retired or disabled federal workers…

In one case, the son of a beneficiary continued receiving payments for 37 years after his father’s death in 1971. The payments – totaling more than $515,000 – were only discovered when the son died in 2008.

If you owe a dollar in taxes you can bet the IRS will find you wherever you are.  But when it comes to spending our money it’s a different story.  As they are probably afraid of any close scrutiny that might show other mishandled funds.

Last year, government investigators found that more than 89,000 stimulus payments of $250 each from the massive economic recovery package went to people who were either dead or in prison.

There’s another $22 million pissed away by Uncle Sam.  $22 million here.  $600 million there.  And $16 muffins.  Where does it stop?  They are so ruthless when it comes to taxing us.  But once they get our money they apparently don’t give a damn about what happens to it then.

One gets the feeling that they like this waste.  As it adds to the deficit.  And the greater the deficit is the greater the need for new revenue.  Higher tax rates.  And getting the rich to pay their fair share.  I say let’s raise the tax rates on those doing such a poor job handling our money.  If they have such a cavalier attitude about taxpayers’ money, let them belly up to the bar and pay for their waste with their own damn money.

If You Want Real Stimulus Repeal Dodd-Frank.  That Alone will Create 30,000 Jobs at One Bank.

So the government is horrible at picking investment winners.  And is about as responsible as a teenager with money.  But Obama is looking to spend another $450 billion in stimulus.  To create jobs.  Unlike that $800 billion stimulus that failed to create jobs.  So they don’t know how to create jobs either.  Worse, they only thing they seem to be good at is destroying jobs (see The Dodd-Frank Layoffs posted 9/13/2011 on The Wall Street Journal).

Bank of America appears to have provided part of the answer by announcing yesterday that the nation’s largest bank will cut 30,000 jobs between now and 2014…

The Fed dutifully ordered banks to cut their fees almost in half. Bank of America disclosed in its most recent quarterly report that this change will reduce the bank’s debit-card revenues by $475 million in just the fourth quarter of this year. The new rules take effect on October 1, so BofA seems to have sensible timing as it begins to shed workers from a consumer business that has become suddenly less profitable by federal edict…

But given the real-world results for bank employees, politicians should not be allowed to pretend that there are no consequences when they deliberately reduce the profitability of employers. Mr. Obama proposed last week to spend some $450 billion more in outlays or tax credits to create more jobs, but it would have cost a lot less to save these 30,000.

If they want real stimulus they should repeal Dodd-Frank.  That alone will create 30,000 jobs.  At one bank.  If this happens at other banks you’re looking at hundreds of thousands of jobs.  Now that’s stimulus.

If they really want to create jobs they ought to go big.  Abolish the EPA.  And the Energy Department.  For a start.  With that kind of uncertainty removed just think of the explosion in economic activity.  Creating jobs galore.  Hundreds of thousands.  Perhaps millions.  The oil and coal industries alone would probable wrest this country from recession.

The Economy is not Just Monetary Policy.  It’s Fiscal and Regulatory Policy, too.

So it’s clear the government doesn’t know the first thing about stimulating economic activity.  They just can’t figure that out.  But what they can do is destroy jobs.  They’re real good at that.  And the reason for all of this is that they’re Keynesians.  They worship at the altar of Keynesian Economics.  Despite its horrendous track record.  Almost three years and counting for the current administration.  But they refuse to lose faith.  Instead, when they fail, they just choose to fail again.  By pursuing more of the same failed policies (see Markets tumble after Fed says it will buy longer-term bonds to try to boost economy by Neil Irwin posted 9/23/2011 on The Washington Post).

The announcement that the Fed would buy $400 billion in long-term Treasury bonds immediately achieved its intended effect, pushing rates on these securities and other investments to their lowest level in decades.

But the stock market rendered a sharply negative verdict. The Standard & Poor’s 500-stock index tumbled almost 3 percent on the Fed’s discouraging statement that its leaders see “significant downside risks” for the economy. Asian markets closed down between 2 and 4.85 percent, and key European indexes were trading more than 4 percent lower at midday.

No one wants to borrow money.  Businesses.  Or consumers.  Because there is just too much economic uncertainty with the Obama administration.  Everybody is hunkering down.  Deleveraging.  And hoarding cash.  Until better economic times.  Times with less uncertainty.  Probably starting sometime after 2012.  When there’ll be a new Republican president.  And hopefully a Republican House and Senate.  To undo those things causing all of this uncertainty.  Dodd-Frank.  Obamacare.  Etc.

The Fed action, which capped a two-day meeting, is focused squarely on lowering mortgage rates in an effort to strengthen the ailing housing market and lighten the load of the tremendous debt weighing on consumers. The move could also make it cheaper for businesses to borrow money for investments and push more dollars into the stock market.

The housing bubble create a surplus of houses that’ll be around for a long, long time.  The country is dotted with empty homes that banks have foreclosed on.  And the banks own a whole bunch more that will be hitting the market soon.  It’s a buyer’s market out there.  But it sure sucks to be a seller.  Especially if your mortgage is under water.  Homes have lost so much value after that bubble burst that anyone selling now will lose tens of thousands of dollars.  So they’re not selling.  Or buying.  No matter how cheap mortgage rates are.

The bond-buying program that ended in the summer, though massive in scale, failed to keep economic growth from sputtering. The disappointing result showed the limits of what the Fed can accomplish at a time when consumers are struggling with enormous debts and the U.S. banking system remains traumatized. The new initiative could face the same constraints.

Quantitative easing 2 failed.  And there’s no reason to think that quantitative easing 3 won’t fail as well.  So why do it?  Because they’re Keynesians.  And their scripture says that’s what you do.  Weak demand?  Why you fix that with cheap money.  But they don’t understand that the economy is not just monetary policy.  It’s fiscal policy, too.  And their fiscal policy is killing the economy.  And what their fiscal policy doesn’t kill their regulatory policy will.

The Only Way to Fix this Economy is to Get Rid of Keynesian Policies

Tax and spend Keynesian policies are strangling the economy.  Stimulus spending doesn’t work.  If it did the economy would be reaching record heights due to that record spending.  But it’s not.  The tax and spend Keynesians explanation for this record of dismal failure?  They didn’t spend enough.

The economic malaise has a lot more to do with uncertainty than weak demand.  It’s that out of control spending.  You eventually have to pay for it.  And every business owner knows that ultimately you pay for spending with taxes.  And they see the Obama administration is hell-bent on raising taxes on anyone earning more than $200,000 a year.  Which will be a tax hike on most small business as their earnings pass through to their personal tax return.

And while they’re waiting for punitive taxes to come down the pike they’re being hammered by regulatory compliance costs.  The big one scaring the bejesus out of them is Obamacare.  And Dodd-Frank is not just for Wall Street bankers.  Not to mention the EPA’s enormous impact on business operations.  They’re being bitch-slapped left and right by these regulations.  And they are terrified by what’s next from this administration.

You see, Big Government Keynesian politicians don’t understand economics.  Or business.  They see business as cash piñatas.  That they can whack at their pleasure.  They have no idea how they make money.  But they assume that they will go on making money no matter what they do in Washington.  And being the Keynesians they are, they believe that businesses make money for government first.  And then, after government takes what they want, what they deem fair, then and only then can they use whatever they earn for their own selfish wants and pleasures.  The selfish rich bastards they are.  Those contemptible business owners.

This is how Big Government Keynesians think.  And this is why they fail miserably at creating jobs.  And economic activity.  The only way to fix this economy, then, is to get rid of Keynesian policies.  And the only way to do that is to get rid of the Keynesians.  At the voting booth.  By voting conservative.  And in our two-party system, that means voting Republican.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

‘More Taxes, Regulations, Uncertainty and Spending’ is the Mantra of the Obama Administration

Posted by PITHOCRATES - September 21st, 2011

Obama’s Proposed Aviation Fees will Fall Predominantly on the People who can Least Afford It

In Obama‘s deficit reduction plan he plans to tax the rich.  Those who can most afford it.  Rich people.  And by rich people he means anyone who has any money to spend (see Airline groups attack Obama proposals to boost fees for aviation security, air traffic control by Associated Press posted 9/21/2011 on The Washington Post).

The aviation fees are part of Obama’s deficit-cutting plan that was released Tuesday. The plan would:

— raise the passenger security fee — now $5 to $10 per round trip — to $15 by 2017 and give the Homeland Security Department the power to push it higher.

— impose a surcharge of $100 per flight to help pay for air traffic control.

But college students fly.  Middle class families fly on vacation.  Non-rich people everywhere fly to visit family members that have moved away.  A lot of people fly.  And an interesting tidbit about the flying public?  They’re not all rich.

The rich people that Obama wants to tax?  Because they can most afford it?  Those well-to-do folk who fly those private jets?  Well, a lot of them do just that.  Fly private jets.  And, therefore, do NOT fly on commercial planes.  So they won’t be paying these new taxes/fees.  So these taxes/fees will fall predominantly on the people who can least afford it.  Imagine that.

The Air Transport Association, which represents large airlines, said it’s unfair for airlines and passengers to pay for security against terror attacks that target the U.S. and not the airlines themselves. The trade group says a typical $300 round-trip ticket already includes $60 in taxes and fees.

The Regional Airline Association, a group of smaller carriers, said the fees could lead to a loss of flights to smaller cities. The group’s president, Roger Cohen, said the $100 surcharge would cost more than regional airlines earned last year, threatening service to smaller cities.

The groups also complained that some of the money raised from airlines and passengers would be used to pay down the federal budget deficit and not to improve the air-travel system.

The airlines have a vested interest in protecting their planes.  Because they bought them.  And planes that blow up or crash in terrorist attacks don’t help the bottom line.  There’s the loss of an expensive airplane.  And the future revenue from that airplane.  The cost of replacing that airplane.  And the lost business from passengers who tend to shy away from an airline whose planes are easy pickings for terrorists.

So let them hire a security contractor to secure their planes.  Using the Israeli model.  Ask very pointed questions and observe people’s responses.  It works well for the Israelis.  Couldn’t be any worse than what the TSA is doing.  I mean, what passengers are going to complain about being groped less?

The administration estimated that boosting passenger security fees will raise $24.9 billion over 10 years. It proposed to spend $15 billion of that to reduce federal debt.

This is telling.  The airlines did not run up that federal debt. So there’s something really troubling about this.  Taking $15 billion from the airlines under the auspices of national security.  Just so they can continue their irresponsible spending ways in Washington.  This is no different than an addict stealing from his mother’s purse to support his habit.

This is Washington’s problem.  Not the airlines.  Washington has a spending problem.  And they can’t stop spending.  Or simply choose not to.  Instead they look for other people to steal from.  Like an addict.  While denying that they have a problem.  And always blaming others.  Like the rich who don’t pay their fair share.  And by rich they mean anyone that has any money to spend.

Tax Cuts Stimulate, not Keynesian Stimulus Spending Funded by Taxes

So how bad is this spending?  How much of a debt problem has it given us?  That the president is shaking down the airlines for $15 billion (see Committee Searches for Economic ‘Tipping Point’; Prefer Not to Find It by Jim Angle posted 9/20/2011 on Fox News)?

“We know that the debt is now 100 percent — approximately 100 percent of (gross domestic product),” said Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh. “That doesn’t include the unfunded liabilities. It doesn’t include (mortgage lenders)Fannie Mae and Freddie Mac. It doesn’t include a number of other things.”

By unfunded liabilities, Meltzer means entitlement programs. Social Security and Medicare alone have $46 trillion in unfunded liabilities, meaning that much more is promised in benefits than the government — and taxpayers — have as a plan to pay for them.

Oh.  It’s that bad.  We owe a dollar for every dollar our economy produces.  But it’s even worse than this.  All of those unfunded liabilities that don’t appear in the official budget.  Fannie and Freddie.  And let’s not forget the Social Security and Medicare trust funds.  Which are filled only with IOUs from Uncle Sam.  Because Uncle Sam spent our money.  That money we put aside with each paycheck.  Those FICA and Medicare withholdings.  That money they forced us to save.  Because we were untrustworthy with our own money.  As they apparently are, too.

Chris Edwards, Director of Tax Policy Studies at the Cato Institute, a libertarian think tank in Washington, argues that U.S. debt is so far out of control that it must be contained soon.

“We’ve had five trillion (in) deficit spending since 2008, the most enormous sort of Keynesian stimulus you can imagine, and yet we’ve had slower growth than any time since World War II. So I don’t think spending helps.”

So the government owes more money than taxpayers can fund.  And yet that didn’t stop them from spending $5 trillion more.  For stimulus.  Which is just code for throwing money at political cronies.  I mean, it’s obvious that it didn’t stimulate anything.  Because the economy is still in the toilet.

And there’s a very good reason for that.  Because tax cuts stimulate.  Not Keynesian stimulus spending funded by taxes.

Meltzer pointed to three “fiscal changes that really did enormous good.” One was the tax cuts from the Kennedy and Johnson administrations, the most effective part of which were business tax cuts.

“They got the biggest bang for the buck,” he said.

The second were the Reagan-era tax cuts which came in two rounds and boosted a flagging economy. Meltzer said a completely different option worked well too.

“(The) third policy that gave people confidence were the Clinton tax increases, which assured people that their future tax rates were not going to go up, that they had seen what they were going to have to take, and there wouldn’t be anymore.”

Meltzer said the increases gave people certainty about what tax rates would be, which reassured businesses they wouldn’t go higher, allowing employers to plan and create jobs with confidence.

The Clinton tax increases?  That’s not why the Nineties were booming.  It was because of greedy capitalists.  Looking to strike it rich in the dot-com boom.  The economy was smoking hot because of irrational exuberance.  Not higher taxes.  And the budget went into surplus when all those dot-com people cashed in their stock options.  And they paid a boatload of capital gains taxes.  Before the dot-com bubble burst.  And threw the economy into recession.

But he’s right on the Kennedy and Reagan tax cuts.  Both used good Austrian supply-side economics.  Which exploded economic activity.  And similar policies could do that again.  If we would just stop with the Keynesian nonsense.  And the belief that crippling regulations will spur economic growth.

Business Owners Hate Uncertainty because, Unlike Uncle Sam, they can’t Print Money

And speaking of regulation, remember the Dodd-Frank act?  Have you read it?  Probably not.  For I doubt anyone in Congress has read it in its entirety (see Dodd-Frank and Uncertainty by Veronique de Rugy posted 9/20/2011 on National Review).

Remember how President Obama promised that the Dodd-Frank bill would provide certainty, stability and growth…?

It’s 1,623 pages long. It is very heavy. If it could fit it in my purse, I could use it as a protective weapon. Whatever else this will do, however, it will not make lending cheaper or credit more readily available, and it will not protect us from another financial crisis. And it will not protect consumers or taxpayers.

What it will do, and already does, is continue injecting gigantic uncertainty into the economy, paralyzing entrepreneurship and job creation. Imagine how long it will take for all the rules to be written and for U.S. businesses to figure out how they are supposed to operate from now on. The vagueness of the law as written means that even business owners and consumers who have the courage to pick up this book and try to figure out what’s in their future won’t get the answers they are looking for.

Really, is there any doubt that some of the $2 trillion in cash that companies are sitting on is a direct result of this uncertainty?

That’s right.  If you don’t know what tomorrow may bring you save your money.  You deleverage.  Pay down debt.  And hoard cash.  Because cash is king.  It’s the only thing you can pay your employees with.  The only thing you can pay your suppliers with.  The only thing you can pay for your insurance with.  And it’s the only thing you can pay Uncle Sam with.  So if you don’t have enough of it around during bad times you may not be around for the good times.  When they return.  If they return.

Business owners hate uncertainty.  Because, unlike Uncle Sam, they can’t print money.  So they have to be very careful with what they have.  To survive things like recessions.  Depressions.  And Dodd-Frank.

In these Tough Economic Times, it is the People that are Suffering, not Rich Liberals

‘More taxes, more regulations and more uncertainty’ is the mantra of the Obama administration.  And, of course, more spending.  Always more spending.  Is it any surprise the economy is not responding well to Obama’s policies?

There is no way businesses will grow in this environment.  Or create jobs.  And without new jobs the economy will never recover.  People understand this.  That’s why Democrats are losing elections.  Even in New York.  It’s a repudiation of Obama.  And the liberal Democrat agenda.

For though the mainstream media has been a loyal propaganda outlet for the liberal elite, the people aren’t buying it anymore.  For in these tough economic times, it is the people that are suffering.  Because of Obama’s policies.  While rich liberal elitists are living well everywhere.  And continue to fly on their private jets.  While the common people will be paying Obama’s new aviation fees.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Bernanke can’t Help this Bad Economy and Washington only Exasperates our Problems with their Regulatory Zeal

Posted by PITHOCRATES - August 26th, 2011

Congressional Action thus far has Scared the Bejesus out of Households and Businesses

All eyes were on Jackson Hole, Wyoming.  Ben Bernanke was giving a much anticipated speech.  And the markets waited with bated breath.  They’re not bated anymore (see Bernanke pledges Fed support, but notes limits by Chris Isidore posted 8/26/2011 on CNNMoney).

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.

And he warned that when Congress weighs future deficit reduction plans, it should be careful to not hurt the economy in the short-term. They “should not…disregard the fragility of the current economic recovery.”

He said there needs to be a better way of Congress making decisions on taxes and spending. And he said a repeat of the this summer’s contentious debate over raising the debt ceiling would likely hurt the economy.

“It is difficult to judge by how much these developments have affected economic activity thus far,” he said about the threat of default and the downgrade of the U.S. credit rating. “But there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”

The economy has big problems.  Problems, though, that will take more than monetary policy to fix.  But when Congress addresses these fiscal issues they should be very careful not to damage the fragile economic recovery.  Because thus far their words and actions have only been scaring the bejesus out of households and businesses.

Businesses Prefer Stability and Responsible Government that doesn’t Govern Against their Interests

Households and businesses are so frightened of what the future holds that they are sitting on their money (see Key Passages From Bernanke’s Jackson Hole Remark by David Wessel posted 8/26/2011 on The Wall Street Journal).

“Financial stress has been and continues to be a significant drag on the recovery, both here and abroad. Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation…. It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”

Uncertainty.  The greatest fear of business.  Because you can’t plan uncertainty.  Because it is uncertain.  Businesses prefer stability.  Households, too.  That, and responsible government.  One that doesn’t govern against their interests.

The Department of Energy is going to raise our Electric Bills by 35%  

And so far government hasn’t been delivering what the households and businesses want (see US breaks ground on first industrial-scale carbon capture project by staff of Business Green, part of the Guardian Environment Network guardian.co.uk, posted 8/26/2011 on the Guardian).

The US government’s carbon capture and storage (CCS) efforts stepped up a gear this week, with the start of construction on the government’s first industrial-scale scheme and funds worth $41m set aside for another 16 research projects.

Work on the plant in Decatur, Illinois, which received $141m of public money and another $66.5m from private sector sources, started just a few weeks after American Electric Power abandoned plans to build its $668m CCS facility.

Is this responsible government?  After record deficits caused the first downgrade of U.S. sovereign debt ever should the government still be spending money on bad green investments?  How do I know this is a bad green investment?  Simple.  The private sector will only invest 32% of its total costs.  The taxpayers are picking up the other 68%.

The DoE said its selection yesterday of 16 projects across 13 states to share $41m funding over three years would further the aim.

Each project will focus on developing technologies capable of capturing at least 90% of CO2 produced, as well as reducing the added costs at power plants to no more than a 35% increase in the cost of electricity produced.

Oh, and the Department of Energy is only going to raise our electric bills by 35%.  So not only do the taxpayers have to pay for the construction of this plant, our electric bills will increase afterwards.  For both households.  And businesses.  Which will be a further drag on the economy.  Which won’t make Ben Bernanke happy.

Killing Businesses with Regulatory Compliance Costs

But it gets worse.  The EPA is causing uncertainty for American businesses.  And killing them with compliance costs.  So much so that John Boehner wrote a letter to President Obama demanding a tally of his punishing regulations (see Five EPA rules that will cost more than $1 billion by Conn Carroll posted 8/26/2011 on The Washington Examiner).

Boehner specifically mentions one regulation that “will cost our economy as much as $90 billion per year. That rule, titled “Reconsideration of the 2008 Ozone Primary and Secondary National Ambient Air Quality Standards” (aka “The Ozone Rule), is the biggest drag on growth that the EPA has formally proposed so far. The EPA is also working on global warming regulations that are sure to cost much more, but those proposals have not been published yet.

The EPA has published at least four other proposed regulations, however, that would inflict costs on the U.S. economy over or near $1 billion a year. These cost estimates are all from the EPA’s own numbers…

Here’s a chart summarizing the 5 regulations in this article:

 

And this is only 5 of them.  Imagine if you add them up in total.  Could it be holding back businesses?  Perhaps.  I mean, would you invest in anything new knowing billions of dollars of compliance costs were coming your way?  I wouldn’t.

Perhaps the Problem with the Bad Economy is the People trying to Fix It

Bernanke is right.  You can’t fix this stuff with monetary policy.  When you’re attacking American households and businesses like this, no one is going to borrow any money to invest.  No matter how cheap it is.

Furthermore, all of these costs are going to be passed onto the American consumer.  They always are.  So this means consumers will have less disposable income.  Which means this will be a further drag on the economy.  And less economic activity means less tax revenue.  Which takes us back to those growing deficits.  They ain’t going away.

Perhaps the problem with the bad economy isn’t due to a lack of demand as the Keynesians say.  Perhaps the problem is with the people trying to fix it.  And there is no quick solution to that problem.  As the 2012 election is still more than a year away.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , ,

Obama Says Judge him on his Dismal Keynesian Economic Record

Posted by PITHOCRATES - August 21st, 2011

Are you Better Off than you were 4 Years Ago?

People who live in economic houses made of cards shouldn’t blow too hard.  Or boast about future successes (see Obama: Judge me on economic progress by Richard Wolf posted 8/21/2011 on USA TODAY).

“Things would have been much worse has we not made those decisions, (but) that’s not that satisfying if you don’t have a job right now. And I understand that, and I expect to be judged a year from now on whether or not things have continued to get better.”

You shouldn’t boast about a successful track record before you have one.  That could come back to haunt you at the next election.  I mean, when your last three years or so in office haven’t been successful economically, why would you think year 4 would be any better?  In fact, the odds are good that someone will Ronald Reagan you if current trends continue.  When that candidate will ask the people, “Are you better off than you were 4 years ago?”

Businesses never, ever hire New Employees while the Economic Outlook is so Dismal

If the judges are American businesses their verdict is already in (see Moody’s chief economist: Lawmakers need to ‘get it together’ to save economy by Meghashyam Mali posted 8/21/2011 on The Hill).

Zandi pointed to positive signs for American businesses. They are “getting their cost structures down, getting their profitability up, getting their balance sheets in order,” he said.

While businesses are still reluctant to start hiring new workers, they had little reason to layoff employees, a sign we would avoid a second recession according to Zandi.

They’re doing things now that a business does during bad economic times.  Cut costs.  Increase productivity.  Avoid new debt.  Stockpile cash.  And never, ever hire new employees while the economic outlook is so dismal.

The Nice Thing about Bonuses is that you can pay your People Less 

And the bad jobs outlook isn’t just on Main Street America.  It goes all the way up to the fat cats on Wall Street (see Layoffs sweep Wall Street, along with low morale by Lauren Tara LaCapra posted 8/21/2011 on Reuters).

The planned cuts at Bank of America have pushed the number of financial sector layoffs this year to 18,252 — 6 percent higher than in the comparable period in 2010, according to Challenger, Gray & Christmas, an outplacement firm that keeps a daily tab on layoff announcements.

Some companies began the culling earlier this year — HSBC has already axed about 5,000 employees, with 25,000 more set to get pink slips by the end of 2012 — and others, such as Goldman Sachs, said that cuts will come by year’s end.

Even the Wall Street bailouts couldn’t save Wall Street.  Or all that quantitative easing.  The economy is tanking some three years later despite all of Obama‘s best efforts to stimulate a recovery.  In fact, it turns out that their best efforts are complicit in these Wall Street purges.

Changes in pay structures mandated in part by the Dodd-Frank financial reform laws have exacerbated the problem.

Banks that used to pay modest base salaries supplemented by opulent stock-and-option packages that encouraged meeting short-term performance goals now are weighting compensation toward base salary…

The shift erodes Wall Street’s former flexibility to lower end-of-year bonuses in bad times and forces a heavier reliance on layoffs.

The nice thing about bonuses is that you can pay your people less.  If you have a bad year, you don’t have to lay off your employees.  You just cut year-end bonuses.  Their base salaries are more than enough to live on.  And they are tickled pink to still have a job after a bad year.  Of course, when you remove bonuses from the picture that only leaves one way to cut costs to reflect declining business.  You have to cut people.  Which is never a good thing in a ‘relationship’ business.

It’s hard to build a level of trust and confidence in a relationship.  And the higher the dollar amounts the harder it is to build that trust and confidence.  It’s scary letting other people into your balance sheet.  Once you do you don’t want to see that person leave.  Because you don’t deal with a bank.  You deal with a person.  That person.  And when they leave there’s nothing but more uncertainty in an already uncertain economic climate.

Keynesian Economics was always about the Growth of Government

So it looks like the chances are good President Obama may get that question next year.  Because indications are that it won’t be better than when he took office in 2009 (see Mises on the Business Cycle by Dennis Sperduto posted 8/21/2011 on Ludwig von Mises Institute).

The economic and financial events of the last few weeks indicate that the economies of the United States and most of Europe remain quite weak, if not in outright recession. This situation comes after unprecedented fiscal and monetary “stimuli” by many governments that were strongly supported and recommended by the large majority of the economics profession, media commentators, and politicians. And of course, with economic conditions showing renewed weakness, the mainstream calls for additional stimuli of even larger magnitudes. The mainstream is unable or unwilling to abandon its Keynesian foundation, a system of thought that has been shown by many individuals associated with the Austrian School to be one of the great retrogressions in scientific economic thought in modern times.

Obama is a Keynesian.  His administration has adopted Keynesian policies.  And all of their Keynesian policies have failed thus far.  No matter how they try, try and try again, they will always fail, fail and fail again.  For Keynesian economics was never about economics.  Not to those in government.  For them it was always about the growth of government. 

Recessions never End because of Keynesian Stimulus, they End Despite Keynesian Stimulus

But the one flaw in their grand design is that the private sector funds everything.  Economic activity.  And government.  So the more government grows, the more wealth is transferred from the private sector to fund it.  Meaning that if the government grows the private sector must shrink.  For here it is simple zero-sum.  Which is why recessions never end because of Keynesian stimulus.  They end despite Keynesian stimulus.

So if the Obama administration moves forward with more of the same it should make the 2012 election come down to a simple question.  Are you better off than you were 4 years ago?  Even Obama is admitting that if things don’t improve over the next year he will be a one-term president.  And right now there’s nothing in the economic forecast that bodes well for a second term.  If he’s judged for his economic performance.  Which he is telling the voters to do in 2012.  As I’m sure they will be more than happy to oblige.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , ,

« Previous Entries