Archive for November, 2011
Ty Cobb: The New Energy Equation
Posted by Tom in Energy Facts & Policies, Nevada, Yucca Mountain on November 29, 2011
Ty Cobb’s interview on Anjeanette Damon’s To The Point show on News 4
gives an interesting summary brief on the new energy equation:
It’s good to have him in our group.
Europe’s Road to Serfdom
Posted by Tom in Constitution, Europe, Federalism, Government Regulation, Statism on November 24, 2011
Friedrich Hayek distrusted the central planners for the fatal conceit that they knew more than people working freely in society, in the marketplace, in the polity. This “rule by the few” has gained a major foothold, no, strangle hold, in Europe. The technocrats in Brussels rule by dictat!
Rany York sent the following video in which Nigel Farage, MEP and UKIP, describes the situation with some accurate historical perspective. He correctly points out the shaky assumptions on which the EU and European Monetary Union were based. His fiery indictment of the unelected technocrats should serve as a warning to us in America: our bureaucrats, agencies, commissions, and tzars are nothing other than unelected technocrats!
Witness the financial upheaval in European financial markets resulting in yesterday’s failed German bond auction, to see where socialism leads. Sadly our President and the leftist Democrats think we are somehow immune.
November Dinner Uptate
Posted by Tom in Symposium Notes on November 16, 2011
I want to thank Steve Hill for an excellent presentation last evening. Steve gave a leader’s view of Nevada’s embryonic statewide economic development program. He heads the Economic Development Commission and is a member of the Governor’s Cabinet. This is the first time the State has centralized and coordinated the development efforts. As Steve explained there will still be regional efforts peculiar to each region but those efforts will need to be results oriented. Steve went through the process which lead to the creation of the state level effort. This started empirically by going to similar states and looking for best practices.
He applied much the same approach to his Hayek presentation and asked for questions and comments. As attendees will attest, comments were given, and sometimes loudly. Brad Schiller and Mark Pingle gave an economic perspective. Tony Ciorciari commented from a major employer’s perspective and John LaGatta from the perspective of heretofore unrecognized ”intangible” businesses. Joe Morabito who runs a major international relocation operation gave candid comments on where businesses are moving and why. All told, there was a major distrust of government efforts in this area.
The takeaway I think is twofold: 1. the group doesn’t trust government to pick winners and losers; in other words, the Texas giveaway model is wrong. And, 2. there are few if any unique, monopolistic opportunities for the state that has gotten fat, dumb and happy on such in the past; witness divorce in the early years, prostitution, then gaming and always mining. Two of those named have evaporated or significantly diminished. One unnamed remains: nuclear development: Yucca, related R&D, reprocessing, regeneration, etc.; ultimately the state can become an energy exporter, the energy capital of the country. There is strong demand for this. It isn’t a question of government creating jobs which it can’t do, or government picking winners which it can’t do, but government blocking a legitimate opportunity which it can do and now does for no legitimate reason.
Pro bono recruiting efforts were suggested and some in the group are working to recruit targeted CA businesses. Witness John LaGatta’s intangible work. There should be some success in this area. In fact, the one strength Nevada has is California’s progressive weakness. Make no mistake, proximity will count in this regard.
Steve was kind enough to ask for our thoughts on specific opportunities either within or without the scope of the Brookings-SRI SWOT areas of focus. Please send positive suggestions to him at, steve.hill@diversifynevada.com.
I also want to thank Ann Silver the new CEO of Big Brothers Big Sisters for giving us an update on the great mentoring work of our local organization. This is a worthy cause that directly translates to taxpayer savings in the local community. The social savings are a big bonus! Don’t forget to get your sponsorships and tables together for the Gala event on March 31st of next year at the Atlantis. Contact me for details, tom@renohayek.com.
Last evening’s dinner concluded our third year of the Reno Hayek Symposium. I trust we fulfilled our objective of bringing an economic perspective to current events. We want to thank our speakers and our economists for all the good work. Next year will have a strong economic focus on political positions advocated by the various candidates. Stay tuned!
O’Driscoll Post: End of Euro?
Posted by Tom in Europe, Financial Crisis, Financial Policy, Fiscal Policy, Monetary Policy, National Debt on November 9, 2011
Jerry O’Driscoll”s post on the Cato blog today will get your attention; it follows verbatim:
“Global equity markets are falling, with the Dow Jones Industrial Average down around 250pts. A benchmark 10-year Italian government bond is yielding 7.4%. Every country whose sovereign debt went over the 7%-mark has required a bailout. I was in Italy a month ago, and the yield was under 6% (still pricey for a developed country).
A bailout of a country Italy’s size would be a gargantuan task — probably a larger effort than heretofore. It is beyond the capacity of the EU. Italy’s debt is just too large. I doubt China would purchase any real assets until labor-market reforms and pension reforms were enacted. China actually wants a return on its investments.
If the IMF gets involved, it would require massive new funds for which the US taxpayer would be on the hook for around 18%. I wonder how that would go over in the US House or even the Senate? That doesn’t mean the Obama administration won’t try to organize a rescue. The Fed has been backstopping the EU banks for some time.
Will the Euro survive? Will the global financial system survive?”
Jerry’s email answer to the last two questions was: “probably and possibly!” I’m not sure of the order he intended.
But see Italy Bond Attack Breaches Euro Defenses today on Bloomberg.com. The simple answer is that monetary governance without fiscal governance does not work. The sooner that is realized, the sooner sovereign bailouts will stop, and the sooner the European nations can begin a healthy recovery.
Boomerang–A Great Read
Posted by Tom in Bankruptcy, Banks, Budgets, California, Deficit, Europe, Fed, Financial Crisis, Monetary Policy, National Character, National Debt, Politics, Wall Street on November 5, 2011
I just finished Michael Lewis’s latest, Boomerang and can highly recommend it. As a non-economist reporter he tells the story of a world awash in cheap money and easy credit and tells it with reference to a few developed countries. Starting with Iceland, the first to go belly up when its fishermen decided to become investment bankers with credit advanced by European banks, he goes to the current zombie Greece. The Greeks borrowed not to invest but just to take exorbitant salaries and long vacations. Now the Irish, bless them, decided to become real estate developers in Ireland this with the funds borrowed from Irish and European banks; unfortunately the government decided to guarantee the banks against horrendous losses on the worthless real estate developments. Onto Germany whose citizens are disciplined not to over borrow or over spend, but whose banks were perfectly willing to lend to the Greeks and Irish without proper credit evaluation.
When he heads home to the US he focuses on his home state of California which is essentially bankrupt. First to fail though will not be the state government but the local municipalities the worst of which is Vallejo which filed for bankruptcy in May of 2008. There is, of course, more to come. Here’s a brief interview with the author:
Supply Side Analysis of Obama’s Latest Stimulus Plan
Posted by Tom in Congress, Deficit, Democrats, Economics, Employment, Fiscal Policy, Politics, Welfare on November 4, 2011
Obama’s incessant campaign call for the past months had been to demand the “Republican Congress” PASS IT NOW. The “It” is, of course, another stimulus plan, excuse me, “jobs bill;” you see the word “stimulus” has, by fiat, been stricken from the Democrat’s lexicon–must be something to do with the pejorative connotation generated by the last stimulus! Anyway, the new stimulus consist of: 1. Temporary payroll tax cuts, 2. Temporary extension of unemployment benefits to two years, 3. Additional debt to finance public sector jobs, and 4. Higher taxes on “the rich.” That this is an insincere reelection effort on his part can be of little doubt, since he knows it would not pass even his Democratic controlled Senate, much less the House.
Stimulus by whatever name it is called should, nonetheless, be subjected to economic analysis and Art Laffer, that infamous supply-sider, has obliged in the current issue of National Review. Laffer calls it a “four point plan for failure.” His article is worth a summary here, with full attribution:
Payroll tax: This is broad-based but effects only the moderately paid workers; it stops at a bit over $100,000 of annual compensation. Broad-based, low-rate taxes are generally good since there is little incentive to avoid them, so a reduction in these taxes presents little incentive to work or not to work, to hire or not to hire. Laffer points out that a reduction in this tax will not effect the decision makers typically earning over the $100K limit and much of that in dividends and capital gains. Laffers point is that cutting the payroll tax, temporarily, will not effect hiring or seeking employment. In other words, it doesn’t effect any job creation.
Extending unemployment benefits to almost two years: Laffer uses a time tested analogy to the Department of Agriculture payments: pay farmers to grow and they grow; pay them not to grow and they don’t grow. Simple: people respond to economic incentives. Obama wants to pay people not to work for almost two years. Obviously, they will take the money. And, by the way, not look very hard for that next job. In short, this is a big negative to job creation.
More deficit stimulus spending: Here we get in to the so-called Keynesian multiplier: the recipients of the extra federal dollar will spend a portion of it thereby creating new jobs which induce more spending thus more new new jobs. This “marginal propensity to consume” gives us the “multiplier;” or $1 divided by $1 minus that marginal propensity to consume. So if the marginal propensity to consume is only 50 cents, the multiplier effect is $2 for ever $1 borrowed! Thus the Keynesians have magically created money!
Wow! What’s missing here? Well, to get that dollar of federal largess, the federal government must take that dollar from someone else. In this case it must take not only that dollar, but it must run that dollar through the federal bureaucracy, then it must pay interest on that dollar because it borrowed the dollar. In short, the economic effect is to rob Peter, waste part of the loot on bureaucracy and interest, and pay Paul the balance. The economic effect is not neutral but is NEGATIVE. It destroys jobs, the jobs that would otherwise be created by Peter via his spending or investment! Look no further for proof than Obama’s last stimulus expenditures.
To cap off the point Laffer offers the “Slutsky equation:” This aggregates the deficit financed stimulus, both debits and credits. “By taking resources from those who produce and giving resources to those who don’t produce, government reduces the incentives to work for both parties. Output, employment, and production will fall.”
Higher taxes on “the rich:” It’s hard to tell if Obama wants to raise revenue or merely redistribute income with this effort. If raising income is the goal, increasing tax rates at the highest brackets will have the opposite effect; lowering tax rates on that bracket however will raise revenue. The simple reason is that those earners in the highest tax brackets have the ability to minimise marginal taxes by converting income to capital gains, deferring income, and shifting income; and they have access to tax accountants, investment advisors and attorneys to help in this process. If, on the other hand, he merely wants to redistribute income or wealth, he succeeds in his election tactic of creating class warfare but he fails in his so-called job creation purpose. And this for the same reason suggested by the “Slutsky equation.” Taking money from the producers and giving it to the non-producers has a negative effect on both; it’s a double disincentive!
In sum, our President is a campaigner who has a negative record on which to run. He has created a straw man with his rants against the “Republican Congress” failing to mention the Democrat controlled Senate which is fully one-half of that Congress. And he has come up with a sure-to-fail stimulus plan which he will use to deflect voter attention away from his abysmal record.
Is Papandreou the Only European Leader With Balls?
Posted by Tom in Economics, Entitlements, Europe, Financial Crisis, Socialism, Welfare on November 2, 2011
Is Greek Prime Minister George Papandreou the only European leader with “balls?” With Germany and France continuing to kick the can down the road and none of the nations calling for a referendum on the can kicking, it seems that the Greek Prime Minister is the only one with any sense. He has called for a referendum from the voters on whether to accept the latest edition of the European bank bailout. These are the same voters who have been rioting. The same voters who have been sucking money out of Germany. The same voters who are accustom to handsome entitlements while cheating on their taxes. Politically, Papandreou is smart in letting the socialists rioters make their own democratic decision. Admittedly, it will not be a well informed decision. But then, in a socialist nation, how could it be?
The point for Europe, America, Asia and the world is the same: the sooner a real resolution is reached, the sooner a real recovery can commence. The contrary example is the real estate market in the U.S. where reaching the market bottom has been forestalled by Obama and the socialist left. The result has been the stagnation and real estate depression that we now witness. By the Greek call for a referendum, Papandreou has cut to the chase. And done so where democracy was born!
Economically, socialism doesn’t work, the European welfare state doesn’t work, and need I say that the American welfare state will not work? We cannot borrow and regulate ourselves into prosperity as Obama would have us believe.
Europe is broke. We are almost as broke. We have the advantage in that our fiscal policy and monetary policy are structured under one federal government. Europe, on the contrary, is a mess simply because it lacks that structure.
Hopefully the can kicking will stop and serious plans will be made to reorganize Europe so that it or its component nations can prosperously function in this economically interdependent world in which we live.
Sinking With Europe?
Posted by Tom in Economics, Europe, Fed, Financial Policy, Fiscal Policy, Foreign Policy, Monetary Policy, Welfare on November 2, 2011
The following is a republication of Jerry O’Driscoll’s op-ed in today’s WSJ, Why We Can’t Escape the Eurocrisis. The article also had lead position in today’s Real Clear Politics.
Why We Can’t Escape the Eurocrisis
EU and U.S. debt are interlinked through the banking system.
By GERALD P. O’DRISCOLL JR.
When is a bailout not a bailout? When the bailor is short of funds. The recently announced debt plan in the European Union comes up short in almost all respects.
The debt crisis is not just an EU problem, but a trans-Atlantic financial crisis. The overwhelming debt problems on either side of the pond are interlinked through the banking system.
First to the EU. The underlying dilemma is that governments have promised their citizens more social programs than can be financed with the tax revenue generated by the private sector. High tax rates choke off the economic growth needed to finance the promises. Economic activity gets driven into the underground economy, where it often escapes taxation.
Nowhere is this truer than in Greece, which has a long history of sovereign defaults in the 19th and 20th centuries. There is a bloated public sector, and competitive private enterprise is hobbled by regulation and government barriers to entry. Successive Greek governments ran chronic budget deficits, and the Greek banks lent to the government. Banks in other EU countries, such as France, lent to the Greek banks.
In Greece and elsewhere in the EU, the banks support the government by purchasing its bonds, and the government guarantees the banks. It is a Ponzi scheme not even Bernie Madoff could have concocted. The banks can no longer afford to fund budget deficits, yet they cannot afford to see governments default. Governments cannot make good on their guarantees of the banks.
Getty Images
Details differ by country. In Ireland, problems began with an overheated property sector that brought down the banks. The economy went into depression, which threw the government’s budget into deficit. Further aggravating the deficit was the government’s decision to guarantee bank deposits, converting private, financial-sector debt into public-sector debt. The details differ from Greece, but the linkage between the government and the banks is the common factor.
France’s growth is weak to nonexistent. Germany’s economy has performed well since the recession, but concerns are growing regarding its banks’ exposure to greater EU risk. And U.S. banks and financial institutions are exposed to EU banks through funding operations, issuance of credit default swaps and unknown exposure in derivatives markets.
The Federal Reserve has engaged in currency swaps with the European Central Bank to support the dollar needs of EU banks. The ECB deposits euros (or euro-denominated assets) with the Fed and receives dollars in return. It promises to repay dollars plus interest.
The Fed maintains they cannot lose money because the ECB promises to repay the swaps in dollars. And yet, with the world awash in greenbacks, it is unclear why the Fed and the ECB even needed to engage in these transactions—except that it suggests funding problems at some EU banks. And if neither EU banks nor the ECB can secure enough needed dollars in global markets, there is a serious counterparty risk to the Fed. The ECB can print euros but not dollars. Sen. Richard Shelby (R., Ala.), ranking member of the Senate Banking Committee, was correct to raise concerns about the Fed’s policy last week. Losses on the Fed’s balance sheet hit the U.S taxpayer, not EU citizens.
The sad fact is that there is not enough money in the EU to pay off the public debts incurred by the governments. Most countries have long since squeezed as much tax revenue from their citizens as they can. That is why they have toyed with a tax on financial transactions, the one remaining untaxed activity in all of Europe.
Greece is the first of other sovereign defaults to come. With last week’s bailout, the EU leaders might have bought time, perhaps a year. But at some point, the ECB will cave and monetize the debt, leading to euro-zone inflation.
The debt calculus changed dramatically this week with the announcement of a Greek referendum on the bailout agreement next January. If voters reject the agreement, the ultimate outcome is unpredictable.
Americans must not be smug about the suffering of Europeans—our financial system is thoroughly integrated with theirs. Moreover, the International Monetary Fund will most likely be involved in the event of future bailouts and will likely need large funds from its members, which ultimately means the taxpayers.
And, of course, the U.S. has its own large and growing public debt burden. We have not gone as far down the road to entitlements, but we are catching up. If you want to know how the debt crisis will play out here, watch the downward spiral in the EU.
Meanwhile, expect more volatility in financial markets. U.S. traders in particular simply have not grasped the enormity of the EU debt crisis.
Mr. O’Driscoll, a senior fellow at the Cato Institute, is a former vice president of the Federal Reserve Bank of Dallas and later Citibank.