Archive for category Economics

Big Government Means Subpar Economic Growth

Posted by Tom in Economics on July 14, 2011

Jerry O’Driscoll sent this from Dan Mitchell, his college at Cato.

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Greece For Dummies

Posted by Tom in Banks, Economics, Socialism, Taxation, Welfare on June 28, 2011

Greece is a socialist country with plenty of entitlements.

Few Greeks work producing products or services which outsiders want to buy, other than the Greek ruins. Therefore there is little income and profits that can be saved and reinvested for future growth.

Even fewer Greeks pay taxes to generate government revenue with which to pay entitlements. Without tax revenue, borrowing is the only source of funds.

So, the Greek socialist government issued sovereign debt in the form of Euro bonds at low Euro interest rates and used the borrowed money to pay the entitlements.

European banks, mainly the French and German banks, bought the bonds and treated them as rock solid assets on their balance sheets. After all, those bonds were “sovereign debt” with the full faith and credit of the national government.

Comes the recession which followed the worldwide financial crisis and with it hard times for all of Europe.

Now when it comes time to repay the Greek debt, Greece has no money, no tax revenue, so it borrows more money form the ECB, EU and the IMF. (NB: U.S. taxpayers contribute to IMF loans!)

This doesn’t sit well with the German workers whose taxes are going to subsidize Greek welfare benefits freely given to socialist Greek freeloaders.

So this time the lenders want assurances that Greece will eventually be able to repay the new loans, thus the ECB, EU and IMF impose conditions to the loans, mainly that the socialists entitlements be cut back, this so the government won’t need so much money in the future.

Well cutting entitlements doesn’t sit well with Socialists freeloaders, so the Greek citizens protest, clash with police, and riot.

Conclusion:

  1. Greek freeloaders are protesting because hard-working Germans won’t continue to support Greek slothful lifestyles.
  2. The EU continues to bail out Greece because if Greece defaults, the European banks collapse because their balance sheets are under water with all the bad Greek paper.
  3. If the European banks fail, there will be another worldwide financial crisis and a run on the Euro with a potential disintegration of the European Union.
  4. Finally, Greece as one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) is only the first bubble to pop. It doesn’t look good for Europe.

Now that you’ve endured, Greece For Dummies, I submit a more intelligent level of discourse is in order. For that please enjoy Daniel Mitchell’s Cato post, Should American Taxpayers Finance Another Big Fat Greek Bailout?

 

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Ethanol Whores

Posted by Tom in Corporate Welfare, Deficit, Economics, Energy Facts & Policies, Government Regulation, Politics, Republicans, Subsidies, Tariffs on June 16, 2011

There is no better current intersection of economics and the environment than ethanol. The rent-seeking corporate farmers in the U.S. and their political employee representatives in Congress and the White House have been able to (i) subsidize, (ii) mandate, and (iii) restrict imports of the environmentally harmful gasoline additive. Even Al Gore, now that he’s made his money, calls ethanol a fraud.

So why in this time of sky high deficits and unsustainable debt burdens we are laying on our grandchildren, do so-called Republican candidates support the ethanol fraud? Votes in corn producing states! It’s that simple.

Newt Gingrich, if he’s still a viable candidate, is an ethanol whore. He supports it. Mitt Romney, that smooth talking flip-flopper who developed the fore runner of Obamacare, is an ethanol whore. He supports it.

In fact, Mitt supported it publicly in Iowa as a follow-up to Tim Pawlenty’s gutsy Iowa statement that we can’t afford ethanol subsidies. So not only is Mitt a ethanol whore, but he’s a cheap one at that.

I expect Obama to win in 2012, if Mitt Romney, father of ObamneyCare, is leading the Republican field. When you think of it, Mitt should be running as a Democratt!

It’s heartening to see that the Senate today voted to end ethanol subsidies. That means it’s probably time for another Mitt Romney flip-flop. Get ready!

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Basic Political Divide: Faith in Government Spending to Create Prosperity

Posted by Tom in Economics, Fiscal Policy, Stimulus/Bailout on May 22, 2011

An interesting post today by John in Power Line, “REPENT! THE END OF KEYNESIAN ECONOMICS IS AT HAND!” His point is that given today’s doomsday prediction it is only right that it be applied to the Keynes multiplier effect. Instead of positive as Obama and his fellow leftists advocate, it’s really negative. Obama’s stimulus, coupled with his other leftists policies of government control, taxation, and redistribution, is a complete failure. A couple of charts illustrate:

A couple of take aways: “The most basic division between our political parties is their relative faith, or lack thereof, in the efficacy of federal spending.” “The reality is that inefficient government spending destroys jobs.” The final chart offers the evidence:

 

 

 

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What Happens When the Euro Plumets?

Posted by Tom in Economics, Financial Crisis, Financial Policy, Monetary Policy, National Debt on May 21, 2011

The prime concern of knowledgable financial analysts has been the Euro, its probable collapse, the consequent effect on the EU and, in turn, the world economy. I read and heartedly recommend John Muldin whose last articles lay out the all too obvious concerns. (See http://www.johnmauldin.com/frontlinethoughts. The basic subscription is free and very good)

In sum, the situation is that the ECB has been buying debt of the bankrupt nations, Greece followed by Portugal, Ireland and perhaps Spain in order to support the EU and more to the point the banks in each EU nation, including those of France and Germany. If ECB support is withdrawn, the banks holding the worthless paper at par, will no longer be solvent! This is the equivalent of Lehman Brothers bankruptcy on steroids!

Assuming the worst for the sake of argument we must ponder the consequences in Europe. Runs on banks are real but probably unnecessary as the currency has no consistant value. Gold, diamonds and high value commodities work as mediums of ad hoc exchange. A barter economy ensues. Europe-dependent international trade at best slows and at worst pauses until enough mediums of exchange can be agreed upon.

The dollar, as the ready-albeit unjustified-medium surges to bubble proportions. US exports become dramatically more expensive for any remaining buyers. US export sales and production slow to deep recession levels. Layoffs ensue. GDP plumets. Federal and state government entitlement demands rise with no ready relief.

The Fed initiates QE3 flooding the economy with more (depreciated in real terms) dollars by buying increasingly worthless US debt.

Will the US which has enjoyed the dumb-fat luxury of being the world reserve currency since Bretton Woods follow the EU and fold? Will there be another substitute world reserve currency? Are all central banks becoming political animals or fiscal policy proxies? How will world trade right itself?

All that said, what’s the effect on your family, your business, your community, your nation and your investments? Is “guns and gold” the mantra of the day? Something to consider!

 

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Minimum Wage, Another Bad Idea of the Left

Posted by Tom in California, Economics, Government Regulation on May 19, 2011

The following and op-ed by Brad Schiller originally published in the Sacramento Bee:

Viewpoints: Minimum Wage Law Relies on False Belief

The debate over the minimum wage has raged since the federal government first set wage standards in 1938. It continues today in California, where freshman Assemblyman Luis Alejo, D-Watsonville, is touting a popular bill – Assembly Bill 10 – to raise and index the state’s minimum wage. The two major points of contention in the policy debate on the minimum wage are whether job loss accompanies a minimum wage increase, and whether a large number of families depend on the income from minimum-wage jobs.

The first argument has been largely resolved: The best empirical evidence confirms standard economic theory that, if the government sets a wage floor above prevailing wages, some jobs will be lost.

But what of the second argument? Legislators from both sides of the aisle have been persuaded to vote for past increases in the minimum wage due to a strong conviction that many families are struggling to make it on the minimum wage alone. My new research debunks this conventional wisdom: A majority of adult minimum-wage earners in families are living well above poverty and are supported by a spouse who earns a considerably higher wage.

If family dependence on the minimum wage is the most widely used justification for wage hikes, we should know how prevalent such dependence is. For instance, a parent working at the minimum wage may hold another, higher-paying job. In two-parent families, the spouse of the minimum-wage employee may be the primary breadwinner. These and other possibilities imply that households with adult minimum-wage workers may not be as income dependent on those jobs as some advocates would like you to think.

The most compelling evidence on this topic is found by examining the finances of affected families in which one adult, age 33 to 50, worked a job earning at or below the minimum wage. I used data from the National Longitudinal Survey of Youth between the years 1998 and 2006, when the federal minimum wage was constant.

In 90 percent of the married-with-children households I studied, there was also a working spouse; 63 percent of these spouses earned more than $30,000 a year, with about half earning more than $40,000 a year.

None of these households are in poverty, nor is their economic well-being dependent on earnings from their minimum-wage job. In only one out of seven of these households are the earnings of both the minimum-wage worker and the spouse less than $10,000 apiece.

We can further describe the financial situation of these married-with-children minimum-wage workers by looking at the percentage of total family income coming from that job. With so many high-earning spouses, the percentage is low; in more than 75 percent of these families, the minimum-wage job accounts for less than 20 percent of family income.

In short, the evidence is overwhelming that family dependence on the minimum wage is the exception rather than the rule. And since almost all of those employees held higher-paying jobs at some point during the period studied, we can once and for all dispel the notion that a sizable number of adults are “stuck” at the minimum and waiting for a raise.

But what about the small number of less-skilled or experienced adults who do work at the minimum for an extended period of time and lack other sources of income? For them, raising the minimum would very likely hurt more than it would help – raising the cost to employ them increases their risk of losing employment altogether. Better-targeted assistance like the Earned Income Tax Credit would be less costly and more effective.

If the principal motivation for increasing the minimum wage is to aid struggling families in California, it is clear that such a strategy is highly inefficient. A majority of families with an adult earning the minimum wage are not struggling, and – given the small percentage of household income contributed by the minimum wage – their economic well-being is little changed as a result of a hike.

 

 

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Hayek vs. Keynes Continued–Fun Stuff

Posted by Tom in Economics, Humor on May 4, 2011

Brad Schiller and Mark Pingle alerted me to this “Round Two” of the Hayek Keynes RAP-FEST. For those loyal Hayek fans the first round was published in this blog on January 26th and 30th of last year and can be found under either “Humor” or “Economics” tags. CHALLENGE: Who can find Ben Bernanke in the audience? Enjoy!

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Public Unions vs. the Public

Posted by Tom in Bankruptcy, Economics, Employment, State Finances, Unions on April 6, 2011

There is a critical difference between private sector unions and public sector unions, PRIVATE SECTOR UNIONS ARE SUBJECT TO THE LAWS OF THE MARKETPLACE. PUBLIC UNIONS ARE NOT AND HAVE NO CHECKS OR BALANCES.

This fact is lost on the ignorant public because the issue is framed in terms of “union rights.” Whatever that means it has no applicability to  public unions. Private unions work for companies that compete in the marketplace. If their demands are too exorbitant in terms of wages and benefits, their employer will lose business to it competition. If the employer loses enough business, the employees lose their jobs. So a competitive market forces parties to be reasonable and respond to market conditions.

In the public union case, the government by definition is a monopoly free from competition. There is no market in which it must compete. Governments are by definition inefficient necessities in society. If their workers are allowed to unionize and collectively bargain for wages and benefits, there is no check or balance on their ability to extort increases, security, tenure, etc. A strike or walkout or slowdown creates a situation where there are no substitute government services. No competition.

Furthermore, the public unions are structured so that mandatory dues are taken from the pay of each government worker. A portion of those dues pay the union bosses and another portion go to political slush funds to be used to elect political candidates favorable to union causes. In essence the union bosses direct money to the elections of…..who? The very people who employ them and “negotiate” their wages and benefits.

So, a public union negotiation, is really no negotiation at all. The ritual of collective bargaining in the public union case is just a union boss talking to the employer boss who was elected with the help of the union boss!

This incestuous relationship is driving our states, counties and cities to the brink of bankruptcy. It is dis-economic to its core. It perpetrates a fraud upon the unsuspecting public. Finally, it increases the theft against our children and grandchildren and is wrong.

The only unrepresented parties are the taxpayers!

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Lets Eat the Rich

Posted by Tom in Bankruptcy, Budgets, Business, Deficit, Economics, National Debt on April 2, 2011

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U.S. Statism That Would Make China Proud

Posted by Tom in Centrally Managed Economy, China, Corporate Welfare, Economics, Statism on March 17, 2011

Friedrich Hayek observed that central planning doesn’t work no matter how smart the central planners because they can’t know as much as the aggregate of individuals dealing freely in the marketplace. This was the basis of his primary attack on socialism, communism.

China for years operated its communist state after the USSR model with central planners controlling the marketplace deciding what is produced, how much, by whom and what the price should be. Well China watched while its model the USSR careened into bankruptcy and dissolved. Clever Chinese learn quickly and have by increasing degrees evolved to a quasi-capitalistic model while not abandoning socialistic central planning completely. Statism still flourishes in China.

Obama and his leftists, excuse me, progressives, are the intellectual elite. They are better than the unwashed masses. They by the shear force of intellect know more than you and I know. Thus they are the best central planners around. They know what’s best for society whether its ethanol production or medical service delivery.

There is no better example of this than Government Motors, the failed car company that Obama confiscated to wipe out bondholders and hand over to the employee union and us taxpayers. And, there is no better story on this than Patrick Michaels Forbes article, Chevy Volt: The Car From Atlas Shrugged Motors. Seems that Obama’s central planners after inserting their own management decided that GM should manufacture little green cars to improve the environment and reduce foreign oil dependence. The little green car of choice was to be called the Chevy Volt, because it ran on electricity. This was so wonderful, electricity not gasoline, that the central planers decided that this merited a tax subsidy, in this case a $7,500 rebate!

Central planner in chief Obama was so impressed that he went to the plant and had his new GM boss order the tripling of planned production. Oh, but then came the embarrassing news that Volt wasn’t the first ever all electric production vehicle, the Volt needed a premium gas engine! So it was really a hybrid. Ah no, the gas was only to recharge the batteries and it would still travel 50 miles without gas. Sorry, another surprise came out: the premium gas engine is needed to turn the wheels and it will only go 25 mile without gas.

The sticker price is $41,000 or $43, 700 with options to which is added a dealer prep charge of $5000, against which the $7500 rebate applies. “This is one reason that Volt sales are anemic: 326 in December, 321 in January, and 281 in February. GM announced a production run of 100,000 in the first two years. Who is going to buy all these cars?”

OK, in statist China, the government runs the production companies, just like Government Motors. But the government also influences other companies, call them dependent companies. The answer to who will but these Volts, is General Electric, a US dependent company.

Seems that GE is awash in tax subsidy dependent windmills. Obama needs a Volt buyer, GE needs windmill subsidies. So Obama appoints Jeff Immelt to chair his Economic Advisory Board and Jeff Immelt buys 50,000 Volts, provided he gets the tax rebate!

Voila! Problem solved! Who loses, after all? Just the taxpayers, the economy, the nation, that’s all. Turns out, Honda won’t lose: A 5 seat Accord gets 34 mpg vs. Volt’s 27 and costs less than half the cost of a Volt.  Hayek looks pretty smart….a lot smarter than Obama!

Patrick Michaels is senior fellow in environmental studies at the Cato Institute and author of Climate Coup: Global Warming’s Invasion of our Government and our Lives, which comes out April 22.

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