Free Markets, Free People

Daily Archives: March 7, 2011


Is the economy set on "rebound"?

That’s kind of what some pundits are hinting with the latest "official" unemployment numbers.

But as the three of us noted on yesterday’s podcast, that number is only a slight glimmer in an otherwise dark picture. And the underlying unemployment numbers (and trends) don’t really support the reduction of last week (the number of new private sector jobs was not enough to maintain the unemployment number). Or said another way, it is most likely a temporary blip. Another ominous development that doesn’t bode well economically is the precipitous rise in oil prices and the impact that will have on any recovery. In a word, the impact it will have is "bad".

Oil is one of those commodities that has a very broad impact on economic activity. It is, until an alternative or substitute is found, the literal life-blood of our economy.

How does oil staying in the $104 to $107 a barrel range sound? Not very good, obviously. As one refiner told me, his only control over how much the fuel he refines costs when it leaves his refinery is the economies he can wring out of his equipment, but the cost of the goods coming in are beyond his control. So that cost per barrel is what he’s paying as the crude shows up at his refinery for processing.

How long will it stay over $100 a barrel? Well, many are saying quite some time:

Oil prices climbed to near $106 a barrel Monday as intense fighting between Libyan government forces and rebels appeared to be turning into a civil war and raised the prospect of a prolonged cut in crude exports from the OPEC nation.

By early afternoon in Europe, benchmark crude for April delivery was up $2.25 to $106.67 a barrel, the highest since September 2008, in electronic trading on the New York Mercantile Exchange. The contract had gained $2.51 to settle at $104.42 a barrel on Friday.

[…]

Citigroup said it raised its 2011 average forecast for Brent crude to $105 from $90, but doesn’t expect the violent protests in North Africa and the Middle East to spread to Saudi Arabia, the world’s largest oil exporter.

"We assume that output disruption is maintained through the second quarter," Citigroup said in a report. "Output disruption, or at least the threat of, will support a fear premium for the rest of 2011."

As mentioned in the article, most now view the war in Libya to be a civil war. And, reports today say that Gadhafi’s forces have had some successes against rebel forces (apparently neither side is particularly swift in the combat portion of battle). Reports also point to other countries possibly helping the rebels. And we know there are "friends" of Gadhafi, mostly found in the socialist South and Central American countries, who will try to help the dictator maintain power.

The initial shock of the turmoil in Libya has worn off the markets and they are now looking at a prolonged reduction of capacity with Libya off line.  And, we’re seeing unrest in other Arab oil producing states as well.  Unrest, or instability, drives the price of oil up.

So it isn’t surprising that in the last two weeks, the price of gasoline rose at its second fastest pace ever:

Gasoline prices in the United States posted their second-biggest increase ever in a two-week period, due to the rise in crude oil prices stemming from the turmoil in Libya, an industry analyst said Sunday.

The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the previous survey on Feb. 18.

The most it ever jumped was in 2005 when hurricane Katrina hit.  But that was soon solved because the event itself wasn’t prolonged as is a civil war.  So chances are, this isn’t the end of the rising price of gasoline.

As you might expect our national leaders have managed to put us in a position where we essentially have nothing to answer with domestically.  In fact, as I recall, we’ve been told repeatedly for the last 20 or so years that bringing significant new assets on line would take at least 10 years or so and thus, I guess, shouldn’t be done.  Er, yeah, ok and where would we be now if we had committed to that 10 years of bringing them on line 20 years ago?  At least better off than we are now.

And most likely not talking about using the strategic reserve I’d bet.  FYI, the strategic reserve is not supposed to be a tool for the use of politicians to drive down the price of gasoline when their failed energy policies show up at the pump.  It is a reserve for use by our military in case we’re cut off from the foreign oil we’ve become even  more dependent upon.

But back to the economy.

Does anyone really need an explanation of the impact higher fuel prices will have on a barely recovering economy (not to mention unemployment)?  And, with the specter of inflation rising – not to mention food prices – how likely is the impact to be “minimal”?

Yeah, it’s not.

And, as usual, we’re in a basically no-win situation thanks to the foresight of our elected leaders and their wonderful job of putting a practical energy policy in motion.  A 10 month drilling moratorium (and the jobs that go with it) with no real end in sight.

Brilliant.

So to the original question – is the economy set to rebound?

Unfortunately if it was, it most likely will be one of the shortest rebounds in history.

~McQ


Are Egyptian commandos operating in Libya

An interesting little tidbit to pass along from the Strategy Page (along with the 700th different spelling of his Gadaffi’s last name):

The rebellion against the Kadaffi dictatorship in Libya has not produced any official outside help, but Egypt has apparently sent some of its commandos in to help out the largely amateur rebel force. Wearing civilian clothes, the hundred or so Egyptian commandos are officially not there, but are providing crucial skills and experience to help the rebels cope with the largely irregular, and mercenary, force still controlled by the Kadaffi clan. There are also some commandos from Britain (SAS) and American (Special Forces) operators are also believed wandering around, mainly to escort diplomats or perform reconnaissance (and find out who is in charge among the rebels).

The Egyptian commandos alleged to be operating in Libya are from Unit 777 which, according to Strategy Page, is considered to be a highly “competent” counter-terrorist unit:

Unit 777 trains with the help of the German GSG-9, French GIGN, and American Delta Force commandos. All Unit 777 members are qualified in static-line (low altitude) airborne operations, and possibly with HALO (high altitude jumps) as well.

But Unit 777’s job in the past, under the Mubarak regime, was the suppression of the Muslim Brotherhood.

So, here they are, allegedly in Libya, advising the rebels. 

Question: if true, who sent them (given Egypt’s current “turmoil”)?

Question: if their previous duty was suppression of the Muslim Brotherhood, what’s their current mission in Egypt?

Question: what is their real mission in Libya – is this a move by Egypt to annex a part of Libya eventually?

Any Egyptian involvement in Libya has to be handled very carefully. While the two countries fought a three day war in 1977, the real cause of tension is the fact that for thousands of years, most of Libya was considered part of Egypt. Given the fact that Libya has all that oil, and less than a tenth of the population of Egypt, well, then, you can figure out the rest. But for the moment, everyone is a revolutionary brother. At least for as long as the moment lasts, then history takes over.

And should the rebels eventually win and given the obvious turmoil that would follow, who would be positioned then to perhaps annex a part of Libya – most likely the part with oil – claiming historical sovereignty?

Oh … and what would we (or could we) do about it?

~McQ


New York Times: NY is not like WI

The NYT editorial board has decided it is time to rein in the compensation that government union employees get:

That huge increase is largely because of Albany’s outsized generosity to the state’s powerful employees’ unions in the early years of the last decade, made worse when the recession pushed down pension fund earnings, forcing the state to make up the difference.

Although taxpayers are on the hook for the recession’s costs, most state employees pay only 3 percent of their salaries to their pensions, half the level of most state employees elsewhere. Their health insurance payments are about half those in the private sector.

In all, the salaries and benefits of state employees add up to $18.5 billion, or a fifth of New York’s operating budget. Unless those costs are reined in, New York will find itself unable to provide even essential services.

So to review – government unions conspired to elect union friendly Democrats to the state legislature who in turn then granted, via “outsized generosity [with other people’s money]”, incredibly expensive benefits that cost those union members next to nothing.

Uh, yeah, I think that’s what has been said about Wisconsin as well.   But in its very next paragraph, the NYT says, presumably so as not to seem too anti-union or anti-worker, that pointing this out isn’t either of those things, but that darn GOP is both:

To point out these alarming facts is not to be anti- union, or anti-worker. In recent weeks, Republican politicians in the Midwest have distorted what should be a serious discussion about state employees’ benefits, cynically using it as a pretext to crush unions.

The NYT provides one of the perverse joys I look forward too each day – trying to figure out how the editorial board will torture both the language and logic to come up with the positions it assumes.  This is another example.  What is happening in Wisconsin – almost precisely the same scenario – is anti-worker and anti-union because good old Governor Walker is one of them – a Republican.

But Governor Cuomo?  Why the model of what it means to be a union friendly Democratic governor:

Gov. Andrew Cuomo has pursued a reasonable course, making it clear that he expects public unions to make sacrifices, starting with a salary freeze. He wants to require greater employee contributions to pensions and health benefits, with a goal of saving $450 million.

Negotiations begin this month, but so far union leaders have publicly resisted Mr. Cuomo’s proposals. If they don’t budge, Mr. Cuomo says he will have to lay off up to 9,800 workers.

Wait, what?  Capitulate or he lays off 9,800 workers?  Wow, that sounds pretty familiar.  So that’s a reasonable course, but what Walker has proposed (do the same or he lays off 1,500 workers) is a “cynical…pretext to crush unions”.

Got it. 

By the way, in WI, government union workers are being asked to pay 12% of their health benefit costs, up from 6%.  In NY, government union workers only pay 3%, far below the 20% private workers pay. And, NY government union workers have received pay increases every year (3%), to include last year (4%) in the middle of the downturn. 

The average salary for New York’s full-time state employees in 2009 (even before the last round of raises) was $63,382, well above the state’s average personal income that year of $46,957. Mr. Cuomo’s proposed salary freeze for many of the state’s 236,000 employees is an important step to rein in New York’s out-of-control payroll. It could save between $200 million and $400 million.

Pay freeze?  Huh.  Reasonable in NY, not reasonable in WI?

And pensions?

In 2000, employee pensions cost New York State taxpayers $100 million. They now cost $1.5 billion, and will be more than $2 billion in 2014. Wall Street’s troubles are a big part of that. But so are state politics. The Legislature, ever eager to curry favor with powerful unions, added sweeteners to pensions and allowed employees to stop making contributions after 10 years.

Of course the salient question avoided by the Times (and the coverage in WI) is “which politicians were “ever eager to curry favor with powerful unions”?”  In WI we know – they’re hiding out in IL.   In NY?  Well simply look at which party has controlled the Assembly for decades, including a supermajority now.  It wasn’t that cynical union crushing GOP (they’ve held off and on slim majorities in the state’s Senate).

Ironically, the NYT points out why government unions are problematic and should be “crushed” without knowing it.  But, and here’s the magic part, – apparently when the NYT makes note of that it has nothing to do with being “anti-union or anti-worker”, it is just pointing out “facts”.

It is also worth considering giving new employees the option to join what is known as a defined-contribution system, similar to the 401(k) plans widely in use in the private sector, and reducing the reliance on a guaranteed benefit system that has proved so ruinously expensive. The 401(k) system shifts the risk of a falling stock market to the employee instead of the state, but in the long run may be necessary to protect vital state services from economic downturns.

Nice … a device that has been in the private sector for decades, has been pointed out by critics of the defined benefit system for just as  long as a means to drastically cut the huge benefit hole the states have dug themselves and the NYT finally gets on board.  The horror, no?  A quasi-privatized pension system that requires workers to contribute to their own retirement.  What’s next, paying more for health care benefits!

Health care – another area the state has managed well.

Current state employees pay 10 percent of their health insurance premiums for single policies, and 25 percent for family policies, which is roughly in line with national averages for the public sector. But it is considerably less than most private workers pay — 20 percent and 30 percent, respectively.

And that has the state paying about $3 billion a year in health care costs with projections seeing that rise $300 to $400 million a year.

Opines the NYT:

If the state is unable to achieve the necessary savings in wages and pensions, it may need to seek higher insurance contributions for all state workers. That benefit is not protected by the state Constitution.

You think?

So again,let’s review. The NYT thinks wages should freeze, pensions need to be privatized, and government workers must contribute much more to their medical benefits/care, right?

But:

Unlike Gov. Scott Walker of Wisconsin, Governor Cuomo is not trying to break the unions. He is pressing them to accept a salary freeze and a reduction in benefits for new workers. The unions need to negotiate seriously.

You have to laugh at this sort of nonsense.

But then there’s this, so you can again be assured that it is indeed the NYT spouting the nonsense:

We are also urging the governor to rethink his pledge to cap property taxes and allow a tax surcharge on high incomes to expire at the end of this year. That would bring the state an additional $2 billion this fiscal year, and $4 billion the following year — not enough to solve the fiscal crisis, but a serious down payment.

That’s right, the editorial board thinks solving it by increasing property taxes and taxing the “rich” is a wonderful idea.

And in an attempt to put a spin on the plea for more taxes:

The state’s middle-class workers will have to make real sacrifices. New York’s many wealthy residents, all of whom are benefiting substantially from a new federal tax break, should have to pay their fair share as well. That would bring the state an additional $2 billion this fiscal year, and $4 billion the following year — not enough to solve the fiscal crisis, but a serious down payment.

The middle class workers the Times is talking about are government union members who, on average, earn  $16,425 a year more than the private sector “middle class” employees. The government employees would have to do something the average middle class worker in the state has been doing for decades – pay more for their benefits. 

But, this gives the editorial board’s an opportunity to talk about its favorite method of problem solving – raising taxes on the rich and on property owners.   And you have to love the language of class warfare – “the state’s middle class workers”, “fair share”, “wealthy residents” (they’re citizens, NYT, just like the middle class workers) and a “serious down payment” on solving the fiscal problem.  Of course, not a word in the editorial about spending cuts.

Oh, and union, you need to “negotiate seriously.”.

Uh huh.

But remember, none of this is like Wisconsin.  And don’t you forget it.

~McQ

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