Free Markets, Free People

Monthly Archives: January 2012

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The Federal Government vs. the Private Sector: wages, benefits and total compensation

Reading over the CBO’s analysis and comparison of private sector wages vs. federal government wages revealed some interesting things.  The CBO broke down its comparison by education – or lack there of.

It seems that if you have a college degree or a professional degree, pay is about equal in the private and government sectors (although benefits are greater if you work for government).  If you have a PhD, you’re much better off in the private sector.

But, if you’re a high school grad or college drop out, the Fed is for you.

Wages:

Federal civilian workers with no more than a high school education earned about 21 percent more, on average, than similar workers in the private sector.

Benefits:

Average benefits for federal workers with no more than a high school diploma were 72 percent higher than for their private-sector counterparts.

Total compensation:

Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.

Now I note this for a very simple reason.  Who do you think is attracted to federal service vs. who do you think might seek employment first outside of federal service?  And what effect do these inflated wages and benefits have on the labor market?

It is sort of like the subsidy/tax question.  If you subsidized something you get what?  More of it.   If you tax it you usually get what?  Less of it.

Well, if you pay wages and benefits far above the market to a certain segment of the population, who are you likely to attract?

And are we necessarily best served by that?

I don’t have anything against high school grads.  I’m simply illustrating a point.  This isn’t a market driven phenomenon.  It is, however, something that will effect labor markets.  It is sort of the opposite of the Medicare problem in the health profession.  Medicare artificially bids down the price of health care to the point that as it continues to lower its payments, more and more health care providers refuse to take Medicare patients.

In this case we have government artificially bidding up the price of labor with arbitrary wage, benefit and total compensation numbers (they’re obviously not tied to private market compensation except somewhat in the case of college or professional degrees).  And, of course, you have to factor in government unions as big reason for this.

What it means is government will take potential workers from the market that might have worked in the private sector at a lower wage.  Now, certainly, there’s no shortage of labor at this point in our economy, however, you get the point.   If we were in such a place (you know, like a recovery with a rapidly expanding private sector?) then you’d have government bidding up wages artificially – and we all know what that means to consumers.  Higher prices.  And to potential employers – higher wages and benefits.

The result – well, probably reduced hiring.  Because any good business is going to do a cost-benefit analysis to determine whether the job they’re considering adding is worth the price they’ll have to pay in wages and benefits.   This is probably one of many factors, at this time, which point to the “no” button.

It is this sort of intrusion in markets (in hundreds of ways driven by government) that distorts them, artificially moves the equilibrium point and causes prices to rise and unemployment to stay high.

~McQ

Twitter: @McQandO


Economic Statistics for 31 Jan 12

Today’s economic statistical releases:

The Employment Cost Index rose 0.4% last month, 2% from last year, as wages are showing upward pressure at odds with the slow economy.

The Chicago Purchasing Manager’s index fell from 62.5 to 60.2 as Chicago area business conditions cooled slightly.

S&P Case-Shiller report their home price index shows continued erosion in prices, down -0.7% for the month on a seasonally adjusted basis. Remove the seasonal adjustments, and the picture is even worse, with the 20-city index down -1.3% for the month and -3.7% from last year.

The Consumer Confidence Index slid from 64.5 last month to 61.1 this month. The Conference Board says the estimate of current conditions is weak.

The State Street Investor Confidence Index fell to 92.4 from last month’s 99.3.

In weekly retail sales, ICSC-Goldman reports a lackluster 0.1% increase for the week, up 3.9% from last year. Redbook is also relatively muted in the January sales increase, coming in at 2% above last year.

~
Dale Franks
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Global cooling?

But, but, polar bears, rising oceans, melting ice, oh my:

The supposed ‘consensus’ on man-made global warming is facing an inconvenient challenge after the release of new temperature data showing the planet has not warmed for the past 15 years. The figures suggest that we could even be heading for a mini ice age to rival the 70-year temperature drop that saw frost fairs held on the Thames in the 17th Century. Based on readings from more than 30,000 measuring stations, the data was issued last week without fanfare by the Met Office and the University of East Anglia Climatic Research Unit. It confirms that the rising trend in world temperatures ended in 1997.

For those alarmists still stuck in the alarmist convenient “science” of the 20th century, this is the inconvenient scientific truth of this century … no warming despite the fact that man-made CO2 levels have gone up.  As David Rose remarks, “the ‘supposed’ consensus” is apparently wrong.article-2093264-1180A4F1000005DC-28_468x286

 

I’m sure you understand why this temperature data was released last week with little “fanfare”.  Had it been the opposite finding, we’d have been treated to a parade of alarmists again claiming that we need to tax ourselves back to the stone age in order to save the planet.

Oh, and remember that big, hot, yellow thing that hangs in the sky that I have mentioned repeatedly should be factored in to the “science” of global warming vs. being ignored? Henrik Svensmark, Denmark’s National Space Institute seems to feel the same way:

World temperatures may end up a lot cooler than now for 50 years or more. It will take a long battle to convince some climate scientists that the sun is important. It may well be that the sun is going to demonstrate this on its own, without the need for their help.

So alarmists can’t ignore this anymore.  They can’t fall back on consensus, because consensus isn’t science.  In fact, right now, given the new data, it is their reputations on the line, not that of the skeptics:

If temperatures continue to stay flat or start to cool again, the divergence between the models and recorded data will eventually become so great that the whole scientific community will question the current theories. The real issue is whether the model itself is accurate.

And, of course, indications are (many indications are) that they’re not.  For instance:

The responsible thing to do would be to accept the fact that the models may have severe shortcomings when it comes to the influence of the sun,’ said Professor Curry. As for the warming pause, she said that many scientists ‘are not surprised’.

he argued it is becoming evident that factors other than CO2 play an important role in rising or falling warmth, such as the 60-year water temperature cycles in the Pacific and Atlantic oceans.

‘They have insufficiently been appreciated in terms of global climate,’ said Prof Curry. When both oceans were cold in the past, such as from 1940 to 1970, the climate cooled. The Pacific cycle ‘flipped’ back from warm to cold mode in 2008 and the Atlantic is also thought likely to flip in the next few years .

Pal Brekke, senior adviser at the Norwegian Space Centre, said some scientists found the importance of water cycles difficult to accept, because doing so means admitting that the oceans – not CO2 – caused much of the global warming between 1970 and 1997.

One of the other indicators was to be found in the Lysenkoish conformity that was imposed on this branch of science by alarmists.

Although the number of publicly dissenting scientists is growing, many young scientists furtively say that while they also have serious doubts about the global-warming message, they are afraid to speak up for fear of not being promoted—or worse. They have good reason to worry. In 2003, Dr. Chris de Freitas, the editor of the journal Climate Research, dared to publish a peer-reviewed article with the politically incorrect (but factually correct) conclusion that the recent warming is not unusual in the context of climate changes over the past thousand years. The international warming establishment quickly mounted a determined campaign to have Dr. de Freitas removed from his editorial job and fired from his university position. Fortunately, Dr. de Freitas was able to keep his university job.

This is not the way science is supposed to work, but we have seen it before—for example, in the frightening period when Trofim Lysenko hijacked biology in the Soviet Union. Soviet biologists who revealed that they believed in genes, which Lysenko maintained were a bourgeois fiction, were fired from their jobs. Many were sent to the gulag and some were condemned to death.

Certainly dissenting scientists weren’t sent to actual gulags but attempts were to made banish them to academic gulags with their credentials in tatters.

16 scientists wrote the above two paragraphs and then reveal what drove this breech of the scientific method was, as we’ve mentioned before, pretty mundane and fairly obvious if you just took the time to look:

Why is there so much passion about global warming, and why has the issue become so vexing that the American Physical Society, from which Dr. Giaever resigned a few months ago, refused the seemingly reasonable request by many of its members to remove the word "incontrovertible" from its description of a scientific issue? There are several reasons, but a good place to start is the old question "cui bono?" Or the modern update, "Follow the money."

Alarmism over climate is of great benefit to many, providing government funding for academic research and a reason for government bureaucracies to grow. Alarmism also offers an excuse for governments to raise taxes, taxpayer-funded subsidies for businesses that understand how to work the political system, and a lure for big donations to charitable foundations promising to save the planet. Lysenko and his team lived very well, and they fiercely defended their dogma and the privileges it brought them.

These 16 scientists also give a little political advice that should be heeded:

Speaking for many scientists and engineers who have looked carefully and independently at the science of climate, we have a message to any candidate for public office: There is no compelling scientific argument for drastic action to "decarbonize" the world’s economy. Even if one accepts the inflated climate forecasts of the IPCC, aggressive greenhouse-gas control policies are not justified economically.

No compelling scientific argument? 

See above.

For 15 years the earth has not been warming even while man-made CO2 levels have risen. 

That’s scientific fact and it is time the alarmist crowd began dealing straight with the public using facts.

~McQ

Twitter: @McQandO


Federal Housing Authority and Freddie Mac: Betting against the homeowner

This should be a big story but in all likelihood it won’t be.  But it gives you an insight to the depth of intrusion into the housing market by the federal government.  Don’t forget, the official story is that the housing problem it is all the fault of big banks.   Read this story carefully, because there is much here that should help explain why that just isn’t so:

First, the job of Freddie Mac according to this article:

Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”

And:

Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get loans and on what terms.

The dirty little secret is they were always “owned” by the taxpayer.  They were government subsidized entities (called “quasi-governmental”) whose policy was set by the federal government. 

So who is in charge of Freddie Mac?

The Federal Housing Finance Agency effectively serves as Freddie’s board of directors and is ultimately responsible for Freddie’s decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.

So let’s see, we now have a guaranteer of mortgages fully run by government (government can’t hide behind the “quasi” label anymore) and run by an essentially unaccountable bureaucrat is responsible for setting the “rules” which “determine whether homeowners can get loans and on what terms”.  Yeah, no intrusion there.

Wonderful so far, yes?

So what’s our friendly little government institution that its CEO says is “helping financially strapped families reduce their mortgage costs through refinancing” been up too lately?

Betting against the success of its “charter”.

But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.

Note that one phrase in the second sentence before we move on: “In addition to being an instrument of government policy dedicated to making home loans more accessible …”.  That’s something that left continually denies, but, in fact, led to the type borrowing that brought the housing market down.  Both Freddie and Fannie have been “instruments of government policy” since their establishment.  Anyone who continues to deny that is simply denying reality.

Moving on, however, you see an inherent conflict of interest which all the experts are trying to waive away as something “walled off” from the side which makes the lending rules for mortgages.  No conflict they say (one has to wonder what government would say if the same conditions existed in a private concern).

But (there are lots of “buts” in this story), here’s the rub:

The trades raise questions about the FHFA’s oversight of Fannie and Freddie. But the FHFA is not just a regulator. With the two companies in government conservatorship, the FHFA now plays the role of their board of directors and shareholders, responsible for the companies’ major decisions.

Under acting director DeMarco, the FHFA has emphasized that its main goal is to limit taxpayer losses by managing the two companies’ giant investment portfolios to make profits. To cover their previous losses and ongoing operations, Fannie and Freddie already had received $169 billion from taxpayers through the third quarter of last year.

The FHFA has frustrated the administration because the agency has made preserving the value of the companies’ investment portfolios a priority over helping homeowners in expensive mortgages.

No conflict though.  The rule maker is also prioritized profit over refinancing.  Again, wondering about the private side of things, does anyone doubt that a private concern would be in the government’s crosshairs if the same things were as obvious there?

It’s a bit like state lotteries.  If you start a numbers game, you go to jail.  The state reserves only to itself the right to run numbers games.  In this case, what would have the FBI raiding the place and grabbing computers if it was a private company is simply a “debate” within the government on whether or not there’s any problem here.

Even though Freddie is a ward of the state, top executives are highly compensated. Peter Federico, who’s in charge of the company’s investment portfolio, made $2.5 million in 2010, and he had target compensation of $2.6 million for last year, when most of these leveraged investments were made.

One of Federico’s responsibilities — tied to his bonuses —  is to “support and provide liquidity and stability in the mortgage market,” according to Freddie’s annual filing with the Securities and Exchange Commission. Mortgage experts contend that the inverse floater trades don’t further that goal.

Sometimes it makes you wonder who serves whom, doesn’t it?  I look at stories like this and tend to wonder if, in fact, we’ve finally transitioned from a government of the people to one that can best be likened to the mafia.  As this story points out, the intrusion is to such a depth now that government priorities no longer reside on the side of serving the people, but instead on serving government and its bureaucracies.

Let freedom ring.

~McQ

Twitter: @McQandO


Economic Statistics for 30 Jan 12

Today’s economic statistical releases:

Personal income rose 0.5% in December, while personal spending remained unchanged. On a year over year basis, income rose 3.8 %, while spending rose 3.9%, once again exceeding the rise in income. The Core PCE Price Index, an inflation measure,rose 0.2% for the month, and is up 1.8% over last year.

The Dallas Fed Manufacturing Survey shows that manufacturing picked up the Texas Fed District last month. The general business activity index rose from -3.0 in the prior month to 15.3, and the production index rose to 5.8 from -1.3.

~
Dale Franks
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Income inequality: why you shouldn’t care

James Q Wilson makes many of the same points that have been made here over the last few months concerning the argument about income inequality that the left has been trying to use as a reason to tax the rich even more than they’re taxed now.   In sum, most of the left’s arguments rest in the premise that the economy is a zero sum game and that the income the “rich” are taking had to come from someone else’s slice.

That argument, much like the climate change debate, depends on a measure of ignorance among those they’re trying to influence. 

In reality, income inequality is nothing to be concerned about when it meets certain conditions.   Or, in other words, it isn’t a zero sum game and everyone has an opportunity to do better.

The first measure as we’ve noted before, is income mobility.  Wilson:

The “rich” in America are not a monolithic, unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half of people in the top 1 percent in 1996 were still there in 2005. Such mobility is hardly surprising: A business school student, for instance, may have little money and high debts, but nine years later he or she could be earning a big Wall Street salary and bonus.

Mobility is not limited to the top-earning households. A study by economists at the Federal Reserve Bank of Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years. Over the same period, more than a third of those in the highest fifth of income-earners had moved down. Certainly, there are people such as Warren Buffett and Bill Gates who are ensconced in the top tier, but far more common are people who are rich for short periods.

In sum, you have both the top and bottom quintiles changing constantly as income earners move up or down fairly regularly.  That means those moving up must be getting the opportunity to do so somewhere, and the fact that there is a change of about half in the period studied says many are succeeding.

Who are these people that get ahead?  Well as Wilson mentions, a poor (I’m talking income here) student who graduates and gets a job in his or her field most likely won’t be poor in the sense of income very long.  And that goes for most of the “rich”:

Affluent people, compared with poor ones, tend to have greater education and spouses who work full time. The past three decades have seen significant increases in real earnings for people with advanced degrees. The Bureau of Labor Statistics found that between 1979 and 2010, hourly wages for men and women with at least a college degree rose by 33 percent and 20 percent, respectively, while they fell for all people with less than a high school diploma — by 9 percent for women and 31 percent for men.

Also, households with two earners have seen their incomes rise. This trend is driven in part by women’s increasing workforce participation, which doubled from 1950 to 2005 and which began to place women in well-paid jobs by the early 1980s.

Preparation, delayed gratification and a work ethic.  The old Puritan ideal.  Amazing the staying power it has, no?  That and adding a spouse with similar traits has a tendency to boost income to the household significantly.  Yet for some reason, the left (who, btw, are all about workplace equality and equal pay) now want you be jealous of those accomplishments.

If, as the left would prefer, we should be concerned with income inequality and the mechanism that advances it, the solution is simple:

We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce — but who would want to do that?

Well certainly not the left, who doesn’t want the rich to go away.  Instead it simply wants to make you hate them so they can justify taking more of their money.  But Wilson’s point is spot on.  This once was the key to the door of the American dream.  Now it’s the key to a class of citizen who is  vilified and called greedy and accused of not paying their “fair share”.  If anyone is killing the American dream, it is the American left.

The tax on the rich is offered as a panacea to all that ails us.  It will help pay down the debt and it will “level the playing” field.  One assumes that means that it will somehow help the poor not be poor. 

But Wilson points out, poverty in the US isn’t a function of the rich making a greater percentage of the national income.  Poverty is a cultural problem that has nothing to do with the rich or taxing them:

The real income problem in this country is not a question of who is rich, but rather of who is poor. Among the bottom fifth of income earners, many people, especially men, stay there their whole lives. Low education and unwed motherhood only exacerbate poverty, which is particularly acute among racial minorities. Brookings Institution economist Scott Winship has argued that two-thirds of black children in America experience a level of poverty that only 6 percent of white children will ever see, calling it a “national tragedy.”

Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.

Most of the lack of economic opportunity and dearth of skills comes not from the rich making too much, but those in that condition making poor choices early in their lives.  Combine that with some of the less desirable cultural aspects of poverty and you end up with a fairly permanent underclass with little hope of advancing.

But that has nothing to do with the rich or how much they make.  Problem?  Yes.  A product of income inequality.  No.

And even then, poverty in this country is a relative thing:

Between 1970 and 2010, the net worth of American households more than doubled, as did the number of television sets and air-conditioning units per home. In his book “The Poverty of the Poverty Rate,” Nicholas Eberstadt shows that over the past 30 or so years, the percentage of low-income children in the United States who are underweight has gone down, the share of low-income households lacking complete plumbing facilities has declined, and the area of their homes adequately heated has gone up. The fraction of poor households with a telephone, a television set and a clothes dryer has risen sharply.

In other words, the country has become more prosperous, as measured not by income but by consumption: In constant dollars, consumption by people in the lowest quintile rose by more than 40 percent over the past four decades.

Income as measured by the federal government is not a reliable indicator of well-being, but consumption is. Though poverty is a problem, it has become less of one.

I always think of my mother when I read things like this.  She was defined as “poor” after retirement and my father’s death.  House paid for, cars paid for, and had more money in retirement (very large savings account) than she could spend, but when measured against the arbitrary income line, you’d have thought she was eating cat food and living in a cardboard box.   She lived very well, but her “income” – all she received a year from Social Security – put her under the poverty line. 

So Wilson’s point is correct – measuring consumption paints a completely different picture, and that picture says things are getting relatively better for the “poor” in this country even while the rich seem to be getting richer.   Something about “lifting all boats” in there.

All of this is, simply, class war populism.  President Obama said in his State of the Union address, “call it class warfare if you want.”  Okay, I will.  That’s precisely what it is.  It is the demonization of a class designed to shift blame from one entity (in this case the Obama administration) to another (the rich) and blame them for all the problems now extant. 

The fact remains that income inequality isn’t a problem.  It is certainly not even a major problem.  And for the most part, American’s reject the argument:

American views about inequality have not changed much in the past quarter-century. In their 2009 book “Class War? What Americans Really Think About Economic Inequality,” political scientists Benjamin Page and Lawrence Jacobs report that big majorities, including poor people, agree that “it is ‘still possible’ to start out poor in this country, work hard, and become rich,” and reject the view that it is the government’s job to narrow the income gap. More recently, a December Gallup poll showed that 52 percent of Americans say inequality is “an acceptable part” of the nation’s economic system, compared with 45 percent who deemed it a “problem that needs to be fixed.” Similarly, 82 percent said economic growth is “extremely important” or “very important,” compared with 46 percent saying that reducing the gap between rich and poor is extremely or very important.

So why does the left continue to pursue it?  Well, one of the reasons is, as mentioned, a need to blame someone else for the perceived failings of this administration. “It’s not our fault.  If only the rich would pay their fair share.  But the Republicans won’t allow it”.

The second, of course, is that left – champions of progressive taxation – see this as an opportunity to advance that ideal again.  Wilson asks the pregnant question which you’ll never get the left to agree too:

But what is the morally fair way to determine tax rates — other than taxing everyone at the same rate?

Indeed.  And:

The case for progressive tax rates is far from settled; just read Kip Hagopian’s  recent essay in Policy Review, which makes a powerful argument against progressive taxation because it fails to take into account aptitude and work effort.

Those are traits that can never be made “equal”.  Those are what propel some out of the lowest quintile and keep others in the highest quintile.  Since you can’t make people work harder or increase their natural aptitude for work, the only way to make things “equal” is to do what?

Penalize those who excel.

That’s precisely what the progressive tax system does.  In the case of this country, it then subsidizes those who don’t excel, thereby getting exactly what those subsides pay for – a permanent underclass, or at least the basis for one.

So, income inequality isn’t our problem.  Poverty is.  Or at least the American version of poverty.   And taxing the rich won’t do a thing to solve that problem.  Nope, the answer is much more complex and involved than that.  That’s what the left doesn’t want to face.  Because if it does, it is likely to find the root of the current problem of poverty in this country directly in programs leftists have touted for decades.

And we can’t have that, can we?

~McQ

Twitter: @McQandO


Observations: The QandO Podcast for 29 Jan 12

This week, Bruce, Michael, and Dale talk about the SOTU speech, Republican race, and slow collapse of the EU.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.


A comparison of catastrophic scenarios

Consider the following generic proposition:

“System Y is a complex system, and its destabilization would have a dramatic negative impact on society. Factor X is known to influence System Y, and the growth of Factor X is believed to destabilize System Y and even make it possibly vulnerable to catastrophic Failure Mode Z.

“Therefore, for the good of society, it’s extremely important to reduce Factor X. Everyone must make sacrifices to avoid Failure Mode Z. “

If any particular values of System Y, Factor X, and Failure Mode Z come to mind when you read that, please note them before you read the rest.

Whether such a proposition is valid in the real world depends on many things. For example, is it proven that Factor X’s growth contributes to the destabilization of System Y? What is the probability that the current rate of growth of Factor X will cause System Y to fail in some way. What’s the probable timeline involved? What are the likely negative results if System Y becomes unstable? Are there results from the past of such systemic failure, and if so what can we learn from them about the probabilities and outcomes in this case?

Let’s take a look at a couple of real cases of the proposition.

First, let’s consider

System Y = global climate

Factor X = carbon dioxide

Failure Mode Z = significant global temperature rise with attendant sea level rise and other forms of extreme environmental degradation

With this particular substitution, most of those on the left would vigorously assure us that the proposition was valid. They would then tell us that, in order to reduce carbon dioxide, drastic measures are needed, even though those measures have some very undesirable side effects on various members of society.

Next, let’s consider

System Y = US or world financial system

Factor X = government spending and debt

Failure Mode Z = financial system meltdown, in which financial institutions fail en masse, and normal commerce is halted or seriously disrupted

Now, if we make this substitution and present the proposition to a typical leftist, their reaction would be quite different. They would very likely not agree that drastic measures are needed to reduce spending and debt. Based on recent arguments from the left, they would look to comparatively small changes to address any dangers, such as raising taxes on rich people, or “rooting out fraud and waste”. Such changes have been tried before, and clearly are not a long term fix, yet the left keeps insisting that they are sufficient to head off potential financial catastrophe.

They would certainly not be in favor of dramatic reductions in Factor X in this case. They would be very concerned about the effects on society of the spending reductions, and would likely even resort to hyperbole to highlight those effects. They might even say that those who advocated dramatic reductions in spending and debt were cruel, heartless people who were simply unwilling to do their part for other, less advantaged people.

Let’s first assume, just for the sake of argument, that both forms of catastrophism are real dangers. I think they actually are quite different in the amount of danger they pose, but for now let’s pretend that they are both serious dangers that could result in catastrophes affecting many millions of people in drastic and awful ways.

In that case, why would the left react so differently to the presumed obvious solution of reducing Factor X?

I believe the real reason the left supports drastic measures in the first case but not the second is fairly obvious. In the first case, the reduction of Factor X (carbon dioxide) requires a dramatic increase in government size and influence. In the second case, the reduction of Factor X (spending and debt by various governments) requires a dramatic decrease in government size and influence. In fact, it calls into question the entire viability of the welfare state. (More on this below.)

Of course, those on the right are subject to the symmetrical analysis. One might conclude (in fact, the typical leftist would almost certainly conclude) that the right makes such decisions solely based on their distaste for big government. They don’t accept the first proposition because it increases government, while they accept the second one because it decreases government.

However, as I said earlier, there are a lot of other factors in play. The probabilities involved and the historical analogs are quite different.

In the climate change case, there is no historical example of the climate system failing by going into a catastrophic mode. There have been ups and downs due to natural causes, but no mass extinction, for example, has been clearly traced to runaway temperature rise.

We have some geological evidence about climate change. Geological examples are necessarily fuzzy, but the best ones we have go the other way. We know that ice ages are not uncommon, and in fact occur on a semi-regular basis. We know that one ended about 10,500 years ago, and that ending (i.e. the warming that went with it) was probably a major factor in the spread of modern humans around the planet.

We know that there have been periods when the climate was warmer or colder than average, and we also know that mankind has generally fared better during the warm periods.

So there’s no tangible example from history or geology that should fuel fear of catastrophic warming. All we have are models. They have a short baseline, and even in that baseline, they have shown serious flaws. Other factors such as solar variability appear to have a greater influence than mankind’s carbon emissions than most of the models include. (This ignores the strong possibility of outright incompetence, fraud, and other human factors that cast doubt on the models.)

You can read a recent summary of the state of that argument in this article. A few extracts:

“…the data was issued last week without fanfare by the Met Office and the University of East Anglia Climatic Research Unit. It confirms that the rising trend in world temperatures ended in 1997.”

 

“CO2 levels have continued to rise without interruption and, in 2007, the Met Office claimed that global warming was about to ‘come roaring back’. It said that between 2004 and 2014 there would be an overall increase of 0.3C. In 2009, it predicted that at least three of the years 2009 to 2014 would break the previous temperature record set in 1998. So far there is no sign of any of this happening. But yesterday a Met Office spokesman insisted its models were still valid.”

 

“Meanwhile, since the end of last year, world temperatures have fallen by more than half a degree, as the cold ‘La Nina’ effect has re-emerged in the South Pacific.

‘We’re now well into the second decade of the pause,’ said Benny Peiser, director of the Global Warming Policy Foundation. ‘If we don’t see convincing evidence of global warming by 2015, it will start to become clear whether the models are bunk.”

 

Climate change has been vigorously discussed on QandO, so there’s not really any need to go further. It’s enough to note that the entire case for climate catastrophism looks a lot shakier than the left wishes to acknowledge. And again, we don’t really have any historical examples to learn from, and the geology is fuzzy.

However, on the economic side, we certainly do have examples of system failure. From Roman times to the Weimar Republic, we’ve seen that an economic system can certainly fail from too much spending and debt.

Further, the economic models have something in them the climate models don’t – clear and obvious exponential factors at work. Compound interest is one such factor that no one can deny. It’s also the opinion of many (including myself) that the spending curve for most welfare-state governments exhibits an exponential shape.

We know that exponential growth cannot go on indefinitely in the real world. Eventually, the amounts outstrip the boundaries the real world will tolerate. This is often expressed by the saying “What can’t go on forever, won’t.”

There are other differences. Climate change, if it happened at all, would happen over a span likely measured in decades. No one outside silly movies is saying that a city such as New York would go to being underwater, or too hot or too cold to live in, in a matter of weeks or months.

Financial failure, on the other hand, could happen quite suddenly. Most people would not be prepared for it, and that would cause the suffering to be worse.

Finally, it’s not clear how much of the populace would be negatively affected by significant warming of the earth. Some would clearly benefit – just ask the folks who live in Greenland. Others could suffer, of course. However, remember our history – humankind does better in warmer periods. So there would have to be a dramatic runaway spiral on heat to get into territory where the net effect would be dramatically negative.

I’m not saying it couldn’t happen, but the probabilities for that look ridiculously low and we have no historical, archeological, or geological examples to point to.

However, an economic catastrophe in the US financial system would affect almost everyone here, and many others around the world. Certainly those with lots of assets could ride out the effects better (“women and minorities hardest hit”) but hyperinflation on the Weimar scale wipes out even huge fortunes. Plus, our financial system is more complex than ever, and we now have a society utterly dependent on its smooth functioning. In the Great Depression, a majority still lived on farms and grew their own food. They were insulated from the very worst effects. Not true today – if the system really broke down, a lot of people would grow hungry quickly. You can write your own ending from there, but it’s pretty much certain to involve civil violence, looting, etc. Because we’re in uncharted territory in the complexity of our society and our financial system, it’s not inconceivable that outcomes could involve depravation and widespread violence never seen in this country (though I think that’s an unlikely, worst-case possibility).

So to summarize: the left is frantically worried about climate change, even though the outcomes are quite murky. They are ready to take drastic action right away, even though those murky effects might be quite a ways into the future, if they can just get those Neanderthal righties to accept the consensus, etc.

But they are quite blasé about an approaching catastrophe that is much more likely, has historical parallels, has effects that could be worse for more people, and could happen in very short order.

How can this be? If what I say is correct, how can they support dramatic intervention to mitigate climate change, but not support dramatic intervention to mitigate economic meltdown?

Because accepting the possibility of economic catastrophe means rethinking their entire philosophy. Intervention to mitigate economic meltdown means dramatic reversal of the welfare state. Most of those on the left are mentally unable to accept that possibility, and will therefore resort to any level of rationalization necessary to reject it.

Thus, I conclude that most leftists have convinced themselves that an economic catastrophe is wildly unlikely to occur, just as those of on the right simply don’t believe that a climate catastrophe is likely to occur. As I outlined above, I think their conclusion is logically unsupportable, whereas I think doubting a climate catastrophe is completely supportable.

Given 2008, given the spending curves, given the obvious incompetence and mendacity of our politicians, how can they doubt the strong possibility of economic catastrophe? Well, in their lifetimes, there has always been one more set of kludges that kept the system stabilized for a while. They can rationalize that, if certain selfish parties just give in to another set of kludges, things will work out fine. They simply ignore historical parallels, or come up with rationalizations for why they don’t apply to our present circumstances. Some have abysmal math skills, and don’t intuitively grasp what an exponential effect really means, so they don’t give such factors any weight.

They also take comfort in the idea that they are fighting for the poor and downtrodden, and cannot conceive of a world in which the welfare state is not the framework where they do that. To them, preventing a catastrophe that has not yet occurred by taking measures that are sure to hurt such people is simply unthinkable.

I think this is insanity. Even if we accepted the most aggressive Republican proposals currently out there, they don’t even turn the tide against spending and debt. Fall 2008 gave us a pretty clear warning that the system is no longer stable. If the financial catastrophe occurs, it will hurt everyone, and it will hurt the poor and downtrodden the worse – far worse than spending reductions that gradually start reducing the welfare state.

This leads to a troubling corollary. Most leftists don’t really seem to believe the system is vulnerable to catastrophe, but, based on behavior, neither do establishment Republicans! If they did, last year’s dance around the debt limit would have a far different character to it. The establishment Republicans are engaged in only a slight variation in the “kick the can” strategy favored by Democrats, and the only reason they vary at all is the influence of the newly elected, tea-party-backed contingent in the House.*

In 2008, both the establishment Republicans and the Democrats in Washington panicked. For a while, it looked like the catastrophe might actually be imminent, and that scared them spitless. They authorized huge, unprecedented levels of spending and debt, mostly because of their fear.

They don’t seem scared now. Even though it ought to be obvious that you don’t solve a debt crisis for the long term by adding a lot more debt, and even though their measures certainly did not achieve the predicted results on growth and employment, they have lapsed back into their mental fiction that nothing that bad is really going to happen.

I’ve pretty much stopped listening to them. The coalition of welfare state leftists and establishment Republicans are living in a fantasy land. I don’t think they will really believe in the possibility of economic meltdown until it actually happens or is so imminent that it can’t be denied. As Heinlein said:

“Human beings hardly ever learn from the experience of others. They learn; when they do, which isn’t often, on their own, the hard way.”

Then, since they’ve never really considered it possible, when/if it happens, they’ll be clueless about what to do. When they take additional panicked action, it’s likely to make things worse instead of better (as I think many of the actions in 2008 did).

Make whatever preparations you think necessary. I don’t think financial catastrophe is inevitable, but I do think it is the most likely outcome, whether it’s ten years from now or twenty years or next month. I have a bumper sticker on my car that sums it up: “Believe in yourself, not the government”.

(*) I concede the possibility that some DC politicians know we might be facing economic catastrophe, but have concluded that they can’t do anything about it politically, so they might as well keep playing the business-as-usual game. I regard that as dishonest and cowardly. If we are to prevent the catastrophe, one of the absolute pre-requisites is that people understand that it could happen, and are therefore willing to endure the measures to prevent it. Also, obscuring the possibility of financial catastrophe in the guise of “not scaring the people” is condescending, arrogant, and makes it more likely that the catastrophe will actually come to pass.


Economic Statistics for 27 Jan 12

Today’s economic statistical releases:

The advance estimate for 4th Quarter GDP came in at 2.8% annualized growth. This beats the 3rd Quarter’s 1.8%, yet still falls below analyst expectations of 3.1%. GDP was up 1.6% over last year, a relatively anemic rate of growth.

The University of Michigan reports their Consumer Sentiment index continues to rise, coming in at 75, compared to 74 from two weeks ago.

~
Dale Franks
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The defense budget

Here’s a little fact to keep in mind when considering the current cuts to spending at DoD (and let’s be clear, there is nothing wrong with appropriate cuts to defense spending), besides all the other ramifications it promises:

Defense accounts for less than 20 percent of the federal budget but already exceeds 50 percent of deficit-reduction efforts. And for every dollar the President hopes to save in domestic programs, he plans on saving $128 in defense.

And that’s without the looming sequestration cuts (keep in mind, most war fighting costs are not included in the budget) of another half trillion dollars.

Or said another way, the administration has decided that it will attempt to cut spending primarily with cuts to national defense.  There is no serious program afoot to cut back the myriad of other government agencies and branches.  In fact, many are expanding (see EPA, IRS, etc.).

As for sequestration, Democrats are bound and determined to see it through, because, you know, national defense is less important than winning an ideological struggle.

Charles Hoskinson of POLITICO’s Morning Defense reports (btw, if you don’t subscribe to it, you should):

BUT REPUBLICANS AND DEMOCRATS are still far apart on one key issue: taxes. We caught up with SASC Chairman Levin at a breakfast Thursday and he said he’s counting on public pressure to push the GOP to accept new tax revenues as part of any solution – something they’ve so far refused to consider. Meanwhile, Levin and other Democrats won’t budge on reversing sequestration except as part of a complete package. "The dam has got to be broken on revenues, and what I believe will break it is the threat of sequestration," he said.

Shorter Levin, “we’re more than willing to hold national security hostage and see it gutted to get our way on taxes”.

It is rather interesting  approach for an administration which is hung up on everyone paying their ‘fair share’.  It seems that the lion’s share of what it will surely tout during the upcoming campaign as serious budget cutting, will come from the one Constitutionally mandated duty it has – national defense.

As for all the programs that have a future funding liability of 200 trillion dollar?

Meh.

~McQ

Twitter: @McQandO

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