Free Markets, Free People


Why the Right Should Embrace “Fairness” in Entitlement Reform

This is a departure from my previous two posts; it’s not about a particular group that has pulled away from the GOP.  Romney pulled a slightly larger share of older voters than McCain did, even if fewer total turned out than in previous years.  That the Romney-Ryan ticket did this while proposing entitlement reform is a substantial feat, but it did involve watering down the reforms a great deal.  For example, Republicans now make a habit of promising that nobody under age 55 will be affected by their reforms.

Why make this concession when the lion’s share of the fiscal problem is current retirees and the many, many Baby Boomers who will retire soon?  Boomers vote, of course, but what motivates them?  I don’t think most seniors could bring themselves to act on straightforward greed; I think they’re voting based on a particular concept of fairness.

Specifically, they paid into the system over a long career, and they believe they should be able to get back what they paid in.  And even though current Medicare beneficiaries get two to six times as much in benefits as they paid in (if this is right), only about a third of Americans think Medicare beneficiaries get any more than they paid in.  As long as they think that way, they’ll continue to oppose means testing and raising the retirement age by wide margins.

You might be tempted to say that our task is to educate them, but it’s much easier to persuade people based on their current beliefs than to convince them of inconvenient facts first.  Republicans basically conceded that cutting benefits to older voters at all would be unfair, and pushed complicated plans that few people aside from Paul Ryan can competently defend.

But we might be even bolder if we just hugged that core fairness principle tighter.

September’s Reason-Rupe poll (PDF – fixed link) asked Americans if they’d support cuts to their own Medicare benefits “if you were guaranteed to receive benefits at least equal to the amount of money that you and your employer contribute into the system.”  It was a blowout: 68% yes, 25% no.  Three quarters of Tea Partiers said yes.

At a stroke, you could slash Medicare in half with a reform based on that principle.  (Their August 2011 poll suggested similar support for applying the principle to Social Security, but the cuts would be much more modest.)

Centering a reform on that principle achieves steeper cuts and seems easier to defend than what Paul Ryan is trying.  Because if Democrats fought us on it, they’d have to make the wildly unpopular case for entitlements as redistribution programs rather than as “insurance” or “savings.”

The kind of coalition the Right needs for sustainable entitlement reform has to include people who highly value fairness (or, as Jonathan Haidt would call it, proportionality).  If we want the project of liberty to be successful, we have to pluck on other heartstrings.

Government picks another loser

I don’t know how many times we have to point these out or how many ways we have to illustrate that government has no business trying to pick winners and losers, because usually, as with most centralized planning organizations, they get it wrong.  Why?  Because they’re absolutely blind to signals from the market.  Government’s picks are founded more in preference than reality:

Obama touted it in 2010 as evidence “manufacturing jobs are coming back to the United States,” but two years later, a Michigan hybrid battery plant built with $150 million in taxpayer funds is putting workers on furlough before a single battery has been produced.

Workers at the Compact Power manufacturing facilities in Holland, Mich., run by LG Chem, have been placed on rotating furloughs, working only three weeks per month based on lack of demand for lithium-ion cells.

The facility, which was opened in July 2010 with a groundbreaking attended by Obama, has yet to produce a single battery for the Chevrolet Volt, the troubled electric car from General Motors. The plant’s batteries also were intended to be used in Ford’s electric Focus.


The 650,000-square-foot, $300 million facility was slated to produce 15,000 batteries per year, while creating hundreds of new jobs. But to date, only 200 workers are employed at the plant by by the South Korean company. Batteries for the Chevy Volts that have been produced have been made by an LG plant in South Korea.

Talk about outsourcing.

Workers are furloughed for one week every month.  And guess who pays for that week?

Boileau pointed out the workers who are on furloughs one week a month are eligible to collect unemployment for that week, and he said the company covers the contributions to their individual benefits during the period.

Reality check commonly ignored when it comes to government:

“Had it been private investors rather than government bureaucrats making the decision, there either would have been a reality check about the industry, or only those who made individual decisions to invest would have lost their money, not taxpayers.”

Instead, government has “socialized” the loss.

The market has moved on – natural gas is cheap and plentiful.  It is the future, at least the near future.  That’s where everything is going.

Meanwhile, the government continues its near unbroken string of picking losers … not that anyone who knows a thing about economics and markets should be the least surprised.  Unlike many other things, this is not “unexpected”.


Look West, Young Ukraine

“Freedom is the right to question and change the established way of doing things. It is the continuous revolution of the marketplace. It is the understanding that allows to recognize shortcomings and seek solutions.”

Ronald Reagan — Address to students at Moscow State University, May 31, 1988

Remember the Orange Revolution? Believe it or not, it’s still pretty darned important.

We’re knee-deep in a presidential election. The European Union is witnessing a slow-motion meltdown. Syria is quickly becoming a bloody nightmare, while North Africa seethes under the vicissitudes of the Arab Spring. Iran marches closer to nuclear arms, and perhaps war with Israel. And Sino-Japanese relations threaten to simmer out of control. So why care about the Ukraine?

The simple answer is because Ukrainians have had a taste of freedom, and liked it, and we should encourage that journey towards liberalization to continue. We have an interest in such development – via free and fair elections, open markets and greater legal protections in its reformed court system – because this is how individuals become personally invested in the growth of the nation, and thus how liberty spreads. As President Reagan emphasized in 1981, “only when individuals are given a personal stake in deciding economic policies and benefiting from their success — only then can societies remain economically alive, dynamic, progressive, and free.” The more societies like that in the world, and especially in the Eurasian region, the better. And this is exactly where Ukraine is poised to go.

Unfortunately, we may be taking steps to discourage further liberalization in the form of a Senate resolution essentially demanding that Ukraine act exactly like a western democracy immediately or face consequences. The reality is that the former soviet republic of nearly 50 million souls is at a crossroads. Will they continue to move towards alignment with the West, or turn back towards familiar haunts in Moscow?

To be sure, the current government has expressed great interest in being integrated into the European Union, going so far as to ink an Association Agreement in March:

The Association Agreement creates a framework for cooperation and stipulates establishing closer economic, cultural, and social ties between the signees. Moreover, Brussels officials expect the document to promote the rule of law, democracy, and human rights in Ukraine.

This first step to entering the EU (which still needs to be ratified) requires a concrete demonstration from Ukraine that it is moving towards “an independent judicial system, free and fair elections and constitutional reform.”

These are exactly the sorts of reforms that serve to expand liberty. Indeed, as Ukraine has liberalized over the past two decades since independence, it has since fits and starts of great economic growth and expanded prosperity. For example, between 2001 and 2008, the economy expanded at an average rate of 7.5%, and despite a severe downturn in 2009, it has continued to grow with exports increasing by 30% in 2010 alone. Indeed, Ukraine is ranked by as the second best country for long-term growth in the world, right behind the Philippines. Ukraine has also begun to institute judicial reforms that promise to train better judges, hold them accountable, and strengthen the fairness of the system that has long been burdened with rampant corruption and cronyism. And for the first time ever, outside election observers will be allowed to monitor the parliamentary elections this month.

Yet, these necessary and welcome reforms lie on a fragile bed.

Ukraine has been moving toward a market economy since it declared independence in 1991. The way has been extremely difficult and bumpy. Twenty years after the beginning of market reforms, Ukraine is still struggling to build a strong, transparent, and sustainable economic system that can provide the Ukrainian people with economic prosperity and social security.

Moving towards greater integration with the West, via the EU, will strengthen that bed. Demanding that Ukraine act as a long-established western democracy right now, today, only serves to further weaken it :

Economics 101 defines the problem of scarcity as unlimited wants with limited resources, and, to paraphrase George Shultz, the laws of economics apply as much in foreign policy as they do at home. While it may be rhetorically satisfying and politically convenient for Americans to assert an equal commitment to every priority in Ukraine, ranging from democratic development to removal of weapons-grade uranium, the reality is that some priorities are achievable, at an acceptable cost and within a realistic timeframe, while others are not.

If we cannot advance all of our values and all of our interests all of the time, then we are left with the necessity of ranking our national priorities. While it is clearly important that Ukraine put an end to politically motivated prosecutions, it bears asking whether resources and attention from Washington that have been focused exclusively on this issue are crowding out other compelling U.S. national interests.

The Orange Revolution was not a battle or a war. It was, and is, a movement. Our national interests will always be aligned with fostering greater liberty, which is what the Orange Revolution movement is all about. Instead of throwing up roadblocks in the Senate, we should be helping build road signs that lead towards further peace, prosperity and freedom.

Down the memory hole – Obama’s promises

You remember this or at least have read or seen it on a video:

Bob Schieffer: “The fact is, unemployment is up. It is higher than when [President Obama] came to office, the economy is still in the dump. Some people say that is reason enough to make a change.”

Bill Clinton:”It is if you believe that we could have been fully healed in four years. I don’t know a single serious economist who believes that as much damage as we had could have been healed.”

CBS’s “Face the Nation,” September 23, 2012

That’s exactly the meme the Democrats have been trying to establish for some time.  First it was “but imagine how much worse it would have been if we hadn’t have acted”.  That foundered on the rocks of 8.2% unemployment.

The new meme is to claim – and that’s all it is – that no one expected the economy to be healed in 4 years, no one.  And certainly not any “serious economist(s)”.

But as the Wall Street Journal points out, plenty of serious people, or at least people who’d like to have you take them seriously, not to mention a couple of “serious economists” promised exactly that – we’d be healed in 4 years.  The list?

There’s Joe Biden, Nancy Pelosi, Harry Reid, Christina Romer, Jared Bernstein, Mark Zandi, and, most importantly, President Obama himself.

Yup, that’s the case, whether or not the spin- meister, Bill Clinton wants to believe it or not.  So how did that work?

Mr. Obama told Americans in 2009 that if he did not turn around the economy in three years his Presidency would be “a one-term proposition.” Joe Biden said three years ago that the $830 billion economic stimulus was working beyond his “wildest dreams” and he famously promised several months after the Obama stimulus was enacted that Americans would enjoy a “summer of recovery.” That was more than three years ago.

In early 2009 soon-to-be White House economists Ms. Romer and Mr. Bernstein promised Congress that the stimulus would hold the unemployment rate below 7% and that by now it would be 5.6%. Instead the rate is 8.1%. The latest Census Bureau report says there are nearly seven million fewer full-time, year-round workers today than in 2007. The labor participation rate is the lowest since 1981.

You don’t say.  So, in fact, plenty of serious people and at least two serious economists make Bill Clinton a liar.  Yeah, I know, that’s harsh considering most people don’t consider political spin a “lie” per se.  I’m just not one of those people.

There have been other excuses tried by the administration and its apologists as well:

The Administration and its acolytes claim that the nature of the 2008 financial collapse was different from past recessions, and that it can take up to a decade to restore growth after such a financial crisis. Economist Michael Bordo rebuts that claim with historical economic evidence nearby.

In reality, the biggest difference between this recovery and others hasn’t been the nature of the crisis, but the nature of the policy prescriptions. Mr. Obama’s chief anti-recession idea was a near trillion-dollar leap of faith in the Keynesian “multiplier” effect of government spending. It was the same approach that didn’t work in the 1930s, didn’t work in the 1970s, didn’t work in 2008, and didn’t work in such other nations as Japan. It didn’t work again in 2009.

The fact remains that there were plenty of promises made by plenty of serious people to include “serious economists” saying they had a plan that would heal us in 4 years.

They have utterly failed.

Tell me again why they should get another 4 years to prolong the failure?


Twitter: McQandO

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When the beast starves

I tend to be more optimistic than Dale about the near-to-intermediate future for the economy and for the culture. This may be unusual for a libertarian, but I’m heartened by many of the ways in which our opponents’ system is unsustainable.

Let me start by saying that, given a certain size of central government, libertarians could do worse than spending almost two-thirds of the budget on a few wealth transfer programs (Social Security and Medicare, both mostly funded by flat taxes, plus Medicaid, which gets much of its funding from the states) and a military like ours.  Imagine if that money was spent employing domestic police and busybodies.

But even that government is fiscally unsustainable, so we expect our government to eventually be forced to give up some of its “responsibilities.”  Assuming the country avoids a sovereign debt crisis, that adjustment might not be so bad for libertarians. Continue reading

August employment report in one word? Awful (UPDATE)

Of course the spin will be that the unemployment rate has dropped to 8.1%.

Unstated is the fact that the reason the unemployment rate dropped is because 368,000 more Americans left the labor force.

In fact, the labor participation rate in the US is at its lowest level since September of 1981. Had we not seen 350,000 dropped from the labor force last month, the unemployment rate would be 8.4%. And if the labor participation rate was the same as the day Obama took office, unemployment would be at 11.2%.

96,000 jobs, while better than nothing, isn’t even close to what is necessary to get this economy going again. And don’t forget, the average monthly gain in 2011 was 153,000 a month. In fact, the U-6, which includes part-time workers looking for full time work, is at 14.7%.

I keep telling you that when you talk about jobs or lack thereof and what that means to individual Americans, it’s personal. While they may care or not care particularly who has the best record in foreign policy or whether or not abortion is something they believe in, being jobless, struggling, and/or knowing someone in the family who is, has much more of a direct effect on a potential voter than the other issues.

14.7% fall into that category with probably twice to three times that many effected by what those 14.7% are struggling with. Believe what you will about the polls right now, but if history is any indicator, Obama isn’t going to get a round 2.

Oh, and just as a reminder of the depth of the failure:
UPDATE: Meanwhile at the Ministry of Truth the “Spin-o-matic” is in overdrive:

While there is more work that remains to be done, today’s employment report provides further evidence that the U.S. economy is continuing to recover from the worst downturn since the Great Depression.

It does?  Wow … who knew?  Certainly not the 350,000 who dropped out of the labor force this month.  But hey, be happy, don’t worry … and ignore the chart.


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Is America’s economy stronger than reported?

That’s the argument Ruchir Sharma makes in the Atlantic this week.  It is one of those contextual or perspective arguments that says, “of course it’s bad, but look at the rest of the world”.   He also, heaven forbid, makes the American “exceptionalism” argument, saying":

Evidence of an American revival, against both developed and emerging world competition, is mounting, driven by the traditional strengths of the American economy–its ability to innovate and adapt quickly.

But … there’s always a “but”:

America’s worst worries — heavy debt, slow growth, the fall of the dollar and the decline of manufacturing — will look much less troubling when compared to its direct rivals. While US growth has slowed by a full point so has growth in Japan and Europe, leaving the United States on top of the league of rich nations.

Sharma says manufacturing is looking up and slowly growing.  As for debt?  Well, private debt is being shed in record numbers:

Consider the key challenge of "deleveraging" or digging out from debt. A new study from the McKinsey Global Institute shows that the United States is the only major developed economy that is even loosely following the path of countries that successfully negotiated similar debt-induced recessions, like Sweden and Finland in the 1990s. Total debt as a share of GDP has fallen since 2008 by 16 percent in the United States, while rising in Germany and rising sharply in Japan, the United Kingdom, France, Italy and Spain. As in Sweden during the 90s, the fall in total US debt is due entirely to sharp cuts in the private sector, particularly the finance industry and private households.

Note the emphasized points in the last sentence – “private sector”, “private households.”

So what’s our biggest problem, our biggest worry, in fact our biggest economic drag that is likely keeping us bouncing along the bottom of this recession/depression?

Well Sharma doesn’t hesitate in identifying it:

The weak link in the U.S. response to the debt crisis is the government. The Scandinavian cases show that government needs to start cutting spending and debt roughly four years after the downturn — exactly the stage where the US is today. Washington has so far failed to put in place a plan for long-term debt reduction, in part because some politicians and pundits are still pushing for more borrowing to ward off "depression." The Scandinavian cases suggest this is exactly the wrong worry right now. The public debt is a big reason that long-term US growth is likely to slow, but even then, it is important to keep America’s debt problem in perspective. China is arguably worse off, with total debt equal to 180 percent of GDP. The more wealthy you are, the more debt you can carry, so America’s total debt (350 percent) is actually less of a challenge.

Don’t worry, be happy … our debt problems is less of a challenge? No, that’s not the point.  It means, relatively speaking,  we’ve been somewhat lucky because the strength of our economy and its size has helped ameliorate the drag increased government debt has placed upon our economic recovery.

Note what Sharma says, given the evidence of the “Scandinavian cases” – we should be cutting spending and debt “four years after the downturn”.

That would mean what?   No QE3.  No trillion dollar budget deficits as far as the eye can see.

However, that’s the plan right now.

President Obama has a campaign ad out talking about how we don’t need to repeat the “Republican plan” because, in his words, we’ve tried that and it didn’t work.

Well I hate to break it to you but what he has planned for the next four years, if he’s re-elected, is a reprise of his first term.  Spend, spend, spend and expand government programs and services (to the tune of $46 trillion over 10 years, much of it debt).

And the Fed?  It’s easing its way toward another quantitative easing (QE3), essentially ignoring the fact that the first two pushed about $10 trillion in cash out there which it is going to have too wring out of the economy at some future date.  Adding even more doesn’t hit many as a very sound move.

One of those is Mitt Romney:

"I am sure the Fed is watching and will try to encourage the economy. But I don’t think a massive new QE3 will help the economy," Romney said, referring to a program called quantitative easing.


"I can absolutely make the case that now is the time for something dramatic and it is not to grow government,” he said. “It is the time to create the incentives and the opportunities for entrepreneurs – businesses big and small – to hire more people and that is going to happen.

Key takeaway?  Romney gets the proper role of government in the economy – “create the incentives and the opportunities for entrepreneurs – businesses big and small – to hire more people…”.

If government did that – became an enabler – then what should follow?  You should see employment begin to rise.

We should be seeing 200, 300, 400,000 jobs a month to regain much of what has been lost. That is what normally happens after a recession, but under this president we have not seen that kind of pattern. We have just been bumping along with barely enough jobs to just hold the unemployment rate about the same – above 8% – 42 months like that. You have to have the Steve Jobs of the world beginning businesses, making products that want to be purchased around the world. That gets Americans back to work."

He’s right.  Exactly right.  And the current president is clueless.  It isn’t about pumping more money into the economy and creating more debt and bigger government. If you want to see policies that continue to cripple what Sharma dubs the “traditional strengths of the American economy”, give the guy in charge 4 more years.

Government’s don’t produce wealth.  The private sector does.  Government spends that wealth.

(Oh, wait, the private sector “is doing fine”.  Never mind.)

Romney gets that part and it is indeed the most important issue of this upcoming election.  Getting government out of the way and into the enabler role of providing incentives and opportunities for businesses to grow and expand (while curtailing government spending and expansion) is what will get this nation on the road to recovery.

The current administration doesn’t understand that – at all.

And, for all practical purposes, that’s all you need to know to decide who should be sitting in the Oval Office next January 20th.

Hint: In case you somehow missed it, it isn’t the guy in there now.


Twitter: @McQandO

Taxes, energy, health care and spending–what we should be talking about

Pete DuPont does a little analysis of what should be major issues in the upcoming  election.  They don’t bode well for the current administration if, in fact, Republicans can get the media to actually pay attention and address them:

Taxes. Big tax hikes coming in January will serve as dampers on economic growth.ObamaCare imposes a new 3.8% tax on investment income. On top of that, if the Bush tax [rates] aren’t extended, the top income tax rates will rise to 23.8% from 15% on capital gains and to 43.4% from 15% on dividends.

But beyond the economic impact, the Obama administration’s focus on class warfare fuels the nation’s dissatisfaction and plays on an unwise resentment towards successful businesspeople. Mr. Obama continues to push for higher taxes and does so in a way that is an attack on those who are successful–demanding that higher-income taxpayers pay their "fair share," when they already pay more than that.

The economic impact shouldn’t be waved off.  When and if both capital gains and dividend incomes are taxed at a higher rate, they will effect both investment and retirement incomes.  Don’t forget those” rich folks” whose retirement income is structured to depend on dividends from blue chip stocks they’ve methodically bought in small quantities over their working years.  It obviously doesn’t matter that their incomes really don’t reach the “rich” threshold that the Democrats want you to envy, their retirement incomes will take an almost 200% tax increase hit regardless if the current rates aren’t extended.  Apparently to collect less than a trillion dollars over 10 years taxing the “rich” (so they’ll pay their “fair share”) vs. spending $46 trillion Democrats are happy to sacrifice those folks.

As for investments, there’ll be a recalculation given the increase on capital gains and it will dampen investments, thus business expansion and finally job growth.

Energy. The American people hear Mr. Obama talk about a broad energy strategy, but they see an administration that has attacked the coal industry with onerous regulations, done little or nothing to assist the natural gas boom, done what it can to slow down oil production, and wasted money on other initiatives that please green supporters but don’t lower the cost of energy.

This administration’s energy policy is a joke, but unfortunately it’s a very expensive joke.  Its priorities are completely backward, but purposefully so.  To call what they are doing a “policy” is simply absurd.  This is agenda fulfillment with the people’s money on pie-in-the-sky projects that have yet to yield (nor do they even promise to yield) the energy required to make them viable.  Meanwhile they’ve done everything humanly possible to retard the fossil fuel industry’s growth at a critical time for our economy.  On the issue of energy, this administration gets an F-.

Health care. Although ObamaCare remains unpopular, the Supreme Court ruling upholding it means that a 17% transfer of our economy from the marketplace to the control of the federal government is coming unless Congress and a President Romney can stop it. At a time when our nation needs lower taxes and more flexibility in health-care decisions, ObamaCare has increased taxes by hundreds of billions of dollars and allowed government to regulate most of our health care decisions.

The secretary of health and human services can now set rules that constrain doctors and hospitals and mandate prices. Mr. Obama once promised us all that if you were happy with your current health plan, you’d be able to keep it. The more we learn about ObamaCare, the unlikelier that looks–and the more the government will intrude in the relationship between doctor and patient.

Despite the disapproval of a majority of Americans, Democrats and this President rammed the legislation through anyway.  That should tell most Americans what they really think of their opinion.  It is a classic “we know what’s best for you” elitist move.

The second paragraph gives a hint though to the powers this legislation has given an unaccountable government bureaucrat.  The Secretary of HHS now has tremendous power to make unilateral decisions that will effect everyone’s health care.  Of course, that’s been discussed by some on the right, but for the most part the level of intrusion these powers will confer won’t really begin to be felt until, conveniently, after the election.


Spending. Federal expenditures under Mr. Obama is both unparalleled and unsustainable. As National Review’s Jonah Goldberg notes, from the end of World War II until the end of the George W. Bush administration, federal spending never exceeded 23.5% of GDP, and the Bush years’ average was around 20%. The Obama spending rates have stayed above 23.5% in every year of his presidency. In the past four years, America has added $5 trillion in federal debt, and around $4 trillion of that was from Obama policies, according to The Wall Street Journal. Federal debt held by the public was 40.5% of gross domestic product in 2008. It’s now 74.2% and rising.

Despite the attempts by Democrats using fudged numbers and trying to spin it so Bush gets the blame, the spending by this administration is, as DuPont points out, “both unparalleled and unsustainable”.   And, don’t forget, the President hasn’t signed a budget in over 1,000 days because the Democratic Senate has refused to pass one, despite the Constitutional requirement it do so. 

Those are the things we ought to be talking about.  Not whether or not Romney pissed off the Palestinians (who doesn’t piss off the Palestinians when they take a principled stand on Israel?  How is this even news?).

These are where Obama’s skeleton’s are to be found.  He’d prefer to keep this closet door firmly closed.  The media, for the most part, seems content to help in that endeavor.

This election isn’t about anything but his administration’s abysmal record.  Spending time talking anything else is simply a distraction.  Unfortunately, given its unprecedented level of economic intrusion, we’re going to live or die economically with the policies that government applies.  Talking about whether a candidate may or may not have insulted the London Olympics isn’t going to change that fact one iota.  But it sure does distract from examining the previous administration’s record, doesn’t it?


Twitter: @McQandO

Capitalism, cronyism and corruption

Gallup has a new indicator poll out that shows the nation’s national priorities according to its citizens.  It’s interesting in many ways, but primarily because one of the highest calls for action is to address “corruption”. 


corruption poll


(As an aside, notice the bottom two “priorities).

Notice carefully how the corruption question is phrased – “Reducing corruption in the federal government”.  What sort of corruption?  Well, one type, that most fair minded people would identify, is that which we call cronyism.  As we listen to the uniformed continue to say we’ve been ravaged by the “free market” system, one can only shake their head in wonder that anyone would identify what we have as a “free market system”.  Rarely, if ever, are markets allowed to function as they should in this country (or any others for that matter). 

What we have is a system of cronyism (I’m removing “capitalist” from the description since there’s nothing “capitalist” about such a system) that is part of what is killing us economically.  David Henderson gives us a good description of the system under which we must operate.

What is the difference between free markets and cronyism? In free markets, buyers and sellers are free to agree on price; no government agency restricts who can buy or sell, and no one is told how or what to produce.[1] In contrast, under cronyism the government rigs the market for the benefit of government officials’ cronies. This takes various forms. Governments sometimes grant monopolies to one firm or limit the number of firms that can compete. For example, most U.S. municipalities allow only one cable company to operate in their area even though there is no technological reason more could not exist. The same is true for most other utilities.

Governments sometimes use quotas or tariffs to limit imports with the goal of protecting the wealth and jobs of domestic producers who compete with those imports. President George W. Bush did this in 2002, for example, when he imposed tariffs ranging from 8 to 30 percent on some types of imported steel.[2] Governments sometimes subsidize favored producers, as the Obama administration did with the politically connected solar-energy firm Solyndra. Governments may use antitrust laws to prevent companies from cutting prices so that other, less-efficient companies can prosper: For example, beginning in 1958, the U.S. government prevented Safeway from cutting prices for a quarter of a century.[3]

The entities governments help with special regulations or subsidies are not always businesses; sometimes they are unions. The federal government’s National Labor Relations Board’s (NLRB) complained against Boeing in April 2011, for example. In response to a complaint from the International Association of Machinists and Aerospace Workers (IAM), the NLRB sought to require Boeing to produce its 787 Dreamliner in Washington State rather than in Boeing’s chosen location of South Carolina. According to the NLRB, by saying that “it would remove or had removed work from the [Puget Sound and Portland] Unit because employees had struck” and by threatening that “the Unit would lose additional work in the event of future strikes,”[4] Boeing was making “coercive” statements to its employees. As a matter of fact, it was not. Boeing was simply telling the employees some likely consequences of the union’s actions.

The Boeing-IAM case is not as simple as most of the press implied. It turns out there was a prior case of cronyism. The government of South Carolina promised Boeing “$900 million in tax relief and other incentives” in exchange for moving production to South Carolina.[5] Such is the tangled world of cronyism.

As we discussed on the podcast last night, we have given, or at least allowed government to amass, power to do what it is doing.   We have, over the years, allowed them to use tax exemptions and other favors, etc. to lure businesses to our states (and we’re then thankful for the jobs created) not understanding that by doing so, we empower politicians to be the decision makers in areas that should be the function of markets.  And what does that foster?  A culture that is incentivized to seek out politicians to grant such favors.   To ask for, and receive, subsidies.  To allow politicians to leverage that power into favoring businesses that fit their political agendas.   They become the focus because we have given them the power necessary to grant those favors.

We see the same sort of game played at a national level as described by Henderson.  That has nothing to do with capitalism folks.  It has nothing at all to do with “free markets”.  In fact, it is the antithesis of both.

Probably the most blatant and disturbing example of cronyism came in the auto bailout:

Of course, a much larger instance of cronyism under the Obama administration, one that makes the Solyndra case tiny by comparison, is the bailout of General Motors (GM) and Chrysler. Bush and Obama together diverted $77 billion in TARP funds to GM and Chrysler. In organizing their bailouts and bankruptcies, Obama  violated the rights of Chrysler’s creditors and gave a sweetheart deal to the United Auto Workers union.

Law professor Todd Zywicki provides the details:

In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the “absolute priority” rule— since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company’s secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers—unsecured creditors, but possessed of better political connections—received more than 40 cents on the dollar.

Pure cronyism.  The bankruptcy rules were thrown out by government in order to pay a favored constituency – labor.  Henderson explains:

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a “deficiency claim”—the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the creditors. Were bankruptcy experts to comb  through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.20

Why did the Chrysler bondholders not object? Many did. But, Zywicki notes, the federal government (in this case, the U.S. treasury secretary) had enormous power over financial institutions through TARP, and these institutions owned much of  Chrysler’s secured debt.

While this has been going on for quite some time, never has it been as blatant as with this administration.  And that blatancy is what has pushed the corruption priority up the list to where it stands second to job creation in this horrific economy.

What can be done to remedy this cronyism “corruption”.  Only one thing, and unfortunately, those enjoying the power are where the remedy must come:

There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power. To reduce cronyism, we must abolish regulations and cut or abolish special government subsidies. That way, there is nothing to fight about. For example, the government should not bail out companies or give special subsidies and low-interest loans to companies like Solyndra that use technologies or produce products that the government favors. It should have unilateral free trade rather than tariffs, import quotas, and other restrictions on imports.

Will it happen?  No.  Those who tout the power of markets and demand they be given priority are now considered “radicals”.  Just listen to President Obama talk about the former administration and try to convince you “we tried their way before and look where it led”.    Spinning a regime prior to his that was as wrapped up in cronyism as is his and claiming it represented free markets is standard, disingenuous, leftist boilerplate with nary a leg to be found standing in reality.  It is pure, fatuous BS.

The “corruption in the federal government” isn’t lobbyists.  They’re a  symptom of that corruption.  The problem resides under the Capital dome and within the offices of the executive branch.  They have the power that is sought by the lobbyists.  No power and there would be no petitioners.   Instead, we see the number of petitioners for favorable treatment by government (usually at the detriment to their competitors) continuing to expand.

So while the public has finally identified a major problem (thanks to the blatancy of this administration) it has a long way to go before it realizes the means by which it must be fixed.  Stripping the federal government of its power to grant favors to its cronies is almost an impossible task, given we have the fox in charge of the hen house.

I see nothing in the future that says those who must fix this are willing to divest themselves of the power to grant favors (see recent farm bill, an orgy of subsidies and pay offs (earmarks), for a perfect example).   Show me when they’ve ever divested themselves of any meaningful power they’ve accrued.

And so cronyism will continue and we will continue to circle the drain of economic collapse.    Meanwhile, Coke and Pepsi will fight about the marginal nonsense that won’t make a significant difference and make all the usual promises about being the panacea for all our ills that voters have been pining for so long.

Or it is “kick the can down the road” politics as usual.

Happy Monday.


Twitter: @McQandO

White House, GDP numbers and Orwell’s Ministry of Truth

The more I read political spin these days, the more I feel the shadow of Orwell’s “Ministry of Truth” from “1984” trying to solidify its existence.

Yesterday’s disastrous GDP numbers were followed up by this nonsense from the White House:

The estimates found economic growth slowed to 1.5 percent last quarter – down from 2 percent the previous quarter and 4.1 percent in the fourth quarter of 2011 — but the chairman of President Obama’s Council of Economic Advisers said that at least it’s still growing.

Yes indeed.  “Still growing”.  That’s a bit like saying a baby born without a brain and being kept alive on life support is “still alive”.

Technically true, but in the case of the baby, a condition everyone would agree is a tragedy.  In the case of this economy, as stated, those numbers are a disaster.

"Today’s report shows that the economy posted its twelfth straight quarter of positive growth," Alan B. Krueger wrote in a statement. "Over the last three years, the economy has expanded by 6.7 percent overall, and the private components of GDP have grown by 9.9 percent."

Yes sir, the private sector is “doing fine”.  9.9% growth in three years!  As for the GDP (which is forecast now to be at an annual rate of 1.3%), hey, it’s still growing.

Unsaid by the spokesman for the Ministry of Truth, is just “growing” just isn’t good enough to be considered “positive”.  Rule of thumb?

Therefore, economists agree the ideal GDP growth rate is more than 2%, but less than 4%. In between the two recessions, the annual economic growth rate was ideal:

  • 2.5% in 2003.
  • 3.9% in 2004.
  • 3.2% in 2005.
  • 2.7% in 2006.
  • 2.0% in 2007.

What economists are also coming to agree on is excessive debt – like that we’ve run up – puts about a 1.2% penalty on GDP.  Or said another way, we’re unlikely to see GDP growth return to the “ideal” anytime soon, given the 10 year plan by government to spend 46 trillion dollars we don’t have.  If you’re wondering what all that means, consult the Japanese economy for the last two decades.  That’s likely the new “normal” with the policies in place from this administration.

But hey, if everyone would rather talk about Mitt Romney’s wonderful European adventure (hey, at least he’s not bowing to everyone in sight), that’s fine.  It is certainly something the Ministry of Truth would approve.


Twitter: @McQandO