Free Markets, Free People

Policy

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.

~McQ

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.

Finally:

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?

~McQ

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.

~McQ

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.

~McQ

Twitter: @McQandO

Poll: The economy belongs to Obama and it’s not good

Apparently the voters (likely voters) believe, according to this poll, that the economy is bad and, despite all his finger pointing to the contrary, it’s Obama’s fault:

Two-thirds of likely voters say the weak economy is Washington’s fault, and more blame President Obama than anybody else, according to a new poll for The Hill.

It found that 66 percent believe paltry job growth and slow economic recovery is the result of bad policy. Thirty-four percent say Obama is the most to blame, followed by 23 percent who say Congress is the culprit. Twenty percent point the finger at Wall Street, and 18 percent cite former President George W. Bush.

That’s a pretty significant split between those blamed, with GW Bush down to a low of 18%.  And note the reason cited: bad policy.

This is another of those indicator polls.  I point them out because they are a temperature check for the moment.  But what this particular poll indicates is all of the finger pointing, blame shifting and distraction aren’t working.  Voters, and again, I want to emphasize these are likely voters, aren’t or haven’t bought into that nonsense.

If indeed these likely voters actually believe the economy to be suffering from bad policy choices by Obama, it means his chance of winning, with 66% believing he’s the reason we’re suffering economically, are not good.

Again, an indicator – one in a long list of indicators to be considered with all the others. 

This one, like many of the others, aren’t at all favorable for the incumbent President.

~McQ

Twitter: @McQandO

Is Iran preparing to close the Straits of Hormuz?

That’s what our intel guys are saying:

U.S. government officials, citing new intelligence, said Iran has developed plans to disrupt international oil trade, including through attacks on oil platforms and tankers.

Officials said the information suggests that Iran could take action against facilities both inside and outside the Persian Gulf, even absent an overt military conflict.

The findings come as American officials closely watch Iran for its reaction to punishing international sanctions and to a drumbeat of Israeli threats to bomb Tehran’s nuclear sites, while talks aimed at preventing Iran from developing nuclear weapons have slowed.

Now, of course, “developing plans” and actually executing them are entirely different things.  But, as irrational as Iran can be sometimes, the development of such plans has to be taken seriously.

If you’ve been paying attention over the past few months, we’ve been creeping any number of assets closer to Iran.  So obviously we believe where there is smoke we may see fire.

"Iran is very unpredictable," said a senior defense official. "We have been very clear what we as well as the international community find unacceptable."

The latest findings underscore why many military officials continue to focus on Iran as potentially the most serious U.S. national-security concern in the region, even as the crisis in Syria has deepened and other conflicts, as in Libya, have raged.

Defense officials cautioned there is no evidence that Tehran has moved assets in position to disrupt tankers or attack other sites, but stressed that Iran’s intent appears clear.

Iran has a number of proxies, as we all know, none of whom have much use for the US or the rest of the Western world.   What would possibly cause Iran to attempt to strike at outside targets?  The belief that they could get away with it:

But U.S. officials said some Iranians believe they could escape a direct counterattack by striking at other oil facilities, including those outside the Persian Gulf, perhaps by using its elite forces or external proxies.

I’m not sure how one thinks they can escape retribution by such tactics, but it is enough to believe you can.  And apparently there are some in Iran who do.  That’s dangerous, depending on where they sit in the decision making hierarchy.

The officials wouldn’t describe the intelligence or its sources, but analysts said statements in the Iranian press and by lawmakers in Tehran suggest the possibility of more-aggressive action in the Persian Gulf as a response to the new sanctions. Iranian oil sales have dropped and prices have remained low, pinching the government.

So, we wait.  And creep more assets into the area.  And wait.

As an aside to all the arm-chair defense experts who claim we shouldn’t be developing advanced weaponry because all our future wars are likely to be “just like Afghanistan”.

Really?

~McQ

Twitter: @McQandO

Crop cronyism’s destructive results

We talk about it.  Politicians condemn it.  Nothing ever happens to change it though.

This year’s agriculture bill again redistributes your money to rent seekers:

Combine a Midwestern drought with pointless ethanol mandates, and the supplies of corn inevitably dwindle, driving prices sky high. Politicians like Sen. Claire McCaskill, Missouri Democrat, are citing the crop crisis as an excuse to ram through a near-$1 trillion farm bill. While a bit of that cash might find its way to a small farmer, the bulk of the loot will be transferred to individuals who are anything but poor. Like the bank bailouts and TARP, the farm bill illustrates the capture of the legislative process by special interests.

The last farm bill in 2008 was the focus of $173.5 million in lobbying expenditure, according to a report released Tuesday by Food & Water Watch. This is all money spent on what the Mercatus Center’s Matthew Mitchell calls “unproductive entrepreneurship” where people are organizing and expending their talent to become rent seekers, and the end result is wealth redistribution, not wealth creation. Real entrepreneurship innovates in ways that are socially useful. Cronyism diverts resources — both money and talent — into a system that rewards privileges to favored groups. In the case of the 2008 farm bill, recipients of subsidies of $30,000 or more had an average household income of $210,000.

Mr. Mitchell argues that “government-granted privilege is an extraordinarily destructive force” because it not only results in a misallocation of resources and slower growth, it undermines civil society and the legitimacy of government by providing a rich soil for corruption.”

She’s absolutely right.  And, of course, when you mess with markets, like has been done with the corn market and mandated ethanol, the expected results occur when something unanticipated, like a drought, happens:

Corn and soybeans soared to record highs on Thursday as the worsening drought in the U.S. farm belt stirred fears of a food crisis, with prices coming off peaks after investors cashed out of the biggest grains rally since 2008.

Corn prices crossed into uncharted territory above $8 per bushel — about three-and-a-half times the average price 10 years ago of $2.28. Soybeans punched past $17 for the first time — also three-and-a-half times the 2002 average.

Analysts said that while forecasts for continued dry weather are expected to sustain the rally, corn prices could be vulnerable to any move by the government to lower the amount of corn-based ethanol blenders are required to mix with gasoline.

Notice what entity is mentioned in the last paragraph?  Yes, government. A key player in the increase in corn prices (yes, understood, they’d be higher with the drought alone, but government’s ethanol mandate has driven them even higher yet).

Meanwhile, as mentioned above, we’re subsidizing agriculture to the tune of $1 trillion dollars of your money (in cash or in debt to be paid back in the future).  Meanwhile, you’ll be paying more for corn based products at the grocery store as well.

Nita Ghei lays out the bottom line problem with this sort of cronyism and rent seeking:

Government privileges come in many forms, direct and indirect. It might be a monopoly, such as the one granted to utilities like Pepco. Regulations such as licensing can be used to limit entry to a particular field to the benefit of existing businesses. Lobbying and the revolving door in Washington create what economists call “regulatory capture,” which is what happens when existing firms use regulatory agencies to benefit themselves. Tax breaks, loan guarantees and subsidies are the most direct signs of a government’s favor. Bailouts of big banks under TARP, and Fannie Mae and Freddie Mac when the housing bubble burst, are the most recent examples of direct action.

Extending each of these privileges reduces America’s economic competitiveness. A monopoly protected by the government has little incentive to provide good service. The greater the availability of privileges, the greater is the incentive to indulge in rent seeking, which diverts resources from truly productive activities. In the long run, the result of anti-competitive policies is less innovation, lower growth and a smaller pie to share.

The greatest scourge to the honest Midwest farmer is not unfavorable weather, pestilence or disease. Far worse for them is the plague of politicians who create an artificial market in which only those with influence can truly compete. Defeating the budget-busting 2012 farm bill is the best chance at a good harvest.

The chances of that happening, however, are slim to none.  Regulatory capture is as common now as government debt and unemployment.  It is a systemic problem that rewards rent seekers and the well connected to the detriment of innovators and competition.  It is the antithesis of capitalism.

Unless we have the will to stop this sort of cronyism, we’re on a short road to failure.  This is another, in a long line of government programs, that are unsustainable, destructive and just flat something government shouldn’t be involved in.

But my guess is, this time next year, we’ll still be talking about it, politicians will still be condemning it and nothing will change except the higher national debt number.

~McQ

Twitter: @McQandO

Why no hiring? Taxes and health care, that’s why

As I’ve mentioned many times, the engine of America is small business.  Those businesses provide jobs to 85% of Americans.  And according to the US Chamber of Commerce, they’re not going to be doing much if any hiring in the near future:

Small business owners’ concerns about the future—particularly on health care and taxes-—are impacting their hiring, according to the U.S. Chamber’s fifth quarterly small business survey released today.

Only one in five small businesses (20%) expect to add employees in 2013, according to the poll of 1,225 small business owners, conducted by Harris Interactive. The majority of small businesses say they are likely to keep the same number of employees over the next year – meaning there is likely to be little change in overall unemployment figures.

Concerns about health care and taxes (both brought to you by Barack Obama) are causing caution among small businesses and that’s because they perceive an “unsettled” business climate.  Consequently there’s no incentive for them to change the status quo.    In fact, they obviously believe there is some safety in the status quo (see the survey to see how they feel about their businesses locally) .

As we’ve mentioned repeatedly, government policy does have an effect on the economy.  It can be an enabler that helps create incentives for businesses to expand and hire or it can be a disabler, doing precisely what it is doing now to unsettle the business climate, create disincentives for expansion or hiring and have small businesses go into a defensive posture.

It doesn’t get more defensive than now.

More from the Chamber survey:

  • 78% want government to get out of the way.
  • 90% are concerned about the impending fiscal cliff and are worried that Congress will fail to take action to prevent it.
  • Nearly 60% say that expiration of the 2001 and 2003 tax rates and other business provisions, coupled with sequestration, will directly impact their business’ growth.

As you might imagine the road map to a better business climate is not hard to follow.  There’s just no desire by the class warriors to do that. 

Instead of doing the hard work of creating a business climate that will provide small business incentives to expand and hire, they’d rather tax them while demonizing them as the evil rich and talking about “fair shares” to 50% of the country that pay’s no – zero- income tax.

If this doesn’t paint the picture of what is wrong with the policies of this administration, I’m not sure what will.  This is Econ 101 stuff.  And apparently it is like a foreign language to this administration.

The golden goose is on life support, and the administration is about to pull the plug.

But let’s talk about Bain Capital, shall we?

~McQ

Twitter: @McQandO

ICYMI: Companies planning on less hiring in near future

According a report by Reuters, much of it is related to the looming crisis in Europe:

Only 23 percent of the firms polled in June plan to add to staff in the next six months, the National Association for Business Economics said on Monday.

NABE’s prior survey, conducted in late March and early April, had shown 39 percent of companies planning to add workers.

The point, of course, is now is certainly not the time, with unemployment at 8.2%, to give business another reason to delay hiring, right?  That would seem, to most, to be a reasonable point.  While the European problem unfolds and comes to some sort of resolution, you’d think government would be attempting to encourage and enable domestic businesses to do some hiring anyway, right?

Instead, as demonstrated in the story below, you have a president (and a party) who seem dedicated to killing whatever possibility there is for such hiring in the bud by calling for higher taxes on the “rich”.

Of course they count on the bulk of the public being ignorant of what comprises the “rich” that the administration wants taxed (small business which produces 85% of the jobs in the US) and certainly, to some extent, they’ve been successful in that endeavor. 

Many will tell you that there’s really not much government can do economically.  That they get blamed or praised when it goes south or does well, but in fact that’s more political tradition than reality.

I disagree.  Economic policy can have a profound effect on the economy.  A policy that encourages and enables business will have a net positive effect economically.  One that discourages or unsettles the business climate (increased regulation, increased taxation, etc.) will have the opposite effect.

Right now we have an example of the latter.   The 8.2% unemployment rate we now endure isn’t a result of the “European crisis”, it is the result of an unsettled and hostile domestic business climate, much of it created by the current administration’s policies.  Europe’s woes will only add to that.  Instead of doing everything they can domestically to encourage expansion and hiring, this administration has decided to again lobby for taxing the job creators at an even higher level.

Of course be prepared for the ready excuse that the crisis in Europe presents.  Blaming Bush doesn’t work as well now as it did 4 years ago.  ATMs and tsunamis won’t work either.  But President “It’s the Other Guy’s Fault” will try very hard to shift the blame of any economic downturn in the next few months across the Atlantic.

But remember – we are at 8.2% now.  And that has much more to do with this President’s policies than anything that has happened in Europe.

~McQ

Twitter: @McQandO

President thinks his biggest mistake of his Presidency is … “story telling”?

I swear I almost laughed out loud when I read this.  President Obama is asked in an interview what the biggest mistake of his presidency has been:

"When I think about what we’ve done well and what we haven’t done well," the president said, "the mistake of my first term – couple of years – was thinking that this job was just about getting the policy right. And that’s important. But the nature of this office is also to tell a story to the American people that gives them a sense of unity and purpose and optimism, especially during tough times."

Story telling is his biggest mistake?  He’s been telling “stories” for 4 years, most of them fictional.  It is his abysmal and clueless performance in office that’s been his biggest mistake.   OK, poor performance probably isn’t a mistake, it’s, well, poor performance.  Perhaps his biggest mistake was thinking he’s done well.  No, that’s just ignorance and ego.

No his biggest mistake was concentrating on his legacy while he let the economy go to hell and now it’s all but unrecoverable (in his 1st term, which is all that matters to him).   He continually told a story about how he and Sheriff Joe were “focused like lasers” on jobs and the economy.

And here we are.

But all of that is not why I almost laughed out loud. 

How many times have you seen the left and Democrats claim that it isn’t the message that is the problem but how it is delivered?

The above quote is the Obama version of that very premise.  You can’t instill a sense of unity, purpose and optimism when you’re continually taking away freedoms.

Cluebat for the left:  it has nothing to do with delivery, it has to do with the fact that most Americans think your policies (and ideology, at least the part that continually calls for more expensive and intrusive government and sees government as the solution to all problems) suck.

It isn’t the “story”, okay?

Forward.

~McQ

Twitter: @McQandO