Free Markets, Free People

Economics


“Inflation is Our Friend”

So, the Fed, for the first time since the 1960s, is buying back long-term bonds as part of it’s new policy, announced today, of buying back $1.2 trillion in securities to pump out cash into the economy.

With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

On top of this, short-term interest rates are already at 0%.  The fed has one monetary policy tool left–massive increases in the money supply–and they’re using it with a vengeance.  This purchase of $300B in treasury  bonds will be a signifigant increase in demand, pushing treasury prices up, and yields down.  The 10-year note’s yield dropped to 2.5% in the aftermath of this announcement.

Our fundamental problem is still that the banking sector has their balance sheets all out of whack, and the Obama Adminsitration still has no apparent plan for clearing up bank balance sheets via recapitalization, or…well…anything else. Now, theoretically, that much new money being created would lower mortgage rates signifigantly.  I wouldn’t be surprised to see 20-year fixed rates at 5% or less.

This action, however, opens the door for massive inflation.  The inflationary implications of this move are so huge, that there’s simply no way the loans could be anything but a money-loser for the banks, because a 5% mortage rate may well be far below the rate of inflation.  That will kill banks already weakened by their bad loan portfolios.

This is an extraordinary gamble of the Fed’s part.  If this new money doesn’t stimulate a signifigant increase in demand for money, then we are going to have a huge pool of money chasing a very small pool of goods.  The market knows it, too, and understands the inflationary implications.  The dollar cratered in the FOREX market today, and analysts aren’t excited about the long-term implications:

Bernanke’s view that currency devaluation may be beneficial to economic growth speaks for itself,” writes Mr. Merk. “But even if there are no active efforts to debase the currency, we are cautious about the U.S. dollar. That’s because we simply do not see a viable exit strategy to all the money that is being thrown at the system.”

“[W]e simply do not see a viable exit strategy to all the money that is being thrown at the system” because there is no viable exit strategy.  We are either going to have serious inflation, or the Fed will have to tighten up so severely at some point in the near future that it will kill economic growth anyway.

In “Texas Hold ‘Em” terms, this is the equivalent of the Fed going “all in”.  We’ve essentially reached the limits of our monetary policy tools with this action.


Reaping, Sowing, etc.

Glad they finally noticed:

The Obama administration is increasingly concerned about a populist backlash against banks and Wall Street, worried that anger at financial institutions could also end up being directed at Congress and the White House and could complicate President Obama’s agenda.

Of course the greatest stoker of this populist backlash has been the Obama administration. I’ll be the first to agree that some of the financial institutions, such as AIG recently, have played into the populist condemnation by the administration, but instead of being specific about the AIGs of the world, they have instead gone after an entire industry to the point that “banks and Wall Street” are synonymous with crooks, swindlers and liars. Having established that narrative, seemingly purposely, there’s now a huge backlash building which may, in fact, cripple the administration’s efforts pertaining to both.

“We’ve got enormous problems that need to be addressed,” David Axelrod, Mr. Obama’s senior adviser, said in an interview. “And it’s hard to address because there’s a lot of anger about the irresponsibility that led us to this point.”

“This has been welling up for a long time,” he said.

Mr. Obama’s aides said any surge of such a sentiment could complicate efforts to win Congressional approval for the additional bailout packages that Mr. Obama has signaled will be necessary to stabilize the banking system.

As it is, there have already been moves in Congress to limit compensation to executives at banks and Wall Street firms that are receiving government help to survive.

Beyond that, a shifting political mood challenges Mr. Obama’s political skills, as he seeks to acknowledge the anger without becoming a target of it. A central question for Mr. Obama is whether his cool style — “in a time of crisis, we cannot afford to govern out of anger,” he said in his address to Congress last month — will prove effective when the country may be feeling more emotional.

And the country is feeling emotional because the administration has been making emotional arguments targeting the industry it wants to help. Not very smart politics. And they’ve now finally realized that.

“Never underestimate the capacity of angry populism in times of economic stress,” said Robert Reich, a professor of public policy at the University of California, Berkeley, and labor secretary under President Bill Clinton. “A big challenge for President Obama will be to maintain a rational and tactical public discussion in the midst of this severe downturn. The desire for culprits at times like this is strong.”

The “culprit” has been identified. In their desire to escape blame, government officials in Congress and elsewhere have almost unanimously used their access to the media to vilify banks and Wall Street while pretending they had no hand whatsoever in this debacle. Unfortunately they’ve been quite successful in the scapegoating. However, having established the narrative, they now have to attempt to reverse it because the public rage they’ve helped stoke may prevent them from doing what they think they need to do to turn the financial industry around.

The entire problem that the administration is now recognizing is one of their own making and another indication of their inexperience and lack of foresight. It’s one thing to demonize such industries when campaigning, it is, as they’re learning, an entirely different thing when you do it as the President of the United States. The administration now has to figure out how to reverse a narrative they helped build and establish. That should be interesting to watch.

~McQ


20/20 and Reason: “Bailouts & Bull”

Last night’s episode of 20/20 was one of the best I’ve ever seen. John Stossel took on several topics, such as taxpayer-funded bailouts, transportation, medicinal marijuana, universal pre-kindergarten and immigration. Many of the segments are based on and include footage from The Drew Carey Project from Reason TV. Stossel also interviews Drew Carey in some of the segments.

The they are six videos (five below the cut). The first one deals with bailouts. Stossel talks to 18 economists about why the “stimulus” was a bad idea. He asks House Majority Leader Steny Hoyer if debt got us into this recession, then why is creating more debt going to get us out? One economist says that one dollar taken out of the economy is one less dollar to be spent in the private sector.

The second video deals with transportation, and actually starts off in Atlanta (my hometown), and is based on this video from Reason TV. It highlights private toll roads built in Orange County, California, Paris, Chicago and Indiana.

This segment is on medicinal marijuana and Charlie Lynch and is based on this Reason TV video. Lynch owned a medicinal marijuana dispensary in California, which is legal under state law. He was arrested by DEA agents for helping sick people and is now awaiting sentencing, up to a hundred years in jail.

This is the segment on universal pre-kindergarten, a promise made by Barack Obama during his campaign. It’s based in part on this Reason TV video.

Here’s the segment on immigration, which is based on a Reason TV video. Stossel shows how the gate is useless because illegal immigrants still manage to get around it, either by climbing over it or cutting holes in it. Stossel talks to both Duncan Hunter and his son, Duncan Hunter, Jr., about why it is necessary. The younger Hunter asks Stossel, “What is it worth to the American people to not have another 9/11?” Stossel says the fence wouldn’t have stopped 9/11 (the 9/11 hijackers came in the country legally). Hunter says, “It may stop the next 9/11.” Gotta love the fear mongering.

Here’s the final segment of the episode. It talks about how easy it is to make it in American if you live within your means and is based on this Reason TV video.


Understatement of the Week

China expresses some … um … “concern” about whether or not it will ever see its money back:

The Chinese prime minister, Wen Jiabao, expressed unusually blunt concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that the securities would maintain their value in the face of a global financial crisis.

"How much chance China get repaid?"

How much chance China get repaid?\


Speaking ahead of a meeting of finance ministers and bankers this weekend in London to lay the groundwork for next month’s G20 summit, Mr. Wen said he was “worried” about China’s holdings of United States Treasury bonds and other debt, and that China was watching economic developments in the United States closely.

“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Just a little? There’s an old saying to the effect of “if you owe the bank $1 Million, then the bank owns you; if you owe the bank $1 Trillion, then you own the bank.” China’s feeling pretty nervous because it knows it can’t sell its holdings except at a tremendous loss — both from the normal discount expected, and from the fact that it is by far the largest mover in the market (e.g. what do you think would happen to Microsoft stock if Bill Gates started selling off?) — and it doesn’t see a whole lot coming out of Washington to instill confidence.

But there’s no need to fret PM Jiabao! Unnamed economists are here to save the day:

While economists dismissed the possibility of the United States defaulting on its obligations, they said China could face steep losses in the event of a sharp rise in United States interest rates or a plunge in the value of the dollar.

Whew! That was close. Nothing but a little market risk to worry about there, Jiabao. Default? Pffft … never gonna happen.

Back in the land called “reality” however, default is plays a bigger part since, aside from reneging on the debt, there are only three other ways for the government to pay for its spending binge: higher taxes, printing more money, or borrowing. Higher taxes impedes growth and leads to less revenue. Printing money leads to hyper-inflation. So, even though those two choices will be used to a certain extent, further borrowing is the only viable alternative to default. But who’s going to lend to us?

Maybe China?

The bulk of China’s investment in the United States consists of bonds issued by the Treasury and government-sponsored enterprises and purchased by the State Administration of Foreign Exchange, which is part of the People’s Bank of China … much of the Treasury debt China purchased in recent years carries a low interest rate, and would plunge in value if interest rates were to rise sharply in the United States. Some financial experts have warned that measures taken to combat the financial crisis — running large budget deficits and expanding the money supply — may eventually create price inflation, which would lead to higher interest rates.

This puts the Chinese government in a difficult position. The smaller the United States stimulus, the less its borrowing, which could help prevent interest rates from rising. But less government spending in the United States could also mean a slower recovery for the American economy and reduced American demand for Chinese goods.

It may just be the case that China’s best option is to support its investment by propping up its best customer with yet more loans. Unfortunately, that means that Washington will have little incentive to slow down spending (since it owns the bank). The nasty little cycle of borrowing > spending > inflation > rising interest rates > falling dollar, will continue necessitating even more borrowing. China, in turn, will have serious questions about the value of its investment, and the US will start having serious discussions about declaring a default.

In short, China’s not just “worried” about the current fiscal mess. It’s crapping its collectivist shorts.


Put The Race Card Away, Please

Mark Sanford, the governor of South Carolina, said this the other day about the possible effects of all of the spending the Obama administration was doing and planning:

“What you’re doing is buying into the notion that if we just print some more money that we don’t have, send it to different states — we’ll create jobs,” Sanford said. “If that’s the case, why isn’t Zimbabwe a rich place?… Why isn’t Zimbabwe just an incredibly prosperous place. ‘Cause they’re printing money they don’t have and sending it around to their different — I don’t know the towns in Zimbabwe but that same logic is being applied there with little effect.”

A little oversimplistic, but this is “sound bite nation” so you have to condense. In effect his point is true to the extent it goes, and the example is a good and valid one, since Zimbabwe is printing money as fast as it can add zeroes to its demonimations. By now, the hyper-inflation it is undergoing from doing so should be well known to people versed in current affairs.

Unless, of course, you want to make a racial thing out of it. Rep. James Clyburn, Democratic Majority Whip, reacts to Sanford’s lesson and example of Zimbabwe:

“For him to compare the president of this country to Mugabe. … It’s just beyond the pale,” said Clyburn, who has sparred with Sanford over the Republican’s refusal to accept all the state’s stimulus funding.

[...]

“I’m sure he would not say that, but how did he get to Zimbabwe? What took the man to Zimbabwe? Someone should ask him if that’s really the best comparison. … How can he compare this country’s situation to Zimbabwe?”

Of course the “how” is fairly simple – if what is being touted as a solution here and was touted as a solution there, then Zimbabwe should be in great economic shape right now. But Clyburn would rather make a racial thing out of it. Obviously Sanford could have used Wiemar Germany of the ’30s, but it isn’t as relevant today as the case of Zimbabwe. And, he could have also used Venezuela. But Venezuela isn’t quite the basket case Zimbabwe is. Nope, in terms of a current example of what might happen, in terms of hyper-inflation from artificially pumping up he money supply, Zimbabwe is as good as it gets.

And besides:

“Rep. Clyburn always plays the race card,” shot back Sanford spokesman Joel Sawyer, who said his boss has also compared the stimulus to failed government policies in Germany and Argentina. “This policy will result in hyper-infaltion. … [Clyburn] is ripping off the people he purports to represent.”

Round 2 to follow.

~McQ


Hayek, Greenspan And The Designs Of Men

Alan Greenspan has a piece in the Wall Street Journal today which essentially casts him as the Pontius Pilate of the financial crisis.  Or, to sum it up rather sucinctly, “it wasn’t my fault”.  You’re welcome to read through it and agree or disagree.  However, the imporant point I think that should be taken from the Greenspan piece are the last two paragraphs:

Any new regulations should improve the ability of financial institutions to effectively direct a nation’s savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions. 

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Those words reminded me of the quote I saw in business columnist Tom Oliver’s piece today in the Atlanta Journal Constitution: 

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — F.A. Hayek

Any columnist who starts with a Hayek quote is guaranteed to get my attention. And I’ve come to enjoy Oliver’s columns. However, reviewing Greenspan’s advice and admonitions in those two paragraphs, juxtaposed against the simple and elegant truth of Hayek’s statement you find yourself back in the outback watching that big red kangaroo headed for a collision with the car. It is inevitable, there’s nothing you can do about it, they can’t or won’t hear your warnings and all you can do is watch – and cringe.

Frankly, as we watch the machinations of government and listen to their declarations, we have begun to understand that for the most part, those in charge of all of this haven’t a clue. As Oliver states:

Far from demonstrating the demise of free enterprise, this long-running, deepening recession is revealing the limitations of government.

Government, in its various yet powerful incarnations, has been offering one fix after another since August 2007.

The more the Fed and Treasury have tried, the less sure they seem and the more nervous the money makers have become.

It’s understandable that folks would look to the new administration for new ideas. So it’s harder than usual to acknowledge that the ideas are in fact pretty old and, having been tried, found wanting.

Whatever one may think about the so-called stimulus, it’s too easily deconstructed as pork and policy initiatives.

And if it’s still debatable whether to nationalize the financial industry, the move to nationalize health care, education and energy can hardly be disguised as economic recovery programs.

It is understandable that those who derive their power from government would use this recession as an excuse to further government’s reach. But they act as if government has been absent — as if they’ve been absent — from the role of regulator and legislator.

He’s precisely right – it wasn’t a problem with lack of regulation or lack of legislation. It was a lack of proper regulatory oversight and a willful decision by legislators to ignore the building crisis coupled with government distorting the market and actually incentivizing risk taking far beyond that which is prudent that led us here. And now that they have us in this position, all of them, Greenspan included, are engaged in a flurry of finger-pointing and name calling at every one but the right ones. This wasn’t a crisis which happened in just the last 6 months or 8 years. This one has been building for a while.

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — F.A. Hayek

We had Democrats in charge and then we had Republicans. Again and again.

Both endorsed and encouraged the subprime sleight-of-hand. Both appointed heads of the regulatory agencies that could’ve stopped the poison seeping through our banks’ balance sheets. Both allowed gamblers to hedge and swap derivatives on top of derivatives that no one can explain and that are proving far more debilitating than the debacle they were insuring against.

Freddie Mac and Fannie Mae became toxic assets of the government while doing the bidding of congressmen who now act like the piano players in a brothel.

The Federal Reserve proved to be anything but reserved, instead stoking a fire that burned us all.

These were not the result of idle hands of government, but rather deliberate deeds that created false markets with inflated credit while turning a blind eye to those who finance election results.

Oliver’s characterizations are dead on – and he’s nailed both the fed and the Congress. The most irritating thing to me about this whole mess, other than the obvious huge loss of wealth, is the success those who were responsible for writing the rules, laying out the playing field and calling the game are escaping both blame and punishment for what they’ve brought about. That toad Barney Frank having the chutzpa to talk about prosecuting those who were guilty of getting us in this mess still astounds me. If anyone should be undergoing such prosecution right now, it is he and numerous other congressmen and women, both past and present.

Oliver concludes as follows and I can’t help but say a hearty “amen” to what he has to say:

We periodically recoil in horror at government’s failure to protect foster children or care for veterans or the mentally ill. But then we turn around and assume government will perform better in areas more complicated.

Why does the failure of government so often lead so many to believe we need more government?

Like the hair of the dog for the alcoholic, it may calm the trembling hands for a moment but it inevitably leads to another spree and another hangover.

Or worse.

We’re headed into a “or worse” moment. No one in government is going to listen to Alan Greenspan’s admonitions or believe Tom Oliver’s brief accounting of the history of this crisis. Instead we’re going to see precisely the opposite happen – more regulation, more strings, more intrusion, more control. And, as Hayek said, we’ll again see “how little [men] really know about what they imagine they can design.”

~McQ


Brooks On Capitalism

David Brooks had started down the road to Damascus when he was called back into the fold by Dear Leader. His Op-Ed in today’s NYT is the result.

Most of Brooks’ offering is a rather transparent attempt to shame congressional Republicans into supporting Pres. Obama’s agenda:

The Democratic response to the economic crisis has its problems, but let’s face it, the current Republican response is totally misguided. The House minority leader, John Boehner, has called for a federal spending freeze for the rest of the year. In other words, after a decade of profligacy, the Republicans have decided to demand a rigid fiscal straitjacket at the one moment in the past 70 years when it is completely inappropriate.

The G.O.P. leaders have adopted a posture that allows the Democrats to make all the proposals while all the Republicans can say is “no.” They’ve apparently decided that it’s easier to repeat the familiar talking points than actually think through a response to the extraordinary crisis at hand.

There are myriad problems with Brooks’ line of reasoning, including many in just to two foregoing paragraphs (e.g. How much input did Republicans have into the recent legislation? By “adopted a posture” is he referring to “not having control of either the House or the Senate”?), but I wanted to focus in on a couple of points in particular.

After some platitudinous admonitions, Brooks launches into his prescription for Republicans to save capitalism:

Third, Republicans could offer the public a realistic appraisal of the health of capitalism. Global capitalism is an innovative force, they could argue, but we have been reminded of its shortcomings. When exogenous forces like the rise of China and a flood of easy money hit the global marketplace, they can throw the entire system of out of whack, leading to a cascade of imbalances: higher debt, a grossly enlarged financial sector and unsustainable bubbles.

I really don’t know what point Brooks thought he was making, but he failed miserably on any score. First of all, “exogenous forces” cannot be “weaknesses” and/or “shortcomings” with capitalism since, by definition, they come from outside that system. At best, examining such forces can be used to understand better ways of protecting capitalism from them. In the context of the entire Op-Ed piece, however, it appears that Brooks is pitching the tired line that capitalism must be reigned in so that people don’t get hurt. That’s like diagnosing the problem with house, finding termites, and then thinking of ways to protect the termites from the house.

Furthermore, Brooks cites a “flood of easy money” (which, of course, is caused by government) as an example of an exogenous force, and then lists the following “shortcomings” of capitalism: “higher debt, a grossly enlarged financial sector and unsustainable bubbles.” What do any of those things have to do with capitalism? If anything, these are once again a failure of government skewing incentives.

In fact, when the government does its darnedest to make the cost of borrowing money historically low, people would be really stupid not to take advantage of that. We all know that rates fluctuate, and that the cost of money will be more expensive when they go back up. Logically therefore, it only makes sense to borrow when the Fed turns the money spigot on and then to find some sort of an asset to grow that money in. That, of course, is what leads to bubbles as everyone has barrels of money but not as many clear ideas of what makes a good investment. Instead of taking the time to really investigate what opportunities are available, and which ones fit a particular person’s portfolio, the herd mentality takes over and we all tend to keep up with the Jones and Smiths whether that means buying tulip bulbs or a run-down house we intend to flip.

The bottom line, however, is that these sorts of scenarios start with government intervention into the market place. In addition to turning on the money spigot, the federal government was also encouraging lenders to make high-risk loans, and for the Freddie Mac and Fannie Mae to buy them up, securitize them and sell them into the derivatives market. Again, that’s all fine and dandy (until it it all goes to hell), but it has nothing to do with “weaknesses” and “shortcomings” of capitalism, and everything to do with government sticking its big fat honker where it doesn’t belong.

More Brooks:

If the free market party doesn’t offer the public an honest appraisal of capitalism’s weaknesses, the public will never trust it to address them.

The “free market party”? Who does he think he’s kidding here? The Republicans haven’t acted like a free market party since … well … it’s been so long I can’t remember.

Moreover, I simply can’t fathom how Brooks thinks a “free market party” would ever be able to reconcile itself to joining hands with Obama on his completely anti-capitalist agenda.

Power will inevitably slide over to those who believe this crisis is a repudiation of global capitalism as a whole.

Earth to Brooks: that’s already happened. Look who the president is for crying out loud, or take the time to read your own newspaper. Each and every day we hear about how the excesses of capitalism caused this crisis, and how the “libertarian” policies of Bush (HA!) have landed us in this awful spot. Capitalism didn’t get a trial, Mr. Brooks, it was rounded up, convicted and summarily shot as soon as the latest grand experiment in government do-goodism failed (again).


Honduras And The Effects Of Raising The Minimum Wage

Honduras is going through a rather large spike in kidnappings. From 5 in 2005 to 121 in 2008. In an attempt to understand this rise in kidnappings, The Overseas Security Advisory Council (OSAC), part of the Bureau of Diplomatic Security of the U.S. Department of State, was sure that economic conditions had most likely driven the spike. But what specifically was likely to have caused it? Apparently an increase in the minimum wage:

In January, Honduran President Manuel Zelaya increased the minimum wage 60 percent, raising monthly wages from US$ 181 to $289. As a result, an estimated 15,000 people have been laid off in urban areas. This number is expected to steadily increase as businesses cannot afford the new mandatory wages. Remittances from Hondurans in the U.S. have also decreased throughout 2008.

Some analysts predict increased crime in Honduras due to citizens unable to find legitimate sources of income. Many unemployed Hondurans could look to kidnapping for ransom in order to obtain large sums of money for a small amount of planning and effort. As the disparity between economic classes continues, wealthy Hondurans or foreigners of affluent appearance conducting business in Honduras could continue to be targeted at a higher rate.

Of course everytime increases are argued against here, those in favor of them tend to wave off the point that raising the wage will cause unemployment among those who can least afford it. Obviously I’m not contending that if we do so here, those laid off will take up kidnapping, but to pretend such rises in minimum wage don’t have any detrimental effect is simply not true – and Honduras provides the case study.

~McQ


Duh!

Warren Buffet on the economy and the effort of the government to “stimulate” it:

While praising efforts by Federal Reserve Chairman Ben Bernanke and others to stimulate the economy, he said the economy “can’t turn around on a dime” and that their efforts could trigger higher inflation once demand rebounds.

“We are certainly doing things that could lead to a lot of inflation,” he said. “In economics there is no free lunch.”

Funny how, when someone like Warren Buffet – who has been a supporter of Obama – says things like ‘trigger inflation’ and ‘no free lunch’, people who were previously playing the denial game (massive spending is necessary and good) suddenly figure there may be a problem.  Meanwhile the laws of economics have continued to function despite the denial.

For the most part the press has ignored Buffet’s words and they’ve been downplayed by the administration.  But perhaps if those who’ve been in denial are willing to consider Buffet’s warnings, they’ll be open to listening to others.  Such as warnings about the double talk that’s been coming out of the Obama administration the past few weeks.  For instance:

Confidence (too little) and uncertainty (too much) define this crisis. Obama’s double talk reduces the first and raises the second. He says he’s focused on reviving the economy, but he’s also using the crisis to advance an ambitious long-term agenda. The two sometimes collide. The $787 billion “stimulus” is weaker than necessary, because almost $200 billion for extended projects (high-speed rail, computerized medical records) take effect after 2010. When Congress debates Obama’s sweeping health care and energy proposals, industries, regions and governmental philosophies will clash. Will this improve confidence? Reduce uncertainty?

A prudent president would have made a “tough choice” — concentrated on the economy; deferred his more contentious agenda.

Instead he’s decided he’s not going to let a “good crisis” go to waste and pursue his very expensive agenda which has nothing to do with the economic crisis (or alleviating it). All the while he preaches about crisis, catastrophe, sacrifice, tightening belts and doing with less even as he plans to expand government beyond anything we’ve ever seen.

It is an amazing performance.

~McQ


Cap-And-Trade – The Impact And The Politics

It is time to get real about what the promised cap-and-trade tax means to the average American.

Politicians love cap and trade because they can claim to be taxing “polluters,” not workers. Hardly. Once the government creates a scarce new commodity — in this case the right to emit carbon — and then mandates that businesses buy it, the costs would inevitably be passed on to all consumers in the form of higher prices. Stating the obvious, Peter Orszag — now Mr. Obama’s budget director — told Congress last year that “Those price increases are essential to the success of a cap-and-trade program.”

Essentially Congress will be creating a new commodity literally out of thin air. It will only create a certain amount of that commodity and so create instant scarcity. As we all know, scarcity drives up prices. The next year, the plan is to remove a portion of the created commodity from the market creating even more scarcity and driving prices for the commodity even higher.

Imagine steel as the commodity. Imagine steel prices going through the roof. Do you suppose they might effect the price of, say, automobiles? Metal buildings? The price of building a bridge or sky scraper?

So who, in the final analysis, is going to end up paying for this increase in steel prices? Why the final consumer, of course. Naturally, with steel, in some cases you can choose to consume (buy a new car, rent an office or approve the bridge) or not consume. However, with the CO2 tax on all industry, to include manufacturing, service, transportation and energy, you have little choice in the matter of consumption. You will be picking up the tab for this.

That brings us full circle to the promised tax cut for 95% of America and my promise that what government gives with one hand it takes with another, making the tax cut illusory at best:

Hit hardest would be the “95% of working families” Mr. Obama keeps mentioning, usually omitting that his no-new-taxes pledge comes with the caveat “unless you use energy.” Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating.

After all the caterwalling the left does about “progressive taxation” they are about to implement the most regressive tax I can imagine. And as I’ve pointed out, the tax is pervasive, touching just about all aspects of life. Food prices will rise. Energy prices will go through the roof.

The Congressional Budget Office — Mr. Orszag’s former roost — estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).

Of course there is talk of subsidizing those at the lower end of the economic ladder so the impact of rising prices is lessened. Naturally that also negates the impact of the cap-and-trade system. In the end, your tax dollars subsidze the system while increased prices are passed along by so-called polluters. As the price of permits rise over the years, permit holders pay the increasing cost, pass it along and you again subsidize it. The rich can afford it, the poor will be subsidized, so who will get squeezed? Why that middle class that Obama and Biden are so concerned with.

Economically, estimates are that we’re going to have a miserable year in ’09 and possibly ’10. But we may begin to see a recovery really start to take hold in ’11, just in time for the 2012 presidential election. The smart politicians in Washington plan to delay cap-and-trade implementation until 2012. The reason should be obvious. If cap-and-trade has the expected impact on the economy, we could very well see the recovery stall and head back into recession. But politically the timing would be perfect. The mirage of recovery would be just enough to keep the current administration in power for another 4 years, before the economy wrecker of cap-and-trade begins to do its work.

~McQ