Free Markets, Free People
This week, Bruce Michael, and Dale record the most pessimistic podcast ever.
The direct link to the podcast can be found here.
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Where has this man been? Or perhaps the most salient question is what planet has he been hiding on? This is what he said in Hawaii to a gathering of CEOs at APEC about why we’re apparently in the mess we’re in:
“We’ve been a little bit lazy over the last couple of decades. We’ve kind of taken for granted — ‘Well, people would want to come here’ — and we aren’t out there hungry, selling America and trying to attract new businesses into America.”
Yes friends, the blame-shifter-in-chief says it is we lazy Americans who’ve taken everything for granted these last few decades that are responsible for the economic downturn we are experiencing now.
Never mind the fact that this administration has openly warred on business. Never mind we have the highest corporate taxes in the world. Never mind that government intrusion and regulation have only gotten worse. Never mind that government has actively sought to block businesses which could make a world of difference in both jobs and competitiveness. For instance:
– blocking oil and gas exploration in the Gulf even after safety and spill prevention procedures were upgraded
– trying to keep one of our major manufacturers, Boeing, from opening a new plant (jobs) in one of our few major industries (aerospace) by attempting to block non-union labor from working in a right-to-work state.
– delaying the Keystone XL pipe line (again, thousands of high paying jobs) for political reasons (delayed until after the election).
Etc. Not to mention the government policy and enforcement of that policy (Community Reinvestment Act) that led to the housing bubble and financial melt down.
It isn’t about a lazy America. It’s about an over-reaching, intrusive government whose level of intrusion and market distortion have only gotten worse “over the last couple of decades”.
And here’s a clue Mr. Obama – we lazy Americans didn’t run up a $14 trillion dollar debt. You pandering politicians did. And that debt load is also killing our competitiveness and has led to a downgrade of the country’s credit rating — on your watch.
Yeah, blame it on others, Mr. Obama — but thinking Americans, Americans who’ve actually run something and done something, know the score. Hopefully they’ll put you in a new position in November of 2012, where your primary responsibility will be getting with your wife and picking out wallpaper for your presidential library.
Where on earth has he been?
Well it looks like the much touted Euro economic package for Greece may be coming apart more quickly than expected, thanks to the bombshell announcement by Greek PM George Papandreou. Papandreou has decided, apparently without consulting anyone else, that the package should be put up for a vote. As the Wall Street Journal points out, a no vote could be disastrous:
A "yes" vote in the referendum could deflate the massive street protests and strikes that threaten to paralyze Greece as it tries to enact a brutal austerity program to earn rescue loans from the euro zone and the International Monetary Fund.
A "no" vote, however, could bring down the government and cut off international funding for Greece, leaving the country facing a financial meltdown.
Of course the country is already facing a financial meltdown, austerity measures have sparked violent protests for months and the purpose of the package agreed upon by European leaders was designed to help avert a meltdown and save both the Greek economy (as much of it as can be saved), while propping up the Euro.
As you might imagine, the surprise announcement was not favorably met by other European leaders. In fact, it wasn’t met favorably by a lot of Greek leaders who apparently had no idea that a referendum was in the offing.
Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, refused to rule out a Greek debt default.
"The Greek prime minister has taken this decision without talking it through with his European colleagues," he said in Luxembourg.
Asked whether a Greeks "no" vote would mean bankruptcy for Greece, Juncker responded: "I cannot exclude that this would be the case, but it depends on how exactly the question is formulated and on what exactly the Greeks people will vote on."
I think most understand that no matter how the “question is formulated”, a vote against the plan would most likely send Greece spiraling down the drain and the fear is it would take the Euro with it
Markets, which had calmed down after the plan was announced, have had the expected reaction to the Papandreou referendum plan. They’ve headed down:
Greek Premier George Papandreou said he will put the nation’s bailout deal through a referendum, potentially undoing a long-awaited agreement struck last week and sending European stocks down 3.3 percent. The region’s bank shares fell 6.4 percent.
"European leaders feel as if they’ve been blindsided by Papandreou," said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Co in Florham Park, New Jersey.
He said the move underscored the current risk in Europe and threw a wrench into the region’s stability plan.
The Dow dropped 2% on the news.
While our attention is on the Palinization of Herman Cain, we need to really keep an eye on this impending crisis. If Greece has a referendum and the vote is “no”, what Cain did or didn’t do in the 1990s isn’t really going to matter much. We’ll have another financial tsunami headed our way and we’d better begin to batten down the hatches.
Most intuitively know you can’t borrow your way out of debt, so it seems like a silly question on its face. But the theory is that government spending creates a simulative effect that gets the economy going and pays back the deficit spending in increased tax revenues. $14 trillion of debt argues strongly that the second part of that equation has never worked.
The current administration and any number of economists still believe that’s the answer to the debt crisis now and argue that deficit spending will indeed get us out of the economic doldrums we’re in. William Gross at PIMCO tells you why that’s not going to work:
Structural growth problems in developed economies cannot be solved by a magic penny or a magic trillion dollar bill, for that matter. If (1) globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries, then rock-bottom yields can do little to change the minds of corporate decision makers. If (2) technological innovation is destroying retail book and record stores, as well as theaters and retail shopping centers nationwide due to online retailers, then what do low cap rates matter to Macy’s or Walmart in terms of future store expansion? If (3) U.S. and Euroland boomers are beginning to retire or at least plan more seriously for retirement, why will lower interest rates cause them to spend more? As a matter of fact, savers will have to save more just to replicate their expected retirement income from bank CDs or Treasuries that used to yield 5% and now offer something close to nothing.
My original question – “Can you solve a debt crisis by creating more debt?” – must continue to be answered in the negative, because that debt – low yielding as it is – is not creating growth. Instead, we are seeing: minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels.
Not good news, but certainly the reality of the situation. Deficit spending has been the panacea that has been attempted by government whenever there has been an economic downturn. Some will argue it has been effective in the past and some will argue otherwise. But if you read through the 3 points Gross makes, even if you are a believer in deficit spending in times of economic downturn, you have to realize that there are other reasons – important reasons – that argue such intervention will be both expensive and basically useless.
We are in the middle of a global economy resetting itself. Technology is one of the major drivers and its expansion is tearing apart traditional institutions in the favor of new ones that unfortunately don’t depend as heavily on workers.
Much of the public assumes we’ll return to the Old Normal. But one has to wonder, as Gross points out, whether we’re not going to stay at the New Normal for quite some time as economies adjust. And while it will be a short term negative, the Boomer retirements will actually end up being a good thing in the upcoming decades as there will be fewer workers competing for fewer jobs.
But what should be clear to all, without serious adjustments and changes, the welfare state, as we know it today, is over. Economies can’t support it anymore. That’s what you see going on in Europe today – its death throes. And it isn’t a pretty picture.
So? So increased government spending isn’t the answer. And the answer to Gross’s question, as he says, is “no”.
The next question is how do we get that across to the administration (and party) which seems to remain convinced that spending like a drunken sailor on shore leave in Hong Kong is the key to turning the economy around and to electoral salvation?
James Pethokoukis reminds us that if we’re not watching the European debt crisis, we should. The one thing Tim Geithner apparently got right was how it could effect the US negatively. Geithner said:
Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand.
And that’s the obvious truth. If you need to catch up, here’s an article in the Financial Times to bring you up to date (you may need to sign up or register to read it).
Pethokoukis then points to a report from Barclays Capital that details what Geithner was talking about:
Our baseline forecast assumes that policymakers will prevent the turmoil in Europe from leading to a full-blown financial crisis similar to 2008 and that US policymakers will not impose excessive fiscal tightening starting in 2012. If, by contrast, either of these risks is realized, the potential for another recession will increase substantially. We use the Fed’s stress scenario under the Comprehensive Capital Analysis and Review (CCAR) as an alternative scenario to our baseline, but ratchet up the intensity modestly and analyze its effect on the outlook for house prices.
1) Our modeling suggests that in a recession scenario, house prices, as measured by the CoreLogic headline index, could decline another 7% in 2012 . … The scenario posits declining real GDP for four consecutive quarters, with Q2 12 having the deepest decline at 6% (q/q saar).
2) Real disposable personal income also declines for four consecutive quarters, albeit with a one-quarter lag relative to the decline in GDP, and the unemployment rate moves persistently higher, peaking at 12.1% by the end of our forecast horizon. …
3) Furthermore, the rising unemployment rate suggests that delinquencies would push shadow inventory higher, putting downward pressure on distressed home prices. Together, the two effects send home prices significantly lower in 2012.
Or in simple terms, if Europe goes, so does the US. Housing down another 7% and unemployment up into the 12% area.
Obviously this is all based on modeling and plugging in various numbers. So just as obviously those numbers could be off a bit. However, the basic premise is correct. If Europe can’t solve its debt crisis, the US will also suffer and, as you can see, suffer mightily (check out the chart at the link).
I think the political implications are clear even for the most partisan among us.
I know, you’re wondering, how does Obama plan to pay for his $450 billion plus job plan, right. Because in the speech he made the claim this was all going to be “paid for”, remember.
White House Office of Management and Budget Director Jack Lew outlined President Barack Obama’s plan to pay for his $447 billion jobs plan — mostly through tax increases.
Lew said itemized tax deductions and exemptions for those making more than $200,000, and families earning more than $250,000 would be cut — raising about $400 billion to pay for Obama’s jobs plan over 10 years.
A change to bring more hedge fund earnings under normal tax rules as opposed to carried interest rates would raise another $18 billion.
The new tax rules would not take effect until January 2013, Lew said. Obama is not offering any spending cuts to pay for the jobs plan.
The rest of the total would be raised by cutting subsidies for the oil and gas industries to bring in another $40 billion, and change the depreciation rules for corporate jets. All told, Obama would cut $467 billion to pay for his plan.
Lew added that the White House doesn’t anticipate that raising some taxes on high income earners would result in the loss of jobs.
Gotta love it. No politics in this. Nothing happens until January 2013 (how convenient). And the changes will pay for his spending now in 10 years. Wow, where have we heard that before? More debt boosting smoke and mirrors. More of the same old tired agenda.
And of course, we all know that no future Congress is obligated to any of this. And you wonder why there are those of us out here shouting about paying for something now vs the future?
Also, it is a litany of those interests and demographics which reside on the Obama “enemies list”. The rich and the fossil fuel industry. It is the usual class warfare politics. To sell this Obama has to attempt to demonize the rich and the oil companies – even more than he’s done so already. As everyone knows, I’m all for ending subsidies for everyone, but what Obama calls subsides in this case are tax breaks all businesses in all sectors take. They’re not direct subsidies at all (regardless of what the press or the White House choose to call them). This is selective taxation of the type that is meant to be punitive.
So here’s the money part of the great plan. It is absolutely nothing the Republicans have supported before. It should be Dead On Arrival. Obviously, knowing the Republicans won’t support such a funding mechanism, President Obama is not at all interested in a compromise jobs bill. Or bi-partisanship. He’s put a completely unpalatable poison pill in the bill and will now try to paint the GOP as intransigent obstructionists.
And, given the fact that taking those tax breaks away from the oil and gas industry will cost them an extra $40 billion it’s hard not to believe it won’t cost jobs. Note Lew didn’t address that point concerning the removal of the tax break. He’s only claiming that in regards to the so-called “rich”.
Business as usual. Tax and spend. And as usual it is spend now an collect later. Somehow we never get around to the spending cuts, do we? $14 trillion dollars of debt say “no”.
If you listen to Democrats, all we need to do to solve the debt and deficit problem is to let the Bush era tax rates expire and raise the tax rate on the rich. We’ve had Warren Buffet, among others, saying “hey, tax me more, I can afford it”. And, of course, those standing their ground on principle saying revenue isn’t the problem and tax increases aren’t the solution are roundly condemned for being greedy and protecting the rich.
Well what if we increased the taxes on the rich? What if we increased them dramatically? Is our deficit problem likely to be solved? The answer, of course, is “no”. And here are the numbers:
“Even taking every last penny from every individual making more than $10 million per year would only reduce the nation’s deficit by 12 percent and the debt by 2 percent,” the non-partisan Tax Foundation’s David Logan writes.
“There’s simply not enough wealth in the community of the rich to erase this country’s problems by waving some magic tax wand,” said Logan.
Rest assured you’d only get one shot at all the money as well. The next year the majority of the rich — and that most likely would include Warren Buffet — would find ways to hide their income from such a level of taxation. Human Nature 101.
So 12% of the deficit and 2% of the debt with 100% taxation. Sound like a solution to you? Of course not. How about raising taxes in general, good idea right now?
If you said, “no”, you’re in good company:
The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts.
The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases.
Whether the president likes to admit it, we’re in danger of a double-dip recession, and one way to guarantee it is to raise taxes during such an unstable time as now. Obviously if taxes are increased on the rich, it won’t be 100%, so the impact on the debt and deficit are likely to be minimal at best. And it would be an action counter to what economists believe to be the best approach to avoiding a double-dip.
That most likely means that Democrats will continue to pursue such an increase with a single-minded purpose. Or, in short, they still don’t get it — it’s the spending, stupid.
Deficit spending has risen faster under Barack Obama than any other president in history. That’s not to say other presidents weren’t in the red during their administrations, but in the case of Obama, its over 4 trillion dollars in less than a single term.
The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama’s watch.
The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion.
It’s the most rapid increase in the debt under any U.S. president.
The national debt increased $4.9 trillion during the eight-year presidency of George W. Bush. The debt now is rising at a pace to surpass that amount during Mr. Obama’s four-year term.
The immediate problem isn’t about taxes or revenues, “it’s the spending, stupid!” Byron York echoes the point:
It’s conventional wisdom in Washington to blame the federal government’s dire financial outlook on runaway entitlement spending. Unless we rein in Social Security, Medicare and Medicaid, the conventional wisdom goes, the federal government is headed for disaster.
That’s true in the long run. But what is causing massive deficits now? . . . The bottom line is that with baby boomers aging, entitlements will one day be a major budget problem. But today’s deficit crisis is not one of entitlements. It was created by out-of-control spending on everything other than entitlements. The recent debt-ceiling agreement is supposed to put the brakes on that kind of spending, but leaders have so far been maddeningly vague on how they’ll do it.
Precisely. When treating a badly wounded person the immediate need is to stop the bleeding, not treat them for heart disease. Once the bleeding is stopped, then you can worry about their heart and future treatments.
The spending has to stop. And President Obama is not the man to do that. He blames his spending on everyone but himself which indicates to many that he has no intention of slowing it down:
Mr. Obama blames policies inherited from his predecessor’s administration for the soaring debt. He singles out:
- "two wars we didn’t pay for"
- "a prescription drug program for seniors…we didn’t pay for."
- "tax cuts in 2001 and 2003 that were not paid for."
While there is some truth to what he points too, the last is nonsense unless you believe the government has first claim to your earnings. Those aren’t tax cuts, they’re tax rates. They’ve been in place for almost 10 years for the first and eight for the second. Tax rates are changed all the time, but until recently they’ve never been referred too as “tax cuts … that were not paid for”. Also not mentioned in Mr. Obama’s litany is TARP – something he voted for – and the trillion dollar stimulus bill, not to mention the new health care law which analysis now shows bends the cost curve up.
Just as this economy is all his, so is the 4 trillion in borrowed money he’s spent during his term to little or no effect during his term. And the budget he submitted to Congress this year, the budget that was rejected 97-0, indicated he still doesn’t understand the spending has to stop.
Our debt now stands at 97.6% of our GDP. That’s default territory. Yet there are those who have attacked Standard and Poors for downgrading their rating to reflect that reality. This is serious business that effects or will effect everyone if it isn’t stopped. GOP candidates need to concentrate on the immediate problem and announce and run on their plan to stop the bleeding.
It might come as a surprise to some, but the bill Democrat Representative Jan Schakowsky (IL) plans to introduce as a jobs bill is long on borrowing money we don’t have and funneling that money through ineffective government programs. Apparently they still don’t get it.
The member of the Congressional Progressive Caucus would spend $227 billion dollars and, best case, create 2.2 million jobs (or, again best case, a little over $108,000 a dollar a job). Her plan reads like something from the Franklin Roosevelt administration:
Under her plan, the following policies would be implemented:
- The School Improvement Corps would create 400,000 construction and 250,000 maintenance jobs by funding positions created by public school districts to do needed school rehabilitation improvements.
- The Park Improvement Corps would create 100,000 jobs for youth between the ages of 16 and 25 through new funding to the Department of the Interior and the USDA Forest Service’s Public Lands Corps Act. Young people would work on conservation projects on public lands including the restoration and rehabilitation of natural, cultural, and historic resources.
- The Student Jobs Corps would create 250,000 more part-time work study jobs for eligible college students through new funding for the Federal Work Study Program.
- The Neighborhood Heroes Corps would hire 300,000 new teachers, 40,000 new police officers and 12,000 new firefighters.
- The Health Corps would hire at least 40,000 health care providers, including physicians, nurse practitioners, physician assistants, nurses, and health care workers to expand access in underserved rural and urban areas.
- The Child Care Corps would create 100,000 jobs in early childhood care and education through additional funding for Early Head Start.
- The Community Corps would hire 750,000 individuals to do needed work in communities, including housing rehab, weatherization, recycling, and rural conservation.
Perusing the list, there’s absolutely no possible threat of waste, fraud and abuse, is there? 750,000 people hired to “work in the community” doing “recycling” and “rural conservation?” “Weatherization”? Nope, no chance of waste, fraud and abuse, none at all.
Of course, nowhere in there other than initially, is there any mechanism to fund the “jobs” created in the future. They’d last as long as the $227 billion did and then the jobs would go away. That would include the teachers, police officers and firefighters. Those are simply in the plan to make it sound more acceptable. If the localities who will get the teachers, police and firefighters funded by this boondoggle can’t afford to hire them now, chances are very good they won’t be able to keep them when the money runs out.
The jobs listed are also mostly make work jobs on make work projects that might be nice to have done, but aren’t going to contribute to the private economy (the actual engine of the economy) in any meaningful way. Nothing is really “produced”, no wealth is created, no revenue – other than salaries – is taxable.
And finally, which health care providers is “Health Corps” going to hire? There’s a shortage of health care providers in the private market. Why in the world would they leave that to work for government in “underserved rural and urban areas?”
It is clear with Rep. Schakowsky’s proposal that the Progressive side of the aisle still don’t get it. How much louder do the American people have to shout to be heard?
Cut spending. Make government smaller. Make government less costly.
Rep. Schakowsky and the Progressives are still stuck in the 20th century. We’re already living the Raw Deal thanks to spendthrifts like her.
One of the irritating things about being deeply in debt is dealing with your creditors. Happily, if your creditor is, say Wells Fargo, they tend to stay within strict legal bounds when dealing with you. If you’ve been unfortunate enough to seek credit from fellows whose last names end in vowels, they tend to be more…forceful in delivering their messages to you. As it happens one of the United States’ creditors also has a name that ends with a vowel: China.
And they have a message. The more or less official organ of the Chinese Communist Party—which is to say the Chinese Government—is the newspaper People’s Daily. So, it is with much interest that I read an op/ed piece in that fine journal with the title, "China must punish US for Taiwan arm sales with ‘financial weapon’". As messages go, this one’s pretty simple.
Now is the time for China to use its "financial weapon" to teach the United States a lesson if it moves forward with a plan to sale arms to Taiwan. In fact, China has never wanted to use its holdings of U.S. debt as a weapon. It is the United States that is forcing it to do so.
The U.S. House of Representatives just passed a debt ceiling bill on Aug. 1. On the next day, a total of 181 members of the House of Representatives signed a letter sent to U.S. President Barack Obama stating that the federal government should approve the sale of F-16 C/D fighter jets to Taiwan as soon as possible to help ensure peace and stability across the Taiwan Strait…
Despite knowing that major creditor countries, especially China, would be the main buyers of its new debt, certain arrogant and disrespectful U.S. Congress members have totally ignored China’s core interests by pressuring the president to sell advanced jets and even an arms upgrade package to Taiwan.
U.S. treasuries will lose value if China stops or reduces its purchases of them on a large scale, which will also affect the value of China’s U.S. treasury holdings. However,as the situation has gotten out of hand, allowing Washington politicians to continue their game might lead to more losses.
U.S. arms sales to Taiwan can only create more jobs for the United States but cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland. The essence of the problem is that some U.S. Congress members hold a contemptuous attitude toward the core interests of China, which shows that they will never respect China. China-U.S. relations will always be constrained by these people and will continue along a roller coaster pattern if China does not beat them until they feel the pain.
I am mildly amused by the claim that such sales both threaten "China’s core interests", but "cannot improve the ability of Taiwan’s military force to compete with the Chinese mainland." Both of these arguments cannot simultaneously be true.
Less amusing is the common attitude of loan sharks to their creditors displayed here using much the same language that Tony "The Shark" would use: Namely, if creditors don’t do what they’re told, you have to "beat them until they feel the pain."
With the recent rise in bond prices and drop in yields, the Chinese have a number of options. The least damaging to the US would be to sit out a few bond auctions, which would force interest rates up. But they’ve also got the nuclear option of selling off as much paper as the market could bear. Yes, they’d forego some yield payments, but they’d probably make a nice tidy premium over the original purchase price to make up for it. Rising interest rates now, at a time when the economy is weak, and short-term rates are already effectively zero, would slow the US economy. At the same time, a massive repatriation of renminbi to China would cause a steep drop in the value of the dollar in foreign exchange markets. This would raise the price of imports equally steeply. This would cause something very similar to the oil price shocks of the 1970s, that plunged the US into stagflation.
Naturally, the Chinese would be hurt by the reduction in their export capability. The question then becomes, "Which of the two political systems, China or the US, is more concerned about democratic pressure to change policy in order to improve the economy?" Who is more responsive to public pressure: our government, or the government that initiated the Tiananmen Square massacre?
I don’t know about you, but I wouldn’t expect Hu "The Kommissar" Jintao to be the one that blinks first.
Of course, if we weren’t $14 trillion in debt, we wouldn’t be very vulnerable to this sort of thing.