Wednesday, January 28, 2009

Only "Card Check" Can Restore Prosperity and Save the Middle Class?

On Monday, January 26th in the LA Times, Robert Reich the former Secretary of Labor in the Clinton Administration uses a false premise and circular reasoning to support the idea that salvation for the middle class, and thus the economy, can only be achieved by a re-unionization of America. He wants you to believe that only Card Check can make that happen.

Starting an opinion piece with a false premise tends to make one's argument suspect. Using circular reasoning to buttress it simply betrays how weak the argument truly is.The very first line in his article is this question, " Why is this recession so deep, and what can be done to reverse it?".

The answer is, IT'S NOT THAT DEEP, and card Check won't help at all. As a matter of fact, the current recession is no more severe at this point than the average of the 10 post-World War II recessions. Apparently Mr. Reich rightly feels that if he started with the premise that today's recession is not nearly as bad as most, it would get in the way of his solution. No crisis, no dramatic solution needed. After all, he is a politician, and this is right out of the political playbook. In order to offer a "solution" that people don't want, you need to create a crisis to make the situation appear dire, in order to marshal support to advance your agenda. Starting with a false claim makes me wonder about the validity of other claims that he makes in the piece as well.

The needle on my Ludite Detection Device nearly went off the scale when he talked of going back 50 years for the solution: Yes, if only we had more union members. Evidently progress in the eyes of progressives is all about turning back the clock. I would like to join Robert in his trip down memory lane, but it would not be in search of Big Labor's glory days. Instead, I'd be looking fondly for Smaller Government and the time when Social Security tax rates were 2.5% percent, not 15.3%, a time when limited government and personal responsibility were the order of the day.

The Mark Twain in me says I've got to call him out on this next quote where he tells us that the rich got richer at the expense of the middle-class and cites a study.
Figures don't lie, but liars figure. - Samuel Clemens (alias Mark Twain)
Here it is:
"It's no wonder middle-class incomes were dropping even before the recession. As our economy grew between 2001 and the start of 2007, most Americans didn't share in the prosperity. By the time the recession began last year, according to an Economic Policy Institute study, the median income of households headed by those under age 65 was below what it was in 2000."

Above, he tries to use a study on median income by the Economic Policy Institute to to say that middle-class income is down. I suppose this is so he can infer it has happened as a result of the reduction in union membership. and the income loss the middle class has supposedly experienced can only be halted by increased union membership. The problem is the statistics don't back up this premise either. Here is what Terry J. Fitzgerald, Senior Economist with the Federal Reserve, says about median household income in a report from September of 2008 : see the full report here

Average household size declined substantially during the past 30 years, so household income is being spread across fewer people. The mix of household types—married versus single, young versus old—also changed considerably, so the “median household” in 2006 looks quite different from the “median household” in 1976. Finally, the measure of income used by the Census Bureau to compute household income excludes some rapidly growing sources of income. The main finding is that—after adjusting the Census Bureau data for three key factors—inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006. The only household types with substantially lower growth were “working-age male householder without spouse present” and “male householder with children but without spouse,” but these types constitute just 10 percent of all households. Household income inequality increased notably over this period; nonetheless, middle American households had substantial income gains."

Here are the factors Fitzgerald cites:
  1. The price index used by the Census Bureau overstates inflation, and thus understates income gains, relative to a preferred price index.

  2. A changing mix of household types leads the overall median increase to understate the median increase of most household types.

  3. The Census Bureau measure of household income understates income growth by excluding some rapidly growing sources of income.

His Conclusion

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

About the only point I can find agreement with Mr. Reich on is his assertion that tax rebates don't work. He is right about this one issue. He is, however, totally wrong on his support for the "Tax cuts for working families, as President Obama intends, can do more to help because they extend over time." My understanding is that these are not tax cuts, but tax rebates. Rebates do not provide any incentive to work more, and will only apply for the next two years, not permanently.

His idea that only unions can permanently raise wages is patently false. Permanent wage increases can only come about through increases in productivity. Artificially raising wages, through the threat of force, which is what unions do, has a tendency to reduce employment over time. How else can you account for the massive loss of union jobs in the private sector? Employees understand this, and it is the reason that unions are having so much trouble trying to organize workers. It's not as Heir Reich would have you believe: the work of evil employers and their intimidation of the workforce.

He claims there are abundant examples of the power of unions to raise wages, and then trots out two weak examples . Buttressing his claim of the wonders of Unions and their ability to increase wages, he tells of the 12,000 janitors that were organized in New England recently, and how they are now being paid $16 per hour plus benefits. If I were them, I'd be concerned. Have a look at these folks who also won a increase in wages, and see how much better off they are as a result. His other example is of the 65,000 Verizion workers who received an 11% wage increase. That's a big increase. and I was almost buying his power of Unions line until I checked to see that he had forgotten to mention that it was over a three year time frame. That makes it a raise of about 3.5% per year, which is better than a sharp stick in the eye, but not enough to make me run out and join a union today.

Terry Fitzgerald's research shows Middle American households did indeed have substantial income gains, and the opinion piece by Mr. Riech clearly shows the dramatic fall in union membership from a high of over 33% to below 8% in the private sector occurred over the same time frame. I not saying the decline in union membership is the cause of increases in income for the middle class. I'm just saying that both things happening, at the same time, has got to make you wonder just a little bit.

Friday, January 16, 2009

Alarmism in Support of Perpetual Dependence

Paul Revere's Midnight Ride was not a journey to alert his countrymen that the British were coming in order that they might as a group surrender their freedom in an orderly manner. He risked his life to forewarn like- minded individuals of the advancing British Army and the tyranny they sought to impose. The alarm he sounded was meant to awaken the spirit of rugged individualism, so that free men could rally to defend themselves from those who would deny them their liberty.

It stands in stark contrast to the unending alarms sounded by today's leaders who rally us for reasons that are very different from those of securing our Individual Liberties.They rouse people to the cause of the collective. They ask us to forgo our own self interest in order to advance their agenda of the group. This is very definition of collectivism, see below!

"Collectivism is defined as the theory and practice that makes some sort of group rather than the individual the fundamental unit of political, social, and economic concern. In theory, collectivists insist that the claims of groups, associations, or the state must normally supersede the claims of individuals." -- Stephen Grabill and Gregory M. A. Gronbacher

Their pursuit is for more power and control of the individual. They are practiced in the art of elevating every problem to crisis proportion as a first step in chipping away at what remains of our hard won rights as individuals. The issues they claim as crisis aren't. They can't be, for the duration of a real crisis is not measured in years, decades and generations but in days, weeks and perhaps months. A true crisis, by definition, is one whose impact would be so devastating that "time is of the essence" in dealing with it successfully. I seem to be hearing that phrase more often these days.

That today's problems go unresolved is confirmation that our political leaders, who are very cognizant of their own self interest, are too beholden to the special interest groups they serve to address their real cause. Many of these problems are the result of government dictates and their unintended consequences. Government solutions have a nasty tendency to ultimately cause more of the problem they were intended to resolve.

Social Security is one example of a phony "crisis" that goes unresolved. Politicians can't fix it because they won't address the real cause of the problem. That's right, it's a problem, not a crisis. It's been a problem way too long to be considered a crisis. It's a simple problem of math. Too few employees pay too many retirees. Taking too much from too few to pay too many can't work. The real solution is to make fewer and fewer people dependent upon Social Security for their main source of retirement income. The ever increasing Social Security taxes borne by the employee and employer ensures that employees cannot adequately save, and employers can't offer additional funding of employer sponsored retirement plans, thus perpetuating the government's retirement dependency machine. The real solution is to reform Social Security, but it has a large and very well organized constituency that lobbies viciously to protect the rights of the members of the group.

Another example of alarmism is the now popular sport of magnifying the current economic downturn, and likening it to the Great Depression. Factually it's not true, as is proved by just about every statistical measure you can examine. Here are a number of comparisons you might want to have a look at. It is nothing more than a cynical ploy of the political class to create fear, as a way to garner support for legislation funding the very programs and projects of special interest groups that were not deemed worthy of taxpayers dollars before the recession began. Creating an atmosphere of anxiety, and then promising goodies for all the right groups is the new American Way. The key to it's success is to ingratiate the maximum number of special interest groups, by offering them all a chance to dip their beak in the Stimulus Trough. This is the reason the Stimulus Program needs to be so large. They are even offering goodies to the opposition in the form of rebates and credits dressed up as real tax cuts.

As more and more people scramble aboard the wagon of government dependency, it leaves fewer and fewer of us to pull the load. Group rights and dependence on government handouts are not what have made this nation great. Individual Liberty and freedom, along with a free market through which we are able to act in our own self interest, is responsible for the prosperity we have come to know. A prosperity that would not have been possible without the individual liberties and freedom provided for us long ago by the founding fathers of our country, who fought and died to secure them.

Wednesday, January 14, 2009

Incentives for Producers The Real Stimulus Plan

A recession is not a lack of spending, and recoveries are not brought about by the government providing free money to boost consumption. A recession is a reduction of economic activity, a lack of production. Just ask the people who put together the statistics on recessions what they measure. You already know the answer, they measure Gross Domestic Product. When GDP is negative for a quarter or two it's called a recession. That's right, it is all about production, so why is the crowd in D.C. hellbent on stimulating consumption rather than setting the stage for a lasting economic recovery through incentives that foster increased production.

The gargantuan spending bill being cobbled together will do nothing to promote real economic prosperity. It can't, as it does nothing to alter the long term incentives for saving, investing and risk taking that are the underpinnings of economic expansion. It is simply a massive serving of Pork, with a side dish of phony tax cuts, and a steamy hot bowl of state welfare spending stew. A true stimulus would replace this economic sacrifice to the gods of pork with a package of long term incentives that would reward the virtues of saving, investment and entrepreneurial risk taking, instead of the vice of all out consumption. Our current system does too little of this, and that is the problem.

Bolstering consumer spending with government transfer payments does not produce economic prosperity. What makes a nation prosperous is expanding economic production. The proposed tax reduction through credits and rebates on the work you performed last year come after the fact, and can't possibly provide an incentive to produce more this year or in the future. Washington's concurrent warnings that we are not saving and not spending enough belies the fact that they do not have a coherent economic vision, and instead craft fiscal policy with an eye towards accommodating their desired spending plans, not economic growth and opportunity.

Recently Congress was on the warpath looking to take the scalps of the CEO's from Detroit for their role in the mismanagement of their respective companies. How hypocritical it is for Congress to now be rewarding the Governors, the CEO's of state government for their gross mismanagement of state budgets. That Congress is now playing the part of enabler for a growing line of Governors in denial, looking for taxpayer handouts to avoid facing the reality of their profligate spending habits of the last decade is beyond the pale.

If the idea is to create additional private sector jobs an expanding economy is the answer. The relevant question is what policies will promote the greatest expansion of our economy, long term? Is government borrowing on a massive scale from the private sector to promote public sector spending initiatives over the course of the next two years the best answer? Of course not! The real solution is to revitalize American business. Our business sector is the greatest job production machine ever created. We'd all be much better off if the monkeys in congress would stop throwing wrenches into it's economic gears.

The American way to wealth creation has always been through capital accumulation, by saving, investing and risk taking . Denying new capital to the markets by the threat of confiscation is exactly what the tax on capital gains does. It keeps capital locked up in mature companies, and locked out of start up ventures, preventing the formation of new firms and the commercialization of new ideas that are the engines of job creation. These taxes that hinder Americans in their efforts to accumulate and redeploy that capital, in turn starve the economy of an ingredient essential for expansion. Government spending on the scale now envisioned will do the same.The time has come to start treating capital and capitalists better.

That it has become politically correct to demonize entrepreneurs as the greedy idle rich is deplorable. Instead, they should be praised for their industriousness and their role as the true community leaders who risk their own capital to organize businesses, creating opportunities for those who can't or won't. You can't hate employers and love the employees.

Marginal tax rate reductions are the key to revitalizing the economy, as they provide the increased reward for the next unit of production. We should start with a permanent across the board reduction in marginal income tax rates, followed by a complete overhaul of the tax system. This same tax code has been in existence, in pretty much the same form, since it's creation in1913 when it was sold to the American people as a revenue generator that would only tax the rich. In the past 96 years, Economist have accumulated plenty of evidence of the damage high income tax rates cause the economy, even if politicians have come to learn precious little about their disincentive effects.

If creating additional employment opportunity is really job #1, we should permanently reduce the job killing tax on labor that Social Security and Medicare have become. Employers and employees now pay a combined 15.3% tax on each dollar of earned income. Even those who aren't subject to the income tax pay this levy. A reduction in this tax would narrow the gap between what it cost an employer for an hour's worth of labor and what an employee receives, increasing both the employer's return on labor and the employee's take home pay. This tax on employment shares a good measure of the blame for the lag in employment growth over the past decade.

It is amazing to me that in today's competition for a share of the global economic pie, our claim to fame is having the highest corporate income tax rates in the developed world. Aside from reducing our global competitiveness, corporations only pay these taxes indirectly. The folks who actually pay the corporate income tax bill are consumers. Tax costs are figured into the price of all goods and services. The Tax Foundation, a non partisan educational organization, has estimated that the average consumer pays $3190 in corporate taxes that are incorporated in the retail price of goods. How's that for promoting prosperity and economic expansion?

The government's unending quest to spend more money comes at the expense of the vibrancy of the private sector. If after a decade of unbridled spending at all levels of government, including the $3 trillion dollars the federal government currently spends each year isn't getting the economy moving, what makes them think that an extra 500 billion this year and next is going to somehow make a real difference? It's time for Bailout Nation to scale back this entitlement mania. This will give those of us in the private sector a break today, and remove the threat of the oppressive tax burden that is sure to follow this massive government spending boondoggle called the stimulus plan.

Sunday, January 4, 2009

The Road to Utopia Isn't Paved with Higher Gasoline Taxes

Wow, that was quick. It's been all of 3 months since gas prices have fallen below $3 a gallon, giving consumers a much deserved break in their pocket book, and already the calls for a large gas tax are back.

Leading the way is Charles Krauthammer. Writing in the Weekly Standard, he suggests that we increase the tax on gasoline by $1 per gallon, or as much as is needed to reduce the number of miles the average American drives. He never does gets around to telling us just how big of a reduction is needed in order to achieve all the wonderful, societal, and geopolitical benefits that will flow from the further taxation of the already over-taxed American people. These benefits range from stopping global warming (which he admits to not believing in) to taming the evil ambitions of Russia, Iran, Hamas, Hezbollah and Venezuela.

Don't get me wrong. I have a great deal of respect for the man, and I actually like his idea of reducing the out sized income flows pocketed by the non friendlies of the world due to high oil prices, but there is a better way to go about it, and it doesn't include a single dollar of additional tax. Instead, let's stabilize the value of the dollar at, say, $500 per ounce of gold. If we do, we can get back to the steady eddie oil prices and ultra low inflation we enjoyed from the mid1800's right up until we severed the dollars link to gold in 1971. The volatility in the price of oil that has occurred since the US decided to float the dollar is amazing. Have a look at this chart and see for yourself.

The seesaw of higher, then lower oil prices is, to a great extent, caused by changes in the value of the US dollar and it's effect on the supply of oil, which ultimately effects it's price, and to a lesser extent on the ebb and flow of the global economy effecting demand. Oil is priced in dollars. Change the real value of the dollar and you change the nominal price of everything denominated in dollars, including oil. This is what Charles and the folks at the New York Times just don't, or won't understand. It was the rise in the value of the dollar from 1997 through 2001 that set the stage for the oil price increases of the 2006 - 2008.

Producing oil is a long lead-time business, which starts with exploration to find what you think are oil deposits. Then, there are the various permitting processes to acquire the right to drill. Finally, you drill the actual wells to determine if what you thought was oil really is, and if production in commercially viable amounts is possible. Commercial viability is dependent upon the price of oil and the recoverable quantities available. It is the role the dollar plays in both the price of oil, and what amounts can be recovered profitably based upon that price, that makes the oil business such a high stakes gamble.

Let's imagine for a moment that you are the oil company executive in charge of drilling and production. The year is 1999, and you are watching two related events that are shaping your companies' decisions on oil production. These events are the rise in the value of the dollar and fall in the price of a barrel of oil.

Over the last two years you have watched as the US dollar increase in value by about 30%, pulling down the price of a barrel of oil from $21 to $13, causing your revenues to plummet.

Ask yourself this question: Just how many additional drill sights am I going to want to pour millions of dollars of my companies' capital into, looking for new reserves? Short answer, not many. Longer answer, the worldwide rig count average fell from 2128 in 1997 to 1457 in 1999, and the rig count didn't recover to the 1997 levels until 2001. That's a whole lot of oil wells that didn't get drilled.

What do you think happens when oil companies all over the world reduce the number of new wells they drill? That's right, the supply of oil is greatly reduced, and by more than might be obvious at first.

The decreased number of newly drilled oil wells and the reduction of their flush production ( production higher then the sustainable trend), along with the inevitable decline of older producing wells acted as a cut in oil production. This intensified the supply problem caused by the “drilling holiday of 1997-2001”.

This makes for a world oil market in which inventories are extremely tight, and small increases in demand produce disproportionate increases in price. When the central bankers across the globe, led by our Federal Reserve, poured liquidity into the global economy, the resultant boom sent gold and oil prices rocketing skyward, until we reached new all time highs for both of these commodities.

Attacking a supply problem from the demand side, through a high tax on gasoline isn't the right path to start down. It's actually the Left's road to never ending tax increases on gasoline curtailing your freedom to travel. The real problem is an erratic Fed and it's up, no wait, it's down dollar policy, a policy that helped restrained drilling in the 1990's and created the liquidity fueled growth of the 2000's.

Would we be where we are today if the Fed had maintained a stable dollar monetary policy? Is it possible to add too much liquidity, and at the same time maintain a stable dollar? The answers are No an No! Does the price of oil rise or fall dramatically when the goal of monetary policy is to provides a stable dollar? Again, the answer is no! Is inflation a problem when the dollar is stable? You already know that answer, and it is a resounding No! Do we need to increase the gas tax to implement a monetary policy which stabilizes the dollar? Of course we don't, so why haven't we stabilized the dollar? That's a great question. You should ask Uncle Ben.

Friday, January 2, 2009

A Dash of Economic Fine Tuning and Mystery Monetary Policy

I don't know where you folks stand, but I think that I have had about all the government fine- tuning of the economy that I can stand. What exactly is the Fed's definition of fine tuning the economy anyway? All these years I have been under the impression that fine-tuning usually involved changes performed in minor increments meant to dial in to a precise target . Rarely have I seen fine-tuning operations performed with a sledge hammer or dynamite, I guess that is unless the fine tuning is courtesy of the Fed and the Treasury Department.

The Feds latest round of monetary fine tuning started a year and a half ago with the Fed Funds target rate at 5.25%. The Fed, in order to push the rate down further added liquidity. Recently, enough liquidity was added to move the rate to zero. Pushing the rate to zero is accomplished by the fed creating money in the form of reserves and adding these reserves to the banking system. By supplying excess reserves, (more reserves than the banks will bid for) the cost of these funds, or the "target rate", starts to fall. Once you have reached a point where no bank will bid for additional reserves you have hit bottom, I mean zero. After reaching a zero Fed funds rate, your guidepost has effectively disappeared, and will continue to read zero no matter how many new dollars you create . At this point, without a target rate to guide you , your monetary policy is now called "Quantitative easing". Quantitative easing is simply providing as much liquidity as the Fed wants until they hit what ever their new target is, which only Bernanke knows. Thus we have arrived at the Bernanke Standard, which I will refer to from here on out simply as the BS.

The Fed has lost it's way, and is now making up monetary policy on the fly. Without any guide posts, how will the Fed and markets know when it has reached its monetary destination? Better yet, how does the Fed even know it is on the road to it's destination? Are the dramatic swings in the value of the dollar brought about by the Fed's new monetary policy and the uneasiness it creates really it's desired outcome? Are the markets really crying out for more uncertainty? When Sir Ben has determined we are exactly ( remember this is fine tuning) where we need to be on the BS continuum how will he know? How will we know?

The combination of "Monetary policy by Mystery" along with the incoming administration's "We're not sure what we are going to do, but it's going to be big fiscal policy" serves to maximize the very uncertainty that bloodies the market on a daily basis. Who is going to step forward and risk capital when so much doubt and confusion has been created by our political leaders?

The President Elect's current guiding principal, articulated by Rohm Emmanuel "You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before", is not a message of hope for the American people. It is just touting that now is a great time for politicians to fleece their cowering constituents once again.

The President Elect shouldn't be waiting in the wings for the right page on the calendar to be turned. He should be front and center, reassuring the markets that soon the dollar will be stabilized and prudent fiscal policies, including tax cuts for corporations and individuals to reinvigorate the productive elements of the economy, will play a major role in the new policy mix.

Mr. President Elect, we're waiting to see some of the leadership you promised!