Wednesday, January 30, 2013
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you've got a business—you didn't build that. Somebody else made that happen.
Clearly, the President was simply stating that you, the business owner, didn’t build the roads and bridges. That your individual success was the result of group effort. That you received instruction. That you, in essence, received help (from people pursuing their own interests). And of course he was right.
You, the business owner, did not personally build what Mr. Obama says you did not personally build. And yes, you use infrastructure that 51% of the populace (including you) pays taxes to maintain. I do, however, have a serious gripe with the President’s lead-in to “you didn’t build that”: That would be the notion that you have been “allowed” to thrive by the grace of “this unbelievable American system”. Allow me to state, emphatically, that the President (as politicians tend to do) has put the proverbial cart way before the horse. Meaning, frankly, vice versa; “this unbelievable American system” has been allowed to thrive by the grace of hard-working, entrepreneurial-minded individuals. To say that government deserves credit, unless you’ve paid for political favor, for the success of your business, is like saying that your dog is responsible for your physical health because of the exercise you get while cleaning up his crap in your backyard day after day after day. Thus, if you’ll over-feed him and extend your fence, you’ll become remarkably fit. Ridiculous! The fact is you allow your dog to dirty your yard because you made a commitment back when he was a puppy (when he was smaller and his piles of crap were easier to manage), and you can still afford to feed him. Not that he doesn’t offer some utility—perhaps he barks off the occasional intruder—you just have to make sure he doesn’t ultimately destroy your landscape and eat you out of house and home…
Friday, January 25, 2013
Just last fall, candidate Mitt Romney sought to exploit populace fear by vowing to label China a "currency manipulator" come day-one of a presidency that wasn't to be. And here Japan has overtly promised to embark upon an aggressive campaign to weaken the yen. Again I ask, where's the outrage? If Romney was right on China, and Japan's up to the same, why haven't the Chinese and Japanese citizens taken to the streets? Why haven't they thrown themselves at their policymakers for stealing from them to make life better for us?
Not what you were thinking? Oh that's right, all the hullabaloo is not over the damage devaluation does to the citizenry's purchasing power, but over what devaluation does for the devaluer's exporters (makes their stuff cheaper abroad), and what it does to the foreign competition (makes their stuff more expensive at home).
Here's a lesson from last year where I address China's alleged, Japan's avowed, and our apparent (ya think?) currency manipulation:
Thursday, January 24, 2013
But to so celebrate the continuing improvement in the economic well-being of America’s middle-class (and America’s poor, btw) would be to suggest that yet further increases in the intensity, reach, and discretion of Uncle Sam’s power might not be so urgently needed after all. Any such recognition of the continued improvement, at least until recently, of the economic well-being of middle-class Americans might scratch the itch that, when left unscratched, prompts so many people to yearn to be led to some imaginary (and always rather gauzily understood) promised land by secular saviors – charlatans whose theatrics and flowery, if largely empty, speeches so impress and enchant “Progressives.”
And here are three of my own contributions to the topic:
The Real Truth About the Economy (borrowing from Don here as well)
Times Are Tough, Right?
Wednesday, January 23, 2013
We're basically pretty much all the way through the private sector deleveraging following the financial crisis, but we're now in the mode of public sector deleveraging and you don't want to move to that too quickly or else you're going to exacerbate our unemployment problems.
We need to be coupling deficit reduction that's delayed in its implementation with more upfront investments. It makes little sense for us to be tolerating an elevated unemployment rate when our 10 year bond yield is well under 2% and there's huge needs in this country.
In essence, with rates so low, government should be borrowing heavily and investing in the economy.
The problem I have with government "investing" is the simple fact that the "investor" doesn't have sufficient skin in the game. At least not the skin you and I generally associate with investing. Political skin yes. That is, policymakers are politically motivated, as opposed to profit motivated. The loss the politician is concerned with is not the loss of money should he miscalculate (normal investment risk), but the political loss should he not propose bold new job-producing projects. And, sadly, investments undertaken without a legitimate (in a tangible sense) profit motive---without the care and due diligence one risking his own capital would undertake---will never yield the social advancement their advocates would promise.
You see, to earn a profit one must receive more than one invests. The business owner, if he's to remain a business owner, must sell his wares for more than their production costs. If he's to compete he must profitably allocate a portion of his revenue toward innovation, toward efficiency, and toward keeping his employees content enough to not be enticed into going to work for the competition. The freer the market, the greater the competition, the faster the advancement of the working class, the better the economy for all.
The fundamental cause of poverty (among the able-bodied) is lack of (for lack of a better term) exploitation. Overly-generous welfare and unemployment payments (you and I may disagree with that characterization based on the lifestyle impact of benefits received, but can you argue that benefits are not "overly-generous" when they're paid
We're $16 trillion in debt, not for lack of revenue, but for lack of profitability. Unemployment remains stubbornly high and the welfare rolls have tripled over the past few years, not for lack of desire by would-be employers, but for lack of profitability. Rather than their energies being harnessed by profit-seekers---rather than realizing the material and emotional benefits that come from putting in a day's work---millions of individuals are being exploited by politicians.
In fact, allow me to correct myself: The fundamental cause of poverty (among the able-bodied) is indeed exploitation---the exploitation of the individual by the politician (from both sides of the aisle mind you).
Tuesday, January 22, 2013
I answered, words to the effect: We can speculate as to what motivates buyers and sellers at any given moment, but of course we'll never know for sure. I can say, however, that, historically speaking, your conventional valuation metrics (price to earnings ratios and such) suggest that stock prices remain pretty compelling. And when you consider what they have to compete with---zero real interest rates---it makes sense that stocks would be trending higher. And while too many governments haven't managed their financial affairs in a manner anyone with a financial affair would deem responsible, companies, by and large, have.
So does that mean we're off to the races? Like I said, we can speculate, but of course we can't know for sure. What we can
Friday, January 18, 2013
And thus it would be equally narrow of us to give credit for today's growing (albeit somewhat tepid) economy to the
The role played by government is greatly exaggerated in historical accounts because we necessarily know so much more about what organized government did than about what the spontaneous coordination of individual efforts accomplished.
Thursday, January 17, 2013
So there’s a reasonable argument for leaving the question of how to deal with future problems up to future politicians.
The point is that the case for urgent action now to reduce spending decades in the future is far weaker than conventional rhetoric might lead you to suspect.
So why are we messing around with this stuff? Why should we worry about the future? We're doing fine. Interest rates are rock bottom---we can borrow and spend till the cows come home. And surely "future politicians" will possess the will and integrity to make the tough decisions, just in case today's policies don't yield the economic bang for our buck Krugman anticipates, right? Hmm...
Of course you know Greece's past politicians would have none of that "conventional rhetoric" either.
I love it when a partisan hack professes credibility by citing "non partisan" groups when their projections jibe with his position (Krugman cites "the nonpartisan Center on Budget and Policy Priorities"). Essentially saying, "since I'm a partisan hack, and I don't deserve credibility, here's a credible source that supports my incredibleness."
How many times have you felt reasonably certain about the outcome of an impending sporting event? Perhaps the teams met two months earlier---same players, same venue, same time of day even---and Team A handled Team B while barely breaking a sweat. Pretty safe bet (you'd think), given the known set of circumstances, that Team A will prevail once again. Then, by some miracle, Team B takes Team A out to the woodshed. What the heck happened? Did the losing point guard party too hard the night before? Was the center low on blood sugar? Did the coach have an argument with his wife just before tip off, setting off a mixture of adrenalin and hormones that impaired his play-calling ability?
So if outcomes are uncertain, even when we know the players, imagine making a prediction as to the near-term direction of markets and the economy---where the players (the buyers and sellers of securities, and the buyers and sellers of goods and services) number in the billions, and the variables that would influence their actions are utterly immeasurable. And my the challenges facing those who would attempt to steer the economy*.
So what's an investor to do? Simply be an investor (not a trader), diversify globally and think long-term.
*Here's Don Boudreaux on central planning (be sure to read the entire article):
The human being observes a bird in flight and then analogizes his – the human’s – limbs and muscle movements to what he supposes, from his observations, are those of the bird. But the human is too easily misled into thinking that he can easily-enough mimic the bird’s body and movements and, thereby, achieve flight.
Obviously, no human can do so. Such attempts as there have been by man to strap on wings, flap, and fly invariably failed – sometimes catastrophically for the pretend Icaruses.
Attempts to centrally plan economies are very much like attempts to fly by dressing like and flapping like a bird: utterly futile because the most that can be observed of any successful economy are a handful of large details (“assembly lines,” “retail outlets”…..). The vast majority (99.99999999999…9 percent) of the details that must work reasonably well aren’t observed by the would-be central planner. What Hayek called “knowledge of the particular circumstances of time and place” – knowledge of details spread today across the globe and across billions of different human minds – is not incidental to the successful operation of a modern economy. Utilizing that knowledge – vast, deep, changing, incredibly fine-grained detailed knowledge – is the very key to a successful market economy.
Also read The Pretence of Knowledge, Friederich Hayek's Nobel Prize address.
Wednesday, January 16, 2013
Raising the debt limit is necessary to preserve the full faith and credit of the U.S. government.
We cannot as a Congress pass spending bills and tax bills and then refuse to pay our bills. Refusing to raise the debt limit is like refusing to pay your credit card bill — after you’ve used your credit card.
The time to control the deficits and debt is when we are voting on the spending bills and the tax bills that create it. Raising the debt limit is about meeting the obligations we have already incurred. We must meet our obligations.
And the following:
Mr. President, I rise today to talk about America’s debt problem. The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. ... I therefore intend to oppose the effort to increase America's debt limit.
It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies.
Now both sides sound completely sincere. So then, why should we think (as we must) that this whole debate is nothing more than political circus? Well, maybe because the first statement above wasn't made by President Obama, nor by Harry Reid or Chuck Schumer. And the second wasn't made by John Boehner or Chuck Grassley. Nope. As a matter of fact, the first statement was made by a Republican senator. That's right, a Republican pleading President Obama's case for raising the debt ceiling. And the second statement came from a Democratic senator. That's right, a Democrat making the Republican House's case for not raising the ceiling without exercising some real fiscal responsibility.
So how does this prove my point? Aren't there always a few dissenters within each party? Yeah, I suppose. But the thing is, the above quotes were recorded in 2006, when the Bush Administration was bumping up against the debt ceiling. And the Republican was none other than Senator Charles Grassley, a presently passionate opponent of increasing the debt limit. And the Democrat was none other than Senator Barak Obama.
Yes, political circus!
Thursday, January 10, 2013
In your Washington Post Op-Ed, A tax deal only the ultra-rich can love, you, I'm afraid, display a bit of ignorance with regard to the investment/expansion pursuits of "virtually every major U.S. corporation." And you seem to lack a basic understanding (save for newly issued stock) of a typical stock transaction. I hope herein, with all due respect, to disabuse you of those misconceptions.
Beginning with the latter: You wrote
Taxing investment income at a lower rate than labor income presumably fosters more investment in the U.S. economy. But say you buy a share of General Electric. The money you pay for your stock will be invested both at home and abroad, because GE, like virtually every major U.S. corporation, is a global company that retains a U.S. headquarters.
Now, let's pretend you're my client, and you call me up and say "Marty, buy me a share of GE." I have news for you, I won't be wiring money from your account on to GE's headquarters (for it to spend on some foreign project) in exchange for a share of their stock. You see they're not issuing any new shares these days. Not that I won't fulfill your wish mind you, it's just that I'll be buying it from some other bloke who's looking to sell his share of GE. If he happens to be a U.S. citizen, there's a good chance the money you pay for your stock will all stay "at home". I'll bet if you thought it through, you'd have realized this yourself. And I don't suspect you've here discouraged your readers from investing in U.S stocks. So no harm done.
You do them a real disservice, however, where you say:
Now suppose you’re an assembly worker at a GE aircraft engine parts plant in Dayton, Ohio. All your work takes place in the United States, and most of your spending is local, even though many of the products you buy are made abroad. Yet our GE employee may be taxed at a higher rate than our GE investor. We reward the investor for, in effect, sending money abroad, while the worker who produces wealth entirely within our borders gets no such reward. Globalization has completely changed the investment patterns of American corporations, but our tax breaks for investments chug placidly along as though U.S. companies still confined their work inside our borders.
I'm thinking you rushed through this one.
For starters you carp about GE making the most of its resources by availing itself of international opportunities, then literally acknowledge the GE employee does the same ("many of the products you buy are made abroad")---then, amazingly, two sentences later, you suggest that the GE employee "produces wealth entirely within our borders." Sadly, perhaps out of desperation (a deadline to meet?), you entirely contradict yourself. But, honestly, that doesn't bother me so much either.
My real problem lies with your implying that the business GE (and the GE employee) does abroad somehow occurs at the expense of the U.S. economy. That it somehow doesn't produce wealth within our borders. Frankly, nothing could be further from the truth. In fact, institutions and individuals allocating their resources in the most productive manner possible, wherever on the planet those opportunities present themselves, is an unequivocal benefit to the home economy, and thus the consumer at large.
You'll see exactly what I mean if you'll take just a few minutes and watch the following presentation (here's the link to the original article).
All this said (and shown below), please don't be too hard on yourself. Your misunderstanding of how money flows internationally is one that plagues all too many consumers, as well as columnists. Just vow never to make this mistake again.
Wednesday, January 9, 2013
Sunday, January 6, 2013
If the Bush-era tax cuts, as popular opinion has it, were all for the rich, how is it that both sides were desperate to preserve the Bush-era tax cuts for the middle class?
And I'm trying to get my head around this notion that tax breaks for the wealthy come "at the expense of middle class Americans." Or, now that we've raised tax rates on the wealthy, how exactly are we helping out the middle? I mean we didn't cut middle class tax rates. And since wealthy people tend to sell stuff for a living, surely raising their taxes won't reduce the prices of goods and services for the middle class. And since wealthy people tend to employ folks, there's no way that raising their taxes will create jobs, or generate pay raises, for the middle class. And raising the tax rates on capital gains and dividends certainly won't make the stocks that occupy the middle classes 401(k) accounts more valuable. And I don't see how the feeling of fairness engendered by raising taxes on the wealthy will enhance anyone's lifestyle.
Is it that the additional tax hit to the wealthy (assuming they don't entirely loophole their way around it) will somehow make it through the government filter and into the hands of the middle class, in ways not yet apparent? Perhaps.
Now while this opacity exists with regard to the middle class, a number of not-middle-class victors indeed emerged, crystal clearly (to the tune of billions in subsidies), from last week's "fiscal cliff" deal. Here's the shortlist:
Virgin Island and Puerto Rican rum producers (lobbying courtesy of former senators Trent Lott and John Breaux)
So was the fiscal cliff fiasco merely staged to give us the impression that Washington is serious about cutting the deficit? Was it truly all about Democrats fulfilling their promise to raise tax rates on the rich, and Republicans and Democrats taking care of their cronies? Honestly, I don't believe it was an act. I believe both sides get how serious the problem is. It's just that, when push comes to shove, their allegiances lie with their respective special interests---leaving them hopelessly hamstrung...
Saturday, January 5, 2013
The following is a little something I wrote last year and have featured in my forthcoming daily devotional Leaving Liberty? We don't need complex equations, or measurements of elasticity to understand the perniciousness of government over-intrusion into the private sector. We simply need to apply a little real-world commonsense. And yes, the Walter Williams quote was the result of me mining for bias-confirming data.
The City Discriminates against Teens and the Unskilled
When we're talking basic economics, politicians are either profoundly ignorant, or they assume we are.
You’d think that San Francisco would be the last place you’d find blatant discrimination against the young and the undertrained. But there’s no denying this one: effective January 1, 2012, the City
By the Bay Where You Pay bumped its minimum wage to $10.24 an hour—making it the only city in America to breach the $10 mark, and the toughest place for a kid to get a job.
I didn’t even know this until I heard yesterday that San Franciscans will now have to pay up (consequently) for the Subway
$5 Footlong. Going forward, $5 will only buy you 9.74 inches of sandwich. The new jingle, “Five dollar half-a-foot plus three- and-three-quarter-inch long,” just doesn’t stick in your brain like the old “five-dollar footlong” did.
But that’s the way of it folks. When we’re talking basic economics, politicians are either profoundly ignorant, or they assume we are.
Here’s Walter Williams (Williams, 2003) on forced minimums:
Minimum prices in general tend to discriminate against the lesser skilled person or the less preferred item. Let’s say ten workers show up and you only can hire five. Well, you can’t discriminate based on price because you have to pay them all eight dollars an hour. So you may hire according to what you like. So if you prefer Catholics to Jews or whites to blacks, you’ll have a tendency to indulge your preferences. You can apply that phenomena to anything. If we made a law, let’s call it a “minimum steak law,” that is, fillet mignon and chuck steak both sell for $10. Well, the cost of discriminating against chuck steak would be zero, because you have to pay $10 anyway. The way that less preferred things compete with more preferred things is by having a lower price. Even though people prefer fillet mignon to chuck steak, chuck steak doesn’t have any problems selling at all.
Thursday, January 3, 2013
The man of systems . . . seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different than that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite, or different, the game will go on miserably and the society must at all times be in the highest degree of disorder. ---Adam Smith, The Theory of Moral Sentiments (1759):
The President, members of congress, their advisors and Fed officials (men of systems) seem to imagine that they can inspire, with their contrived incentives, individuals to perform in a manner that would produce some predictable level of growth sufficient to offset the cost of the inducements. They fail to consider that each individual proceeds down her own path, entirely independent of whatever they might choose to impress upon her. Therefore, given the gross improbability that the principles guiding the hand of government would coincide with those guiding the individual, society---particularly when men of systems find themselves desperate to stimulate the economy---will find itself in the highest degree of disorder.
Ultimately, and ironically, when the economy finally gains enough momentum to burst through the restraints placed on it by well-intentioned (or otherwise) men of systems, men of systems---bolstered by a sympathizing media---will take all the credit.
Wednesday, January 2, 2013
This was the President (Tuesday evening) committing to not engaging, come February, in another debt ceiling
The problem I have with the President's statement is the suggestion (taking him literally) that Congress would "pay the bills that they've already racked up". The ultimate bill-payers, of course, would not be Congress. Allow me to rephrase, and correct, his statement:
"I will not have another debate with this Congress over the whether or not future taxpayers should pay the bills Congress has already racked up through the laws they passed."
With future taxpayers in mind, read (emphasis on paragraphs 3 and 4) the following from my forthcoming daily devotional Leaving Liberty?:
DAY 6: Let’s Hope Our Grandkids Are the Forgiving Sort
Prudence, alas, is lost on tomorrow’s—and other people’s—money.
So the present administration throws a few billion at solar companies. They say we’re investing in the future: the future of the energy industry, future jobs, and the future of this planet. Therefore—given high unemployment, rising oil prices, and melting ice caps—it’s worth every dollar “we” can throw at it.
Breaking news! As I type this in April of 2012, First Solar, the nation’s largest and heavily government-subsidized solar company, just announced that it will cut its workforce by 30 percent to align its operations more closely with current opportunities. Its stock is up 6 percent to $22.05 per share as I type. Incidentally, it traded north of $120 just a year ago—but hey, we’re thinking long-term.
Now you and I know that all government spending is taxpayer funded—so, being that we are a long way from running a surplus, why haven’t these “investments” required an immediate increase in our income taxes? Well, as a practical matter, had the powers-that-promote-green-power forced a tax hike to fund these grand “investments,” we voters would be none too friendly come this November. So then, alas, they borrow. For they know that us consumers will allow the worst sort of chicanery when we’re given thirty years to pay for it (let’s hope our grandkids are the forgiving sort).
That’s why the costs of proposed schemes are forever fed to us in ten-year servings: “The Congressional Budget Office estimates that the cost of XYZ over the next ten years will be $X,” or “Over the next ten years the deficit will be reduced by $X if we raise taxes on people who earn above $Y.” Sound familiar? Prudence, alas, is lost on tomorrow’s—and other people’s—money.
There's no question that had today delivered a 300 point decline for the Dow, you'd have received one audio commentary, and at least one written, where I would have entirely dismissed today's drubbing as a long-term non-event. Ah but what about today's 300 point rally? Well, as much as I'd love to tell you that 2013 is off to the races, that today's rally is indeed an event, and that you'd be wise to race on in with that hoard of cash you've stuffed under your mattress, I can't. For if the dealmakers were, as the consensus suggested, destined to deal regardless---whether it be today or a month from today---a game-changer this ain't. That said, while I can't have you feeling good about the market because of yesterday's deal, I can, however, have you liking the market for reasons I spelled out in Our View Going Forward.
As for the ongoing raise-taxes-versus-cut-spending-to-tackle-the-deficit-debate, here's a little commonsense from an essay featured in my forthcoming daily devotional Leaving Liberty? (I know, shameless self-promotion):
DAY 7: Dude, We Need to Put You on a Diet (November 2011)
Dudes we have to cut spending.
Theres this raging debate, with regard to the federal budget deficit, shaking the walls of our nations capitolone side argues for spending cuts, the other for tax increases. Lets see how the arguments stack up against a little everyday commonsense.
So the nurse invites you back and asks you to slip off your four-inch-heel boots. You step on the scale, she rests the sliding bar on 261 pounds, you cheat a tiptoe to 59 inches.
Ninety minutes later (youre starving), the doc says, Dude, we need to put you on a diet! (He's a young, hip doc.) You ask, How about diet pills? Doc says, No, I dont like the side effects, and your hearts not sounding so good. Lets see how you do with just cutting calories for a while. You say, No way, Doc! Thats not fair! If you dont give me the pills Im not cutting back on what I eat! Whatre you nuts? cries Doc. Whether or not you get the pills, assuming you wanna live, you still gotta go on a diet!
So our nations frame currently supports $2.2 trillion (revenue) per year. We step on the scale and were at $3.7 trillion (spending). One side says, Dudes we have to cut spending! while the other says, How about we raise taxes? The one side says, Lets see how we do with just spending cuts first (being that the economys been so erratic). The other says, Thats not fair! If you dont give us tax increases, were not cutting a dime! Crazy!
Tuesday, January 1, 2013
Here's sentence one: "For the first time since President George W. Bush began the country’s long slide into debt by cutting taxes in 2001, an agreement was reached late Monday in the Senate to raise income taxes on the rich."
Here's a chart: The blue line is revenue, the red line is government spending. Notice the trajectory of revenue after Bush cut taxes in 2001. Notice the trajectory of spending from 2001 to current. I have no problem with laying substantial blame on the Bush Administration for the size of the debt, but I do have a problem with blaming it on tax cuts when tax revenue following those cuts rose at a record pace. Clearly, as the red line illustrates, the record pace of spending would explain our "country's long slide into debt".
Note: The two recent dips in revenue coincided with recessions. And no, cutting taxes---leaving capital in the private sector---does not cause recessions...