Wednesday, August 24, 2011

Why Big Business loves Big Government

In a nutshell, Big Business loves Big Government because the cost of Big Government always falls most heavily on Small Business.  The most egregious recent example of this is Obamacare, which imposes healthcare obligations across the board on big and small businesses.  The marginal impact, however, falls most heavily on small businesses since most big businesses already provide healthcare to their employees!  [Now you may say, that is only fair, why shouldn't Small Business provide healthcare as well?  But that's a question for another discussion.]

If Big Business already provides healthcare then it will incur virtually no incremental costs from Obamacare.  Small Business, on the other hand, finds itself with a new costly mandate.

One of the main ideas that this blog will continually stress is that if you increase the cost of something you will get less of it.  [I think this is a very simple concept, but for some reason Washington doesn't seem to understand it.]  So here you have a situation where the cost of operating a small business will clearly rise--meaning you will end up with less small businesses than you would have otherwise expected.  Since Small Business competes with Big Business, less Small Business means less competition!!  And less competition means higher profits for Big Business!!  Of course less competition also means less overall employment, but that's not the concern of Big Business.

And this is true not only for Obamacare but for any government action that imposes costs or regulations on business:  Big Business can always spread the cost of Government mandates out over a much bigger base than Small Business.  [My usual example is to imagine two basketball players, one 7 feet tall and one 6 feet tall.  If you put 100 lbs of weight on each of their backs, which one is more likely still to be able to dunk?]

So, whenever you hear CEOs of Big Businesses supporting Big Government programs you should always take it with a grain of salt.  They really aren't doing the country any favors.  Like Br'er Rabbit, they're usually just asking for what's good for them--less competition and higher profits.    

Monday, August 22, 2011

Pushing on a String

Readers of this blog should now understand why Keynesian stimulus and Quantitative Easing haven't worked to restart the American economy (see How to Grow an Economy).  Numbers released by the government last week showed an increasing inflation rate and a continuing high unemployment rate--stagflation--the result we've projected from these policies.

That being the case, with none of his actions able to stir the economy from its torpor, it appears that the President has actually given up.  He's taken his family on an all-expense-paid vacation for 10 days to Martha's Vineyard and said "I'll talk to you when I get back."  These are not the actions of a man who "has the answer."  And clearly he doesn't, for if he did why wait so long into his administration to reveal it?

But this post is not meant solely to berate the President.  He has been in over his head since the minute he was inaugurated and has, with his failure to stand up to the extremists in his own party, made himself irrelevant.    Nixon had to go to China, and Obama could have brought the Far Left into the fold.  The problem is that Obama is truly the Left's leader and his beliefs in big government and wealth redistribution are simply anathema to a thriving economy.  He would have made a good union boss or even Speaker of the House but he should never have been elected President.

Accordingly, when the President finally makes his "jobs" speech in September you can expect more of the same--the leaks already indicate increased aid for the unemployed, short-term reductions in payroll taxes, government infrastructure projects, blah, blah, blah.  All of these have been tried continuously since he became President and none of them have worked--or ever will.  To review, here is why:  (1) extending unemployment compensation not only discourages the unemployed from accepting available jobs but takes money from the still employed thus discouraging them from working so hard and reducing overall production, (2) new companies will not be formed nor employees hired in response to short-term reductions in payroll taxes because the amounts involved are not nearly as large as the additional costs that the President has already imposed (e.g., Obamacare) on job creation, and (3) the government cannot build any bridges unless it first takes the money needed to do so from its citizens, thus ensuring that any employment benefit from the new bridge is offset by an employment loss elsewhere.

It is simply astonishing to me that, even though all of these policies have been tried and failed, all the Democrats can come up with is more of the same.  Paul Krugman, the New York Times "economist" would have the government double-down on spending and I'm sure, when that didn't work, he would spend more.  To him and other Liberal "economists" the fact that Keynesian policy has not worked simply means that not enough has been spent!   [They are True Believers, more akin to religious zealots than scientists, which is why when I use the term "economist" with them it is bracketed in quotation marks.]  One definition of insanity is doing the same thing over and over even though it does not work.  Democratic economic policy certainly qualifies.

In light of his economic policy's abysmal failure, a President that truly represented all Americans would be flexible enough to realize that his advisers have been wrong and that a new strategy needs to be adopted.  One that realizes that the government is not the salvation, but that its citizens are America's greatest strength.  Millions of our relatives came to the United States, not for a handout, but to escape intrusive governments and to forge their own path--they came for freedom.  To succeed, America needs to return to its roots.  And to do that, what is needed is a policy that enables individuals to create opportunity by.getting government out of the way.

Continuing the redistributionist policies of the Left may help Obama to be reelected, but it will also ensure that the country continues to stagnate.  Bill Clinton changed course and the economy thrived.   President Obama needs to learn from President Clinton.  He can't have it both ways--he can't save the economy and continue to back every tax and spending increase and regulatory program advanced by the Left.  Until he realizes that to be the case, anything he does will be as effective as pushing on a string.



Tuesday, August 16, 2011

How to Grow an Economy

People treat economics like it's some kind of mystical thing, but it's really not rocket science.  In fact, in my opinion, all you really need to understand about economics can be boiled down into one concept:  supply and demand.  Practically the entire subject is derived from that.

Markets determine prices based on supply and demand.  If demand exceeds supply prices rise to the point that the two are once again in balance.  If the return (i.e., profit) to suppliers at that point is higher than the risk that the endeavor requires then new supply can be expected, resulting in a new equilibrium.  The reverse is also true.

With that in mind, let's look at the two policy responses that United States government officials have employed while trying to restart the economy:  Keynesian stimulus and Quantitative Easing.

The theory behind Keynesian stimulus is that, by government increasing its spending at times of reduced private demand, prices will rise to the point that supply follows (i.e., that higher prices result in increased supply) and employment will rise with it.  As pointed out in a previous post, Keynesian-ism fails for the simple fact that the government can't spend what it doesn't take--any demand increase from government spending has to result in an equal demand decrease by private spending.  [It would be funny if it weren't so tragic that the other side of the transaction is so often ignored by "economists" making the case for their own policy preferences.  I can't tell you how many economics classes I sat through in college where that was the case.]  And, as also pointed out previously, the cost of the bureaucrats who run the government programs further act to reduce supply, resulting in higher prices and less productive employment.  Stagflation is the expected outcome and is the situation now found in the United States.

So Keynesian stimulus doesn't work.  What about Quantitative Easing  (i.e., printing money)?  Once again, the reason it cannot work is easily grasped if one understands the concept of supply and demand.  Printing money shifts a country's aggregate demand curve higher, which results in higher prices.  Unfortunately no supply response (i.e., supply increase) can be expected because once inflation is subtracted, the return to producers will not have changed.  All printing money does is increase prices, nothing else.

It's clear that both Keynesian stimulus and Quantitative Easing have failed to restart our economy and now you at least know why.  What, on the other hand, would work?  If we think about it from a supply and demand perspective, there really is only one answer and it's so simple it almost leaps out at us:

If you want to increase demand for workers you make it more, not less, profitable for people to hire them--it's that simple.  Make it more profitable to hire people and you will increase hiring!!!  That means you don't impose new healthcare costs or higher taxes or new regulations.  Doing this only makes sure that fewer people are hired.

As more people get hired, more goods and services are produced and the economy grows.

Like I said in the first sentence, economics is really not that complicated.

Wednesday, August 10, 2011

Jobs, Jobs, Jobs, blah, blah, blah

Now that the President has obliterated America's credit and credibility he has set his sights on jobs!  Watch out below!

This is a man who forced through the greatest job-killing piece of legislation in history, the abomination known as Obamacare, who has pushed continual extensions of unemployment compensation (which rewards people for not working), who has threatened continuously to increase taxes.  And now he has set his sights on jobs!  My first thought is, what took so damn long?  Why wasn't this his only focus when he was elected in the middle of a recession?  Because the Democratic party platform is basically an anti-jobs platform, that's why!  And they've bought everyone off with promises of a free lunch.  "No jobs?--its rich guys' fault, tax them more!!"  That's not a jobs program--its class warfare.

Nothing the Democrats have proposed since Obama was elected (or as far back as I can remember for that matter), from a policy standpoint, has had any chance of increasing employment.  The problem for the Democrats is that they've been completely co-opted by their core base and forgotten (if they ever knew) how economies actually work.  Well, here's a reminder--big companies are always looking to become more productive, as they do so they need fewer employees per amount of output.  If output goes down, like in a recession, big companies lay people off. In a normal environment, some of the people who get laid off from big companies go out and form little companies, which hire other people who are looking for jobs and the economy starts growing again.  That is the normal cycle.

Of course, people who start little companies do so in order to make MONEY.  They don't do it for charity.  So if it costs too much to start a new company they won't do it--its not worth the RISK.  That is the key understanding that the Democrats lack.  Otherwise would they have passed Obamacare in the middle of the worst recession (the President's own assessment) since the Great Depression?  Didn't they realize that all of the Obamacare mandates make it more costly/risky for any entrepreneur to start a new business?  And they also wanted to pass tax increases, which were thankfully prevented by the Republicans, that only would have made things worse!!

To date, the Democrats sole attempt to increase hiring has been based on the ridiculous Keynesian "if you spend it they will hire" Policy of Dreams.  Trillions of dollars of stimulus have been spent to no effect.  How can that be?  The reason is so simple its pathetic:  money doesn't grow on trees!  Every dollar of stimulus has to be taken from someone, either in the form of taxes or borrowing, both of which take an equal amount away from spending!  It is literally robbing Peter to pay Paul.  But its worse than that actually since every dollar that is taken in this robbery is first sent through Washington where the bureaucrats take their cut before sending it on.

So the net-net is that money that could have been efficiently spent by Peter on goods produced by Paul is instead taken from Peter and given to Paul by a Bureaucrat and then, Paul and the Bureaucrat, use Peter's money to buy the same goods that Peter is trying to buy which drives the price up for those goods since there is less of them available since, instead of making goods, Paul and the Bureaucrat are living off Paul who can only make so much.  So the glorious outcome, which is entirely predictable, is that prices rise and employment falls.  And this is the policy the Democrats have hung their hat on.  

If the President wants to increase non-government jobs, and those are really the only ones that matter since I cannot think of one non-defense job where a product is made that actually adds to the country's well-being (that is probably a gross exaggeration but you get the point), then he has to suck it up and make it easier for businesses to hire people.  And that means reducing the cost of doing so--and that means lower taxes and less regulation.





Tuesday, August 9, 2011

America in Triage

Yesterday the Dow Jones plummeted more than 600 points, over 200 of which came after President Obama tried to reassure the world that the United States should still be considered a AAA credit.  Both the drop and the President's speech came in response to S&P reducing America's rating below AAA.

This shouldn't have been a surprise--S&P had warned it would do so if the U.S. didn't reduce its deficit over the next 10 years by an aggregate amount of at least $4 trillion.  Of course Congress didn't come close to that kind of number--better to let the country go down the tubes with half-assed solutions than to risk their jobs!  Instead Congress and the President trumpeted a deal where only $900 billion would be cut --most of which is back-end weighted--primarily by increasing spending less than planned (!!) with an additional $1.5 trillion of unspecified cuts to be enacted by the end of 2011.  So instead of the $4+ trillion that S&P said would be required for it to consider the U.S. AAA-rated, Congress came up with a very dubious total of $2.4 trillion, most of which will probably never happen.

And Congress and the President have the nerve to question S&P?  Amazing.  Its as if they have absolutely no clue what is at stake for our country.  Which gets me to the title of this post:  America in Triage.

In war, doctors treat the most serious wounds first.  That saves lives.  Wounds that are not life-threatening are treated afterwards.  To save the United States, the same must hold true.  And the biggest wound afflicting our country is entitlements.  To try to fix our budget problems without addressing Social Security and Medicare is like clipping a patient's toenails while he is bleeding to death from a gunshot wound.

Unless we address entitlements soon there really will be no way to save the United States.  This is true for one simple reason--the Baby Boom generation has begun to retire.  On a simplified basis, the math of Social Security should be straight forward:  $-in = $-out.  Historically there has been a surplus of $-in due to the fact that the population and employment were growing.  Unfortunately that excess was used to expand other government spending--it was never saved.  [There is no "lockbox" Mr. Gore.]  Now, due to the tidal wave of approaching Boomers the $-in and the $-out will soon go into significant deficit unless something is done.  And that deficit will dwarf the deficits that now have the world so worried.

Examining the root cause of the coming Social Security deficits (Medicare is saved for a later post) yields a clear solution to the problem.  Social Security was never intended to be a universal retirement plan for Americans.  As such, the age at which people became eligible for it originally was very close to their life expectancy!!  Meaning that while there was a safety net available if they lived long enough, chances were they wouldn't!!  Unfortunately, from the perspective of having a balanced system, life expectancy in the United States has increased far faster than the eligibility age for Social Security, meaning citizens that were expected to die are collecting Social Security for many years more than the actuaries could have guessed.  In a nutshell, that is the entire issue with regard to Social Security.

Understanding that, the solution to this problem is obvious--even France has seen it--raise the age of eligibility until it approaches life expectancy thereby bringing the $-in and $-out back into balance.  In fact, solving the Social Security time-bomb in this way would ignite our economy like no Keynesian prescription ever could.  

The Failure of Unfettered Democracy

We in the United States are now witnessing the death of yet another form of government, our own.  The Founders created a Federal government with limited power, realizing that unfettered democracy would only result in tyranny and that any government that permitted the majority to vote themselves benefits at the expense of minority would eventually fail.  Thanks to activist courts that is the state in which the United States now finds itself.

The ongoing debt /deficit drama has clearly demonstrated one thing--that Congress has neither the will nor the desire to solve the country's problems.  Neither party is willing to reject the will of their extremists for to do so is to risk re-election.  There is a path back to prosperity but it will not be an easy trek....