The Vicious St. Bernard

June 13th, 2011

The “Odd Couple” reruns of my youth have never left my consciousness. Currently I’m recalling an episode where Oscar complains that Felix’ efforts to help always make the problem much worse. “You’re like a vicious St. Bernard!” It occurs to me that the vicious St. Bernard (originally used as a rescue dog) is a perfect metaphor for government regulations.

Yale Law School Professor Stephen Carter recently reported on an in-flight conversation with a business owner. The man was explaining that despite his firm’s success, he had no plans to hire any new employees. Why? Because of the mountain of regulations coming out of DC. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?” While profitable, his business operates on low margins. So it’s not a stretch to think new employees could wind up costing more than they generate for the firm.

Executives can adapt to hostile operating conditions as long as there’s a degree of certainty regarding the rules they must follow. The government may heap new costs on me, but as long as I can factor those costs into my plans, there’s a good chance I can put together a strategy to remain profitable. But if the government suddenly changes the rules, all bets are off.

The term laissez faire has taken on negative connotations in recent years. But its origin was a simple plea for government to stop changing the rules. As the story goes, in 17th Century France, finance minister Jean-Baptiste Colbert once met with a group of business leaders. Colbert was notorious for frequently changing the rules businesses had to follow. When the minister asked how the government might help them, one of the group replied “Laissez nous faire,”  or  “Leave us alone.”

21st Century America has a government full of Colberts looking to change the rules to improve our lives. Of course, the more cynical can argue that politicians have no interest in making things better; they just want to reward their friends and punish their enemies. No doubt, that’s true of some, but I prefer to give people the benefit of the doubt…even congresscritters.

Let’s revive the spirit of laissez faire and tell government to stop killing us with kindness. I’m sure the job-creating engine that is U.S. industry would shift out of neutral. As Felix Unger said to Oscar Madison, you want to help me? Don’t help me!

Dangerous Donald Trump Goes Back to the Future

February 15th, 2011

In the time travel film “Back to the Future,” Marty McFly goes back to the 1950s and nearly wipes out his own existence. But everything works out well for Marty and his family in this 1980s feel-good flick. Never willing to play second banana to anyone, real estate tycoon and potential presidential candidate Donald Trump wants to zoom right past Marty and drag us back to the 1930s. But unlike Mr. McFly, if The Donald gets his way most Americans will be far worse off.

Yesterday on “Your World with Neil Cavuto,” Trump told  substitute host Stuart Varney that because of China’s unfair trade practices, including its artificially weak currency, he advocated a 25% tax on all Chinese products entering the US. As I explained in the post “Congress To Punish China by Taxing America’s Poor,” such a tax would punish the mainly poor and middle class Americans who spend relatively more money on Chinese goods. Trump argues that such a tax would spur US industry and hiring. No doubt there would be some winners, mainly companies whose products were previously more expensive than similar Chinese goods. But the de facto tax on Americans of modest means would be crushing.

Mr. Trump graduated from the prestigious Wharton School (and did extremely well there!). If he took any courses in economic history, he might remember that the Smoot-Hawley tariff of the 1930s is a major reason why that era’s nearly global depression is not called the Great Depression in most countries outside the US. I’ll reiterate from my previous post:  raising trade barriers always hurts a country’s own citizens. Our standard of  living will be reduced substantially, with those earning the lowest incomes taking the brunt of the impact.

The Donald is a genius at drumming up lenders for his various real estate projects. But his economic illiteracy makes him unfit for a powerful political office. I’ll take heart that in the TV era no one with a comb-over has ever been elected president.

42% of Americans Agree There’s No Free Lunch!

October 12th, 2010

A new Rasmussen Reports survey shows 42% of American voters believe “there is a conflict between economic growth and environmental protection…” While the firm reports this is the highest percentage since May, I do find it troubling that 33% disagree with the statement and 25% aren’t sure.

Tradeoffs are a basic reality of life that every adult should understand (see the core article There’s No Free Lunch). In this case, spending more money on environmental protection leaves less for economically productive activities. The result is lower growth than would occur without the additional spending. Of course spending less on the environment would boost growth, but could have other undesirable consequences. It’s a tradeoff.

There’s no right answer for exactly how much to spend, as each of us places a different value on economic growth and environmental concerns. And honorable people can disagree about the exact impact of more or less spending on the environment. But until we accept the reality of tradeoffs and start considering them, it is difficult to make intelligent choices. If someone tells you there are no tradeoffs, he is either a fanatic, a charlatan, or he is operating on a childlike level where you can have your cake and eat it too.

When someone proposes a new regulation, ask “How much will it cost and who is paying the tab?” You can’t add 30 million people to health insurance rolls or place major restrictions on CO2 emissions without imposing serious costs. If they say “it’s going to save money!” do us all a favor and just walk away.

Congress to Punish China by Taxing America’s Poor

September 30th, 2010

Yesterday the US House voted overwhelmingly to explore levying heavy tariffs on Chinese imports in retaliation for that country keeping its currency at an artificially low level. The Senate has yet to consider the  bill. This is all about the view that the weak Chinese yuan is creating a huge trade deficit that is crushing America.

Regardless of whether or not you believe the trade “deficit” is a serious problem (and I don’t), the government’s threat to retaliate via tariffs is beyond stupid. Chinese firms export a wide variety of products to the US, and these are disproportionately purchased by poor and middle class Americans. You don’t see wealthy Americans buying Chinese luxury cars, boats, or designer clothing. So if the US government slaps a 25% tariff on Chinese goods, the poor and middle class people buying these products will see their standard of living reduced. It has the same effect as a tax increase.

Raising trade barriers always harm’s a country’s own citizens. Whenever this policy threat emerges I always see the image of Cleavon Little’s Sheriff Bart in “Blazing Saddles” taking himself hostage. If US politicians think it’s necessary to punish China, I wish they’d come  up with something that doesn’t hammer Americans. Then again, I think most of us understand they’re really not trying to solve a problem. Politicians are focusing on November 2 elections and are counting on voters being economically ignorant enough to reelect them.

Rational Behavior and the Crash of 2011

June 11th, 2010

In a recent Wall Street Journal piece, supply side economics guru Arthur Laffer has a chilling prediction for the US economy.  According to Laffer, the scheduled expiration of the Bush tax cuts at the end of 2010 has companies and wealthy individuals accelerating production and income into 2010 to avoid higher taxes next year.  This generates an artificial boost to economic activity in 2010, but will be a sharp drag on the economy next year.  Laffer says the most likely outcome is the US falls back into recession, the so-called “double dip.”

Few others seem to be talking about this impending financial car wreck. And I have to wonder why.  The Bush tax cuts contained a “sunset” provision because otherwise they would not have passed.  Republicans always assumed no Congress would want to be responsible for a sharp tax hike, and extending the tax cuts would be simple.  But the current congressional leadership has shown little interest in taking up the issue. If Dr. Laffer is right, a last-minute action to prevent a tax increase would be useless:  companies and individuals would already have accelerated production and earnings, borrowing from growth they would have generated in the future so it’s taxed at 2010’s lower rates.  My question:  was this behavior predictable?

Traditionally, economic models assume people act rationally. In recent years this been the source of much debate among economists. Indeed, the very idea that most people act rationally seems preposterous.

Stories of people acting bizarrely are interesting, and pepper news reporting. It’s easy to get the impression that most of your fellow citizens are several ice cubes short of a tray. But I’m convinced the vast majority of the decisions we make are perfectly logical FOR US. This is especially true where our economic well-being is concerned. Studies of street level drug dealers have shown how rational their completely unregulated pricing structures are. Factors such as supply/demand, the likelihood of being arrested, the likelihood of being punished, etc. determine selling prices for drugs that make a lot of sense.

This leads to my thesis that applying a little common sense, one can often predict the result of  government policies. Merely ask yourself “what would I do if I were in this position?” It’s easy. Let’s play.  In 1990 the federal government passed a special luxury tax of 10% on items such as yachts, jewelry, and furs. What would you do if you were shopping for a yacht? You might suck it up and pay the tax. Or you might scale down your purchase to a cheaper yacht. Or you might delay or completely abandon your purchase. No doubt each camp would attract some people, but the inescapable conclusion is that overall yacht sales would be lower than without the extra tax. This is exactly what happened. Many employees at yacht builders lost their jobs. Instead of raising revenue, the drop in sales resulted in less tax dollars for the government. In 1993, the tax was repealed. But what about Laffer’s example?

If I knew my tax rate for 2011 were going up substantially, would I try to accelerate income into this year? As my friends in Nawlins say, “hell yeah!” To the degree they can (and Laffer claims there’s a lot of flexibility), companies and wealthy individuals would be crazy if they didn’t try to pull as much income as they can into 2010 from 2011. And what is the likely result? Laffer mentions two government subsidies from the past year: cars for clunkers and the $8000 mortgage tax credit. Both programs were very popular, and accelerated car and home sales respectively while they were in place. But after they ended, sales plunged. It’s obvious that people who might have bought cars in the next few months made sure to buy them when the lucrative subsidy was in place. And home buyers who might have closed later in the spring or summer jumped to take advantage of the tax credit expiring in April. Perfectly rational, and perfectly predictable.

So is Laffer right about the prospective double dip? There are many factors that determine economic growth. But there’s little doubt that next year’s impending tax hike will cause many companies to accelerate income into this year. As a result, 2011 growth will have a big chain around its neck. Unless Congress gets busy shortly on extending these tax cuts, I wouldn’t bet on any upside surprises next year.

NY Again Going After Millionaires

May 27th, 2010

In an attempt to help close the state’s massive budget deficit, a source says NY Assembly Speaker Sheldon Silver wants to push through a tax hike on millionaires.  But in an era when wealthy people are very mobile, another predatory tax hike will likely result in lower revenues, as affected taxpayers get fed up and leave the state.

This post from exactly one year ago discusses Maryland’s experience with such tax hikes.  And there’s a link to a previous post about New York scaring away the wealthy.  NYC Mayor Michael Bloomberg understands that wealthy citizens already shoulder an inordinate burden in high tax states like  NY.  He is on record strenuously opposing more punitive taxes.

The philosophical War on Success has severe implications for our country’s long-term future.  But the War on the Wealthy playing out in many jurisdictions  may very well lead to bankruptcies or bailouts from New York to Los Angeles.  We must hope it is as ineffective as the War on Poverty.

China’s One-Child Policy and Unintended Consequences

January 27th, 2010

In 1978 Chinese authorities limited couples to one child each in order to slow the growth of the country’s massive population. And like most serious government interventions in citizens’ lives, this policy threatens to unleash far-reaching societal changes far beyond the scope of the original plans.  We call such effects unintended consequences.

More than most social scientists, economists believe it crucial to consider the likely unintended consequences of government actions.  Often this is a lot easier than it sounds. With a little common sense, people can predict some ways a population might react to certain policies. For example, if a company raised overtime wages from 150% to triple the normal wage, many employees would undoubtedly try to work more slowly to scoop up more of this lucrative overtime pay. It’s human nature. If the government mandated a “living wage” of $50K per year, many low paid workers would be fired. And businesses unable to raise prices enough to cover higher salaries would suffer financially, with some going under.

The impacts of China’s policy are mentioned in today’s Washington Times article.  Anyone who understands China’s culture knows that parents value boys far more than girls.  They should have realized millions of people would abort pregnancies when they found their only baby would be female.  Now China has a severe female shortage.  There are not enough potential brides for Chinese men.  This has also spurred a thriving sex slave business.

Because the Chinese succeeded in dramatically slowing the birth rate, they created a demographic time bomb:  a rapidly graying population that will be difficult to support by a much smaller group of working young people.  Contrary to popular belief, China is essentially a 3rd world country.  It’s an economic powerhouse solely due to the size of its population.  Its 2008 GDP per person ranked roughly 100th in the world at less than $3300/person.  The average Chinese citizen would need to see his production rise 20% to catch up with his counterpart in Ecuador. The government has massive currency reserves, but they wouldn’t go very far if they had to support hundreds of millions of gray panthers (or pandas).

It isn’t just totalitarian regimes that ignore unintended consequences. Politicians in western democratic nations see no reason to restrain their proposals by considering long-term consequences. They just want to tout the goodies they’re giving their favored constituencies, and hope most of us don’t realize the potential unintended consequences of their schemes. This pattern is unlikely to change until voters embrace a “use your brain” movement that demands politicians consider the implications of their policies.

CFTC Poised to Reign in Oil Speculators

January 14th, 2010

According to this Businessweek article, the Commodity Futures Trading Commission (CFTC), the regulatory body for US futures exchanges, is discussing whether to limit the number of contracts traded by speculative investors on the New York Mercantile Exchange.  The stated purpose is to reduce the impact speculators have on energy prices.

As I’ve discussed before, speculators cannot have a sustained impact on prices without leaving a paper trail.  Such a trail was absent at the price peak in 2008, and it’s not there now.

In a rare display of bureaucratic straight talk, CFTC commissioner Bart Chilton admits his ignorance:  “Even if I’m not sure that these new speculators are contorting markets, if there’s the hypothetical possibility, we’re obligated to do something about it,” Chilton said. “To do nothing would be irresponsible.”

Just brilliant.  He’s essentially saying “I don’t know what I’m doing, but I’m a regulator and I’m paid to regulate.”  Using the “government knows best” mindset, Chilton doesn’t consider that perhaps doing SOMETHING would be irresponsible.

When government intervenes in markets, there are always unintended consequences.  Regulatory and legislative fingerprints are all over the mortgage meltdown.  I point you to Thomas Sowell’s book “The Housing Boom and Bust” for an excellent and easy-to-understand recap of that mess.

Perhaps before acting out of ignorance Mr. Chilton should consult someone with a bit of expertise and try to determine whether his cure might prove to be worse than the disease.

Can we retrofit our way to prosperity? Obama and the broken window fallacy

December 16th, 2009

The media’s review of President Obama’s recent visit to a Home Depot store focused on him referring to energy efficiency as “sexy.”  What I found far more interesting was the president’s embrace of a simplistic yet dangerous economic principal known as the broken window fallacy.

The broken window fallacy says you can generate economic growth by destroying property.  If someone breaks your window, you must buy a new window, have it installed, and maybe even pay someone to clean up the mess.  All of these actions generate economic activity and income for certain people.  But the fallacy of this analysis is that it ignores the destruction of wealth: if not for the broken window you could have used that money for a far more productive endeavor, which would have generated economic growth and also left you better off.

According to Politico44, Obama said  “The simple act of retro-fitting is one of the fastest, easiest and cheapest things we can do to put Americans back to work while saving money and reducing harmful emissions.”  While he doesn’t suggest smashing things just for the sake of rebuilding, doing unnecessary work to spur “growth” is just another version of the broken window fallacy.

If you think more insulation or retrofitting your house with new technology will be beneficial to you, then great.  But touting it as a means of putting Americans “back to work” temporarily is bad economics.  Money spent on make-work propositions gets diverted from productive endeavors that may actually lead to sustained economic growth.  If you want new windows, by all means get them.  But don’t break your windows for the good of the rest of us.

Can Government Create Jobs?

December 8th, 2009

Today’s Thomas Sowell column tackles a concept few politicians and MSM types seem to understand:  government can’t create jobs.  Sure, it can tax and borrow big bucks, using some of the proceeds for hiring government workers.  But productive jobs come from wealth, and government doesn’t create wealth; it redistributes it.  The more efficient private sector would likely create far more jobs than government if the latter didn’t extract so much money to pay for its schemes.  Government merely transfers workers from the private to public sector (with some no doubt lost in the shuffle) and takes credit for the jobs it “created.” Dr. Sowell notes FDR’s massive government jobs programs never put a dent in the unemployment rate.

Sowell continues that government makes hiring much more expensive with its many mandates on employers.  The health care bills being considered in Congress will send the cost of private sector hiring soaring.  Econ 101 teaches us that when you raise the price of something, people normally demand less of it.  This is no different for labor.  If government mandates make new workers cost more than they produce, a company won’t hire them.  And current employees who become a drag on profits will be fired.  If private sector workers become an endangered species as companies shrink, just who will be paying all those taxes to support an ever-expanding government payroll?