Browsing the blog archives for August, 2009.

The elusive recovery

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Sometimes things just don’t add up.

The White House just revised its budget deficit projection for the next 10 years upward by $2 trillion—about $7K more for every man, woman and child in the U.S. The economy is now projected to shrink 2.8% this year, 1.6% higher than the previous guess. Meanwhile, President Obama announced his attention to reappoint Ben Bernanke as Fed chairman, complimenting him for his “bold action” and “outside the box” thinking. The best argument you can make for Bernanke is that “things could have been worse” without the Fed’s massive intervention in the economy. This narrative is strikingly similar to Obama’s frequent lament that Bush left him a bigger mess than he realized when he took office.

While Washington is spending us into massive debt to stimulate growth, the economy just hasn’t responded as originally projected. As Al Gore would say, everything that should be up is down, and everything that should be down is up. Meanwhile, we are still talking about more government spending and control in the health care arena. And don’t forget cap-and-trade.

If you think you’ve seen this movie before, you’re right. Roosevelt tried to spend his way out of the Depression, but unemployment remained at 19% in 1938. As FDR’s Treasury Secretary Henry Morgenthau testified in 1939: “We are spending more money than we have ever spent before, and it does not work. … I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this administration we have just as much unemployment as when we started … and an enormous debt, to boot.”

Some resemblance of a recovery is likely, sooner or later. All of the money we are throwing at the economy is bound to spur enough activity to deliver some short term relief. But the current approach to the problem is akin to giving a heroin addict more of the drug so he can avoid the pain of withdrawal, without which he cannot begin to rebuild his life. Hopefully those who have been unable to learn the failures of Keynesian economics from history will now learn it from the current crisis.

If Obama thinks Bush left him with an economic mess, just wait until the next President has to clean up this one.

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The Nature of Competition

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“Evil corporations” are often charged with profiting unethically or from the misfortunes of others. Airlines collect an estimated $2 billion each year in ticket change and cancellation fees from fliers. Chain retailers often charge more for a certain products in one location than in another. Credit card companies charge “outrageous” fees and interest rates on their balances. Should we regulate these companies so they can’t profit from our bad circumstances? I discussed this topic earlier today on the Wilkow Majority, but I think it deserves a blog post as well.

Let’s start with a fundamental business principle: Profit does not come from the most visible sources, nor is it generated equally from all sources. A service station might break even on gasoline sales and make its money on hot dogs and Cokes. Grocery stores charge higher margins on candy bars in the checkout lines. Oceanfront hotels raise rates and make their money in the summers. Carmakers typically earn less on entry level vehicles than on their upscale models. The point here is that companies earn profits when and where they can.

There is a flipside to this reality we often forget. If the service station did not charge high margins for snacks, it would have to raise the price of gas to cover its overhead. If grocers did not earn a lot from selling products in the checkout aisles, they would have to raise other prices to make up the difference. If airlines were not allowed to charge $100-150 when customers change flights, they would have to raise fares to remain profitable. In the end, it all comes out in the wash.

IN MOST INSTANCES, REGULATING THIS TYPE OF BEHAVIOR HURTS CONSUMERS INSTEAD OF HELPING THEM. I once heard a guy complain that gas stations in the desert shouldn’t be able to “take advantage of customers” by charging more than those in cities. He was willing to allow a few cents per gallon to cover additional transportation costs, but nothing else. I asked him who would run a gas station in the middle of nowhere if he were not allowed to charge higher prices to compensate for getting fewer customers. “If they can’t make money charging a fair price, then they shouldn’t be in business.” I reminded him that if the specific station he was complaining about wasn’t there, he would have been stuck on a desert highway without any gas at all. He was arguing for his own demise.

The bottom line is simple. If you don’t want to pay more for gas, fill up in the city before you drive in the desert. If you think the interest rates and fees charged by your credit card company are too high, live within your means and you won’t pay them anything. There is no free lunch. If companies can’t earn profits in one area, they’ll try somewhere else. Authorize the government to regulate companies on your behalf and you will lose another piece of your own freedom.

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End of the Public Option

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It looks like the end of the so-called public option in the President’s healthcare reform package. While Obama continues to speak in generalities, Health and Human Services Secretary Kathleen Sebelius made the following comment on CNN’s State of the Union: “I think there will be a competitor to private insurers. That’s really the essential part, is you don’t turn over the whole new marketplace to private insurance companies and trust them to do the right thing. We need some choices, we need some competition.”

This quote tells us a lot about how this administration views the economy. So what exactly is a “competitor to private insurers?” Why must the government get involved to have real competition? Insurance companies—like all private businesses—compete to provide the best products and services at the lowest prices. We could have more competition if Washington would take action to allow individuals to purchase their insurance from providers across state lines. We don’t need a government player in the market to do this.

And what’s this about trust? Are insurance providers untrustworthy? Are we supposed to “trust” the government to “do the right thing” when it comes to health insurance?

This is really quite simple. Private businesses MUST deliver the goods to survive. Those that perform well are rewarded with profit, while those that don’t meet customer needs lose money. Government-run businesses are not under this pressure, however. They can lobby for legislation to tilt the playing field in their favor when things aren’t going well. Or they can simply ask for more money from Congress, arguing that they exist to pursue the “public good” instead of profit.

Sebelius told us a lot in her statement. This administration views private businesses as evil capitalists who can’t be trusted, while only the government is capable of “doing the right thing.” But they’re missing the point. The profit incentive is not evil; it’s precisely what forces private businesses to meet the demands of the market. Remove the profit incentive and organizations can do as they wish without repercussions. This is why we need MORE private competition, NOT a government option.

The public option might be gone for now, but we must remember why it was there in the first place. The left’s preoccupation with destroying capitalism is still alive and well.

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The Role of Government

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Our founding fathers instinctively knew that governments usually create more problems than they solve. However, the modern liberal clings to the notion that an expanded government is usually good for society. Most conservative-liberal debates today are built on this clash of worldviews. History clearly favors the conservative position, but many conservatives fail to grasp this fact.

Let’s say that you run a jewelry store and someone recommends that you hire his buddy Rex as the night watchman. The only problem is that Rex just served 15 years for armed robbery. My guess is that you wouldn’t give serious consideration to making the hire. Liberals and conservatives would agree on this one.

Now, suppose the same person argues for an expanded government program like universal health care. You may discuss issues such as rising healthcare costs, the uninsured filling up the emergency rooms, and tort reform. These are important considerations, but the core assumption is usually overlooked: Why is more government presumed to be the solution to this or any social problem?

Rex may have served 15 years for committing a single armed robbery, but our government robs us incessantly and few government activities (outside of those specifically enumerated in the Constitution) have produced any measurable net benefits. From FDR’s prolonged Depression to LBJ’s Great Society to Obama’s massive “economic stimulus” and push toward complete control of the healthcare system, most government programs simply are not effective. The burden of proof here should be on the liberal.

The most common liberal argument for big government is the idea that government doesn’t have a profit motive. In the case of healthcare, we are told that the “public option” will be more efficient because the need for profit will be squeezed out of the system. Following this logic, the government should run everything from grocery stores to phone companies. If you think I’m stretching this a bit, consider Washington’s recent encroachment into the banking and auto industries. Some liberals have even called for nationalizing oil production.

This argument is easily refuted by pointing to the former USSR, Cuba, and even China before its recent shift in the direction of capitalism. The typical liberal response is that the Soviets were not wrong about socialism per se, but they just needed more refined government programs. Keep pressing them on this point and most will admit that their claims remain untested. They THINK a government takeover of the best healthcare system in the world will improve things, but they can’t point to a track record. They are left arguing for an upheaval of the most successful economy in the world with only conjecture for support. At this point the debate is over.

So when you get in your next debate with a liberal, watch out for the “big government is good” assumption at the outset. Ask him to present evidence that expanded government creates a better and more prosperous society. Many have accepted this notion without giving it much thought. Why be satisfied with winning the debate on a specific issue when you can attack the core of liberalism instead?

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