Browsing the blog archives for August, 2010.

Henry Hazlitt is still right

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Henry Hazlitt’s Economics in One Lesson is one of the best primers in the discipline. The test of any work in economics is the test of time, and Hazlitt passes with flying colors. The latest example is Washington’s’ “reigning in” of the credit card companies.

Congress passed and Obama signed the so-called Credit Card Accountability Responsibility and Disclosure Act of 2009. Among other things, this piece of legislation limits many of the penalties credit card companies can charge their customers. These rules went into effect on Sunday. Today—with interest rates at an all-time low—the average credit card interest rate is 14.7%, 1.6% HIGHER than it was a year ago. We were told that consumers would SAVE money as a result of this legislation, but the reality is that many Americans with credit card balances will pay more in interest to compensate.

This should come as no surprise, and was really an easy prediction. Hazlitt warned policy-makers of the UNINTENDED CONSEQUENCES of their economic manipulations over 60 years ago. Yet, Obama and Congress apparently didn’t understand this when the bill was passed, and many in the mainstream media don’t even get it now. The credit card business is not that complicated. Individuals who carry large balances and/or don’t make their monthly payments represent a higher risk of default, so they have to pay more or companies won’t issue them a card. If companies can’t levy hefty penalties, they’ll have to charge higher interest rates.

I heard an unrelated AP report the other day that illustrates the same intellectual folly: “It’s going to cost more for travelers to fly American Airlines.” AA, like other airlines, is starting to charge a little more for its most desirable coach seats. We were told that this raises the cost of flying, which is clearly not true for two reasons. First, it only raises costs for passengers who want the purchase those desirable seats. Second, it will LOWER the cost for everyone else in the long run because AA is able to charge more to those passengers. Airlines have to cover their costs from somewhere. The more OTHER PEOPLE pay for their seats, the more likely you are to get a better deal on yours.

As a university professor, I hear a lot about the need to teach critical thinking skills to my students. It never ceases to amaze me how much critical thinking appears to be in short supply among our politicians and throughout the mainstream media. Perhaps they really understand and are just banking on the fact that we can be easily fooled.

By the way, the solution to the credit card problem is simple: Pay your bills on time and you won’t have to worry about penalties or high interest rates. If you’re in the hole now, cut back on your lifestyle and pay your way out of it. We can’t expect Washington to live within its means if we can’t live within ours.

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GM’s CEO is stepping down

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Ed Whitacre surprised the business world on Thursday when he announced that he would step down as GM’s CEO on September 1 and as Chairman of the Board at the end of the year. Whitacre became Chairman when GM emerged from bankruptcy protection in July 2009 and was officially named as its CEO in January 2010. GM has reported profits for each of the first two quarters of 2010. “It was my public duty to help return this company to greatness,” he remarked, “and I didn’t want to stay a day beyond that, really.”

Something isn’t right here. First, the notion that Whitacre took on the challenge as a public duty strikes me as disingenuous. Including stock options, Whitacre will earn about $9 million for 8 months service as CEO. If this was merely a public duty, then why is he accepting the stock option piece of his package totaling $7.3 million? Maybe he’ll refuse it as part of his “public duty.” Don’t hold your breath.

Second, the idea that Whitacre has “returned GM to greatness” is a massive overstatement as well, and it takes a lot of chutzpah to make such a claim in the first place. Even if these profits are the basis for optimism (and I’m not convinced), two quarters in the black just doesn’t constitute greatness.

The more I think about his decision and departing statement the more bizarre it sounds. It’s as if Whitacre’s team cut a 30-point half-time lead to 25 by the end of the third quarter, at which time he claimed victory and left the arena.

My guess is that Whitacre sees long term problems with GM, decided to appoint himself as company savior and bail out with a cool $9 million before things turn sour. GM’s fundamental problems haven’t been resolved and the company’s international operations aren’t doing well. Perhaps we’ll find out why he really stepped down in the coming months.

Lee Iacocca’s stint at Chrysler from 1979 to 1992 is one of the best known corporate turnarounds in American history. Iacocca secured a $1.2 billion government loan guarantee, a mere drop in the bucket when compared to the US government’s 61% ownership stake in GM. Iacocca wasn’t perfect, but when all is said and done, I doubt historians will mention these two names in the same sentence.

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Another bailout…

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The Democrat Congress approved another bailout, this time $26 billion for states. Supposedly, the bill won’t increase the deficit and will help states keep from laying off teachers and first responders. There is so much wrong with this bill, but I’ll be as succinct as possible.

First, this bill—like the others—WILL increase the deficit. We are told it will be paid for by closing a business tax loophole and cutting food stamp payments in 2014. “Closing the loophole” is a tax increase that will have negative unintended consequences, and if you really believe food stamp payments in 2014 will change as a result of this bill, then you are naïve as Obama must think you are.

Second, education and local police and fire protection are the Constitutional responsibility of states and local municipalities. The federal government should play no role in hiring teachers and policemen. States are free to raise their own taxes if they wish, and the fact that they have chosen not to means they are either facing budget realities on their own or they are cajoling Washington for more money they don’t have to raise on their own.

I don’t expect many states to refuse the money. Even if they strongly disagree with the approach, governors and state legislators know that their citizens will ultimately pay for it one way or another, so why not get their share of the pork? But herein lies the problem. States cannot print money and are not able to incur debt to the extent that the federal government can. Washington is simply doing the dirty work for the states, who are able to avoid tough budget choices without raising taxes. We are supposed to see the Obama administration as the compassionate caretaker willing to step in and help when states are in trouble. We’re supposed to feel warm and fuzzy. We aren’t supposed to ask the obvious questions:

Who is really going to pay for this? You will—sooner or later—if you earn enough to pay taxes.

Why can’t the states raise their own taxes? They can, but they chose not to.

What’s going to happen if and when state budgets run short next year? They’ll expect another bailout.

Why is any of this Washington’s business? It’s not.

If it makes sense to reduce food stamp payments by $12 billion in 2014 or to close a business tax loophole, then why tie these reductions to more spending? The Democrats are not interested in cutting either spending or the deficit.

Why are we constantly told that more spending is needed to save teachers, police officers, and firefighters, while less popular programs are not on the cutting block? This is a con game. The public simply would not stand for $26 billion more to fund the burgeoning welfare state.

If this $26 billion bailout is sorely needed, why not simply redirect unspent funds from the previous bailout? This bill is really about expanding government and buying votes.

Why is Obama telling us that it’s time for the federal government to make hard budget choices when he’s unwilling to let states make their own? He’s simply not serious about fiscal responsibility.

We will be told that those who oppose incurring $26 billion in additional national debt so that states won’t have to balance their own budgets just hate kids, oppose education, or don’t want to fight crime. Don’t let them frame the argument around emotion. This is a golden opportunity for Republicans who are serious about limited government to take a stand. Let’s hope they do.

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Privatizing Government Services

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There may be no such thing as a free lunch, but it is often available at a reduced price, especially for governments willing to privatize services.

A number of examples of local government waste have been reported lately. In a less publicized case, a July 19 Wall Street Journal story opened with the following: “Faced with a $118 million budget deficit, the city of San Jose, California recently decided it could no longer afford its own janitors. So the city’s budget staff called for dropping its custodial staff and hiring outside contractors to clean its city hall and airport, saving about $4 million.” If an outside contractor could provide the city with the same services as municipal employees, then why was this job done internally in the first place? Why did it take a $118 million deficit before the city took steps to save $4 million without sacrificing the services provided for the public?

The main problem is that government lacks a profit incentive. In the private sector, organizations must get a job done at the lowest cost. This is not true in government, where politicians introduce competing objectives that can raise costs and create inefficiencies. While often demonizing private enterprise for making tough choices in the interest of the bottom line, governments need not be concerned with profits in the first place. Depending on the entity—federal, state, or local—governments can look to tax increases, deficit spending (i.e., future tax increases), or even printing money as possible solutions.

The Los Angeles boycott of Arizona illustrates this point even when government services are obtained from outside firms. Presumably, LA has done business with Arizona companies because they delivered goods and services the city needs at a higher quality and/or a lower cost. “Replacement companies” in other states will be less efficient, raising costs for the city’s taxpayers. In the end, LA will pay more for the same services from companies located in other states, all in the name of political correctness.

I wonder how much more could be saved if non-essential government services were eliminated and the essentials were performed by independent firms. Studies conducted by the Cato Institute and others—not to mention examples like San Jose—suggest that such a figure could be staggering. Organizations that outsource are not required to invest heavily in technology that might not be as efficient in the future. They also retain the flexibility to expand or contract programs more easily as needed.

Why don’t we see more outsourcing of government services? A major reason is union influence. Outsourcing translates into more activity at the small business level where unions wield much less power.

Now more than ever, governments are struggling with financial reality. The current level of spending is far from sustainable, and more taxes and deficits will stifle the economy and pass the problem down to future generations. The battle to eliminate non-essential government spending is important. Equally critical, however, if the need to get the most bang for the buck when governments spend for essentials. Less is usually more when it comes to government.

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