Browsing the blog archives for October, 2010.

Election spins

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There are two spins you’re guaranteed to hear from the left every election, and this year is no exception. They sound plausible to the casual voter, but can be rejected easily with some critical thinking.

The first one is all too familiar: “[Insert Republican] wants to cut Grandma’s social security…” The pundit or campaign ad usually references an alleged risky scheme to privative the system or cut benefits, closing with “[insert Democrat] will protect our seniors and Social Security.” True conservatives want to reform Social Security for those who haven’t retired yet, but I’ve never heard a Republican run on cutting benefits for existing recipients.

This type of argument—properly interpreted—should be good for conservatives. The Social Security system is headed for bankruptcy, and the few on the left who actually acknowledge the problem either want to raise the income limit (i.e., tax moderate and high income earners), invoke means testing (i.e., cut payments to moderate and high income earners), or give amnesty to millions of illegals to make them instant contributors. The first two proposals are just more wealth redistribution, and the last one merely kicks the problem down the road. As low income earners, the newly minted Americans would contribute substantially less to the system than existing taxpayers. While this money could be used to pay retirees in the short run, it won’t be long before we have a face a larger problem. If the liberal position on Social Security is redistribute more wealth, invoke amnesty, or simply do nothing, then the conservatives should win this issue easily.

The second spin takes many forms but goes something like this: “The U.S. is current facing [insert economic challenge], but Congress is unwilling to act due to partisan bickering…. [Democrat] favors [insert new or expanded federal program] while [Republican] wants to do nothing and protect the special interests…” This is a classic intellectual sleight of hand. Conservatives don’t reject new and expanded government intervention into the economy because of partisan bickering, but because it doesn’t work. This is a more subtle message to uniformed voters because the mainstream media has conditioned most Americans to accept Keynesian logic, and taking some kind action seems to be the right thing to do when you have a problem.

The first spin can be debunked in a minute or two. But if a coworker falls for the second one, it might take a couple of meetings at the water cooler or a thorough discussion over lunch to set the record straight (for starters, ask him why the $787 billion stimulus didn’t work). Fortunately we still have some time. Believe it or not, the polls tell us that there are many undecided voters still out there. We can win them over one at a time.

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Here’s to Juan Williams

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Juan Williams has been my favorite liberal for some time. I usually disagree with him, but he’s intellectually honest, passionate, well-informed, and demonstrates genuine good will and common decency. Williams was finally bitten by the political correctness he hesitated to confront while at NPR. His dispatch–including the snide comments about his psychiatrist–are indicative of the left’s subtle yet constant effort to chip away at free thought and expression in our nation. Juan Williams is a true professional. I wish him the best.

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The Fed…one more time

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Everywhere I turn I hear more calls for “action” and “leadership” to “get the economy back on track.” I recently addressed the folly of desperate stimulus spending. Now I’m hearing demands for even more intervention from the Federal Reserve. It’s time to go over the problem with the Fed’s attempted management of the economy one more time. I wish I didn’t have to cover Fed-101 again, but as the President likes to say, I want to be perfectly clear. Apparently some people require more explanation.

The Fed attempts to steer the economy in several ways, two of which we’ll discuss here, (1) manipulating interest rates and (2) expanding the money supply. Absent the Fed, interest rates would be determined by the market. Banks would base their rates on availability of funds, risk (down payment, credit scores, collateral, etc.), and projected inflation (which would be less of a concern without the Fed anyway). Not everyone or every business would get a loan. Business startups or mortgages with little or no down payments or equity would move to the back of the line. These loans are the most likely to fail in the first place, and they shouldn’t be funded anyway.

Under our central banking system, the Federal Reserve makes funds available to banks and controls the percentage that can be loaned at any given time. The Fed also provides funds to banks and determines the interest rates, which directly affects the rates banks charge their customers. When the economy is sluggish, the Fed lower interests rates and makes more funds available to spur borrowing  to reignite the economy, but this provides an incentive for banks to make more credit available than the market can support. Sooner or later, loan defaults rise as a result. The left might blame greedy banks for this debacle, but the direct cause is Fed.

The second way the Fed intervenes is through expanding or contracting the money supply. This can be done by printing more greenbacks, but we see the same effect when the Fed changes bank loan requirements or intervenes in financial markets buy purchasing t-bills or other securities. Whenever the amount of money increases, each dollar in circulation is worth proportionally less. In other words, the Fed is TAXING YOU by reducing the value of your savings and increasing future prices whenever it expands the money supply.

In both instances, the Fed is borrowing from tomorrow’s prosperity to prime today’s economy. This is classic, flawed Keynesian logic. Keynes insisted on heavy government intervention during recessions and is famous for the quip, “in the long run we are all dead.” Unfortunately we’ve been going down this road since the 1930s, and today we are seeing the long term effects. We are not dead yet, but it seems like the economy is.

The ONLY way out of the current recession is to let the market sort it out. Congress and the Fed can do little to help other than stay out of the way. This means no moratoria on mortgage bankruptcies. The housing market is overvalued and must find its real market values before it can recover, painful as it may be. This means no bailouts. Weak companies must be allowed to fail and pave the way for new, stronger businesses.

This also means a massive overhaul of the Federal Reserve so that its ability to manipulate the economy can be severely curtailed, if not eliminated altogether. We’re probably a long way from making much progress on this front because most Americans don’t understand the long term damage the Fed inflicts on our economy. The Republicans will have an opportunity to lay the foundation if all goes well in two weeks. Let’s hope they don’t settle for the middle ground…again.

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The t-shirt says it all

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The most interesting souvenir I picked up while in Beijing last month was a t-shirt. It only cost me about $3, but the underlying message is priceless.

Mao souvenirs are common in China. One popular t-shirt has a caricature of the former leader with a quote below, “Serve the people…Mao Zedong.” An Obama version of the shirt is now available, featuring the president wearing Mao’s Chinese cap and the “OBAMAO” logo appears on the back. Other designs are available as well, each with Obama replacing Mao. These t-shirts have been around since 2009; you can see a photo of the one I got at http://www.cnngo.com/explorations/shop/obamao-tshirt-658266.

Mao is an icon in China. Cartoons and parodies with his likeness exist from time to time, but the government there does not permit him to be presented in a negative light. Chinese students study his writings in school alongside those Confucius and Marx. Although China has strayed from Mao’s teachings over the last two decades–especially in the area of economic reform—his reputation is alive and well, and insults are not taken lightly.

Now I don’t take everything I see on a t-shirt literally, but there’s an underlying message here. The Chinese people have heard our president wax eloquent on wealth redistribution. His views on the evils of corporate America and “the rich” are widely reported there. The Chinese know Mao and Marx well, and they see a connection with Obama. Many see our president as a kind of American version of Mao, a leader who seeks to “fundamentally transform America.”

There’s a real irony here. Americans who use terms like Marxist or socialist to describe Obama are called mean-spirited. While his apologists tell us that there is no intellectual basis for such a comparison, Obama’s Marxist overtones are widely recognized in China. I tried not to discuss Obama much while there as I didn’t want to find myself criticizing the president on foreign soil. But it’s clear that Obama is as popular there as any American president could be, and those I spoke with seem to understand what he means by “hope and change.”

BTW, you can get your own OBAMAO shirts on eBay, but it will cost you more than $3. And if you think the Chinese produce shirts like this for Republican presidents, think again: http://www.pekingduck.org/2005/03/ask-me-what-my-t-shirt-says-in-chinese/.

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A Single World Currency?

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There’s been some renewed talk about a one-world currency over the past few weeks.

Ideally, there should be a single world currency—gold. National currencies would simply equate to a given quantity. If each dollar was worth a certain amount of gold, then more dollars couldn’t be printed unless the gold existed to back them up. Nations have abandoned this principle because it does not permit them to incur debt and devalue their currencies easily. We used to associate devaluation with the developing world, but no more. Governments in the U.S., Europe, Japan, and elsewhere have incurred massive debts while their economies are stymied. Guided by flawed Keynesian thinking, they want to spend even more to “jumpstart the economy,” but their debt levels are already too great at the present currency values. Devaluing the currency enables these governments to keep on spending while potentially boosting exports, providing that their trading partners don’t do the same. When other countries threaten to respond in kind, we can have a currency war.

This is an economic advantage to a single world currency, improved efficiency. Companies could trade across borders without concern for abrupt changes in exchange rates. Individuals could travel freely without the hassle or expense of exchanging currencies. There is a political advantage as well. With a single world currency, individual nations could not manipulate the value of their own currencies.

However, the disadvantages of such a policy are substantial in both economic and political terms. On the economic side, weak economies benefit at the expense of stronger ones when there is a common currency. In the event of a crisis, nations with stronger economies will be called on to subsidize the recovery of those in trouble, as we have seen with Greece and the euro. Likewise, if central banks drive interest rates, this becomes quite complicated because of different economic situations across borders. Central banks shouldn’t be driving interest rates in the first place, but that’s another story.

A common currency would be a political disaster. Central economic planning at the national level is egregious in its own right, but even worse at a global level. Regulators from various nations would meet to negotiate expansion of the money supply. Who gets to print and spend new currency would become a political challenge, replete with calls for “global equity” and wealth redistribution. Individual nations would relinquish control over the most central component of exchange, money. There is no economic advantage for countries like the U.S. with relatively strong currencies to participate in such a collective effort.

A global currency would also bring about opportunities for devaluations at the global level. Devaluation is an inherent tax on wealth because it leads to price influence, meaning that each unit of currency held by a company or individual declines in value. With massive government debt burdens, many leaders would welcome a global devaluation and accompanying inflation; the printing of money designed to bring about this devaluation would give governments more to spend. If there is a single world currency, then accumulated wealth—including your 401(k)—could be decimated by the action of a politically-motivated global bureaucrat. 

The chatter about global currency regulation and ultimately a single world currency is built on a combination of Keynesian economics and pure Marxism. Rather than address debt problems within one’s own country by pursuing fiscally sound economic principles, world leaders find comfort in a collective solution that appears to provide an easy way out. But collectivism always fails in the long term. It might offer some immediate benefits to the weak, but never to the strong.

Make no mistake…the efficiencies gained by a global currency pale in comparison to the economic and political costs. Unfortunately, Tim Geithner is on record as being “open” to discussions on the idea of collective regulation of global currencies. This is a scary thought. More central economic planning, especially at the global level, will only make things worse. Instead, we should get our own economic house in order and insist on fiscal accountability in Congress.

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