Browsing the blog archives for November, 2010.

De Facto Collectivism

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Whether it’s GM or the banks, states or municipalities, or Greece and Ireland, the concept of one entity suffering at the expense of another is now sacrosanct. Why are we seeing so many bailouts today? Ask the left and you’ll get a simple answer—the Bush recession. Bailouts are necessary to maintain stability when the economy falters. Corporate greed and the Bush tax cuts gave us this mess, and government intervention is necessary to keep everything from falling apart.

But there’s a better answer, and it’s equally simple—COLLECTIVISM. “Strength in numbers” can easily turn into “the producers carrying the non-producers” when the irresponsible among us learn to game the system or simply refuse to make tough choices. We see a good example in Europe. The EU is not obligated to bail out Greece or Ireland, but the collective system they have created allows financial poison from one country to spread more easily to its neighbors. This not only creates an incentive for Germany, France, and others to support bailout efforts, but also creates incentives for less prosperous members to engage in risky growth and development schemes because they won’t be held fully accountable for their actions.

Of course, not all forms of collective behavior are bad. VOLUNTARY collectivism occurs all the time. Purchasing life insurance is a good example. Things work fairly well in this instance because there is no incentive for any of us to die in order to collect the benefits. When we engage in voluntary collectivism, we can evaluate the terms of the deal for ourselves. Our liberties are retained.

The real problems are with INVOLUNTARY and DE FACTO forms of collectivism. A good example of INVOLUNTARY collectivism is the “right to healthcare.” Because one’s right is another’s obligation to pay without any say in the matter, it creates a perverse incentive for all of us to overuse the system. It’s just common sense that there would be fewer trips to the doctor if we had to pay out of pocket.

DE FACTO collectivism refers to collective behavior that does not exist in legal form, but certainly exists in practice. De facto collectivism is an insidious threat because is it not as easy to identify. Freddy and Fannie are not government-owned per se, but their financial obligations will always be backed by the taxpayers. GM is supposed to be a private corporation, but its union and political ties give it seemingly endless government backing. A bank that is “too big to fail” can receive taxpayer backing when “too many jobs” are at stake.

Collectivism ALWAYS works against initiative, creativity, and individual responsibility because benefits and failures are shared. De facto collectivism exists because many can’t see it, refuse to address it, or simply benefit from it. But those who stand to gain—an automaker, a large financial institution, a nation like Ireland, or even an illegal immigrant at the ER—certainly understand what’s going on.  De facto collectivism is at the root of most of our economic and social problems. It’s time we recognize it for what it is. It’s also time for the Republican Congress in Washington to put an end to it. The solution is simple—JUST SAY NO.

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The GM IPO

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The Wall Street Journal is reporting today that General Motors in on track to sell about $18 billion in shares in what will likely become the world’s second largest initial public offering (IPO). So why are some investors interested in GM now when nobody would touch the company two years ago? Has GM been nursed back to health?

Arguments to the contrary notwithstanding, accounts of a GM turnaround are premature at best and vastly overstated at worst. But the company is probably a safe bet, at least for a while. Let me explain.

I have argued from the beginning that Obama’s massive infusion of government funds into GM was a guarantee that the company will be “profitable.” The ownership position gives the federal government an incentive to make sure this happens, at least as long as Obama is around. A loss for GM is a political loss for the Democrats. It’s no surprise that the massive taxpayer support, cash for clunkers, and the public flogging of Toyota have all benefitted the company as well. Whether it’s R&D incentives for “green cars” or healthcare legislation that relieves the company of obligations to its workers and/or retirees, the Democrats will continue to funnel taxpayer funds to GM, directly or indirectly. Smart investors know this.

Investors in the GM IPO include giant pension funds, hedge funds, and GM factory workers and retirees. But SIAC, a state owned enterprise and partner of GM in China, also invested, acquiring $500 million in stock or about 1% of the company. SIAC made its intentions known before the IPO. Concerns about Chinese ownership of GM aside, the SIAC investment raised investor confidence because the purchase gives the Chinese government skin the game as well. A GM failure would result in heavy losses for the US and Chinese governments, the UAW, and large pension funds. The combined political pull here is almost too great to imagine.

In Business School we teach that GM’s long term success should depend on its ability to produce quality vehicles that consumers see as good values, but this is not really the case anymore. Sure, building a decent car is important, but GM’s success is much more political. I don’t know where the stock price will go, but I do know that Washington will do its best to support the company. For this reason, it might not be the worst stock you can buy.

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The global financial catfight

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The global catfight among central economic planners has begun.

The Fed’s $600 billion cash infusion in the economy is ill-fated to be sure, and it hasn’t won many supporters around the globe. Brazilian Finance Minister Guido Mantega put it like this:”It is doubtful the Fed decision will produce any results…Throwing money out of a helicopter doesn’t do any good.”

German Finance Minister Wolfgang Schaeuble attacked the move from another angle: “What the U.S. accuses China of doing, the U.S.A. is doing by different means.”

Just for clarification, I’m not concerned about the German or Brazilian opposition per se; we should pursue policies in our best interest. The problem in this instance is that they are right. Concerning Mantega’s comment, history reminds us that FDR tried the helicopter approach and failed miserably. His 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.”

Schaeuble has exposed the hypocrisy that underpins the Fed’s move. Geithner actually seemed to get it right in recent weeks when he chastised the Chinese for manipulating the value of its currency, and ultimately the exchange rate with the dollar. The Fed has essentially done the same thing by weakening the dollar on world markets. Unfortunately, Geithner and his fellow central planners lack a moral compass. His arguments with the Chinese about free markets are simply not credible.  In a broader sense, the same central planners—Geitherner and others—who argue against market-based decisions in their own countries argue for some sort of quasi-market based environment for currency exchange and trade.

There is a deeper lesson to learn from this ongoing catfight. The chief argument behind socialists is that central economic planning is more efficient; with everyone working together, stability and steady growth can be achieved. Even if this were sound economic policy, it couldn’t work on the global stage anyway. When the economic planners converge, they are never quite able to agree on much in terms of specifics because each nation has its own distinct interests. You can only alleviate this problem with unified global economic planning, also known as a one-world government. This is why Marxists constantly call for banking, climate, and other regulations on a global scale. This is precisely why we should oppose it.

The real solution is a principled approach that honors open markets and free trade. Only when the U.S. lives by these principles can we insist on reciprocity from other nations. Reigning in the Fed is a good first step. Ron Paul’s well-crafted attempt to audit the Fed (HR1207- the Federal Reserve Transparency Act) failed by a 229-198 vote several months ago. The votes will be there in January.

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More taxpayer funds for GM

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The dollars are still flowing from the U.S. Treasury to General Motors.

There’s been a lot of talk about GM’s relisting on the stock exchange this week. This is supposed to be evidence that bailout funds are being paid back and GM is on the road to sobriety. But there’s something you probably did not know.

Companies that experience a significant ownership change typically lose access to a tax benefit enabling them to count prior losses and various other expenses—including pensions—against future earnings for tax purposes. In 2009 the federal government quietly decided that companies receiving bailout funds under the TARP program would be exempt from this restriction. This means that GM will be able to count up to $45 billion in pre-bankruptcy losses against future profits for up to 20 years.

When the GM bailout was initiated, I argued that GM WOULD BE PROFITABLE EVENTUALLY because leftists in government would continue to channel taxpayer funds, breaks, and subsidies to keep the company afloat. Whether it’s the original bailout, cash for clunkers, pension “reform” that reduces or eliminates the GM pension burden, “green” subsidies, or tax loopholes, the Obama administration has a vested interest in the company’s survival.

This loophole is further evidence that the GM bailout was simply a bad idea. It’s also a textbook example of why there’s no such thing as fair competition when the government has a horse in the race.  Perhaps the new Congress should take action to eliminate the loophole for GM and other bailout companies. I’m getting ready to pass this suggestion along to my new Congressman.

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Post-election reality

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Now the real battle begins. Many of you might think we can take a breather after the midterms, but now isn’t the time.

Tuesday was a good day for Republicans, but Reid’s reelection in Nevada reminds us that the era of big government is still alive and well. Nonetheless, I hope Tuesday was a good day for liberty, capitalism, and Constitutional government.  Both Democrats and Republicans tend to slide to the left after they are (re)elected. The conservative you thought you elected on the Republican ticket will face a litany of big-government temptations in Washington. Staying true to the cause will only happen if we don’t fail to remind our representatives why we sent them there in the first place.

There are a number of big issues we must address. Many conservatives are focusing on Obamacare and tax cuts. These are important concerns, but here is a sampling of three more that must be on the top of any conservative agenda.

1. Cap-and-trade, AKA global wealth redistribution and central economic planning, is built on the scientific notion that humanity—namely capitalism—is destroying the plant. Environments suggest that cap-and-trade legislation would create “green” jobs, but don’t be fooled. It would severely damage our economy, and any compromise on such a measure would lend credence to the idea that collective global regulation is required to address the “problem.” I’d like to see Congress hold hearings on the matter and host the national debate we never had. Gore’s notion that anthropogenic global warming is “settled science” was a convenient ruse designed to push through legislation when Democrats controlled the Congress. Gore failed, but this idea should be intellectually defeated once and for all. Republicans should have the wisdom and fortitude to attack this collectivist scheme at the core.

2. Illegal immigration has created state and local budget nightmares across the nation. The fourteenth amendment was never intended to grant citizenship to babies of illegal immigrants born in the United States. Congress should immediately pass a clarification of the amendment as a first step toward resolving the issue. The illegals will protest, but common sense is on our side. Win or lose, anyone who opposes the measure—including the President—should be required to take a stand on this issue.

3. The Federal Reserve is responsible for much of the economic malaise we are currently experiencing, yet it is allowed to conduct many of its affairs without oversight. Congressman Ron Paul introduced sorely needed legislation (HR1207) to audit the Fed in 2009. The bill received numerous endorsements but failed on a largely party-line vote this summer after a number of Democrats withdrew their support at voting time. HR1207 would shine the light on Fed activity and could ultimately lead to tighter controls on the central bank. This bill should pass with a Republican majority in Congress, and a 2/3 majority might be possible if President Obama issues a veto.

Will the new Congress have the courage to attack issues like these—and there are many more—or will it attempt to “create jobs” with more government intervention? Will bailouts to the states be eliminated or just curtailed? Will Congress propose to end specific entitlements or just reduce the rate of their growth? Without a strong value base rooted in integrity, the Constitution, capitalism, and limited government, the new Congress will inevitably succumb to the predictable calls from the left and the media for compromise. I’ve lived long enough not to celebrate too early.

The new Congress will have a golden opportunity, but also has a lot to prove. Serious reform won’t begin to happen unless we keep the heat on our representatives. Some things will not be possible until Obama is defeated, but two years of Obama-lite is not acceptable.

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