Browsing the blog archives for February, 2011.

Wisconsin and the Unions

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Wisconsin Governor Scott Walker’s attempt to balance the state budget is well known. Like many other states, Wisconsin faces a $3.6 billion budget shortfall in the next biennium, and something has to be done.

The proposal is not nearly as “extreme” as the left wants us to believe. Under Walker’s proposal, government workers would contribute half their pension costs (5.8% of their salaries) and pay at least 12.6% of health-care premiums, up from about 6% now. These are reasonable measures. Simply stated, “business as usual” is not an option for states trying to balance their books. Unlike Washington, most are required to balance their budgets; printing and borrowing are not viable options. But what I find most interesting about the proposal and the protests is what we’re hearing from two outsiders.

Several days ago President Obama invited a local (Wisconsin) radio station into the White House to discuss the situation and commented, “…some of what I’ve heard coming out of Wisconsin, where they’re just making it harder for public employees to collectively bargain generally, seems like more of an assault on unions.” Meanwhile, the Washington Post reported that the White House’s political arm, Organizing for America, has been active orchestrating phone calls, e-mails and Twitter and Facebook messages to rally opposition to the plan.

As with Arizona’s efforts to curb illegal immigration, President Obama sees nothing wrong with meddling in state affairs. The President claims a willingness to make the tough decisions necessary to cut the federal deficit, but is unwilling to sit on the sidelines while a sovereign state tackles similar issues on the state level. For Obama this is about union power, plain and simple.

The second outside influence here is a bit more intriguing. At least some of the leaders of the Egyptian uprising are siding publically with the union protestors as well. An interesting website (www.minimubarak.com) emerged a few days ago likening Government Walker to Hosni Mubarak. Click on the link to the site, as a picture is worth 1000 words.

The union response to Walker’s proposal in Wisconsin was predictable, but what is going on outside Wisconsin is just as important. His recent official tone might be more moderate, but the President still can’t resist meddling in state affairs, and his affinity for actively supporting his union friends hasn’t changed. Ironically, the union notion is based on the idea that workers have the right to bargain collectively with management—if they choose—without outside interference. If Obama supported a genuine union-management balance, he would resist commenting on this issue altogether.

The response from the Egyptians is a bit more troubling. It’s not possible to tell if the Egyptian solidarity with the union protestors reflects the views of Egyptian movement as a whole, but I think I’m hearing “workers of the world unite” in the background. Having lived in Cairo for 5 months in the 1995, I’m not sure what the protestors there really want, but I’m guessing they want a dubious and irrational mix of freedom, socialism, and Sharia law. The protests in Egypt and neighboring countries have been compared to 1776 and the crumbling of the Berlin wall. Judging from recent events, such comparisons are both premature and grossly overstated.

Sources:

http://chronicle.com/article/U-of-Wisconsin-Faculty-Would/126354/

http://delcotimes.com/articles/2011/02/21/business/doc4d614cdc93c79469053206.txt

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There’s no substitute for eternal vigilance

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I recently attended a conference devoted to analyzing the Federal Reserve’s record since its inception in 1913. Presenters included well known economists on various sides of the issue, former Fed officials, and even a former bank CEO. I returned home more knowledgeable about the Fed, but also with a clear understanding of a deeper problem.

Initially, the Federal Reserve was designed to promote maximum employment, price stability, and moderate interest rates. The Fed was also charged with taking action to ensure that any major financial disruptions don’t infect other parts of the economy. When comparing the pre-Fed and post-Fed years—and even removing the interwar period—the scorecard doesn’t look good. Since the creation of the Fed, booms and busts have become more pronounced, inflation has intensified, and research has demonstrated that monetary policy has little to do with the long term unemployment rate anyway. It’s easy to conclude that the Fed is not serving us well and we should look at other alternatives. To be fair, however, it’s not that simple.

The Fed was established when a gold standard was in place, and that standard—not necessarily Fed intervention—was presumed to be an adequate check on inflation. Currency can’t be created “out of thin air” when every dollar must be backed with something tangible like gold. With today’s fiat currency, expanding the money supply by printing more dollars or manipulating banking requirements can be done much more easily.

In the end, the government must play some role in currency transactions; it’s unavoidable. Without a gold standard, the Fed—or whatever replaces it—can expand the money supply at will. Returning to the gold standard will be a difficult political feat, but without such a change, abolishing the Fed would be akin to overthrowing Mubarak in Egypt. The real question is not what you dismantle, but what replaces it. Put another way, just imagine what the economy would look like if monetary policy was run by Congress instead of the Fed.

Some have proposed fixed monetary rules for managing the Fed. The late Milton Friedman once proposed expanding the money supply by a fixed low, nominal rate every year. Ostensibly this would keep the Fed from doing too much damage, but politicians can always change rules and permit exceptions in the face of wars, recessions and other national “emergencies.” Hence, such a rule is only as good as those we elect to enforce it.

Friedman also proposed (at one time) that the debt be automatically monetized each year. In other words, a trillion dollar deficit this year would be financed by printing another trillion dollars right away to pay it off. Monetizing the debt would be inflationary, but Friedman’s intention was actually sound. He wanted Congress to face the economic effects of its runaway spending whenever it passes a budget. Friedman believed such a requirement would result in a great anti-spending fervor from the public because the link between deficit spending and inflation would be immediate and clear. He might have been correct.

Despite Congressional and Fed efforts to the contrary, markets correct themselves much more efficiently when governments (and quasi-governmental entities) stay on the sideline. Abolish the Fed or not, Keynesians and others on the left will always claim to know better than the market. Their cries for redistribution and other schemes to “correct” capitalism’s failings will never cease, as elections will inevitably hang in the balance. Wendell Phillips echoed the sentiments of our founding fathers when he warned us that “eternal vigilance is the price of liberty.” He couldn’t have been more correct.

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Toyota’s Absolution

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The NHTSA and NASA released the findings of a 10-month investigation into the cause(s) of Toyota’s “unintended acceleration” problem, concluding that driver error was the culprit for most of the incidents. Even the “government watchdogs” must concede now that the severity of the problem was much overblown.

This was no surprise. Toyota’s predicament served as a perfect opportunity for the Obama Administration to flex its anti-business muscle. The Japanese company has been a competitive thorn in the side of U.S. carmakers and the UAW for years. Besides, the government needed a way to prop up sales of vehicles produced by General Motors, a company majority-owned by the government at the time. Transportation Secretary Ray LaHood’s own bias was apparent when he advised consumers (before later amending his comments) in 2010 not to drive their Toyotas. He now admits that “Toyotas are safe to drive.” Thank you, Mr. Secretary, for telling us what millions of Americans already confirm to be true on a daily basis.

Needless to say, this crisis has cost Toyota a fortune. Ray LaHood should be fired for his reckless behavior, but I’m not holding my breath. Alternatively, an investigation of the DOT and NHTSA’s handling of the Toyota incident is in order. LaHood should be required to take the stand and to account for his agency’s mismanagement. LaHood expected Toyota to apologize to the American people for accidents whose cause had not been fully established. LaHood owes both Toyota and the American people an apology.

So what can we learn from this crisis? Our “government watchdogs” are not apolitical, unbiased entities whose sole mission is the safety and wellbeing of the American people. Unlike the companies they regulate, they don’t have to answer to customers and shareholders. Even when their costly speculations turn out to be unfounded, they can always find something to reinvestigate. LaHood told us on Tuesday that he’s “still examining Toyota’s pedal design.” In other words, he didn’t find a smoking gun, but he won’t close the book on the investigation. To use a sports analogy, these guys never lose a game. When the clock is about to expire and they’re behind, they simply change the rules and add more time.

It is also true that government should not get involved in business ownership as Washington did with GM, but this issue has already been addressed in a previous blog post. The key point here is that the mechanisms inherent in capitalism—not bureaucrats—will ensure that Toyotas are safe in the future. Its cars are thoroughly and independently tested without any federal oversight. Drivers won’t purchase Toyotas if they are not safe, and the legal infrastructure will penalize the company if it cuts corners on safety. Heavy-handed government intrusion into this process is costly and disruptive. It serves only to create the illusion among some that government authority is a necessary counterweight to the inherent evils of capitalism.

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Remembering the Gipper

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February 6 was Ronald Reagan’s birthday; he would have been 100. The older I get, the more I admire Reagan. His legacy is much greater than can be posted in a single blog, but I’d like to present three things we can learn from his presidency:

1. The private sector works. Reagan exhibited confidence in the American people. He knew that they—if left alone—could bring about their own economic prosperity. As Reagan put it, government was the problem, not the solution. The same is true today. http://www.hark.com/clips/jrnppndgms-government-is-the-problem

2. Cutting taxes can increase revenues. Reagan cut taxes during his tenure, while federal revenue from income taxes rose from $364 billion in 1980 to $673 billion in 1989.

3. Government spending was and still is the problem. Although he garnered enough support from the Democrat Congress for his tax cuts, Reagan was unable to reduce the growth in spending. Had federal government outlays grown only at the rate of inflation during that time, we would have experienced budget surpluses spurred by economic growth in his second term.

These lessons probably ring true with most of my readers. Nonetheless, liberals like to paint Reagan as a “great communicator” who was able to hoodwink the American people with his simplistic and unworkable conservative ideology. His inability to tame the budget deficit is cited as evidence that “Reaganomics” failed. But this assessment is simply not true. As Reagan might say today, “…the trouble with our liberal friends is not that they’re ignorant; it’s just that they know so much that isn’t so.” http://www.hark.com/clips/dlvxhnstwz-the-trouble-with-our-liberal-friends

To be fair, Reagan deserves partial blame for the increase in government spending during his tenure. Perhaps he should have negotiated with Congress like he did with the Soviets. Likewise, it is true that tax cuts do not always increase government revenues. This depends on the marginal rates, prevailing economic conditions, and other factors, as the Laffer curve tells us. However, Reagan understood that the American people were overtaxed at the time and the numbers proved him right. The same case could be made again today.

Interestingly, I haven’t heard much talk about the “Reagan deficits” as of late. Budget deficits were in the $150 billion range when Reagan left office. Perhaps Obama’s 2010 deficit of well over $1 trillion has put things into perspective.

Going forward, the economic lessons from the Reagan era can be summarized quite easily: The economy can grow and the budget deficit can be eliminated (eventually) if we (1) cut taxes, (2) eliminate unnecessary regulations, and (3) reduce government spending. Putting this into practice means making difficult decisions about spending priorities—just saying no. Unfortunately, Reagan lacked a Republican Congress and only accomplished 2 of the 3. President Obama moved in the opposite direction in all 3 areas during the first two years of his term, and the ongoing economic crisis is the result.

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