Browsing the blog archives for October, 2012.

Obama’s Plan (finally)


With only controlled and largely favorable interviews remaining before election day, President Obama released his so-called jobs plan. While he spent the last several weeks hammering Mitt Romney for a lack of specifics on his economic proposals, the President chose not to release his “plan” until after the final debate. The document is well crafted and reads as if Obama is the challenger, not the incumbent. His ideas for big government solutions to our current economic problems are largely unchanged from his rhetoric four years ago, leaving us to wonder why we continue to have the same set of problems.

While Obama’s plan is seriously flawed, most of the issues have already been addressed herein. Nonetheless, his entire plan can be debunked by reading the title page:


First, there is nothing NEW about this proposal. Virtually every issue it covers—from education to job growth to energy—is linked to a new or expanded government program. History is replete with philosophers, politicians, and economists whose solutions to social problems always seem to reside with government intervention and wealth redistribution, not individual initiative and innovation. Obama is simply repackaging the same collectivist ideas of the past.

Second, there is nothing PATRIOTIC about this proposal. The President seems to argue that our economic and social problems could be solved if only “the rich” would sacrifice a little more of their wealth. Patriotism used to be associated with individualism—enjoying life and caring for yourself so that you won’t become a burden to society. In Obama’s world, patriotism is associated with the collective—a transfer of wealth from those who earned it to those who did not by way of government bureaucrats, all in the name of the “common good.”

Finally, government cannot create both JOBS and SECURITY. Jobs are created in the private sector when individuals and firms are free to develop new ideas, products, and services. Economic development creates both opportunities and insecurity as some companies fail or restructure as part of the process. A government committed to “middle-class security,” by definition, must seek to slow down economic activity. This approach assumes that free enterprise is flawed and must be managed by central planners. We’ve tried this for the last four years and the economy is not moving forward.

A good example of the jobs-security problem is the GM bailout. The President’s claim to have saved a million jobs is preposterous because it assumes that GM would have ceased to exist if it had entered a normal bankruptcy without government favors. But even if GM dissolved, its customers would look to other manufacturers to fill the void, and they would need to employ workers just like GM. Instead, Obama chose security and stability. The taxpayers have lost billions, GM remains an inefficient carmaker with a precarious future, and consumers have been denied the improvements in products and services that occur when the government doesn’t pick winners and losers.

There’s a lot more to critique in Obama’s plan, but I think it’s best to focus on the big picture. This election is about the roles, responsibilities and powers of the individual versus the state. The President has clearly staked out his position on the side of the state.


The State of the Economy


With only 16 days until the election, President Obama and many in the mainstream media are making the case that while challenges remain, the US economy is headed the right direction. The Dow has risen over 60% since Obama took office, unemployment has declined back to 7.8%, interest rates are low, and inflation seems to be in check. Could there be some merit to this argument? Examine the big three indicators–GDP, unemployment, and inflation–and you find no room for optimism.

1. Gross Domestic Product is anemic. GDP is projected to increase this year at a rate below that in 2011, which was lower than in 2010. While GDP isn’t a perfect representation of economic vitality, declining growth rates is a clear sign that the economy is stagnant.

2. Unemployment is worse than 7.8%. Official unemployment figures do not include frustrated jobseekers and count part-time workers who would like to work full-time as employed. Factor these into the equation and you get a true unemployment rate close to 15%.

3. Inflation will be a serious problem in the near future. The CPI (for technical reasons) understates the extent to which prices have been rising in the last few years, but the real threat is around the corner. The Fed’s rapid expansion of the money supply through quantitative easing has set the state for a serious middle term problem with inflation. As Milton Friedman put it, “inflation is always and everywhere a monetary phenomenon.” Put another way, expanding the money supply always devalues the currency, and currency devaluations can always be traced to expansions in the money supply. While the lag time can vary from months to years, the direct link between the quantity of money and price inflation is a nonnegotiable law of economics. Hence, the Fed’s failed intervention designed to stimulate the economy in the short term will be financed by the most insidious of all indirect taxes, a weaker dollar.

As we can see, the verdict for the last four years is not good. Unfortunately, prospects for the next four years are mixed at best. First the good news…GDP and unemployment can be addressed with proper economic policy. A simpler, less intrusive, and more predictable regulatory structure, and a flat tax–or even a two-tiered system with a very limited number of deductions–can remove many of the governmental influences that stymie individual and business decision-makers. Corporate America is sitting on an estimated $2 trillion in cash and real expansion and hiring will occur if Obama’s anti-business bias is replaced with a pro-business outlook.

But now the bad news…When business investment picks up, the economy will begin to feel the inflationary effects of several founds of QE activity. The seeds for long term damage have already been sown, and it will be difficult if not impossible for either candidate to sidestep this reality. If Obama inherited the Bush recession, then Romney would inherit Obama deficits and Bernanke inflation.

If elected, Romney could take the first step in turning the economy around. But while a departure from Obamanomics would be a welcome change, we shouldn’t expect too much too soon. The kind of economic overhaul necessary will require a complete change of perspective on the role of government in a free society. The occupant in the White House would be a good place to start, but the job won’t end there.


China, Trade & Politics


The Chinese trade dilemma is now a campaign issue. Although the Obama Administration is filing a WTO case against China claiming at least $1 billion in government subsidies related to autos and auto parts, the White House has delayed making an official determination on China’s currency policy. Mitt Romney says he will immediately classify China as a currency manipulator if elected. I’ve discussed China trade issues in previous posts, but they’re worth revisiting in the context of the election.

For starters, Obama’s claim about the Chinese auto industry has merit, but the WTO case is preposterous. Indeed, the Chinese government has ownership positions in a number of automakers and suppliers, and its policies have favored Chinese firms over foreign companies. But our own bailout of GM has been followed by various government schemes to support the automaker (and the U.S. auto industry in general), from cash-for-clunkers to green energy grants to Volt subsidies. The U.S. government lacks the moral authority to address this issue at the moment.

Of course, China does manipulate its currency, pegging the yuan in part to the U.S. dollar. This lowers the price of Chinese goods in American markets, a positive for U.S. consumers but a negative for U.S. businesses. The extent to which this occurs is debatable, although economists have suggested that a free floating yuan would rise in value by 20% or more. To suggest that it doesn’t contribute to the plethora of Chinese goods on shelves of American retailers is nonsensical. But the currency issue should have been negotiated firmly years ago. Today, an entire global economy has been built on an artificially weak yuan.

Global trade makes economic sense as long as the governments involved play reasonably fair and are not hostile to the United States. Problems with China such as currency manipulation, state ownership and control of Chinese firms, and intellectual property rights protection must be addressed. Those who suggest that doing so will “spark a trade war” are dooming the U.S. to permanent trade disadvantage. The goal should be free trade, not protectionism. Smoot-Hawley taught us in 1930 that harsh, retaliatory trade legislation usually leads to tariffs and restrictions from our trading partners.

Beware of those who do not understand both sides of the global trade dilemma. Protectionists claim that they support free trade as long as it is fair, but their policy proposals are often highly restrictive and naive. Global trade is good for consumers and creates jobs for American exporters. Any way you slice it, a reduction in trade hurts our economy. On the other hand, some business leaders oppose any government action designed to address fairness issues. They are willing to overlook problems like an artificially weak Chinese currency because they fear retaliation from our trade partners.

We should insist on both free and fair trade. Romney appears to understand this balance and is calling for firm negotiations, not a trade war. While China should not be a scapegoat for our largely self-inflicted economic woes, there are serious trade issues that should be addressed. We can do better.


A GM Triple Play


Just when you think you’ve seen all of the government subsidies for GM another one appears. But this one has three problems, not just one.

In 2010 Michigan manufacturer Compact Power received a $150 million government grant to produce batteries for electric vehicles, including the Chevy Volt. Given the weak consumer demand for the Volt, Compact Power has furloughed some of its workers before producing any batteries for the Volt. But this is more than just another green jobs debacle like Solyndra. Any batteries eventually produced and shipped to GM will be underwritten by the taxpayers, enabling GM to obtain them below actual production cost and ultimately understate its own production cost for the Volt. To make matters worse, Compact Power is a subsidiary of South Korean giant LG Chem, meaning that Washington is not only subsidizing GM, but its foreign suppliers as well.

So American taxpayers are (1) supporting a failed green jobs program for (2) a foreign-owned firm with the intent of (3) subsidizing production costs at GM. I guess the central planners are trying to kill 3 birds with one stone.


The California Pension Plan


At a time when most states and private organizations are trying to shed the liability associated with guaranteed and defined benefit retirement programs, California is moving in the opposition. The plan still has another legislative hurdle, but it appears to have the political support necessary for passage. Under the proposal, an estimated 6 million California residents without retirement plans would have 3% of their wages placed in a retirement unless they opt out. The state would administer the fund and guarantee a minimal return.

There is an upside to the proposal. Individuals without retirement accounts are destined for dependence on Social Security, a program whose long term solvency is questionable and whose retirement payouts are modest at best. If 6 million Californians aren’t saving on their own, they need to start. This having been said, the proposal has serious problems. I’ll address 3 of them here:

1. There is no reason why any government–federal, state, or local–should be in the business of guaranteeing returns. Allegedly private insurance companies will guarantee the returns, but what happens if they fail, or when program advocates begin to complain that the guaranteed rate of return cannot keep pace with inflation? One way or another, taxpayers will share the risk.

2. Although we are told that these retirement contributions will not be mixed with state revenues, this is unlikely over the long run. The existence of the so-called Social Security lockbox hasn’t kept contributions from being “loaned” to the federal government for years. California is already strapped for cash. If these retirement funds are “invested” in state and municipal-backed securities, then they become state-backed by default. It’s unrealistic to assume that state government officials won’t leave these funds alone when state debt continues to grow. And if Washington ever steps in to bailout state pension programs–something Illinois Governor Pat Quinn has already proposed–then U.S. taxpayers will be underwriting the California scheme.

3. Proponents tell us that the plan is limited and optional, but there is little reason to believe that it will stay this way. Social Security was launched with a 2% tax rate. In fact, the maximum tax paid in 1950 was only $60 per individual. Today (not counting the temporary cut), the ceiling is well over $13,000. Targeted, limited, and optional government programs rarely stay that way. Mark my words…as soon as this programs is underway, its defenders will be calling for “employee contributions” to boost returns.

Supporters of this retirement scheme claim that they merely wish to encourage Californians without retirement plans to save on their own. However, the Social Security program already extracts 12.4% of all income up to $110,100 and cannot provide a level of income necessary to sustain a reasonable retirement. We don’t need another government retirement program; we just need to overhaul the one we already have and encourage individuals to save on their own.