Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Posts Tagged ‘Economy’

The federal “jobs” bill is just more government waste!

Posted by sanityinjection on February 11, 2010

From the same folks who brought you the wildly successful federal stimulus bill, now get ready for the new federal jobs bill, intended to address the biggest problem facing the American economy right now: high unemployment. Cost? $10 billion – a real bargain compared to the last boondoggle. Trouble is, it doesn’t do what it’s supposed to do.

The theory is that properly designed federal legislation can provide incentives for private sector companies to hire more workers, thereby decreasing unemployment and strengthening the economy. And there is nothing wrong about that – in theory.

The problem comes when you try to make it work in practice. For that $10 billion cost, the estimated number of jobs the legislation is expected to create is only 80,000 to 180,000. Meanwhile, since the start of the recession, the economy has lost 8.4 million jobs.

If you do the math, using the most optimistic figure of 180,000 jobs, the cost for creating each job is about $55,500. In other words, the program creates jobs by essentially paying the first year of the job’s salary with taxpayer dollars. (Not quite, actually, as some of the spending doesn’t go to the companies but covers the government’s costs to oversee the program.) But since the federal incentives go away after the first year, what do you think a smart business owner is going to do? He’s going to hire the person, let the government pay the salary, then lay the person off after a year when the incentives go away and he can’t afford it anymore – resulting in no permanent job creation at all.

Of course, the counter-argument is that after a year’s time the economy will have improved enough that the business will be in better shape to afford to add the worker on their own dime. That, however, is contrary to most economic forecasts which suggest that the effects of this recession will be with us for at least the next two years or so.

So, while well-intentioned (and even negotiated in a bipartisan fashion, mirabile dictu!), what this bill ultimately does is waste $10 billion of the taxpayers’ money. It’s a good example of how well-meaning legislation can actually end up having a negative impact. Of course, the Republicans who vote against it will be immediately tarred by the President and the media as “do-nothings” and “obstructionists”. Here’s hoping they have the courage to do the right thing in spite of the criticism.

If the federal government *really* wants to create jobs, it should stop trying to cleverly incentivize businesses to do what they don’t want to do. Instead, it should get out of the way. Cut the capital gains tax, which will encourage more private investment in companies so that they will have the funding to add jobs where there are real jobs to be done. Also cut the corporate tax so that more companies will stay in the US or relocate here, thus preserving existing jobs for Americans and hopefully adding new ones.

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Posted in Politics | Tagged: , , , , , , | 3 Comments »

Health care? It’s the economy, stupid.

Posted by sanityinjection on July 9, 2009

I commend to your attention this superb piece by Jay Cost over at Real Clear Politics. Cost’s main forte is statistical election analysis, but in this piece he examines the Obama Administration’s priorities and suggests that the President is making a mistake in trying to expand health care coverage while the conomy is still in crisis.

To briefly summarize Cost’s analysis: He argues convincingly that America elected Obama primarily to fix the economy. He then criticizes the President for allowing the Democrats in Congress to craft a stimulus bill that would not meet the goal of a short-term boost ot the economy (as we are now seeing all too clearly) and ramming it through so quickly that there was no opportunity to improve it. Now he’s trying to move health care legislation while voters are still waiting for the promises made when the stimulus bill was passed to be fulfilled. Cost argues that by misreading what is most important to American voters, Obama runs the risk of damaging his political fortunes along with those of the Democrat Party.

It’s not that health care reform is not needed. It’s that you have to clean up one mess before you create a new one ūüôā

Posted in Politics | Tagged: , , , , , , | 1 Comment »

2008 post-election analysis and the future of the GOP

Posted by sanityinjection on January 12, 2009

RealClearPolitics, in discussing the concept of “permanent majorities” and the cycle of party dominance in American politics, gives us this interesting look back at the 2008 election:

We see that McCain’s lead over Obama holds until Lehman Brothers and AIG collapse. McCain’s numbers drop again after he suspends his campaign, and Obama’s start to rise as the Dow later starts to fall. By the time the stock market bottoms out around 8,500, Obama had the 8-point lead that he would hold through Election Day.

Without the collapse, the campaign dynamic could have been quite different. For instance, how would the country have reacted had the Obama campaign been forced to go sharply negative, rather than employing the kind of “Rose Garden strategy” it was able to employ? If one accepts that the financial collapse hurt Republicans by even a couple of points, then Norm Coleman, Ted Stevens, and Gordon Smith would have stood a much better chance of holding their seats, and Republican House losses might have been quite reduced. In other words, were it not for the timing of an event that was out of the campaigns’ control, the election could have been different.

This is significant as it pertains to the current soul-searching going on in the Republican party. Viewed in this light, 2008 does not represent any kind of wholesale rejection of Republican policies or values. What it does indicate is that the electorate lost confidence in the GOP’s ability to manage the economy, which is significant. If the Republicans want to remold themselves in response to the elections, the key to doing that would seem to be to regain the high ground on economic issues by returning to a policy of fiscal discipline. Under the Bush Administration, Republicans in Congress passed spending increase after spending increase and Bush vetoed none of them. They called for tax cuts, but without corresponding cuts in spending voters may well have wondered where those tax breaks were going to come from.

It’s true that a significant portion of the spending increase was in the defense sector. But if that is to be justified (and I think it can be), then it has to be accompanied by reductions in other areas. Instead, Bush and the GOP horse-traded away fiscal responsibility to the Democrats in return for the latter party’s support of the war funding.

Republicans are beginning the process of arguing themselves into apoplexy over whether the party should become more or less socially conservative. This argument is pointless and needlessly divisive. To borrow a phrase, “It’s the economy, stupid.”

Posted in Politics | Tagged: , , , , , , , , | 9 Comments »

This is *not* the Great Depression, part II

Posted by sanityinjection on October 15, 2008

Gregg Easterbrook explains, in language that normal people can understand, that there is a big difference between a financial panic, which is what we are currently in, and an actual recession or depression:

“Financial chaos is sweeping the world,” a New York Times lead story said last week. I didn’t notice any chaos in my part of the world — every business was open, ATMs were working, goods and services were plentiful. There are economic problems to be sure. But chaos? Collapse? Next Depression? Please, media and political worlds, let’s stop hyperventilating and show some perspective.

What is going on is a financial panic, not an economic collapse. Financial panics are no fun, especially for anyone who needs to cash out an asset right now for retirement, college and so on. But financial panics occur cyclically and are not necessarily devastating. The most recent financial panic was 1987, when the stock market fell 23 percent in a single day. Pundits and politicians instantly began talking about another Depression, about the “end of Wall Street.” The 1987 panic had zero lasting economic consequences — no recession began, and in less than two years, stocks had recouped all losses. (See John Gordon’s excellent 2004 book on the history of financial panics, “An Empire of Wealth.”) Perhaps a recession will be triggered by the current financial panic, but it may not necessarily be severe.

Politicians and pundits are competing to see who can act most panicked and use the most exaggerated claims about economic crisis — yet the fundamentals of the U.S. economy are, in fact, strong. Productivity is high; innovation is high; the workforce is robust and well-educated; unemployment is troubling at 6.1 percent, but nothing compared to the recent past, such as 11.8 percent unemployment in 1992; there are no shortages of resources, energy or goods. University of Chicago economist Casey Mulligan shows that return on capital is historically high; high returns on capital are associated with strong economies. Some Americans have significant problems with mortgages, and credit availability for business could become an issue if the multiple bank-stabilizing plans in progress don’t work. But the likelihood is they will work. When the 1987 panic hit, people were afraid the economy would collapse; it didn’t. This panic is global, enlarging the risks. But there’s a good chance things will turn out fine.

Why has a credit-market problem expanded into a panic? One reason is the media and political systems are now programmed for panic mode. Everything’s a crisis! Crises, after all, keep people’s eyes glued to cable news shows, so the media have an interest in proclaiming crises. Crises make Washington seem more important, and can be used to justify giveaways to favored constituent groups, so Washington influence-peddlers have an interest in proclaiming crises.

An example of the exaggerated crisis claim is the assertion that Americans “lost” $2 trillion from their pension savings in the past month, while equities “lost” $8 trillion in value. “Investors Lose $8.4 Trillion of Wealth” read a Wall Street Journal headline last week. This confuses a loss with a decline. Unless you cashed out stocks or a 401(k) in the past month, you haven’t “lost” anything. Nor have most investors “lost” money, let alone $8.4 trillion — crisis-mongering is now so deeply ingrained in the media that even Wall Street Journal headline writers have forgotten basic economics. People who because of financial need have no choice but to cash out stocks right now are really harmed. Anyone who simply holds his or her ground with stocks takes no loss and is likely, although of course not certain, to come out ahead in the end. During the housing price bubble of 2003 to 2006, many Americans became much better off on paper, but never actually sold their homes, so it was all paper gains. Right now many Americans holdings stocks or retirement plans are much worse off on paper, but will be fine so long as they don’t panic and sell. One of the distressing things about last week’s media cries of doomsday is that they surely caused some average people to sell stocks or 401(k)’s in panic, taking losses they might have avoided by simply doing nothing. The financial shout-shows on cable tend to advise people to buy when the market is rising, sell when the market is falling — the worst possible advice, and last week it was amplified by panic.

We’ve also fallen into panic because we pay way too much attention to stock prices. Ronald Reagan said, “Never confuse the stock market with the economy.” Almost everyone is now making exactly that mistake. The stock market is not a barometer of the economy; it is a barometer of what people think stocks are worth. These are entirely separate things. What people think stocks are worth now depends on their guess about what stocks will be worth in the future, which is unknowable. You can only guess, and thus optimism feeds optimism while pessimism feeds pessimism.

There is no way the American economy became 8 percent less valuable between breakfast and morning coffee break Friday, then became 3 percent more valuable at lunchtime (that is, improved by 11 percent), then became 3 percent less valuable by afternoon teatime (that is, declined by 6 percent) — to cite the actual Dow Jones Industrials swings from Friday. And the economy sure did not become 11 percent more valuable Monday. Such swings reflect panic or herd psychology, not the underlying economy, which changes over months and years, not single days. For the past few weeks pundits and Washington and London policy-makers have been staring at stock tickers as if they provided minute-by-minute readouts of economic health, which they do not. It’s embarrassing to see White House and administration officials seemingly so poorly schooled in economic theory they are obsessing over stock-price movements, which they cannot control and in the short term should not even care about.

Consider this. On Black Monday in 1987, the market fell 23 percent. If you had invested $100 in a Dow Jones Index fund the following day, it would be $460 now, a 275 percent increase adjusting for inflation. That’s after the big slide of the past month, and still excellent. So don’t panic, just hold your stocks. And if you’d invested $100 in real estate in 1987, it would be $240 today, a 30 percent increase adjusting for inflation. That’s after the housing price bubble burst. A 30 percent real gain in 20 years isn’t a great investment — until you consider that you lived in the house or condo during this time. To purchase and live in a dwelling, then come out ahead when you sell, is everyone’s dream. Not only do stocks remain a good buy, America on average is still coming out ahead on the housing dream. (This example uses the Case Shiller Index for the whole country; because housing markets are local, some homeowners have lost substantial ground while others enjoyed significant appreciation.)

Economic problems are likely to be with us for awhile, but also likely to be resolved — the 1987 panic and the 1997 Asian currency collapse both were repaired more quickly than predicted, with much less harm than forecast. Want to worry? Worry about the fact that the United States is borrowing, mainly from foreign investors and China, the money being used to fix our banks. The worse the national debt becomes — $11 trillion now, and increasing owing to Washington giveaways — the more the economy will soften over the long term. It’s long-term borrowing, not short-term Wall Street mood swings, that ought to worry us, because the point may be reached where we can no longer solve problems by borrowing our way out.

Posted in Current Events, Domestic News, Politics | Tagged: , , , , | 5 Comments »

Now that the bailout passed…what next?

Posted by sanityinjection on October 6, 2008

Free falling stock markets around the world today are a reminder that despite the federal bailout legislation, the economy is not going to rebound overnight. Having taken emergency measures to stave off a severe depression, what long-term steps should we be taking to improve the US economy?

Zachary Karabell has a piece up in the Wall Street Journal today arguing that America’s fundamental economic problem is its failure to adapt to a changing global economy in which we are no longer an economic superpower, but merely the greatest of a handful of powers. He cites enormous transfers of wealth out of the US and Europe to Asia and the Middle East over the last 5 years. The US imports goods and commodities at a furious rate but is not seeing that capital outflow reinvested in the US as it once would have been.

Karabell suggests two major changes that need to occur to put us on a sound long-term footing. The first is to achieve greater energy independence, so that we can stop sending trillions of dollars to OPEC and Russia. This of course has to involve a broad spectrum of energy investment, including offshore oil drilling and alternative energy sources. There is no reason why, in ten years, the majority of homes in the US cannot be heated by domestic natural gas, powered by a more diverse cocktail of sources including nuclear and wind energy, and have an electric car charging in the garage.

The second major change is to decrease the corporate tax rate, which is much higher than in Europe or Asia and creates a disincentive to operate businesses here (which means fewer jobs) and keep profits here. Karabell argues that arguments about the fairness of having corporations bear more of a share of the tax burden than middle-class working families are not wrong so much as obsolete, because the ability of companies to locate overseas makes it too easy to evade corporate taxation. Why have a high tax rate if it cannot be practically collected? Better to take a smaller piece of what will be a resultingly larger economic pie.

Article is here: http://online.wsj.com/article/SB122325757745406687.html

Posted in Domestic News, Politics | Tagged: , , , , | 3 Comments »

What about a “trickle-up” mortgage bailout?

Posted by sanityinjection on October 1, 2008

The Washington Post has a column today by two Yale professors with an interesting alternative baliout proposal. Instead of bailing out mortgage-backed securities to stablize the markets, what if we paid off the actual mortgages? Effectively, the government would be buying and renegotiating the mortgages. This would immediately re-value the mortgage-backet securities, healing the market from the bottom up instead of the top down, while also providing relief for homeowners. The government could take an ownership interest in the actual real estate instead of in securities.

I’m not sure if I buy this, but it is an interesting proposal and worth taking a moment to read:

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR2008093002316.html

Posted in Politics | Tagged: , , , | 2 Comments »

Bailout redux: From bad to worse?

Posted by sanityinjection on October 1, 2008

In the wake of the failure of the bailout legislation, Congress is back with a new attempt. The strategy this time is to pass a revised bill in the Senate first, putting pressure on the House to go along.

This legislation is the same as the last bill except with “goodies” added to it to try to entice more legislators to vote for it. The biggest change is that the bill would raise the limit of bank deposits insured by the FDIC from $100,000 to $250,000. This is supposed to improve confidence in banks and supposedly enjoys widespread bipartisan support. But if that’s true, why wasn’t it in the original bill?

Answer: Because it’s a total red herring. Individual investors rarely keep more than $100,000 in depository accounts (nor would it help the economy if they did), so it would be mostly small businesses affected by the change. The real problem, though, is that the FDIC doesn’t have enough money to cover all its potential obligations now, yet this proposal would more than double them. It’s a shell game because the money to bail out the FDIC would ultimately have to come from Treasury, which would require additional authorization.

The legislation also contains a package of tax incentives – one for the left (alternative energy), a couple¬†for the right (AMT relief, business R&D), and a couple of random ones (child tax credit, tax relief for flood victims.) I don’t have any real objection to these – the AMT provision is actually something I strongly support – but none of it has anything to do with the point of the bill! None of these tax provisions will do anything to stabilize the financial sector in the short term – they are political bones being thrown to legislators in order to gain votes for the bill.

The overall effect is that the bill has become more intellectually dishonest than it was before, and the price tag goes up by about $100 billion. Any Congressman who switches to a Yes vote on this bill should be ashamed of themselves for selling their principles down the road in exchange for candy. Still, I shudder to think what will happen if this second attempt fails, as whatever comes next is almost certain to be even worse.

More on the FDIC provision here: http://politicallydrunk.blogspot.com/2008/09/is-now-really-time-to-increase-fdic.html

Posted in Politics | Tagged: , , , | 2 Comments »

This is *not* the Great Depression

Posted by sanityinjection on September 29, 2008

As Congress votes on the financial bailout legislation, the media continues its coordinated hysteria campaign to convince us that we are on the verge of a second Great Depression. Irwin Kellner at MarketWatch.com chimes in with the economic facts that suggest the sky is not falling, at least not yet:

  • In the crash of 1929 the Dow Jones industrials¬† plunged 40% in two months; this time around it has taken a year to fall 22%.
  • The jobless rate jumped to 25% by 1933; it is little more than 6% today.
  • The gross domestic product shrank by 25% during the early 1930s; it is up over 3% during the past year.
  • Consumer prices fell by about 30% from 1929 to 1933; and the last time I looked they were still rising.
  • Home prices dropped more than 30% during the Depression vs. about 16% today.
  • Some 40% of all mortgages were delinquent by 1934 compared with 4% today.
  • In the 1930s, more than 9,000 banks failed compared with fewer than 20 over the past couple of years.
     Remember also it was policy errors, not the stock market crash, that caused the Great Depression:
  • Instead of increasing the money supply, the Federal Reserve of that era reduced it by one-third.
  • Instead of lowering taxes, Herbert Hoover raised them.
  • And to channel whatever demand was left into U.S.-made goods, the government enacted the Smoot-Hawley Tariff Act to keep out foreign products; this only provoked our trading partners to do the same.
Add to this today’s automatic stabilizers such as unemployment insurance and Social Security, the¬†FDIC to insure bank deposits and circuit breakers to keep stocks from falling too quickly, and you can see why this is not a depression in any way shape or form.

 

Full article is here: http://www.marketwatch.com/news/story/dont-call-bailout/story.aspx?guid=%7B0A2E0398%2D2E89%2D4F7F%2DB8C7%2D4150783B1B2E%7D

Posted in Domestic News, Politics | Tagged: , , , | 1 Comment »

First crack at the big bailout

Posted by sanityinjection on September 25, 2008

Canadian David Warren points out that those who are blaming capitalism and free markets run amok for the financial crisis couldn’t be more wrong:

http://www.realclearpolitics.com/articles/2008/09/bailout_blues.html

In fact, one of the major factors that led to the creation of the dubious subprime loans was *anti-capitalist* pressure, from governments, non-profits, and discrimination lawyers,¬†on financial institutions to ignore credit math and create programs to help poor people with bad credit buy homes. We were told that home ownership was a basic human right – but that means that the financially irresponsible have that right, too. Not that this excuses deceptive, fraudulent, and manipulative practices by the firms in question and their CEOs. But it does suggest that maybe regulation of the industry by people with agendas other than the smooth sailing of the economy isn’t the best solution.

Posted in Current Events, Domestic News, Politics | Tagged: , , , , , , | 6 Comments »

Are you better off than you were 8 years ago?

Posted by sanityinjection on August 27, 2008

That’s the question that always gets asked around election time. The assumption is that if voters feel they are better off (generally, but specifically in an economic sense) than they were when the incumbent took office, they will vote for the party in power. If not, they’ll vote for the other party. This conventional wisdom was firmly established in 1980 when voters punished President Carter and the Democrats for the oil shocks and general economic malaise of the late 1970s.

In 2008, the assumption is that the voters will similarly punish the Republican party for the status of the economy. But according to Investor’s Business Daily, looking strictly at incomes, Americans are in fact better off economically than they were when George Bush took office:

http://ibdeditorials.com/IBDArticles.aspx?id=304643903414901

Of course, this will not be a compelling argument to someone who has lost their job or had their home foreclosed. Yet there does seem to be a fair amount of evidence that although certain sectors of the economy are struggling, and high oil prices are a challenge for everybody, viewed as a whole things are not nearly as bad as the media would have us believe. Our current oil crisis, in real terms, pales before the oil shocks of the 70s, and our economy is far more robust than in the days of “stagflation”. We have had only one quarter of negative growth – not enough to be technically a recession.

The truth is that the President has much less of an impact, and deserves far less of the credit or blame for economic success or failure, than most people realize.

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