The Real Truth About the Economy...

I'm good for 3 or 4 of the 1.4 million hits on [MoveOn.org's] video below. I gotta tell ya, I'm amazed at how Economist, and former U.S. Labor Secretary, Robert Reich can illustrate "The Truth About the Economy" in a mere 2 minutes, 15 seconds. But I suppose offering up talking points, with no more than surface (and suspect) justifiers, is how you influence/motivate/mislead your everyday voter. Most folks (not you of course), alas, won't commit five minutes (could be Facebooking) to get to the "real truth".

I toyed with the idea of offering up my own rendition of "The Truth About the Economy" (with statistics I've previously cited on this blog), but luckily for me - and you - Professor Don Boudreaux (video #2 below) beat me to it. The thing is, he takes a whole 5 minutes (a Youtube marathon to "most folks") to address only Reich's first, 27 seconds long, bullet point. I.e., getting to the real truth requires a little scratching of the surface.

If you at times find yourself sympathetic to the pathetic argument that life in these United States has been somehow "unfair" to the middle-class, PLEASE take a few minutes and consider the facts.

http://www.youtube.com/watch?v=JTzMqm2TwgE&feature=youtube_gdata_player

http://www.youtube.com/watch?v=s6FmhXQ32Wo&feature=youtube_gdata_player

It's All About Lasting...

John has a half-million dollars in his 401(k)... Ten years ago he had a hundred thousand... So why was John happier ten years ago? Because four years ago he had $600,000... He's thinking the market stinks...

In March 2009 Jim Jr. inherited a $285,000 retirement account that's now worth $500,000... He's thinkingthe market's wonderful... Jim Sr., the deceased benefactor, died of unknown causes... Friends suspect it was due to stress over seeing his 401(k) drop from its $600,000 peak in October 2007...

Mary has a half-million dollars in her rollover IRA (used to be her 401(k))... Ten years ago she had a hundred thousand... Four years ago, like John, and Jim Sr., she had $600,000... But, oddly, she's relatively happy... Why? Because in March of 2009 she became eligible to roll her 401(k) to an IRA under new management - at the time it was worth $285,000... She thinks the move to the new account is the reason for her dramatic [partial] comeback...

Bart (colleagues call him Lucky) enjoys an 11 year stint advising the investment committee of Goodperson Foundation's endowment fund... The fund's up a million dollars "for his efforts"... He gladly takes the credit... "He's so much better than the advisor they fired December 2002 (at near-bottom of the infamous tech-bubble bear market)", or so say the committee members... But is he? The portfolio, while sporting different titles within (Bart bought XYZ while his predecessor bought ABC), looks, from an asset allocation standpoint, very much like it did under previous management... I.e., that's why they call him Lucky...

Bottom line folks; while some would say it's all about timing, I'd say it's all about perspective... With regard to advice: While, at the margin, a good/honest advisor can bring value in terms of education, planning, asset selection, and, more importantly, helping you not make the big mistakes, it's all about lasting the bear markets - and of course maintaining the equity/fixed-income mix best suited to your circumstances...

Subsidies = Bad Idea!!

The President says we should stop subsidising big oil and "double down" on green energy... I agree with the first part...

Many a politician, manufacturer and union rep would have us believe China cheats when it comes to trade... When we're talking subsidies, I agree... They are... But it's not you and me they're cheating... Per my illustration below:

The Curious Case of Chinese Tires

Here's legitimate economist, Don Boudreaux, blogging at cafehayek.com... Ironically, his book Globalization inspired my finger-painting below, although Chinese tires wasn't then his chosen topic (as it was in my scribble):

Lobbyist Scott Paul details the bounty that American tire producers now reap from the Obama administration

The Curious Case of Buffett and Bosanek

Debbie Bosanek, secretary to Warren Buffett and honored guest at Tuesday's State of the Union address, "pays a tax rate of 35.8 percent on her income", according to that bastion-of-truth-and-impartiality, ABC. You're thinking that's Federal Income Tax, right?

Let's do the math:

For starters, at a 35.8% tax rate, she's doing quite well for a secretary (but hey, she works for one of the richest cats on the planet)... So, for the sake of illustration, let's give her a taxable income of $100k:

Federal Income Tax: She'll pay $850 on the first $8,500, $3,900 on the next $26,000, $12,275 on the next $49,100, and $4,592 on the remaining $16,400... For a total of $21,617 or 21.62%... Hmm, that's not 35.8%?

Oh that's right, she lives in Nebraska, where she takes a state tax hit of $6,840... Now we're at $28,457 or 28.46%... Closer, but still not 35.8%...

Now wait a sec, if we go back to 2010, before the "payroll tax holiday", we gotta add another $7,650 for payroll taxes... Now we're at $36,107... That's it!! That's 36.11%... Back off a bit for deducting state taxes paid and I'm guessing you get close to ABC's #...

Now let's go back to Federal income tax, because that's where the adjustments would come: The President says millionaires should pay income taxes at a rate no less than their secretaries'... According to USA Today (taking from IRS data), millionaires pay, on average, an effective 24.4% federal income tax... Looks like they're already there...

So then, from a purely Federal standpoint, it's payroll taxes (Social Security and Medicare), not income taxes, that bring her tax "rate" well above her boss's... But that's not all bad considering she'll get almost $30,000 a year from social security (assuming she calls it quits at 66)... And, given the cost of medical care, God knows how much benefit from medicare...

But, you say, the Federal Budget's $1.5trill over-spent, and Social Security's on a collision course with a brick wall... Yep... And no doubt we'd agree it's the fault of the system we've created... However, alas, some would say the system (not hard work) has rewarded those who make great money and punished those who don't, and that's why we're in this fine mess... Honestly, can you get your head around that one?? Seriously, if you can, please clue me in...

By the way, if we'd simply step back, just a bit, and (govt) spend at 2007's rate, we'd have a balanced budget right now... Again, clue me in as to how the "1%" put us in this position...

All that aside, when we break it down, the problem in the case of Buffett and Bosanek is Nebraska... Nebraska billionaires aren't paying their fair share... I therefore propose, in the interest of fairness (screw practicality), that the Nebraska state income tax on folks earning over $250,000 per year be raised to 18%... That'll surely bring Buffet and Bosanek to par, and it'll do wonders for Nebraska's budget... That is until all the businesses move to Texas...

Pardon my cynicism...

"all lies and jest, still a man (voter) hears what he wants to hear and he disregards the rest" Simon and Garfunkel

Romney: "I'm smart enough to make and keep a few hundred million, turn around the Olympics and help build dozens of great companies, but I am utterly clueless when it comes to international trade, and I'm scared *^#%!less to show you my tax returns."

Gingrich: "I never lobbied on behalf of any government sponsored enterprise. They paid me that $1.5 million for a history lesson. And I'm appalled that anyone would dare suggest otherwise! Just look at the contract."

Santorum: "I'm for free markets and smaller government. That is, after big government does every favor imaginable for manufacturers."

Voter L: "Congress has done nothing but obstruct the President's efforts to turn this economy around. It's the Republican's fault that, since Mr. Obama took office, the national debt's up 50% and the U.S. will spend $1.5 trillion more than it'll take in this year. I don't care that the Dem's ruled both houses during the first two years of his term, it's all their (the Republican's) fault!"

Voter R: "Last thing we need is another career politician in the White House. Some wordsmith with no real private sector experience. That's right, I'm for Newt all the way!"

Obama: As follows (now listen closely... And don't think for a minute your guy wouldn't do the same... Our job, when considering today's lineup [not just for theOffice of the President], is to choose the lesser [evil] of all the weasels)...

http://www.youtube.com/watch?v=eQdwr-xNJIU&feature=youtube_gdata_player

Once skinny kittens - And - Do the math on dividend taxes...

When we talk about fairness (lack thereof) in this country, make no mistake, we're talking about outcomes (haves vs. have-nots), as opposed to opportunities. When we're talking about the share of the pie growing faster for the 1%, we're not talking entirely about current 1%ers. There's been substantial movement in and out over the years---that is, a number of today's "fat cats" were yesterday's skinny kittens. And many will only suffer the humiliation of inclusion into the 1% for a single year---due to selling the farm, the family business or the coastal residence (their capital gain explains their relatively low tax rate). When we talk in terms of shared responsibility, we're obviously not talking about the fact that the top 1% paid 25% of all taxes in 1991 and 37% in 2011. When we're talking about the Buffett Rule, we're not talking about taxing earned income, we're talking about taxing investment results.

When an investor sells stock in XYZ to buy ABC, she pays capital gains tax on gains on XYZ, even when she uses all the proceeds to buy ABC. She therefore either has to invest less in ABC, or use some of her earned income (on which she already paid taxes) to pay the tax due on the gain on XYZ.

When a billionaire receives his income via corporate dividends and pays that shameful 15% tax, those who'd have us believe he's gained an unfair advantage, strategically leave out the fact that that income to the corporation (owned by shareholders) was taxed first at 35%, then distributed as a dividend (no deduction to the corporation) to be taxed, once again, at 15%. You do the math.

Now, having done the math ($1mill income to the corp [owned by shareholders] costs $350,000, the remaining $650,000 dividend to the shareholder costs $97,500, for a total tax on the $1mill of $447,500 - or - an effective tax rate of 44.75%), when it comes to dividends, are you still thinking the fat cats are getting a break? Now be honest...

January 25, 2012 TV Segment

The manufacturing evolution...

Rick Santorum, duringlast week's CNN candidates debate,attempted to make the case for a zero corporate tax for the manufacturing industry, and 17.5% for everybody else... He stated that the cost of doing business in the U.S. makes manufacturing goods more expensive, versus our overseas "competition"...

His intentions (noble as they are) notwithstanding, government picking winners (favoring one industry over another) is cronyism by definition... And that's where we get into trouble... If you give preferential tax treatment to one industry, make no mistake, others will lobby hard to convince you that they are every bit as critical to the growth of jobs in this country(or, sinisterly speaking, that they will more strenuously promote your ambitions)... Net result; more companies devoting more resources to lobbying Washington and less to expansion (jobs), etc...

There's forever an evolutionary process with regard to manufacturing; involving gains in technology and the movement of production to wherever cheap/efficient labor resides... And, trust me, that's precisely how it should be... Take Hong Kong for example: After WWII, Hong Kong quickly became an export-driven manufacturing center... During the ensuing years however, it underwent a nearly 100% transition to a service-based economy (accounts for 90% of GDP)... And today boasts one of the most robust economies on the planet...

The following sentence taken from the Economic Freedom Index (ranks #1) website's summary of the Hong Kong economy says it all:

"Regulatory efficiency and openness to global commerce strongly support entrepreneurial dynamism, while overall macroeconomic stability minimizes uncertainty."

I suspect regulatory inefficiency (and its attendant uncertainty) has much to do with the U.S's anything-but-robust economy (of late), as well as its plunge from #3 to #10 on the Economic Freedom Index...

Guest Blog: Bloice C. Davison, III

One More Benefit of Free Trade

by Bloice C. Davison, III

Economists can explain the effects of tariffs using supply and demand diagrams. Supply and demand diagrams, however, show the effect that tariffs have on the supply and demand of a specific good or service, not the effect that the tariff may have on an entire economy. How can one demonstrate the effect that tariffs have on national wealth generally? One mathematical tool that can shed some light on the effects tariffs have on national wealth is correlation.

What is correlation? Correlation means that two or more sets of numbers have a mathematical relationship. If two variables are correlated, then they vary together. If the relationship is linear, then there are three basic types of correlation: positive, negative, and none. A positive correlation means that as one variable increases so does another. A negative correlation means that as one variable increases another decreases. No correlation occurs when one variable increases and there is no corresponding increase or decrease in another variable.

Correlation does not always mean causation. For example, when ice cream sales increase crime tends to increase as well. No rational person believes that ice cream sales cause crime. So what is happening? Both variables are connected by another one that is, at first glance, unseen (economists love the unveiling the unseen versus the seen). The common variable between the two, known to statisticians as a lurking variable, is the summer time. Crime and ice cream sales appear to be influenced by the seasons but not by each other.

There are, however, times when two variables are likely connected by a cause and effect relationship. College administrators are well aware of the positive correlation between SAT scores and academic performance. As SAT scores increase, GPAs tend to increase as well. The data points tend to lie close to a trend line, a line that

It's American to be Rich!

Don't let em fool ya... these wannabe-presidents are way rich... And, while running for office, they're not at all proud to be so... In fact, the richest-of-them-all so doesn't want you to know his financial worth, nor see his shamefully dismal 15% tax hit, that he's trying mightily to hold off exposing his tax return till he's the shoe-in candidate - or until his CPA does 2011, which I'm guessing had less in capital gains than 2010...

God forbid the richest country in the world should be led by a rich dude! No way! We need somebody like us! You know, a blue-collar-type we can relate to... Like Joe from the assembly line... Or Joe the plumber, who got in The President's face, and put him in his place, a few years ago... Joe can relate!

That's right, Joe the Plumber for President! All kidding aside, given the characters who've occupied the White House the past few terms, good old Joe might be a fine pick...

But here's my thing... It's okay to be rich... It's American to be rich... I'm thinking the President ought to not need the paycheck... I'm thinking the President ought to be someone who's made it in the private sector, who knows how the puzzle works itself in a free-market... I'm thinking the President does not need to relate to Joe Lunchbucket's plight... I'm thinking the President needs to relate to how good companies work, how to not over-regulate and tax them, how, in essence, to get government the hell out of their way so they can pay Joe a descent wage and offer him the opportunity to advance...

Seriously: As my man Milton says in this video:"is there one of you who would say you don't want a doctor to treat you for cancer unless he himself has had cancer?"

http://www.youtube.com/watch?v=fKc6esIi0_U&feature=youtube_gdata_player

No Kidding; the cap gains rate should be 0%....

So, after years of self-imposed austerity, Walter, the Wal-Mart Store Manager manages to sock away, in passbook savings, a tidy $75,000; the remains (after contributing to govt employment and a few bailouts) of $100,000+ of unspent income... It's March 2009 and Walt's thinking, at Dow 6,500, the stock market just might sport an opportunity or two... So he buys the Mt. Everest Smallcap Fund (I made that name up, I think... If there is such a titled fund, this is not my endorsement) and lo and behold he was right (lucky); his original $75,000 investment sits, a mere 3 years later, at $130k and change...

Meanwhile, residential real estate continues to languish... Walt, now a self-proclaimed investment swami, is thinking property's where he'll find his next 80% quick hit... So he begins his "research", looking to put down the whole $116k... Now wait a sec, you thought he had $130k? Nope, fraid not... You forgot about the 15% capital gains tax, plus the bloke lives in California (ugh)... You know; all those govt jobs and future bailouts take money...

So let's get this straight... Walt earns $100k+, which is taxed as ordinary income... Then, rather than spending the remaining $75,000 on immediate stuff, tax -free (like the rest of the 99%ers), he invests it in growing, job-generating companies, then gets penalized to the tune of $thousands (for actually doing something productive with it)...

Folks, the cap gains rate does not even begin to, or even remotely, prove that the code favors the rich, as this New York Times editorial would have you believe... I'd say, unequivocally, the opposite... The tax code clearly rewards spending, for again, our man Wally could've simply blown the $75k entirely tax free, affording him no opportunity to ever become rich...

In the end, alas, the code favors 0% of the population... For, by taxing investment, there's less to invest, meaning less capital in the private sector, meaning less job growth and therefore less income taxed at ordinary income rates... The only truly "fair" cap gain rate, if "fairness" is what you're after, would be 0%...

January 18, 2012 Market/Economic Report (video)

January 11, 2012 Market/Economic Report (video)

Cronyism in America (video)

As I've often expressed herein, the Occupy Movement and the Michael Moore's of the world would, intentionally (I believe in Moore's case) or otherwise (I believe unintentionally in the case of many of the misinformed "occupiers"), have you and I mistake cronyism for capitalism... Per this video:

"Germ-Free" or "How Not to Become a Five Handicap" or "Who the Hell is Goethe"

Whether we're talking the politician with no business experience or the equally-sheltered PhD Fed Chairman, I'm thinking the perplexities in public policy we free-market types like to point out has much to do with the fact that today's policymakers (so many of them) were reared in an essentially germ-free environment... It's like that study of immune systems; the one where scientists placed a group of chickens in an optimally comfortable environment, perfect temperature, plenty of the best feed, no risk or challenges whatsoever. After a few generations the scientists placed the offspring of these chickens in a normal environment.They all quickly died

A Bloat of a Different Color...

What if I told you you're currently netting, on average, 250 calories/meal more than you're burning off daily... Now you tell me, would you be fatter or skinnier a year from now?

Let's say you arrange your daily activities so as to net minimal physical stress... Now you tell me, will your bones and muscles be more or less dense, will they possess more or less capacity a year from now?

What would you say if I told you you could lose weight by increasing your caloric intake by 70% daily? And what if I told you you could become physically stronger while exerting even less over the next 12 months?

As much as you'd love to believe me, you'd tell me I'm full of it...

But what if I were the recipient of the Nobel Prize in Nutrition (were there such a thing), would you believe me then? Sadly, some of you (those who'd do just about anything not to diet or workout) would... But, alas, my academic prowess notwithstanding, me saying it wouldn't amount to hill-a-pork-n-beans twelve months from now...

Now what if I told you you're spending 70% more than your annual income... You tell me, will you be richer or poorer a year from now?

Andwhat would you say if I told you you'd be in better fiscal shape if you spent even more over the next 12 months?

I'd be full of it, right?

But what if you were a company? Still full of it... Ah, but what if you were a nation? Now there's a bloat of an entirely different color... For at least one Nobel Prize winning economist, and oodles of pandering politicians, would have you believe that very thing... The question is, do you believe them?

Kool-Aid-drunk or not....

If the Administration's order for a rate-hiking insurance company to "immediately rescind the rates, issue refunds to consumers or publicly explain their refusal to do so" (per the secretary of health and human services, Kathleen Sebelius's "wielding power granted by the new health care law") doesn't trouble you greatly, you've been drinking the Kool Aid quite heavily my friend...

Here's Trustmark's (the "greedy" insurer in question) response: "We respectfully disagree with the assumptions and conclusions drawn today by the Department of Health and Human Services. Our premiums are driven by the rising cost and increased utilization of medical services. In essence, our pricing is the result of claims experience and the marketplace (competition)... It is imperative therefore, in the interest of our owners, employees and customers, that we, an American corporation, maintain the freedom to set premiums accordingly. And the Administration, by the way, is utterly clueless when it comes to pricing medical insurance... And besides, it's none of your friggin business..." Now doesn't that warm your free-market heart? Of course, alas, I made up everything after "medical services"...

Think about it folks; Kool-Aid-drunk or not, you gotta agree that government is in no position to direct the pricing of any service or commodity... And suffice it to say that, when it does, it entirely distorts the marketplace: Producers recede in number (think low-income housing... think Dodd Frank and smaller banks) and the consumer ends up with fewer choices, lower quality and, ultimately, higher prices...

Are They Good or What?

Have you heard the news? S&P is poised to downgrade seven Euro Zone countries (and it's playing havoc with the market this morning)! Wow! Those guys are good! They have such insight, such predictive ability... How could they possibly know, at this juncture, that the Euro Zone has serious problems... And to have the guts to step in and step down credit ratings at a time like this - well, all I can say is, this is a real tribute to their worth... I mean this totally supports their credibility...

Harkens me back to the days of AIG, Lehman, etc... When the agencies had those teetering institutions marked all the way down to the double and triple A's.... Are they good or what?

Jobs are a consequence, not an objective...

So I keep hearing this call for Mitt Romney to prove Bain Capital actually created a net new job... His boast that between Staples, Sports Authority and a couple others alone, Bain put well over a hundred thousand folks to work apparently doesn't cut it... And it won't till someone factors in precisely what did get cut (in jobs #s terms) by Bain during Romney's tenure...

Please tell me you're not buying this... Seriously... Do you think Bain's mission statement included anything having to do with creating new jobs? Of course not... Nor should it have... I imagine Bain's mantra went something like; "we exist to bring value to our shareholders by discovering and developing the great institutions of tomorrow"...

The questions should be; was Bain a successful enterprise under Romney? Did it grow its own workforce? Did it grow its own revenue efficiently (output per employee)? Did it handle its projects legally, equitably and ethically?

Surely we're not looking for someone with a history of job creation/protection (for its own sake)... If we were, any old politician (like Romney*) or union chief would do... We need someone with a history of business creation (like Romney*) and who understands the [very minute] role of government in the process... Jobs are a consequence of economic freedom, not an objective...

*Yes, Romney's platform presents some contradiction...

Political capture maybe?

I keep thinking folks are waking up to the reality of our present state of affairs (in govt spending terms)... I just don't know to what extent... Politics is a messy business... Intellectual honesty takes effort... As, alas, some impressively-credentialed, politically-connected experts are not above massaging even their own [published] perspectives...

For example: A Nobel Laureate economist, known for his strong political leanings, on 1/2/2012 wrote: "We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way." That very same gentleman, on 3/11/2003 (emerging from recession) wrote; "I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits." Hmm...

Now granted it's been 9 years between calls, so perhaps our renowned expert has learned that, as he suggests in his '12 column, debt and the deficit just aren't the issues they were back in '03 (even though they're several times larger)...Has he indeed concluded that we can spend our way out of this recession, but couldn't/shouldn't have the last? Or is there some politicking going on here?

I can't help but wonder if Krugman doesn't see himself on the shortlist for public appointment...

Imgonnalosemyassaphobia

While compiling my second collection of essays, I came across the following and couldn't resist... This one's timeless - and maybe even a bit entertaining...

The October 6th (2009) issue of Business Week featured the following two headlines; The Market Will Keep Going Up, the storm has passed, and the old rules of risk and reward are back, and

Letter to Mr. Romney & His Record and His Rhetoric

Open letter to Mitt Romney:

Dear Mr. Romney,

You're about to catch some serious heat from your [hypocritical/supposed capitalist] opponents, right and left, on your exploits at Bain Capital. You're, they'd have voters believe, the heartless corporate raider. Ads featuring folks who've lost their jobs when Bain (you) swept in and swept away their employers will flood the airways in the weeks ahead. You sir have been handed a most golden of opportunities.

For not only will you do the obvious---cheer those companies Bain nursed to huge profits and new jobs---I suspect you'll spin to your advantage the notion that a "raider" might penetrate Washington and expose/purge inefficiencies so glaring a freshman business major could unearth...

Sincerely,
Martin L. Mazorra

To the reader: This would not be my endorsement of Mr. Romney, I have some fundamental concerns (with regard to *trade, for one) that I've expressed heretofore. This would be however my encouraging of any aspiring, or sitting, politician who'll get to the long-overdue housecleaning so desperately needed in Washington. Not that my endorsement/encouragement matters in the least...

*As bright as Mr. Romney is, I can only conclude that his egregiously ignorant position with regard to trade with China (for example), is politics at its worst --- i.e., he has to know better, which, assuming he does, makes him no better than his opponents. I.e., while his record at Bain Capital is a legitimate (and, leveraged properly, a political) plus, his rhetoric with regard to trade, while he clearly views it as a political plus, is without question a legitimate minus.

This is Economics 101: To the extent we pay less for a Chinese-made product than our demand price (the max we'd pay), we enjoy consumer surplus. To the extent our exporters sell goods to China at a price above their supply price, they enjoy producer surplus. Apparently therefore, our consumer (2/3rds of our economy) enjoys a substantially greater benefit from trade than does the Chinese consumer.

The protectionist politician (he who'd impose tarrifs, etc.) pretends to represent the consumer... Oh but make no mistake my friend, he does not. He represents only his constituent producer(s), at the direct expense of the consumer at large.

Click below for my down and dirty free trade illustration:

Jobs, QE3, The Dollar and Emerging Mkts

My Forecast...

I am making virtually the same market/economic prediction I made back in September 2009... Here's the excerpt from that post:

Yesterday evening Bloomberg Television aired a special subtitled Predicting the Future. The program featured a half dozen or so brainiac second-guessers who waded in on everything from where the economy

January 4, 2012 Market/Economic Report (video)

This Week's Quotes...

"The right argues that the cause of the crisis was that the government made banks (Fannie and Freddie and CRA) buy bad loans. The left argues the government through deregulation let investment banks run amok. Each is partially correct. My explanation is a little more complicated but it is also simpler in that it explains the behavior of the investment banks and Fannie and Freddie:past bailouts of large creditors increased the expectation of future bailouts. That in turn let all financial institutions borrow from large creditors at reduced rates and in enormous amounts relative to using their own money." Russ Roberts

In other words: Fannie, Freddie and Wall Street were, per yesterday's blog, walking tightropes connecting skyscrapers sensing a government safety net just a few feet below...

"The worst tempered people I have ever met were those who knew that they were wrong." David Letterman

Such are the red-faced, forehead-veins-bulging, analysts/economists while defending their forecasts on CNBC and Bloomberg...

Walking tightropes connecting skyscrapers unprotected...

So what if I said to you, "I'll give you a million dollars if you successfully walk a tightrope connecting two skyscrapers several hundred feet apart."? I suspect, unless you're a funambulist by trade, or terminally ill, you'd, without hesitation, decline. But what if I said "there'll be a safety net, just a few feet below, the whole way. And if you don't happen to make it across, I'll give you half a million just for the effort"?

Per the below excerpt from the book Animal Spirits, a captivating read written by two noteworthy econ professors, the Keynesian would have us believe that, without a law forbidding us from walking tightropes connecting skyscrapers unprotected, we'd indeed walk tightropes connecting skyscrapers unprotected. We in essence are ill-equipped, like infants near kitchen stoves, to act on our own behalf. We need government politicians to slap our tiny hands. To protect us from ourselves, from our "Animal Spirits"...

"Keynes' claim about how animal spirits drive the economy brings us to the role of government. His view of the government's role in the economy is very much like what we are told in the parenting advice books. On the one hand, they warn us not to be too authoritarian. The children will be superficially obedient, but when they become teenagers they will rebel. On the other hand, these books tell us not to be too permissive. In this case they have not been taught to set proper limits for themselves. The advice books then tell us that appropriate child rearing involves a middle road between these two extremes. The proper role of the parent is to set the limits so that the child does not overindulge her animal spirits. But those limits should also allow the child the independence to learn and to be creative. The role of the parent is to create a happy home, which gives the child freedom but also protects him from his animal spirits. This happy home corresponds to Keynes' position (and also our own) regarding the proper role of government."

So then, in the Keynesian's view, the overindulgence, the (for example) destructive risk-taking by financial institutions, which contributed substantially to the recent Great Recession, was not about comfort in believing that government had erected a safety net just a few feet below, but about government allowing access to the tightrope to begin with - essentially allowing animal spirits to go unchecked.

Hmm? I'm thinking different. I'm thinking the safety net's the problem. I'm thinking it's the politicians' animal spirits that need reigning in. I'm thinking, left to our own devices (no safety nets), we'll, as a society (with individuals making real-life [consequence-delivering] mistakes) weigh the risks and, generally speaking, make, with much greater frequency than our policymakers, intelligent grown up decisions.

Market Commentary (audio)

Click here for today's commentary...

Is it the PhD or the Predisposition?

The free market is indeed inefficient, by society's definition... I.e., suffering exists, even in free markets... Yet the question remains; is there a better alternative... Would rationing, redistribution and central control of resources make for lesser or greater suffering?

I [personally] believe history conclusively answers that question...

Forget about the impressive resumes of the policy wielders... Law degrees and PhDs cannot supersede the predispositions, power trips and political ambitions of their holders...

I just began reading a book (Animal Spirits) authored by two heftily-credentialed economists... PhD's each, one from Yale the other (a Nobel Prize recipient) from Cal Berkeley... At the get-go they proffer a compelling argument that lack of financial industry regulation and too-small stimulus efforts have left us with high unemployment and a snail's-paced recovery... They open their case for "equity" (lack thereof being the relative outpacing in income gains for the rich vs the poor) early on... They suggest that tax reform during the previous Administration saw a reduction of the tax burden on the rich far greater than that on the poor...

(I just Googled the definition of "poor"... The U.S. Dept of Health and Human Services [in March 2011] defined poverty for a family of four as earning a total yearly income of less than $22,350... So, doing the math (taking into account the standard deduction and the child and earned income tax credits), I have the family who sits right on the poverty line paying federal income tax at an effective 0% rate... In fact, their effective rate is negative, in that they actually get a "refund". Although it's not a refund in that they paid no income tax... It's in essence a bonus paid by folks who actually pay taxes... That's, by definition, redistribution... Nothing mean-spirited here; just wondering what else, from a tax standpoint, should be done for the poor...)

Thus far, alas, the authors make no mention of the word 'freedom'... But like I said, I just started the book, and therefore, notwithstanding their early hint at their solution (larger government) to our troubles, I'll reserve my [heftily-biased/uncredentialed] final judgment for later...

The fact that I have also read volumes written by economists (with qualifications rivaling those of my protagonists) who seek to prove that big government is the root of our nation's problems, suggests, as I said, earning a PhD, a Nobel Prize even, cannot supersede the predispositions of their holders...

The President says we are addressing, on behalf of the middle class, "the defining issue of our times", "a make or break moment"... I sincerely beg to differ; the U.S. was defined long ago as "the greatest nation of all time"... Our founders risked life for an essentially libertarian (freedom, small government) ideal... One that remains, albeit [at times] under the surface... And while political winds will forever blow against this American ideal, its foundation lives in the intuition of every hard working citizen... We'll allow government to grow only so large, only so controlling, only so destructive before we reign it in... I truly believe we're verging on a real shift in momentum (regardless of who wins the White House this November)...

Stay tuned...