Saturday, June 27, 2009

Obama's Policies Fail on the State Level -- Why Should They Succeed on the National Level?

California, New York, and New Jersey are already well along to instituting the policies that Obama wants to push onto the US taxpayer nationally. So how are they doing?
A decade ago all three states were among America's most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

These states have been models of "progressive" policies that are supposed to create wealth: high tax rates on the rich, lots of government "investments," heavy unionization and a large government role in health care.

Here's a rundown on the results:

Government spending as economic stimulus. State-local spending per capita is $12,505 in New York (second highest after Alaska), $10,136 per person in California (fourth) and $9,574 in New Jersey (seventh).

Has all this public sector "investment" translated into jobs? Not quite. California had the nation's third highest jobless rate in May (11.5%). New Jersey and New York had below average unemployment rates in May compared to the national average of 9.4%, but one reason is that so many discouraged workers have left those states. From 1998-2007, which included two booms on Wall Street, New York and New Jersey ranked 36th and 31st in job creation. From 2000 to 2007, the New Jersey Business & Industry Association calculates that nine out of 10 new Garden State jobs were in the government.

Soak the rich. Mr. Obama plans to pay for his government investments through higher tax rates on the top 1% and 2% of taxpayers. Our troika of liberal states are champions at soaking the rich. The state-local income tax burden, according to the Tax Foundation, is the highest in the nation in New York, second highest in California and sixth in New Jersey. New York City boasts the highest business tax rate, 17.6%, according to a study by the American Legislative Exchange Council. Seven of the 10 highest property tax counties in America are located in New Jersey.

Instead of balanced budgets, these high taxes have produced record red ink. California's deficit for 2010 is projected at $33.9 billion, New Jersey's $7 billion and New York's $17.9 billion, despite multiple tax increases this decade. The Manhattan Institute finds that three-quarters of the loss in revenues this year in Albany is a result of reduced income tax payments by rich people even though the state keeps raising taxes on high earners.

California's debt burden has multiplied so fast that it now has the worst bond rating of any state, and Governor Arnold Schwarzenegger and state legislators are pleading with Washington to command the other 49 states to pay off its IOUs. The interest rates on Golden State bonds have nearly tripled in the last two years.

Powerful unions. Mr. Obama believes union power is a ticket to the middle class. The middle class is getting creamed in all three of these "progressive" states, where organized labor is king. The unionized share of the workforce is 20% in California, 19% in New Jersey and 27% in New York compared to 13% across the country. All three are non-right-to-work states, have super-minimum wage requirements and provide among the nation's most generous public-employee pensions.

Workers in these paradises are indeed uniting -- by leaving. New York ranks first, California second and New Jersey third in moving vans leaving the state. A study by the National Institute for Labor Relations Research found that over the past decade these and other high-union states (mostly in the Northeast) had one-third the job growth of states with low union penetration.

Government health care. New York, New Jersey and California are among the leading states in government spending on and intervention into the medical market. A 2008 study by the Pacific Research Institute ranked the states on the basis of government regulation of health care and found that New York is most regulated, while New Jersey ranks sixth and California seventh. "New York," the report declares, "suffers from government health programs that are out of control, a grossly overregulated private insurance market and almost completely uncompetitive provider markets."

Have government controls and Medicaid expansions ("the public option") lowered costs? Here is what the American Health Insurance Plans found. For family coverage annual premiums in 2006-07, the national median cost was roughly $5,300; in California it was $5,884, in New Jersey $10,398, and in New York $12,254. New York's coverage mandates cause families to pay more than twice what they do in other states for insurance.

As a result, California and New York have more than one-third of their residents uninsured or in Medicaid -- much higher than the national average of 25%. More government involvement in health care in California, New Jersey and New York has raised costs and often reduced private coverage. That's hardly a model for the nation. _WSJ
Hardly a model for a rational nation, but perhaps precisely the model that Obamanation is looking for. Remember, a nation that is hurting is a nation growing more dependent on its government. It is hard for powerful rivals to grow out of the private sector, when the private sector is dead or dying, and the government is all that is left.

The only way these Obama-esque states stay alive is via political corruption, or federal bailout. Artificial insemination of vitality by sucking other regions dry through oppressive redistributive taxation and regulation.

On their own, California, New York, New Jersey, Michigan, Illinois, etc. would collapse under their own corruption and criminality in government. But Obama wants to bring that style of criminality to the highest levels of the federal government. And it is unlikely that he will let his biggest fans bite the dust.

In the long run, totalitarian economies do poorly compared to more open market economies. But in the short run, corrupt government officials can strip a private sector to the bone, and re-distribute the wealth to powerful political backers.

Unions, trial lawyers, eco-lobbyists, powerful progressive lobbying groups such as ACORN and PP etc. In a corrupt government, wealth flows out of the productive sector into the well-connected crony sector. This is what we are seeing under Obama / Pelosi.

Monday, June 22, 2009

Whitewashing China's Economic Problems.

Large numbers of investors and financial analysts have pinned their hopes for the global economy on China's back. The most polluting nation on Earth, one of the most dictatorial and most corrupt nations on the planet is being held up as the future of the planetary economic system.

But China's cheery economic numbers may be hiding a darker set of realities behind the bamboo curtain. Here is one critical look at China's economic situation that is worth a read. The Chinese economy may be in the middle of a huge financial bubble of its own.

China has been buying up commodities worldwide at a frantic pace -- trying to take advantage of bargain basement prices brought on by low global demand. This Chinese commodities "rally" has inflated the Baltic Dry Index and China's economic figures, but it may be on the verge of fizzling.

The emerging problem of toxic Chinese drywall sales to North America is likely to once again raise the issue of the Chinese Poison Train. Toxic products flowing out of Chinese enterprises into world marketplaces should have had a far worse impact on Chinese exports than they have done. Poor quality steel from Chinese foundries is another problem likely to come back to bite the dragon's tail.

The problem of excessive Chinese regulations and limitations on entry into the marketplace continue to give corrupt and inefficient State Owned Enterprises in China an unfair advantage over private enterprise. This corrupt inefficiency shows no sign of going away anytime soon.

The gullibility of those who take Chinese economic figures at face value is difficult to explain, outside of wishful thinking. Everyone is looking for the big score, and right now China seems to be the biggest score around. Wait and see.

Saturday, June 13, 2009

Baby B-O's Brave New Ball and Chain for Children

It has taken Barak Obama less than 4 months as US President to cast an ugly pall over the American economic future of generations of children. Obama's record-breaking budget-busting spending spree has shackled future generations of American taxpayers with the ball and chain, with no end in sight.
Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis. _Economist
That's what makes Obama's profligacy so much worse than anyone could have imagined: the productive population of the US is shrinking at the very time when it is being saddled with incalculable debt.
....nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care.....

All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.
A tall order? Worse than that. An impossible order. Tackling social security, Medicare, out of control public sector pensions, etc. is more than the weak-spined politicians of the Obama era would care to take on.

The productive segment of society is growing old and retiring. New generations will lack the skills, the will -- and in some cases the aptitude -- to pick up the mantle of responsibility and productivity. In other words, there will be fewer and fewer skilled and productive workers to pull an ever-growing load.

What is Barak Obama's answer to the problems he is making worse every day? We don't really know, but since every day in Obama World is a campaign for something, we should be hearing from the Obama campaign on this topic real soon.

Meanwhile, in the background, the sound of printing presses rolls on into the long economic night.

Tuesday, June 09, 2009

Socialists Win Big in Sweden, Denmark, Greece

In the recent European elections, socialists (in red above) were winners in Sweden, Denmark, and Greece. In much of the rest of Europe, a different story unfolded.
* The anti-Islam campaigner Geert Wilders came in second in the Netherlands with 17% in the Netherlands on Thursday.
* The Hungarian anti-Gypsy extremist party Jobbik took three of the country’s 22 seats.
* In Austria two far-right parties mustered 18%.
* Extreme Slovak nationalists gained their first seat in the European parliament.
* “Eurosceptic” parties won more seats in Denmark, Finland, Austria, and the Czech Republic.

....* The leaders in France and Italy benefited from tough anti-immigration and law-and-order stances, despite the tabloid scandals of the private lives of both. _cominganarchy
As the Obama depression spreads to smother the economies of most of the developed world, the political fallout will be interesting to watch. Hope for the best, prepare for the worst.

Sunday, June 07, 2009

Obama Prepares to Ascend to Heaven: "My Job Is Done, States the Messiah"

President Obama ascended to heaven from the Sultan Hassan Mosque in Cairo. In a final statement before departing his home planet, Obama apologised for the harm done to the world by previous US administrations. His last act as US President was to officially dissolve the United States.

"It's all one world now. I have done as much as I can, it is now up to you. If you want nuclear weapons, there is no one left to stop you. If you want to destroy all the Zionist states in the world, who is to say you can't? The economies of all the European governments around the world are now as good as dead. My job is done. Good-bye."

Hillary Clinton -- who was present at the ascension -- was initially too flabbergasted to speak. After 30 seconds she recovered, however, and spoke into the microphone -- despite the lack of a teleprompter (the ascended president's teleprompter had ascended with him).

"I am now in control," the Secretary of State declared. "I am now carrying the football, and Air Force One is right here. From that airplane I could order the destruction of the entire world," she glanced around quickly on hearing angry shouts from Iman Abdel Fateh and Dr. Zahi Hawass who were also in attendance at the mosque.

"Oh don't worry, Imam! I'm not going to destroy anybody! I just want the people back home to understand that they still have to pay their taxes and obey the speed limits and all. Barack's ascension doesn't change a thing as far as how the US government does its job back home. Despite what Barack said to the European press, the US isn't really a Muslim country you know."

After her speech, Mrs. Clinton was hustled away by secret service agents to Air Force One, where a quick conference call was set up with Nancy Pelosi and Barbara Boxer to line up US Congressional support behind Mrs. Clinton's unorthodox succession to power. There are rumours that Ms. Pelosi was implementing plans of her own for an end run to the presidency. News sources are remaining mum on the negotiations thus far.

Meanwhile, Joe Biden was last seen hurrying to an underground bunker in an undisclosed location. According to secret service agents on the scene, Mr. Biden was complaining -- to no one in particular -- mumbling under his breath ... "Barack gets ascended and I'm stuck in an underground bunker? What am I, chopped liver? I'm mad as hell and I'm not going to take this!"

When asked if he wanted to stick around and possibly get caught between Nancy Pelosi and Hillary Clinton in an all-out war, Mr. Biden acquiesced, and was led quietly awy to his bunker.

Tuesday, June 02, 2009

The Financial Bubble: 10 Causes

The following 10 thoughts on the causes of the ongoing US financial bubble-burst are re-printed from The American Spectator:
1. "When it comes to the home mortgage boom and bust, who was to blame? The borrowers? The lenders? The government? The financial markets? The answer is yes. All were responsible." (Thomas Sowell, The Housing Boom and Bust, 2009.) This seems fair.

2. Not explanatory of the problems are "greed" and "no regulation." Greed is a constant, always with us as part of human nature. As for "no regulation," the highly regulated commercial banks and the highly regulated thrifts are deeply enmired in the swamp of the bust, just as they have been many times in the past, constant regulation notwithstanding.

3. Economic and financial cycles are natural and cannot be avoided. The bubble was an exaggerated cycle. Various government actions contributed to making it worse:

• Fannie Mae and Freddie Mac, a government-sponsored duopoly, were made into huge points of concentrated vulnerability to failure, which then indeed failed. They significantly inflated the housing bubble though their huge entry into high risk mortgages right at the top of the market -- financed, of course, with government-guaranteed debt, so that the buyers of their debt did not have to ask about the soundness of their asset expansion. (See paragraph on trade deficit and China below.) This risky strategy was encouraged by politicians and by HUD's "affordable housing goals."

• The "Greenspan Gamble," which was intentionally to ignite and feed a housing boom to offset the deflationary effects of the tech stock crash, succeeded too well. Instead of a mere housing and mortgage boom, we got the bubble.

• The dominant rating agencies, a government-sponsored duopoly, were made by regulation into concentrated points of vulnerability to failure, which then failed, when their high credit ratings of MBS built from risky mortgages did not include anything resembling the downside case which became reality.

• Politicians all cheered rising home ownership rates and "creative" mortgage financing, which simply meant riskier financing.

4. There was a "logical" very widespread belief that house prices could not fall on a national basis. "Average U.S. house prices rarely fall from one year to the next. Bankers, brokers, appraisers, loan servicers, mortgage investors, homeowners and the designers and promoters of collateralized debt obligations all attest to the truth of this assertion… 'History is definitive,' pronounced the American Banker, 'the national average price of a home may remain flat for a number of years, but it doesn't fall.'" (James Grant, Mr. Market Miscalculates, 2008.)

Mortgage professionals were well aware of many instances of regional housing and mortgage busts, with falling house prices and high defaults and losses. But it was thought that this would not, and perhaps could not, happen on a national average basis. This firm belief by almost all parties made it possible for the belief to be false, in the paradoxical way of financial markets.

5. The market and the regulators became enamored with statistical treatments of risk. But: "The model works until it doesn't." (Moore's Law of Finance)

Human sources of risk are old-fashioned: short memories, the inclination to convince ourselves that we are experiencing "innovation" when what is happening is lowering credit standards, optimism, speculation which is successful in the early bubble stages, gullibility, group psychology.

6. "The good times of too high price almost always engender much fraud. All people are most credulous when they are most happy." (Walter Bagehot, Lombard Street, 1873.) True then, true now, unfortunately.

7. Highly leveraged financial systems are bound to have panics and busts from time to time. Increasing leverage of households was promoted by lenders and the government to create "affordable loans," with both higher LTV ratios and higher debt to income ratios. Financial firms were highly leveraged. Financial engineering produced highly leveraged structures, including CDOs, SPVs, CDOs-squared. Banks are able to be highly leveraged because of government deposit insurance, and have created balance sheets heavily concentrated in real estate risk. The entire macro economy became more highly leveraged, with record debt to GDP ratios, the "Big Balance Sheet Economy." Leverage always feels good when things are going up.

The "Great Moderation," of which the world's central bankers were so proud, created the conditions in which increased leverage seemed successful, thereby also creating the conditions for the bubble and bust. "Stability creates instability." (Epigram of Hyman P. Minsky's "financial fragility" theory.)

On the way down, needless to say, the leverage is more than painful.

8. The large and persistent U.S. trade deficit was financed by a build-up of debt, notably with China, but also with other countries. An important part of the debt was held in obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, because these were viewed as U.S. government risk (as indeed they were, as proved by events). But it meant that the trade deficit was thus directing credit expansion to housing. Chinese savings became high U.S. house prices.

There seems to be an interesting analogy of the oil boom of the 1970s with consequent LDC ("less developed countries") credit collapse of the 1980s, to the Chinese export boom and consequent housing collapse of the 2000s. People were very proud in the first instance of "petro-dollar recycling," and in the second of "record home ownership." Consider:

• Oil went from OPEC, which put the proceeds into U.S. banks, which made loans to LDCs, which later defaulted.

• Goods went from China, which put the proceeds into U.S. debt securities, which financed mortgage loans, which later defaulted.

9. So-called "fair value" accounting, pushed by the SEC and its helper, the FASB, made the panic and the bust worse. So did pressure from both these bodies to constrain the build-up of the necessary loan loss reserves in good times.

10. "The most common beginning of disaster was a sense of security." (Velleius Paterculus, History of Rome, c. 30 AD)
In summary, overconfident investors, bankers, and government budgeters overspent and overleveraged their way into far more risk than they were prepared to acknowledge, or deal with.

The unexpected collapse of this hyper-leveraged bubble paved the way for the emplacement of a government of wastrels that is preparing to amplify the economic destruction by at least an order of magnitude.

Talk of economic recovery other than on a local or regional scale, is highly premature and misleading. Brocko Bomba, clown of clowns, is in the driver's seat. The train is on the downslope, accelerating rapidly. Either jump, pull the emergency brake, or prepare for a wild ride with an unhappy ending.