A Bad Deal -- No Progress on the Deficit

The Republicans have caved once again.  The deal hammered out between Biden and McConnell is one more setback for the nation.  It promises to put real brakes on the economic recovery because of the tax increases and makes no progress at all toward reducing the deficit that continues be the nation's number one economic problem.

Why Democrats support this is a mystery?  This deal and others like it, soon to be agreed to, virtually guarantee that future beneficiaries of social security and medicare are in for a very unpleasant surprise.  Those now 50 and under cannot expect much more than half of the promised social security and medicare.  Those under 40 should not expect anything at all.

Now, while age limits can be increased and means testing can be implemented, we should do it.  Doing it two years from now will effectively reduce future benefits more than doing it now.  Putting these things off just make things much, much worse in the future.  This was a squandered opportunity. 

Republicans should replace Boehner as Speaker and every Republican who votes for this deal should receive a primary challenge.  Hopefully, McConnell will be challenged in the primary in his upcoming bid for re-election.  It gets harder and harder to see how Boehner and McConnell are an improvement over Reid, Pelosi and Obama.  They all seem to get to the same place eventually.  It doesn't do any good to win elections if this is the ultimate political outcome.

It's not clear what the Republicans are fighting for -- but they are definitely not fighting for smaller government and for economic growth.  Nothing in this deal moves in those directions.

This is a good deal for Obama and a good deal for the media.  They should be very happy.  The steady decline of the US into a second rate status in the world economy proceeds apace.  This seems to be what Obama and his fans in the media want to happen and they are getting their wish.

What Happened to Curbing the Deficit?

In its extreme enthusiasm for Obama, the press has totally neglected the deficit issue, which was the entire reason behind the creation of the fiscal cliff in the first place. Instead the press has focused exclusively on Obama's absurd "tax the rich" gambit.  Obama's plan will likely lead to lower, not higher, revenues from the top two percent.  So, that part of the Obama agenda simply raises the deficit and provides disincentives to expand employment.  Great policy!

Meanwhile, the $ 1.6 trillion deficit is getting larger.  The real cliff lies ahead when the debt markets begin to balk at the continued explosion in US sovereign debt.  We are now on "Greece watch."  It is only a matter of time.

Meanwhile, the media continues to be irrelevant to the real issue of our time.  For a brief period, the media and Obama can enjoy their "victory," but the long run, not so long run now, leads to insolvency.  Watching Greece and Spain is instructive.  The media should spend some time in Greece and Spain to see where their policies lead.

Let's hope that McConnell can resist Reid, Biden and Obama and let nature take it's course.  Over the cliff we go.

Republicans for Tax Hikes

A number of Republicans have decided to vote for the restoration of the Bush tax cuts with an upper limit.  Obama's upper limit is $ 250,000. Apparently, many Republicans are willing to sign on if the upper limit is moved up a bit to $ 400,000 or $ 500,000.  If Republicans would simply refuse to sign on unless all the Bush cuts were restored, they would, without any doubt, get their way.  But somehow they have become convinced by the media, the Democrats, and their reading of the polls that they must buy into the Obama tax hike.

Why would Republicans get their way?  Because Obama would be forced to go along if the choice were that stark.  Obama does not want to preside over a major tax increase that further damages an already weak economy.  He would own it, not Republicans.  After all, the Republican House passed a full extension of the Bush tax cuts last July.  It is only Obama's petty insistence on raising rates on the top 2 percent, raising at best a trivial amount of revenue, that is holding up the extension.  It is Obama's economy for good or evil. That is the leverage that the Republicans have.  But, they seem intent on throwing away that leverage.  They won't have this opportunity again if they let it slip away now.

Boehner, they say, will hold an "open vote" on any Reid-McConnell compromise so that House passage can be accomplished with a majority of Republicans voting no.

It's time to rev up the tea party.  What good is a Republican who votes for tax and spending increases, which is what the Reid-McConnell compromise will amount to?  If there were no Republicans at all in the House or Senate would the ultimate outcome be much different?

Various conservative pundits, Bill Kristol for one, have advocated that Republicans simply surrender and vote for the tax increase on the top 2 percent.  Has Kristol forgotten the effect of higher marginal tax rates on job creation?  Or is Kristol only concerned about pleasing the media?

Republicans should reject any compromise that involves raising taxes on anyone unless there are major cuts to social security and medicare.   Boehner should be replaced as Speaker if he permits a vote on a bill that a majority of House Republicans are opposed to. 

The country's future is at stake because of the exploding national debt.  Going over the fiscal cliff is far, far preferable to a bad Reid-McConnell deal.

It looks for now like Republicans are planning to join their Democratic brethren in raising taxes, increasing spending, and further damaging the country's future prospects and economic vitality.

Deja vu.

Was This By Design?

Listening to the media and democratic pundits ignore the exploding national debt to indulge in a dialogue about an almost irrelevant issue -- taxing the upper 2 percent -- makes one wonder?  Do these folks not understand the arithmetic.  Are they unaware of the $ 16.5 trillion national debt, growing by ten percent per year in an economy with just over $ 15 trillion in GDP?  Why the focus on something that, at the most optimistic assessments, can only produce 0.08 trillion in revenues annually?  Even that miniscule number is unlikely.  Far more likely is that the increased tax rates on the upper 2 percent would drive down revenues from that group.  But, even at the most optimistic assessment, it is a waste of breath.

So, why is that the entire conversation?  Maybe these folks are untroubled by a US decline.  They seem so fundamentally out of touch with traditional American values, maybe they are mainly interested in changing the culture to suit themselves even if that means economic decline.  That's what redistribution seems to be all about. Maybe the media and the democratic pundits don't really care if economic growth is zero and the young have no future and old folks end up with nothing.  Perhaps this is all by design, not simply gross stupidity.

Don't Blame the Economy on the Cliff

The economy is weak because of government policy -- not the ongoing fiscal cliff stalemate.  The Obama Administration has waged war against the private sector free market from the day it took office.  That war has borne fruit.  This is the slowest economic recovery since the 1930s.

The slow pace of economic growth has nothing to do with the cliff.  It has been going on since late 2009.  There is not going to be any serious economic growth in the US given the regulatory and legal environment that has been imposed upon the US economy since Obama took office.  The financial sector has been crushed, bank lending has been discouraged by the regulators, the energy sector has just barely survived the Obama onslaught, and employees are an endangered species.

Obamacare pretty much says it all.  Another costly mandate on companies and ultimately on individuals was the final kicker.  Along the way the elimination of the Keystone pipeline project was emblematic of the Obama strategy.  Push government spending and expansion and crush the private sector.

Well, guess what.  They have succeeded.

So, forget the cliff.  The cliff, whether we go over it or not, won't matter.  This is not an economy going anywhere.  The only significance of the cliff is that if a deal is reached, US bankruptcy will be sooner not later.  At 20 trillion in debt and an economy in the ditch, it is unlikely that bankruptcy can be avoided and we should reach that level in Obama's seventh year in office.

Markets Like Going Over The Cliff

Why is the stock market so much higher than just a few weeks ago?  Don't stocks know that we are headed over the fiscal cliff?

Going over the cliff is a good thing, not a bad thing.  Higher taxes, lower spending is just the beginning.  Much, much higher taxes and the virtual elimination of the military and other discretionary spending will be required just to get through the next 15 years of the entitlement programs.  Going over the cliff will provide 15 years of breathing room against the collapse of the entitlement programs.

Not going over the cliff could force a crisis in treasury financing within the next two or three years.  Going over the cliff gets you past the end of the Obama years with a national debt of 20 Trillion and eight years of a lost decade.  But, it will get you to the end of the Obama years most likely. 

Not going over the cliff will accelerate the national debt crisis with a good chance that we can't get through the Obama years without a treasury financing crisis, similar to that of Greece.

So, let's buy a few more years by going over the cliff.  This is the price you pay for entitlement reform being "off the table."

Why Pretend -- Let the Tax Cuts Expire

If there is no appetite for reforming entitlements, then our future is massive tax increases and a stagnant and depressed economy.  Why not start this process now?  The track that we are on will eventually lead to the kind of top tax rates that we see in Europe -- 70 percent in France, for example.  And even those rates won't improve the national debt situation.

The truth is that the Democrats plan is to continue to raise tax rates by pretending that somehow tax revenues can catch up with entitlement spending.  But there are no tax rates or revenues that can match the entitlement explosion.  Our national debt will be a multiple of GDP within a few years and is probably already unpayable at any level of tax revenues.

It's time to let the public get a taste of their future -- high taxes, massive bureaucracy, a crushing of the private sector, high and permanent unemployment, and diminished employment and income prospects for younger generations.  Within a dozen years, we will begin to back away from spending for the elderly -- not because we want to -- but because there is simply no money available to maintain these programs at existing benefit levels.

The problem we have is that a majority of Americans think all of this stuff is affordable.  That's why entitlement reform is "off the table."

So, let taxes rise.  Among Democrats, only Harold Dean seems to be aware of the arithmetic.  He has made it clear that he supports letting all of the tax cuts expire.  It's rare that I agree with Dean, but, on this one, I agree.

The public needs to get a taste of the future regime that they have voted for.  If the entitlements are "off the table," then lets put the reality of the future on the table now before it is too late.  Perhaps four years of economic stagnation, smothering regulations and high taxes will be enough of a taste of our future to bring our citizenry to its senses.

The Latest from Greece

Greek riots and demonstrations are now a daily event in Athens and other major cities.  Civil disorder is common place -- looting and random thievery are accepted in modern day Greece.

Meanwhile, the Greek public still believes that they are beset by the evil greed of rich people and large corporations.  If only....  

For three generations, the Greeks have been told that the "middle class" deserves endless services, employment guarantees, free health care, and no taxes.  They bought in.

It's always about "fighting for the middle class," until there is no longer a middle class. That's where we are in Greece.  We now have a protracted battle between the protected class -- mostly government employees -- and everybody else.  We now witness a civil war between the young -- who are supposed to support all of this nonsense -- and the old, who no longer can support much of anything.

Greece is the target.  That's where the Obama policies take you.  Substitute personal responsibility for government largess and you get modern Greece.  Meanwhile, move the rhetoric over to demonizing the rich and you get the Obama plan.  Freedom, free markets, hard work -- these are now outmoded notions to be replaced by "defending the middle class."  One such defense is the announcement today that GM workers will receive $ 7,000 bonuses this year, thanks to the taxpayers, who have lost billions of dollars underwriting GM worker pension funds.

This is where it goes.  Pit one group of Americans against another.  It is no longer about merit and hard work.  Those are outmoded notions.  The Greeks don't believe any of that either.  They have been carefully nurtured to believe that the government will take care of everything.  Obama has taken heed.  You can win a lot of elections and curry favor with an adoring media by simply pretending that effort is no longer required for the good life.  These rich folks have enough for us all.

So, modern Greece is descending into chaos.  Don't visit Athens as a tourist, because police protection has broken down.  This is a society that no longer believes in civil order.  Virtually all Greeks now believe that their problems are caused by rich people, German banks, and big corporations. They have been watching TV and listening to their leaders.  They drank the koolaide.

Now, we are drinking the koolaide.  What is the Obama plan to reduce the deficit?  Tax rich people.  How do you deal with a $ 70 trillion unfunded entitlement deficit.  Raise $ 80 billion a year from rich people.  This year alone that will reduce our deficit from $ 1.6 Trillion to $ 1.52 Trillion.  That's what we are talking about.  These terrible Republicans. If they would only agree to the Obama plan our national debt would rise a mere $ 1.52 trillion per year and the national debt would reach only $ 24 Trillion in six years instead of $ 25 Trillion.  Thank you, Mr. President.  That's a big help.  No point in trying to deal with the entitlements, after all, $ 24 Trillion in six years isn't bad and that's only the beginning.  We can do better than that (or more than that, if you like).

No need to worry about Greece with such a statesman-like President.  The adoring media deserves some credit as well.  If they get their way...just think.  We can get to a mere $ 24 trillion in debt in six years.  In 20 years, we should be able to scale the $ 40 Trillion mark.  Hey, maybe Greece isn't that far way after all.

Road Signs on the Way to Greece

"Get something done....anything!"  That seems to be the thinking of the financial and political pundits.  Who cares if the outcome is further explosion in the national debt, more crushing taxes, and strangling regulations?  That seems to be the "rise above" mentality.  The ultimate policy is less important than the desire to get this episode behind us.  This is known as "kicking the can down the road."  The fact that the economy is getting a swift kick as well does not seem to concern the pundits.

The only thing that the President and his allies are willing to do is further the punish the free market and the private sector with increasing taxes and increasing regulation and creating further divisions between rich and poor and young and old.  This is the strategy that Greek politicians used for the past three decades to get Greece to the place where it is now. 

Blame rich people, blame the private sector and expand further government activity and the percentage of folks who are riding the stagecoach of government benefits.

When Greece was going down this road, the media strongly and vocally supported the trip.  They are doing so again as the US follows the Greek path.

Boehner and his Troops

John Boehner is doing his best, but it is hard to fault the House Republicans for refusing to go along.  Boehner is playing tactics, while many House Republicans think it is too late for tactics. They are probably both right.

Boehner tried to push the ball back into the President's court, since the President has been unwilling to bend on anything.  It is not unreasonable for those among Republican ranks to ask why they should vote to raise taxes on some folks absent any offer of spending cuts at all from the White House. This is especially the case given that Senate leader Harry Reid said that the Boehner plan was dead on arrival and Obama promised to veto it.  Why capitulate pre-emptorily when there is nothing forthcoming from the other side?

Not that any of this matters much as long as entitlements are "off the table."  No deal is of any significance without entitlement reform.  Obama is perfectly willing to let the country go over the cliff and proceed on its way to Greece.  Boehner is doing his best, but Obama and the Democrats are determined to continue the march to insolvency.

Without Medicare, There is Nothing There

The big driver of the national debt is medicare spending, made worse by Obamacare.  This subject is "off the table" according to the White House.  Put simply, the Obama administration is prepared for an exploding national debt and is unwilling to make any effort at all to slow that explosion.

Raising tax rates and tinkering with social security cost-of-living adjustments is a joke.  Neither will reduce the future trajectory of the national debt and raising tax rates will actually make things worse.

If Republicans sign on to this deal, you have to wonder what they plan to run for re-election on in 2014.  Why control the House of Representatives, if you intend to do nothing but cave to Obama?  Where is the loyal opposition?

Show Me The Money

Now German Chancellor Merkel is in deep political trouble after the election results in North Rhine-Westphalia in Western Germany.  Merkel's party, the Christian Democrats, had their worst showing in NRW since World War Two ended.  They received just under 26 percent of the vote, having received 35 percent two years ago.

That pretty much completes the cycle.  No political leaders that stood in 2010 are going to survive the Merkel-Sarcozy bailout and austerity program, including Merkel.  She is up next year and it is obvious that her political day in the sun is over.  Germans aren't interested in underwriting the Greeco-Spano-Italo-Portugo-French welfare states.  They won't do it and no government will survive that promises to do it.

The problem for all of Europe and really all of the western advanced economies is that they are out of chips.  Some can play a few more hands before it is over, but all of them are in the same boat -- no money.

Neither side of the Eurozone crisis makes any sense:  There is no reason for Germans to bail out Greeks and there is no reason for Greeks to adopt austerity.  Neither position makes any sense and both Germans and Greeks will toss out any leaders that pursue such policies.  Plain old-fashioned honesty is the right solution.  The Greek debts cannot be paid.  End of subject.  It is time to face that fact.

What needs to be done is a "workout."  Greece needs to sit down with its creditors and offer them 15 cents on the dollar or whatever and get this done.  If that means some banks fail, they would fail anyway, since Greek debt probably isn't worth 15 cents on the dollar.  Governments can nationalize their banks and deal with the resulting financial crisis by reorganizing the bank balance sheets (bank bond holders become equity holders to some extent) and then putting them back into private hands.

This solution averts the abandonment of the Euro and is simply dealing with an unpayable obligation in the only way that is possible to deal with an unpayable obligation.  The politicians have been simply making things worse by pretending that there is some other solution that works.  There is no other solution that works.

More On Your Tuition Dollars

Brown University is good-hearted.  So much so, that they announced today that they would donate $ 31.5 million to the city of Providence, Rhode Island.  In a Wall Street Journal story today, Brown's president, Ruth Simmon, was quoted as saying that "Brown is deeply concerned about Providence's financial situation."  And well they should be.  Providence's finances have gone down the chute as one might expect based upon a public employee pension fund that is, at best, 70 percent underfunded. 

The story in the Journal, goes on: "Providence has been negotiating with Brown and its six other largest tax-exempt nonprofits to make more voluntary payments in lieu of taxes."

So, now, when you ask: why do these Universities (and other worthy tax exempt institutions) need so much money?   Part of the answer is that they are funding bankrupt cities like Providence.  This is not the only absurd expenditure embarked upon by today's colleges and universities, but it is an expenditure, like a host of others, that has nothing whatsoever to do with providing anyone with a college education.

Why Jobs are Few and Far Between?

Americans are generous people. They believe in helping others. The Americans for Disability Act, passed by overwhelming bi-partisan Republican and Democratic support, championed both by then Senate Majority Leader Robert Dole and then President Bill Clinton, must have seemed like a good idea at the time. Why not help people with disabilities? Isn't that the right thing to do?

Most Americans would answer the above question in the affirmative. Why not?

But, the reality is the ADA, as the act is known, has a definition of disability that the vast majority of Americans would never agree with. For just one example, chronic alcoholism is a "disabililty" under the ADA. If an employer refuses to hire someone because they are obviously inebriated in the interview and they confess to a severe drinking problem during the job interview, then that employer can be prosecuted under the ADA. Is that what a bi-partisan group of Democrats and Republicans thought they were singing up for? Funny! Neither Bob Dole nor President Clinton brought up the plight of alcoholics as reasons for their support of the ADA when they spoke eloquently for the Disabilities Act.

In the modern University, professors are required to "accomodate" students with disabilities. You might think that would mean students with speech impairments or other physical disabilities. Nope, such accomodations to students with physical disabilities are rare. The vast majority of the "accomodations" in the classroom are for students with "learning disabilities." Such learning disabilities often give such students three to four times as much time to take an examination as the time provided for students without such disabilities. One wonders what future careers this time of "accomodation" is preparing the student for? What are these "learning disabilities?" That's a pretty murky topic. "Inability to focus or concentrate" for lengthy periods of time is one such disability. Did the sponsors of ADA envision this application of the notion of a "protected disability?"

No wonder employers shy away from hiring employees when lawsuits can quickly emerge if a potential job candidate shows up drunk for the interview. Worse, the target of the lawsuit is the potential employer! There are so many reasons not to hire anyone and to economize on the work force. This is just one of many.

Outsourcing looks very attractive when you stop to think that employers in other countries don't face these kinds of lawsuits from the mere act of attempting to give someone a job. America has put itself in a position where offering a job is, more often than not, a prelude to a civil suit or a violation of the criminal code. So, why bother? Employees are toxic and best avoided. That's the message from the US government.

The Cost of Higher Education

One of the predictable outcomes of the technology revolution is that the cost of providing education should gradually fall to zero. In time, the marginal cost of providing most aspects of education, especially "higher education," should be negligible.

Why?

First of all, the body of knowledge that is imparted in higher education grows only glacially. From year to year, you can think of it as almost constant. We also know a lot about how people learn and we know that people can learn from using computers, ebooks, and the like. These things are cheap and getting cheaper.

Does it help to have classrooms? Yes, but only marginally. Often computer programs and well crafted films can provide better instruction than the classroom. Businesses, like the Teaching Company, have exploited the idea that courses on CDs can teach as effectively, perhaps more effectively, than herding students into classrooms.

We know that the really great teachers spend less and less time in the classroom of American higher education institutions. This is a blanket recognition that the classroom may not be a high priority for American higher education institutions. Indeed, we know that classroom instruction has not been a major priority of the so-called elite higher education institutions for many years.

We know that one-on-one mentorship can help in higher education. But, over time, there is less and less one-on-one mentorship in American higher education, especially at elite schools. The more "elite" the school, the less likely a student will ever receive any educational mentoring in the school.

So, if you think about the higher education that students actually receive in the modern American institutions of higher education, the vast bulk of that education can be produced at virtually no cost and made available to the masses. Indeed, some of this is already being done -- AcademicEarth.com is just such an example.

Why, then, is the cost of higher education spiraling out of control in America? This is a question that is rarely asked. Most of the discussion of the economics of higher education focuses on how to generate more taxpayer funding for higher education or how to provide more loan funding for students who face the massive costs of modern American higher education. But, the really interesting question is why, if providing the actual education costs little or nothing, is the cost of higher education exploding beyond the cost of producing anything else in the economy?

The answer is that modern higher education is increasingly about providing three things:

1) an active social environment that students can really enjoy -- including fitness centers, semesters in exotic foreign locations, elimination of hard, core curriculum in favor of "relevant" topics, almost complete abandonment of science and mathematics, dramatic expansion in semi-professional and pre-professional athletic programs, and the ascendancy of "soft" business majors and "inter-disciplinary curricula." This means that higher education has become more fun, less demanding, and less effective;

2) political education -- provided through centers for this and centers for that focusing on race, ethnic, gender, environment. These centers, which are extremely costly, often provide misinformation as opposed to education and are usually staffed by people whose academic credentials would make them ineligible to be faculty members in any normal academic department, even at non-elite schools. A strong pro-government orientation toward attacking alleged ills of society dovetails neatly with higher education's support for more taxpayer funding. It may not be educational, but it is useful to those who run these institutions, who spend enormous hours and dollars lobbying various levels of government for more funding;

3) certification -- the idea that a degree conveys the message that a student possessing the degree has a minimum level of education. This idea is gradually losing traction as businesses across America have discovered that degrees even from elite institutions do not mean literacy, competency or work ethic. Businesses have become much more skeptical about the qualifications possessed by the graduates of the American higher education system.

So, while American higher education institutions do a bang up job of providing the first two items above, the "certification" is increasingly seen as a hollow shell.

In short, higher education is less and less about education. It is about social and political indoctrination and unlike education, social and political indoctrination is a very expensive proposition. It is not cheap to provide a "Club-Med" environment on a University campus and to constantly update it with more and more expensive features. As the "education model" is supplanted by the "resort model" in higher education, it becomes increasingly expensive to compete with other "resorts."

If you want to develop your social skills and learn networking skills, find your way to an elite higher education institution. But, if you want an education, go online. The former path is absurdly expensive, while the latter path is almost costless.

Given these dynamics, the future is pretty easy to read. Education, real education, will ultimately be provided in an inexpensive fashion by modern technology and what currently passes for higher education will continue to morph into an elaborate, expensive, four year form of a summer vacation with mostly political content.

Employers will eventually ignore the "certification" conveyed by higher education institutions, as the value of such certification withers away. Instead employers will find other ways to ascertain the skills and qualifications of "educated" employees. Higher education will never lose its charm, but it will, in time, lose its relevance as the costs continue to explode beyond its value.

Politics Masquerading as Economics

The NY Times strikes again!

In today's times,MIT's Simon Johnson, has put his name on one of the most absurd articles about the modern economy that has yet to find its way into print. It's worth reading, if only for its absurdity.

Johnson has decided that America's banks are responsible for Medicare's funding problems. Medicare has a $ 66 trillion unfunded liability. The entire US GDP is slightly more than $ 15 trillion and the bank sector is a small fraction of that number. So, how did the mouse fell the elephant?

You would have to read the argument to believe it. Johnson teaches entrepreneurship at MIT, so I guess he can be forgiven. If you want to be treated to a good laugh, read Johnson's "perspective" in today's NY Times.

The NY Times must roam the world looking for folks that will say these kinds of things in print.

Walker versus McDonnell

Republicans often do the work of their opponents. Virginia's Bob McDonnell is a case in point. When McDonnell was sworn into office as Virginia's new governor in early 2010 his very first action was to undermine the state's public employee retirement system. The prior governor, Democrat Tim Kaine, had put in the 2010 budget, that McDonnell inherited, a provision that would begin the process of employees contributing to their own pension funds. All McDonnell had to do was accept this provision and a bi-partisan beginning to reforming public pension funding would have begun, at zero cost to taxpayers. But, no.

McDonnell could not wait to strike the employee contributions, amounting to a meagre one percent of compensation (an amount that would be increased to two percent in year two), from his budget. Loudly proclaiming his desire not to raise taxes, his actions guaranteed massively higher taxes on future generations of Virginia taxpayers.

In his second year, McDonnell seemed to begin to see the error of his ways but by that time the funding status of the state's retirement system was beginning to spin out of control. Belatedly, McDonnell proposed a bizarre, Rube Goldberg set of reforms, that fail to deliver either adequate retirement income for public employees or a reasonable method of financing such income. The crazy, convoluted set of reforms was mainly designed to appease every possible interest group and anger no one. This is not an uncommon path for Republicans, regardless of rhetoric.

Wisconsin Governor Scott Walker, on the other hand, risked the wrath of the public employee unions by going right to the heart of the problem and making serious, major, and easy to understand reforms. And they work. Now, Walker, is battling a recall movement. Why? Because Walker's reforms are for real. When real reforms take place, there is opposition. McDonnell's program is not real reform. It is simply another example of Republicans expanding the role of government and adding more obligations for future taxpayers, while striking a pose for fiscal restraint. But, it is only a pose.

Court Decision is Pivotal

Normally, the Supreme Court's activities are irrelevant to the future direction of the economy. But, not this time.

The American economy is weighted down by historically unsustainable debt levels. This is not just a problem of federal debt. If you add in state and local debt, the situation is significantly worse than the European sovereign debt crisis. And, there is no good solution.

On top of the sovereign debt overhang, the American economy is beset with an onslaught of new regulations that threaten to overwhelm the fledgling recovery. Businesses have pulled in their horns. There is no real enthusiasm to expand employment or start new businesses. Meanwhile, there is a steady drumbeat of vitriol from the White House about how "unfair" business people are. This stuff takes its toll.

With Obamacare on the horizon and a massive tax increase slated for early 2013, the American economy is poised to go over the cliff and another important recession could well be underway by the second half of 2012.

Will it happen?

That depends. There is always the feeling the tax increases that will automatically take place in early 2013 might be postponed one more time. That won't help much because taxpayers will realize that this merely postpones the day when they will get bludgeoned by the tax man. But, it will help a little.

More threatening is Obamacare. Obamacare dramatically increases the national debt, expands the government's direct role in the economy in a historically unprecedented manner, and burdens businesses with the largest single cost mandate in history.

The combination of Obamacare and much, much higher tax rates and an Administration that wants even higher tax rates than those that are coming in early 2013 is deadly for an economy struggling to find it's way out of the 2008-09 crisis.

If the Court finds that Obamacare is constitutional (which may or may not be the correct constitutional decision...I'm no expert on that one), the economy will be in big, big trouble and a second recession is undoubtedly in the offing. Combined with inept policy in the Eurozone, things could get dicey, economically and politically throughout the developed world.

Pretty gloomy picture! But, it may not turn out that way. I am ever the optimist. Hopefully, Obamacare will not pass constitutional muster and the scheduled tax hikes in early 2013 can be cancelled (permanently). If those two items work out, then the economy should gradually work its way forward. If not, Katie bar the door.

For now, I would still own common stocks, but if Obamacare is constitutional then stocks will not be a good place to be. We will know by some date in June what lies ahead.

Irrelevant Economic Issues

Does it matter if a presidential candidate has a Swiss bank account? Will that impact economic growth for good or evil? Will raising tax rates on millionaires, which will mainly lower tax revenues (because income will simply be shifted or accrued), improve the economy or help the unemployed or reduce national debt? The answer to all of these questions is "no."

The real issues in the American economy are economic stagnation, exploding levels of state, local and federal debt, and the absence of public or private savings. These are the issues that matter. Assuming that a candidate has nothing to say about any of these issues, it only stands to reason that the candidate will begin to talk about other things like "tax fairness," "carbon footprints," "public investments," and so forth.

The interesting question is whether the public is interested in the real issues or the irrelevant issues. European countries have focused on irrelevant issues for the past three generations and now they are paying the price. Which direction will the US choose?

What would Keynes Say?

Mainstream economists continue to parrot the single equation naive "Keynesian" model of macroeconomics. This model says that increasing "G" will increase aggregate demand and lead to a higher GDP.

This "naive" model was developed by Richard Kahn, not Keynes, and was brought forward in a world where government spending was, by modern standards, relatively modest.

Today, in a world where government activity consumes nearly half of all resources in the US and close to two-thirds of the resources of the typical European economy, it is highly unlikely that more government spending would have any "Keynesian-like" effects. Why would giving public employees a ten percent pay raise improve the GDP? Keynes would turn over in his grave to see his work interpreted in this fashion.

Most economists don't read Keynes. What they read is the simplest mathematical versions of Keynes devised by other economists who also never read Keynes. But the name, "Keynes," is tacked onto these models to invoke the spirit of this great economist.

But, it was Keynes who first came up with the expression of "animal spirits." What are "animal spirits?" According to Keynes, capitalism is driven by the "animal spirits" of entrepreneurs. These animal spirits have nothing to do with increased government spending. Indeed, increased government spending may serve to reduce the animal spirits, so essential to economic prosperity.

But mainstream economists seem to have no interest in the animal spirits of entrepreneurs that Keynes found so important in his actual writings, as opposed to the modern caricatures of his work that appear so often in media and elementary economics courses offered in major American Universities.

If the actual writings of Keynes were assigned reading for students, they would learn that Keynes himself never subscribed to the simple-minded models that pass for modern Keynesianism. A simple perusal of "A Treatise on Money" written in the 1920s and "The General Theory of Employment, Interest and Prices" published in the mid 1930s" would be enough to convince the modern reader that Keynes would never support modern "Keynesian" policies.

Even on things like the European debt crisis, you will find Keynes useful reading. Try his first major work: "The Economic Consequences of the Treaty of Versailles." Keynes makes it clear in "Versailles" that huge debts facing weak economies will cause those countries trying to collect such debts more economic pain than if the debts were reduced dramatically. Keynes would clearly not support the Geithner-Merkel-Sarcozy program for Greece, Spain, Italy, Portugal and Ireland.

It should be obvious that capitalism works best when the environment values capitalists. If the environment is unfriendly to capitalists, then capitalism is not going to fare well. If capitalism doesn't fare well, then middle and lower income classes have no real chance for economic progress. Most observers, regardless of their training in Economics, understand this.

Keynes understood this better than his contemporaries. That's why it was Keynes and not someone else who surfaced the idea of entrepreneurial animal spirits. Keynes would not be supporting the current war on capitalists being waged by Washington policy makers if he were here today. He would be looking for ways to stoke animal spirits not dampen them.

Robert Reich Has It Right

Robert Reich, for Secretary of Labor in the Clinton Administration, penned an article today "For the rich, the recession is over." He's right.

The various policies put in place during the Fall of 2008 -- TARP, Federal Reserve activity, followed by the Stimulus Package of early 2009 and regulatory burdens of Dodd-Frank have all combined to rescue rich people, but promise to thwart any serious economic recovery. On top all of these misguided policies the Congress passed the "Affordable Care Act" which virtually guarantees no future economic growth for the US.

Absent a real economic recovery, poor folks really don't have a chance. The combination of laws that forbid hiring poor people (minimum wage laws) and laws that make it illegal for banks to loan money to poor folks (Dodd-Frank) and laws that make it virtually impossible to break the union monopoly of many construction jobs (Davis-Bacon, etc.), the deck is stacked against the poor and the middle class. As if this weren't enough, projects that could (eventually) lower gasoline prices and provide an immediate source of job creation (Keystone project as just one example) are blocked and taxpayer money is poured down ratholes of Administration supporters (Solyndra, etc.)

Politicians don't have to get jobs in the private sector, so they can blissfully claim that they are looking out for poor people as they pass laws that prevent the poor from having any real opportunities. The Congress and the Administration have combined to prevent the economy from having a chance of a normal economic rebound. This hurts poor people and middle class people. But, it has little or no effect on rich people.

Thus, Reich's conclusion. "For the rich, the recession is over." For middle class America, things will remain difficult.

"The Living Wage Campaign"

The left always gets attracted to ideas that sound good regardless of their real impact. The "living wage campaign" is just such an idea. This is essentially a minimum wage rule that advocates claim would help people pull themselves up out of poverty. In fact, it does just the opposite. Not an uncommon outcome for moral sounding initiatives put forward by wealthy, entitled college students designed to help the disadvantaged.

Even if one buys into the general idea, you have to wonder why the students and the advocates of the "living wage" don't simply dig into their own pockets and give money to workers who they think have inadequate income. The idea of making a personal wealth sacrifice never appeals to advocates of these schemes, who are invariably drawn from among America's wealthiest families. No, their idea of charity is to have someone who doesn't agree with them foot the bill for their ideas. Charity begins across the street for such advocates, it never begins at home.

A living wage is equivalent to putting up a sign saying "low skilled employees need not apply." All you are really doing is reducing the number of jobs available to poor folks and eliminating any shot of those at the bottom of the skill spectrum from getting a job. Imagine that the living wage was raised to $ 20 per hour. What would happen to the person now holding a $ 10 per hour job? He/she would have no chance of getting the $ 20 per hour job. First of all there would be many fewer such jobs simply because of costs. But, secondly, and more significantly, the new wage level would attract much higher skilled employees and eliminate from consideration the kinds of folks that now can compete for those jobs.

What the "living wage" people are really advocating is: 1) reducing the number of jobs available to low skilled employees; 2) upgrading the skill levels of those people that occupy those jobs by eliminating any real chance that low skilled employees can compete for such jobs. How noble! Why not simply put up a sign: "poor people need not apply here!" The living wage campaign amounts to the same thing.

Notice that the employees that currently hold these jobs are rarely in the vanguard of the "living wage movements." Instead wealthy and privileged college students, who are largely sheltered from the vicissitudes of the economy, are trying to show the world how caring they are. As the living wage campaign advocates bask in the mirror extolling their personal morality, low skilled Americans take one more step back into the economic morass.

The Eurozone Slips Back into Recession

No big surprise. Austerity and the absence of reform are not a good mix. Meanwhile, sovereign debt levels soar off into the stratosphere.

There will be a lot of finger-pointing and the blame-game in the future when the current European trajectory ends in disaster. All of this was easily avoidable.

Had Greece been permitted, just two short years ago, to do a default workout with its creditors, the Eurozone economy would probably be motoring along today. But, no.

The Geithner-Merkel-Sarcozy strategy, which is really just blindly putting one's head in the sand, has been adopted. The result: economic contraction and growing political chaos. As for reform, that is out the window, as recent developments in both Spain and Italy can attest.

Whenever economic conditions seem to be faltering, there is an outcry for politicians to "solve" the problem. Inevitably, politicians take a relatively minor problem and turn it into an economic disaster. This has happened over and over again in the history of modern, developed economies. Only when politicians did not have enough clout to interfere (19th century America, for example) were economic problems left to right themselves and economic growth permitted to triumph over foolish policy prescriptions.

Economies can heal themselves. People can learn. But, what never works is direct action by the government to "solve" the problem.

Piling debt upon debt and attempting to force austerity on Europe won't work and will end in disaster. By the time disaster strikes, Geither, Sarcozy, and Merkel will no longer be in power. So, they will be sitting on the sidelines pointing fingers at others. But, the coming disaster for Europe will be a direct result of the foolishness that now passes for policy.

The only way to deal with too much debt is to reduce it. The only way to achieve economic growth is to break the stranglehold of too much government and too much regulation. The Merkel-Sarcozy-Geithner policies take us in exactly the opposite direction.

The future for Europe is perfectly predictable.

Economic Inequality

Derek Jeter has made hundreds of millions of dollars. The sanitation worker who picks up the garbage at Jeter's home makes a fraction of that amount. What accounts for that discrepancy?

People are willing to pay high prices to watch Jeter play baseball and companies are willing to pay Jeter large amounts of money to speak favorably about their products. Is that wrong?

Why is there a problem here? It is not as if Jeter is the king and his garbage man is his serf. If the garbage man had Jeter's baseball skills and vice versa, then their positions might be reversed. In fact, in future generations that may well happen. Such is life in a free market.

Inequality of income and wealth by itself is of no signficance. It really does not matter. Poverty is a different story, but in the example above there is dramatic inequality of income but no poverty. These are different things and should not be confused.

Jeter is not wealthy because he compelled someone to give him money. He is wealthy because he has a skill and talent that people are willing to pay money to see. The system is working.

The attempt to create equality between Jeter and his garbage man may do nothing more than reduce both of them to poverty. Without a free market, there would be no Jeters and the garbage man would make little or no money because there would be scant tax resources from the Jeters of the world to fund the garbage man's job.

Today in the New York Times, Thomas Friedman has another mindless comment about income inequality that makes one wonder if he thinks before he writes. Those who wish to reduce inequality should address the talents, abilities, education and work ethic of the folks at the bottom of the economic pile. Wealth transfers won't help because they are soon dissipated through foolish behavior.

Free markets provide opportunity for the poorest amongst us. Every society has rich people, but the only societies in the history of mankind that have lifted the living standards of the average citizen are economies with free markets.

Dealing with poverty is an agenda worth working toward. Worry about inequality of income is a fool's game.

If Obamacare is Overthrown

If the Supreme Court tosses out Obamacare, the United States may have a unique opportunity to think about a framework for a rational health care industry.

The framework should begin with the free market. The guiding principle should be that individuals pay for their own health care. Without that guiding principle, health care provision will always be too expensive, inadequate for many, and absurdly inefficient. Check out the health care programs in Europe. None of them are any good because they all have too much government involvement.

Let us all admit that the free market isn't perfect. No question about it. The free market provision of health care will inevitably end up with situations that none of us like. No denying that.

But all policy decisions are a question of choosing among alternatives. No solution is perfect and government solutions almost always tend to be the worst available. Should the government really be delivering the mail?

We now have a completely absurd healthcare system. Hospitals are required, through the blunt instrument of denial of federal dollars, to provide health care to anyone who walks through the door. This absurd arrangement is a recent phenomenon. It wasn't always this way. There once was a time (pre-1960) that one had to prove that you could financially foot the bill before a hospital had to serve you. That concept worked.

To deal with folks who couldn't pay their way into a hospital, the US was dotted across the country in every locale with charity hospitals who took care of folks who couldn't pay their bills. There is no reasonable size county in the US that did not have such a charity hospital. This system worked and worked well.

But, the adoption in the mid 1960s of medicare-medicaid, spelled doom to the concept that hospitals could deny services to people that could not pay. In effect, the government took over the private hospital industry, by threatening the denial of federal funds connected to medicare and medicaid.

Now, it is automatically assumed that anyone has free and unfettered access to a hospital at any time they want simply by finding their way into an emergency room, whether they can pay or not. Meanwhile, charity hospitals no longer exist. Who needs them when every hospital becomes a charity hospital?

So, now we have a health care system that no one pays for (out of their own pocket). Any product that no one thinks they are paying for will find that it's price will increase without limit. Eventually, unchecked, the present health care system of providing free care for everyone will mean that all of society's resources will be consumed by the health care activities.

So, what to do? A return to a free market health care system is the answer. Individuals should pay for their own health care and should be denied access to health care in private hospitals unless they can pay for that health care. If the government wishes to get into the act, then the government should build charity hospitals and administer a separate system for folks who can't afford to pay, which would be a very, very small part of the population.

The market for catastrophic (in the sense of costs) care can be handled by the insurance market. Here is one place where state regulation of insurance should be abandoned in favor of a streamlined federal regulation that focuses only on "truth in packaging." The government should not dictate what insurance plans should be offered but should merely make certain that individuals are told straight up what the insurance plans offer and make certain that insurance companies deliver on the plans they sell to the public. In the case of pre-existing conditions, the government could subsidize some catastrophic plans if the citizenry deems that to be a good idea. But, individuals with heavy health care costs should shoulder much of the cost. No one should skate through the system paying little or nothing.

Those who fall through the cracks should become the wards of government-sponsored charity hospitals. No doubt, health care will not be as good in such places, but health care in such places will likely be far better than what governments provide currently in Europe.

There is no good definition of health care. I would not include provision of contraception as part of my definition of necessary health care, but it is clear that the Obama Adminstration does include such things. Let individuals make their own definition. The government is not omniscient. Citizens don't agree on what constitutes adequate health care.

One thing for sure: Americans don't like Obamacare. Even today, two years after passage, 57% of Americans favor repeal of Obamacare. That's pretty amazing.

Americans have traditionally believed in private responsibility and charity towards all. A free market in health care and a free market in health insurance, supplemented with charity hospitals for the indigent, is what the US needs, not federally dictated programs that deny citizens the right to choose the health care products and programs they desire.

Greece's Future -- Red or Brown?

The mainstream political parties are losing their support in Greece, as one would expect, given the imposition of austerity. The communist party and neo-nazi parties are on the rise and threaten political chaos and civil unrest. Sound familiar? This was the Germany of 1922-23 as the German government faced a mountain of reparation payments from the aftermath of the Treaty of Versailles and an enforced austerity program. Now Germany is the enforcer and Greece may well become the new Germany.

This is the predictable outcome of the Merkel-Sarcozy-IMF bailout scheme. There is no way that this solution will hold. It will come apart and Greece will become a different country, unrecognizable from the rest of Europe. Portugal, Spain, and Italy will eventually be on that path as well, unless the Merkel-Sarcozy-IMF plans are abandoned.

Europe needs a reality test, not austerity. The sovereign debts in Europe are unsustainable and unpayable. This is a pretty harsh reality, but it is the reality. No amount of "political will" by Germany and France will ultimately matter.

Remember that the US situation is worse, once state and local debt is added to federal debt. Greece is our future as well unless the realization dawns that our debts are unsustainable and unpayable as well.

You can always tell when a country has lost it's fiscal sanity when it thinks that if only it could get more revenue out of it's richest citizens, it's fiscal problems would be solved. Taxing rich people is completely irrelevant to the fiscal situation of Greece and to the fiscal situation in the US.

What is driving the debt problems of the Western economies are the entitlement programs -- retirement and health care. There is no set of taxes that can support these systems -- not in the US and not in Europe. Absent private savings, there is simply no way to support our rapidly aging population and the health care needs of the future. The empty charade that "government programs can deal with this" is nonsense. The government is not providing any savings for the future and government policies have obliterated private savings.

So, watch the future play out in Greece. Coming to your neighborhood soon!

Europe -- The Unraveling Process

German bonds are beginning to sink. A national strike has been called in Portugal to shut down the economic life of the country to protest the government's austerity measures. Bond yields in Spain and Italy have resumed their upward march. There is a growing awareness that Greek reforms will never take place.

No surprises here, unless your name is Merkel, Sarcozy, Bernanke or Geithner.

The European debt explosion marches on to its inevitable conclusion. The forces that drive sovereign debt expansion in Europe, in Japan, in the US, are alive and well. Politicians can huff and puff all they want, but it won't matter. The unraveling process is well under way. Check out the trend in US bond yields. We're going the same route.

In case you didn't see it, Ben Bernanke and Tim Geithner weighed in yesterday on how things are going in Europe.

Bernanke (to a House Oversight Committee): "In the past few months, financial stresses in Europe have lessened, which has contributed to an improved tone of financial markets around the world, including in the United States."

Geither (to that same House Oversight Committee): "The European economies at the center of the crisis have made very significant progress."

You wonder what these guys are looking at to make these kinds of statements. The American public is not well served by misleading statements from it's chief economic politicos.

Big News -- Greece Back in the Headlines

Elections are coming up in Greece and guess what? Greeks don't care for the austerity plans and economic reforms foisted upon them by the terms of the recent bailout. Surprise, surprise!

Merkel, Sarcozy, the ECB and the IMF are a ship of fools. There is no way the Greek population, or any population, would agree to these terms. It won't happen. So, why are the politicians putting us through this ruse? The same reason that American politicians are going through the charade that higher taxes on the rich can fund the American welfare state.

This is all ridiculous. The Greeks will never abide by the agreements. All that has happened is that the debts of Greece have been assumed by Germany (and, to some extent the, US through the IMF backing). "Extend and pretend" continues to be the policy of the Eurozone, enthusiastically supported by the Obama-Geithner team. It won't work. Give it up.

These sovereigns debts are unpayable and the sooner that this truth is faced the better for all concerned. Time for workouts across the Eurozone (including Germany).

Diamond in the Rough

The "Jobs Bill," currently under consideration by the United States Senate is a terrible piece of legislation. Nothing surprising about that. The fact that it is bi-partisan only adds to its odor. However, buried within the bill is a provision that limits some of the worst provisions of the Sarbanes-Oxley legislation of 2002 that has all but destroyed the US IPO market. Sarbanes-Oxley is the legislation that was passed in the heat of reaction to Enron and World Com and is one of the worst pieces of finance legislation that ever found its way through Congress (although Dodd-Frank is certainly even worse).

Sarbanes-Oxley was a reaction to the fact that the US stock market, from 1981 until 2002, had increased 1200 percent. That, apparently, was an inadequate return, according to the political class...hence the adoption of Sarbanes-Oxley. Since Sarbanes, Oxley, the stock market has basically done nothing, which, I suppose, is more in keeping with what the political class deems to be a more investor-friendly climate. Both SOX and it's step-brother, Dodd-Frank, have placed the American financial system in the deep freeze and other financial centers around the world could not be happier. Seeing American voluntarily abdicate its pre-eminence in world finance plays right into the game plan of Europe, China and all of our competitors.

Thus, the effort to give the IPO market a breather from the Attila the Hun approach of the Congress to free markets.

But, watch out. Now the political class is objecting. Even the Council of Institutional Investors has even weighed in. You might think that such a weighty institution is non-political, but you can forget that. The CII is dominated by far left politicos whose main goal is to use a heavy sledge hammer on American corporations and they are succeeding. Now the CII wants even this glimmer of help to those seeking access to capital markets to go take their case to foreign capitals. America is no longer the place to bring your IPO, so says the CII and the left wing political class. So, this small effort to give breathing space to companies seeking to raise capital is under siege.

This was the only decent provision in the "Jobs Bill." The rest of the bill is embarrassing. Perhaps the diamond in the rough will survive. We shall see.

Read Danny Hakim's NYTimes Article

I am not normally a fan of plugging NYTimes stories, but this one has to be read. Danny Hakim has written a terrific article laying out the plight of cities and counties in the state of New York. He recounts one story after another of impending municipal bankruptcies. In every case, the cause is the same -- bloated public employee expenses -- mostly public employee retirement and health care.

Normally in recessions, the costs of running government agencies slows down since there isn't any reason for employment costs to rise. But, not so with pension and health benefits. They rise astronomically regardless of the economy.

This problem is not confined to cities and municipalities in New York. California faces the same situation for almost all of its large cities and counties. Many other states are in the same boat, especially where unions have major political clout -- Illinois, for example.

So, for those who think Europe has problems, just relax. European debt problems are coming to your neighborhood soon and for pretty much the same reason -- absurd expenditures on retirement and health care programs.

Spain Says: "No Way, Jose"

The new Spanish government has announced that it plans to flaunt Eurozone rules regarding it's fiscal deficit. The 4.4 % promised by the previous government in its deal last year with the European Commission has been tossed aside by the new Spanish Prime Minister Mariano Rajoy. So much for fiscal austerity. Spain now has the worst of both worlds -- expanding debt and no real spending curbs. The Spanish economy has the highest unemployment rate in Europe, pushing it's way toward 25 percent. Not surprisingly, the new Spanish government cannot survive politically if it fully implements the austerity program that it agreed to just twelve months ago.

This will be the continuing tale. European countries will not live up to the austerity agreements that they forge with the ECB and the European Commission. Merkel and Sarcozy are wasting a lot of people's time with this. It is not going to happen.

Meanwhile, interest rates on Spanish debt surged upward. The beat goes on. Sooner or later the Eurozone "solutions" will collapse in tatters and reality will set in. The sooner the better.

More Nonsense from the NY Times

Nicholas Kristof has a piece in today's NY Times depicting the plight of present day Athens. He concludes that the economic collapse of Athens is the result of "Republican-like" policies enacted by the Greek government. Really?

According to Kristof, the problem in Greece is the result of "austerity" imposed by Germany and France. I'll buy that. But, the question is why is the austerity being imposed. The answer, which Kristof seems blissfully unaware of, is that Greece is broke and cannot borrow any more money from anywhere. Thus, on their knees, they have gone to the ECB for funding. Should the ECB simply write them a blank check. That seems to be the view of Kristof.

Kristof joins a long list of commentators that cannot seems to add and subtract. Where is the money to come from to continue to support Greek profligacy? Kristof, like most far left commentators, seems unconcerned about who pays for all of this. But, at some point, someone must pay for all of this. Who is that to be?

Greece is suffering from living way beyond it's means. Nothing more, nothing less. They should default on their indebtedness and start anew. That way, Greece could avoid most of the most pernicious effects of austerity. But, no. We are still in the "pretend and extend" mode. So that, for now (but not for long), we think we have forged together a "Greek solution." But, we haven't really.

As Kristof notes, austerity is disastrous. But, the right answer is not to blame some outside party for removing the punch bowl. The right answer is honesty. Admit that Greece cannot pay its debts and start anew. Just doing debt swaps with private creditors is not enough . Greece needs a total debt workout with all of its creditors, not just with the private ones.

Meanwhile, Kristof needs a lesson in arithmetic. No one can afford what goes on in Europe or the US. Eventually, those funding this kind of nonsense will quite funding it. That's where we are with Greece.

The Right Energy Policy

Why does the US government need an "energy policy?" The free market is available. Oil companies, owned mostly by average Americans through their pension investments, will develop whatever is needed. Recent natural gas discoveries and production have blunted the environmental argument against the use of fossil fuels. So, why doesn't government just get out of the way?

The Obama crowd seems to believe that if they legislate a drop in demand that will solve the energy problem. I guess, in the extreme, if they were to outlaw the use of cars, fossil fuel consumption would drop precipitously. Outlawing cars probably seems extreme even to the Obama crowd, so they have taken the half way step -- tell everyone what car to buy -- the Volt. Since Americans don't want to buy the volt, the Obama folks sweeten the pie with a $ 7,500 tax subsidy per car (now, urging that the subsidy be raised to $ 10,000 per car).

But Americans don't like the Volt and it's sales are moribund. Americans like the big SUVs and that's what they are willing to pay for. So, why not let them? Why does government know better than individuals?

Obama says that "big oil" gets $ 4 billion per year in subsidies. Is that true? What he calls subsidies are "intangible drilling expenses," which is nothing more than the depreciation scheme available to natural resource producers of all stripes. Should you be able to deduct the wearing out of plant and equipment? Most people would say yes. Should you be able to deduct the wearing out of an oil field? Most people would say yes. In any event, it is the average American who mostly owns big oil, so Obama should say "we are subsidizing average Americans with $ 4 billion a year in depletion write offs....let's stop doing that and raise the taxes on average Americans by $ 4 billion." That is what he is really advocating. Soak the middle class by pretending to go after "big oil."

But, at the end of the day, why not let capitalism do its thing. By tinkering, by restricting the ability of the oil industry to develop oil and natural gas to meet domestic demand, the Obama policy leads to volatile energy prices and US dependence on the good wishes of countries like Russia, Iran, and Venezuela. Why is this a good idea?

What free markets do best is to allocate scarce resources and provide for alternatives when some resources become too expensive. That would be the correct energy policy -- no energy policy at all.

Austerity as the Welfare State Unravels

We are treated daily to news accounts of families suffering from removal of government benefits that such families had come to expect. Today's NYTimes features a community in England facing the loss of a government-provided day-care center. These stories describe the often desperate plight of families suddenly deprived of something that they had come to depend upon. This is the cruel downside of the modern welfare state.

Inevitably, the welfare state, in every country, expands it's reach into every aspect of life. Eventually, with the elimination of private saving and a sense of personal responsibility, the welfare state becomes wildly unaffordable. That's where we are now in most of the Western world. Now comes the painful, but inevitable, process of dismantling the welfare state as the promises run up against reality.

The money has to come from somewhere. No matter how loudly welfare proponents proclaim the existence of this economic right or that economic right (now proclaiming, for example, the right to publicly provided contraception!). Europe now and the US soon will unravel their welfare states, since there is no one out there willing to fund ithem. No doubt the NYTimes will treat us to more stories of families who, having abandoned earlier habits of thrift and self reliance to accept government welfare, now face the withdrawal of those benefits.

There is no limit to the expansion of the welfare state short of catastrophe because those who are it's proponents are unmoved by arguments about incentives and affordability. But, numbers are numbers, so more and more families in the West will be forced to face the harsh realities that the welfare state and it's ultimate dissolution will impose.

Valuing Common Stocks

The smart money is still bearish. With the Dow Jones hovering just below the 13,000 level, the financial pundits are almost unanimous in their bearish outlook. The exception to the gloom is the optimistic view of the sell side -- the brokers. They like the market here, but then, they pretty much always like the market. It comes with the territory (that is, the job).

So, are the bears right? Is the party over? Is it time to take a pause?

First a caveat. The only honest answer is that no one really knows, no matter how convincing one's argument may be.

That said, my guess is that the pundits are wrong. Common stocks will likely be much higher in value ten years from now than they are now. It would not be a surprise to see stock performance exceed historical levels over the next ten years, which would mean a Dow Jones of over 30,000 by 2022.

But what of the next twelve months? Will the market conveniently sell off or pause to give the late-comers an opportunity to climb aboard? I doubt it.

That doesn't mean that the economy is set to take off. It isn't The economy will continue to plod along with high levels of unemployment and very slow economic growth. Businesses will continue to find ways to avoid employees and taxpayers will look for ways to avoid the tax hikes that everyone knows are likely to be in our future. This means continued economic stagnation, albeit a slowly expanding economy.

This is not an economy that provides opportunity for those with limited economic means. That has been effectively precluded by government policy. But, it is an economy that benefits those who ride on top of the stagecoach. Their ride will get better, stocks will go higher. The Warren Buffetts will do well (and they won't pay higher taxes, even if they face higher tax rates).

Another Economist Off the Rails

Maybe he is being misquoted! In today's NY Times Professor Ronald Kurtz of MIT's Sloan School of Management is described as believing, in his new book, that tax policy is the reason we have an out of control debt situation. If Kurtz believes this, he must have some serious trouble with arithmetic. Taxes are really irrelevant to our long run debt situation -- whether high or low. The entitlements cannot be afforded if we were able to grab 100 percent of everyone's income -- rich and poor.

So what difference does the tax rate make? There are, of course, two debates going on. One is the "fairness" debate which is a bit misleading, since those who advocate "higher taxes on the rich" are well aware that higher tax rates may end up reducing what rich people will show as taxable income and reduce revenues, potentially dramatically reduce revenues. So "fairness" may come at the price of lowered federal revenues. Is that fair?

The other part of the debate is that higher marginal tax rates reduce incentives for business expansion and employment. Those who deny this point to earlier periods when marginal rates were higher. But, no one paid those higher rates of yesteryear. There were far too many loopholes.

When John Kennedy was first sworn in, he asked for a report on all the taxpayers paying the 91 percent rate, which was the highest rate at the time. Guess what? There were a whopping total of seven taxpayers paying that rate. No one willingly pays rates like that. You wouldn't either (neither would Warren Buffett). The rich simply shift assets around so that no income shows up. One of the wealthy taxpayers in 1961, Mrs. Dodge, a General Motors heiress from Grosse Point, didn't even file a tax return. Her assets were all in tax free municipal bonds. So, do you think Mrs. Dodge cared a whit whether rates were 30 %, 70 %, 91 %, or 100 %.

So, what did John Kennedy do? He sent a bill over to Congress to lower the highest marginal tax rate from 91 % to 70%. His purpose? To increase tax revenues. President Kennedy got the point, that seems lost on Professor Kurtz.

Anyway, here we go again. Another economist who thinks that a $ 66 trillion unfunded liability can be dealt with by taxing a hand full of wealthy Americans.

Selective Enforcement Once More

Prosecutors are now quietly leaking that they don't see any criminal activity in the demise of MFGlobal. Recall that MFGlobal fraudently looted $ 1.6 billion from customer accounts that were, by law, supposed to be segregated from the firm's own assets. Now, it turns out, prosecutors are leaking that this all seems to be an innocent mistake.

Interesting, after Goldman Sachs has been blistered over and over again by the SEC and by state prosecutors for activities that no one had ever considered anything other than ordinary market-making. In the brave new Obama world, Attorney General Holder and his cronies in state law enforcement invented new criminal activities where there were none, in order to make political headlines at the expense of Goldman Sachs.

But now, when former Democratic Senator and Governor John Corzine is the one whose hands appear to have dipped into the cookie jar, this all is being washed up as simply an innocent mistake. Never mind that innocent customers, whose accounts have been looted, were not protected by the Obama-led CFTC, too busy on political witch-hunts to provide for the simplest of their regulatory responsibilities.

If customer accounts at broker-dealers that are, by law, supposed to be segregated from the broker-dealers' own funds, can be looted any time the firm is run by folks friendly to the President, then no one's funds are safe -- in broker-dealers or in mutual funds either. The blank check that is being issued to Obama's cronies to steal from the public is just one more example of the collapse of the rule of law.

But, this time, the real economy will suffer. Gradually investors will begin to sense that their assets, held in broker-dealers or in mutual funds, are not safe from looting by the people running those firms. So long as the leadership of these firms, like Corzine, worship at the Obama shrine, the investors will be unable to pursue criminal wrongdoing and their losses will be simply chalked up to "innocent mistakes."

The Price of Energy

As gas prices careen toward $ 5 per gallon, we are reminded that fossil fuels are the only game in town. For all of the waste and corruption of the Obama energy policy, it is good old drill, drill, drill that provides any hope of slowing the increase in gas prices at the pump.

Obama seems perplexed. He notes that energy consumption is down. So, why are prices up? Is he aware of China and India? They use energy too. Guess what? They are going to keep pushing the demand for energy higher and higher. Even with oil at $ 300 per barrel, one wonders if Solyndra would have made it. This is the most naive administration regarding fundamental economics in the past hundred years. Somehow, they think a few windmills will get it done. It won't.

Sooner or later, even the Obama crowd will realize that the US must tap its fossil fuel reservoir, potentially the largest such reservoir in the world.

Higher prices at the pump has a partial offset in profits and jobs in the US energy sector. No doubt, the bad guys in the Middle East will get their share as well. But, all in all, the only thing Americans have to fear regarding energy supply is more bad policies from the Obama Administration.

Buffett as Buffoon

Becky Quick and Joe Kiernan took Warren Buffett to task this morning on CNBC for his hypocritical stance on income taxation. Joe suggested, as has Governor Christie recently, that if Warren is so intent on paying more in income taxes why doesn't he write a check. Buffett's response: his writing a check would not solve our deficit problem.

Interesting answer. Neither would putting a surcharge on "millionaires and billionaires." Raising taxes on the rich would not put a dent in the deficit problem that the US faces. It doesn't matter whether just Buffett pays up or whether he is joined by his rich buddies. It won't move the needle.

So, why won't he write a check and show the way if he believes that is the "right thing to do."

Why? Because, Buffett is a hypocrite. He wants to appear to be the good guy, knowing full well that all he has to do to avoid income tax is shift his assets around and have no taxable income at all and pay no taxes whatever.

If Buffett wanted to pay more taxes, the route is obvious. As Governor Christie put it so eloquently: "shut up and write a check."

Buffett likes to hear the sound of his own voice, but he isn't about to share any of his wealth with the US taxpayer. Let others do that, says Warren!

Kiernan went on to query Buffett about his love for big government and having the government deciding winners and losers in the private economy and invest taxpayer dollars in the Solyndras of the world. What was Buffett's answer? "The US has the greatest industrial machine on the earth," said Buffett.

Buffett, like a lot of the far left, gives the free market zero credit for the US economic engine. To Buffett, the government is the be-all and end-all of American greatness. No wonder he supports Obama.

He should write a check!

"The Rich are Bulletproof"

So spoke Meredith Whitney, bank analyst of some note this morning on CNBC. As Ms. Whitney described our current economic plight, she marched through one set of new regulations after another that are roadblocks set up to thwart the economic future of middle and lower income Americans, while noting that the rich are unaffected by all of the new Obama Regulatory regime.

Dodd-Frank and the Consumer Protection Agency are open assaults on the American middle class. It has now become much, much harder to get any kind of credit -- be it a mortgage, a home equity loan, a credit card, a pay day loan, whatever. The nanny state has decided that middle and low income Americans should take their business to the loan shark community. We've seen all of this before.

In the name of protecting middle and low income Americans, the Obama Administration has put middle America into an economic straight-jacket. Credit is the life blood of any economy, but by declaring war on those who issue credit to middle America, the Obama Administration is laying waste to the hopes and dreams of the average American.

It is a mistake to blame lenders when folks get in debt over their heads. Let people do whatever they want. People will learn. By declaring war on those who provide credit, American policy is making sure that people who need credit won't be able to get it when they need it.

This is one of the many terrible consequences of our new over-regulated economy.

A Silly Deal

The Greek bailout announced overnight is ridiculous and will not avert plunging the Greek economy into chaos. It will only be a matter of a few months until this deal will create political conditions in Greece that will shake up the Eurozone. There is simply no way the Greek citizenry will abide this deal.

Meanwhile Merkel and Sarcozy will take a victory lap for nothing. Note that on the bailing side is the IMF, of which the biggest single donor is the US taxpayer. So, Obama has stepped the US into this quicksand and dragged the US taxpayer in with him.

No one wins with this outcome. But, it will look like a win to the politicians ... for a while.

The only apparent winners are the French and German banks. But, their victory is only temporary until this deal unravels as it smacks up against reality.

Myopia Reigns

A "Greek Deal" will be cheered by stock markets as taking the Greek issue off the table. But, does it? Will Greece honor the severe austerity embodied in any Greek deal? Not likely.

Politicians love situations like this. A patchwork solution that makes the long run problems far, far worse than simply ignoring the problem and letting nature takes it's course.

Greece needs a "workout," not a debt expansion and extension and austerity.

The Eurozone needs policies that promote economic growth and economic opportunity. European politicians are supporting policies that do the opposite. Default is not a bad thing. "Extend and pretend" is not a policy. It is a cop-out.

What is needed are two things: 1) a recognition that the high levels of debt in the Eurozone are not only unsustainable, they are unpayable; 2) the absurd "protection" and "entitlement" programs that characterize the European welfare model are inconsistent with economic growth and economic opportunity.

But, in the short run, the Tim Geithner mentality will reign, no doubt. A Greek deal is reminiscent of the famous "Emporer Has No Clothes" story. For a while, it works, but it has no chance of working in the long run.

None of this will matter for long as the Greeks will not live up to the austerity programs forced upon them by their politicians. The bailout will simply buy time for the present disastrous economic policies to continue unabated until discussion begins about the next bailout that Greece will need.

Hopelessness for the Young in Europe

The New York Times has an excellent article today detailing the plight of youth in England. But, English youth are better off then the rest of European youth. Staggeringly high levels of youth unemployment, reaching 50 percent in some Eurozone countries, are creating a generation of drifting, aimless young Britons and Europeans with no economic future.

This is the natural outcome of government policies that guarantee the good life. The good life has to be paid for. The youth are victims of all of this. By making it virtually impossible to fire anyone, Europe has guaranteed mainly that no one wants to hire any young people. Why? If they don't work out, you can't fire them. So, why hire them in the first place?

Those who thought that the European model was the way to go or that every country in the world can "afford" health care for all of its citizens (and other "affordable" things that government can do), should take a good hard look at Europe today. It is a catastrophe and it is simply a question of numbers.

Economic recovery won't even do the trick given the arithmetic of the welfare state. But, economic recovery is not in the cards with government policies like this.

Take a hard look. This is America's future playing out before our eyes. It is easy to promise, and, for a while, it works. But, eventually massive debt and kicking the can down the road leads to economic chaos and disaster. Europe is paying the price for policies that keep the free market from working. The US is next up on this stage.

Romney on China

President Obama is likely to be re-elected by default. Mitt Romney, the most likely Republican nominee has penned an article on China in today's Wall Street Journal that is an embarrassment to good sense. Far from appreciating the significance of a China that has turned hard in the direction of free markets and away from the communist model, Romney has once again given voice to the know-nothing crowd.

Blaming China for American economic weakness guarantees that Romney really doesn't understand why the American economy is faltering. America's problems have nothing whatever to do with China and pretending that it does eliminates the possibility of promoting the necessary reforms to get the US economy back on track.

It becomes increasingly more difficult to see any real difference between Romney and Obama. That favors the re-election of the President.

Fair and Balanced Trade with China

Once again, President Obama has shown a lack of understanding of the simplest of economic fundamentals. Yesterday he reiterated his argument that Chinese trade policy is what causes our balance of payments problems. Nothing could be further from the truth.

The problem that the US has is that we have no domestic savings, but we do spend a significant amount on investment (plant and equipment spending, for example). Where do the funds come from to fund our domestic investment, since every beginning economics student understands that savings must equal investment?

If we don't save, then we must "import" savings from other countries. China has a private savings rate that exceeds, by some estimates, forty percent. Since China has an excess of savings and we have a dearth of savings, Chinese savings are "imported" to the US. This is the balance of payments problem, not some issue with currency valuation or Chinese import controls.

No amount of China bashing will ever reduce the massive US balance of payments deficit. Only if Chinese domestic savings collapses or if the US increases its own savings rate will the balance of payments move toward zero.

It is worth noting that all of Obama's economic proposals actually encourage Americans to save less not more by promising to take care of their health care, mortgage problems, old age, ad infinitim. Why save? Big government will come to your rescue.

Their are good reasons why China should get rid of import controls and let their currency freely fluctuate in value, but nothing China could do, short of lowering their domestic savings rate, can move the needle on the US balance of payments problem. We created that problem by our own policies that encourage people to save as little as possible.

Obama is not the only one who seems not to understand this issue. Add Romney, Newt Gingrich, Donald Trump, Tim Geithner, etc., to the list of folks that don't understand this simplest of issues.

The Volcker Rule -- Another Bad Idea

The Volcker Rule -- the idea of banning proprietary trading by investment banks -- is a terrible idea. This rule is designed as a response to the 2007-09 financial crisis. But, proprietary trading made no contributions to the financial crisis. This is simply one more punitive attack on Wall Street with unfortunate side effects for average Americans.

The problem is that in order to ban proprietary trading, you must define what you mean by market making and therein lies the problem. Market making is faciliting the purchases and sales of investors. The Volcker Rule requires no trade unless the other side of the transaction can be found. The bank itself is not permitted, under the Volcker Rule, to participate in any way on its own account to facilitate the transaction.

This is ridiculous.

The impact would be increased volatility and terrible transaction outcomes for traders and investors.

This reduced liquidity will adversely affect everyone.

Volcker's response: liquidity is a bad thing. Liquidity creates asset pricing bubbles.

Volcker's response shows that he really doesn't understand capital markets as well as he thinks he does. There has been a massive amount of research on liquidity and as yet no one has advanced the argument that liquidity creates asset bubbles. In fact, most research on this topic suggests exactly the opposite.

Andrew Sorkin reports in today's NY Times that JPMorgan's highly respected CEO (and Obama supporter) Jamie Dimon had this to say of Volcker: "Paul Volcker by his own admission has said he doesn't understand capital markets. He has proven that to me."

The country owes a great debt to Volcker for his management of the Federal Reserve in the early 1980s, but the "Volcker Rule" is a discredit to his legacy.

Sentiment is Changing

It's interesting how much people's views of the market's future is so dependent upon its recent past. There is not much new in fundamental news from last summer until today, but the stock market is up nearly twenty percent over that period and you can see the shift in sentiment that has taken place. People now see less risk in the stock market and better prospects for higher prices than last summer when prices were much lower.

So, what's new (other than higher stock prices). Europe is in worse shape than last summer. The US fiscal situation continues to deteriorate and the political environment has become even more toxic. The future of the bond markets looks worse than ever. There is a threat of war in the air in the Middle East. Unemployment is still above eight percent and employment growth is still the slowest on record for an economic recovery.

But, prices are higher, so everyone extrapolates.

My guess is that stocks will continue to go higher. Stocks are still cheap, but not as cheap as they were. I expect 2012 to produce US stock returns in excess of twenty percent, but we shall see. The smart money is still bearish.

The $ 1.6 Billion Example

When you regulate everything, you regulate nothing. The recent MFGlobal disaster is just one more example of the failure of the over-regulation of the financial services industry.

Nothing could be more important than making certain that customer accounts are not commingled with their broker-dealer's accounts and looted in the interests of protecting the rich and powerful. Nothing! This is the most important regulatory function that the CFTC performs. And, how did it do? Total and complete failure, bordering on a lack of interest.

Meanwhile thousands upon thousands of new regulations proliferate. These new,stifling, regulations serve only to increase costs to consumers and protect the largest banks in our midst at taxpayer expense without adding one iota of protection for the hapless customer. The spirit of Sarbanes-Oxley and Dodd-Frank is punitive. Barney Frank is finally getting his revenge on the capitalist system. Who cares if the average American is the victim.

Meanwhile, customers who were told that their assets were "segregated" and protected by MFGlobal and by the CFTC regulatory protection are left with no protection at all as regulators were busy pursuing political agendas.

So, where is former Democratic Senator from New Jersey John Corzine who presided over this disaster? Is he to be protected as well. Is their no one to be held accountable when customer funds "go missing?" Obviously, this is not an issue the regulators are much concerned about, which gives one a pretty good idea of their priorities. I guess if you are a Democrat there are a different set of rules that apply.

They Won't MakeThat Mistake Again

Several states led by California and New York (two states whose irresponsible spending is spiraling the states toward bankruptcy) have gleefully announced a settlement amounting to $ 26 billion from banks that made the mistake of lending money to prospective home buyers in the last ten years. That is pretty evil, I suppose. Imagine the temerity of providing a loan to someone who was buying a home. That deserves a whopping fine.

One thing for certain, banks won't make that mistake again. From now on, these banks will take care to lend only to those who they are 100 percent certain will pay them back, which means mainly people who don't need the loan in the first place. For the rest of the borrowing public, this settlement will make it much more unlikely that they will be able to borrow to buy a home in the future.

It is worth noting that the most irresponsible states in the US led the charge to tag the banks. Next they will complain that banks don't loan enough to underserved communities. They will be right. Who in the world would willingly loan to the underserved after experiencing these kinds of fines. No one.

Startup Act Is a Non-Starter

Republic Senator Jerry Moran and Democrat Senator Mark Warner have introduced another way of cluttering up the US Federal Tax Code -- the "Startup Act." (See their editorial in today's Wall Street Journal). This is another "targeted" tax measure that puts more pages in the federal tax code, is another bonanza for tax lawyers, is another way to pick winners and losers by using the tax code.

Warner, who never saw a tax he couldn't support or a new regulation that he couldn't back, is always positioning himself as a moderate. In fact, he and Nancy Pelosi think alike on everything of substance. Who knows how Senator Moran got duped into supporting this? But, Moran is from Kansas, after all.

Like all good ideas that get inserted into the tax code. This one promises major tax benefits to rich people like Mark Warner without any real hope of moving the needle for the unemployed or those at the bottom of the economic pile.

What is needed is true tax reform and simplification, not more clutter in the tax code with someone's next great idea. Great ideas get amended and amended so that only the Warren Buffetts of the world can truly derive any benefit. Meanwhile, the average American picks up the tab for the taxes that the truly wealthy, like Mark Warner, have no intention of paying.

If Warner and Moran wanted to do something for the jobs market, try eliminating minimum wage laws. That would provide more jobs quicker than any other measure that Congress could consider.

It's time the politicians stopped dreaming up new ideas to make the federal tax code worse and thought about returning to free market policies and reducing the reach of big government.

Thinking About Debt

Lurking behind the good news of last Friday's employment numbers is the long running concern over sovereign debt problems in the developed world. Europe, the US, and Japan have unsustainable levels of national debt that get worse daily and there are no plans anywhere to deal with growing debt levels. There is conversation, but only conversation. No politician anywhere is willing to risk their political career by providing an honest assessment of the spiraling debt situations that the developed world faces.

Does this mean we are doomed and we should be storing up canned food in nearby caves?

The fear, of course, is that much of this sovereign debt will prove worthless and the collapse in values of the debt will be disastrous for the developed world.

Imagine the collapse of a stock market. In that case their is a real wealth loss of significance (just as a market bubble can create, if only temporarily, a real wealth gain).

But, debt is different. Debt is a zero sum game in a way in which other assets are not. If you owe money and can't pay it, sit down with your lender and restructure your debt, the gain to you is offset precisely by the loss to the lender. In the event of bankruptcy the bankrupt entity no longer owes the debt once legal bankruptcy is established. So, with defaulted debt, there is always a winner and a loser and one cancels out the other. There is no real net worth loss.

The only way that defaulted debt can lead to a net worth loss is if the lender has been pretending that there is no chance of a default -- not marking-to-market.

In the case of Greece, for example, the debt is trading well below 50 cents on the dollar, so that a default of 50 percent doesn't even penalize current bond holders, since the market would not give them 50 cents on the dollar anyway. But, one advantage of doing a workout for Greece is that now they don't owe the amount of debt eliminated in the restructuring. That is a plus for Greece and offsets the loss to its lenders.

Debt is different.

The point here is that if sovereign debt is restructured, the outcome need not be as disastrous as all the pundits think. It is only if these countries bury their head in the sand and refuse to proceed with restructuring, which is the route that Merkel and Sarcozy seem to be pursuing, will the exploding sovereign debt lead to catastrophe.

Pretending to have wealth that you don't have seems to be a national pastime in France. That should stop and the realities should be recognized for French and German banks who hold much of increasingly less valuable sovereign debt of Greece, Portugal, Spain and Italy. Germany and France will be forced, eventually, into nationalizing most of their major banks. Why not recognize the liabilities of these these banks now and proceed instead of a policy of "extend and pretend," patterned after the absurd policy antics of the the US government in 2008 and 2009.

As in most things, honesty and candor will lead to a good outcome, while obfuscation and hubris will only lead to disaster.

The realities of sovereign debt should be faced squarely in the developed world and the sooner that debt can be structured the better. Then, the developed world can rebuild their sagging economies and provide economic prosperity for their citizens, instead of the current plans for austerity and retrenchment.