A Real Dilemma

The upcoming 2012 presidential election (and the accompanying House and Senate elections as well, for that matter) present a real dilemma – two alternatives neither of which is particularly attractive.

On the Democratic side we have President Obama with his lackluster first term. Actually, I don’t fault him for not solving the recession problem – it is clear that no one really knows how to resolve this issue, and the high-powered academic economists can’t even agree among themselves as to the proper course.

But I do fault him for not trying harder – for wasting his first three years in office saving the bonuses of Wall Street executives and CEOs, and subsidizing the jobs of union members who make up his base, and pushing through his heath care bill while all across the nation ordinary people’s homes were being foreclosed and jobs were being lost and small businesses were being forced out of business.

And I fault him, and especially Nancy Pelosi, for ramming through a messy and expensive (and perhaps even unconstitutional) health care bill while cutting Republicans completely out of the negotiations.  It caused such bitterness among Republicans that it has been full-scale civil war between the parties in Congress ever since, and resulted in putting some 70+ intransigent Tea Party freshmen onto the House that even Republican Speaker John Boehner has difficulty controlling.

And finally I fault him for not putting in place a medium-term plan for cutting the ballooning federal debt. One might reasonably argue that the middle of a recession is not the time to cut the federal budget, but that argument only holds water if accompanied by a credible plan to cut the deficit in the medium term. He has presented no such plan, and such “budget cutting” he has finally agreed to (forced to it kicking and screaming by the Tea Party members) has largely been smoke and mirrors, and far too little to make any real difference.

All-in–all this Democratic administration has clearly been over its depth both domestically and in foreign policy.  Remember the Russian “reset” and the “open hand” offered to the Arab world? – not much came of either of those initiatives.

But on the Republican side we have what appears to be equal incompetence. None of the current candidates look particularly promising, and while at this point the presidential election is the Republican’s to lose, they do seem quite capable of nominating some right-wing extremist and losing it.

The Republican fixation with cutting taxes, while there is indeed some logic behind it, appears to be held as an unthinking non-negotiable ideological position, not a logical one. More than that, there is little evidence from their performance in the previous Republican administration that they are any less feckless about the debt problem than the Democrats.  It is true that this Democratic administration managed to add as much to the nation’s debt in three years as Bush did in eight years, but that isn’t saying much good about the Bush administration either.

Finally, despite all the hype and talking points, I have yet to hear from any Republican candidate a better idea for getting the economy moving again.

So we have a real dilemma – I may again want to vote “none of the above” in this next election.

Recommended: Obama's Crony Capitalism

Over on Reason.com A. Barton Hinkle has written an article entitled Obama's Crony Capitalism that summaries the issues with the recently bankrupt Solyndra solar cell company that the administration poured so much money into and touted as such a big deal.  As he notes, aside from the Chicago-style politics involved (one of the biggest investors was also one of Obama's biggest money men in the last campaign), it is a case study in why the government ought not to try to pick winners and losers in the marketplace.  It is worth reading.

Is Social Security a Ponzi Scheme?

Governor Perry has made quite a splash with his repeated claim that Social Security is simply a Ponzi scheme. The liberal press has had a field day with this, and even some of his Republican opponents have attacked him on this.

But is he right?  Well, a Ponzi scheme, like the one run by Bernie Madoff, works by taking the money from people who invest later and using some of it to pay "dividends" to people who join earlier, and then diverting the rest of the "investment" to the crook's own use.  It works fine until there are no more new people joining and investing new money, after which the whole scheme collapses and the latecomers all discover that they are going to get nothing back for their investments.

That sure sounds like Social Security.  We older folks put our money in, and theoretically it went into a "lockbox" (the Social Security Trust Fund) not to be used for anything but eventually paying monthly checks out to us. But in fact the money didn't go into a "lockbox" -- it went back out to Congress as fast as it came in to pay for all sorts of pet Congressional programs, replaced by paper IOUs (Treasury Bonds). So all that is really in the "lockbox" is paper IOUs, no "real" money. So where does Social Security get the money to pay out the monthly Social Security checks?  It can't get it from the "lockbox" because there is no real money there, just paper (actually electronic) IOUs. So it gets it from the people paying in the month before.

This system works fine until there aren't enough new people paying in each month to cover the amount that Social Security needs to pay out, and we are just about at the point, as our population ages and we have an increasing number of older people collecting Social Security against a smaller number of workers paying in each month.
 
But what about the Treasury Bonds in the "lockbox"?  Isn't that real money? Fancy as it sounds, a Treasury Bond is nothing more than an IOU that promises to pay back the capital and a little interest at some future date.  These days when a Treasury Bond comes due, the government just sells another Treasury Bond to get the money to pay out the first bond, "rolling over" the debt rather than really paying it back (something the government and banks frown on individuals doing, but seems for some reason to be OK if you are the US Treasury....) .  That works fine so long as someone will buy the new Treasury Bond.  The day there are no new buyers the whole scheme falls apart.

If you or I tried to run a scheme like this, we would be quite properly arrested, tried, convicted and jailed, as was Bernie Madoff.  But when the government does it.............

So it may be offensive to liberals to call Social Security a Ponzi scheme, but if it walks like a duck and looks like a duck and quacks like a duck..........

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Added thought: To say it is a Ponzi scheme now (which it is) is not to say it couldn't be repaired and "un-Ponzied".  In fact, it could with some relatively simple changes, such as slowing raising the eligability age, taking the cap off of earnings taxed for Social Security, and changing the over-generous inflation adjustment to make it track core inflation rather than wages.  The problems with Social Security are much smaller, and much easier to repair, than those for Medicare/Medicaid.

Obama's Proposals

Finally, three years into his term and three years into a devastating recession, President Obama took on the jobs issue for real. It is what he should have done at the beginning of his term, instead of wasting time and political capital on the healthcare issue.

As usual, President Obama was eloquent in his speech last night. But as usual, it offered nothing new.  It was clearly a re-election speech, designed to maneuver Republicans into damaging positions ahead of the upcoming election, rather than a problem-solving speech aimed at really solving the nation's problems.

As usual, his solution was to throw more (borrowed) money at the problem rather than address any of the underlying structural problems. The word "stimulus" was assiduously avoided, but that is in fact what he proposed.  Since a "stimulus" twice that big had almost no measurable effect except to dramatically increase the national debt, it is not clear how one half that size can be expected to have much effect.  He proposed tax cuts, but since he didn't propose cutting federal spending at all the reduced revenue just increases the deficit.

I didn't really expect anything new from the president's team, and I see most pundits didn't expect much either.  The coverage of the speech this morning is remarkably sparse, even from the pundits who usually think he walks on water.

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PS - I see that the world's stock markets have taken a steep nose dive in the wake of President Obama's speech (the Dow is down 338 points as I write this). Last time he gave a speech the stock market dropped a hundred points even as he was speaking. One might think this was a message...............

What the government should (or can) do (Part 1 – what we know)

There is no question that the roots of our current economic mess are very complex indeed. The crisis stems from a long accumulation of natural circumstances, shifts in technology, demographic changes,  short-sighted corporate and government policies, poor consumer choices, and improvident government by both political parties, among other factors. Decades or centuries from now, with ample perspective, historians may be able to untangle the threads enough to identify the major contributing factors, but in the present day we can only go from what we know or understand now.

So what do we know right now?  Well, we know that Keynesian “pump priming” by the government with its last massive stimulus package didn’t work very well. Nick Gillespie yesterday had an interesting piece on Reason.com, One Reason Why Keynesian Stimuli Aren't Working: They Aren't Keynesian, that argues that Keynes himself would have been appalled at how his theory is being applied (or rather, misapplied) today.

We also know that the current academic economic models don’t fit the real world very well. We have had the nation’s leading academic economists using their models over the past two decades to project the results of various policies, and more often than not these models have failed. As I noted in a post a few days ago, these models didn’t predict the current recession (in fact most of them projected continued strong growth through this period), they didn’t correctly predict the result (or lack of result) of the first stimulus package, they didn’t correctly predict the real risks in all the fancy new risk derivatives swamping Wall Street, they didn’t predict the 2006-2007 housing bubble, nor for that matter the 1999-2000 “dot.com” bubble.

We also know that increasingly the American workforce is not adequately prepared for the jobs of tomorrow. We still have an infrastructure and educational system and regulatory environment suited to the agricultural and manufacturing nation we were decades ago, but blue-collar manufacturing (and to a certain extent agriculture as well) provide less and less US jobs every year, while the growing number of high-tech technical, engineering and innovation jobs in the US are increasingly filled with bright foreigners because there are not enough American citizens trained to take those jobs.  The three-yearly OECD Program for International Student Assessment (PISA) report, which compares the knowledge and skills of 15-year-olds in 70 countries around the world, ranked the United States 14th out of 34 OECD countries for reading skills, 17th for science and a below-average 25th for mathematics.

We know that the federal government, in the form of Congress and the Presidency, have become thoroughly dysfunctional, so polarized ideologically as to be hardly able to function at all. For example, this administration has been funding the government for over two years now on continuing resolutions, because it can’t get a budget passed at all, let alone by the end of the preceding fiscal year.  This sharply limits what can reasonably be expected from federal government action. Nor is this likely to change as long as both parties have gerrymandered their House districts to make them safe seats for one party or the other – which has produced the undesirable side effect of eliminating moderates of either party from the House.

We know that the current federal government funding, in which we borrow almost half the federal budget every year, is unsustainable, and that major entitlement programs like Social Security and Medicare will have to sharply curtail their benefits soon, because there simply won’t be enough money to cover these obligations in the near future as they are currently constituted.  Economist Lawrence Kotlikoff has recently estimated the total unfunded liabilities of current federal programs, largely Social Security, Medicare and Medicaid, at $70 trillion.

We know that we have too many regulations in this nation, promulgated by too many federal agencies which often have overlapping authority and conflicting agendas. Certainly regulations are necessary in a large nation like ours, but like the Sorcerer’s Apprentice, things have long since gotten way out of hand in the regulatory sphere. Of course, this is to be expected – once an agency is established and given some authority, it will naturally work to perpetuate itself and expand and defend its area of authority, its legitimate “tuft”. That is simply human nature – or at least the nature of bureaucracy.

Regulations are estimated to cost US businesses somewhere between $2 trillion and $2.8 trillion per year. According to the Office of the Federal Register, in 2007, the Code of Federal Regulations (CFR), the official listing of all regulations in effect, contained a total of 145,816 pages that claimed 21 feet of shelf space. In 2011 alone, 50,000 pages of new regulations have been added thus far to the Federal Register.  Clearly something is wildly amiss.

We know that the federal tax code has become unwieldy and ineffective.  The Federal Tax Code weighs in at 71,684 pages as of 2010! We have one of the highest corporate tax rates in the world (and then double tax the dividends as well), but offset it with trillions of dollars of special interest exemptions and  rebates, so that some US companies that report billions in profits pay no federal  tax at all.

We also know that we have put off maintenance and improvement of our national infrastructure too long.  Bridges, roads, rail lines, power transmission lines, power plants, dams, etc etc are all aging and in need of repairs or replacement, but we haven’t been doing it at either the federal or the local government level, preferring to put funds into social programs, entitlements, public employee pension funds, and unfunded wars in the Middle East.  We are the inventors of the internet, yet US average internet service speed, at 4.8mbps, ranks 15^th in the world (Japan, at 61mbps, is the leader, with South Korea close behind).

This is what we know.  Part 2 will deal with what, if anything, the government could do about these issues.

Recommended: Obama's Economic Trifecta

Joel Kotkin has an interesting piece over on the Forbes website this morning: Obama's Economic Trifecta: How The President Helped Kill Progressivism, Capitalism And Moderation. It is not very flattering to the administration, as is obvious from the title, but on balance I think his charges are pretty accurate. Of course, he is not particularly kind to the Republicans either, and again I think his criticisms are accurate.

What has been notable about this administration's attempts to deal with the recession is that despite all the rhetoric, the measures actually taken have been aimed largely at preserving jobs on Wall Street, in large corporations like the auto companies, and among union members, with little or no effective action to help main street small businesses, homeowners facing foreclosure, or the jobless. It is hard not to come to the conclusion that despite being a Democrat (supposedly representatives of the common working person), Obama is actually more concerned with shoring up the in-group wealthy establishment and his union political base than helping the nation as a whole.

He will apparently propose yet another expensive stimulus plan tonight, even though his last, much larger stimulus plan didn't seem to do much to help the situation.  There is a legitimate question, of course, about just how much the government can do in any case to "create" jobs.

Government policy can certainly make it harder for companies to function, but I think there is relatively little the government can do to actually create more productive jobs (as oppose to simply more bureaucratic jobs). Only private businesses can create jobs that actually add to the national wealth, and the administration's efforts to push high speed rail and green technology companies as new sources of jobs has been pretty naive at best, and look more like pandering to his supporters than actually trying to do anything effective.

It will be interesting to see exactly what he does propose tonight, and whether it is any departure from Washington's usual solution of just throwing more (borrowed) money at a problem.

President Perry?

As President Obama's numbers plummet along with the stock market and the nation's economic growth numbers, and Governor Perry's poll numbers continue to rise, now well past his only serious opponent, Governor Romney, the possibility that Perry might become our next president is increasing. One cannot discount the fact that Texas, under his stewardship for the past twelve years, is booming economically and has produced about half of the new jobs in the nation over this recession.

Still, he has some extreme views that worry me. But Russ Smith in his piece Is Barack Obama Dumb? (he argues he isn't) makes this point:

As I’ve written before in this space, Perry’s adherence to creationism, apparent fear of homosexuals, abortion opposition, constant invocations of God and dismissal of global warming make me queasy, but in next year’s election those extreme right-wing positions won’t really matter. The only issue is the dreadful economy, which shows no sign of improving before voters pass down their verdict, and while you can scoff at Texas’ remarkable job creation in the past several years—the general liberal reckoning is that all those jobs are at minimum-wage fast food joints—it’s not as if Obama can make any boasts about his own record on that score.

I think he is right. President Obama has said all the right things (from my point of view, at least) about gays, global warming, and abortion, but he has failed miserably at getting the economy going again and dealing with the joblessness. I could tolerate some extreme views on these subjects (especially since the President can't really put many of them into practice without the full support of Congress) if it came along with some effective and hard-nosed approaches to things like the economy and the debt.

Still, Republicans would be wise to listen to Mike Huckabee's recent advice:

Republicans have to nominate someone better than the person they want to defeat. If they get so adamant that they will only support a candidate that believes everything on their checklist, they will re-elect Obama.