The Cultural Divide Explains the Economic One

Saturday's Wall Street Journal had an interesting piece about "The New American Divide":

People are starting to notice the great divide. The tea party sees the aloofness in a political elite that thinks it knows best and orders the rest of America to fall in line. The Occupy movement sees it in an economic elite that lives in mansions and flies on private jets. Each is right about an aspect of the problem, but that problem is more pervasive than either political or economic inequality. What we now face is a problem of cultural inequality.

When Americans used to brag about "the American way of life"—a phrase still in common use in 1960—they were talking about a civic culture that swept an extremely large proportion of Americans of all classes into its embrace. It was a culture encompassing shared experiences of daily life and shared assumptions about central American values involving marriage, honesty, hard work and religiosity.

Over the past 50 years, that common civic culture has unraveled. We have developed a new upper class with advanced educations, often obtained at elite schools, sharing tastes and preferences that set them apart from mainstream America. At the same time, we have developed a new lower class, characterized not by poverty but by withdrawal from America's core cultural institutions.

There remains a core of civic virtue and involvement in working-class America that could make headway against its problems if the people who are trying to do the right things get the reinforcement they need—not in the form of government assistance, but in validation of the values and standards they continue to uphold. The best thing that the new upper class can do to provide that reinforcement is to drop its condescending "nonjudgmentalism." Married, educated people who work hard and conscientiously raise their kids shouldn't hesitate to voice their disapproval of those who defy these norms. When it comes to marriage and the work ethic, the new upper class must start preaching what it practices....America outside the enclaves of the new upper class is still a wonderful place, filled with smart, interesting, entertaining people. If you're not part of that America, you've stripped yourself of much of what makes being American special.

Such priorities can be expressed in any number of familiar decisions: the neighborhood where you buy your next home, the next school that you choose for your children, what you tell them about the value and virtues of physical labor and military service, whether you become an active member of a religious congregation (and what kind you choose) and whether you become involved in the life of your community at a more meaningful level than charity events.

Everyone in the new upper class has the monetary resources to make a wide variety of decisions that determine whether they engage themselves and their children in the rest of America or whether they isolate themselves from it. The only question is which they prefer to do.

ADDENDUM: I had this piece by Michael Gerson filed in my "to do bin". It's related:

Conservatives naturally focus on equal opportunity rather than on equal outcomes. But equality of opportunity is a more radical concept than we generally concede. It is not a natural state; it is a social and political achievement. It depends on healthy families and cohesive communities. But opportunity also depends on effective government — on public safety, public education and public health. Governmental overreach can undermine other important social institutions. Yet the retreat of government does not automatically restore them to health.

Liberals often fail to recognize that income redistribution, while preventing penury, is not identical to social equality. The main challenge of poverty is not a lack of consumption but a lack of social capital — measured in skills and values — and of opportunity. Addressing these problems is more complex than increasing marginal tax rates, particularly when revenue is used to cover the increasing costs of non-means-tested entitlement programs. The structure of the modern welfare state is not focused on empowering the poor. Instead, it has increased the percentage of government transfer payments that go to middle- and upper-income seniors.

On all sides, the poverty debate can be paralyzed by an obsession with fundamental causes. A failing community is a puzzle box of interconnected failures. Globalization and technology put downward pressure on wages and lead to stagnant labor markets. Permissive cultural norms encourage family breakdown and self-destructive behavior. Complaining about the rise of China or the decline of morality can be satisfying. But cosmic explanations can be obstacles to action.

Krugman: Don't Worry About Debt; It's Like a Ponzi Scheme

In a column titled "Nobody Understands Debt," Paul Krugman gives two reasons for Americans not to worry about President Obama and the rest of the federal government running up bewildering amounts of debt.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Is it me, or does that sound like another Social Securityesque Ponzi scheme? Like Social Security, it's subject to the same assumption that the society will continue to expand both economically and with respect to population, which are arguably very closely related. The peculiar liberal death wish comes into play because liberal policy preferences, many of the very policies that have required so much government spending, contribute to stagnation in population growth. At some point, the equation doesn't add up.

Which leads to Krugman's second point:

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This is true, he argues, even when we don't owe the money to ourselves, but to somebody else:

It's true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents' worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Unfortunately, he's not very clear about whom he's defining as "America." Following the links that Krugman provides to other things he's written, one comes across a chart showing the nation's foreign liabilities as 160% of GDP, versus assets of 140%. But even the "deficit-worriers," as Krugman calls them, put the total debt, to foreign and domestic lenders, at $15.2 trillion, versus GDP of $14.5 trillion. That's a ratio of about 105%. Yet, the U.S. Debt Clock gives $56.4 trillion, or 389% of GDP, as the debt of every person and entity in the United States.

So, what Krugman means, therefore, by America's debt, I'm not sure, although it looks likely that he's stating that the $56.4 trillion grand total includes $23.2 trillion in foreign debt and $33.2 trillion in domestic debt. Whatever the case, I'd wager that whomever Krugman shuffles into the deck for the additional amount of foreign debt shown in his chart has very high foreign investments.

The worry on the table, though, is the federal government's debt, and if the economy and population continue to remain so low, it's not going to fade into a field of rapid growth, but is going to become a problem that even Krugman-like apologists cannot deny. After all, the government's income is only the fraction of GDP that it takes in through taxes and fees. If one is going to compare the total debt of the people of the United States to GDP for the purposes of balancing it against foreign assets, it would be more reasonable to compare the government's debt to the $2.3 trillion it brings in through taxes. That's a ratio of 661%.

A Different Kind of Clock, Heading Toward a Different Kind of Midnight

I'm cleaning out my bookmarks for the first time in about seven years, and as we approach the change of the clock from one year to the next, I thought it appropriate to direct your attention to the U.S. Debt Clock.

At this moment, the national debt is $15.2 trillion, personal debt is $16.0 trillion, and the total U.S. debt — including household, business, state and local governments, financial institutions, and the federal government — stands at $56.4 trillion.

Happy New Year! Another day older and deeper in debt.

Should Anyone Be Surprised that Government Bonds Might Not Be a Good Investment for the Next Few Years

Burton Malkiel, famous for having written a book titled A Random Walk Down Wall Street where he argues there's no systematic way to beat the market, offered this big-picture advice for balancing an investment portfolio in yesterday's Wall Street Journal...

Are we in an era now when many bondholders are likely to experience very unsatisfactory investment results? I think the answer is "yes" for many types of bonds—and that this will remain true for some time to come....So what are investors—especially retirees who seek steady income—to do? I think there are two reasonable strategies that investors should consider. The first is to look for bonds with moderate credit risk where the spreads over U.S. Treasury yields are generous. The second is to consider substituting a portfolio of dividend-paying blue chip stocks for a high-quality bond portfolio.

But at least with regard to his second option, the blue-chip stocks, isn't he explaining something that's readily obvious from the state of our political system, i.e. right now, so many units of government have been run so badly, it is going to be a while before they can raise the money to take care of their governing obligations and pay high-interest bond yields, meaning that (to borrow a juxtaposition from Justin) investing money in actual productive activities right now is a much better option than investing in the government's ability to tax?

Whoops! Providence Budget Still Under Water

Well, I don't like to say "I told you so" but an article in GoLocalProv yesterday about the state of Providence's budget wasn't really a surprise. According to the article, almost halfway through the current budget year, the budget still is not only not balanced, but it's about $24 million in the red.

Some of the reasons:

Savings of up to $6 million hinged on 30 officers taking advantage of an early retirement incentive. Only 16 did.

Taveras hoped to save $11 million by switching retirees over to Medicare. But most of those savings got wiped out when the federal government slapped the city with an $8 million penalty

Worse yet, it is not a one-time fee. Instead, the penalty will be assessed annually for the foreseeable future.

Lastly, am I the only one who remembers then-Mayor, then-Congressional candidate David Cicilline telling us that he was leaving Providence in excellent financial shape? Hmm, well there's also this:

The city ended the 2011 fiscal year in June with a higher-than-expected $4.9 million deficit, city records show—and that is not counting approximately $30 million that was borrowed to help close the gap.

I do wonder if Mayor Taveras referred to the situation he inherited as a "Category 5" hurricane, only because we don't have a Category 6.

Negative Outlook, but Still Able to Confiscate

Like a lot of conservatives, I'm sure, I find the prospect of our nation's credit begin downgraded, or at least given a negative outlook, as Fitch Ratings just applied to the United States, a somewhat hopeful sign that the game of government taxing, borrowing, and spending cannot go on in perpetuity. But as I watch the dance, my sense that the agencies are really grading the government's ability to confiscate resources through taxation only grows stronger.

We'd like to think that the ratings reflect how well a government is doing its job of being a government and how strong its underlying economy is, and those are surely factors. But the core criterion for grading the debt that a government sells is the likelihood that it will be able to take money from the people under its control and hand it over to its lenders. Sadly, the U.S. government sits atop a large nation of people who desire to forge a (taxable) living and who thus far have proven unable to elect a government that's willing to restrain itself.

In that context, a "negative outlook" is little more than a whisper of a hint that the government needs to change its ways. For it to bear the fruit of a lower rating, the prospects would have to be bleak for the government paying back its debt at all. The imagination reels at what a world in which that's a real possibility would look like; it's one thing for Greece to appear unable to pay its bills, but the U.S.? Yet, experience shows that reasonable adjustments will not be made when entrenched interests have so much motivation to fight against them. Only crisis will serve, and few wish to foster crisis when it remains possible to pretend there's no long-term threat.

Part of the problem, it seems to me, is that there's no up from AAA. Selling less debt would make it more likely that the government can and will pay back what it already owes, but with the might of the U.S. bureaucracy as a collection agency, such a shift would be a mere shading of likelihood.

Rhode Island Will Recover, After Everyone Else Does

A projection posted at the New York Times Economix blog divides the 50 states and the District of Columbia into 5 groups, based on when they are expected to be home to the same number of jobs that they were in December 2007.

The first group has already recovered. The group after that is projected to recover by 2013. The last group isn't expected to recover until "past 2017".

There are only 3 states in the last group: Nevada, Michigan, and...I'll let you guess the third.

(Also, would anyone like to interpret the significance of the fact that one of the three places that has already made its recovery is D.C.?)

Eating on Only $4.50 a Day

Anti-poverty activists have thrown down the gauntlet to those of us lucky enough to eat regularly and (as obesity statistics show) too much.

Anti-poverty activists are challenging Rhode Island residents to spend just $4.50 a day on food for a week as part of a campaign to draw attention to the importance of funding for food stamp programs.

The Rhode Island Interfaith Coalition to Fight Poverty With Faith is conducting a "Food Stamp Challenge" beginning Thursday in which participants will be asked to spend on food the national average received by food stamp recipients. That translates into $31.50 over a week, or $1.50 a meal.

Cereal - 2/$4
Frozen Vegetables - 10/$10
Fresh Strawberries - 2/$5
Mangoes, Avacadoes, Oranges - 10/$10
Pasta - 10/$10
Spaghetti Sauce - 10/$10
Chicken Breast (5 portions) - $6.99
Tuna - 5 cans/$4
Applesauce (ea. pack=6 servings) - 2/$4
Frozen entrees - 6/$10
Apples - $.88/lb
London Broil - $1.88/lb

Or, if you don't like the big guys, you can go to a local chain:

Hamburger - $2.59/lb
Chicken Breasts - $.99/lb
Cereal - $1.88 box
Fresh-baked loaf Italian bread - $1.99
Rotisserie Chicken - $3.99
Bulkie/Sub Rolls - $1.29 (6-pack)
Cheese Slices (Individ wrapped 12 pack) - buy 1, get 1 free @ $3.99
Deli Bologna or Ham - $2.99/lb
Fresh Marinara Sauce (20 oz.) - 2/$6
Pasta - 4/$5
Tuna - 5 cans/$5
Frozen Vegetables - 4/$5
Grapes - $1.99/lb
Bag of Potatoes (5 lb.) - $2.99

Remember, these are just from the fliers. Who knows what deals you'll find when you actually walk the aisles. I even stayed away from the Top Ramen and frozen burritos! There are plenty of affordable and healthy options if you're willing to take a little time, stay out of the snack aisle, buy what's on sale (even stock up!) and "resign" yourself to buying cheaper store brand items. An enterprising shopper might even "cherry pick" the best from each store and save more. If you do that, you may be able to even splurge for a steak every now and then by, for example, dipping into your pasta reserves (each box of pasta has, what, 4 servings?).

My point isn't to denigrate those who rely upon food stamps to eat (which, as Justin already pointed out, are supposed to be supplemental anyway). It's to show that it's doable. And guess what? These lists are pretty darn close to what my family of four shops for regularly (incidentally, the food supplement would be $126 for all of us). My conclusion? The current level of food stamp subsidization is plenty sufficient.

The Catholic Notion of a Global Authority

It comes around once a year in the missal for the Catholic Mass, and the lector, standing before his or her neighbors to read the holy words very often exudes a palpable discomfort:

Be subordinate to one another out of reverence for Christ.
Wives should be subordinate to their husbands as to the Lord.
For the husband is head of his wife just as Christ is head of the church, he himself the savior of the body.
As the church is subordinate to Christ, so wives should be subordinate to their husbands in everything.
Husbands, love your wives, even as Christ loved the church and handed himself over for her to sanctify her, cleansing her by the bath of water with the word, that he might present to himself the church in splendor, without spot or wrinkle or any such thing, that she might be holy and without blemish.
So [also] husbands should love their wives as their own bodies. He who loves his wife loves himself.

It's the second line in this passage from St. Paul's letter to the Ephesians that sticks in modern throats. Subordinate? I think not. What's missed is the balance between the calls to each spouse. The subordination requested is to a man who would do as Christ did and die a horrible death for those He loves. The dutiful husband and father is to be a savior to his family after the model of a crucified Christ. It's subordination to a man who is called to be subordinate right back. She realizes that she is part of him, and he realizes that she is him.

Something similar is at play in the typically unnuanced MSM characterization of the Vatican's new document, "Note on financial reform from the Pontifical Council for Justice and peace."

The Vatican called on Monday for the establishment of a "global public authority" and a "central world bank" to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises. The document from the Vatican's Justice and Peace department should please the "Occupy Wall Street" demonstrators and similar movements around the world who have protested against the economic downturn. "Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority," was at times very specific, calling, for example, for taxation measures on financial transactions. ... It condemned what it called "the idolatry of the market" as well as a "neo-liberal thinking" that it said looked exclusively at technical solutions to economic problems. "In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale," it said, adding that world economics needed an "ethic of solidarity" among rich and poor nations. ... It called for the establishment of "a supranational authority" with worldwide scope and "universal jurisdiction" to guide economic policies and decisions.

The Vatican didn't "call for the establishment" of such an authority in the sense that the world's leaders ought to get to work on it tomorrow. Rather, the document describes a long evolution toward an ideal. And as with St. Paul's characterization of marriage, the document isn't as one-sidedly anti-free-market as Philip Pullella's Reuters summary, above, suggests. It also acknowledges the risks of socialism and technocracy. Consider:

However, to interpret the current new social question lucidly, we must avoid the error — itself a product of neo-liberal thinking — that would consider all the problems that need tackling to be exclusively of a technical nature. In such a guise, they evade the needed discernment and ethical evaluation. In this context Benedict XVI's encyclical warns about the dangers of the technocracy ideology: that is, of making technology absolute, which "tends to prevent people from recognizing anything that cannot be explained in terms of matter alone" and minimizing the value of the choices made by the concrete human individual who works in the economic-financial system by reducing them to mere technical variables. Being closed to a "beyond" in the sense of something more than technology, not only makes it impossible to find adequate solutions to the problems, but it impoverishes the principal victims of the crisis more and more from the material standpoint.

In the context of the complexity of the phenomena, the importance of the ethical and cultural factors cannot be overlooked or underestimated. In fact, the crisis has revealed behaviours like selfishness, collective greed and the hoarding of goods on a great scale. No one can be content with seeing man live like "a wolf to his fellow man", according to the concept expounded by Hobbes. No one can in conscience accept the development of some countries to the detriment of others. If no solutions are found to the various forms of injustice, the negative effects that will follow on the social, political and economic level will be destined to create a climate of growing hostility and even violence, and ultimately undermine the very foundations of democratic institutions, even the ones considered most solid.

Recognizing the primacy of being over having and of ethics over the economy, the world's peoples ought to adopt an ethic of solidarity as the animating core of their action. This implies abandoning all forms of petty selfishness and embracing the logic of the global common good which transcends merely contingent, particular interests. In a word, they ought to have a keen sense of belonging to the human family which means sharing the common dignity of all human beings: "Even prior to the logic of a fair exchange of goods and the forms of justice appropriate to it, there exists something which is due to man because he is man, by reason of his lofty dignity."

In 1991, after the failure of Marxist communism, Blessed John Paul II had already warned of the risk of an "idolatry of the market, an idolatry which ignores the existence of goods which by their nature are not and cannot be mere commodities." Today his warning needs to be heeded without delay and a road must be taken that is in greater harmony with the dignity and transcendent vocation of the person and the human family.

I will certainly not be the last to acknowledge that religious people are just as prone as anybody to muddled economic thinking, and those who hew their careers and behavior most closely to the premise that a higher authority has a claim on their lives are no less prone to err in their trust of human authority than those who believe human beings can control everything. But what this particular document is describing is a human development that brings the people of the world together toward common advancement with full respect of individual autonomy.

That objective is, or ought to be, not only consistent with, but inherent to any ethical approach to economic liberty. The libertarian ideal, in other words, shouldn't be "let me do whatever I want," but rather, "let me do good in the way that I think best." And the global authority here described is one that conveys feedback in a deeper manner than achieved by price systems. Otherwise, the Vatican is warning, a prosperous peace cannot continue.

To lash out at suggestions of global cooperation is to miss the opportunity presented by such statements as this, from the Vatican's document (emphasis added):

... It is a matter of an Authority with a global reach that cannot be imposed by force, coercion or violence, but should be the outcome of a free and shared agreement and a reflection of the permanent and historic needs of the world common good. It ought to arise from a process of progressive maturation of consciences and freedoms as well as the awareness of growing responsibilities. Consequently, reciprocal trust, autonomy and participation cannot be overlooked as if they were superfluous elements. ...

As we read in Caritas in Veritate, "The governance of globalization must be marked by subsidiarity, articulated into several layers and involving different levels that can work together." Only in this way can the danger of a central Authority's bureaucratic isolation be avoided, which would otherwise risk being delegitimized by an excessive distance from the realities on which it is based and easily fall prey to paternalistic, technocratic or hegemonic temptations. ...

These measures ought to be conceived of as some of the first steps in view of a public Authority with universal jurisdiction; as a first stage in a longer effort by the global community to steer its institutions towards achieving the common good. Other stages will have to follow in which the dynamics familiar to us may become more marked, but they may also be accompanied by changes which would be useless to try to predict today.

Clearly, this is not a Cato Institute policy paper, but at the same time, it allows the room to suggest that the "changes" that we cannot predict include the development of social institutions outside of government — institutions of mutual consent and understanding, but consistent with free will and personal autonomy — that provide the necessary authority for consensual cooperation.

The error in the typical reaction to this sort of application of Catholic theology to the material world is to imagine that the Church has seen the future and it is the EU and UN writ large. Beneath the jargon of social justice writing is actually a call to re-imagine what global authority might look like, and it is a project that free-marketers ought to undertake with as much zeal as those who can think of nothing more original than the repackaged Marxism, which this very document describes as a failure.

Even if it's Amazing, It's not fair, so I hate everything

Trying to figure out this Occupy thing? Right now, this seems to explain it the best (h/t):

Overall, much of the logic seems to go something like this (h/t):

ADDENDUM: I put this is all under our "On a lighter note...." category because there is humor in the unknowns surrounding the Occupy movement. Still, there are serious questions that haven't been answered.

Now, a movement that started with no concrete goals as a simple protest of power must decide what to do with some power of its own. Can a leaderless group that relies on consensus find a way for so many people to agree on what comes next? Can it offer not only objections but also solutions? Can a radical protest evolve into a mainstream movement for change?

The beauty of capitalism — the beauty of the iPhone world as opposed to the world of politics — is that...[w]hatever drove Jobs, it drove him to create superior products, better stuff at better prices. Profits are not deductions from the sum of the public good, but the real measure of the social value a firm creates. Those who talk about the horror of putting profits over people make no sense at all. The phrase is without intellectual content. Perhaps you do not think that Apple, or Goldman Sachs, or a professional sports enterprise, or an Internet pornographer actually creates much social value; but markets are very democratic — everybody gets to decide for himself what he values. That is not the final answer to every question, because economic answers can satisfy only economic questions. But the range of questions requiring economic answers is very broad.

I was down at the Occupy Wall Street protest today, and never has the divide between the iPhone world and the politics world been so clear: I saw a bunch of people very well-served by their computers and telephones (very often Apple products) but undeniably shortchanged by our government-run cartel education system. And the tragedy for them — and for us — is that they will spend their energy trying to expand the sphere of the ineffective, hidebound, rent-seeking, unproductive political world, giving the Barney Franks and Tom DeLays an even stronger whip hand over the Steve Jobses and Henry Fords. And they — and we — will be poorer for it.

And to the kids camped out down on Wall Street: Look at the phone in your hand. Look at the rat-infested subway. Visit the Apple Store on Fifth Avenue, then visit a housing project in the South Bronx. Which world do you want to live in?

Netflix Shows Flaws in Marginal Pricing

Megan McCardle looked at Netflix/Qwikster and explains how the problem is a business model over reliant on marginal cost pricing. It's an object lesson that can be extended to, for example, health care costs.

[P]eople were confusing the marginal cost with the average cost. Content providers were willing to license their movies and television shows cheaply to Netflix as long as Netflix had a small customer base: it was extra revenue for the companies, and it was probably mostly substituting for DVD rentals, which they didn't make money off of anyway, so it was essentially free money.

You can get a sweet deal if you are the customer who gets marginal cost pricing. Medicare does this--reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.

The problem is that as voters and as customers, we often get the notion that this can be extrapolated to everyone. So liberal policy wonks want to save money by putting everyone on Medicare, or some equivalent program that uses the government's monopsony pricing power to get lower prices for everyone; thrifty customers think that everyone should drop cable and just pay $14.95 for streaming plus DVDs.

But everyone cannot be the marginal cost consumer. Someone has to cover things like development costs.

Who Pays for Past Mistakes

Generational warfare: It's bound to happen here in Rhode Island with the pension crisis. It's also happening nationally on the budget deficit debate with the new Super Congressional panel set to convene. Education Policy wonk Rick Hess offers his perspective:

You're either with the kids or with those rushing to the ramparts to defend retiree entitlements. So, which is it?

Consider the President's vague calls last week to spend billions more on school construction and preserving school staffing levels (which would've been more compelling if he had offered any inkling as to how we might pay for it). Obama finds himself unable to do more than offer marginal, dead-on-arrival programs because the feds have spent more than half the budget just mailing checks to retirees, covering health care bills, and paying interest on the accumulated debt. Everything else—schools, financial aid, the FBI, defense, transportation, the environment, NASA, foreign aid, you name it—has to make do with what's left.

As Julia Isaacs at the Brookings Institution has pointed out, the federal government now spends about $7 on seniors for every $1 it spends on children....Do we really think it's a good idea to spend half of all non-interest spending on making retirement ever more comfy?

[T]oday's retirees have contributed taxes that amount to less than half their Medicare outlays. Today's Medicare payroll tax doesn't fund Medicare--it funds only Part A (hospital expenses). Premiums cover just 25 percent of Part B (doctor treatments and visits). And premiums for Bush's Medicare drug program (Part D) cover just 10 percent of the cost. The rest of the hundreds of billions in outlays for these programs is vacuumed out of general revenue. (See here for a good breakdown on Medicare funding.)

Social Security has the government reflexively spending hundreds of billions to mail out monthly checks to the wealthiest segment of the population, without an ounce of thought as to whether that's the best use of borrowed funds (the famed Social Security "trust fund" being, you know, nonexistent). The Social Security Administration reports that more than 20 percent of those 65+ have incomes over $65,000 a year. In a nation where median household income is in the $40,000s, is it really radical to rethink how much we mail to these households every month?

Toss in all of the tax deductions that President Obama called for eliminating this summer, including the corporate jet deal, and you address another $400 billion over 10 years, or less than 2 percent of the shortfall. So, just keeping the deficit from exploding will involve all those taxes and trillions more in cuts. Those demanding substantial new spending then need to raise hundreds of billions beyond that, through additional cuts or tax increases....Even with hefty tax increases, protecting existing entitlements ensures that we won't have much available for schools, colleges, or anything else.

In short, it's possible to get our house in order, free up dollars for schooling, and shift dollars towards youth. But doing so requires facing down the massive, intimidating seniors' lobby.

Shared sacrifice involves asking Baby Boomers and retirees to step up and, you know, sacrifice. It doesn't mean holding harmless the generations who voted themselves free stuff through the good times and doesn't rely almost entirely on raising taxes and curtailing benefits for the under-40 set.

A Bad Economy Is in the Democrats' Favor Structurally

William Jacobson makes an interesting point regarding the intersection of the economy and electoral politics:

Workers giving up hope, thereby keeping the unemployment rate artificially low, is keeping Obama's reelection hopes alive. If the headlines screamed that unemployment was 11.4%, even I might begin to believe [that the U.S.A. would not give Obama a second term].

We've already begun to see commentary and political cartoons attempting to smear Republicans on the grounds that it's in their electoral interests for the economy to stay sour until the next election. There is some truth to that, but inasmuch as it's a bipartisan reality with every election, it's hardly a strong moral condemnation.

Rephrased, a bit, what Jacobson is saying is that it would help the Republicans if the statistics better reflected, to voters, how bad the condition of the economy really is. But there's a deeper way in which this particular data point helps the Democrats: Workers who give up move toward dependency on the government, and the Democrats are the party of dependency. If you're struggling to find work in the private sector, you're more apt to want the market to be free to thrive, to want employers to be given more space to invest and hire. Those who throw up their hands are thereafter more likely to put out their hands to collect whatever money the government directs toward them.

Green Fave of Obama's Goes Under, Taxpayers Foot the Bill

Solyndra is a manufacturer of solar panels--a green technology!--and was given half a billion dollars in loan guarantees by the Federal Government. Oh, and a major Obama donor, George Kaiser, was also a financial backer of the the company. Now it looks like they're going under:

A company that served as a showcase for the Obama administration’s effort to create jobs in clean technology shut down Wednesday, leaving 1,100 people out of work and taxpayers obligated for $535 million in federal loans.

Solyndra, a California solar panel maker, had long been an administration favorite. Over the past two years, President Obama and Energy Secretary Steven Chu each had made congratulatory visits to the company’s Silicon Valley headquarters....solar industry analyst Peter Lynch said that Solyndra struggled from the beginning with an imbalanced financial model.

“You make something in a factory and it costs $6, you sell it for $3, but you really, really need to sell it for $1.50 to be competitive,” Lynch said of Solyndra. “It was an insane business model. The numbers just don’t work, and they never did.”

One Sector of the Economy Booms: Government Regulation

First, a chart and explanation from Investors Business Daily (h/t):

Under President Obama, while the economy is struggling to grow and create jobs, the federal regulatory business is booming.

Regulatory agencies have seen their combined budgets grow a healthy 16% since 2008, topping $54 billion, according to the annual "Regulator's Budget," compiled by George Washington University and Washington University in St. Louis.

That's at a time when the overall economy grew a paltry 5%.

Meanwhile, employment at these agencies has climbed 13% since Obama took office to more than 281,000, while private-sector jobs shrank by 5.6%.

It has long been the case that regulatory agencies could utilize discretion in policing their realms. For instance, OSHA could reduce fines and work with companies to come into compliance by following a process that had the company accept or admit the violations and have fines reduced by 2/3 while also putting a payment plan in place. (This last is especially important to small companies who can't afford to pay the fine all at once, up front). No more. Apparently the Obama administration has directed OSHA to scrap that approach to "generate" as much "revenue" as possible.

The EPA will also become even more hardline and that will effect businesses and local governments (and your taxes). They've ordered the City of Newport to pay a $170,000 fine and spend $25M to fix a problem with their Waste Water treatment plant, after the city had already spent $32M to fix it (whether we can blame the EPA, City of Newport for incompetence--or both--is probably an open question). In addition, the EPA has now tightened their already tough regulations even more. Going from concentrating on so-called “point sources” (smokestacks, fan exhaust outlets, etc.) that emitted certain threshold levels of chemicals they have identified as hazardous wastes to regulating (and fining) any exposed amount of any of these chemicals found in a facility. The apparent theory being that opening a door allows pollution of the atmosphere.

Regulations impact jobs, especially on the small business level. Obviously, we need safe, clean work environments. But working with small companies, as has been done in the past, seems to have been, well, working. This new change in philosophy is both antagonistic and ill-timed, given the current state of our economy.

The Tone Deaf Ruling Class

This is precisely the thinking that has to end:

The two-phase plan will require Obama to argue for spending more money in the short term while reducing the federal deficit over a longer period. Many economists support that combination, saying that cuts in spending should wait until the economy is stronger. But political strategists say it has been difficult to communicate that idea to voters.

Obama pushed the idea Wednesday during a stop in Alpha, Ill. "Yes, some of these things cost money," he said. "The way we pay for it is by doing more on deficit reduction."

Enough already! Stop with the stimulus spending. Stop with the gimmicks. Stop with the attempts to use anxiety about the economy to expand the government's size and scope.

It doesn't "pay for" increased spending to spend a little bit less money you don't have in other areas. That is, reducing the deficit doesn't mean that you can spend the reduction, unless you've crossed the zero mark and are no longer spending more than you take in.

What Goes Up... Taxes

The other day, I made reference to the possibility that having an economy calibrated to two-income households, rather than the one-income households that were once the norm, is a hindrance on entrepreneurial ventures. Yes, if one spouse's attempt to create a business fails, the other spouse's income remains, but in the current marketplace, both incomes are necessary.

Since the effective doubling of the workforce, the market has adjusted household expenses, especially big-ticket expenses like housing, to the new normal income level. In an interesting spin-off discussion, Todd Zywicki ntoes that leading the big-ticket inflation is taxation:

Here's the key problem in Caldwell's argument: note his list of increased expenses for household "big necessities: mortgages (up 76 percent), cars (up 52 percent), taxes (up 25 percent), and health insurance (up 74 percent)." The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes. For the other expenses it is the percentage increase in dollars spent on those expenses. For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes. So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes. I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done. And, again, I have laid this out in considerable detail previously here.

What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%. The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back.

Zywicki overstates when he declares that taxes constitute the "entire two-income trap." Even if taxes were the only expense to increase at all as a percentage of income, that wouldn't change the fact that it now takes two incomes to cover expenses that used to take one. That said, conservatives certainly aren't averse to arguing that we need to shrink government in both its activities and its expense.

And Down We Go

Well, someday has come:

Standard & Poor's announced Friday night that it has downgraded the United States credit rating for the first time, dealing a huge symbolic blow to the world's economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation's rating one-notch below AAA, the credit rating company said "political brinkmanship" in the debate over the debt the debate over the debt had made the U.S. government's ability to manage its finances "less stable, less effective and less predictable." It said the bi-partisan agreement reached this week to find $2.1 trillion in budget savings "fell short" of what was necessary to tame the nation’s debt over time and predicted that leaders would have no luck achieving more savings later on.

A Treasury spokesperson took the tack of belittling S&P, which is fine, as far as it goes, but won't do much to correct the nation's course.

Downness and the Debt Ceiling

Yesterday, I gave some thought to shifts in government policy and in American culture that may ultimately be behind our economy's failure to recover satisfactorily. Much like the productive people who have been leaving Rhode Island because they've assessed that the opposition to needed reforms is simply too powerful, many Americans know what must be done but expect it to be near impossible to make it so. In that respect, the debt ceiling was like a small-scale prod at enemy lines to test the strength of its forces.

The standard line among Democrats, and even many Republicans, is that cutting government spending would just be too hard. All of the government's "promises" are sacrosanct — from Medicare to welfare programs to public school funding — and there simply isn't enough waste and fraud to be squeezed out of the system to cover the deficits (even if officials and bureaucrats were inclined to do the squeezing).

To be fair, they've got a point. A look at Kevin Williamson's prescription for government spending cuts shows just how many powerful groups would have to be bucked. That's certain to be a problem with democracy once elected officials realize that they can stitch together bought constituencies. Everybody's going to want their own ox to be the last one gored.

But cutting has to be done. Our government has been operating with a policy-first approach — assuming that the resources will be found to do whatever politicians and their backers think is right. Rhode Island is dying proof of the silent sunset clause in such an approach. If the federal government couldn't even be forced to abide by its already-astronomical borrowing limits — if it couldn't be forced to make honest-to-goodness, non-fudged and actual cuts to projected spending — then what hope is there?

Very little. If we collectively find it to be impossible to cut spending and begin mitigating our reliance on Big Government, it might be beyond impossible to change the cultural problems that underlie our approach to civics. Another bubble may come along and allow us another decade of ignoring the disease, as the Internet and housing bubbles did, but we'd only be worse off for it, in the long run.

As it happens, Mr. Williamson commented, yesterday, to one of my recent posts, saying that he's "given up writing about the deterioration of our culture," because there's "not much left to say." In a final analysis, the deterioration of our culture is the only thing to say. Repeating the common sense analysis of our errors is the only way to make people (gradually, culturally, almost subconsciously) shift their behavior and civic practices. Even if the necessary changes are beyond our society's abilities, right now, ensuring suffering on a massive scale and initiating the risk that our weakness might inspire global-scene-changing actions on the part of other peoples, the right path will be easier to find when we've come back around to it if it is well described.

Continuing Downness on the Economy

Thinking further about an aspect the topic that I raised this morning — namely, things that prevent Americans from forging their own way in this economy — many additional factors came to mind. A huge one is debt.

On my short lunch break, I don't have time to go in search of the link, but I read recently that personal debt in the United States greatly exceeds government debt, which is a compounded problem beyond forcing future generations broadly to finance today's public spending. Even within a couple of generations, the typical family would have needed much less money just to survive because it would have lived within its means on an annual basis.

My in-laws bought their modest cape in Portsmouth for $15,000. For the sake of ease, assume the interest payments amount to a doubling of the ultimate cost of the house; that means they would havce wound up paying roughly $1,000 per year over the life of a thirty-year mortgage. A similar house now would cost somewhere around three-quarters-of-a-million dollars, with the same interest assumption, or $25,000 per year. Somebody who decided to go out on his or her own to start a business could live on just about that amount of money while ramping up, and somebody with a mortgage of that size will surely be significantly more reluctant to take on greater debt in order to invest in a business venture.

I'm simplifying, of course. Wages have inflated, as well, and the price of real estate has something to do with demand, and so on. But part of the reason that the market has borne a 2,000% increase in the price of a house is that our toleration for debt has grown immensely. It's not just mortgages, either. Consider college debt (which has arguably only inflated the amount of education that one needs for the same exact sort of work). Cars. Equity loans. Credit cards.

Speaking from personal experience, that all means that I would be insane to commit to business loans for, say, Anchor Rising. Given all of my existing debt, I need to make so much money just to pay each month's bills that I'd quickly eat up my investment in personal salary. And if the full-time writing activity didn't result in an adequate revenue stream, I'd wind up needing to earn even more money per month to pay off the loan.

Of course, Americans used to have more room in their personal finances for a host of other reasons. When the marketplace was calibrated to the idea of one-income households, a spouse was spare capacity. Whether the working man's wife found part-time work outside the home, helped her husband with business paperwork, or worked as a partner in a storefront, that was all extra income tacked onto basic priorities.

As with regulations, both the tolerance of debt and shifts in the culture have had justifications, but it may be that they've finally all added up to a society that so differs from its prime that decline is inevitable.

Ratings and Receivers

Andrew and Matt discussed ratings agencies and municipal receivers on last night's Matt Allen Show. Stream by clicking here, or download it.

Why We're Down on the Economy

Derek Thompson touts these as "the 4 scariest economic graphs I've seen this year." Basically, they chart every recession of the last fifty years in terms of a percentage of the previous peak.

As a rule of thumb, I'm always skeptical about metrics that are multiple steps away from raw numbers, in this way. A peak is a single data point and can therefore skew a decade's worth of numbers because it was unnaturally high or low. If, for example, a housing boom predicated on loans from the the future causes a particularly large spike, then the following trough — when people realize the delusion under which they've been operating — will be particularly low.

That said, the first and last charts seem to me to suggest that eyes have been opened to more than just the insecurity of mortgage-backed securities. The first shows "Real Gross Domestic Product: Percent of Previous Peak," and after a five percent dip, by mid-2009, we're currently back to 99.5% of the prior high point. The last shows "Employment: Percent of Previous Peak," which bottomed out with a 6.5% drop by 2010 and has only recovered about 1.5% of its comparative strength.

It looks like investors and producers have discovered that they can turn a profit without employing Americans. And they won't fill their payrolls again unless some change in the market gives them reason to do so.

Alternately, competitors could duplicate the jobs available in a particular industry in order to build their own organizations, but that brings us to another thing that I think people are realizing: The United States is no longer as good a place to be an upstart company looking to squeeze out efficiencies in existing industries or fill niches that the big companies haven't noticed.

I'm not, here, talking about the lottery-ticket possibilities exemplified by Google and Facebook. Neither do I mean the investment-driven bids to attract large buyouts from behemoths wishing to pad portfolios of potential next-big-things. If existing companies are finding that they can maintain their bottom lines without the large expense of labor costs, then smaller companies ought to be able to leverage that capability to compete, therefore making it crucial that incumbents put their profits and reserves to the most efficient use possible, whether that means opening new branches or lowering prices.

If, for example, the large contractor across town finds that relatively inexpensive equipment and tools allow him to cut his crews in half and take the savings for himself, there's no reason his employees can't break off and use the same techniques to compete. They'll edge out the contractor's excess profits, but they'll be doing better, themselves.

Of course, my use of the phrase "no reason" is rhetorical, not accurate. Public policy creates all sorts of reasons that carpenters might not want to try their hand at contracting. There are layers of insurance that a business requires. Regulations that they must follow. Minute codes with which they must be familiar. Fees that they have to pay to gain this license or that registration. In Rhode Island, they have a $500 minimum tax if they organize as anything other than a sole proprietorship. If they hire other people, there are piles of paperwork to manage.

I'm using the construction industry emblematically, here, but Iain Murray notes that "the costs of regulation today amount to $10,000 per employee per year for small businesses in the U.S."

That's why the advert where a little girl borrows her father's phone to help run her lemonade stand and ends up running a multinational just can't happen. The bureaucrats just wouldn't let her do it without jumping through the costly bureaucratic hoops first.

He even links to a map set up to track towns that shut down kids' lemonade stands.

Sure, there are arguments to be made for each and every regulation on the books, but in favoring the impulses to regulate and tax and to protect consumers from their own unfortunate decisions, we've set up a system that protects organizations once they reach a certain level of establishment. This applies to the downtown barber who has the means to secure a license, pay minimum taxes, and make his shop fully compliant with regulations and building codes, and it applies to the bailouts of banks and automobile manufacturers that have established themselves as "too big to fail."

Charles Krauthammer is right, as a lot of us have said all along, that President Obama (and President Bush, before him) "did a huge Keynesian gamble, and it failed." That's because borrowing money from the future to inject into the current economy can only jump-start real growth if the specific economic downturn of the time results from a lack of funds and if those funds can flow to the segments of the market best situated to transform raw materials and human productivity into new dollars.

If the downtown barber and corner lemonade stand are all set to go but just need the union masons working on government road projects to stop in on their way home from work, then Keynesian stimulus might help. But if the barber and lemonade kid are prevented from doing what they do, the government money will just flow to SuperCuts and CVS, which will use the extra revenue to overpower competition and pad reserves.

In government, we face a spending problem, not a revenue problem, and in the economy overall, our shackles derive from regulation, not funds.

Loan Guarantees: Another Gimmick That Won't Spark Business Activity

Further to Justin's post, we learned yesterday that

A dozen companies – half of them out-of-state businesses looking to relocate to the Ocean State – are lining up to take advantage of the same controversial loan-guarantee program that drew Curt Schilling's video game company, 38 Studios LLC, to Providence.

Loan guarantees by the state are no way to lure and keep business here. It is simply not feasible for the state to expose itself to the amount of risk involved in backing a sufficient number of such loans to make a difference.

The pertinent correlation, of course, is between Rhode Island's abysmal business climate and its poor economy and corresponding employment figures. A spark to the latter will not ignite until Rhode Island's real EDC decides to step in and address the former with substantive regulation and tax/fee reform rather than continuing to sit on the sidelines with the rest of us watching the gimmick parade.

Letting the Spinners Get Away with Economic Baloney

It's getting kinda hard to take the spin that permeates economic reporting. Reporter Kate Bramson and her headline writer mainly adopt RI Department of Labor and Training Director Charles Fogerty's line that the statistics show "slow, steady progress." The headline and lede are, "Rhode Island unemployment dips slightly, to 10.8 percent, Still, 10.8% an improvement over numbers for December," and the story deepens with this:

Job growth in Rhode Island is one of the positive trends in the first half of the year. Although the number of jobs dropped from May to June by 1,500, Rhode Island had 4,200 more jobs in June than in December. That six-month growth is an increase of 0.9 percent -- which Fogarty said is "outpacing the nation."

A quick glance at the accompanying table, mostly taken from the U.S. Bureau of Labor Statistics' page for Rhode Island unemployment, shows that, while the number of unemployed Rhode Islanders dropped by 4,891, the number of people working also dropped, by 5,362. That is, the overall labor force shrank by 10,153 and hasn't been this small since September 2009.

As for the increase of "jobs based in Rhode Island" since December, a closer look at the month-to-month statistics (which are all that are easily found) suggests that the uptick is mainly in construction and accommodation and food services, which can be expected to increase in Rhode Island this time of year.

Training for Jobs That Don't Exist

Under normal circumstances, this program might be an unalloyed positive, and I do believe that every student should have some familiarity with construction and trades:

On Olmsted Way, a short street across from the Wanskuck Mill on Charles Street, 10 graduates of the YouthBuild Providence program are at work this summer, renovating 24 apartments in two buildings at the Olmsted Gardens affordable-housing complex. ...

In the YouthBuild Providence program, www.youthbuildprov.org, part of the national YouthBuild network, low-income youths ages 16 to 24 work to earn their GEDs or high school diplomas while also learning job skills by building affordable housing. Marques said the 10-month educational program includes alternating weeks of classroom work and on-the-job training.

The money for the program appears to come, ultimately, through the federal government, in part (one infers) by paying for the projects, which thereby operate with the inexpensive labor. But are public dollars spent on training for a flailing industry really a good idea?

The organization's Web site calls construction "a booming industry in our state that is poised for substantial growth." Another article in Sunday's Providence Journal, however, describes the industry's employment position as follows:

In building construction, slight job gains in commercial and industrial construction are being swamped by losses in residential, where foreclosures, tight credit and depressed prices have taken a toll. In June, residential and commercial building companies employed 1.2 million workers, down 15,900, or 1.3% from a year earlier, according to the Labor Department.

Back in October, Rhode Island led the nation in its percentage of construction jobs lost, and I haven't seen any evidence that much has changed. That means that job training programs focusing on building are adding low-end labor to an industry that already has a great deal of downward pressure on employment and salaries. And a 10-month program does so relatively quickly.

That sounds like a blueprint for stagnation for older workers and disappointment for new entrants to the trade. Were it a (gasp) for-profit program — with enrollees paying for their training — it would have to adjust to economic trends. With government funding, the folks making the financial decisions aren't those who stand to gain or lose by graduates' success or failure, and the bureaucracy in place to funnel the funds generates its own motivation.

Maybe If the Kitchen Table Is on a Yacht... with Servants

This AP analysis — or whatever you would call such an essay — by Calvin Woodward and Martin Crutsinger is dumb to the point of being offensive. Woodward and Crutsinger try to put the debt ceiling debate in terms of family finances, and the lede that the Providence Journal gave to the story captures the error:

The choice in simple terms: Borrow more while fixing the budget, or refuse more debt, leave some bills unpaid and risk upheaval

Perhaps I'm not alone in thinking that the politicians' preferred option would actually be to borrow more without fixing the budget and then make the same threats and doomsday predictions when the problem comes around again. And what about the unmentioned option of living within one's means in the first place? President Obama offers a typically erroneous comparison:

"A family, if they get over-extended and their credit card is too high, they don't just stop paying their bills," he said. "What they do is, they say, how do we start cutting our monthly costs?

"We don't stop sending our kids to college, we don't stop fixing the boiler or the roof that's leaking. We do things in a sensible, responsible way."

The idea that our bloated government is so trim and efficient that the next cut will have to be to the roof maintenance budget is ridiculous on its face. But frankly, if a household is to the point at which it has to borrow forty cents of every dollar it spends, then it really has to think about selling the house and (contrary to the essay's authors) selling some assets is really not an extreme step.

Canada did it

Michael Barone points to a piece by Fred Barnes (sub req'd, but Barnes has mentioned this before) that explains that helping an economy by reducing spending can be done. Barone summarizes:

In the 1990s Canada’s Liberal party government reduced its national debt and revived its economy by, among other things, reducing federal employment by 45,000 jobs, 14% of the total. The ratio of spending cuts to tax increases was nearly 7-1. Overall Canada’s economy, which grew by less than 1% annually between 1989 and 1993, grew by an average of 3.4% between 1994 and 2006.

Regarding the $2 Trillion in "Cuts" for the Proposed Raise in the Debt Limit Ceiling

CATO has put out a simple video explaining that the "drastic cuts" being bandied about ain't no such thing, they're just the typical political cuts (ie; a reduction in the previously projected rate of growth) (h/t):

"Unexpectedly" Bad Job Numbers

Glenn Reynolds has been noting the "unexpectedly" bad job reports for many months now. In other words, for some reason, news outlets, pundits and the government all seem to be surprised that the job market continues to stink. Month after month, they've amped up hopes that unemployment is going to go down while new job numbers leap up. Today's report was no different and also revealed that the past two months were--you got it--"unexpectedly" worse than originally thought.

The nation's unemployment rate ticked up to 9.2 percent in June from 9.1 percent the month before as businesses and government agencies added only 18,000 jobs to their payrolls, the Bureau of Labor Statistics just reported.

The number of Americans classified as unemployed rose to 14.1 million from 13.9 million in May...."The change in total nonfarm payroll employment for April was revised from +232,000 to +217,000," BLS reports, "and the change for May was revised from +54,000 to +25,000.

How the Economy Would Recover

It's kind of surprising to see this reported as news, but perhaps it's been so thoroughly forgotten among politicians and in the culture that it's actually a new discovery for journalists:

You get laid off. Your job search goes nowhere. Your savings dry up. Now what? The answer for many is as old as capitalism: Start a business.

This isn't the new Google, here. This is Bob's Landscaping and Junk Hauling or Alicia's Cake Baking and Daycare — whatever it takes to bring in a serious income. It might be a hobby or side business that morphed into a lifeline, but the key for most people is starting with relatively little capital — a lawn mower, computer repair tools, a sewing machine, all of which they might already own.

That's why the best approach to repairing the economy isn't to soften the experience of unemployment while throwing wads of debt-derived dollars into the economy. Rather, what's needed is to maintain a reasonable safety net while easing regulations.

Rhode Island especially needs to learn this lesson. Not only does the General Assembly look likely to tax new items (albeit many fewer than the governor wanted), but we frequently see the state and municipal governments ratcheting up fees, expanding fines, and otherwise making it more difficult to negotiate the economy.

Maybe It's Your Philosophy, Ben

There's an army of right-leaning and libertarian bloggers who would be willing to offer this puzzled economic power broker a pointer or two:

The economy's continuing struggles aren't just confounding ordinary Americans. They've also stumped the head of the Federal Reserve.

Fed Chairman Ben Bernanke told reporters Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy. And he said the troubles could continue into next year.

What's the quote from Keynes? "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood." Maybe Mr. Bernanke needs to question whether he's getting something wrong from the point at which he makes assumptions about how the world works.

It Isn't a Jobless Recovery...

...if it's a recovery at all...it's a "Jobs lost" one.

Only 58.4 percent of Americans are employed, the fewest since the 1980s. Corporations have recouped 100 percent of profits lost in the recession. GDP has regained its pre-recession level with 7.3 million fewer workers.

It’s easy to criticize corporations for raking in profits while millions of workers go unemployed or underemployed. However, the bottom line is that companies have adapted to the changing structure of the U.S. and global economies a lot faster than the American workforce has, and a great number of those workers have a lot of catching up to do.

The push to bolster profitability has permanently altered the employment needs of many corporations, especially the mix of skills companies require. "We believe a large proportion of today's high unemployment is structural in nature, resulting from a huge skill mismatch between the jobs being created and the existing skill sets of jobseekers," says Wells Fargo economist Mark Vitner.

Increase Professorial Efficiency and Tuition Costs Will Go Down

Richard Vedder, an economics at Ohio University, explains that one way to cut college tuition costs would be to ask professors to, you know, teach more.

In a study for the Center for College Affordability and Productivity, Christopher Matgouranis, Jonathan Robe and I concluded that tuition fees at the flagship campus of the University of Texas could be cut by as much as half simply by asking the 80% of faculty with the lowest teaching loads to teach about half as much as the 20% of faculty with the highest loads. The top 20% currently handle 57% of all teaching.

Such a move would require the bulk of the faculty to teach, on average, about 150-160 students a year. For example, a professor might teach one undergraduate survey class for 100 students, two classes for advanced undergraduate students or beginning graduate students with 20-25 students, and an advanced graduate seminar for 10. That would require the professor to be in the classroom for fewer than 200 hours a year—hardly an arduous requirement.

Faculty will likely argue that this would imperil the university's research mission. Nonsense. First of all, at UT Austin, a mere 20% of the faculty garner 99.8% of the external research funding. Second, faculty who follow the work habits of other professional workers—go to work from 9 a.m. to 5 p.m. and work five days a week for 48 or 49 weeks a year—can handle teaching 200 hours a year while publishing considerable amounts of research. I have done just this for decades as a professor.

True Unemployment Numbers

Unemployment is reported as having gone up to 9.1% in May. It's actually worse:

Since November, the number of Americans counted as employed has grown by 765,000, to just shy of 139 million. The nation has been creating jobs every month as the economy recovers. The economy added 244,000 jobs in April.

But the number of Americans counted as unemployed has shrunk by much more — almost 1.3 million — during this time. That means the labor force has dropped by 529,000 workers.

The percentage of adults in the labor force is a figure that economists call the participation rate. It is 64.2 percent, the smallest since 1984. And that's become a mystery to economists. Normally after a recession, an improving economy lures job seekers back into the labor market. This time, many are staying on the sidelines.

Their decision not to seek work means the drop in unemployment from 9.8 percent in November to 9 percent in April isn't as good as it looks.

If the 529,000 missing workers had been out scavenging for a job without success, the unemployment rate would have been 9.3 percent in April, not the reported rate of 9 percent. And if the participation rate were as high as it was when the recession began, 66 percent, in December 2007, the unemployment rate could have been as high as 11.5 percent.

NOAA Run Amuck: Fraud, Waste and Abuse

The Providence Business News tipped me off to this story.

The mayors of the region's two leading fishing ports Wednesday said a special master's report on miscarriages of justice by federal fisheries law enforcers described an "un-American" system that presumed guilt, and seemed consistent with a disrespectful view of fishermen they said permeates high levels of the agency.

"The penalties were shakedowns," said Mayor Scott Lang of New Bedford.

"The coercion was remarkable," added Mayor Carolyn Kirk of Gloucester. "It's unimaginable that this could be happening in America."

"Normally," Lang added, "people go to jail, but here they get transferred to a better climate." {as this editorial explains-ed.} ....[NOAA administrator Jane] Lubchenco led an entourage to Gloucester last Tuesday to meet with fishermen, issue an apology for failings of the law enforcement system, discuss a suit of reforms and announce the decision to return $649,527 in fines levied against elements of the commercial fishing industry which had its start here in the 17th century.

An investigation by the Commerce Department's Inspector General found the regulations were "unduly complicated." Federal agents "overzealous" and "abusive." Excessive fines including one for $270,000 for "administrative errors."

"We're honest hard-working people," [fisherman Richard] Burgess said. "And we have been treated as common criminals."

The inspector general found the $30 million the fishermen paid in fines went to a NOAA fund with no oversight. The fund was used by regulators to buy more cars (202) than agents (172,) and for trips to fishing conferences in exotic locales such as Australia, Malaysia and Norway. It was also used to purchase a $300,000 "luxury vessel" used by government employees for "fishing trips."

And according to this memo obtained by CBS News while under investigation NOAA officials in Washington had a "shredding party" destroying garbage bags full of documents.

As part of its fiscal 2011 Continuing Budget Resolution, Congress earlier this spring voted to bar spending on new catch share systems in the Atlantic and Gulf fisheries through the end of the fiscal year, but in response Lubchenco drew in grants from the Congressionally created non-profit National Fish and Wildlife Foundation and other foundations to fund future catch share systems.

Behind the Unemployment Headline

This is the good news that's we've all heard being touted:

For the fourth month in a row, Rhode Island's unemployment rate dipped slightly in April to 10.9 percent, the first time in 21 months it has fallen below 11 percent.

Additionally, the number of jobs in the state grew by 1,800 from March to April to 462,200, according to data released Friday by the state Department of Labor and Training. April was the third month in a row the number of jobs in the state has grown.

Read a little farther — almost to the end of the article — and you find that "growth" can have strange meanings:

The number of unemployed Rhode Island residents dropped by 900 from March to April to 62,100. That’s 5,500 fewer people who are now counted as unemployed compared with April 2010.

Rhode Island’s labor force equaled 571,100 in April, down 900 from March, and down 5,100 from April 2010.

That is, on the month-to-month basis, the drop in unemployment and the number of people who left the labor force are an exact match. I'll withhold judgment on Rhode Island's pending recovery until such time as the unemployment rate falls because people who weren't working now are. Otherwise, the statement's a bit like declaring the health of our people to be improving because sick people have been dying off.

Jobs Saved and Destroyed

I've long described President Obama's stimulus program as an attempt to insulate governments at various levels from the effects of the recession. The great bulk of the dollars flowed to states and municipalities in order to prevent budget cuts and, therefore, salary cuts and layoffs.

The problem with seeing the "just spend" approach as a means of jump starting the economy is that the government must take its spending money from somewhere, and to the extent that it collects it immediately in taxes, it changes its productivity incentive from making a profit to making busy work. The former is clearly a more efficient way of creating wealth.

And to the extent that government borrows the money that it spends — obligating the country to repay — it is merely shifting money from future productive uses, with interest. Moreover, given the role of investing in the economy (spanning from the stock market to home buying), which is in a sense a gamble about where wealth will be in the future, that money from the future can now no longer be borrowed for more productive uses.

In other words, in principle, there's little difference between taxing and borrowing in this regard, although the degree to which each saps the private economy to benefit the public may differ dollar for dollar. That brings us to an economic study highlighted by PowerLine, finding as follows:

Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services.

Stimulating the government necessarily dulls the economy, and there appears to be a reverse multiplier effect of sorts.

Debt Versus Economy

Too much can be made by each individual organization's predictions, but there's something disconcerting about this:

PIMCO's Bill Gross, the manager of the world's largest bond fund, raised his bet against U.S. government-related debt in April to 4 percent from 3 percent, according to the company's website on Monday. ...

Gross told Reuters on Friday: "Treasury yields are currently yielding substantially less than historical averages when compared with inflation. Perhaps the only justification for a further rally would be weak economic growth or a future recession that substantially lowered inflation and inflationary expectations."

A Couple of Narrower Economic Debates

The other day, I mentioned the International Monetary Fund report suggesting that, by a "purchasing power," China would surpass the United States economically in 2016. Stephen Green isn't buying the "purchasing power" thing:

Measured dollar-for-dollar, China's GDP is less than half that of the United States’ — it's only by measuring "Purchasing Power Parity" that the numbers are even close, even all the way out to 2016. Per capita, most Chinese are quite poor, making little more than $4,000 a year. Grade on the PPP curve, and your average Chinese still makes only around $7,500. Per capita GPD in the U.S. is a much-comfier $47,132.

Of course, there's also the major consideration, which ought to be read into every study, that projections could be wrong — whether the error manifests in a gradual shift from expectations or a sudden boom or collapse.

While I'm on the topic of debates about economics and the metrics thereof, Al Lewis offers this opinion in the battle between Treasury Secretary Tim Geithner and Standard & Poor's:

S&P last week announced there's a 1-in-3 chance it will lower America's Triple-A credit rating, a move that would force higher interest rates on a debt-bloated nation.

Reading between the lines, one comes to suspect that Geithner's premise is based on the possibility of ever-increasing debt. Less-commonly mentioned are the huge number of assets that the government could sell to avoid default. Of course, the list to be found via the link concerns itself with financial assets and doesn't even begin to list such things as publicly held land that could be sold.

More interesting than the flat denial, though, is the pro-government spin of a left-wing think tank and Lewis's response:

Then there's S&P. "S&P has a horrible track record for judging credit worthiness," wrote Dean Baker of the Center for Economic and Policy Research. "It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman Brothers, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures."

S&P's legacy of risk mismanagement, however, comes from overrating incompetent and even criminal enterprises where it had grotesque financial incentives to do so. Not for downgrading things amid clearly downward trends. Still, what kind of company believes in Enron, yet loses faith in the U.S.A.?

Several answers are available to that last question. First, if S&P's tendency is to err toward optimism, it could be the case that the United States is in dramatically worse shape than Enron, just propped up by its power to tax and wage war. Second, the government's financial dealings are much more in the open than Enron's, so it's possible to be more accurate. And third (to throw a bone to the pro-government folks), S&P could see organizational advantage to threatening a downgrade of the U.S.

A Winner by Fiat

Oh, happy day. Keynes and Hayek are back for round 2 of their rap war:

Not surprisingly, the representatives of the public sector and media, as portrayed in the video, have a preference.

The Young and Unemployed

As the old song goes, the children are the future, and in discussing the effects of our graying workforce, John Kostrzewa worries about Rhode Island's:

Eleven percent of the 107,108 people ages 22 to 29 who lived in Rhode Island in 2008 moved out in 2009. That's 11,200 young people.

The numbers are even scarier when you break out college educated Rhode Islanders.

One in five who were here in 2008 had left in 2009, largely because they couldn't find a job.

Kostrzewa's mainly addressing the effects of our long-running downturn, but since I arrived in the late '90s, it's been the common wisdom in Rhode Island that young adults had to leave to find opportunity. The Great Recession just exacerbated what was already a problem, and as factions fight over slices of the public pie and beneficiaries demand that the pie be expanded through taxation, necessary priorities come into stark relief.

After all, what's the point of Rhode Island's generous "investment" in education if the products of our efforts — highly educated young adults — simply leave? Increasing taxation and making it harder to do business in the state in order to prop up an inefficient educational system of questionable quality has the steps backwards. The state has to reorder its priorities, and the people who make public decisions (and those who pull their strings) are manifestly disinclined to do so.

Commenting to my morning post, yesterday, Dan offered a compelling simile:

Fixing Rhode Island's cyclic financial problems at this end-game point in time is like trying to remove a horned toad that has inflated itself in crack deep between two jagged desert rocks while it bites and hisses and squirts defensive blood at you out of its eyes. Any herpetologist knows that once it has retreated in there, it's too late and it's time to move on to another location. Lots of other states to choose from in the United States.

Or, as Mark Patinkin put it, while explaining that RI's elected leaders have to do what's necessary, even if it means the end of their political careers:

One can say many public employees — especially those doing risky jobs like cops and firemen — deserve such pensions. Even I think they do. But sadly, we are past the point of talking about "deserve." We're in the realm of "afford."

Pensions are only a heavily bleeding part of the wound. Rhode Island has to make subjective notions of fairness and desert secondary to functional possibility. Social services have to be curtailed; the education system has to stop being managed under the assumption that more money means better results; and regulatory manacles have to be removed from businesses, even if it means that the state no longer micromanages everybody's safety and, yes, even if it means that people get rich.

Time to Stop Being an Ostrich

When Ernst & Young, one of the Big 4 professional services firms, releases a study (PDF) that says Rhode Island is one of the worst in the nation for tax competitiveness when it comes to attracting new business, you'd better listen.

This study provides a state-by-state comparison of the tax liabilities that new investments in selected industries or types of economic activities would incur in each state, taking into consideration state and local statutory tax provisions and the financial and economic characteristics of the new investments. The analysis focuses on capital investments in industries that have location choices, such as factories or headquarters, rather than those that are tied to a specific geography, such as retailers or hotels. The estimated tax burdens on selected investments are combined to provide an overall measure of the business tax competitiveness of each state.

The usual advocates can debate and reframe and reshape the debate all you want in an effort to raise taxes on the rich and "big business". No matter how persuasive you may be, businesses don't care. They aren't coming here: E & Y have provided a first filter for them. And the businesses that are here may take a second look. They'll leave. Because business people listen to someone like Ernst & Young. Will Rhode Island?

Move Out of the State? That Might Only Buy You Some Time

Former RI Auditor General Ernest Almonte says moving out of the state is, right now, about the only way that Rhode Islanders can avoid paying the $13,000 apiece we "owe" to fund public employee retirees (present and future). This is the big headline that came out of a conference held at URI last night.

Also discussed was the Pew Center for the States research (RI fact sheet in this PDF), which found that Rhode Island had only 59% of its $11.5 billion pension liability covered in 2009, ahead of only five states (Illinois, 51%; Kentucky, 58%; New Hampshire, 58%; Oklahoma, 57%,West Virginia, 56%). However, as General Treasurer Gina Raimondo pointed out, Rhode Island is now even worse off (probably because of the recent decision to re-set the pension rate of return) and now sits at 48%. Worst in the nation. Yay.

Raimondo was on with Dan Yorke earlier in the day and left little doubt that we are screwed and that there is no more road left to kick the can down. She sounds ready to dig in and fix things. She said it wasn't "a problem" but "THE problem" facing the state right now. Unfortunately, Raimondo still seems to be clinging to the idea that a defined benefit plan--rather than moving to 401(k) style defined contribution plans--is still a viable option. I don't think so.

As Michael Barone recently wrote, "the U.S., in general, just can't afford generous defined benefit systems" anymore. Meanwhile, European countries are coming to the conclusion that social welfare benefits and programs aren't untouchable, after all.

The paradigm is shifting whether we like it or not. Promises were broken and it sucks. But it's economic reality: there is no money. We have to deal with current pensions and benefits, not just "future" pensions and benefits for workers not yet hired. That was the easy, low-hanging fruit. It's time for politicians--the people who are supposed to lead--to step up and really deal with this. That's why they were elected. If they don't, we'll have to find someone who will.

The Reign of Obama May Close Out the Age of America

It's not the current president's fault (although many of us would be inclined to suggest that he hastened the end result), but if Barack Obama wins a second term, it may be that he'll turn out the lights on the Age of America... at least according to the International Monetary Fund:

According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 — just five years from now.

Put that in your calendar.

It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power. ...

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using "purchasing power parities." That compares what people earn and spend in real terms in their domestic economies.

Brett Arends, who wrote the above, suggests that the Age of China won't be as benign a hegemony as has been the past few "ages" dominated by Western democracies. He also quotes NYU Stern business professor Ralph Gomory as suggesting that the United States has "traded jobs for profit," leading to "a small, very rich class and an eroding middle class."

On the latter count, I'd say that business leaders' transition of jobs to lower-cost foreign markets is only part of the story. As seems to be a repeating theme, in our society, the trouble arises by our failure to follow a particular governing philosophy. What I mean is that the pursuit of cheaper labor for reasons of profits has had to combine with government imposition of regulations, mandates, and other market controls in order to trip up the United States.

With ever-increasing barriers to entry, the middle and working classes have been unable to compete with established companies, decreasing the risk for the internationals in turning toward distant employees. Displaced workers, and those who would employ them, have also been restricted in their ability to explore new means of making a living.

The way through this is to trust in the American people by removing government manacles, despite the fears and selfish interests of our ruling class, and begin to rebuild the character of the nation.

Americans Get More Tax Revenue Then They Send

A milestone has been reached. One not seen since the Great Depression.

Households received $2.3 trillion in some kind of government support in 2010....that’s more than the $2.2 trillion households paid in taxes, an amount that has slumped largely due to the recession, according to an analysis by the Fiscal Times.

Also, an estimated 59% of the 308.7 million Americans in this country get at least one federal benefit, according to the Census Bureau, based on 2009 data. An estimated 46.5 million get Social Security; 42.6 million get Medicare; 42.4 million get Medicaid; 36.1 million get food stamps; 12.4 million get housing subsidies; and 3.2 million get Veterans' benefits.

And the handouts from the government have been growing. Government cash handouts account for a whopping 79% of household growth since 2007, even as household tax payments--for things like the income and payroll tax, among other taxes--have fallen by $312 billion.

That is a tough feeding trough to take away from voters....In short, Americans have the government, not private enterprise, to thank for their wealth growth....does that mean those households are more inclined to re-elect politicians who are pushing for more government handouts?

Does the workforce erode because it is easier to collect a check than answer to an alarm clock each morning?

Not Working: A Society in Decline

A USA Today study finds that the percentage of Americans not working hasn't been higher since women began entering the workforce, and the percentage of men who are working has never been lower. Moreover:

In 2000, the nation had roughly the same number of children and non-working adults. Since then, the population of non-working adults has grown 27 million while the nation added just 3 million children under 18. ...

The aging of 77 million Baby Boomers born from 1946 through 1964 from children to workers to retirees is changing the relationship between workers and dependents.

Retirees generally are more costly to support than children.

Fewer children. More non-employed. A wave of pending retirements. Now stir this in:

A quarter of teenagers were jobless in March, representing a surprising increase from February, even as the unemployment rate for the rest of the population decreased.

So, not only are there fewer children, but fewer of them are forming the habits and skills of working.

The article about teen unemployment notes economists' expectation that increasing the minimum wage will only exacerbate things, as employers eliminate low-end positions that they can no longer afford and look for higher-skilled employees to fill the more-expensive positions that they keep. Meanwhile, the first article linked above ends with this:

Economist Eileen Applebaum of the liberal Center for Economics and Policy Research says the real problem is a lack of jobs. Another 25 million people would work in a healthy economy, and incentives such as child care assistance could help, she says: "We're getting richer. We can afford things. We just need to fix what needs to be fixed."

Those of us who are suspicious of the Left's ability to do such fixing might wonder how its solutions address the actual problem by continuing to expand and deepen dependency — of parents on government and of the young on parents and government. That strikes me as the opposite of the wise direction.

Indeed, progressives' proposed policies always represent a further step in the progression of covering up and papering over the adverse consequences of previous changes. Even with male exodus from the workforce and decreasing numbers of children, and decreasing proportions of them working, we're still hearing calls to somehow force the system to shift in favor of women to compensate for a debatable wage gap. Moreover, we're hearing calls to continue the dilution of marriage by severing the inherent link between it and childbirth.

Western civilization spent much of the past half-century undermining the family structure that secured its advancement toward prosperity. Papa Government isn't going to fill the gap, because the nuclear Western family ultimately encourages independence, while government encourages dependence. Parents will inevitably die; Big Government is eternal, unless killed.

The Insidiousness and Destruction of Decades of Incremental Tax Increases

In response to the protest rally held by the business community yesterday at the State House, the governor asked for proof that his proposed massive broadening of the sales tax will damage Rhode Island businesses.

Rhode Island currently has the fifth highest state and local tax burden. It also has one of the worst business climates in the country - the latter due in part to the high cost of doing business here in which a myriad of government regulations, taxes and fees features prominently. (Boiler fee, anyone?)

However, these conditions did not evolve overnight. One by one, such regulations, taxes and fees were added. And then, one by one, many of them were expanded or increased, sometimes repeatedly; in the case of the fire code, to a ridiculous degree. As this happened, Rhode Island slowly evolved into its current status of business and property-owner unfriendliness. In response, one by one, businesses moved out of the state; naturally, taking jobs with them in the process.

This, then, is the fulfillment of the governor's assignment: the proposed massive broadening of the sales tax is a continuation of a decades-long practice that has slowly but inexorably driven business out of the state.

If we're ever going to pull out of this downward spiral, we need to head in the opposite direction. Regulations need to be addressed. And let's come to grips with the budget's structural problems so that we can begin decreasing taxes and fees rather than once again doubling down on failure and increasing them.

Guilt Industry Meme of the Day: Women Earn Less Than Men

"Rhode Island women earn $10,200 less than men" says the Providence Business News headline.

Full-time employed women in Rhode Island are paid an average of $10,191 less than their male counterparts, according to research conducted by the National Partnership for Women & Families.

The research is meant to shed light on the persisting gender-based wage gap on Equal Pay Day on Tuesday, April 12.

In Rhode Island, a woman working full time is paid $39,248 per year, while a man working full time is paid $49,439 per year.

Nationally, women working full-time are paid an average of 77 cents for every dollar that men earn.

Feminist hand-wringing about the wage gap relies on the assumption that the differences in average earnings stem from discrimination. Thus the mantra that women make only 77% of what men earn for equal work. But even a cursory review of the data proves this assumption false.

The Department of Labor's Time Use survey shows that full-time working women spend an average of 8.01 hours per day on the job, compared to 8.75 hours for full-time working men. One would expect that someone who works 9% more would also earn more. This one fact alone accounts for more than a third of the wage gap.

Choice of occupation also plays an important role in earnings. While feminists suggest that women are coerced into lower-paying job sectors, most women know that something else is often at work. Women gravitate toward jobs with fewer risks, more comfortable conditions, regular hours, more personal fulfillment and greater flexibility. Simply put, many women—not all, but enough to have a big impact on the statistics—are willing to trade higher pay for other desirable job characteristics.

Men, by contrast, often take on jobs that involve physical labor, outdoor work, overnight shifts and dangerous conditions (which is also why men suffer the overwhelming majority of injuries and deaths at the workplace). They put up with these unpleasant factors so that they can earn more.

Recent studies have shown that the wage gap shrinks—or even reverses—when relevant factors are taken into account and comparisons are made between men and women in similar circumstances. In a 2010 study of single, childless urban workers between the ages of 22 and 30, the research firm Reach Advisors found that women earned an average of 8% more than their male counterparts. Given that women are outpacing men in educational attainment, and that our economy is increasingly geared toward knowledge-based jobs, it makes sense that women's earnings are going up compared to men's.

It's Been a Good Decade: Why Public Employees Make So Much of Freezes or Minor Cuts

To those of us not in the public sector, it seems outsized when public employees and politicians make so much of temporary pay freezes or a few minor cuts (or reductions in the expected increases!). Red Jahncke adds some context that will help us understand their perspective by explaining how, nationwide, local and municipal government employee compensation has outpaced the private sector. He backs it up with two tables (6.2D and 6.5D) from the National Product and Income Accounts of the U.S. Bureau of Economic Analysis.

Table 6.2D shows that, nationally, state and local government worker compensation grew 45 percent from 2000 to 2007 — plus another 8 percent in the next two recession years, while private-sector compensation grew only 33 percent from 2000 to 2007 and — surprise, surprise — fell 3 percent in the recession. [Incidentally, the chart also shows that Federal Gov't grew 52% 2000-07, 11.5% during the next two recession years~ed.].

Table 6.5D reveals that, during the 2007-2009 recession, private-sector employment fell by 8 million jobs to a level below its total in 2000, while state and local public-sector employment grew by 185,000 jobs, reaching 1.3 million, or 9 percent, above its total in 2000.

The 2007- 2009 data speak to the issue of fairness — massive job losses and pay cuts in the private sector, continued job gains and a smart compensation boost in the public sector. In 2010, relatively few jobs were regained in the private sector or lost in the public sector.

And the data for the full decade speak to the issue of sustainability: How can slower-growing private-sector income produce the taxes to fund a public-sector payroll growing at almost twice the pace?

The answer is that it can’t, and it isn’t.

Suprise! Most of Government Stimulus Stimulated Government

The ProJo tried to figure out where the $1.9 billion in stimulus money that has been spent in Rhode Island has gone (funds can be spent as late as 2015). The ProJo included a chart of the "Top stimulus winners in R.I.", insofar as what it could determine (apparently, not all entities--such as Medicaid, food stamps, unemployment--need to report their stimulus take).

State Department of Elementary and Secondary Education - $306,120,869
Gilbane Building Co. - $166,864,104
State Department of Transportation - $142,258,998
State Department of Administration - $59,613,259
Clean Water Finance Agency - $45,814,600
State Department of Public Safety - $37,905,163
Brown University - $36,602,898
Rhode Island Public Transit Authority - $34,246,658
The Rhode Island Quality Institute - $27,194,787
Quonset Development Corporation - $26,188,000

Basically, according to the ProJo, at least half of the money (conservatively) has gone directly to government and quasi-government agencies. When it didn't, it went to private enterprises doing government work (Gilbane Building Co. and Brown University). When combined with the unreported numbers, pretty much all of the stimulus went to maintaining or enlarging government expenditures.

Remember, Government Doesn't Budget Like We Do

When we say we're going to cut what we spend on, say, ice cream at my house, that means we either buy less, wait for sales or just stop buying it. So let's say, instead of $5 a week, we'll shoot for $4/week. We just cut the ice cream budget by $1. As Jonah Goldberg reminds us, that's not how governments define a "cut":

By earth-logic, if you got a raise of 10 percent last year, but this year you're only getting a raise of 8 percent, you're still getting a raise. On Planet Washington, that qualifies as an indefensible slashing.

So when the GOP cut $4 billion from the budget last week, the Democrats acted as if it was an involuntary amputation.

Now the GOP wants to cut $61 billion of discretionary nondefense spending from the total budget of $3.7 trillion, and Democrats are responding as if this will spell the end of Western civilization.

But given their terror of forcing a government shutdown, Democrats were forced to counteroffer with a cut of $10.5 billion, or 0.28 percent of the federal budget.

Imagine you have a budget of $10,000 (about 40 percent of it borrowed on a credit card), then "slash" 28 bucks. That's what it's like to be a frugal Democrat....In 2007, the budget was 19.6 percent of the GDP. In 2009, it went up to 25 percent of GDP. That's where the Democrats would like to see it stay.

What happened? The financial crisis, of course. But as many of us suggested at the time, one of the Democrats' real motives behind the stimulus was to inflate the "baseline" budget so that huge increases would never be reversed, thanks to the DC logic that a cut in growth is a cut.

Desires as Economic Development

Reacting to Governor Chafee's mention of it, Ed Fitzpatrick has read Richard Florida's book proclaiming the importance of tolerance to the economy and expresses, it seems to me, an appropriate skepticism regarding causation and correlation:

"My research finds a strong correlation between, on the one hand, places open to immigrants, artists, gays, bohemians and socioeconomic and racial integration, and on the other, places that experience high-quality economic growth," Florida wrote. "Such places gain an economic advantage in both harnessing the creative capabilities of a broader range of their own people and in capturing a disproportionate share of the flow."

I believe it was Snooki who first said: Correlation is not causation. In other words, just because there is a "strong correlation" between tolerance and economic growth doesn't mean tolerance causes economic growth. Perhaps that is a point both Chafee and his critics gloss over.

As I suggested a few weeks ago, it seems to me that urban areas, especially with high concentrations of colleges, are likely to attract creative types regardless of an Nth degree of tolerance for them. Indeed, one might suppose that a region experiencing "high-quality economic growth" might generally attract people who are different from the native population.

In any event, even if "tolerance" deserves its place as one of three economic legs (talent and technology being Florida's other two), that doesn't mean that it is the one on which Rhode Island is deficient. Personally, I'd put aside the "three Ts" as an interesting post facto analysis with only indirect influence on Rhode Island's economic health and focus, instead, on the more specific metric of economic freedom as indicated by taxes, mandates, and regulations.

Hey, At Least We've Got the Fetish Fair

Even in bad economic times, conventions and the like can give the local economy a boost.

On Sunday, buyers jammed the hotel rooms-turned-storefronts on several floors. There’s even a 20-percent-off sale on whips.

But shopping isn’t the only draw. In the bondage room, attendees practice their knots and tie each other up.

“I’m being punished for talking too much,” says a petite young woman crisscrossed with ropes.

Others attend dozens of classes that reflect a taste for the exotic, including Hypnotic Belly Dancing, Belt Bondage, Discovering Your Inner Sadist and Creative Humiliation.

U.S. Manufacturing Leads the World (Still)

I mentioned a few days ago that U.S. manufacturing continues on an upward trend. Jeff Jacoby makes the point that, despite what we hear and feel, U.S. manufacturing still leads the world by a wide margin:

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

“The decline, demise, and death of America’s manufacturing sector has been greatly exaggerated,’’ says economist Mark Perry, a visiting scholar at the American Enterprise Institute in Washington. “America still makes a ton of stuff, and we make more of it now than ever before in history.’’ In fact, Americans manufactured more goods in 2009 than the Japanese, Germans, British, and Italians — combined.

American manufacturing output hits a new high almost every year. US industries are powerhouses of production: Measured in constant dollars, America’s manufacturing output today is more than double what it was in the early 1970s.

So why do so many Americans fear that the Chinese are eating our lunch?

Consequently, even as America’s manufacturing sector out-produces every other country on earth, millions of young Americans can aspire to become not factory hands or assembly workers, but doctors and lawyers, architects and engineers.

Perceptions also feed the gloom and doom. In its story on Americans’ economic anxiety, National Journal quotes a Florida teacher who says, “It seems like everything I pick up says ‘Made in China’ on it.’’ To someone shopping for toys, shoes, or sporting equipment, it often can seem that way. But that’s because Chinese factories tend to specialize in low-tech, labor-intensive goods — items that typically don’t require the more advanced and sophisticated manufacturing capabilities of modern American plants.

A vast amount of “stuff’’ is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens. American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality.

Harvard Study: 4 Year Colleges Aren't for Everyone

This really isn't a surprise, is it?

The U.S. is focusing too much attention on helping students pursue four-year college degrees, when two-year and occupational programs may better prepare them for the job market, a Harvard University report said.

The “college for all” movement has produced only incremental gains as other nations leapfrog the United States, and the country is failing to prepare millions of young people to become employable adults....Most of the 47 million jobs to be created by 2018 will require some postsecondary education, the report said. Educators should offer young people two-year degrees and apprenticeships to achieve career success, and do more to ensure that students who begin such programs complete them, said Robert Schwartz, academic dean at Harvard’s education school, who heads the Pathways project.

“For an awful lot of bored, disengaged kids who are on the fence about completing high school, they need to see a pathway that leads them to a career that is not going to require them to sit in classrooms for the next several years,” Schwartz said yesterday in a telephone interview.

Checking Out of the Race

The Lonely Conservative (being from New York state) has posted an email from an online acquaintance that voices a sentiment with which increasing numbers of us are surely familiar:

And I watch countless news stories about people who are criminals (illegal aliens, felons) liars, cheats, or just stupid getting help with their mortgage loans because they "need it". And people getting free medical services because they "need it". And people declaring bankruptcy because it's just too hard to pay the bills, they "need to". All the while I see my government crushing people like me–expecting us to just keep doing, just keep paying, just keep being responsible in order to make up for all of those people who were not.

My mind has drifted in much the same direction as I've watched the mail, eager for all of my tax documents to come in so that I can get the refund that will make me able to stop the calls from collection agents. It would have saved us substantial money in late fees to have had that money dispersed with our regular paychecks, rather than siphoned off as a free loan for wild-spending governments.

Some substantial mistakes on my family's part have made us slaves to debt, and it is a daily temptation just to walk away. As it is, we've pared our lives down to minimal expense, and frankly, as we offload the debt, I'm planning to use that space to ease my workload rather than chase lifestyle improvements. Productivity just isn't worth it, unless it's in line with something that you're passionate about regardless of pay.

The receding economy has revealed some stones that lay just below the water, and the blogger above suggests that the sight of them is changing Americans' perception:

My friend is the "Forgotten Man" of our day. Most of us are. How far away are any of us from feeling just as she does? It's one thing to go through these challenges knowing we're all going through it. But we aren't all going through it. Because we now have four Americas:

1-The public employee union class

2-The entitled/welfare class

3-The elite ruling class

4-The rest of us who are paying dearly to support #s 1, 2 and 3

In my industry, I've watched employees eager for layoffs, who game the system to get back some of what they've invested in it. One contractor recently expressed his disapproval of that tendency, calling it immoral to leach of the system and pass the buck on to him. I was actually surprised at my own disagreement. Until very recently, I'd have nodded along; now, I have to admit sympathy for the opposing view.

It's most definitely wrong to pass the burden of one's galtishness on to those who are still striving to produce, but it's all too easy to see the target as the giant tumor of a system that lays across us all, taking the money that would allow us to repair windshields and fill oil tanks in order to finance lavish benefits and years of unemployment checks and then borrowing money from our future labor and that of our children and grandchildren in order to bolster public-sector employees through the recession and promise the time-delayed boon of pensions.

We're all limited in the length of our view, especially when it comes to social and cultural matters. We can only know so many people and have personal experience with so many walks of life. I do worry, though that something in that unique American attitude is changing, and it won't be healthy for anybody involved. It's not too late — I have faith — but much will depend on the ways in which our leaders address the various crises that we now face.

SEC Investigating RI

WPRI's Ted Nesi has broken the story that the SEC is looking into Rhode Island's muni bonds. Nesi has Gen. Treasurer Raimondo's statement on the matter and also points to a New York Times article on how the SEC is investigating Illinois' pension funding mechanism, which is similar to Rhode Island's. Basically, it has to do with reducing the pension liability for future workers:

Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget....The maneuver, and techniques that have similar effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a number of other places, allowing those states to harvest savings today by imposing cuts on workers in the future.

Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone.

Struggling states and cities need to save money, but they run into legal problems if they tamper with the pensions their current workers are building up year by year. So most places have opted to let current workers and retirees go unscathed. Colorado, Minnesota and South Dakota are the exceptions, dialing back cost-of-living increases for people who have already retired. All three states have reaped meaningful savings right away, and all three are being sued.

Cuts for workers not yet hired do not save much money in the present — but that’s where actuaries can work their magic. They capture the future savings for use today by assuming, in essence, that 100 percent of today’s work force is already earning tomorrow’s skimpier benefits. When used in actuarial calculations, that assumption has a powerful effect. It reduces the amount a government must put into its workers’ pension fund every year.

That saves the government money. But it undermines the pension fund, which must still pay the richer benefits of today’s retirees. And because the calculations are esoteric, it is hard for anyone except a seasoned actuary to see what is going on.

US Manufacturing Output is Up, But What About Jobs?

From the Mercatus Center at George Mason University:

Since 1975, manufacturing output has more than doubled, while employment in the sector has decreased by 31%. While these American job losses are indeed sobering, they are not an indication of declining U.S. competitiveness. In fact, these statistics reveal that the average American manufacturer is over three times more productive today than they were in 1975 – a sure sign of economic progress.

The true cause of dwindling American competitiveness is a tax code that puts domestic firms at a clear disadvantage – not a lack of skill or innovation on the part of the American worker. (Chart after the jump).

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Principles Opposed to Slavery and Statism

Once again, I find I must recommend an inaccessible article in National Review, this one by Gettysburg College history professor Allen Guelzo:

The antidote to slavery, Lincoln insisted, was also economic free labor. In the 19th century, free labor was the shorthand term for a particular way of viewing capitalism: as a labor system, in which employers and employees struck bargains for production and wages without restriction and where the boundaries between these two roles were fluid enough that today's employee could, by dint of energy, talent, and foresight, become the employer of tomorrow.

Slavery was the polar opposite fo free labor. With very rare exceptions, it denied the slave any future but that of being a slave, and it replaced the open-ended arrangements of employees and employers with a rigidly dictatorial system. The harmful effects extended beyond the slaves themselves, Lincoln wrote, because in the process, all labor became stigmatized as "slave work"; the social ideal became "the gentleman of leisure who was above and scorned work," rather than "men who are industrious, and sober, and honest in the pursuit of their own interests." Men who are industrious — that, of course, described Lincoln. Slavery, then, was not merely an abstraction; it was the enemy of every ambition Lincoln had ever felt.

Especially interesting are the links that Guelzo implicitly draws between the social system built on American slavery and a social system built on statism. For one thing, both characterize a relationship of freely exchanged employment as its opposite:

Lincoln was aware that pro-slavery propagandists had begun claiming in the 1850s that laborers in northern factories were, in reality, no more free to make wage bargains than slaves on southern plantations. In fact, they claimed, "free labor" was worse off, because employers had no obligation to provide health care for mere wage-earners or to support them in childhood and old age, the way slaveowners did for their slaves.

Not for no reason, then, did the Confederate government organize itself in line with the principles of its guiding institution:

... while the Union government contracted out its wartime needs to the private sector, the Confederate government set up government-owned supply facilities...

Historian Raimondo Luraghi called it "quasi-socialist management."

Despite the links between slavery and statism, two considerations have to taken into the balance, one qualifying the case of the former, the other the case of the latter. First, the slave-based system, here, is specifically that of the mid-to-late 1800s — the last guard, as it were, striving to maintain the system. In prior eras, slavery was simply a fact of life coexisting, however discordantly, with evolving notions of liberty.

Second, statists often begin with the well-being of the lower classes primary in their minds. In that respect, their views are opposite those of slaveholders. What unites them is the notion that the great majority of human beings are better off letting experts with centralized authority govern their lives. No matter the impetus, that sounds like slavery to me, no matter how beneficent.

Stagnant Life for the Up-and-Comers

"It is truly a Great Depression for young adults," said Andrew Sum, an economics professor and the director of the Center for Labor Market Studies at Northeastern University in Boston. "Young adults are working at lower rates than they ever worked before since World War II. As a result, you would expect migration to fall because they have nowhere to go to."

That's the conclusion drawn from Census data suggesting that younger workers are staying put despite local unemployment, seeing no opportunity elsewhere. One wonders how this will affect the behavior of the generation of Americans who've just reached adulthood.

The lack of such opportunities as often propel new graduates toward productive lives chasing the American dream is surely a factor. But then again, the expectation of living in a childhood home (on the parents' healthcare into one's mid-twenties) seems to have increased anyway, as have the gadgets of a sedentary lifestyle.

An optimist might observe that an increase in reluctance to move will force wages up in areas in which labor's in short supply, while an decrease in the desire to work will do the same throughout the society. At some point, though, the cost has to become prohibitive, except for those who can move their operations to countries without the excess wealth to support sloth.

An adjustment of priorities could be a very healthy thing in our consumerist society, but (especially if the urge toward consumerism is not adjusted) it could also create a nation of dependents in search of support.

Advice for the Young Regulator

Kevin Williamson churns out the economic heresies when he defines "social value" as "the stuff society actually values" and "profits" as "evidence of the creation of social value." Much of modern discourse is a debate over semantics, but choose the words as you wish, the underlying economic principles remain the same, and Williamson is entirely correct to explain the perversity of heavy government regulation as follows (addressed as if to the newly appointed regulator):

You can see the problem: You want to regulate because you do not trust competition among firms to serve the public interest. But regulation becomes just one more arena for . . . competition among firms. Round and round we go: Instead of competing to sell people the tastiest hamburgers at the lowest price, or competing to hire the most productive Teutonically efficient burger-slingers at the most efficient wage, companies compete in the field of regulatory-compliance efficiency, which does not shovel any greasy social value into anybody’s ravening public-interest maw at all. The weird thing is that the more you regulate, the more McDonald's will discover that its most important profit-controlling variables are only tangentially related to selling people hamburgers. The clown finds out that Jack in the Box got himself a waiver from Obamacare, and now he wants one for the Hamburglar and Grimace, and we're right back to the original competition among firms that you didn't trust in the first place, but with a perverse twist: Instead of competing to provide social value in the marketplace, firms compete to wring profit out of politics.

And that, if we extend Williamson's logic outward, introduces competition among politicians to make promises to powerful parties, so that they can define social value in such a way that the firms will support their campaigns and arrange for special deals and lucrative gigs when the political career runs its course, not only for the politicians, but also for the regulators and the people whom they hire to come up with the rules.

So, the rules pile up, creating unnecessary, unproductive jobs navigating them, drawing profits and wages away from people who create things that society actually values, rather than people whose main occupation is trying to convince others that they're acting in the interest of "social value." Moreover, the rules become a minefield limiting the ability of new firms to arise and compete with the big boys, who therefore can get away with much more of the objectionable activity (devaluing labor and the rights of the community) that much regulation is broadly meant to curb.

But here's the thing: Betamax and the Arch Deluxe and Clairol's Touch of Yogurt Shampoo (seriously, that existed) just get yanked off the shelves when hordes of people don't buy them, and the great big milling laboratory of the marketplace tells Joe Businessman, who is really a research scientist seeking social value, to shelve that particular hypothesis and maybe not expect a bonus this year. But there's no feedback mechanism like that in government, which means that when you do stupid, you do immortally stupid. You might find yourself asking why Alabama has a law against having an ice-cream cone in your back pocket at any time or chaining your alligator to a fire hydrant. (What was the precipitating episode there, Bubba?) You get Americans in the 21st century still paying the temporary emergency telephone tax to fund the Spanish–American War (1897–98). On and on it goes. Forever. Deathless stupidity tends to accrete and clog up the system, over time, and Washington is a factory whose workers produce deathless stupidity like it's their job, like they're getting paid for it. Because it is. Because they are.

Some Hot Air in the Green Economy

Speaking of the suspicious structure of the "new economy"... the economics of wind have come under some scrutiny, lately. Specifically, the project being questioned is Portsmouth's windmill:

Because the setup was considered net metering under state law, National Grid never negotiated a power purchase agreement with Portsmouth. An agreement would have been reviewed by the PUC, which could have rejected the selling price.

Instead, state law required National Grid to buy the power at a prescribed rate that is higher than what the utility pays for power from other sources, such as natural gas-fired power plants.

Portsmouth sells its power to National Grid at the exact price the utility charges the town and other customers in the same rate class. It’s a retail rate, not a wholesale rate. The bundled price includes the actual cost of energy, along with other charges for distribution, transmission and transition. ...

That left the town a net income for the period of $257,075 — money it could use to pay its energy bills or any other line item in the municipal budget.

In other words, the state government forced the energy company to pay extra money for Portsmouth's wind energy, which it will pass on to other clients, thus shifting money from the private sector into the Portsmouth government's coffers. One suspects that much of the emphasis on "green technology" — especially that emphasis coming from the public sector — is built around similar schemes.

Affecting What We Can

In a November article for National Review (yes, I'm a bit behind), Keith Hennessey offers ten methods by which elected officials can begin "moving incrementally in the right direction" when it comes to the economy. Most of the items deal with particular issues and ought to be considered, but his #2 speaks to a general approach to governance and ought to be elevated above the rest:

Two. Set the right goal: creating the conditions for growth rather than trying to create growth. Policymakers need to get the policies right and let business leaders decide how to run their firms. Corporate leaders are sitting on unprecedented piles of cash, waiting to see what Washington will foul up next. Take Washington out of their decision-making by creating a stable, predictable, low-cost business environment. They will then decide how best to hire, invest, and expand. Your job as an elected official is not to create economic growth or jobs, it is to create the conditions under which the private sector creates growth and jobs. Stick to your lane and let business leaders stick to theirs.

It is accurate as both a slight and a neutral statement of fact to say that legislators and government executives are not qualified to direct industry and the economy. Actually, nobody is, on a macro scale, but politicians are especially unqualified, and moreover, it is dangerous simultaneously to insert powers of specific economic development into the same hands that hold powers of policing and taxation.

The line between setting conditions and dictating mandates can be gray, in spots, but it's the principle that matters: Let the people investing their reputations and livelihoods on particular endeavors determine the best methods, and make it easier for them to move forward.

When Government Is Empowered to Balance Fish and Farmers

The most stark example yet in the United States — thus far, still shy of mass starvation under Communist regimes — of the danger of letting the legislative brush slop regulations on too many areas of human activities has to be the destruction of California's Central Valley:

Why has California become the epicenter of unemployment? While Michigan and Florida have a mix of problems, including (in Michigan's case) a history of bad management decisions on labor contracts, California's Central Valley woes are entirely a government creation. As I wrote yesterday, the decision by a federal judge to cut off water supplies to an area that literally fed the world turned the Central Valley from an agricultural export powerhouse to a center of starvation within two years. Congress has refused to act to reverse this decision, and as a result, almost a quarter of the families in the area now need government assistance to feed themselves while living on some of the most productive land in the world.

The background is that the 1973 Endangered Species Act has worked its way to protection of the delta smelt, a species of inedible bait fish that is argued to be affected by the pumps that supply the Western portion of the valley with water, so the water has been cut off, leaving irrigation at 25% of its previous flow.

As we'll surely be hearing throughout the year, the Environmental Protection Agency is currently on course to enact similarly detrimental regulations by bureaucratic fiat, treating carbon dioxide as a pollutant covered under the Clean Air Act of 1970.

Let Imbalances Correct Themselves

One hears in this op-ed by David Mabe the thinking behind centralization's inevitable failure over time:

Even in these times of high unemployment, forecasts of labor shortages are becoming more prevalent. New England has long boasted a highly educated population relative to other parts of the country, but the retirement of Baby Boomers and net loss from population migration suggest that the demand for skilled workers will increasingly outpace the supply. These and other looming demographic shifts threaten to hamper regional recovery efforts. ...

Universities, and especially community colleges, according to Modestino, should focus on degree-completion initiatives, increased financial assistance for students, and greater opportunity for career training and professional collaboration to fill looming workforce gaps; such areas of focus would produce a "win-win-win" for employers, for the regional economy, and for the students themselves.

Where the "win-win-win" inevitably falls apart is a mismatch of incentives. When the mandate comes from the government to "do something," taxpayers end up funding the sorts of education that young students prefer (light and easy to pass) and the courses that educators, on the whole, prefer to offer (subjective and difficult to quantify). The result is another cost layered into the economy with inadequate translation into economically productive jobs.

Let private industry work independently with educational institutions to finance the aid and courses that they specifically need, then let students choose those subsidized paths... or not. "Degree-completion initiatives" will move students toward that piece of paper, but not necessarily toward the skills that they actually need.

Policy Stasis as Economic Boost

I think John Kostrzewa overstates the ability of the recent tax-cut preservation legislation to boost the economy:

... I give [President Obama] credit for crafting the compromise with the Republicans because the major pieces of the bill will create an economic stimulus that will stir job creation. It is not the same type of $800-billion stimulus approved last year that funneled taxpayers’ money into the hands of government bureaucrats who spent it inefficiently.

Rather, most of the money this time will go directly to taxpayers who will spend it on basic needs to run their households. Because two-thirds of economic activity in the U.S. economy is based on consumer spending, the money people will get to keep, rather than pay in taxes, will boost their confidence and spur growth.

The tax-cut legislation didn't really add anything to economic policy; it just prevented a massive shift in an unhealthy direction. That it's been passed will surely steady the markets' anxiety, but that just brings the needle back to zero from the red side of the dial, where it hovered only because the president and Democrats were threatening negative change.

The most significant addition to policy, that I've seen, is the Social Security payroll tax cut, which I'll certainly welcome in the short-term, but which only decreases my expectation of ever benefiting from the program in years to come. Of course, that skepticism is also the status quo; Americans of my generation and younger more accurately see Social Security and MediCare as taxes than as investments.

Tabulating Rhode Island's FY2011 Federal Earmarks

For those interested, HERE is a working list of all of the earmarks contained in the lame duck FY2011 budget. I assume it will be continually updated as required (hence, the "working"). I've also broken out the RI earmarks from messr's Reed, Whitehouse, Langevin and Kennedy and you can download it HERE.

All told, according to the latest info, RI's Congressional delegation has requested $53,625,000, broken down as follows:

* Approximately $41.4 million tabbed for Department of Defense projects
* $2.65 million is tabbed for EPA--particularly wastewater improvement projects--and Parks Service projects
* $2.5 million for economic development projects (broadly defined) with money going to the John H. Chafee Center for International Business, Rhode Island School of Design and URI
* Approximately $7.12 million is going to various projects under the Dep't of Labor, HHS, & Education.

Speaking of Being Rich...

Did you happen to see this profile of the $250,000 family, in the Washington Post, no less?

Just how flush is a family of four with a $250,000 income? ...

The bottom line: Living in high-tax areas on either coast can leave our $250,000-a-year-family with little margin. Even with an additional $3,000 in investment income, they end up in the red - after taxes, saving for retirement and their children's education and a middle-of-the-road cost of living - in seven of the eight communities in the analysis.

Taxes already take a huge chunk from such households (as from all households on the independent side of the line between beneficiaries and payers), and I'm naturally inclined to rail against that fact. Still, we should be clear about the import of these findings.

The first thing to note is that some percentage of the above-$250,000 group are actually small business owners who process their companies' finances through their own tax filings. They aren't actually living on that amount of money.

Beyond that group, though, rich families live relatively well. They've less stress about paying for education; they've larger homes; they've services to help maintain those homes; they'll actually get to retire; and so on. In short, they're "in the red" only in the sense that they aren't amassing an unused sum of money.

The point, with respect to increased taxes in this income bracket, is that they won't jar loose unproductive resources. Rather, they will require such families to transfer money away from other expenses. Investments in long-term projects (materials, employees, and equipment, for business owners) will be one of the first things to go. Charity will likely lead the list. Consumer goods — the purchase of which creates a long line of jobs — will likely take a larger hit than retirement investment and college saving. Perhaps they'll downgrade their homes and cars, decreasing not only their spending, but also the amount of taxes that governments of various tiers are able to collect.

Nobody should pretend that the richest 2% are living lives of like toil to those of use closer to the median income, but in certain regions of the country, most of them aren't sitting on untapped mounds of cash.

Land and Money

Last month, Marc noted that the Providence Journal editors' article pointing out that some relatively conservative states lead the nation in per-capita stimulus funding conveniently sliced the data. As Marc showed, the top 10 states by dollar amount were not all that surprising. As he also showed, funding per square mile shifted the list to mainly blue (and small) states.

A recent letter to the editor by Ernie Rabideau, of Bristol, makes the same point from another direction:

Note that five of the top seven by low population match five of the top seven by stimulus funding per capita, including all of the top four. If you further consider states with the lowest population densities, six of the top seven are matches with the top funding recipients per capita. This is because an equivalent bridge, road or utility system in Alaska or Montana costs more per capita than one in say, California, because of its cost being divided by a much lower number of people.

As an extreme example, a construction expenditure in Wyoming actually costs over 68 times more per capita than the same one in California. Sure, fewer people may need fewer roads and bridges, but roads in big sparsely populated states must be longer to connect population centers, and basic construction costs in cold and/or mountainous locations are generally higher than in warm flat ones. I suppose if we want to balance per- capita spending by state, we don’t have to connect the cities and towns in the rural west, or Vermont, with safe roads and bridges; but there are many benefits to our entire country when we do.

When the Competition Catches Up, Despite Itself

Megan McArdle makes some interesting points about China's potential for economic growth that may quickly find it more susceptible to competition:

The endless acquisition of US currency is unsustainable. The sterilization transactions required to keep their foreign exchange operations from turning into inflation have left the banking system positively gorged with low-interest government bonds; and now that the sterilization has eased, the inflation is showing up anyway. The current official figures are 4.25%, and a bank economist we spoke to yesterday expects something over 5% in the near future.

The wages, too, are starting to rise. Anecdotally, we're hearing reports of labor costs jumping 15-30% in major urban areas like Beijing and Shanghai. Importing low-wage workers from distant farms and using the labor cost advantage to dramatically undercut competitors is a strategy that has limits.

Both those who essentially believe in central planning and those who do not have a tendency to see its initial appearance of success (the lure) as perpetual. The laws of economics still apply, and it still spells disaster to subvert them for too long.

A Race Best Not Entered

An article about Massachusetts' race for a wind energy boom conveys the folly of Rhode Island's own quest:

Massachusetts could soon be home to the nation's first offshore wind farm -- and state officials are hoping to use the Cape Wind project to help fuel a small but burgeoning local wind-power energy boom.

There are already more than a half-dozen companies staking out their claim to the state's wind energy landscape, from designing better turbine blades to marketing high-tech machines that can measure wind speeds and directions from the ground.

And when the nation's largest wind blade testing facility opens early next year on Boston's waterfront, officials are hoping to draw even more business.

One gets the sense that Rhode Island officials believe that being the first state to enter fully into the industry grants rights to house its hub. It's not going to work like that. There's no wall at the border that prevents companies serving the Rhode Island wind market from setting up shop in Massachusetts... or vice versa. Indeed, companies will likely wish to serve both from the same location.

The real determining factor is not going to be which state was first in the water with an offshore farm, but which state presents a better environment in which companies can begin operations and thrive. That should be our state's focus, and it doesn't require special deals for particular organizations in a narrow industry.

Why Old Trucks Are Worth More

Although typically a fan of liberal policies and government-driven solutions Bob Kerr has decided that he doesn't like the outcome of car taxes on old vehicles:

"It's obvious that small towns need to raise money," [David Shepherd] says.

Still, he finds the tax bill he received in September a mysterious piece of work. It seems to create something out of nothing.

The tax bill on his truck from the Town of Hopkinton is $96. It is not a bill that will mean major cutbacks on Dutch Hill Road. But it is a bill strangely out of sync with previous bills.

Last year, the tax bill on his old truck was zero, nothing, nada.

"Where does that value come from?" he asks.

Ah, there's the question. A truck gets a year older, a little more settled on its front end, and yet its official value goes up.

There are two culprits, here. The first is the cessation of the state's reimbursement of towns for the taxes that they would otherwise charge on the first $6,000 of a vehicle's value. The remedy for that problem, it seems to me, is for the David Shepherds of Rhode Island to involve themselves with local government and rearrange the circumstances that lead the town to require the money. Pushing those tax dollars through the State House only obscures the financial pictures.

The second is the increased value of used cars. Kerr quotes a woman from the Hopkinton tax assessors office opining that "a lot of people aren't buying new cars, so the second-hand ones become more valuable." What this misses is that Kerr-idol President Obama and the Congressional Democrats created a program that gave people incentive to bring in older vehicles and buy newer ones and that required those older vehicles to be destroyed. That reduced the supply of old vehicles (for parts as well as in whole), and increased the value of those that had not been traded in.

Perhaps Bob should send a copy of his column to the White House.

Creating Pants on Fire Out of Truth

Sunday's PolitiFact correctly rates as "true" RI Democrat Senator Sheldon Whitehouse's statement that "the law... permits companies that close down American factories... to take a tax deduction for the costs associated with moving the jobs to China or India or wherever." But in its headline, in its presentation, and in an expanded quotation from Whitehouse, the article restates the argument in such a way as to drift into "pants on fire" territory.

The headline in the print edition of the Providence Journal is "Businesses do get tax incentive for 'offshoring.'" Reporter Eugene Emery rephrases the question as whether "the U.S. tax code actually offer[s] an incentive for firms to engage in such 'offshoring.'" And an expanded quotation shows Whitehouse stating that "loopholes in the tax code... reward American companies for moving American jobs overseas."

One needn't enter the debate about whether and what the United States should do about the loss of jobs to lower-cost workers in other countries to note that the rephrasing of the question is significantly deceptive. As the initial quotation states, businesses can deduct "for the costs associated with moving," but:

Robert E. Scott, senior international economist with the Economic Policy Institute, a liberal-leaning think tank that deals with issues of concern to low- and middle-income workers, confirmed that relocation expenses are deductible and that existing tax law makes no distinction between whether a company moves part of its operations to another state or to another country.

In other words, the code doesn't create an incentive to move, it just doesn't create a disincentive to do so. That's a very different dynamic. Were the U.S. government actively encouraging companies to leave our shores, the public reaction would rightly be greater than if tax law merely allows the usual adjustment for revenue spent on business-related activities.

The incentive to offshore is actually that labor is much less expensive overseas, and that merits a different response than pursuing a species of protectionist policy. I'd suggest endeavoring to increase the rights and expectations of those foreign workers and encouraging Americans toward more profitable careers.

Trust and Confidence in Manufacturing

Accurately or not, windsurfing — an activity that I tried during summer camp once, some twenty years ago, on a windless lake — comes to mind as a metaphor when trust is needed. Sometimes, you just have to lean back and trust that the wind is there to hold you up and move you forward. That, at least, is the advice that I vaguely recall from the failed expedition, and it comes to mind upon reading this paragraph from Kevin Williamson's recent article arguing that the United States has been unduly worried about China:

Despite all the new competition, the United States remains a manufacturing powerhouse — in fact, the total value of manufacturing output in the United States today is far, far higher than it was in the 1950s. Measured by revenue, profit, or return on investment, U.S. manufacturing is unparalleled, and our factories' output is more than twice China's. But it is true that many manufacturing jobs have been "lost." They were lost not because U.S. manufacturing can't compete with that of feckless Third World rivals, but because U.S. manufacturing is, to use the technical economics term, awesome. The real productivity of U.S. businesses overall grew at an average rate of 1.5 percent a year from 1973 to 1995, which is a really robust number. But the productivity of U.S. manufacturing businesses grew by 2.5 percent in those same years, which is enormous. As Martin Wolf puts it in Why Globalization Works, that growth in productivity alone would have reduced significantly the number of manufacturing jobs in the United States. Add in the fact that people in affluent societies spend relatively less of their disposable income on manufactured goods and relatively more on services, and that reduction becomes even more dramatic. And so it was. There is an obvious parallel: In very poor societies, large numbers of people are employed in agriculture, and people spend most of their money on food. As they get richer, relatively few work in agriculture, and they spend proportionally little on food. Manufacturing, as Wolf sees it, is the new agriculture. In historical terms, it was not that long ago that 75 percent of the U.S. work force was engaged in farming. Now it’s less than 1 percent. But who laments the loss of good farming jobs? (Mostly people who have never worked on a farm, that’s who.)

Increased productivity collects greater wealth, and (in theory, at least) the more-efficient economy will create new and better paying occupations to replace those lost. The fear arises in the inability to predict what those occupations will be. And the alternative is to promote economic inefficiency by holding too tightly onto obsolete jobs, which leads toward the inevitable flaw that Williamson sees in China's economy (emphasis added):

... One of the benefits of running a jackbooted totalitarian regime high on nationalism is that you can do things like enforce a substantial rate of saving and a low level of consumption, or conscript large armies of industrial workers out of the agricultural classes. This sort of transformation is hardly unprecedented in the Communist world: It is precisely what the Soviets accomplished in the decades after their revolution, and a lot of American nincompoops thought they were geniuses. Modern China, having the benefit of a highly globalized economy and sophisticated modern finance, did a decidedly better job of its transformation than did the U.S.S.R. — a lot more carrot, a lot less stick, post-Mao anyway — but, for its day, Soviet industrialization was every bit as impressive a show of force — which is precisely what it was and what China's transformation is. For all the rhetoric about liberalization, China remains a hierarchical, centralized, command-and-control economy, one in which the military takes a very strong hand in many industrial enterprises. China is not the future model of capitalism, but the contemporary model of socialism. And like all socialist enterprises, it is hamstrung by the misallocation of economic resources, a fact that is ameliorated, but only in part, by its willingness to incorporate itself into the global economy and avail itself of the benefits of efficient capital markets.

Thus, "according to World Bank figures, China’s imports in 2005 were 32 percent of GDP; America’s imports were exactly half that: 16 percent of GDP."

What ought to happen, if the government weren't in the habit of erecting barriers to entry for new companies to compete with old, is for increased productivity to enable price-dropping competition to move up the ladder. When companies streamline, those on the losing end have an opportunity to apply their expertise so as to create alternative brands, which would create incentive for innovation and drive out the excess wealth now collecting at the top of the heap. The market may currently create obscene salaries for CEOs, but automation and the ability to find less expensive labor in a global society ought to enable folks with the same executive competence to offer the same products for a lower cost.

It's a balancing act, to be sure, but I, for one, continue to doubt the ability of central planners to operate the controls, and I expect those with power to find ways to twist well-meaning regulations into protections against competition.

Cap Without the Trade

A blurb in a recent edition of National Review's The Week offers a necessary reminder of an issue that shouldn't slip out of public view:

Having seized for itself, with the help of the courts, the authority to regulate greenhouse gases without the consent of Congress, the Environmental Protection Agency under Obama has aggressively proceeded to do so. There shall be a 20 percent reduction in emissions from heavy trucks and buses by 2018, the agency decreed -- this following similar declarations regarding cars and light trucks. The idea of setting up a cap-and-trade system of emissions permits has lost favor in Congress, partly because a major scientific scandal diminished the credibility of cap-and-trade advocates, and partly because making energy more costly in a weak economy is politically as well as economically crazy. But the administration has proven that it is determined to unilaterally impose these unpopular caps, and there is little Congress can do to stop it. Unless the opponents of energy restrictions can win a difficult battle against the White House between now and 2012, we're getting cap but no trade.

What's needed is statutory language that takes this sweeping power out of the hands of unelected regulators.

Recovery Requires Rethinking

An excellent article about government economic policy and our current crisis by Reuven Brenner and David Goldman (initially published in First Things) is well worth reading in its entirety. The essay's underlying conclusion is that the focus on this or that manipulation of the economy as an explanation for our current predicament effectively misses the critical point:

The policy debate is a blame game, but one played by blind men with an elephant. Some say that if the Federal Reserve had not kept interest rates so low for so long, there would have been less credit expansion and fewer defaults. Others say that if the Fed had paid more attention to the external value of the dollar than to price indices or GDP, it would have suppressed the developing bubble in home prices. Still others argue that without official support for subprime securitization, the vast subsidies provided by government-sponsored mortgage funders, and the monopoly position of the heavily conflicted rating agencies, the securitized debt bubble might have been contained. Yet others argue that the proprietary trading focus of deposit-taking institutions made the payments system vulnerable to panic.

All these observations are true, and all of them are misleading, for the crisis arose not from any of these errors as such but rather from the Keynesian mindset of policy makers and regulators that prevented them from identifying these problems before they combined to threaten the financial system and the long-term health of the economy.

It's not only a problem of spotting errors; it's also a problem of misconceiving the likely effects of policies:

The collapse of the credit expansion raises the prospect of deflation, and the Keynesian elite now proposes to ward off this danger by returning to the inflationary policy that brought about the crisis in the first place. The International Monetary Fund's chief economist, Olivier Blanchard, offered what he called a "bold innovation" in February 2010, proposing that central banks pursue 4 percent inflation. Evidently Blanchard thinks that people will happily accept a 22 percent reduction in their wages over five years and a 48 percent reduction over ten years. Professional deformation on this scale attests to the triumph of Keynes over common sense. The reasoning of proponents of such policies - Paul Krugman advocates even higher inflation rates - is that the fear of inflation would lead people to spend money before its purchasing power declined. The Keynesians did not stop to ask how Americans could begin a spending spree after the colossal wealth destruction of the past several years, just before the largest retirement wave in American history.

Perhaps it's a matter of a wealthy elite not understanding the decisions and motivations of the masses, or perhaps it's just an inability to intellectualize the relative weight of every likely consequence of policies. The important point is the fundamental misunderstanding of economists' and politicians' ability to manage a global economy. The economy cannot be steered by policy; it's an unwieldy vehicle with many hands on the controls — the hands of every person with resources and talent (i.e., everybody). At best, policymakers can throw large, blunt objects in the path as obstacles and smooth roads that might be taken.

Brenner and Goldman further support my frequent contention that economic advancement must come from somewhere:

As an advocate of emergency measures during the 1930s, Keynes, as we have said, deserves some credit. His legacy in economic theory, though, has been malignant. It is easy to explain why he drew support during the 1930s. It is harder to explain why the Keynesian model, with its inherent tendency to drive off the road, has survived so long.

Part of the answer is that countries devoted to "Keynesian" policies had a run of good luck that covered up the systematic errors of economic policy. And the memory of this run of good luck still beguiles politicians and their advisers, who yet hope that the easy times will come back.

A major source of that good luck was the migration of capital and talent spurred by troubles elsewhere. Until 1989, most of the world suffered under communist or other dictatorial regimes prone to violent political upheaval. Whatever talent and capital was able to escape from the dictatorships arrived on the shores of a handful of Western countries, foremost among them the United States. The export of human and financial capital to the United States and a few other countries helped cover up accumulating mistakes. In politics as in business, competitors survive not because they are clever but because the competition is stupider.

A minor adjustment that I'd make is that the politicians and advisers aren't "beguiled" by past success so much as enthralled by the power that Keynesian policies aggregate to government. It isn't that they are sure the policies will work, in other words, but that they want the policies to work because they benefit by them. The more important point, though, is that economic growth must have a source, and it cannot often be identified from distant capitals or predicted in advance by politicians.

Ultimately, the wisest action for those in power is to create the conditions in which their countrymen can innovate in their own spheres and steer their own economic futures. It's messy and unpredictable, but the only thing predictable about central planning is that it will fail on an increasingly spectacular scale.

Unemployment Benefits and Change

Being unemployed for long periods is a terrible experience for those who lack the resources to survive an extended financial drain. Especially when a family is on the line, the hopelessness and fear of joblessness is one of modern life's greatest anxieties.

Still, at a certain point, unemployment benefits begin to become a weapon of dependency for government agents:

Thousands of out-of-work Rhode Islanders will start running out of unemployment benefits on Nov. 30 unless Congress acts to renew certain federal benefit programs.

About 30,000 unemployed people are collecting jobless benefits in Rhode Island, where the unemployment rate is 11.5 percent, fifth-highest in the nation.

If certain federal benefit programs expire as scheduled late this month, about 17,000 unemployed Rhode Islanders would run out of benefits sooner than they otherwise would, state figures show.

Short-term help is, I'd argue, a just and reasonable responsibility of state government, and during times of economic stress, the federal government should shift funds from other expenditures to help the states in their efforts. But when nearly two years of government subsidies come to be seen as a humanitarian necessity, the calculation begins to change.

After all, those who are kept afloat by such funds are less likely to make changes that might improve their circumstances while contributing to the economy. That's true on a personal level, with the decreased the likelihood that workforces will move from place to place or industry to industry as the economy requires, or reconfigure their living circumstances toward more sustainable expectations and better fortified family supports. It's also true on a political level, with the ire of unemployed voters focused on maintaining and extending their temporary benefits rather than pressuring politicians to cease their games and get out of the economy's way.

Where the Jobs Are

First, according to USA Today:

The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office...Federal workers earning $150,000 or more make up 3.9% of the workforce, up from 0.4% in 2005....Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis.

I'm sure this is just a coincidence.

RI Rides on the Stimulus Gravy Train

So, the ProJo editors decided to attack "Sarah Palin's Alaska" for "fiscal hyper-hypocrisy". Following the NY Times lead, the ProJo cites data from ProPublica showing that "oil-rich Alaska leads in per-capita federal stimulus money — $3,145." They go on to list the 8 next highest spending/capita states--Montana, Vermont, North Dakota, New Mexico, Wyoming, Idaho, Massachusetts and Washington--and gleefully note that "these are states where 'fiscally conservative' rhetoric attacking the Feds is rife." Well, that's one way of looking at the data.

For starters, here are the overall Top 10 federal stimulus receivers:

No surprise, big states, right?

But the ProJo is trying to be clever and bolster their charge of hypocrisy by focusing on a per capita calculation.

This is the same data from ProPublica cited by the ProJo. I wonder why they left out stimulus money that went to Washington, D.C. in its per capita list? Well, I didn't and I added Rhode Island--which came in 11th--to my list, though the ProJo failed to mention that, too. I guess it didn't really help make their argument or they were so focused on skewering hypocrites they missed what's going on in the community they supposedly serve.

Well, I said to myself, since they get to play with numbers, I want to do the same. A lot of the stimulus money went to infrastructure--roads, bridges and the like--and into the entities that support it. States with big land areas have more of all of that. So I wondered what the spending breakdown per square mile would look like.

Well, how about that? Pretty much the direct opposite conclusion can be drawn if the data is "shaped" that way. Small, though densely populated, northeastern states comprise half of this top ten. And lookee there, li'l ol' RI is #3...and Alaska (not shown here) is dead last, followed by Wyoming, Montana, the Dakotas and other big states.

All that being said, I guess, given the ProJo editors premise, Rhode Islanders aren't hypocritical because we get a lot of stimulus--whether per capita or per square mile--and we continue to vote for those who brought it in. And can you imagine what our economy would be like without it? I wonder why the ProJo editors didn't point that out...

Economic Liberty as Equalizer

Taking some legislation that President Obama has proposed as his cue, Andrew Biggs makes the case against legislative corrections to the gender pay gap. All such arguments come down to the point that there are legitimate reasons that men, in aggregate, make more money than women, and Biggs gives the underlying reason why that can be expected to be so:

Discrimination is unlikely to drive the gender pay gap because, as economist Gary Becker pointed out a half century ago, when one employer underpays his workers, competing businesses can earn windfall profits by luring them away. If Employer A pays women 77 cents on the dollar, Employer B can hire all Employer A's female workers at 78 cents on the dollar to replace his costlier male workers. This raises Employer B's profits, while Employer A must now pay full freight for employees. The Royal Swedish Academy of Sciences noted, in awarding Becker the 1992 Prize in Economics, that "discrimination thus tends to be economically detrimental not only to those who are discriminated against, but also to those who practice discrimination." As long as there is a critical mass of non-discriminating employers—and the growth of female-run businesses in recent decades and changes in social norms among males indicates there is—then employers' profit motives will narrow the pay gap to levels justifiable in terms of productivity. Ironically, while the Left assumes that businesses readily sacrifice worker safety and degrade the environment in search of profits, they nevertheless believe employers forgo profits simply to satisfy a misbegotten desire to discriminate.

Of course, to the sorts of people who advocate for legislation like the Paycheck Fairness Act, to write the phrase "make more money than women" is to concede that there is, in fact, discrimination, because they begin with the belief that there are no legitimate reasons. Even if it means forcing businesses to ignore relevant factors (like skills lost during child rearing), to arbitrarily increase the cost of male workers (by offering, e.g., paternity leave), or attacking the very culture and biology that produces the substantial differences between men and women, zealous foes of perceived discrimination care only to work toward equivalent statistical outcomes (unless it's men who are on the losing end). Whether that coincides with equivalent senses of happiness and fulfillment is another matter.

If, by contrast, one accepts the premise that biological reality and individual preferences create circumstances in which it is reasonable for some pay gap to exist, the question is wholly different: How do we squeeze whatever invidious discrimination there is out? Here, I agree with Biggs that the answer is economic freedom:

Even if some of the pay gap is due to discrimination, therefore, economic liberalization may be the key to reducing it. Because employers that discriminate lose profits relative to non-discriminating competitors, increased competition weeds out discrimination. Several studies have shown that as industries faced increased competition, through either deregulation or international trade, the gender pay gap shrank. And the pay gap is larger in monopoly markets without competition and smaller in start-ups and small businesses that must be productive in order to survive. Women need more markets, more enterprise, and more opportunity, not more regulation and litigation.

Arbitrary discrimination is expensive, so creating barriers to entry through government regulations only creates the circumstances in which existing businesses have the competitive space to play silly personal games.

Reflections on the nature of free markets, different ways of being pro-business, liberty and the attributes of a healthy democracy

2+ minutes of pithy comments by Milton Friedman on greed, enlightened self-interest, and how societies and free markets work.

A succinct summary on the two meanings of being pro-business from Don Boudreaux, who writes for the Café Hayek blog and is a professor of economics at George Mason University:

There are two ways for a government to be ‘pro-business.’ The first way is to avoid interfering in capitalist acts among consenting adults – that is, to keep taxes low, regulations few, and subsidies non-existent. This ‘pro-business’ stance promotes widespread prosperity because in reality it isn’t so much pro-business as it is pro-consumer. When this way is pursued, businesses are rewarded for pleasing consumers, and only for pleasing consumers.

The second, and very different, way for government to be pro-business is to bestow favors and privileges on politically connected firms. These favors and privileges, such as tariffs and export subsidies, invariably oblige consumers to pay more – either directly in the form of higher prices, or indirectly in the form of higher taxes – for goods and services. This way of being pro-business reduces the nation’s prosperity by relieving businesses of the need to satisfy consumers. When this second way is pursued, businesses are rewarded for pleasing politicians. Competition for consumers’ dollars is replaced by competition for political favors.

There is much talk today about the polarization in America and how different factions should compromise by acting in a bipartisan fashion. But such talk is absurd because it ignores several critical and unavoidable issues:

First, policy differences are often based on competing world views. Those differences cannot be wished away by superficial talk about bipartisanship. For example, if you believe in the first definition of being pro-business, i.e., that only the private sector can actually create jobs and the government’s proper role is to promote economic liberty by incenting the private sector to do so, then no size of any stimulus bill will be acceptable. Nor is there any middle ground if you believe that Obamacare represents the socialization of medicine and you don’t believe in socialism. These positions are not about being the "party of no." Instead, they are a clarion call for an alternative public debate about statism, about whether we aspire to become like a European welfare state. Then, instead of ramming down a statist solution to the healthcare issue onto America, we could agree that the status quo for the delivery of medical care isn’t good enough and use that as an alternative starting point from which to conduct a legitimate public debate about different solutions. Polarization will only genuinely dissipate after there is sufficiently open and reasoned public debate about such principles and the desired endpoints of policies that derive from them so that a consensus can begin to form across America.

Second, both political parties have inhibited such a debate. Public choice theory teaches us that we should not be surprised that the parties are focused primarily on promoting their own self-preservation, by sustaining power for the sake of power instead of promoting reasoned debates about how a belief in the ordered liberty of our American Founding should impact our public policies. Such is the added price we pay for having given up on limited government. But, if we believe in liberty, then the people in America have to stand up and insist on the debates. Which is why the Tea Party is perceived to be such a threat to both parties' establishment figures. That debate will take time and will appear messy along the way. But only an arrogant, self-absorbed narcissist will underestimate (more here and here) the American people's ability to instinctively figure things out. Just like the American people rejected the Republicans in 2006 and 2008, the 2010 election was a repudiation of the arrogance of a Democratic party that refused to listen to the American people in recent times. Political gridlock is nothing more than the American people telling the government to stop in its tracks until the the debates can be held.

If the debates are inhibited by the political class, then there will be more repudiations in the coming elections:

...This isn't a wave, it's a tidal shift—and we've seen it coming for a long time. Remarkably, there have been plenty of warning signs over the past two years, but Democratic leaders ignored them. At least the captain of the Titanic tried to miss the iceberg. Congressional Democrats aimed right for it...

But none of this means that Republicans are winning. The reality is that voters in 2010 are doing the same thing they did in 2006 and 2008: They are voting against the party in power.

This is the continuation of a trend that began nearly 20 years ago. In 1992, Bill Clinton was elected president and his party had control of Congress. Before he left office, his party lost control. Then, in 2000, George W. Bush came to power, and his party controlled Congress. But like Mr. Clinton before him, Mr. Bush saw his party lose control.

That's never happened before in back-to-back administrations. The Obama administration appears poised to make it three in a row. This reflects a fundamental rejection of both political parties.

More precisely, it is a rejection of a bipartisan political elite that's lost touch with the people they are supposed to serve. Based on our polling, 51% now see Democrats as the party of big government and nearly as many see Republicans as the party of big business. That leaves no party left to represent the American people.

Voters today want hope and change every bit as much as in 2008. But most have come to recognize that if we have to rely on politicians for the change, there is no hope. At the same time, Americans instinctively understand that if we can unleash the collective wisdom and entrepreneurial spirit of the American people, there are no limits to what we can accomplish...

Elected politicians also should leave their ideological baggage behind because voters don't want to be governed from the left, the right, or even the center. They want someone in Washington who understands that the American people want to govern themselves.

William Voegli offered this sage advice several years ago: “A healthy democracy does not require blurring political differences. But it must find a way to express those differences forcefully without anathematizing people who hold different views.”

The sections titled Issues #1, 2 and 4 in this lengthy May 2010 blog post highlight some of the underlying core beliefs that animate a world view which believes in free markets and liberty. These are the meaty topics worthy of public discussion.

A more intense level of public debate has begun across America in recent months. Here's to it continuing in a vigorous manner until a meaningful new consensus can form in the country.

Forward Our Republic Driving

Back when I was a teenager and thought vehicles an important means of branding, I was a GM guy, especially Pontiacs. Somehow, my group of friends seemed inclined to believe the hostile interpretation of Ford as an acronym for "Fix or Repair Daily." Since its government bailout, however, I've sworn off GM, despite the money toward a new car still lingering as an earned benefit on my GM Card.

For that reason, was thrilled to come across these two stories on the same day, not long ago. The un-bailed-out Ford is doing relatively well:

Ford is on a roll.

Its popular new cars and trucks are grabbing a bigger share of the U.S. market. It's about to erase a big chunk of its health care debt. And it's adding a significant number of jobs for the first time in five years.

On Tuesday, the automaker said it made $1.7 billion from July through September, a jump of nearly 70 percent from a year earlier and its sixth consecutive quarter in the black.

The second article notes that it isn't merely a quirk of the market:

The most problem-free cars and trucks are made by Honda and Toyota, but Ford is closing in fast and General Motors is making big quality improvements, according to Consumer Reports magazine's 2010 reliability rankings.

The first paragraph lumps the American companies together, but there's a substantial difference of degree. Ford is the number 10 make, while GM's highest is Chevy, at 17. Indeed, Ford has "several individual models that were better quality than Toyotas."

Still Making Stuff

Kevin Williamson thinks that President Obama's proposed infrastructure bank is essentially the White House's play to get in on the corrupt Congressional practice of earmarking (subscription required). The article's worth a read, but this tangential paragraph is what caught my eye:

Even though the extraordinarily productive service sectors of the U.S. economy create a lot of output that can be delivered by e-mail rather than by truck or train, manufacturing remains the second-largest single sector, trailing only wholesale trade. In fact, the idea that the United States has entered a "post-industrial" phase is largely a myth. Measured by output, the U.S. economy is much more industrial-looking than Washington's scary bedtime stories about McJobs and outsourcing would suggest: After wholesaling and manufacturing, the biggest sectors are indeed those service-oriented industries — retailing, finance, and health care — but these are followed by a massive construction industry that is nearly as large as the health-care sector. In terms of economic output, the warehousing and transportation of goods bigger than the software industry or the accommodations and food-services industry — to take the two poles of the services economy — and several times the size of the education sector. U.S. factories, as Cato Institute scholar Daniel Ikenson has reported, produce 21.4 percent of the world's manufacturing value added, 60 percent more than China's (without a billion semi-indentured workers earning Third World wages or a for-profit police state — take that, Tom Friedman!). We're making a lot of stuff and moving it around.

Take that as a reminder that the United States still has a foundation on which to build... and much still to lose.

A Foreign Reason to Get Our Own House in Order

How about a frightening assessment of our relationship with China:

Why would China so brazenly challenge the world's economic powers like this? Because the country's leaders know what our leaders are only beginning to understand — that China would probably win a global trade war.

It's certainly worth reading Eric Weiner's entire essay for the details of his argument, but the point that I draw from his conclusion is that America's indebtedness and creeping cultural dependency have left us with no good governmental cards to play. Extrapolating a way forward, I'd suggest that Americans need to increase their efforts encouraging the Chinese people to push back against the abridgment of their rights and, perhaps more importantly, to begin restructuring our society so that we're less dependent on foreign loans and more apt to produce and to do business with our own countrymen and women.

Which strongly relates, it seems to me, to Peggy Noonan's latest insight into the national mood:

For those who wonder why so many people have come to hate, or let me change it to profoundly dislike, "the elites," especially the political elite, here is one reason: It is because they have armies of accountants to do this work for them. Those in power institute the regulations and rules and then hire people to protect them from the burdens and demands of their legislation. There is no congressman passing tax law who doesn't have staffers in his office taking care of his own financial life and who will not, when he moves down the street into the lobbying firm, have an army of accountants to protect him there.

Washington is now to some degree the focus of the same sort of profound resentment that Hollywood liberals inspired when they really mattered, or seemed really powerful. For decades they made films that were not helpful to our culture or society, that were full of violence and sick imagery. But they often brought their own children up more or less protected from the effects of the culture they created. Private schools, nannies, therapists, tutors. They bought their way out of the cultural mayhem to which they'd contributed. Their children were fine. Yours were on their own.

It all comes down to a desperate need to return the focus of our nation to individual autonomy, which requires, most of all, that more of the necessary restraints on others' behavior be accomplished through cultural means, rather than governmental. Central management and individual liberty are mutually exclusive, in the long run, and since we can't manage our way to a stronger global economic footing, we have to achieve it through our heritage of freedom and personal volition.

How Is Debt Going Away... Revisited

Since I took the time to argue, last month, that the slow pace of paying down debt, as compared with giving banks no choice but to write it off, means that a whole lot of debt has to be paid down to balance out each default. Michelle Singletary would say that I'm being too charitable:

CardHub's analysis found that credit card debt for the second quarter of this year decreased by about $12 billion compared with the previous quarter. But banks charged off $21.8 billion during the same period. Given that the drop in outstanding debt is smaller than the dollar amount that was charged off, the difference of $9.8 billion is the amount of debt consumers accumulated, Papadimitriou said.

His findings give a more realistic view of how seriously the recession has crippled consumers. The charge-offs also indicate that many banks are continuing to experience deep losses, and this is one of the reasons why credit is still tight. It's why many lenders have been cutting people's credit limits, he said.

The Wall Street Journal analysis that I cited in the first link, above, found that some debt was indeed being paid down. The difference between that and CardHub's numbers appears to be that the former is all debt, while the latter is credit card debt. That could mean, in other words, that folks are paying off longer-term debt while still living off of their credit cards.

Whatever the case, Americans still have much work to do breaking their addiction to swiping plastic.

Not an Optimistic View

John Mauldin's report from an economic conference in Texas doesn't leave much room for optimism, with its first point being as follows:

John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark (even bleak, as he gets further into the speech) picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won't even be new rules until the end of 2011, and then the lawsuits start.

Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

Granted, Hofmeister is an insider, but the central difficulty he describes is a critical one. America's political polarization has made it difficult for the energy industry to advance, amidst regulations that shift regularly, depending who's in power. Moreover, the relentless growth of government has led to 13 energy regulation agencies and 22 congressional committees with a hand in oversight.

Mauldin goes on to review dark prognostications in employment and housing, but an interesting question of political philosophy emerges when the conference turns to questions of China:

Among the societies we describe as democratic capitalist there are vast differences in the bargains and hence in the nature of economic activity. America tolerates levels of instability, crime, inequality and pernicious religious zealotry that Europeans and Japanese consider absurd, but it gets in return a much more dynamic entrepreneurial system of wealth creation. Japanese willingly accept levels of social conformity that Westerners consider bizarre, but achieves a high level of social stability and tremendous success in economic areas (such as high precision manufacturing), where self-disciplined social cohesion is a plus.

China, like all societies, is working out its bargain. It is still very much a work in progress but the process is dynamic, not static.

Mauldin's description of the return for America's bargain is far too limited. Dynamic entrepreneurialism is, after all, a subset of broad freedom and has its variations in other social realms than business — religion, science, art, and on and on. Unfortunately, for some of the same reasons that energy is set to become much more expensive, we're drifting away from our heritage, in that respect.

When Government Is All, Political Connections Are Decisive.

Stephen Spruiell describes the "atypical" way in which the Federal Deposit Insurance Corporation (FDIC) has handled ShoreBank, a Chicago-founded bank with a leftist lending bent. Apparently, "the FDIC relieved ShoreBank of its most toxic assets but left largely intact its management team — a highly unusual move" — and is not requiring an adjustment of its business model. The suspect treatment began in earnest after the Treasury Department said that the bank would have to raise $125 million in private investment to qualify for a TARP bailout:

That was a staggering sum for a bank that, at its zenith, had dared to dream about raising $100 million in a stock offering but was now losing that much money at an annual rate. Not to be underestimated, ShoreBank's network of political patrons, from Illinois Democrats such as Sen. Dick Durbin and Rep. Jan Schakowsky to friends of Bill [Clinton] and buddies of Barack, started suggesting to the biggest players on Wall Street — names like Goldman Sachs, Morgan Stanley, and GE Capital — that they really ought to consider helping ShoreBank. And what do you know? Last May, this who's who of bailout recipients and regulatory targets announced that they couldn't think of a worthier cause. ShoreBank ended up raising nearly $150 million. The banks ponied up most of the money (the Ford and MacArthur Foundations kicked in their share) and placed it in an escrow account, to be invested in ShoreBank upon its receipt of TARP money.

But by then it was too late. The Federal Reserve took another look at ShoreBank's rapidly deteriorating assets and determined that any taxpayer investment in the bank would quickly disappear, never to be paid back. The administration couldn't afford to let the bailout be that explicit, because House Financial Services Committee ranking member Spencer Bachus (R., Ala.) had already fired off a letter demanding to know whether any administration official had played a role in the bank's private-capital raising. That removed TARP from the administration's tool kit, but, having coaxed nearly $150 million out of the private sector, the bank's friends in government found another, less obvious way to save ShoreBank.

The investors created a bank with the different name of Urban Partnership Bank; the FDIC seized ShoreBank and sold it to Urban Partnership at a $368 million loss of its public fund. Moreover, contrary to its rules, the FDIC allowed the cast of characters from the failed bank to take their places in the new bank.

No doubt, many folks believe that ShoreBank's stated mission of giving people on the same degree of concern as profits is a wonderful goal, and worth preserving. But when the model isn't working, red flags should suggest that more people might be harmed than helped. Those flags should all but cover the field when big-government corruption becomes the savior.

How Is Debt Going Away?

Most of us have taken it to be one of the few salutary effects of this recession that Americans' debt habits appear to have shifted somewhat. Blogger Les Jones suggests that we've overestimated that result:

It turns out that the belt-tightening interpretation may not have been true in the least. If the data below is correct 99% of the reduction in consumer debt was due not to repayment of loans, but to non-repayment. The debts didn’t go away because they were paid off. They went away because they were written off as hopeless.

I'm not inclined to disagree with Jones that "there's too much debt that will never be repaid" — although, in the name of exactitude, I'd note that the Wall Street Journal's numbers to which he's reacting actually suggest that 96% of the reduction was due to default. However, this evidence alone doesn't prove that habits haven't changed. After all, it's much more difficult to pay down debt than to default and takes a longer time to show results.

If I pay every dollar that I can toward debt reduction, my total goes down a couple of hundred dollars per month. If my creditors were to write off my debt in total, well, it would plummet quite a bit more than that. Indeed, in the balance between the two ways of reducing debt, there would have to be a large number of folks like me to offset even one defaulter.

Helping Small Businesses by Making Their Lives Harder

It's as if, even when they're claiming to be legislating on behalf of small businesses, Obama and the Democrats can't resist binding small businesses:

But under a little-publicized provision in the bill, mom-and-pop owners of triple-deckers, duplexes, condos and other such rental real estate will have to obtain the names, addresses and federal tax identification numbers of many of their snowplow operators, electricians, painters and other such service providers.

If the landlord pays such a contractor a total of at least $600 for the year, the landlord will generally have to issue that contractor a special tax form, called a Form 1099 (or "ten ninety-nine" by tax professionals). The landlord will have to list on the form the amount the contractor was paid for the year, and send a copy of that form to the IRS.

When hiring workers, in this way, businesses are acting as consumers, not as contractors; it's not as if they charge renters a markup on top of handyman bills. But to clueless Democrats (and not a few establishment Republicans, I'm sure), anybody who profits from any activity is a target for taxes or assistance in collecting taxes. It will now be that much more difficult for Americans to start business operations involving rental properties and to hire tradesmen and workers to maintain them.

On the margins, the decision of whether to hire somebody or to do repairs one's self will tip toward the latter. There will also be increased incentive to hire off-the-books tradesmen rather than small operations that are striving to follow the rules. Finally, although the news report explains that the government hopes to recoup $2.5 billion in taxes over the next decade, by this move, it seems not to be questioned what the real cost to affected businesses will be.

The only rational justification for this move, that I can see, is that the government is trying to fund its incompetent stimulus programs by squeezing the private sector so that it doesn't have to shave its own programs. The problem is that even tax-cheating small businesses contribute to the economy, while government is all absorption.

Even During Painful Time, the Urge to Redistribute

To be fair, Kenneth Rogoff does maintain some balance:

While tax cuts enhance long-term productivity, expanding the government sector is hardly a recipe for economic vitality. There are surely many useful activities for the government to undertake in a market economy, but a frenzied orgy of stimulus spending is not conducive to rational discussion of what they should be. And of course, there again is the matter of the soaring national debt.

The problem comes with the reasons that Rogoff dislikes the tax-cutting solution. First, he argues against increasing public debt, which should only require that tax cuts be coupled with reductions in government spending.

A second problem with tax cuts is that they might well have only a limited impact on demand in the short run, with the private sector hoarding a significant share of the funds to repair badly over-leveraged balance sheets.

Here, Rogoff merely chooses to ignore human nature. Private sector entities with "over-leveraged balance sheets" will "hoard" until they feel secure, whether tax cuts help them to do so or not. They will also continue to be reluctant to hire and expand businesses, and by continuing to confiscate their resources through taxation, the government will only prolong this healing process. Moreover, Rogoff's central theme is that economic recovery is going to take "many years."

So, given the long-term recovery, why not go with a long-term solution? That's Rogoff's third and most mystifying reason for disliking tax cuts:

By some measures, nearly half of all Americans do not pay any income tax already, so cutting taxes skews an already very unequal income distribution. Deferred maintenance on income equality is one of many imbalances that built up in the U.S. economy during the pre-crisis boom. If allowed to fester, the political consequences could be severe, including trade protectionism and perhaps even social unrest.

Continued high unemployment and economic uncertainty won't cause social unrest? Rogoff should look around. Easing government confiscation from the half of the population that actually pays for it is unfair because the others contribute not at all? That's a truly remarkable sentiment; apparently it is the role of government to take from productive Americans merely for the sake of taking. And what's this about "maintenance of income equality"? I'd prefer maintenance of a bustling economy with plenty of opportunity for those willing to seek it. A moment's thought should lead any reasonable person to the conclusion that it's better to advance though others profit more than to wallow in stagnation.

Because he takes off the table tax cuts that would allow the private sector to repair itself at a more rapid pace, Rogoff winds up suggesting that the Federal Reserve should buy up government bonds and private debt. That means "printing money," which means inflation. I'm not a Harvard economist, by any means, but my understanding is that inflation would make it more difficult to pay off debt, generally. Thus, those who benefit from government handouts and who manage to sell their debt to the Fed would benefit at the expense of those — most likely throughout the broad economic middle — who must continue to pay off the same amount of debt with dollars that are individually less valuable.

Somehow, the question seems to come back to this: Is the redistribution of wealth worth continued all around hardship for everybody who isn't politically connected? It would seem to be one uberclass or another.

Once Again, Government Spending Can't Spark Growth

John Kostrzewa mentions, as if it should be a surprise, that temporary tax gimmicks have been as unable to spur the economy as giving away loads of money:

The federal housing tax credit was supposed to be the bridge between a dead real estate market in early 2009 and a recovery this year.

The idea was that an $8,000 credit would stimulate sales and stabilize prices, forming a floor under a housing market that had been sinking for three years.

For awhile, it seemed to be working.

But when it expired last month, and the private housing market was left to stand on its own, another reality hit home — the federal tax credit had become a bridge to nowhere.

Used this way — especially by a government already running deficits — tax credits are little more than government giveaways. Economically speaking, they're good, as far as government giveaways go, because at least they reward some sort of activity, but they're still just a limited drop of resources.

In that, such credits are in keeping with the flawed and failed approach that the Democrats have been taking to stimulating the economy. Essentially, Obama and Co. have been gambling that the private sector would come up with something as government hand outs bridged the economic gap. Back in 2009, I likened the method to adding water to a pond in the hopes that it would overflow its bounds somewhere and expand.

There are two problems with this strategy:

• The government, by its nature, must take money from one area of the pond in order to dump it in another.
• The areas that it has sought most rapidly to fill — maintaining or expanding money in the public sector and in select, struggling industries like housing, finance, and automobiles — were a problem precisely because they were artificially high.

Kostrzewa cites uncertainty as the root cause of continuing malaise, but that's more of a subsidiary cause. The free market thrives on uncertainty and risk. What makes the current uncertainty insidious is that it is the result of government usurpation of market mechanisms. In other words, it's not that people are uncertain about what will happen in the future — which they always are — but that they're uncertain about the very rules of the economic game under the micromanagement of a capricious government that's easily manipulated by special interests.

At this point, the only way to change that dynamic — barring a surprise breakthrough like another Internet — will be a plausible mea culpa by the federal government for its actions over recent decades, the last two years most of all. New policies should lower taxes permanently and withdraw the government's various fingers from the economy. And the only way for such a turnaround to be plausible will be in conjunction with major turnover in elected offices.

Hoping for an Effective Stimulus Without Change

Victor Davis Hanson has an interesting post at National Review's The Corner, on why borrowing more money won't act as a stimulus in the same way that deficit spending during World War II did (he's reacting to a Paul Krugman column based on that premise). Hanson provides lots of macro-level historical detail, but the fundamental premise is that the deficit spending of World War II was paired with some fundamental changes in how the money was spent...

The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities — all on the assurance that this furious pace and consumer scarcity would be short-lived.

Small Cuts Credited, Huge Windfall Ignored

This article, by Neil Downing, is a bit hard to take:

Despite a recession, record floods and high unemployment, Rhode Island managed at least one achievement this year — a state government budget surplus.

Preliminary figures posted Wednesday show that the state recorded a $17.7-million surplus for the year ended June 30, even though it began that year with a $62.3-million deficit.

The article goes on to meander through elected officials and bureaucrats crowing about the hard work that they've done to trim the budget in difficult times. This part comes almost as an unrelated tidbit toward the end (emphasis added):

The state could use the surplus should there be a budget deficit for the year that ends June 30, 2011, he said.

But if there is a surplus for that year, too, the state could use the money to deal with what is scheduled to be a budget deficit of about $320 million for the year that ends June 30, 2012.

That is when the federal government is scheduled to pull the plug on the extra aid it has been doling out to states to help them get through the recession.

There's something pitiful about state officials' slapping themselves on the back for fiscal-management prowess based on a tentative $17 million surplus when a higher form of government is shoveling hundreds of millions in future-taxpayer money to them through the back door. It's a bit like a glutton's claiming success in his diet because he skipped the sorbet in a ten-course meal.

National Budget Deficit Trends

Randell Hoven (h/t) uses CBO figures and a simple chart to put the lie to the now familiar claims that the Iraq and Afghanistan wars and Bush tax cuts caused a $3 Trillion budget deficit.

The CBO breaks that cost down over the eight calendar years of 2003-2010. Below is a picture of federal deficits over those years with and without Iraq War spending.

The sum of all the deficits from 2003 through 2010 is $4.73 trillion. Subtract the entire Iraq War cost and you still have a sum of $4.02 trillion.

No one will say that $709 billion is not a lot of money. But first, that was spread over eight years. Secondly, let's put that in some perspective. Below are some figures for those eight years, 2003 through 2010.

* Total federal outlays: $22,296 billion.
* Cumulative deficit: $4,731 billion.
* Medicare spending: $2,932 billion.
* Iraq War spending: $709 billion.
* The Obama stimulus: $572 billion.

There is an important note to go along with that Obama stimulus number: the stimulus did not even start until 2009. By 2019, the CBO estimates the stimulus will have cost $814 billion.

If we look only at the Iraq War years in which Bush was President (2003-2008), spending on the war was $554B. Federal spending on education over that same time period was $574B....

So spending $572B in two years stimulates an economy, but spending $554B over six years ruins one?

The Way Out of the Recession

If an article by the Associated Press's Jeannine Aversa is any indication, the road to economic recovery remains a mystery to mainstream journalists:

The Federal Reserve has little power left to lift the economy out of its rut. Congress, with an election looming, has no appetite for more stimulus. Shoppers are reluctant to spend, and businesses are slow to hire.

Let's face it: There is no easy or imminent fix for the flagging recovery. ...

Americans who are worried about their jobs, not to mention volatility in the stock market, don't want to borrow. They saved 6.2 percent of their disposable income this spring. Before the recession, it was more like 1.2 percent. ...

"It's a pervasive level of uncertainty that people and businesses feel about their economic futures," says Ken Mayland, president of ClearView Economics. "It's frozen them into inactivity."

The state of the economy is, of course, the leading cause of uncertainty, but the efforts of President Obama and his Democrat Congress to — in White House Chief of Staff Rahm Emanuel's phrase — not "let the crisis go to waste" has put it over the top. The solution, therefore, is not more "stimulus" of the sort that we've been seeing, but a clear message from Washington that "our methods have failed, now it's up to you in the private sector."

In concert with a deep change of faces in Congress, Republicans and Democrats should pledge no "transformative" legislation until the economy is humming again. No cap and trade. No pro-union hand-outs. And a repeal of ObamaCare. They should also strive to give taxpayers as much of their money back as possible so that we can save to the level at which we'll feel secure and then begin spending and investing.

Mystery only enters the equation when the objective is to maintain and expand a large, invasive government while persuading the public to behave as only folks confident that the economic rules are stable and that the ruling class will not govern by whim.

Government Giveaways... to Itself

Matt and I discussed the federal government's billion dollar giveaways to states to make up for their poor management and failure to adjust to the economic times, on last night's Matt Allen Show. Stream by clicking here, or download it.

Obama's Recession

It seems to me that explanations for the continuing recession are such that it's no longer appropriate to blame the causes of the initial downturn, much less the U.S. administration in power at the time:

Companies learned during the recession to do more with less, and with uncertainties about consumer spending, the broader economy and government policies, many businesses are holding the line on employment, even as they pour hefty sums into new machinery, equipment and software. ...

Bill Cheney, chief economist at John Hancock Financial in Boston, says that he is still hopeful that hiring will pick up as sales increase and existing workers are pushed to the hilt. But if they don't, he says, companies’ reluctance to hire could end up hurting them and undermining the recovery.

"Profits are great, but all that could change if the job engine continues to sputter," he said. "Business capital spending helps, but consumer spending matters more." And without jobs, he said, people will pull back.

Apart from the politics, it's reasonable to suggest that individuals and organizations have come to the conclusion that they'd gotten in the habit of overextending themselves and are correcting that behavior, and it's a precarious prescription to suggest that they oughtn't be more fiscally responsible. But a case could be made that in propping up the economy with money borrowed from the future — that is, creating demand without the corresponding increase in wealth among consumers — the current government has given companies the wherewithal to step back and invest in productivity improvements that don't create jobs, but rather ensure that they will return less rapidly.

The Government's Business Model

It's quite model the U.S. government has created for itself, as an entity, and the Democrats have made its principles undeniably clear with their ownership of power:

Spending more on border security commands bipartisan support, but the jobs bill, which narrowly passed the Senate, is being described in starkly different political terms. Democrats say it could save the jobs of more than 300,000 teachers, police officers and other public health workers. Republicans see it as more profligate government spending and a pre-election gift to teachers' unions and other public service unions that are crucial to helping keep Democrats in the majority.

The legislation provides $10 billion to school districts to rehire laid-off teachers or ensure that more teachers won't be let go before the new school year begins. The money could keep more than 160,000 teachers, including 16,000 in California and 14,000 in Texas, on the job, advocates say.

The other half of the bill has $16 billion for six more months of increased Medicaid payments to the states. That would free up money for states to meet other budget priorities, including keeping more than 150,000 police officers and other public workers on the payroll. Some three-fifths of states have already factored in the federal money in drawing up their budgets for the current fiscal year.

With all tiers of government unable to operate in ways that maintain their workforces — and reluctant to trim unnecessary labor — the feds are simply borrowing money against the livelihoods of future taxpayers to fill the gap. They're taking money from the private sector to insulate their own employees against the combination of mismanagement and hard economic times. Conveniently, since government employees can vote for their employers, the larger government gets, the greater its directly bought and paid voting bloc becomes.

This is what way-too-big government looks like, and the trend must be reversed.

A Flat Pyramid Scheme

In the course of checking a claim by Congressman Jim Langevin, C. Eugene Emery, Jr., offers this explanation of the calculation behind the "multiplier effect" allowing Democrats to claim, as Langevin did, "for every $1 we spend on unemploymen t benefits, $1.90 is put into our economy":

When you give $1 to people who have lost their jobs and they have run out of savings, those dollars get spent. So Mary gives it to Mike down the street to buy some of his fruits and vegetables. Mike, who relies on customers like Mary, might put 25 cents in the bank but use the rest to buy seed and fertilizer from Tom's store in town. Tom might save a dime of the 75 cents he got from Mike but use the remaining 60 cents for a new pair of glasses.

When economists calculate the gross domestic product, they add up all those transactions (excluding the amount set aside in savings and money that ends up overseas if you buy foreign goods). In this limited example, Mary's $1 has added $2.35 ($1 plus 75 cents plus 60 cents) to the gross domestic product. Yes, it's still just $1, but by passing it along it has helped three people.

For purposes of economic theory, this is an interesting consequence of the definition of the GDP, but in contriving a policy to increase economic activity and employment, it's not so useful. The GDP calculation does not differentiate between a dollar that Mike spends because Mary transferred her government cash to him and a dollar that Mike pulls out of his savings because he thinks investing in his business is a better strategy. To get the economy rolling of its own volition, policies must encourage the latter.

Since a government in deficit has no savings of its own, it must take Mary's dollar from somebody else, whether decreasing some other expenditure, increasing taxes, or borrowing from the future. That means that Mike might reasonably expect the personal profits from his business to decrease, encouraging him to find other things to do with his money than invest in his economic output (savings, foreign transactions, etc.).

Whether we continue to extend unemployment benefits is more a moral question than an economic one. But on the economic side, priority number 1 ought to be encouraging business owners and entrepreneurs to take on the risk that ultimately provides folks like Mary with employment.

Issues Big and Small

I've been preoccupied, today, with the sorts of thoughts that are hugely important to the individual, but quotidian details on a larger scale... and there's been so much on that larger scale that might otherwise have merited consideration. The economy, obviously:

The recovery lost momentum in the spring as growth slowed to a 2.4 percent pace, its most sluggish showing in nearly a year and too weak to drive down unemployment. ...

... the recovery has been losing power for two straight quarters. That raises concerns about whether it will fizzle out. Or worse, tip back into a "double-dip" recession. ...

In the revisions issued Friday, the government estimated that the economy shrank 2.6 percent last year -- the steepest drop since 1946. That's worse than the 2.4 percent decline originally estimated. The economy's plunge underscores why the unemployment rate surged to 10.1 percent in October, a 26-year high.

Businesses appear to have the resources to expand, but it's all about the uncertainty, and uncertainty has been the theme of the current Congress and administration. Thousands of pages of invasive law creating new bureaucracies to impose unwritten regulations. Those with resources, in other words, have reason to hold their breath.

The Gulf spill is another big item, today:

The generally accepted view of the Deepwater Horizon disaster has focused on the blowout preventer and the non-standard procedures BP conducted just before the explosion and fire. However, most of the damage and the main source of the spill came from the collapse and sinking of the DH platform rather than the initial explosion. A new report by the Center for Public Integrity, based on testimony from people on scene and Coast Guard logs, contains evidence that the platform sunk because of a botched response from the Coast Guard, which failed to coordinate firefighting efforts and to get the proper resources to fight the fire.

And the controversy will continue. Of course, now that BP has promised its billions in aid and the investigations into the incident pick up steam, we hear this:

Yes, the spill killed birds — but so far, less than 1% of the number killed by the Exxon Valdez spill in Alaska 21 years ago. Yes, we've heard horror stories about oiled dolphins — but so far, wildlife-response teams have collected only three visibly oiled carcasses of mammals. Yes, the spill prompted harsh restrictions on fishing and shrimping, but so far, the region's fish and shrimp have tested clean, and the restrictions are gradually being lifted. And yes, scientists have warned that the oil could accelerate the destruction of Louisiana's disintegrating coastal marshes — a real slow-motion ecological calamity — but so far, assessment teams have found only about 350 acres of oiled marshes, when Louisiana was already losing about 15,000 acres of wetlands every year.

Sometimes, it's difficult to know what to believe, when the issue isn't right there in front of you. Another argument, I'd suggest, for small, decentralized government.

Now back to my personal preoccupations...

The Effects of Minimum Wage

This is a familiar argument, but given the attractiveness of government fiat, it seems it must be had again and again:

Three years after the passage of federal wage legislation, teen employment prospects are suffering tremendously. The unemployment rate for 16 to 19-year-olds remains above 25 percent; for those ages 16 to 17, the unemployment rate is close to 30 percent. While the recession has been a significant cause of teens' employment woes, some advocacy groups have claimed that it's the only cause — downplaying any employment loss caused by the more than 40 percent increase in the federal minimum wage that occurred over the same time period. ...

Using state-specific variations in minimum wage growth, and carefully controlling for the effects of the recession and other state economic differences, Even and Macpherson are able to isolate only the decline in teen employment that was caused by the federal wage hike.

For the 19 states affected by all three stages of the federal wage hike, there was a 6.9 percent decline in employment for teens aged 16 to 19. This translates to approximately 98,000 fewer employed teens. Broadening the analysis to include all 32 states impacted by any stage of the federal wage increase, the authors find approximately 114,400 fewer employed teens.

Of course, teen employment is only one segment of the total entry-level employment pool, but it's surely representative, and it's particularly notable which subsegment is likely to be hardest hit:

When Even and Macpherson look specifically at 16 to 19-year-olds with less than 12 years of education, the proportional employment loss grows larger. In states impacted by all three wage hikes, there was a 12.4 percent decrease in teen employment.

Yes, this subsegment overlaps teens who are presumably still in school, but even so, they're losing valuable experience in the workforce. The ripple effects in the economy are surely substantial, from increased responsibility for higher-level employees, decreased opportunity for employers to expand, and growing attractiveness of immigrant labor.

Debt and Taxes — Big Either Way

Brian Riedl likens our growing national debt to the bubble that's left many of us owing more for our houses than they're worth, forcing others into destitution, and holding our economy under water:

In short, between 2009 and 2020, Washington is set to borrow more than three times more than in the previous 220 years combined. How has this been possible? Because Washington, like many homeowners, was lured by temporary low- interest rates. Since 2000, the interest rate on the 10-year Treasury note has fallen from 6 to 3 percent. The U.S. Treasury has lowered its interest costs further by shifting toward cheaper short-term debt. Thus, nearly half of government debt will need to be refinanced in the next 12 months, and nearly two-thirds will require refinancing within 36 months. So even though the national debt has surged since 2000, the annual net interest costs have actually declined from $223 billion to $209 billion. Consequently, some commentators are downplaying the long-term cost of rising debt. In doing so, they display a failure to understand interest-rate trends.

Enter President Obama's Deficit Commission, which appears to be preparing to raise taxes to the tune of $26.7 trillion to make up 25% of the projected shortfall for Social Security and Medicare. At almost twice GDP, that means that even if the government manages to cut other spending enough to make up three-quarters of the problem, the equivalent of our entire economy will have to be siphoned away for two years.

Mark Zaccaria: Lobstering Moratorium Another Example of Bad Government Policy

In a climate of increasing regulation from Washington, the Atlantic States Marine Fisheries Commission recently recommended a five year moratorium be placed on lobster fishing all along the Atlantic seaboard. While the decision was fortunately voted down, it still represents a growing trend of dangerous restrictions being placed on individuals and industries by uninformed and misguided regulators.

The recommendation by the Atlantic State Marine Fisheries Commission would have been a death sentence for the RI lobster fishing industry. It would have cost the state countless jobs. Just the idea that a government commission was considering a complete ban on lobstering demonstrates the bureaucrat's disregard for the local economy. There are legitimate concerns about maintaining a healthy population of lobster in our waters and the lobstermen that I know are first among those seeking to do so. A complete ban on harvesting would not have been productive for either the shellfish or RI business.

Since 2008, the federal government has spent more than $1 trillion attempting to artificially "stimulate" the economy. Despite the massive increase in spending unemployment in Rhode Island remains above 12% and the national debt has grown to more than $13 trillion. It's clear that something is not working.

The problem is that the federal government believes that it is more effective at creating jobs than the individual entrepreneur or business owner. The regulations and restrictions being placed on individuals and industries by an ever growing government is killing jobs and bankrupting our economy. Rhode Island's representatives should be encouraging businesses to come to our state, not driving it out with overbearing taxes and regulation.

Mark Zaccaria is candidate for Congress in Rhode Island's Second Congressional District.

They'll Find the Money or Change in Ways We Don't Like

One wonders whether U.S. legislators don't understand the consequences of their work — which isn't implausible, inasmuch as it's a real question whether they read the legislation on which they vote — or don't care. Of course, the conservative critique of government is that big government will tend to work in the interests of those with the incentive to manipulate lawmakers who cannot or will not see pitfalls, leaving the only rational and ethical choice for legislators to be to decline to micromanage the private society that they're supposed to serve.

The point comes to mind, this time, on news following passage of the "sweeping financial overhaul":

Investors are worried about banks' future earning power after Thursday's passage of the most dramatic rewriting of banking rules since the Great Depression. Adding to the pessimism are falling trading profits — which all three banks mentioned in the their earnings reports — and weak U.S. loan demand. ...

Yet banks are already moving to recoup any losses. One approach: making traditionally free services premium offerings. A Bank of America pilot program in Georgia, for instance, charges customers $8.95 a month to get paper statements or use bank tellers. The bank could start the program nationally as soon as next month.

Bank of America is also considering raising minimum balances on some accounts and charging customers who fall below it, Moynihan told analysts during a conference call.

Locking more money in savings accounts is probably not the best outcome for our struggling economy. But more generally, it simply isn't the case that companies — banks or otherwise — sit on large piles of money that they know they don't need and that they are willing to give up at the wave of the president's magic pen, as if they were children refusing to share their candy. That's not to say that businesses don't hoard wealth or don't rationalize self-serving strategies; it's merely to make the obvious point that they'll seek to profit as much as the market will bear, saving as much as they deem wise and distributing their profits as they perceive their internal dynamics to require.

When government operatives pick a particular policy of the banks, such as debt card "swipe" fees, to disallow by fiat, the affected organizations will look elsewhere. They're obviously in a much better position to know what fees can conceivably be imposed, and with industry-wide rules (excepting government debt cards, naturally), they've less to fear from their competition as they impose them.

Perhaps the most chilling paragraph in the article, though, is this:

But banks won't have free rein to raise fees on whatever they choose. The financial overhaul calls for the creation of a new Bureau of Consumer Financial Protection. The agency will have vast powers to enforce regulations covering mortgages, credit cards and other financial products to ensure customers are getting a fair deal.

Unelected bureaucrats, in other words, will now have "vast powers" to make a laboratory of the finance industry for experiments in consequences. At least when private businesses engage in such experimentation, they do so at the risk of their own financial health. When government agencies muck things up, they tend to find themselves with more authority.

And that reality presents a golden opportunity for large incumbent players in the industry who can find ways to take over and influence their regulators in such a way as to ensure that they profit even in calamity.

Stimulating Something Other than Lethargy

Stephen Spruiell argues that there have now been five rounds of stimulus spending by the federal government, totaling $1.085 trillion, which surpasses the cost of both wars in which our nation has been engaged over the last decade. He further argues that the approach that the government has been taking has been flawed in its very principles.

This isn't just a matter of wasted money, because the mounting debt will eventually come due and, moreover, the debt is creating a bubble likely to pop, moving us (at last) to the ultimate "too big too fail" collapse. Not surprisingly, I like his proposal for a reworked stimulus policy:

Keynesian economists also argue that scaling back stimulus spending might actually hasten a debt crisis. Cutting spending during a period of economic weakness, they say, would depress growth, which would depress tax revenues, which would make debt service even more difficult. The reason they are enchanted with this argument is that it never occurs to them to cut spending and tax rates simultaneously. To be clear, I am not claiming that tax-rate cuts would foster enough economic growth to pay for themselves, but there is strong evidence that they would foster more growth than deficit-financed government spending would — evidence that economist N. Greg­ory Mankiw recently summarized in the journal National Affairs. The incentive effects of tax-rate cuts would more than offset whatever harm (my guess is: very little) might accompany spending cuts of an equivalent size. Meanwhile, the spending cuts would offset the revenue lost to the tax cuts.

Considering Unemployment

Having followed the work of Providence Journal reporter Neil Downing for years, now, I'm confident that it was not a deliberate omission, but I can't help but wonder why a particular factor contributing to economic malaise didn't make it into his recent article about unemployment:

In the current recession — which began in late 2007, and is now in its fourth calendar year — people are often out of work for 6 to 12 months — "if they're lucky to find a job," [URI Professor Edward] Mazze said; many are out of work for more than a year — or longer, he said.

The main reason, Mazze said, is that "no jobs are really being created." Partly because of high rates of foreclosures and consumer debt amid this recession, "businesses are afraid to spend because consumers are not spending," Mazze said.

Businesses and consumers both are facing uncertainty not only because of the depth of the recession but because we've got a "transformative" regime running the country. Massive public debt. Looming changes to healthcare requirements. Environmental regulations appearing inevitable, whether Congressionally enacted or administratively implemented. And the list goes on.

In such an environment, planning for as-yet prospective demand is even riskier than usual.

Smaller as Well as Divided

It's fortuitous that I'm a bit behind my blogging schedule today, because Marc's closing point happens to relate to my thoughts upon reading Red Jahncke's criticism of the Dodd-Frank Act regulating the finance industry. Jahncke gives a little history:

Under Glass-Steagall, banks were local and regional champions. In New England, for example, Connecticut had Connecticut National Bank and Rhode Island had Fleet Bank. Then, as the states formed regional banking "compacts," New England had Bank of New England and a much-larger Fleet. No matter how well or poorly managed (many failed), these institutions cared. Local and regional bankers knew local and regional businessmen.

Then, in 1994 Congress scrapped state control of interstate banking under Glass-Steagall and allowed nationwide branching. Banks became behemoths with no loyalties and no person-to-person knowledge or understanding of borrowers.

In 1999, Congress repealed the rest of Glass-Steagall, i.e. its separation of commercial and investment banking. And that unleashed huge, highly complex, diversified financial conglomerates -- a very new phenomenon. The short experience with these giants has not been good.

As Anchor Rising readers will surely be able to recite, this is far from the whole story, inasmuch as it was a particular type of asset underlying complex derivatives and forms of investment insurance that catalyzed the collapse. In other words, the bigness and complexity of the banks may have caused problems on their own, but without implicit government backing of — and government incentives for — risky mortgages, investors would not have been as willing to ignore the stability of the table on which the house of cards was being built.

Those tasked with investigating investments — and regulating them, as Jahncke points out — didn't fear the financial structure when they perhaps should have, but they also didn't fear the instability of loans going to people for amounts that they could not afford. Referring back to Marc's post: divided government can, in some instances, get us the least-bad of both sides, but it can also result in a toxic combination, as powerful players find that sweet spot for manipulation in the crack that runs between laissez faire and subsidization.

As for Jahncke's concerns, I'll agree that the Dodd-Frankenstein monster has gone in entirely the wrong direction, essentially writing the problems into the law, and that a different reform could be helpful toward stabilizing the market. But no reform could match a cultural decision that we're all better off knowing our bankers and sticking with those dedicated to our own local markets.

Ways to Reduce Unemployment

Arthur Laffer think's its prima facie absurd to think that extending unemployment benefits could reduce unemployment:

No one opposes unemployment benefits as a transition aid for people to get back on their feet and find a new job. Unemployment benefits are a safeguard for individuals down on their luck. But to argue that unemployment benefits actually reduce unemployment is disingenuous at best, and could induce our government to enact policies that have the effect of destroying our nation's production base from whence all benefits ultimately flow.

Although some partisans may overextend their spin in the heat of political battle, I think for the most part the arguments for improving the economy and extending unemployment benefits lie along different tracks of reasoning. Most people see payments to the unemployed as a compassionate expense to be balanced against efforts to revive the economy.

I will say, though, that I like Mr. Laffer's suggestion for an alternative stimulus:

Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.

My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?

Unfortunately, where government spending is concerned, neither political party emphasizes the greatest economic efficiency. The temptation is too great to convert the money into political currency.

Complication Underlies the Conservative Critique

Jeffrey Friedman's analysis of the origins of our current economic crisis and assessments thereof is worth reading, but he wraps it in the pose that everybody else is wrong:

To their credit, liberal analysts realized from the start that the cause of the recession was a banking crisis, not a housing crisis. In explaining the banking crisis, however, liberals used a theory drawn straight from the rotten core of contemporary social science: the theory of "moral hazard." It suddenly became conventional wisdom that the crisis had been caused by banks that rewarded successful employees with big bonuses but failed to penalize losses. This was said to have encouraged recklessness. Later, conservatives came up with their own variant of moral hazard, according to which bankers took too many risks because they knew that their banks, being "too big to fail," would be bailed out if their bets turned sour; so why not make the riskiest, most lucrative bets?

Most reasonable spectators would, I think, disagree with Friedman in that they'd acknowledge the role of each of these factors — and others, as well. Friedman would respond that the evidence is against them:

The intellectual bankruptcy of these theories lies in their assumption that the bankers knew they were making "reckless" bets. This assumption is demonstrably false: Ninety-three percent of the mortgage-backed bonds acquired by commercial banks either were rated AAA — the safest possible rating — or were issued by Fannie and Freddie, giving them an implicit government guarantee. Because of their perceived lack of risk, these bonds generated less revenue than did bonds with lower ratings. Revenue-hungry bankers who were oblivious to risk never would have bought Fannie, Freddie, or triple-A bonds; more lucrative double-A, single-A, and lower-rated mortgage-backed bonds were always available. Both the liberal and the conservative moral-hazard theories are therefore wrong. For the most part, the bankers didn’t deliberately take big risks, or they would have taken big risks that paid a higher yield.

Friedman ought to have paused before submitting his essay to National Review and considered whether it's plausible to assert that anybody — anybody with a coherent understanding of events — had really made it integral to their scenarios that entities looking for safe, long-term bets (such as pension funds) had been lured into overt risks. For most people and groups with money in the game, the risk was actual, not intentional, although those advising them might have had some inkling of the instability of the underlying assets.

What appears to have happened, in a nutshell, is that the marketplace — consisting of players with various degrees of savvy and awareness — decreased the degree to which it assessed risk in terms of the thing being traded and increased the degree to which it assessed risk in terms of the entities involved. Investors weren't betting on the likelihood that the sun wouldn't come up the next day; they were betting somebody else's assurances that it would not. Because of implicit government backing, traders and ratings agencies gave mortgage-backed securities ratings on par with those given to the government, and because of their size and the safety of being at the top of the ladder, large firms and their agents behaved as if they expected their losses to be mitigated, should things go awry, and because the above put smiley-face stickers on the trades, everybody else bought in.

For none of those involved is an acknowledgment of risk necessary.

Friedman pivots, on this obvious fact, in order to reach the point that truly interests him: That we have to acknowledge the complexity of life and the possibility of error. What's interesting about this, to me, is that Friedman thinks he's introducing something new. Such statements as the following read as if drawn from foundational documents of modern conservative political theory:

The experts, the regulators, and the bankers were ignorant of a risk caused by a complication that hadn’t occurred to them. The experts, regulators, and bankers were wrong; but they were not evil. They were simply outwitted by a complex world. ...

A more sophisticated approach would attend to the fallible ideas not just of voters but of bureaucrats, legislators, and judges — and to the roots of these ideas, both mass and elite, in cultural sources of (mis)information and ideology, such as the mass media and formal education.

All Friedman is doing, here, is describing the basic reasons for the conservative worldview — from libertarian principles of limited government to the Christian belief that evil is an illness and delusion, not an individual personal quality.

Hucksters Not Wasting the Crisis

Funny, I hadn't heard insufficient involvement of "disadvantaged groups" included among the contributing factors to our the economic crisis that supposedly necessitates a stronger government hand in the finance industry. And yet:

Chris Dodd, Barney Frank, and Barack Obama insist that the new financial regulation bill pending a vote in the Senate is a necessity to restore stability to troubled markets. Instead, it looks as though Democrats have been more concerned about quota systems than economic growth. Buried deep within the bill is a requirement for all regulatory agencies with jurisdiction in economic arenas to start beancounting based on ethnicity and gender.

It's almost as if regulation is not a means to correct problems, but an end in itself, expanding government authority to dictate the terms of our social existence.

A Reminder of Our Status

Here's a reminder of why things have to change dramatically in Rhode Island:

Among the states, Rhode Island's [unemployment] rate of 12.3 percent was the highest in the region and the fourth highest in the U.S. Since May 2009, Rhode Island's rate was up 2.1 percentage points and was among 12 states nationally that recorded increases in their jobless rates during the last 12 months.

The rates in the other New England states were: Massachusetts (9.1 percent), Connecticut (8.3 percent), Maine (7.1 percent), New Hampsire (6.4 percent) and Vermont (6.2 percent).

Remember when Rhode Island hit 10% unemployment, and we all began (finally) to worry? Well, no other state in New England has even hit that point, and we may not see it again ever, unless we change our way of doing business.

One of 12 out of 50 states that saw increasing unemployment over the past year. We need to sweep out the State House and rehire the entire state bureaucracy.

Hiding in the Treasure Room

Predictive economic news has been dire, lately. If the dark notes weren't so broadly being sounded, one might suspect a Republican conspiracy to keep a nascent recovery from helping the Democrats. The alternative explanation is that conservatives have been correct in their concerns about the Democrats' method of "stimulating" the economy and that the consequences have begun to appear a few months earlier than government incumbents would prefer.

Of course, such reliable left-wing Democrat voices as New York Times columnist Paul Krugman are doing their best to run that hypothetical conspiracy in reverse, as Stephen Spruiell points out in a recent National Review (subscription required). But the left-right battle is secondary to Spruiell's main topic. Krugman points to the stability of government security interest rates as evidence that people aren't really all that worried about federal debt, to which Spruiell replies:

In some ways, gold is a better indicator of investor concern about the government's finances than are interest rates on government bonds, because at least two forces are keeping those rates irrationally low. First, since the crisis began, the Federal Reserve has injected over $1 trillion of new money into the economy, mostly in the form of loans to the nation's commercial banks at 0 percent interest. Over that same period, these banks have increased their purchases of U.S. government bonds by $500 billion.

David Smick, a financial consultant and author of The World Is Curved, explained the phenomenon in an article for Commentary earlier this year: "The perception now is that Washington has entered a new era of 'political banking.' . . . [Banks] can borrow from the central bank for next to nothing [and] use that borrowed money to buy guaranteed government debt, taking the difference in yields as riskless profit." This is not a bug in the government's strategy for dealing with weakness in the banking system; it is the strategy's central feature. The banking sector's demand for low-risk securities, and the Fed's willingness to finance that demand at 0 percent, have helped banks repair their damaged balance sheets while so far keeping the government's interest rates manageable. With virtually no perceived risk and a Fed eager to finance the purchases, banks don't mind a low return on their investment.

That sounds more than a little like GM's proclamation that it would be paying of government loans ahead of schedule... using other money procured from the federal government. It doesn't take much deep economic thinking to see that one cannot borrow to pay of debts for an extended period of time.

As I've said before, such a strategy only makes sense if the person or entity engaged in the financial activity has reason to expect an increase in income or, in the case of the government, in economic activity. Otherwise, the interest will eat an increasing amount of funds that were already too limited and, in the case of the government, the distortion of market forces will dissuade the sorts of behavior that can create or discover unforeseen economic expansion.

The "Stimulus" in Miniature... or Hatchback

It appears that many residents' car tax bills will offer an early illustration of the consequence of the big-spending stimulus pursued by Congress and the White House:

A number of cars, which normally lose value each passing year, have increased in value this year as a result of several economic forces hitting the used car market. ...

"There are less used vehicles out there for people to buy," said [state Vehicle Value Commission Chairwoman Linda] Cwiek, who also is the tax assessor in North Kingstown. She placed blame for the short supply of used cars on the federal "Cash-for-Clunkers" program.

To stimulate a sagging automotive economy and to aid the environment, the federal program offered financial incentives to turn in older vehicles in favor of buying more fuel-efficient models. In all, the program removed 677,842 vehicles from the road and sent them to the shredder. That prevented them from entering the used-car market.

Not only does the government have to take money out of the economy to put money into it (even if it takes from the future), but distortions of the marketplace will ripple. In this case, the effect was exacerbated by the environmentalist lunacy of destroying the cars. Many of us observed at the time that the government was essentially paying out money to ensure that used cars would be more expensive.

On a broader scale, big government-initiated spending only works as a stimulus if the economy is already headed for a breakthrough. Softening the interim with public debt is a gamble that's best hedged, and Obama and the Democrats went all in, mostly in order to prevent government entities from having to contract.

ADDENDUM:

By the way, it looks as if I wasn't so unreasonable to question the General Assembly's change of law allowing vehicle assessments to go up for the purposes of taxation.

Earning Happiness

The behavior of both sides of the liberal-guilt–welfare axis might find some explanation in this line, drawn from a review of Arthur Brooks's The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America's Future by Matthew Continetti (subscription required):

It is not inequality, Brooks writes, that makes people unhappy. It is a lack of self-worth. It is the feeling that success is unearned.

On the welfare-recipient side, Continetti notes:

In 2001, the University of Michigan's Panel Study of Income Dynamics noticed a correlation between welfare dependency and sadness. The panel found that going on the dole increased the chances of feeling "inconsolably sad" by 16 percent. "Welfare recipients," Brooks writes, "are far unhappier than equally poor people who do not get welfare checks." And while Brooks is quick to point out that correlation is not causation, the data certainly suggest that welfare doesn't make you any happier.

On the guilty liberal side, one thinks of the simplified explanation that Rush Limbaugh (gasp!) frequently offers: they know that they're wealthy beyond their merits, so they assume the system that so blessed them must be unjust. Rather than returning their "unearned" rewards, though, they seek to take a smaller amount from everybody — regardless of desert — in order to give to those who have "unearned" and not received.

Move beyond — if you can — the previous paragraph's poke at our pals on the left and focus on Brooks's point, which he states thus, in a 2007 City Journal article:

What I found was that economic inequality doesn't frustrate Americans at all. It is, rather, the perceived lack of economic opportunity that makes us unhappy. To focus our policies on inequality, instead of opportunity, is to make a grave error—one that will worsen the very problem we seek to solve and make us generally unhappier to boot.

Pointing out that income inequality in the United States has been expanding because "the rich are getting richer faster than the poor are getting richer," Brooks highlights the astonishing fact that, for some who rail against inequality, discouraging work among the successful is actually a feature, not a bug, of income redistribution:

According to British economist Richard Layard, "If we make taxes commensurate to the damage that an individual does to others when he earns more"—the damage to others' happiness, that is—"then he will only work harder if there is a true net benefit to society as a whole. It is efficient to discourage work effort that makes society worse off." Work, according to this postmodern argument—contrary to millennia of moral teaching—is no different from a destructive vice like tobacco, which governments sometimes tax in order to discourage people from smoking.

We who are productive, but not yet successful, might wish to interject that making gobs of money typically involves enabling other people to make or save money, too. As we've discussed on Anchor Rising before, replacing the rich folks who run WalMart with an army of mom 'n' pops would eliminate the employment of the large company's relatively well-compensated employees and disallow people of the same economic class from economizing in the way that WalMart's retail model allows.

Unsurprisingly, the difference in perspective ultimately seems to come down to whether one views society as a collection of castes or of individuals. The left sees those who work for WalMart as People Who Work for Walmart and, implicitly, always will. The right sees them as people who currently see WalMart as offering the greatest opportunity given their current circumstances. The poster representative for the former view is the single mother grasping about for any means of supporting her family; the poster representative for the latter view is the young adult making some side cash while learning the benefits of a strong work ethic and developing workplace interpersonal skills.

By way of a disclaimer: these distinctions are false. The single mother is just as apt to see "check out clerk" as a stepping stone, and the young adult may just as likely max out his potential stocking shelves. The point is that one side of the political divide presents current occupation as demonstrated maximum potential without public assistance, while the other side leaves potential up to the individual to demonstrate. (Shades of this difference can also be seen in union lamentations that teachers don't make as much money as others with the same amount of education. The problem is that individuals who go on to higher-paying gigs — say, quarter-million-dollar education commissioner — no longer appear in the "teacher" category.)

As Brooks and Continetti also explain, the effect of attempts to eliminate income inequality don't increase happiness. Because perceived opportunity is the greater contributor to that emotion, their policies actually have the opposite effect. We can take this assessment a step forward if we look to an underlying consequence of the mindset, whether it's conscious or not: The left's policies make government the provider of opportunity. To the extent that the right believes opportunity is provided (rather than seized from amidst the flow of uncontrollable natural and social forces), its policies put the responsibility in the hands of individuals.

A Mega High Ratio of Stimulus-Money-Spent-To-Jobs-Created But Did the Dire Economic Crisis Even Exist?

Marc Doughty of Pawtucket [H/T the "RISC-Y Business Daily Newsletter" - sign up here] has done the math that I had been meaning to get to:

At the bottom of the June 15 article ("Stimulus-funded jobs appearing") are numbers that should truly frighten anyone who still believes that the government is equipped to put the unemployed back to work.

For $46 million, the state essentially bribed 86 employers to open 270 positions, of which only 32 were filled from a pool of over 800 applicants. Some simple division shows that the cost per job created so far is over $1.4 million. Even if the program succeeded at placing every single qualified applicant, the cost would be over $225,000 per job created, which far exceeds any sort of reasonable return on investment for taxpayers.

It would have been far cheaper to place the applicants on welfare and pay for them to attend GED or community college courses for the duration of their unfortunate circumstances.

Programs like this one (with 4 percent success rates and massive costs financed by public debt) will postpone, not hasten, true economic recovery.

Encouraged by the first wave of such dubious spending launched by his predecessor, President Bush, President Obama insisted that we were justified in saddling future generations with large amounts of our debt because there was a dire economic downturn lurking that absolutely had to be averted by the creation of jobs via lots of government spending. (We're going to pretend for this discussion that much of the stimulus money didn't go to many, many other unrelated "projects".) Yet while all of this government spending was occurring, the vast majority of jobs maintained were in the private sector without a dime of stimulus money. The result has been that the economy continues to stink, though not crash. In fact, despite all of the wild spending (our debt will equal 97% of our GDP next year) Fed Chairman Ben Bernanke observed this week that

financial conditions have become less supportive of economic growth on balance

All that spending. Comparatively few jobs created. Was there ever really an economic disaster about to unfold as President Obama foretold?

Government as Lone Shark Collector

I've written, periodically, about my belief that debt is the new method of indentured servitude. If we can get young adults to enter the working world with hundreds of thousands of dollars in education loans, some additional thousands in credit card debt (incurred on the expectation of profitable labor after graduation), with car loans a near necessity, and housing options pushing them toward entering into mortgages, we've taken away a great deal of the freedom that economic independence imparts. The situation gets chilling if this story is anything more than journalistic sensationalism of a few peculiar cases:

It's not a crime to owe money, and debtors prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts.

In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009, a Star Tribune analysis of state court data has found.

Not every warrant results in an arrest, but in Minnesota many debtors spend up to 48 hours in cells with criminals. Consumer attorneys say such arrests are increasing in many states, including Arkansas, Arizona and Washington, driven by a bad economy, high consumer debt and a growing industry that buys bad debts and employs every means available to collect.

Whether a debtor is locked up depends largely on where the person lives, because enforcement is inconsistent from state to state, and even county to county.

In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. In January, a judge sentenced a Kenney, Ill., man "to indefinite incarceration" until he came up with $300 toward a lumber yard debt.

I expect we'll see this trend expand as the federal government takes on more responsibility in the finance sector, including the bailing out of too-big-to-fail banks. The reality that every loan shark has always known is that some debts cannot be collected. That's the risk of lending. If the government begins stepping in to jail those who fall behind, the public is taking the role of the crooked-nosed debt collector banging on the door and the balance of risk and benefit that makes lending a healthy application of free will and mutual benefit begins to evaporate.

Lamenting the Impossibility of Having and Eating the Cake

This short article about job prospects for young adults in Greece catches many of the various nuances, but it still seems as if there's a disconnect of cause and effect. Consider:

From their settled perches, the elders criticize and cluck. The young, they say, have either no initiative, a dearth of opportunities, or some combination of the two. They fear that young people will be unable to start their own families and they fret over the prospect of Greece’s demographic undoing.

The youth of Greece are merely responding as the culture in which they were raised taught them. They feel owed — and their elders don't appear to be enthusiastic to undo the government catering that they've enjoyed in order to secure opportunity and a healthy polity for their children. This is the inevitable result of a big nanny-state government.

Now begins another phase, which one suspects was part of the intention of those who strove to set this international movement in motion:

[Twenty-year old Olga] Stefou believes that the government is bound to respond to her discontent. And she has suggestions: Greece should make up its budget shortfall by pulling its 122 troops from Afghanistan and levying steep taxes on the Orthodox Church rather than squeezing the workers, she says.

Moving six score troops from active to inactive duty and transferring wealth from a Church is not going to make up for the demands of unemployed youth with high expectations as to what the world owes them. It is, however, subtle evidence that there are people strategizing to turn a shiftless and insecure generation into a political, quasi-military weapon.

It makes for an interesting, frightening question to consider the addition of the Muslim fanatics currently permeating Europe to the dynamic. Secular revolutionaries may discover that the discontented troops that they've been carefully cultivating find something more compelling in the notion of jihad than of a worker's paradise.

BP: Boycotted Petroleum

Filling in for Dan Yorke, on Friday, Channel 10 reporter Gene Valicenti (another transplanted Jersey boy, by the way) took up the question of whether people feel it's appropriate to boycott BP gas stations as a means of punishing the company for the oil spill in the Gulf of Mexico. Inasmuch as I was busy cutting seventy-two copes for massive crown molding in a coffered kitchen ceiling, I wasn't able to offer my two cents on the air.

I find it highly unlikely that anybody engages in a full boycott of a particular gas station. Rather, people will look for alternatives to a greater or lesser degree based on their impressions of the company. Nobody's going to walk or wait for AAA to bring a can of gasoline for an empty tank rather than pull in to a disliked station. On the other end of the spectrum, it's probably rather easy to push people to pick one or the other competitors on the same intersection and with a price differential of a couple of cents.

Personally, BP's pretentious environmentalish advertising had turned me off enough to engage in a boycott of the most mild sort (milder than my avoidance of dictator Chavez's Citgo stations) even before oil began to flow toward our southern coast. Increasing the intensity of my wallet-vote statement wasn't something that I'd considered, but I don't think it's an irrational decision for people to make.

Valicenti suggested that a boycott would only hurt the local store owner, but look, there has to be a consumer consequence for big companies. We've already got the federal government bailing out corporations that have gained a substantial claim on our economy; allowing companies to hide behind their employees and franchisees when they mess up would further undermine the very mechanism that makes capitalism a system for efficiency and quality. If a company like BP needn't fear consumer backlash, then it really will become solely the role of governments to impose penalties.

That ties in with a secondary argument that Valicenti put forward — namely, that boycotting BP would do no good, because the company would just move its product elsewhere. That's baloney on its face. That the company spends so much on developing and disseminating marketing materials in the Rhode Island market (for example) proves that it is very interested in ensuring that Rhode Islanders think well of it. The executives know that gas stations compete on the basis of mere pennies and that even something as superficial as dislike of a corporate logo can make the difference in consumer choices. Clearly, their response to pervasive anger at their brand is not something that they would brush aside.

To boycott or not to boycott BP is not a question in which I'm inclined to invest much passion. It's a matter of practicality and preference. By contrast, striving to argue against a boycott on philosophical or structural grounds could actually do harm to our economic and political system.

Spend to Punish

In response to the Providence City Council's useless declaration condemning Arizona's controversial immigration law, Domenick Fabrizio, of Cumberland, has a suggestion:

Since this city council wants to use economics to punish Arizona, my wife and I have decided to draw an economic line in the sand. We've decided to boycott organizations in Providence that we have frequented for years, including the Barker Playhouse, the Providence Performing Arts Center, the Providence Place mall, the Rhode Island Philharmonic and several restaurants.

We urge others who agree with us to do the same.

The first consideration ought to be the state of the economy, and anything that hinders that is inadvisable. More deeply, though, an economic boycott in response to the foolishness of city officials seems to punish the wrong people; those who are actually out there being productive are probably not the decisive factor in electing such goons. Of course, one must adjust for the left-leaning inclinations of the specific industries, mainly in arts and entertainment, that Fabrizio lists. Increasing economic pain and government dependency would conceivably have an opposite effect to that desired, when it comes to electoral politics.

So, don't boycott. Spend more, but in targeted fashion in order to encourage business and maybe to put money into the hands of folks who'll support a change of government in the city.

Tax Hikes and V Number 2

Not to kick off a beautiful Tuesday with gloom, but it seems inescapable. Environmental catastrophes, lingering war, emboldened terrorist states, and shifting demographics in the West that give those terrorist states reason for optimism about the future would each be bad enough, but the economy is what brings the world's problems to the front doors of every American. And on that topic, there appears to be an expanding feeling that recovery is not pending.

Indeed, Arthur Laffer foresees a likely scenario in which 2011 brings a second dip to the Great Recession:

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

I hope he's wrong. Given everything else going on in the world, an economically depressed, socially dispirited United States will be an ineffective beacon during the dark days ahead.

Government Doesn't Create Jobs...

... at best it borrows them, and while I certainly hope I'm wrong, I'm concerned that we're just not going to experience significant job growth for the foreseeable future:

A burst of government hiring of temporary census workers pushed the nation's unemployment rate down a fraction in May, but private-sector employers added a mere 41,000 new jobs last month — a figure so disappointing it sparked a huge sell-off on Wall Street and sowed fresh angst about the economy's future.

Adding to the worries was the fact that, so far this year, the bulk of the new private sector jobs have been going to workers with a high school education or less instead of to the middle-class workers on whom any long-term return to prosperity depends.

On the radio, Friday, I heard President Obama claiming the gradual success of the economic policies that "we" put in place over the past year, but I didn't get the impression that he was referencing the hiring plans of the Census. The reality, at the national level, is that the Democrats have made advancing their agenda and preserving past gains (as with public-sector growth) a higher priority than jobs and the economy. At the Rhode Island state level, the Democrats are shuffling chairs around and hoping for some sort of windfall miracle.

It may or may not be reasonable to extrapolate local evidence to national government, but one interesting aspect of the local debate is that the General Assembly clearly understands what sorts of noises it needs to be making. The budget is notable in its attempt to wash state government's hands of tax increases; the tax system "overhaul" makes some revenue-neutral tweaks without addressing the fundamental problem of too much government confiscation; and the legislation "making business easier in Rhode Island" cleans up some government-imposed nuisances but doesn't touch the mandates and regulations that create the real disincentives to economic activity, here.

Keynes Had Reconsidered the Invisible Hand

Monty Perelin at American Thinker observes

Wait, stop the Economics. There has been a terrible mistake.

From the timeline of the "Maynard Keynes" website. [H/T Jill Fallon at Estate Vaults.]

Over lunch at the Bank of England [in April, 1946], Keynes tells Henry Clay of his hopes that Adams Smith's "invisible hand" can help Britain out of the economic hole it is in:

"I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago."

Growing Gov't, Shrinking Priv't Sector

USA Today reports that recent number from the Bureau of Economic Analysis confirm what many people have sensed: private wages are shrinking while government grows. The facts:

* Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007 {and down from 47.6% in 2000--ed.}.

* Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started {and up from 12.1% in 2000--ed.}. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says.

The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries....The shift in income shows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

"It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs.

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.

More of What Americans Don't Want

The financial regulation legislation — which has passed both houses and is awaiting reconciliation — hasn't raised the ire that healthcare did before it. Several factors come play into that dynamic no doubt: financial regulation is less tangible, Wall Street makes a better villain than insurance companies, folks are tired from the healthcare skirmish, and so on. But it still represents fine evidence that we need wholesale change of the people representing us in Washington.

Kevin Williamson describes one reason why (subscription required):

Much too much has been made of the $50 billion resolution fund and the levy that financial firms would pay to fund it. Senator McConnell abominated it as a "bailout fund," but he was paying attention to the wrong pot of money: That $50 billion is a little ladle-load of cashola compared with the buckets of schmundo that the Dodd bill will make available for indirect bailouts and endless support of troubled businesses — financial and non-financial firms alike. Case-by-case interventions may be out, but the bill would allow — in fact, appears designed to ensure — bailouts for the creditors of troubled firms. Under the Dodd bill, Wall Street firms (or unions, or sovereign-wealth funds, or anybody else with the right political connections) who are exposed to losses on failing financial companies will be able to collect significantly more money than they would be able to under normal bankruptcy procedures. That is the bailout.

We've seen this before, of course. The AIG bailout, for instance, amounted to bailout of Goldman Sachs and other banks that had a lot of AIG exposure and would have had a harder time being made whole in bankruptcy court than they did under Washington's management. The Dodd bill instructs that the government shall "ensure that unsecured creditors bear losses in accordance with the priority of claim provisions" in the existing law — but how well has that worked out in the past? What legal authority did the Obama administration have to upend the normal priority of claims in the bailout of General Motors, a corrupt deal that saw secured creditors forced to take substantial losses while unsecured creditors received a better deal than they were legally entitled to — all because those unsecured creditors were the union bosses who put Barack Obama into the White House? That wasn't just a bailout of GM; it was also a bailout of the UAW. That's the kind of bailout regime that the Dodd bill will make permanent: the indirect bailout.

The Fatal Bubble

What defines an economic bubble? There are probably technical answers to that question, perhaps even involving percentages and such, but the basic inference is an apparent growth that's really just full of air, deceiving people into behaving as if the cause of the increase is actually something of substance when, in reality, it could dissipate immediately upon exposure to the atmosphere.

In a recent letter to the Providence Journal, Philip Overton, of Westerly, expresses something that has likely been nagging at a great many of us, in recent months and years:

There is no fiscal integrity in our government right now and this is the next possible great bubble building.

The substance in which we've been deceived to believing is that the government can absorb the vicissitudes of the economy. We're relying more and more on government not only to fill the craters that other bubbles have left when they've popped, not only to fill other bubbles (sometimes in the form of doomed companies), but also to conduct matters of economy and even personal well-being. It can't last.

The only question is what happens when the government bubble bursts. A free-for-all of wealth grabbing and recriminations seems likely, and let's not forget that there are those on the global playground relentless in the eye that they keep on our every step, in the hopes that the lone superpower will falter.

Advancing in the Melting Pot

Ron Haskins seeks to answer the question of whether the United States of America is really the land of bootstrap advancement and personal opportunity (subscription required). In a nutshell, he does find economic advancement from generation to generation, but by the numbers, it appears that the economic quintile of one's parents is more determinative in America than in other Western countries.

But he points out a factor that is too often lost, and that (I'd argue) applies to a wide variety of comparisons. Healthcare comes to mind.

One of the annoying features of many media stories and political speeches about the evidence reviewed here is that the popular accounts make it seem that impersonal social forces, especially the American economy and government policy, entirely determine the opportunities new generations will find as they grow up. Leaving aside the fact that, as we have seen, the American economy has been exceptionally productive, and the fact that the federal government alone spends $750 billion (5.7 percent of GDP) on mobility-enhancing programs, the critics hardly mention the vital role of parental and personal responsibility.

The fact that personal responsibility plays a major role in mobility and economic well-being can be easily demonstrated. The three basic rules of success in America are that young people should finish their educations (at least high school), get jobs, and get married before having children. Computations based on Census data that my Brookings Institution colleague Isabel Sawhill performed for our recent book, Creating an Opportunity Society, show that kids who follow these rules have a 74 percent chance of winding up in the middle class (defined as income of $50,000 or more) and a mere 2 percent chance of winding up in poverty ($17,200 for a family of three in 2008). By contrast, young people who violate all three of these rules have only a 7 percent chance of winding up in the middle class and a 76 percent chance of winding up in poverty.

One could say that the U.S. has built a structure for opportunity and given everybody the rulebook, but it does not force citizens to follow it. Indeed, progressive policies over the past century have created unhealthy incentive to stay put, economically, and the identity politics and political correctness of the past few decades have sealed the fates of too many.

So we're back to the left/right divide. One side looks at a lack of universal economic opportunity, regardless of personal outlook, and insists that the American system be replaced with something centrally planned and designed to guarantee individual results. (Put aside the clear fantasy of that objective.) The other side replies that costless cultural changes and the acceptance of some degree of risk will yield better results for the individual and for our shared culture and economy.