Tea Party Understands Economics Better Than Obama Or Bill Maher

Liberal commentators and comedians appear to accept Keynesian economics as such an evident truth that non-believers must be stupid. Keynesian economics has become a liberal dogma, not subject to challenge by reasonable people.

Consider comedian Bill Maher’s quip to a former Obama advisor on Aug. 6, 2011:
“Keynesian economists and climate scientists both know real things, but the stupid people who don’t know things get an equal vote. Isn’t that frustrating?” (Laughter from the audience.)

Video: A Lesson From Keynes
 

Liberals target the Tea Party as their favorite nominee for the “stupidity” prize. Tea Party members are not only dunces. They are irresponsible hostage takers who do not care if they bring the country down with them.
Here is a shocker for Obama, Maher and Tea-Party haters: Since the Nobel Prize in economics was established, seven Nobel Prizes have been awarded to economists who cast serious doubt on Keynesian economics. Not one Nobel Prize has been awarded to an economist who advanced the Keynesian agenda. New York Times liberal columnist, Paul Krugman, won his Nobel Prize for trade theory, not for macroeconomics.

Maher’s “stupid people” who reject Keynesian economics, it seems, are in rather distinguished intellectual company.

Let me go down the list of Nobel-laureate Keynesian skeptics:

1) Permanent or life-cycle income (Milton Friedman, Franco Modigliani)
This theory says that consumers are forward looking. They base their consumption decisions on income they expect to earn over a longer period of time, not what they earn now. They change their spending only in response to changes in long-term income, not in current income.

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If the UN Wants to be Useful: Build Villas for Dictators

Egypt is prosecuting Mubarak in a hospital bed inside a cage. He faces the death penalty. An international court has indicted Kaddafi.  If his Libyan enemies get their hands on him first, he will be killed. Pinochet was hounded to the end of his life despite a grant of immunity after he turned over power following a democratic election.

What signals do these three cases send out? They tell dictators to fight on, to the bitter end if necessary.  In the meantime, NATO warplanes must be deployed, national treasure lost, and thousands of innocent civilians killed. In many cases, the dictator will prevail and continue in office. Nothing has been gained. The costs have been high.

If the UN wanted to make itself useful, it should have a protection program for dictators who negotiate to leave office. The compound should be heavily guarded, have all the latest luxuries, and the staff must be attentive and deferential. A deserted island might do the trick or a scenic down-on-its-luck country may want the business.

Those countries that want to extract revenge from fallen dictators would find this a tough proposition to accept. They are already rid of their dictator. Why should they help other countries get rid of theirs? But from a cost-benefit perspective, the UN-sponsored retirement community makes a lot of sense. This is one case where we need an “international community” to persuade reluctant members to do what is best.

I can imagine such a dictator-retirement community. Robert Mugabe takes a leisurely stroll, chatting with Mohammar Kaddafi and Bahsar Assad as Raul and Fidel Castro nap on  chaise lounges at the pool. Their mistresses would be welcome as well. What a sight!

The New GM: It Should Do Well With No Debt

The new GM reported a profit of $2.5 billion for the second quarter of 2011. This compared to a loss of $15 billion in the same quarter of 2010.

Indeed, the new GM appears to be doing a lot of things right. It has reduced its labor force from 263,000 to 208,000. It operates fewer plants. It made slightly more cars, and it has reduced its buyer incentives.

The Obama administration will use this success story as his major economic achievement. He saved GM with the government’s $50 billion bailout. He did not save the shareholders of the “Old GM.” They lost everything.

There is one fact missing in this optimistic story. The $50 billion bailout wiped out $40 billion of GM debt. It is a lot easier to make a profit if you have no debt payments.

In the second quarter of 2011, GM had no interest expenses. Ford, which borrowed money to stay in business, has around a half billion in interest expenses each quarter. The government bailout, in effect, gave GM a huge competitive advantage over its rivals. Without the bailout, GM would be paying more than $2 billion a year in interest costs.  Its second quarter profit would have been $1.7 billion instead of $2.5 billion.

GM now faces an increasingly bleak third and fourth quarter. If its profit drops to, say, $800 million, virtually all of that is due to the bailout of its debt.

Is GM the success story we are told it is?

A Tale Of Three Thefts: China, Russia, And The U.S.

The denial of the rule of law for the few may affect the economic actions of many.

Russia 2006 
In December of 2006, Gazprom, the Russian energy monopoly, "accepted" control of Sakhalin-2 from Royal Dutch Shell (RDSA - news - people ). Sakhalin-2 is a drilling venture off Sakhalin Island in Russia's North Pacific. Shell negotiated the offshore drilling rights with the Russian government to be Sakhalin-2's owner and operator along with its two Japanese partners. In return, Shell agreed to invest $8 billion. Shell's deal was unusual because it included no Russian partner, but it was approved at the highest levels in 1994. As the end of 2006 approached, Sakhalin-2 was ready to go into production. Shell's investment had grown to $20 billion

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Rhode Island Is Smarter Than Everyone Else

A new Rhode Island state law places bondholders before other creditors in the case of bankruptcies of municipalities.

The town of Central Falls declared bankruptcy recently, but its bondholders are scheduled to be paid in full. The pensions of retired city workers will  suffer a cut of one third.

Why did Rhode Island take this unusual and politically-costly approach?  A Rhode Island official explained it as follows: “We do not want bondholders to think this state was not a good place to put their money.” He also noted that without this law, Rhode Island municipalities will have to pay higher interest rates for its borrowing.

How is it that such economic rationality trumped politics in Rhode Island? Why could we not have had such rationality during the federal debt limit debate?

Municipalities in states borrow in highly competitive markets. They must compete against 49 other states. If the state’s investment climate is inferior to others, they cannot attract lenders. If you wanted to buy municipal bonds, would you buy from Rhode Island or California?

The federal government faces less competition, and the competition it faces is weak (such as European and Japanese sovereign debt).  Our federal government believes it can sell its debt not matter how badly it misbehaves.

The recent Standard and Poor downgrade may change this way of thinking.

The NYT Says What Obama Cannot Say: Raise Everyone’s Taxes

The New York Times Sunday editorial reveals point blank the liberal agenda. According its the editorial writers, we cannot cut spending in any significant way without curtailing core liberal programs. Hence, “there is no economically sensible or politically honest way to address the deficit without also increasing revenues and reforming the tax code.”

Even more remarkable is their candor with respect to taxes. Contrary to Obama’s promise not to raise taxes on the middle class, the NYT calls for raising taxes on just about everyone. 

I supply their blueprint for taxation during the second Obama administration without comments:

1). Let the Bush tax cuts expire at the end of 2012 for those making $250,000 and above.  The other tax cuts could expire at the end of 2013. The middle class should keep their tax cuts for a year to prop up consumer demand. The expiration of all the tax cuts would “save” $3.8 trillion over the next decade.

2) Tax reform should not touch breaks for home ownership and retirement saving, but they should be targeted only to help low and middle-income tax payers. Capital gains should be taxed at 35 percent. Tax breaks that subsidize profitable industries like oil must be ended. If the ending of tax breaks permits, tax rates could be lowered generally.

3) We should use a value-added tax or carbon taxes to raise “needed revenue for deficit reduction, and for what government provides” so that all additional tax revenue need not be squeezed from income taxes.

The NYT ends with its reading of public sentiment: “The public is open to new taxes, and the economic facts are clear. Until tax increases are considered in equal measure to spending cuts, there will be no budget fix.”

I imagine this editorial is not being greeted with enthusiasm in the White House. It lays bare the fact that Obama’s core supporters do not want to cut spending. Instead, they propose massive tax increases on middle- and low-income families.

If Obama were to publicly embrace these proposals in his upcoming campaign, his chances of reelection would shrink virtually to zero. Republican candidates should keep this editorial ready for use.