Sunday, February 26, 2012

Want More "Fairness?" Look to Europe's Basket Cases

President Obama calls for “social justice.”  He agrees with the motley “occupiers” that the One Percent gets almost everything.  Reagan and the Bush tax cuts burdened us with a tinderbox of inequality, he lectures us. The rich should pay their fair share. “Enough is enough.”  We must create a “just” society that guarantees the poor a dignified life.
In a word, we must become like Europe, for whom Obama expresses open admiration.
Obama apparently does not know that the European countries that have become “fairer” over the past two decades are now basket cases of debt, social unrest, and an unaffordable welfare state.  Those European countries that have had the discipline to become “less fair,” are, in the words of a sympathetic liberal columnist (The GOP scrambles for a bogeyman) “doing well economically, both in absolute terms and in contrast to us.”
We should be like Germany or Sweden but not like Greece, I guess. But Germany and Sweden are recovering from too much of the social justice that Obama wishes to impose on us, while Greece is falling apart in a sea of equality and justice.
Buried in OECD statistics is an innocuous table entitled “Gini coefficients (after taxes and transfers).” Gini coefficients are the most widely used measure of income inequality.  A zero Gini means everyone has the same income. A unitary Gini means one family has all the income. Ginis therefore fall between zero and one. The higher the number, the greater the inequality.
The table shows the percentage increase (or decrease) in income equality for European countries after redistribution by the state through taxes and benefits. (The more positive the number, the greater the increase in inequality. Negative numbers show a reduction in inequality, as Obama would like.)
Go to

Saturday, February 25, 2012

This Is The Point I Have Been Making About Greece

The Greek people not its technocrats will decide on austerity, and the Greeks do not like it.

               Cartoon from The Economist, Feb. 18-24, 2012
Caption: Merkel to Greek finance minister: "I'm afraid more belt tightening may be required." Finance minister: "Perhaps you'd like to tell him."

Wednesday, February 22, 2012

Krauthammer is Right: We Are Defunding Social Security

In my A Shame Republicans Let Politics Trump Economics, I bemoaned the terrible politics of “compromise” that led to the ill-conceived extension of the payroll tax cut.

Charles Krauthammer nailed this issue in recent commentary, which I heard on the radio (I cannot find it on Google). Here is the gist of what he said:

If this were a Republican administration, the Democrats and media would be screaming about a Republican plot to do away with social security.  We should not allow the Obama administration to call this a tax cut. We should call it by its true name: The defunding of social security.  What’s worse, we are defunding social security for short run political gain on both sides of the aisle. All economists know there will be no economic gain from such short term measures.

We have reached the strange point where Congressional Republicans are being congratulated for cooperating with the Obama administration for passing harmful legislation, both for the purpose of short-run political gain.

Tuesday, February 21, 2012

A Vivid and Amusing Eye Witness Account of the February 4 Moscow Demonstrations: A Moment of Fame on VOA

A colleague of Marianna Yarovskaya and me, Gregory Kataev (film and theater director), sent this description of what it was like to be a part of the 100,000 plus Moscow demonstrations of February 4. This letter shows the confusing and quixotic mix of "anti-government forces" that must organize themselves if Russia is to have a return to democracy.

"On Saturday, February 4th, my friends and I went to Bolotnaia Square.  We walked the full length of the demonstration route along Yakimanka Street – from the Oktiabr’skaia metro station to the Udarnik cinema, and on to Bolotnaia Square.

There were A LOT of people there.  Unfortunately, there were also a lot of Communists and Nationalists. My friends and I lost each other as I was carried off by the crowd. As I’m walking, I’m thinking to myself: Here are some good guys – rosy cheeked, stalwart, marching with precision, holding jaunty cute yellow flags; in short, nice guys. They appear to regard me with compassion. And suddenly these nice guys start yelling at the top of their lungs: “Russia for the Russians!” “Russia for the Russians!” I thought, “Well, I'm in trouble.”

It was not easy to get out of there!  To my right, a bearded guy, about 40 years old and a head taller than I (and I'm not that short myself), looks at me and asks: “Why aren’t you chanting?” I reply: “Sore throat.” And immediately I ask myself, “Why did I chicken out?”  Then I say to him, “As a matter of fact, I’m half Jewish.”  He says, “Aaaaaah... And which of your parents is Jewish – mother or father?  Your father is a Jewish man?” I answer: “The Jewish man – is my mother.” He says, “Well then you are Russian. The important thing is that your father is Russian!"  And he bellows out once more: “Russia for the Russians! Russia for the Russians!” And to me again: “Well, you have  done well, brother, coming out to march!”  That is how I became the brother of a Russian Nationalist.

Then, I seized the moment and defected to another column of demonstrators. But things went from bad to worse. Now I was marching with Anarchists (black-and-red flags), also nice guys. We were followed by a huge crowd of Communists with red banners, stars, hammers and sickles, and other such horseradish. In general, Marianna and Paul, one thing was clear: if any of these nice guys comes to power, he will hang people like me from lampposts.

We caught up with the biggest column, a coalition of Democrats, Liberals, People's Freedom Party (Parnas) and Yabloko already in Bolotnaia Square.  My friends and I again lost each other there. I roamed around among different groups of people.  I heard conversations that were reminiscent of the revolution of February 1917!  The only difference was that people were not shooting their Mausers into the sky.*  But it seemed like they might start firing any minute.  So I walked around and talked to people, then finally stopped to rest and climbed onto a huge snow mound where it seemed to be a bit quieter.

To my surprise, I found myself among some American journalists. They did not seem like themselves. They wore valenki (felt boots) or some kind of specially warmed boots and winter coats. Their faces were blue from the cold. It was -22ÂșC, and even I wore my father's dublenka (sheepskin coat) and ridiculous winter hat for the first time in several years. In short, they looked like engineers from the Russian industrial town of Tula, but certainly not like Americans!

One guy, in his 40s, turned out to be James Brooke, the Voice of America Moscow Bureau Chief. In a nutshell, standing right there in this snowdrift, I said something to him and his microphone, which ended up on Voice of America news in my brief moment of fame as:

“Standing on a pile of snow, Gregory Kataev, a filmmaker, said he was happy to see such a turnout when the temperature was minus 20 degrees.
If I want a better Russia, if I want it to be a democratic country,  I have to do something, not only speaking in the kitchen, as we say in Russia,’ he said.”

The atmosphere was like a crowded, chaotic marketplace, but with snow and arctic cold. Bearded, rosy-cheeked men wearing tulups (rural sheepskin coats), members of the Union of Russian People, stood nearby. They stared at us as though we were reptiles, bastard spies, smack dab in the middle of the Russian nation and wanting nothing more than its demise. I strongly felt home-brewed patriotic hospitality in their kind glances – it became clear that it was better not to speak English for more than ten minutes in their earshot.

They started asking us questions.  I kept my VOA interview brief because I wanted to avoid engaging in a more radical form of interaction with these people than discussion. They carried posters reading "Give the power to the Russian people!" and they outnumbered us significantly.

The funny thing is that the Russian version of the VOA report says that I addressed the crowd from the height of the snow mound!  And all I did (besides my short interview) was help the Americans understand a couple of speeches that were broadcast by the powerful loudspeakers. We all stood on the snow mound very far from the stage and it was impossible to get anywhere near it because of the dense crowds. The next day two friends of mine called me to say: "We heard you on the Voice of America! Have you been addressing the people from the top of a snow mound, like Lenin from the roof of his armored car?  Did you get there in the sealed train from Washington?"**

I hope, Marianna and Paul, that you find this account entertaining and enlightening.

* Mauser - the name (the brand) of the hand-gun popular during the First World War, Revolution and Civil War in Russia. The crowd of people shooting in the sky from their Mausers is a typical political-meeting street scene in pre-revolutionary Russia.

** Lenin, Russian Communist and Bolsheviks' leader, was sent by the German secret service from Germany to Russia (in April, 1917) across the First World War frontline in a sealed, protected train-wagon in order to get safely into Russia and complete the Russian revolution—so that Russia would sign a peace treaty on German conditions. Having arrived in Russia, Lenin held his famous “uprising speech” addressing the people on the train-station square from the roof of the armored car (bronevik).

I Repeat Again: There Is Still No Greek Solution

The press is again full of reports that the troika (IMF, EU, and ECB) have reached an agreement on Greece. Markets will again rise, until they see that little has happened.

The troika has agreed to release a new tranche of rescue funds to stave off a March Greek default. Private lenders have agreed to their haircut (but that had really been decided a long time ago). The rescue funds will probably be doled out slowly to make sure that Greece meets its end of the bargain and cuts wages and public sector employment.

With an election coming up (and the public vehemently against outside intervention and austerity), Greece cannot meet its end of the bargain. Greece can only do so by agreeing to be governed by external bodies, such as the troika, which spells the end (temporarily perhaps) of Greece independence.

This is one of a hundred of steps that remain to be taken before we can say that Greece has been rescued.

Sunday, February 19, 2012

Widow Martha Pays More Than Warren Buffett and His Secretary Combined

Scene: Senate Committee on Finance Hearing Room. Date: Sometime in 2012. Martha, a stylish attractive woman in her 70s, raises a shaking right hand as she is sworn in. The network cameras are notably absent. They have been told by their management to stay away.  CSpan is covering another hearing and Fox News has been delayed.

Senator John Coburn (R Oklahoma) begins the questioning:

Coburn: We are meeting here to discuss the President’s proposal to raise the rate of taxation on capital gains from 15 to 23.8 percent. We understand that you have particular views on this subject.
Martha: Yes sir. I am a widow. I live in a nice retirement community in Houston, Texas. My social security check pays for most of my living expenses, and I do some part time work. But I have to cover the rest by selling off the stock I own.

Coburn: So you are one of the millions of ordinary Americans who own stock?
Martha: Yes, my late husband Sam was pretty good when it came to investments. Before he died ten years ago, he told me to hold on to my stocks as long as I could. He was particularly high on Massachusetts Investors Trust. Barron’s lists it in its “Best Mutual Fund Family,” I am told. All I can say is that Sam trusted this company. He had a big share of his assets in Massachusetts Investor’s Trust.

Coburn: How have these stocks been doing? We all know the market has been down.
Martha: My stocks have not done well since Sam died, especially the last five years. But I need more money to pay my bills, so I finally sold my Massachusetts Investor Trusts. In December, I sold $20,000 worth of shares and my broker told me that my capital gain was $2,600, and that I would have to pay a tax of $390.
Senator Schumer (D of New York) asks Coburn to yield time to him.

Schumer: Well, it seems things worked out for you. You only have to pay a small tax of 15 percent on the $20,000 sale. Hard working folks have to pay more than that on their income taxes.
Martha: Senator, it is hard for me to understand, but my broker told me that my real gain after inflation was only $30. He explained that the annual return on Massachusetts Investor Trust shares over the past ten years was 2.97 percent but inflation was 2.95. He said that everyone knows that what counts is the capital gain after inflation. He then had a shocker for me. He told me that the tax rate on my $2,600 capital gain after inflation is 1,200 percent.

Schumer: Stammers.

to read the rest

Obama at Boeing to Praise the Dreamliner He Almost Killed

I am surprised President Obama showed his face at Boeing Corporation last Friday in Washington state to cheering union crowds to praise Boeing’s new 787 Dreamliner, declaring eloquently: “I am here to sell stuff.” 

As the Times account reported:

“the White House also carefully calibrated the optics of the trip, choosing to visit a unionized Boeing plant in Washington State just a few months after the NLRB dropped a lawsuit against Boeing over complaints it built a nonunion plant in South Carolina to retaliate against the union in Washington State for strikes.”

Indeed, the Obama administration’s NLRB held Boeing’s multi-billion Boeing 787 hostage by ruling it could not build an extra production facility for the  Dreamliner in right-to-work South Carolina (after Boeing had already completed construction of its new plant there). The Obama administration blackmailed Boeing just as it was to begin mass production of its 787 aircraft – a project already four years behind schedule and facing stiff competition from Europe’s Airbus 380.  

The Obama administration was telling the nation’s premier manufacturing exporter where it must do business or else.

Had Boeing not caved to its Washington State unions on a new contract, the Dreamliner would have still be in limbo today.

And Obama, the President who threatened to ruin the project on which Boeing’s fate depends, stood before cheering crowds in Washington state to praise Boeing and its new 787, as "the perfect example of American ingenuity."

What nerve! What chutzpah! I imagine the Republicans will wish to revisit this mugging on behalf of organized labor during the election campaign.

Saturday, February 18, 2012

Roddick's Serve and Buffet's Earnings: Is the Game of Tennis Smarter than the American Electorate?

Andy Roddick has the fastest serve (163 mph) in men’s professional tennis. Warren Buffet’s investment earnings are the equivalent of Roddick’s serve. The game of tennis does not change the weight of the balls or the strings of the racket “to make it fair” because one person serves so fast.

Obama uses an extreme outlier, Warren Buffet, to make his case for consequential and, in my view, negative  changes in our tax system that affect middle-class investors. Most investors earn modest returns on their investments, and much of their gains are eaten up by inflation. To use Buffet as a model for the average middle class investor makes no sense. We should forget about Buffet for the time being.

Tennis players are too smart for that. How about the American people?

Data on Tax Rates of Real Capital Gains (Nominal capital gains adjusted for inflation)

I am publishing a piece on inflation and capital gains taxation this Sunday in my Forbes Econworld blog. It is tentatively titled “Widow Martha Pays More Than Buffet and His Secretary Combined.”  In this piece, I use a Standard and Poor’s  calculator to show nominal and real gains from investments in the S&P 500 over five year intervals from 1971 to 2011 and for the whole period at the current 15 percent capital-gains rate. (I also show the same results with Obama’s proposed 23.8 percent capital gains rate).

I find that, for the entire 40 years, the effective tax rate on real capital gains was 47 percent. In three periods, real gains were negative (for an infinite tax rate). During the three five-year periods of booming markets, the real tax rate was 20 percent. In the period 1986-1990, the real tax rate equaled that of Buffet’s secretary at 30 percent. If we use Obama’s proposed 23 percent capital gains tax rate, the lowest effective tax rate on real gains is 30 percent.
Annual percentage S&P 500  nominal gain (loss)
Annual percentage S&P real gain (loss)
Tax rate on real gains with a 15% tax on nominal gains
Tax rate on real gains with a 23% tax on nominal gains
Infinitely large
infinitely large
Infinitely large
infinitely large
Infinitely large
infinitely large

Wednesday, February 15, 2012

A Shame the Republicans Must Let Politics Trump Economics

The extension of the payroll tax holiday is bad economics. It may be good politics, or avoids a bad political outcome.

Economists know that temporary tax breaks have little or no effect on aggregate demand. Reducing payroll taxes for the rest of the year only increases the unfunded liability of social security and increases uncertainty.  The net effect on growth and employment of extending the payroll tax reduction is likely to be negative. It is bad economics to all but die hard Keynesians.

Republicans are going along with bad economics because they are unable (or unwilling) to make the powerful economic case for ending the tax break. The longer it lasts, the more likely it is to become permanent, with disastrous results.

I guess we have little confidence in the good sense of American voters. If they are worried about the solvency of social security, clearly they could be made to understand that you don’t take away a large portion of its funding, for uncertain and unlikely short term gain.

Republican leaders wilt when they hear the President speaking about the extra $1,000 in the pockets of U.S. households.

Too bad.

Tuesday, February 14, 2012

Why No One Is Buying Volts: Twenty Years to Earn Back the Fuel Saving

The Journal’s “Is Chevy’s Cruze Dulling the Spark of its Volt?” runs the numbers on the Volt and the similarly sized Chevy Cruze.  

The Volts sells for some $20,000 more than the Cruze. According to EPA estimates (which has the Volt running on gas for part of its usage), the Volt consumes $1,508 gallons per year, while the Cruze burns $1.779. If the Volt is used only for short distance travel, its electricity costs $648 per year.

Thus a typical driver who mixes long distance and city driving would need more than sixty years to earn back the fuel saving. A Volt owner who drives only short distances in the city would require twenty years.

Even if our gas prices rose to European levels, it still would not make economic sense to buy the Volt.

And does anyone wonder why GM sold only 603 Volts in January? Another loss for Obama’s industrial policy.

Monday, February 13, 2012

I Repeat: There Is No Greek Solution

The press announced another agreement. The markets rose. The Greek parliament approved more austerity measures demanded by the troika of international agencies to release the next tranche of Greece’s bailout funds. Maybe Greece will indeed get some more international money to stave off default, but this will be a temporary band-aid.

It is too late for Greece.  Greece is no longer governable.  Angry crowds will get angrier and larger. There will be general strikes. With an upcoming election, any parliamentary candidate who backs the austerity program will lose. Greek politicians can promise the Germans, the IMF, and the European Central Bank austerity until they are blue in the face, but they will prove impotent in the face of  public anger and intransigence.

Greece has held on so long by making promises it cannot keep, which its European neighbors pretend to believe. This farce is coming to an end. Either Europe must decide to look the other way and unconditionally bail out Greece or let Greece default. Both outcomes are bad, but the choice must be made and soon.

Sunday, February 12, 2012

Romney Must Convince Conservatives He's Not A David Brooks Republican

Rick Santorum’s sweep of three nominating contests in Colorado, Minnesota and Missouri on February 6 shows that Mitt Romney has not convinced the base that he is conservative. They fear Romney is a Moderate Republican dressed in sheep’s clothing for the primaries. Conservatives and Tea Party activists worry that Romney is a David Brooks Republican. (Brooks is the New York Times’ token Republican columnist).
Just a few lines from Brook’s Times article Flood the Zone illustrate the vast gap between moderate Republicans and conservatives.

In his piece, Brooks criticizes Obama’s one-size-fits-all approach to poverty. Brooks argues in favor of a broad range of private and public solutions that include churches, Boy and Girl Scouts, evangelical and Muslim charitable organizations, to name just a few. Only by “flooding the zone” with all kinds of programs, can we find effective solutions.

to read the rest

Free to Choose Means Less Freedom: Obama on Birth Control

The Times The Freedom to Choose Birth Control convolutes common language and fails to comprehend fundamental economics. It says that “free access (to birth control for any woman), along with the ability to receive family planning and preventive health services, was at the foundation of health care reform.”  I did not know that. As I recall, Obama did his best to dodge that issue during the non-debate over his health care reform.

Most of us interpret “free to choose” in Milton Friedman’s sense. In a market economy, we are free to choose among alternatives. As long as we are prepared to pay the market price, we can buy whatever car, food, movie ticket, laptop, or anything else we want. No one can dictate to us how to choose among alternatives. That is our business, and Friedman considered this the cornerstone of economic freedom.

Obama, apparently, understands “free to choose” differently. In his version, free to choose means getting goods and services without paying. Even though birth control is a regular non-catastrophic expense, probably not higher than feeding a daily coffee habit, women are not free unless they have it free.

In Obama’s mind there are certain goods that must be supplied to us free of charge in order for us to be free. Insofar as no business can afford to part with its goods and services free, the state must dictate an arrangement that provides them to the customer at no out-of-pocket cost.  The state can only do this by mandates that force providers, insurance companies or anyone else involved to do something they would not do on their own.

The freedom to choose birth control (at a zero price) represents a loss of freedom.

Why stop at birth control? We should have the freedom to communicate. We should receive cell phones with unlimited minutes for free. Until we have Obama’s grand public transport system, we should have the freedom to move freely between point A and B. The state should dictate that every person get a free car, as long as it runs on electricity. The same applies to food, electricity, and gas. Why not? Why not admit those lacking in communications, gas and food “freedom” unlimited access to Wal-Mart. After all Wal-Mart exploits is employees and deserves it. Just throw open the doors and shut down the cash registers.

The freedom to have life’s essentials free of charge represents a loss of freedom. I assume Obama understands this and is doing it deliberately.

In my Essentials of Economics classes I used to ask students to consider what would happen if we gave things away free. The correct answer was chaos, followed by state rationing. I think the New York Times editorial board would flunk my exam.

Thursday, February 9, 2012

Where Is the Outrage? The Mugging of the Five Mortgage Lenders

I try to watch Fox News’ The Panel every evening. Charles Krauthammer usually gets things right. That is a comfort.

Today’s big news was Obama’s announcement that the U.S. Attorney General and 49 states’ Attorneys General had strong armed five large mortgage lenders into a $25 billion settlement. In effect, the $25 billion blackmail will be used to rewrite the terms of mortgages of underwater homes and pay penalties to owners who have already lost their homes.

My big disappointment: Krauthammer did not express outrage but, in effect, credited Obama with a significant political victory. He did not see this as an attack on free enterprise or the rule of law.

Obama, in his announcement to the press, preened that he stands on the side of social justice and for the little man and against the villainous banking industry. He is single handedly leveling the playing field.

I guess the Obama administration expects the $25 billion bailout to pump up home prices and lend new life to the housing market. The principal relief and reduced interest payments will only keep underwater homes off the market a little longer. They will not raise home prices. Instead of the home market clearing, it will continue in disequilibrium who knows how much longer.

Most “good deeds” of the Obama administration carry with them unanticipated consequences. The $25 billion blackmail plus the threat of potential criminal prosecution of lenders send a rather chilling message to mortgage lenders. The best way to stay out of trouble is to make no mortgage loans. In the absence of home loans, housing prices will not recover. The housing industry lives from credit. Without it, it is dead.

The public will not realize that this lies in store for a year or two. By then the election is over, one way orthe other.

If we play this game out, a second Obama administration would have to coerce reluctant lenders to make mortgage loans with threats, quotas, and additional repression.

By the time we see this, we are stuck with another four years.

Wednesday, February 8, 2012

The Times Jumps In To Carry Justice Ginsburg’s Water

Justice Ruth Bader Ginsburg got herself into hot water, when she recommended to Egypt not to use the U.S. Constitution as its model. These are not politic words from a Justice of the Supreme Court carrying the weight of upholding the Constitution on her shoulders. She, like President Obama before her, seemed not to like the absence of “positive rights” in our Constitution.

The New York Times wasted no time in rushing to Ginsburg’s rescue with its ‘We the People’ Loses Followers. This page-one article reports the obscure research  of two law professors to be published in June, that shows that constitutions written in the postwar period have become less like the U.S. Constitution with the passage of time. The Times article even dredges up a 1789 letter from Thomas Jefferson saying that constitutions naturally expire at the end of nineteen years.”

I must say, they circled their wagons quickly. We can’t let middle America think we do not like the U.S. Constitution.

Monday, February 6, 2012

American Airlines Shows The Corruption Of Obama's GM Bailout

The American Airlines bankruptcy reveals the scope of President Obama’s political payback to the UAW.  Unlike General Motors and Chrysler, American Airlines is undergoing a “normal” Chapter 11 bankruptcy according to the rule of established law. The GM (and Chrysler) bankruptcies of 2009 were directed by a White House task force that upended regular bankruptcy procedures. The White House objective was not to create a competitive new GM, but to get the best deal possible for the UAW and make GM a de facto “Government Motors.”

It’s not that the airline unions failed to deliver for Obama and the Democrats in 2008. The Airline Pilots Association contributed three quarters of a million dollars – small change compared to the UAW’s more than four million to Obama and the Democratic Party.  Apparently you have to pony up big to get a deal from Obama.

The White House Auto Task Force and its Czar spared UAW the dismay and outrage of renegotiated union pay scales, revised work rules, and loss of defined-benefit pensions that American Airlines union members face. American’s anticipated fifteen percent job loss is about the same as GM’s, but without a dime of taxpayer money. Obama did not save GM jobs, he saved UAW pay scales and pensions. UAW members left their jobs with a $25,000 new car and $20,000 cash. (Chrysler employees left with much more). Laid-off American Airlines pilots, mechanics and flight attendants will likely leave with little or nothing.

to read the rest 

A Times Columnist Strays From the Media Reservation on Planned Parenthood

A colleague familiar with the ways of  the media elite told me: “No one pays much attention to Ross Douthat” (The New York Times Columnist).  I now see why.

Douthat caught my attention in April 2011, when he pointed  out that Obama could have his European welfare state by simply letting the Bush tax cuts expire. (The NYT Lets the Cat Out of the Bag: Reduce the Deficit By Raising Taxes on the Middle-Class Without Doing Anything).

In Sunday’s Times, Douthat committed a cardinal sin in his The Media’s Abortion Blinders. I quote:


“Conservative complaints about media bias are sometimes overdrawn. But on the abortion issue, the press’s prejudices are often absolute, its biases blatant and its blinders impenetrable. In many newsrooms and television studios across the country, Planned Parenthood is regarded as … an apolitical, high-minded and humanitarian institution whose work no rational person — and certainly no self-respecting woman — could possibly question or oppose. But of course millions of Americans — including, yes, millions of American women — do oppose Planned Parenthood. They oppose the 300,000-plus abortions it performs every year (making it the largest abortion provider in the country), and they oppose its tireless opposition to even modest limits on abortion.”


How can the media elite tolerate such heresy from one of their own?

Sunday, February 5, 2012

A Freudian Slip? “Volt: The Car America Had to Build”

I was struck by GM’s new ad: “Volt, the Car America Had to Build.”  These words are poorly chosen but revelatory of where things stand. The ad masters probably did not know what they were saying, but General Motors is now officially “Government Motors.” Yes, after Obama's bailout, GM indeed MUST produce the Volt. Its job is not to build the best and most competitive cars, nor to create value for its shareholders. Instead, GM’s task is to serve the interests of America (read: the Obama administration). 

And pundits wonder why such a large percentage of Americans stands in fear of Obama being reelected.

Saturday, February 4, 2012

Putin Tries to Counter Mass Demonstrations With His Own

The organizers of the planned “For Honest Elections” demonstration scheduled for today (February 4) held their breath. They knew the Moscow temperature would be minus 10 Celsius at noon. Could they get a hundred thousand protestors for the demonstration at Bolotnaya Square? If weather had kept Putin protesters away, the government would cheer that the opposition’s back had been broken.

It is now six PM in Moscow on February 4, and the answer is in. According to organizer estimates, no less than one hundred thousand demonstrators showed up carrying white balloons, wearing white ribbons and carrying signs: “Russia without Putin.”  Aerial photos confirm the massive numbers of demonstrators at Bolotnaya Square.

to read the rest

Friday, February 3, 2012

Those CBO Growth and Budget Projections: Just Forget About Them

The CBO 2012 and 2013 projections grabbed a lot of attention when they were released earlier in the week. The headlines were that growth will slow to two percent in 2012 and one percent in 2013, unemployment will rise to over nine percent by 2013, but the deficit will shrink dramatically. All of these calculations are based, as I pointed out in a recent blog, on discredited Keynesian models anyway.

None of these things will happen because the policy assumptions on which these projections are based will never materialize. The Bush tax cuts will not be dropped in their entirety (a slight possibility if Obama is reelected). Discretionary spending will not decline in absolute value over a five year period, and the various cuts in Medicare will not take place.

Actually the CBO points all this out, but commentators look only at the headlines and ignore the crucial details that tell us: “Never mind.”

Thursday, February 2, 2012

Are CBO Estimates Really The Gold Standard Of Accuracy?

The pessimistic CBO estimates of growth, deficits, and unemployment for 2012 and 2013 are big news. The Democrats use them to argue for more stimulus. The Republicans cite them as a cautionary tale against government spending. Both sides express reverence for the “non-partisan” CBO, whose calculations are the “gold standard” of accuracy and integrity.

This elevated view of the CBO is wrong, not because the CBO is partisan or not immune to fudging. The CBO studies that I have examined use Keynesian models as the basis for all their calculations. If they are ordered to estimate the effect of the stimulus on GDP and jobs, they attach Keynesian multipliers to different spending categories. The model they use guarantees the finding that the stimulus saved jobs and growth. Similarly, when the CBO looks ahead to 2012 and 2013 and applies similar Keynesian models to projected tax increases and slower government spending, they will automatically conclude that growth will be slow and unemployment high.

The new CBO estimates cover 172 pages of charts, explanations, and footnotes. The draft spends most of its time on the details of government spending and revenues, which they must estimate using the flawed assumptions Congress gives them. The CBO publication does not take the reader into the “kitchen” where they prepare their estimates of GDP, but the source of their pessimism is clear from a short quotation (page 36):

Federal fiscal support for economic growth will weaken this year before turning to significant restraint in 2012 and 2013. Without the 2010 tax act, federal fiscal policy would have been restrictive this year because of the previously scheduled tax increases and the waning of the effects of ARRA (the stimulus).
 To read the rest

Wednesday, February 1, 2012

Why Am I Confused? We Got Into Trouble Lending on Underwater Homes. Now We Want To Do More of It

Am I the only one confused? We got into trouble in the first place by making risky mortgage loans to owners whose home value went underwater. I now see that Obama proposes to ramp up loans (using federal backing) to homeowners whose homes are underwater!

Is this another example of doubling down on a bad idea?

Someone help me out.

My Advice: Ignore All Headlines on Solution of Euro Crisis

Yesterday’s headlines read something like: “Europe Decides on Fiscal Union,” or Merkel Wins on Fiscal Discipline.” Ignore such headlines as most others. Europe is no closer to a solution of its problems than it was a week ago or three months ago.

If you read the articles on the fiscal union, you see the same rehashed ideas. Debtor countries are to be fined if their deficit exceeds a certain percentage of GDP. Now it is .5 of the structural deficit. The European Court of Justice is being brought into the picture as the supposed police man of the agreement.

One can drive a truck through this new “agreement.” No one really knows how to calculate the structural deficit (the deficit at full employment). The rule can be broken for a range of emergency situations, and how do you fine a country that is broke? The Greek debt issue has not been resolved. Portugal needs more money.

So far I have counted about 25 announcements that the Euro crisis has been resolved or is about to be. I guess these headlines are wishful thinking.