Of “loose money and credit generated by the Fed”

Jeffrey A. Tucker, editor of Mises.org (http://mises.org/) has written an article titled ”Business Cycles, Not Our Fault“  In this article, Tucker argues that the real cause of the current calamity in the U.S financial system is “loose money and credit generated by the Fed”.  It is an interestingly relevant and thought provoking article.  Some relevant exerpts are presented below.  The full article can be found at the following web address: http://mises.org/story/3226 

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“Business Cycles, Not Our Fault”

By Jeffrey A. Tucker, November 21, 2008

“We are told that the economy has tanked because foreigners invested too much in the US, that foreigners saved too much money, that we all lived beyond our means, that greedy capitalists fed our materialist instincts until we popped, or any combination of the above. Or maybe business cycles are just like weather, cold one season and hot the next. Regardless, it is the government that must come to the rescue with the usual combination of cockamamie schemes.”

“Discovering the Austrian business cycle theory, then, is a revelation, because through it, you learn how the whole business traces to loose money and credit generated by the Fed. The money is pumped into the capital-goods fashion of the day, in this case housing. The whole sector becomes overbuilt and unsustainable and it turns, tanking many other affected sectors. The only answer to the problem is not more of the poison that caused the problem but a real liquidation.”

 

Source: Welker’s Wikinomics website (www.welkerswikinomics.com)

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“Lord Lionel Robbins wrote in 1934. His book called The Great Depression, ….. (in it he) presents the Austrian theory in a very precise way, and documents how the Fed and the Bank of England inflated the money supply and loosened credit in the latter half of the 1920s, leading to the bust. His is a cautious treatise in some way.”

“After all, he was blaming the central bank — not exactly a position that was politically wise — and we aren’t just talking about the equivalent of a blogger today. He was Lionel Robbins, the most influential economist in Britain until Lord Keynes stole the show with his whiz-bang policy ideas. And why? Robbins counseled letting the bad investments wash out of the system. Keynes thought you could use the state to rev the bad back to life.”

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“The Theory of Money and Credit” by Ludwig von Mises (First edition, 1912)

“As another example, and really the definitive one, Ludwig von Mises himself was writing all throughout the late twenties and early thirties about the business cycle. He nails it all in essay after essay: the credit expansion, the malinvestment, the folly of counter-cyclical policy, the dangers of protectionism and reflation, and so much more. These essays could all be written today, and what is also impressive is Mises’s focus on theory. He never makes empirical claims that aren’t backed up by an attempt to explain the theoretical apparatus behind the analysis.”

 Economist Ludwig von Mises (1881-1973)

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“All of this leads up to Rothbard’s America’s Great Depression, the book that is often cited as the one to show that the episode was caused not by the market but by the central bank. It is getting all new attention today. But if you follow his citations, they lead right back to Garrett, Robbins, and Mises — three of the observers of the time who saw precisely what was happening. They had to be ignored by the New Dealers, for they utterly demolish the case for stabilization policy.”

 

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For other information on economics that is running counter to the present stream of thought in regards to appropriate and needed government policy actions in response to current economic crises around the world, I encourage you to visit website for “The Ludwig von Mises Institute” (http://mises.org/).

Have a great Thanksgiving Holiday!  Here is an appropriate economic cartoon for your holiday meditations.

 

 

 

 

 

 

 

 

Source: Economist Stefan Karlsson’s Blog (here)

Mount Kilimanjaro, Tanzania, African Continent (19,340 feet in elevation)

Economist Greg Mankiw re: Proposed Fiscal Stimulus: $280,000 per job

Congratulations and thanks to Harvard Economist Greg Mankiw for his recognition of the cost per job for the proposed fiscal stimulus package of President Elect Barack Obama.  Following is the web address for the article….

http://gregmankiw.blogspot.com/2008/11/280000-per-job.html

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Monday, November 24, 2008

$280,000 per job

The Washington Post reports:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years….Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

 

Let me amplify the last point with a rough back-of-the-envelope calculation. The average weekly earnings of production and nonsupervisory workers is about $600, or about $60,000 over a two-year period. Granted, labor income is only about two-thirds of national income, and we have to add a few supervisors into the mix. So let’s say each job created means $100,000 of extra national income. If we are generating $100,000 of income with $280,000 of government spending, the multiplier is only 100/280, or 0.36. By contrast, traditional Keynesian models suggest a multiplier closer to 2.0.

Dividing one number by the other, that works out to $280,000 per job.

What is going on here? Logically, it must be one of three possibilities:

1. The fiscal stimulus is going to be much smaller than is being reported.
2. The new administration is setting a low bar for itself when it comes to job creation.
3. The Obama team believes in very small fiscal policy multipliers.

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Greg Mankiw’s Blog address is http://gregmankiw.blogspot.com/

 

 

Thanksgiving Proclamation by Abraham Lincoln (1863)

Lincoln’s Thanksgiving Proclamation

Washington, DC—October 3, 1863

The year that is drawing toward its close has been filled with the blessings of fruitful fields and healthful skies. To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added which are of so extraordinary a nature that they can not fail to penetrate and soften even the heart which is habitually insensible to the ever-watchful providence of Almighty God.

In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign states to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere, except in the theater of military conflict, while that theater has been greatly contracted by the advancing armies and navies of the Union.

Needful diversions of wealth and of strength from the fields of peaceful industry to the national defense have not arrested the plow, the shuttle, or the ship; the ax has enlarged the borders of our settlements, and the mines, as well as the iron and coal as of our precious metals, have yielded even more abundantly than heretofore. Population has steadily increased notwithstanding the waste that has been made in the camp, the siege, and the battlefield, and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.  No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy.

It has seemed to me fit and proper that they should be solemnly, reverently, and gratefully acknowledged, as with one heart and one voice, by the whole American people. I do therefore invite my fellow-citizens in every part of the United States, and also those who are in foreign lands, to set apart and observe the last Thursday of November next as a day of thanksgiving and praise to our beneficent Father who dwelleth in the heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners, or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the imposition of the Almighty hand to heal the wounds of the nation and to restore it, as soon as may be consistent with the divine purpose, to the full enjoyment of peace, harmony, tranquillity, and union.

In testimony whereof I have hereunto set my hand and caused the seal of the United States to be affixed.

Done at the city of Washington, this 3d day of October, A.D. 1863, and of the Independence of the United States the eighty-eighth.

Original Thanksgiving Proclamation by President George Washington (1789)

General Thanksgiving

By the PRESIDENT of the United States Of America
A PROCLAMATION

 The original Thanksgiving Proclamation (here)

WHEREAS it is the duty of all nations to acknowledge the providence of Almighty God, to obey His will, to be grateful for His benefits, and humbly to implore His protection and favour;

and Whereas both Houses of Congress have, by their joint committee, requested me “to recommend to the people of the United States a DAY OF PUBLIC THANSGIVING and PRAYER, to be observed by acknowledging with grateful hearts the many and signal favors of Almighty God, especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness:”

NOW THEREFORE, I do recommend and assign THURSDAY, the TWENTY-SIXTH DAY of NOVEMBER next, to be devoted by the people of these States to the service of that great and glorious Being who is the beneficent author of all the good that was, that is, or that will be; that we may then all unite in rendering unto Him our sincere and humble thanks for His kind care and protection of the people of this country previous to their becoming a nation;

for the signal and manifold mercies and the favorable interpositions of His providence in the course and conclusion of the late war; for the great degree of tranquility, union, and plenty which we have since enjoyed;

– for the peaceable and rational manner in which we have been enable to establish Constitutions of government for our safety and happiness, and particularly the national one now lately instituted;

– for the civil and religious liberty with which we are blessed, and the means we have of acquiring and diffusing useful knowledge;

– and, in general, for all the great and various favours which He has been pleafed to confer upon us.

And also, that we may then unite in moft humbly offering our prayers and fupplications to the great Lord and Ruler of Nations and beseech Him to pardon our national and other transgressions;

– to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually; to render our National Government a blessing to all the people by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed; to protect and guide all sovereigns and nations (especially such as have shewn kindness unto us); and to bless them with good governments, peace, and concord;

to promote the knowledge and practice of true religion and virtue, and the increase of science among them and us; and, generally to grant unto all mankind such a degree of temporal prosperity as he alone knows to be best.

GIVEN under my hand, at the city of New-York, the third day of October, in the year of our Lord, one thousand seven hundred and eighty-nine.

(signed) G. Washington

Source: The Massachusetts Centinel, Wednesday, October 14, 1789

Past Government Fiscal Stimulus Efforts Have Not Helped the U.S. Economy

Following is an article on the failure of past efforts in the United States to stimulate the its economy using Keynesian-style government expenditures (i.e., fiscal stimulus).  This article was written by Daniel J. Mitchell, Senior Fellow (here) at The Cato Institute (http://www.cato.org/). 

This article is particularly timely given the announced intentions of new administration of President Elect Barack Obama to pursue a government expenditure / fiscal stimulus package early in 2009 as part of a solution to problems in the U.S. economy (here).  According to Mitchell and many other notable economists, such attempts to revive economies in the past via government expenditures have been ineffective at best, and may have actually prolonged recessions and depressions in the past.

               

Following is the article as printed in “Pajamas Media“

http://pajamasmedia.com/blog/myth-government-spending-stimulates-the-economy/

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Myth: Government Spending ‘Stimulates’ the Economy

 

It’s just an excuse for politicians to dole out other people’s money. 

November 21, 2008 – by Daniel J. Mitchell

   

 

 

Whenever the economy stumbles, politicians and interest groups commonly argue that government spending should be increased. Based on a theory known as Keynesianism, this increase is supposed to boost economic performance. Yet the notion that bigger government leads to more growth is both theoretically unsound and empirically false. This strange theory was first put forth back during the 1930s, when America was suffering from a deep downturn. An economist named John Maynard Keynes argued that the economy could be boosted if the government borrowed money and spent it. According to this Keynesian approach, this new spending would put money in people’s pockets, and the recipients of the funds would then spend the money. This would, according to the theory, “prime the pump” as the money began circulating through the economy. The Keynesians also said that some tax cuts — particularly lump-sum rebates — could have the same impact since the purpose is to have the government borrow and somehow put the money in the hands of people who will spend it. 

So is this the right recipe to boost a flagging economy? Keynesian theory sounds good, and it would be nice if it made sense, but it has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can’t inject money into the economy without first taking money out of the economy. Put more bluntly, Keynesianism only looks at one-half of the equation. It conveniently ignores the fact that any money that the government puts in the economy’s right pocket is money that is first removed from the economy’s left pocket. As such, there is no increase in what Keynesians refer to as aggregate demand. The bottom line is that Keynesianism doesn’t boost national income, it merely redistributes it.

The people who lend the money to government generally are not the same people who get money in their pockets because of the new spending or tax rebates, but that’s not important. The Keynesian theory is based on the notion that there will be an increase in overall spending power, yet that clearly is not the case. Some advocates of this theory get a bit more creative and say that Keynesianism works because it increases consumer spending rather than the money sitting idle. But money that is unspent by consumers does not sit idle. It winds up in the banking system someplace and is used to finance investment spending. So-called stimulus programs, at best, shift how national income is used so that more gets consumed rather than invested, but at noted earlier, there is no increase in overall economic output.

It is worth noting that government could finance new spending through inflation. Thankfully that option doesn’t seem to be on the table since almost all politicians now realize that it would be foolish to mimic the disastrous policies of basket-case economies such as Argentina and Zimbabwe.

The real-world evidence also confirms that Keynesianism is a failure. Indeed, it was a failure even before Keynes published The General Theory in the mid-1930s. In his four years, Herbert Hoover was a poster-boy for big government. He increased taxes dramatically, including a boost in the top tax rate from 25 percent to 63 percent. He imposed harsh protectionist policies. He significantly increased intervention in private markets. Most important, at least from a Keynesian perspective, he boosted government spending by 47 percent in just 4 years. And he certainly had no problem financing that spending with debt. He entered office in 1929 when there was a surplus and he left office in 1933 with a deficit equaling 4.5 percent of GDP. Needless to say, Hoover’s big-government Keynesian experiment was not very successful since growth went down and unemployment went up.

  President Franklin Delano Roosevelt

Unfortunately, other than being a bit more reasonable on trade, Roosevelt followed the same approach. The top tax rate was boosted to 79 percent and government intervention became more pervasive. Government spending, of course, skyrocketed – rising by 106 percent between 1933 and 1940. This big-government approach didn’t work for Roosevelt any better than it did for Hoover. Unemployment remained very high throughout the 1930s and overall output did not get back to the 1929 level until World War II.

Other Keynesian episodes generated similarly dismal results, though fortunately never as bad as the Great Depression. Gerald Ford did a Keynesian stimulus focused on tax rebates in the mid-1970s. The economy did not improve. But why would it? After all, borrowing money from one group and redistributing it to another group does nothing to increase economic output. Tax cuts only boost the economy if they reduce the tax penalty on work, saving, and investment — i.e., lower tax rates, not gimmicks.

More recently, George W. Bush gave out so-called rebate checks in 2001 and 2008, yet there was no positive effect in either case. And Bush certainly was a big spender, yet that didn’t work either. Not that this should be a big surprise. Surveys of the academic literature reveal that even left-wing international bureaucracies are producing research showing that bigger government hurts economic performance by misallocating national resources.

Japan’s experience also shows the foolishness of Keynesianism. Throughout the 1990s, Japanese politicians tried to use so-called stimulus packages to jump-start a stagnant economy. But the only thing that went up was Japan’s national debt, which more than doubled during the decade and now is far above even Italy when measured as a share of GDP. The economy, not surprisingly, remained stagnant.

   

If Keynesian spending doesn’t make sense from a theoretical perspective, and also fails every time it is tried in the real world, why do politicians keep trying the same approach? Your guess is as good as mine, but the answer probably has something to do with the fact that politicians love to spend other people’s money, and Keynesianism is a convenient rationale.

Dan Mitchell is a senior fellow at the Cato Institute, and co-author of Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It.

Gary Becker (Nay) and Richard Posner (Yea) Debate U.S. Auto Industry Bailout

Gary Becker – a highly respected economist, and Richard Posner, an esteemed lawyer and former judge, debate the benefits and costs of the U.S. government bailing out the U.S. auto industry on “The Becker-Posner Blog” (http://www.becker-posner-blog.com/index.html).  

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A. Gary Becker - Opposing a U.S. Auto Industry Bailout

Gary Becker, 1992 Nobel Prize Winner in Economics (Dr. Becker’s website), presents his reasons for being against a U.S. Auto Industry bailout (here) in a blog entry titled “Bail Out the Big Three Auto Producers? Not a Good Idea-Becker“.  Following are a few key exerpts…

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“If GM is not bailed out, the company claims it will be forced into bankruptcy within a few months, and Ford’s situation is only slightly better. GM is blitzing Congress, President Bush, and President -elect Obama with pleas for a bailout, followed by a warning that bankruptcy will also hurt auto suppliers throughout the nation that depend on GM’s business. GM is also claiming that bankruptcy will put major financial pressure on the Pension Benefit Guaranty Corp, the federal agency that insures benefits to retirees in the auto industry as well as to million of other workers.”

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“Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees. In those days, the UAW was one of the most powerful unions in the US, and it bargained aggressively with the auto manufacturers, carrying out strikes when its demands were not met. When the American auto industry began to face tough competition from Japanese and German carmakers, they were saddled with excessive pay to their workers, and vastly excessive pensions and health benefits to their current and retired workers.”

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“Is GM “too big” to fail? I do not believe the company is too big to go into a reorganization-which is what bankruptcy would involve. Such reorganization would abrogate its untenable labor contracts, and give it a chance to survive in long run. A bailout, by contrast, would simply postpone the needed reforms in these labor contracts, the business model of GM, and its management.”

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B. Richard Posner - Supporting a Bailout of the Big 3 U.S. Automakers

Richard Posner (Judge Posner’s website) presents his reasons for being in support of a U.S. Auto Industry bailout (here) in a blog entry titled “Bail Out the Detroit Auto Manufacturers? Posner’s Comment“.  Following are some of Richard Posner’s thoughts on the subject…

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“Becker has laid out the case for refusing to bail out GM, Ford, and Chrysler. It is a powerful case, and if the drop in auto sales that is driving these companies toward insolvency had occurred two years ago, there would be in my view no case, other than a political one, for a bailout. But in the current financial crisis, I believe a bailout is warranted, provided that the shareholders and managers of the companies are not allowed to profit from it.”

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“The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into. The first problem is that the companies might have to liquidate, because they might be unable to attract the substantial post-bankruptcy loans that they would need to enable them to remain in business. The credit crunch–less politely the near insolvency of much of the banking industry–has made that industry unable or unwilling to make risky loans, and loans to the auto companies after they declared bankruptcy would be risky.”

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“Second, not only the size of the automakers, but peculiarities of the industry, would cause bankruptcy to greatly exacerbate the nation’s already dire economic condition. In the very short term, the automakers would probably stop paying their suppliers, which would precipitate a number of the latter–already in perilous straits because of the plunge in the number of motor vehicles being produced–into bankruptcy. Many of the suppliers would probably liquidate, generating many layoffs. At the other end of the supply-distribution chain, consumers would be reluctant to buy cars or other motor vehicles manufactured by a bankrupt company because they would worry that the manufacturer’s warranties would be unenforceable. So more dealerships would close, producing more bankruptcies, liquidations, and layoffs. With the demand for the vehicles made by the Detroit automakers further depressed and the supply-distribution chain in disarray, the liquidation of those companies would begin to loom as a real and imminent possibility. Liquidation of the automakers would produce an enormous number of layoffs up and down the chain of supply and distribution. Such prospects reinforce the unlikelihood that a reorganized industry could survive on debtor in possession loans.”

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“The U.S.-owned auto industry may be doomed; it may simply be unable to compete with foreign manufacturers (including foreign manufacturers that have factories in the U.S.); or a reorganization in bankruptcy may be the industry’s eventual salvation. But the automakers should be kept out of the bankruptcy court until the depression bottoms out and the economy begins to grow again. …  Any bailout, however, should come with strict conditions, to minimize the inevitable moral hazard effects of government bailouts of sick companies. The government should insist on being compensated by receipt of preferred stock in the companies, on the companies’ ceasing to pay dividends, and on caps on executive compensation, including severance pay.”

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Some Comments

As economists say, this reasoned discussion of the pros and cons of this issue is “good stuff”.  Generally, I would side with Becker in thinking that the inexorable and ongoing economic pressures upon a noncompetitive economic enterprise such as the U.S. Auto Industry essentially doom it to perpetual unprofitability and eventual economic inviability. 

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From an individual point of view, I have never in my life bought anything other than a General Motors or Ford automobile.  However, now that “the veil is completely pulled back” in regards to the noncompetitive position and future inviability of these two companies who are so heavily dominated by noncompetitive union labor contracts and costs, I as a consumer wish that now I had the local option of at least considering the purchase of a Toyota, Honda, Kia or Nissan. These are the companies that are competitively positioned to survive in the current economic downturn, and to prosper beyond that. And they are not mortgaging the future of my children in this country by seeking to deepen the U.S. government’s debt at the present time.  Good will capital is a precious thing to preserve among your customer base. It could be that the Big 3 U.S. automakers are squandering their public goodwill with their intranscience over dealing with their noncompetitive labor cost issues. 

 

 Mount Hood, Oregon (www.summitpost.org)

 Another picture of Mount Hood (www.weiss-miller.com)

U.S. Auto Industry Noncompetitiveness – Higher Labor Costs

From an Economics Blog titled “Carpe Diem” (http://mjperry.blogspot.com/) comes the following information on wages earned by the Big 3 U.S. auto makers (i.e. Chrysler, General Motors and Ford) versus the “Japanese Transplants” (i.e. Toyota, Honda and Nissan).  Kudos to Dr. Mark J. Perry, a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

See the following post in Carpe Diem for the full story (here). Note the $29 per hour pay gap between the U.S. based automakers and those originating in Japan with plants in the U.S..  These types of cost differentials are one of the primary reasons for the non-competitiveness of the U.S. automakers in Detroit. 

 

Daniel Ikenson of the CATO Institute also has a strongly written article on this issue at the Cato@Liberty blog.  See “A Cancer on the Big 3″ (here).  Here is a selected quote from his aricle…

“Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands.  And, of course, they make cars that Americans want to buy.”

 

Swiss Alps (Eiger Glacier) (travel.webshots.com)

Government Assistance for Ford, Chevy and Chrysler?

Among the host of critical financial issues facing the U.S. government at this time is whether to provide additional financial assistance to the U.S. auto industry to help them through the current recession.  Along with concerns about additional debt obligations by the U.S. government and the jobs and retirement accounts of longtime Ford, General Motors and Chrysler union employees, there are serious economic concerns about not allowing competitive economic forces to work themselves out in the U.S. economy.

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Following is a thoughtful article written on the subject from Daniel J. Mitchell of The CATO Institute (http://www.cato.org/).  It was original published on CNN.com (www.CNN.com). The article supports a free market approach toward this issue, allowing for a financial reorganization of the “Big 3″ with the likelihood of a more efficient, profitable and competitive U.S. auto industry developing in the future.

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“Say No to Auto Bail Out”

Daniel J. Mitchell, CATO Institute (here)

General Motors, Ford, Chrysler and the United Auto Workers union are pouring millions of dollars into a lobbying campaign for a taxpayer bailout. The money devoted to influence peddling in Washington would be better spent on improving quality and finding ways to reduce a bloated cost structure, but both management and UAW have decided that fleecing taxpayers is a better option.

 

A taxpayer bailout would be a terrible mistake. It would subsidize the shoddy management practices of the corporate bureaucrats at General Motors, Ford and Chrysler, and it would reward the intransigent union bosses who have made the synonymous with inflexible and anti-competitive work rules.

Perhaps most important, though, is that a bailout would be bad for the long-term health of the American auto industry. It would discriminate against the 113,000 Americans who have highly-coveted jobs building cars for Nissan, BMW and other auto companies that happen to be headquartered in other nations.

These companies demonstrate that it is possible to build cars in America and make money. Putting them at a competitive disadvantage with handouts for the U.S.-headquartered companies would be highly unjust.

 Milton Friedman, Economist. Well known for espousing the principles of competitive free markets

A bailout also would be bad for General Motors, Ford and Chrysler. The so-called Big Three desperately need to fundamentally restructure their practices. More specifically, the car companies need to endure some short-term pain in order to restore long-term viability. But that won’t happen if politicians raid the treasury.

Getting access to taxpayer money would be akin to giving an alcoholic the key to a liquor cabinet. It also would be bad for American taxpayers and the American economy. For instance:

A bailout will hurt the overall economy by misallocating resources. When politicians grant special favors to a certain industry or a particular union, such decisions necessarily mean that market forces are being replaced by special-interest deal-making. This type of interference with free markets is why nations such as France, Germany and Japan tend to grow more slowly and enjoy less prosperity. But if America goes down this same path of government intervention, it is inevitable that we will suffer the same fate of stagnation and higher unemployment.

A bailout will encourage other industries to seek taxpayer handouts. The Wall Street bailout was a disaster in many ways, most notably as measured by the weak stock market and economic volatility. But another negative aspect of the bailout is that other industries have now decided that it is OK to stick their snouts in the public trough, as well. First Wall Street’s high fliers get a bailout. Now the inefficient management and union at the Big Three want a handout. Who will be next in line to pillage taxpayers? Giving handouts in exchange for political support is akin to getting high. Once politicians decide they like the buzz of campaign contributions, they’ll turn into junkies with ordinary Americans footing the bill.

A bailout is a perverse transfer from poor taxpayers to rich taxpayers. America’s Founding Fathers surely never envisaged that the federal government would take money from one group of Americans and give it to another group. Yet much of the federal budget is devoted to redistribution programs.

Bailouts are a particularly bizarre form of redistribution, however, because the corporate bureaucrats at the Big Three are among the very richest Americans. The UAW bosses make extravagant salaries, as well, and even regular union workers make an average of approximately $70 per hour, far higher than the average American.

The government should not be in the business of giving unearned wealth to any group of citizens, but surely liberals and conservatives both can agree that politicians should not be taking money from middle class taxpayers and giving it to upper-middle class and rich taxpayers.

Advocates oftentimes admit that bailouts are not good policy, but they invariably argue that short-term considerations should trump long-term sensible policy. Their biggest assertion is that a bailout is necessary to prevent bankruptcy, and that avoiding this result is critical to prevent catastrophe.

But Chapter 11 protection may be precisely what is needed to put American auto companies back on the path to profitability. Bankruptcy laws specifically are designed to give companies an opportunity – under court supervision – to reduce costs and streamline operations.

Bankruptcy would not be popular in some quarters, to be sure. The bloated management structure would be streamlined and many overpaid executives would be unhappy about having to find new jobs.

The UAW would be equally upset, particularly since bankruptcy might force an end to extravagant pension benefits and inefficient workplace practices. But bankruptcy is akin to getting an alcoholic to put down the bottle. There clearly will be short-term discomfort, but compassionate people recognize that this is the best approach.

America is on a dangerous path. The Wall Street bailout was a mistake. It transferred a huge amount of money from the productive sector of the economy to the government, and also exacerbated “moral hazard” by rewarding companies and executives who made dumb decisions. But this may be the tip of the iceberg.

A bailout of U.S.-headquartered auto companies also would be a mistake, as would bailouts of homeowners or any other constituency. If politicians genuinely want to help the economy, they should focus on reducing the burden of government, not increasing it.

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 Mount McKinley, Alaska, USA (upload.wikimedia.org)

Reforming U.S. Health Care: Critique of Senator Baucus’ Proposal

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The issue of reforming the U.S. Healthcare System was a major topic of discussion in the recent U.S. presidential election, and it promises to be an issue of major debate in next couple of years (2009-2010).  At issue is whether the U.S. Healthcare shifts toward more of a “socialized medicine / universal healthcare system” as practiced in European Countries and Canada, or reemphasizes free market, competitive approaches in solving U.S. health care needs. 

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From a free market-oriented economist perspective (such as is mine), the losses in efficiency, choice and quality of health care services that have been associated with “socialized medicine / universal health care” where it has been adopted are reason enough to resist such an approach. That said, since the country is open to discussing the how the current system can be improved, it is time to reexamine what is now being done both well and poorly in our current health care system, and present better policy alternatives than socialized medicine for serious consideration in the upcoming debate.

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   The Children’s Hospital, Denver, CO, USA   

Following is the link to an article written by Stuart M. Butler, Ph.D., Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.  (http://www.heritage.org/)  

 Stuart M. Butler, Ph.D., The Heritage Foundation

This article addresses a proposal by U.S. Senator Max Baucus, Democrat from Montana, concerning a health care reform proposal he presented on November 12, 2008 (link here).

 U.S. Senator Max Baucus, D-Montana

Although Senator Baucus is to be commended for parts of his proposal, his recommendation to expand the Medicare and Medicade entitlements, and the design he has put forth for national competitiveness which puts the government plan in direct competition with private plans are problematic.  Following are some specific points from Stuart Butler’s critique of Senator Baucus’ proposal

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The Baucus Health Reform Plan: A Starting Point for Serious Discussion (here)

by Stuart M. Butler, Ph.D., Heritage Foundation

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Senate Finance Chairman Max Baucus (R-MT) has just unveiled a comprehensive health plan in the form of a white paper, which he sees as framing the upcoming debate on health care reform.  The introduction of Senator Baucus’s plan is a welcome development in that it puts some flesh on the bones of ideas that have been circulating in policy circles.  It also indicates a more open conversation about health reform than occurred durng teh last major effort at reform, which was characterized by the secretive health task force of the Clinton Administration.

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Rigging the Rules for “Medicare for All”

Among the key proposals in the Baucus document is a health exchange. While the idea of an exchange generates broad interest and support among a wide range of policymakers, Baucus—like Presidentelect Obama—proposes a national exchange rather than encouraging a variety of state exchanges that would reflect local conditions and stimulate state creativity in designing better access to private health insurance. While it is true that a national system of exchanges can achieve a well-functioning health insurance market across the U.S., it would be wise to let states propose the best ways of realizing those objectives. Within his national exchange, Baucus also proposes letting a new public plan “similar to Medicare” compete with private health plans. This approach is fraught with difficulty and danger, because the federal government would then “own” a plan in the competition while also setting the rules for that competition. Who can doubt that the rules would be rigged in favor of the Medicare-style public plan?

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A Level Playing Field

There is a good argument to be made for assuring the existence of some type of reliable plan that Americans with major health problems can afford. Senator John McCain (R–AZ) acknowledged that in the 2008 presidential campaign, and proposed a program of guaranteed access to coverage. But Baucus needs to work with others to achieve two things:

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1. Develop an Alternative to a Medicare-style pPlan that can achieve the same objective

In the Federal Employees Health Benefits Program (FEHBP), for instance, the governmenthas arranged for a variety of affordable national plans to be available in conjunction with numerous local plans and does not run a competing public plan.

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2. Find a way of structuring competition that guarantees a true level playing field

In the FEHBP, for example, national private health plans, not the taxpayers, bear the insurance risk and compete fairly with local coverage options.

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Without a convincing way of doing both of these things, it will be very hard to dispel the idea that Baucus’s combination of a national exchange with a public plan is anything other than a stalking horse for a single-payer “Medicare for All.”

Tax Treatment of Health Care

A very welcome feature of the Baucus document is its discussion of the federal tax treatment of health insurance. Federal tax treatment of health insurance is widely understood as a fundamental element in achieving affordable health care reform. It is arguably the most important factor shaping the health insurance markets and thus a key driver of the incentives that dominate health care financing and delivery.

As the Baucus document notes, “Many economists argue that the unlimited employee tax exclusion leads to increased health spending.” Baucus suggests an incremental approach to reforming the tax treatment of health insurance by proposing a cap on the existing tax exclusion. Thus workers would retain their tax-free health care benefits but there would be a maximum amount that could be excluded from their taxable income. This approach is consistent with other tax-preferred benefits, such as 401(k)s and health savings accounts. Baucus also proposes expanding coverage through targeted tax subsidies. This discussion of the tax treatment by the finance chairman could lead to a very productive bipartisan conversation. Hopefully, President-elect Obama will join in that conversation.

Entitlement Expansion

Distressingly, Baucus would support entitlement expansions, which is hard to defend given the unsustainable nature of existing entitlements. Medicare and Medicaid are already fiscally unsustainable, and expanding these programs now just exacerbates the existing problem. The expansion of these programs would also further crowd-out private coverage options in favor of taxpayer-financed coverage. Baucus also proposes an individual mandate on Americans to buy coverage and on employers to either offer coverage or pay a fine. The senator should reconsider both mandates. There would be no need for an individual mandate if Congress were to enact a combination of positive tax incentives (such as tax credits) and methods to help facilitate take-up in private coverage (such as automatic enrollment). Likewise, the employer mandate is misguided: It would merely hide the real cost of coverage and be passed on to workers in the form of lower cash wages.

More Discussion Needed

The proposal thus has strengths and weaknesses and raises key questions that must be debated fully. Baucus should be commended for putting forward such a thorough document at the beginning of the debate instead of the common practice of trying to push through a chairman’s proposal close to a vote. He now needs to foster a bipartisan conversation on how to build on the white paper’s strengths, such as addressing the inequitable and inefficient tax treatment of health insurance, and how to deal with the paper’s current weaknesses.

—Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.

  DISTANT CUMULONIMBUS – CHADRON, NE

 Mount Evans, Colorado, USA

Thinking “Free Markets” These Days

With the results of the U.S. Presidential election fresh in my mind, with the resulting shift in representation toward more government regulation and oversight of the U.S. economy, I have been thinking about the need to appreciation of the benefits of free market economic policies in our country. 

  A photo of K-2, the second tallest mountain in the world (www.k2baltihouse.co.uk)

Free trade, less intrusion upon economic systems from government beaurocratic regulation, moderate to lower taxation to spur economic growth, the free flow of capital to and from sectors of the U.S. economy that are either profitable or unprofitable, pro-growth policies combined with responsible government expenditures - these are all crucially important economic issues to consider when setting policies that will impact the future prosperity of the United States as well as the World economy. 

Following are just a handful of online information sources geared toward the preservation of free markets and the reasonable role of the U.S. government in the U.S. economy.  There is much to say on this in the future as the next U.S. congress and administration begin dealing with economic policy issues.  For now, I encourage you to “read up” and prepare yourselves for the coming policy struggles.

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A. The Cato Institute (http://www.cato.org/)

The mission of the Cato Institute is to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace. The Institute will use the most effective means to originate, advocate, promote, and disseminate applicable policy proposals that create free, open, and civil societies in the United States and throughout the world.

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B. The Ludwig von Mises Institute (http://mises.org/)

It is the mission of the Mises Institute to restore a high place for theory in economics and the social sciences, encourage a revival of critical historical research, and draw attention to neglected traditions in Western philosophy. In this cause, the Mises Institute works to advance the Austrian School of economics and the Misesian tradition, and, in application, defends the market economy, private property, sound money, and peaceful international relations, while opposing government intervention as economically and socially destructive.

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C. The Heritage Foundation (http://www.heritage.org/)

The Heritage Foundation is committed to building an America where freedom, opportunity, prosperity and civil society flourish.  Founded in 1973, The Heritage Foundation is a research and educational institute – a think tank – whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.

 

Picture of Mount Rainier, in the Pacific Northwest

(symbolicly speaking, economic growth is the key issue to keep our eyes on, and which we too often lose sight of with our focus on the immediate necessities of economic life).

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There are of course a number of other free market economics and conservative political leadership / issues analysis websites that I hope to refer to in the future in discussing this issues.

So, this blog is off in yet another direction that fits the times and life circumstances and interests of the author.  This seems to be the time for free market economics adherents to be outspoken and up front in defense of free market capitalism and conservative political ideals. 

Churchlayman