10/28/2011

It's All Greek to Me

Before you get excited about the last minute Euro-Deal and the 340 point rally in the Dow, consider this: Wall Street has been dancing to Greece's whistle. If Greece says 'jump,' Wall Street jumps, if Greece says 'Sorry, false alarm,' Wall Street cries. This has been going on for about 2 years now, and it's getting pretty tired. Shame on you if you think everything's going to be fine just because Greece and/or its European pretend-to-be saviors announce another plan to come up with a plan.


Greece is broke and has no significant revenue sources to pay off its debt. Foreign investors own about $385 billion worth of Greek government debt. Many banks and governments that own Greek debt are at the brink of insolvency already, so Greece's inability to pay its debt may push other countries and their banks into insolvency. You can't trust statements from European officials because they are trying to prevent panic. Panic will make any kind of solutions more expensive and more difficult to execute.


Eventually Greece's saviors will realize that this is a leaky bucket money pit. A sudden and unprepared Greek bankruptcy would shatter the eurozone unless Greece is quarantined first.
Doing this wouldn't be cheap. To prepare for a such a quarantine (which is a more diplomatic term than ejection from the eurozone), Europe would have to prepare and fund a fund that can pay for:
1) Defaulting Greek government debt
2) Shoring up banks that won't qualify for inter-bank credit
2) Make sure Italy and the next dominos in line are safe
It's estimated the price tag will be about $3 trillion (about the same amount of money our Federal Reserve has printed in the last three years). Can Europe scrape together $3 trillion? The combination of liquidity drying up and assets imploding is a lethal one.

What's really happening in Europe is that everyone is bailing out everyone! The larger problem betrayed by yesterday's agreement is that European leaders continue to act as if they are mainly dealing with a crisis of confidence, which can be restored with evermore far-reaching bailout schemes. There are no new ideas for promoting the structural economic reforms—both at the periphery and at the center of the euro zone.   It's still a house of cards waiting for the next windstorm.

This is the classic example of how socialism can fail. Worker productivity is not sufficient to support all the benefits doled out. So governments borrow in ever increasing amounts to perpetuate the ruse. But eventually, the whole thing collapses of its own weight. We here in the US should be learning from this - but we haven't.

10/21/2011

My Response to the Occupy Wall Street Protesters

This is a great letter, and it is real.


To All My Valued Employees,

There have been some rumblings around the office about the future of this company, and more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. However, the good news is this: The economy doesn't pose a threat to your job.

What does threaten your job however, is the changing political landscape in this country. Of course, as your employer, I am forbidden to tell you whom to vote for - it is against the law to discriminate based on political affiliation, race, creed, religion, etc.

Please vote for who you think will serve your interests the best. However, let me tell you some little tidbits of fact which might help you decide what is in your best interest.First, while it is easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a backstory.

This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes outside. You saw my big home at last years Christmas party. I'm sure all these flashy icons of luxury conjure up some idealized thoughts about my life. However, what you don't see is the back story.

I started this company 12 years ago. At that time, I lived in a 300 square foot studio apartment for 3years. My entire living space was converted into an office so I could put forth 100% effort into building a company, which by the way, would eventually employ you.

My diet consisted of RamenPride noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn't have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business -- hard work, discipline,and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting Nordstrom's for the latest hot fashion item, I was trolling through the Goodwill store extracting any clothing item that didn't look like it was birthed in the 70's.

My friends refinanced their mortgages and lived a life of luxury. I, however, did not. I put my time, mymoney, and my life into a business --- with a vision that eventually, some day,I too, will be able to afford these luxuries my friends supposedly had.

So, while you physically arrive at the office at 9 am, mentally check in at about noon, and then leaveat 5 PM, I don't. There is no "off" button for me. When you leave the office, you are done and you have a weekend all to yourself. I unfortunately do not have the freedom. I eat, **, and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to me like a 1 day old baby.

You, of course, only see the fruits of that garden -- the nice house, the Mercedes, the vacations... You never realize the back story and the sacrifices I've made. Now, the economy is falling apart and I, the guy that made all the right decisions and saved his money, have to bail out all the people who didn't.

The people that overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed a decade of my life for. Yes, business ownership has its benefits but the price I've paid is steep and not without wounds. Unfortunately,the cost of running this business, and employing you, is starting to eclipse the threshold of marginal benefit and let me tell you why:

I am being taxed to death and the government thinks I don't pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes. Payroll taxes. Workers compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then guess what? I have to pay taxes for employing him. Government mandates and regulations and all the accounting that goes with it, now occupy most of my time. On Oct 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my "stimulus" check was? Zero. Nada. Zilch.

The question I have is this: Who is stimulating the economy? Me, the guy who has provided 14 people good paying jobs and serves over 2,200,000 people per year with a flourishing business? Or, the single mother sitting at home pregnant with her fourth child waiting for her next welfare check?

Obviously, government feels the latter is the economic stimulus of this country. The fact is, if I deducted(Read: Stole) 50% of your paycheck you'd quit and you wouldn't work here. I mean, why should you? That's nuts. Who wants to get rewarded only 50% of their hard work? Well, I agree which is why your job is in jeopardy. Here is what many of you don't understand .. to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn't need to pay taxes, guess what? Instead of depositing that $288,000 into the Washington black-hole, I would have spent it, hired more employees,and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don't defibrillate and shock his thumb thinking that will bring him back to life, do you? Or, do you defibrillate his heart? Business is at the heart of America and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers in Washington believe the mud of America are the essential drivers of the American economic engine.

Nothing could be further from the truth and this is the type of change you can keep. So where am I going with all this? It's quite simple. If any new taxes are levied on me, or my company,my reaction will be swift and simple. I fire you. I fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child's future. Frankly, it isn't my problem anymore. Then, I will close this company down, move to another country, and retire.

You see, I'm done. I'm done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed, and with it, will be my citizenship.

While tax cuts to 95% of America sounds great on paper, don't forget the back story: If there is no job, there is no income to tax. A tax cut on zero dollars is zero. So, when you make decision to vote, ask yourself, who understands the economics of business ownership and who doesn't? Whose policies will endanger your job? Answer those questions and you should know who might be the one capable of saving your job. While the media wants to tell you "It's the economy Stupid" I'm telling you it isn't.

If you lose your job, it won't be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the Constitution, and will have changed its landscape forever. If that happens, you can find me in the South Caribbean sitting on a beach, retired, and with no employees to worrya bout.

Signed, Your boss,
Michael A. Crowley, PE
Crowley, Crisp & Associates, Inc.
Professional Engineers

Thanks to Mike Trani for this!

10/11/2011

Debunking Liberal Economic Myths

Kevin Drum, writing in Mother Jones, proposes 5 “Myths” about some common economic issues that he claims aren’t true.  Liberal writers often suffer from a kind of confirmation bias when making such statements. This is the tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true.
Let’s have a look at what Mr. Drum says, and I’ll provide my own “confirmation bias” to show that the statements are either false, or not wholly accurate:

Myth #1 The Stimulus Failed
The central theme of this assertion revolves around what FDR did during the Great Depression.
Mr. Drum asserts (correctly) that FDR tackled the depression with inflation, easy monetary policy, and government spending. Then in 1937 spending was cut and monetary policy tightened up.    Mr. Drum reports that in 1938 the austerity program was abandoned and the economy started to grow again. What he doesn't report is that  FDR raised taxes sharply in 1937 in an attempt to balance the budget. Once tax increases took effect, the economy collapsed into another recession – the second stage of the double-dip which lasted into WWII. But in 1938-9, FDR relented. In a 1938 speech Roosevelt acknowledged that some administration policies were retarding recovery. Economic policy shifted considerably around this time, and the economy boomed. Antitrust enforcement resumed. The fiercely controversial undistributed profits tax, which was retarding investment, was drastically reduced and then eliminated in 1939. The sit-down strike was declared illegal, and employers could fire sit-down strikers. Many people believe it was WWII spending that got us out of the Depression. But the full effect of the war effort really didn't start to take effect until after 1941.
Drum asserts that the "stimulus worked in 1933". But FDR’s policies then put the ‘great’ in Great Depression. Unemployment never dipped below 14%, and even FDR’s own treasury secretary, Henry Morgenthau, lamented that spending didn’t work. It wasn't until FDR finally removed heavy taxation and regulations and encouraged the private sector in 1938-9 that the economy really took off. That is what finally succeeded.
Then Mr. Drum attempts to say that the 2009 stimulus worked. But posting figures about "how many jobs were created" is disingenuous. Before the stimulus, total employment was 134.3 million. Today, it is 131.1 million. That's a net loss of 3.2 million jobs since 2009. You do the math. You can make the “well it would have been worse” case until your face turns blue. The fact is, the stimulus didn’t work, period. If we had simply left everything alone, the normal powers of economic contraction and expansion would have done the job by now. I’ll explain:
Habituated as we have become to steadily rising prices, it would shock just about everyone to know that prices in the United States fell steadily for almost 150 years -- from the late 1700s all the way to 1913! During that time we experienced some of the fastest economic growth in the history of the planet. It was in 1913 that the Federal Reserve was created.
There is one simple method that works whether you’re selling a house, an idea, or your own skills: Lower your asking price. To get out of a recession, wages and prices need to fall in order to bottom out and get things going again. Unfortunately, Keynesians only know how to prevent that from happening, and the FED and politicians are deathly afraid of deflation, which is a normal part of the recovery process.
It is the artificial propping up of the economy with easy money, effective zero interest rates, and quantitative easing by the FED that has kept the current recovery in paralysis for so very long. In case you haven't guessed, this is living proof that Keynesian economics is an abject failure.
Keynesian stimulus theory ignores the second half of the story: Deficit spending must still be financed, and financing carries budgetary consequences and economic costs. Proponents generally acknowledge the long-term budgetary costs, but ignore the offsetting near-term consequences that render Keynesian stimulus useless.
When the Fed stops the printing presses and allows the economy to hit bottom by itself, it will begin to rebound by itself. In the meantime, all the stimulus spending and jobs bills in the world will be utterly useless, as we have seen. Posting figures about "jobs created" is disingenuous.
Myth #2: The deficit is our biggest problem right now
Here Mr. Drum claims that if our national debt were really at dire and unsustainable levels, nervous investors would be driving up interest rates on federal borrowing. He completely ignores the fact that in an effort to keep interest rates artificially low, the Federal Reserve has printed over Three Trillion Dollars in just the last three years! It has also deliberately been keeping short term rates effectively at ZERO. “Nervous investors” has nothing to do with Federal Reserve policy and it’s results. It was spending that got us into this fix. Drum is asking for more spending! Then he posts this silly chart that is supposed to illustrate "The Bush Effect" on the deficit. The chart only has two years of real data - everything after that is meaningless projections. Standard & Poor’s downgraded the credit rating of the United States for the first time in history. They did it for several reasons, and our unsustainable short and long term deficits is one of them. They deliberately cited deficits as one of the major reasons for the downgrade, and they said there could be further downgrades.
The Facts:
Under Bush’s "tax cuts for the rich" the rich paid more in taxes in 2005 than any time in the prior 20 years. In fact, as the Wall Street Journal noted, thanks to Bush’s tax cuts for the rich, the richest one percent went from paying 25% of all income taxes in 1990 to 39% in 2005. The richest 5% went from paying 44% of all income taxes in 1990 to paying 60% of all income taxes in 2005.
More importantly, after the 2001 initial tax cuts, the annual growth rate went from 0.3% in 2001 to 2.5% in 2002. By 2004, GDP growth was the highest in 20 years.
Likewise, after the 2003 tax cuts, the unemployment rate fell to the lowest level since World War II.
During the Bush years, despite the 2000 Recession, the attacks on 9-11, the stock market scandals, Hurricane Katrina, and wars in Iraq and Afghanistan, the Bush Administration was able to reduce the budget deficit from 412 billion dollars in 2004 to 162 billion dollars in 2007, a sixty percent drop. During the Bush years the average unemployment rate was 5.2 percent, the economy saw the strongest productivity growth in four decades and there was robust GDP growth.
Not only were more jobs lost after the 9-11 attacks in 2001 than in the 2008 market crash, but more jobs were created by President Bush’s pro-business policies and tax cuts than by the Obama-Pelosi "spend your way to hell" Keynesian failure. The deficit is indeed our biggest problem - both the short term and the long term deficits.
reference: [Heritage.org] "Setting the Tax Record Straight: Clinton Hikes Slowed Growth, Bush Cuts Promoted Recovery" http://goo.gl/5w41s
Myth #3: Lower taxes are the best way to grow the economy
Again, this is cherrypicking data with confirmation bias. Tax rates alone are, indeed, not the best way to grow the economy. You also need an environment that will encourage job creators, you need confidence in the regulatory environment, and most of all, you need low tax rates that are permanent -- that investors and businessmen can rely on.  And it's not just personal income tax rates - it's corporate tax rates - ours are the highest in the developed world.
A simple case from real life:  Ireland, long a poor, economically backward nation, adopted a 12.5% corporate rate in 1988 when it suffered the second lowest per capita income in the EU. The Irish rode the resulting boom over the next 20 years to the second highest per capita income in the EU. Our own Treasury Department issued a study showing that Ireland raises more corporate tax revenues as a percent of GDP with this low rate than we do with our rate nearly 3 times as high. No, lower taxes aren’t the “best way” to grow the economy – they’re only a part of the solution.
Myth #4: Regulatory Uncertainty is Clogging the Economy
Drum says, "In any case, regardless of what the Wall Street Journal editorial page says, the Obama administration has hardly been a whirlwind of regulatory activity. Its health care reform will have very little effect on either small businesses (which are exempt) or large businesses (which mostly offer health plans already) and only a modest effect on medium-size businesses. Its financial reform bill affects only the financial sector. Its proposed new air-quality regulations will mostly affect old coal-fired electrical plants that would have shut down anyway."
What a bunch of malarky!  We know that Obamacare has already started to increase healthcare costs for everyone – they went up 9.1 percent last year. And we already know that the Dodd-Frank legislation is already increasing costs for consumers – e.g., banks resorting to charging $5 monthly fees to use a debit card. And we already know that air-quality rules are costing the coal-to-electricity industry billions and many plants will simply have to be shut down. Does Mr. Drum think that his electric bill will now go down?
The Administration’s published regulatory agenda included a total of 191 planned new regulations, each of which had an estimated annual cost of $100 million or more, with some involving billions of dollars annually.  Overall, the Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion. There were only six major deregulatory actions during that time, with reported savings of just $1.5 billion. This flood of red tape will undoubtedly persist, as hundreds of new regulations stemming from the vast Dodd–Frank financial regulation law, Obamacare, and the EPA’s global warming crusade advance through the regulatory pipeline—all of which further weakens an anemic economy and job creation, while undermining Americans’ fundamental freedoms.
The cost of new regulations hit $26.5 billion in 2010 - a record. The regulatory burden increased at an unprecedented rate during FY 2010, as measured by both the number of new major rules as well as their reported costs. Even more are on the way in 2011.
Regulatory uncertainty isn't the sole factor clogging the economy but it's a big one. Attempting to brand this very big problem as a "myth" is very sad indeed.
Myth #5 Obama is debasing the Dollar
Drum claims, "The usual measure for the strength of the dollar is called "trade-weighted value." In July 2008, just before the financial crisis erupted in earnest, the greenback's value stood at 95.4. As I'm writing this in mid-September, it has gone up, then down, and is currently sitting at 96.1."  He apparently hasn't looked at the long term chart. Here it is:
tradeWeightedDollar
It is easy to see that from as early as 2002, our monetary policies have more or less continuously debased our currency. By the way, in 1985 the Trade Weighted Dollar stood at about 143, which would be completely off the chart posted above. Enough said.
Of course there is a sixth myth, contained in the title of Mr. Drum’s article: “Rich People Create Jobs”.  Of course they create jobs!
Small firms (e.g. “rich people” according to president Obama):
  • Represent 99.7 percent of all employer firms.
  • Employ just over half of all private sector employees.
  • Pay 44 percent of total U.S. private payroll.
  • Have generated 64 percent of net new jobs over the past 15 years.
  • Create more than half of the nonfarm private gross domestic product (GDP).
  • Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
  • Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
  • Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

10/08/2011

The Global Warming Petition Project


The purpose of the Petition Project is to demonstrate that the claim of “settled science” and an overwhelming “consensus” in favor of the hypothesis of human-caused global warming and consequent climatological damage is wrong. No such consensus or settled science exists. As indicated by the petition text and signatory list, a very large number of American scientists reject this hypothesis.

Publicists at the United Nations, Al Gore, and their supporters frequently claim that only a few “skeptics” remain – skeptics who are still unconvinced about the existence of a catastrophic human-caused global warming emergency.

It is evident that 31,487 Americans with university degrees in science – including 9,029 PhDs, are not "a few." Moreover, from the clear and strong petition statement that they have signed, it is evident that these 31,487 American scientists are not "skeptics."

These scientists are instead convinced that the human-caused global warming hypothesis is without scientific validity and that government action on the basis of this hypothesis would unnecessarily and counterproductively damage both human prosperity and the natural environment of the Earth.

All of the listed signers have formal educations in fields of specialization that suitably qualify them to evaluate the research data related to the petition statement. Many of the signers currently work in climatological, meteorological, atmospheric, environmental, geophysical, astronomical, and biological fields directly involved in the climate change controversy.

So, the next time some Global Warming Alarmist tells you that you are an idiot because the "science is settled", point them to this site and ask them if 31,487 reputable American scientists are idiots too.

What's Different About "This" Recession?

 

I am often scolded by my liberal friends about how this past recession (2008) was different, we almost had an economic collapse, it was as bad or worse than the Great Depression, and various other items all underscoring the need for "more stimulus". They claim that we tried lower tax rates, etc.


A quick look at the composition of the stimulus spending in the American Recovery and Reinvestment Act of 2009 (see chart) reveals that the major portion of the spending was to transfers to state and local governments (mostly used for fiscal relief, which is temporary), transfers to persons (temporary) and "Tax Cuts" - almost all of which were temporary in nature. Temporary measures simply cannot provide permanent economic growth. They run out (as they already have), and you end up with more of the original problem that has never been solved in the first place. Plus - an even bigger debt burden.

Stimulus
There are not many cases of economic collapse in modern history and in most cases the economies made a slow but eventual recovery. Interestingly, the advent of crisis has been traced to asset bubbles (e.g., real estate) or imbalances in the financial systems which broke down and paralyzed the real economy. Only after purging out bad debts and driving asset prices to lows, with employment levels and wages severely reduced, have the economies begun a painful and long standing process of recovery.


During such economic turndowns, deflation is a normal part of the rebuilding process. Overblown markets bottom out, prices stabilize, and the process of recovery ensues. What is different about the 2008 crisis is that instead of allowing this normal deflationary process to take place, the Federal Reserve (which, like politicians, is terrified of deflation) began an expansionary monetary policy to attempt to "shore up" the real estate, banking and investment system in the US. In fact, the Fed has printed over $3 Trillion in fiat money in just the last three years. All that has accomplished is to make us all poorer due to the debasement of our dollars.


What this does is that instead of encouraging the economy to rebound, it creates a rolling recession where asset classes never fully bottom out and recover normally. That is what is really different about "this recession". A misguided stimulus, and misguided monetary policy.