Happy Fourth of July!: Independence vs. Dependence

Happy fourth of July! I hope you all are enjoying, or planning on enjoying some delicious BBQ with friends and family, then watching some fireworks somewhere (maybe even lighting of few of your own). But, let's not forget that while those things are fun, tasty, etc., they are not what this day is all about. This day is about independence. It is about freedom. It is about making a choice to believe in the unlimited capacity of the human spirit.

This is not dependence day. We do not need the government to provide us with internet, healthcare, retirement benefits, or anything but the opportunity to get those things ourselves. Tell me - was the iphone created because some lawmaker appropriated funds to some government entity and told them to create the world's coolest phone? Tell me - did the best computers in the world come about because of the government? Tell me - Did we become the largest, most innovative economy in the world because of government regulation and intervention? No. It was because of freedom. It was because our forefathers believed that private individuals live happiest and produce the most when they are not tethered to an oppressive government. That is why we separated from England!

In America everyone can be great. We encourage, and offer the opportunity from the bottom up, not top down. Stifling success to spread wealth and make everyone equal just lowers the quality of life and possibilities for everyone. However, letting people be free to innovate, create, be self-motivated, responsible, and allowing them to believe in themselves will make everyone prosperous. It has for 230 plus years. Let's maintain that trend.

God Bless America! Happy Birthday Lady Liberty!

Blast from the past

Today I wanted to share with you a blast from the past. This is cartoon from the Chicago Tribune in 1934. My only question is, have things changed any? Oh, and you may find this picture a bit small. I had to shrink it to fit it on the blog.

Those in the cart are Ickes, Wallace, and Richberg. On the side of the cart it says "Young pinkies from Columbia and Harvard". One of them in the cart has a bottle labeled "power" and all of them are shoveling money overboard. The man leading the cart on a donkey has a sign on his back that says "Tugwell... Head Braintruster". On the back of the cart it says, "Depleting the resources of the soundest government in the world". In the background Stalin with arms folded is saying, "How red the sunrise is getting". In the bottom left corner there is a quote next to the head of the man writing the plan that says, "It worked for Russia". The plan says, "Plan of Action for U.S. - Spend! Spend! Spend under the guise of recovery - bust the government - blame the capitalists for the failure - junk the constitution and declare a dictatorship"

The New Era of Statism

I have a question that I believe is on the minds of a lot of people. Since when did statism become so attractive? I bring this up in light of of the recent economic policy of the Obama administration. The bailouts under the Bush administration were folly. The extended bailouts with pet projects that are entirely unrelated to boosting growth and employment signed into law by the Obama administration were folly. The mortgage plan to cover the collective buttocks of millions of Americans who can't afford their mortgages rewards bad behavior. The continued bailout mentality for the financial, auto, and mortgage industries is not just misplaced, but incredibly counter-productive and yes, statist. The government is very good at creating new dependents, and that is exactly what it is doing with the bailouts, attaching the money it lends to preferred stocks and huge chunks of the company. That kind of behavior frightens current stock holders and future investors. With the flight of new and old investment those companies continue to hemorrhage, forcing the government to bailout their bailouts. And, in the big picture, government becomes the de facto controller of a massive part of the private sector (ie: the banks).

Here is the definition of statism as defined by oh so reliable wikipedia (I corrected some spelling mistakes):

Statism (or Etatism) is a term that may refer to any of the following:

1. Government having a major role in the the direction of the economy, both through state-owned enterprises and indirectly through the central planning of overall economy.

2. The "concentration of economic controls and planning in the hands of a highly centralized government."

3. The Fascist concept of statism which holds that "basic concept that sovereignty is vested not in the people but in the national state, and that all individuals and associations exist only to enhance the power, the prestige, and the well-being of the state. The fascist concept of statism repudiates individualism and exalts the nation as an organic body headed by the Supreme Leader and nurtured by unity, force, and discipline."
However, if all of the statist-leaning policies were not enough for you, charitable tax deductions will be significantly reduced or disallowed and the President and his administration aim to raise taxes during a recession, creating more unbalance by putting the most burden on the wealthy. You might think, "Well that doesn't affect me." Yes it does. First off, the tax increases on the wealthy are not going to cover the administration's new drive to overhaul the entire healthcare system and foster green energy with a cap and trade systems, so you can count on tax hikes hitting people who make anywhere upwards of $75,000 a year. In fact, there will be tax hikes all around, but Geithner and the Obama administration seem to think that the economy will be out of its "funk" by the time they actually take effect, which will be 2010 and 2011. However, they seem to forget that people react to these events prior to them happening. So, the announcement alone of tax hikes during this economic malaise is only exacerbating the crisis, as is evidenced by the continued downturn of all markets. Oh, and lest I forget, we will soon enter an age where more people do not pay taxes than those who do. That means that more people will feel entitled to government services without paying a single dime. Under the current Obama tax plan, there are a lot of breaks and rebates for people who do not pay taxes, and the lower income tax brackets will become smaller.

Just had to get that off my chest. Some of Obama's projects might even be good, or at the very least well-intentioned, but he needs to wake up and realize that now is not the time to overhaul the health care system or put a cap and trade policy into effect. Just like any family or individual, the government should not spend money it does not have. We got into this economic predicament by spending more than was in our means and taking on bigger loans than we should have. Explain to me Tim Geithner, Ben Bernanke, and President Obama how we are going to get out of this problem by doing the same thing that got us into it. All of these trillion dollar pump-priming initiatives and this $3.6 trillion budget are going to do is increase debt and the size of government, cause rampant inflation, and prolong the recession, perhaps turning it into a depression. It is also important to remember that the money that is being spent now does not yet exist. The government is spending money on expected revenue. But, how is it going to have this money to spend if it negates the incentives to earn it with higher taxes and cutting deductions? If you have a problem with it, raise your hand.

But this stupidity really is not surprising. I mean, since when did the government do a good job of managing anything? Why do we seem to think that having the government take over the financial sector and the health care system is going to make things better? Just look at the SEC, FDA, SSA, TSA and the Department of Homeland Security. Are those good examples of administration? Do we truly want the government to take over our lives even more, with it's track record? I think not.

Strapped for cash: Using homemade barter currencies

Given the current economic climate, a lot of people are strapped for cash. More often than not, this poses a problem. However, it's not a problem for Mrs. Margaret Maylindropper of Altamonte Springs, Florida. For several months now she has been without cash, but has managed to stay afloat by paying everything from her bills and mortgage to her gasoline refills with meatballs.

"I make a zesty meatball. They are extra tender and juicy. No one can resist them. Some people want my meatballs more than cash. In fact, some of the neighborhood kids have set up lemonade stands and the girl scouts just wait outside my house with cookies in hopes that I'll buy some with a bag full of meatballs," said Mrs. Maylindropper.

Mrs. Maylindropper is not alone. Her other neighbor, who chose only to reveal himself as Fred, has also switched to a barter currency. Fred offers foot massages and pita bread. One foot massage is equal to two pita breads. Unfortunately, his pita bread isn't as desirable as his neighbor's meatballs. And, his gas company has claimed his foot massages aren't really that great.

"Look, I'm doing what I can. I can't please everyone all the time. My hands get sore. But hey, I think it's a better idea than what I was going to do. I was going to do face painting and body art," said Fred.

Many in the community are relieved that Fred chose pita and foot massages instead. Melanie McGruber had this to say, 

"Last Halloween he tried to paint me. He had a roller and a can of spray paint and asked what I wanted to be - either a mermaid or a fence. I just couldn't decide, so he made me into a merfence."

The resourcefulness of this community is suburban Florida is commendable. Perhaps the country could learn a thing or to from Mrs. Maylindropper's meatballs and Fred's pita. If you don't have money, don't sweat it, unless, you're using that sweat to make meatballs.

Adam Smith gets the last laugh

Here is a great article in today's Financial Times about Adam Smith and what he would say about the current economic crisis:

Adam Smith gets the last laugh

By P.J. O’Rourke

Published: February 10 2009 19:22 | Last updated: February 10 2009 19:22

The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s “third way” and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, “Hello, God, how’s my atheism going?”

Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before – probably a record for going short.

“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations. “If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Therefore Smith concluded that, although a house can make money for its owner if it is rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it”. [281]*

Smith was familiar with rampant speculation, or “overtrading” as he politely called it.

The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s 30 private banks survived. The reaction to the ensuing credit freeze from the Scottish overtraders sounds familiar, “The banks, they seem to have thought,” Smith said, “were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with.” [308]

The phenomenon of speculative excess has less to do with free markets than with high profits. “When the profits of trade happen to be greater than ordinary,” Smith said, “overtrading becomes a general error.” [438] And rate of profit, Smith claimed, “is always highest in the countries that are going fastest to ruin”. [266]

The South Sea Bubble was the result of ruinous machinations by Britain’s lord treasurer, Robert Harley, Earl of Oxford, who was looking to fund the national debt. The Mississippi Scheme was started by the French regent Philippe duc d’Orléans when he gave control of the royal bank to the Scottish financier John Law, the Bernard Madoff of his day.

Law’s fellow Scots – who were more inclined to market freedoms than the English, let alone the French – had already heard Law’s plan for “establishing a bank ... which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country”. The parliament of Scotland, Smith noted, “did not think proper to adopt it”. [317]

One simple idea allows an over-trading folly to turn into a speculative disaster – whether it involves ocean commerce, land in Louisiana, stocks, bonds, tulip bulbs or home mortgages. The idea is that unlimited prosperity can be created by the unlimited expansion of credit.
Such wild flights of borrowing can be effected only with what Smith called “the Daedalian wings of paper money”. [321] To produce enough of this paper requires either a government or something the size of a government, which modern merchant banks have become. As Smith pointed out: “The government of an exclusive company of merchants, is, perhaps, the worst of all governments.” [570]

The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty. Smith proposed that everyone be free – free of bondage and of political, economic and regulatory oppression (Smith’s principle of “self-interest”), free in choice of employment (Smith’s principle of “division of labour”), and free to own and exchange the products of that labour (Smith’s principle of “free trade”). “Little else is requisite to carry a state to the highest degree of opulence,” Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), “but peace, easy taxes and a tolerable administration of justice.”

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

We could pump the banks full of our national treasure. But Smith said: “To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils.” [440]

We could send in the experts to manage our bail-out. But Smith said: “I have never known much good done by those who affect to trade for the public good.” [456]

And we could nationalise our economies. But Smith said: “The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of General Motors.

* Bracketed numbers in the text refer to pages in ‘The Wealth of Nations’, Glasgow Edition of the Works of Adam Smith, Oxford University Press, 1976

The writer is a contributing editor at The Weekly Standard and is the author, most recently, of On The Wealth of Nations, Books That Changed the World, published by Atlantic Books, 2007

Government Stimulates Itself

First off, I cannot believe someone would have the cajones to ask if Harry Reid was confident that this bill was big enough. I remember only a short time ago when people were up in arms about TARP's $700 billion price tag. Now people are wondering if this is enough? Are you serious? TARP hasn't done much thus far, so why do you think this bill will be any different? It's just a melange of pet projects and partisan pork. The point of a stimulus bill is to create jobs, spur investment, and strengthen the economy. All this bill seems to do is make a feigned or even superficial effort to address stimulus, all the while really just throwing most of the money at projects that are entirely irrelevant. Senator Inhofe's recent press release confirms my unease:

February 6, 2009

WASHINGTON, DC - U.S. Senator James Inhofe (R-Okla.), issued the following statement tonight after the announcement of a compromise on the Senate stimulus bill.

"While I appreciate the efforts of my colleagues to bring down the price tag of this bill, the fact is we still face a trillion dollar spending bill. Making it worse, the bill is 93% spending and only 7% stimulation. Over the past few days I have fought to include more in the way of real stimulus through higher percentage of infrastructure and defense spending, while working to cut much of the typical government waste often found in a bill of this size. Yet Democrats have blocked these efforts.

"The good news tonight is that the American people are catching on to the fact that this is the largest spending bill in history and are becoming more and more vocal in their opposition. My offices in Oklahoma and Washington DC have been flooded with emails, phone calls and faxes overwhelmingly opposed to this trillion dollar legislation. They can rest assured that my vote remains an unwavering ‘no.'"

Here's real stimulus.

(If only this cartoon were what the government was really doing. As it turns out, they're fanning themselves with money while pelting the bull with loose change.)

For Real Stimulus

Sometimes when you read this blog you chuckle. Other times I hope you think. Other times I hope you get confused. But today the blog is going to touch on some important stuff that most people should know. I got this article from Investment Business Daily. I think it was published either the fifth or the ninth (sorry, I cannot make out my grandmother's handwriting on the copy she sent me). I am in no way claiming this as my own work, but I am taking the time to re-write it on this blog verbatim for all of your benefit. Read on.

"Economy: Congress is ready to ram through a half-baked stimulus package costing as much as $1 trillion. But if it's stimulus we need, why not make it effective stimulus - tax cuts, say, instead of wasteful spending?

The massive new spending program that is being pushed by the congressional Democrats emboldened by their newly enhanced majorities may come up as soon as Tuesday, when they return from their holiday breaks.

Unfortunately, they've picked the least effective way to give the economy a boost. Those who argue for hundreds of billions of dollars for infrastructure projects and "green jobs" have it all wrong. We've tried those remedies before and found them wanting.

In the 1930s, for instance, we went on an infrastructure binge, building new roads, dams and schools; electrifying the rural south and enlarging our ports, among other major tasks.

Granted, some infrastructure improvement was called for. But all the activity didn't pull the country out of depression - not by a long shot. Unemployment averaged 17% in the '30s, and it wasn't until 1941 - the start of World War II - that GDP returned to its 1929 level.

Japan followed the same Keynesian game after its real estate bust of 1989. To the applause of many American liberals, hundreds of trillions of yen were spent on infrastructure, raising outlays on big projects from 6.5% of GDP in 1990 to 8.3% in 1996 - even more than contemplated under Obama's plan.

That didn't work either. The 1990s were a "lost decade" for Japan's economy, and the country is still stagnating. Its infrastructure boom did have one lasting legacy however: Japan is now the most heavily indebted nation in the OECD.

If President Obama and his fellow Democrats get their way, the U.S. may soon be trudging down the same path. Next year, reckons budget expert Stan Collender, the defecit may hit $1.3 trillion, or 8% of GDP, as Congress tries to spend its way out of recession. That's roughly $13,000 for every taxpayer.

Shouldn't we at least expect some big bang for our bucks? If so, and although it's not popular with his party, Obama might want to re-think his aversion to tax cuts. They'll actually work.

How do we know? Because they have in the past. In the '20s, '60s, '80s and again this decade, new presidents also faced grim economic conditions. Each time, the president - be it Coolidge, Kennedy, Reagan or Bush - cut taxes. And each time the economy boomed.

McKinsey & Co. estimates total losses of $1.4 trillion to $2.2 trillion due to the credit collapse. But this can be reversed by making the underlying assets profitable again. The fastest way to do this is to cut taxes on businesses and entrepreneurs, which will immediately lift the rate of return on assets and thus their value.

This in turn will bring more investment, more hiring and more income - all things that Obama has said he wants.

We're not making this stuff up. According to research cited by former White House economist Greg Mankiw, the economy expands by $1 to $1.40 for every $1 spent by government. But if you cut taxes instead, you really get results.

Mankiw cites a major study of tax cut changes dating back to 1947 showing that each $1 of tax cuts brings $3 in added GDP. This study is particularly significant because one of its authors, Christiana Romer, is Obama's chief economic advisor.

Simply handing blank checks to Congress and the White House, and letting them pass an ill-considered stimulus plan with little transparency and no checks on spending is a very bad idea. 

No stimulus would be better than a bad stimulus. And the only stimulus that's been shown to really work is cutting taxes.