Category Archives: Uncategorized

The Republican Tax Plan – Is it a Tax Cut Too Far?

I noted recently that economist cannot agree on the good, bad or ugliness of the medium to long term impact of near-zero interest rates or quantitive easing (QE). This suggests that economics is in a sad state of affairs. Even the Republican tax deal, winding its way through reconciliation this week, continues to create fervent grounds for disagreement. The most important sticking point concerns the rate of growth the tax changes might lead to. This is critical since it is the resulting change in GDP what will spin off excess profits and therefore taxes that will go to pay for the tax breaks. If GDP does not grow fast enough, insufficient funds will be created. If GDP excels, al will be well and the Democrats won’t be happy since they may lose the next general election.

In the Wall Street Journal on December 2-3 there was an interesting opinion piece by Phil Gramm and Michal Colon titled, Don’t Be Fooled by Secular Stagnation. Mr. Gramm is former chairman of the senate banking committee and now with the American Enterprise Institute. Mr Solon works for US Policy Metrics. The article compares America’s GDP averages over recent history and the assumptions that the Republicans are making with their forecasts. The two are not that far apart at all, yet other reports from different perspectives, using different assumptions, suggest growth will not reach its goals. The COB suggests growth might make 1.9% over 10 years; the Republican’s are looking for 2.6%. It turns out that since the end of WWII to 2008, America has averaged about 3.4% and this includes 10 recessions!

Then, when you get under the hood of the various models economist use you find the strangest of assumptions. The CBO’s model does not allow for any spin off of profits generated from growth to be plowed back into the economy to drive more growth. This the model is quite limited. Why don’t our economists or civil servants update their modes? Because it would be more political than economic. The CBO, as the article suggests, has been worn more times than it has been right with its GDP forecasts in the last 20 years. We might as well just ignore them and set up a new government department. At least that adds to employment which I am sure is irrefutable.

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Regulating for Regulations’ Sake?

I read in today’s US print edition of the Wall Street Journal (see Change Proposed on Who Gets Tips) of a proposal to overturn a regulation concerning how tips are pooled that will impact restaurants, casinos and the like. Apparently under Obama’s reign, regulation was written that protected front-office staff from having to share tips with back-room staff. Now under Trump’s reign this regulation is being overturned and the industry may revert to the previous practice, that required tips to be shared with back-room staff.

I didn’t know such a regulation existed. Why does the federal government, or any government, regulate how tips are shared or pooled? Why is it not a decision for owner, manager and staff to work out? If it were left to local folks running the businesses, employees would flock to those businesses that offer the approach they appreciate the most.

This is a classic example of regulation for no other purpose than growing big government. We need to get Uncle Sam out of the kitchen and accounting office and back to running the armed forces.

Democrats Desire for Regulation Increases Inequality

Yes, you read the title of this blog correctly but you wont accept the point. It so happens that one small data point represents a major contributing factor to inequality. Since WWII the availability of affordable housing has declined. First both left and right drove increase affordable housing. It was good for the wider population as it led to a wider base on which the American Dream was driven. However, the plan backfired.

Over time more and more lower income families took up the opportunity and more and more subsidies were driven into the market. This even led to aspects of the financial crisis that sits at the root of our current economic malaise. But the key is that an effective level of affordable housing around the US supports the need of workers to move to where there was work. This is one of the factors that drove growth and even productivity. That is, until the late 1980s. Since then productivity has been slowing, and it turns out, the stock of affordable housing. At the same time, Americans move less, and the baby boomers have started to retire.

But the odd part is not that left and right supported the goal, it is the left that have fought against themselves. In the US print edition of the WSJ on Sept 30-Oct 1, there is an Opinion piece title, “Why Housing is Unaffordable in California“. This article nicely captures the facts that democrats, in control of Californian legislature, have passed land regulation that limits how land can be used. This has contributed to continuing and driving land prices up and at the same time pricing lower paid workers out of the region. Yet at the same time the state legislature encourages its population to bass bonds to fund new affordable housing plans. It is thus fighting against itself. The rich are getting richer and the poorer are unable to get a hold on the work that would help them close the inequality gap.

Why don’t our politicians stop being politicians and get out of the way of real decision makers that work together and in the same direction?

Three for Three: Lies of Communism and Capitalism

There were three articles in the August 14th US print editions of the Wall Street Journal and Financial Times. One highlighted what the mainstream media does not want to admit about Trump; one looked at the so called lies at the heart of capitalism and communism, and the last looked at Brexit and Germany‚Äôs view of its neighbor. This blog looks at the third hot topic of the lies of capitalism and communism.  

In “From Lenin to Lehman – the big lies“, Martin Sandbu of the FT would have you believe that communism and capitalism have failed and thus we ought to seek some compromise, some hybrid model.  This is bunk and ends up being journalistic diatribe.  The author has some bone to promote and the space offered by his newspaper editor allowed him to confuse us all.  But its not all bad news.  Let’s look at his lies at the center of communism.

Mr. Sandbu claims that there are two lies.  The first suggests that communism undid itself since it brayed its own vision of a society of equals, solidarity and self realization through collective purpose.  I can see the old black and white videos now.  The reality was that a centrally planned economy led to an inner circle of leaders who were “more equal than others” and this spread into the very infrastructure built and supplied to govern the commune.  Reality was never like this ideal.  The second lie concerns the possibility of central planning.  Trying to understand how organizations work is complex; how economies work is harder still.  Nothing beyond the planning of a dinner table is possible, lets be honest.  But some folks tried.

From here the author decides to show how and where capitalism failed.  He argues correctly that the price mechanism is a superior tool to central planning by being able to convey demand and supply conditions.  However he suggests that the price system failed during the financial crisis since asset prices were bubbling and so we all fell for the froth and of course we all missed the risk embedded, hidden in the US mortgage system.  He argues that the wealth we all thought we had in the prices of housing assets was not real.  The value was a lie.  Clearly the author is using price incorrectly.

He then asserts that the crash we experienced has left the western countries now poorer than before the crisis and so bereft of any chance to live a life better than our parents.  It seems the American Dream is neutered if you swallow Mr Sandbu’s point of view.  I think this is all twaddle.

First price and value.  Those of us that are smart enough know the difference but is this at the heart of the first lie?  Did we all feel that as prices rose into bubble status the value of our assets increased?  Yes we did.  But the lie was not in the price per se but in the processes used to derive that price.  There were policies, promoted by democrat and republican, that encouraged the start of the bubble by enabling poor folks to take out loans they realy could not afford, as a means to promote house ownership (the America dream) to more of the population.  This was followed up by exotic financial tools that spread risk across many products.  This was then corrupted by villains that poorly rated risk and those loans taken out by poor people that had no income.  So all told it was a ponsi scheme promulgated by social engineers and politicians.  It was not a simple failure of price.

Yes, as a result our economies have taken a beating.  Worse, those same politicians have throttled our economies ability to drive growth:  affordable housing is depressed; new start-ups are regulated and taxed to record lows; innovation, R&D and education are under invested and regulated.  Overall yes the American dream is under attack.  But that is not a lie or a failure of price or capitalism. It is a failure of our socialist, centralized, big government model.  We live in a near-socialist system with more controls and more of the economy under government controls than ever before.

The lie is that our media won’t report how bad this situation is.  The article suggest some middle ground is needed.  We need more pure market-based freedom to allow the individual to grow, thrive, and live on the fruits of his labor.  We need free markets.  Such freedom will lead to +3% GDP growth and then enough surplus money will be generated to pay for welafare for those on hard times.

More on the Failings of the Mainstream Media

I wrote the other day about my experiences with CNN and its political coverage and leanings in, The Rise and Fall of CNN.  Interestingly there was an article in the Econoist, August 5th, titled, Media Matters – Attitudes towards the mainstream media take an unconstitutional turn.  The article reports on some survey data that shows a notable shift in the lowering and loss of trust in all number of mainstream media outlets.  The report looked at how the reporting and analysis of Trump’s actions across media firms and the degree to which the firms’ reports are trusted.  It seems we are all trusting of each other less.

And if that was it enough, there was news just the other day that the Whitehouse has launched its own media channel – or as some media outlets call it, a propaganda channel.  If Trump’s “real news” channel is propaganda, that means all media channels are proganda channels – let’s be fair and onset here.  I have not looked into this but it seems to be less a channel and more like a few videos posted periodically on a Trump-related Facebook page.  So it’s hardly a channel but the so called media are arguing over what it means.
I just wish I could find a channel that:

  • Reports what happened in the world
  • Analyses the actions from both sides of the table
  • Ends the debate by discussing what might happen next

I’ll leave it to my own mind to come to a conclusion on what I think is good or bad. I dont need left-leaning, or right-leaning pundits to “tell” me.

The Rise and Fall of CNN

25 years ago I used to travel across Europe working with clients on small projects that kept me away from home for a day or three. My French is weak and German non-existent so I preferred to stay in English speaking and organized hotels. I discovered Marriott and other US centric hotels. After a long day and a client dinner, I would hide out in my hotel room and watch CNN. It was my first regular exposure to ‘America’ from an American point of view. I loved it.

After a couple of years I started to travel to the USA, mostly the Deep South. This was typically for a few days every other month, for about a year. Kent Mercer was playing for the Braves.  Of course I continued watching CNN. In those days I felt that the channel was well balanced; political views of the left and right were equally shared and equally scrutinized. I often compared CNN to my beloved BBC. About 20 years ago I moved to the US.

But about 8-10 years ago I spotted a slight shift in focus. CNN seemed to shift slightly and that shift seems now all but complete. That shift started with less and less coverage of right leaning views and more and more coverage of left leading views. At the same time, left leaning views were examined less and right leaning views were challenged more comprehensively.  The ‘fai, balanced’ view was disappearing.  That balance is now all gone and the channel’s reputation is all but gone.

Last evening is a good example. CNN was examining the current news related to Special Council Robert Mueller who has just impaneled a grand jury in relation to the Trump-Russian probe. To have a balanced review of this news CNN should have explored equally the challenges related to:

  • Mueller’ political leanings and relationships with the Clinton’s and democrats 
  • The fact that there are technical challenges outstanding on his ability to prosecute the case
  • Despite the wide scope of his remit, he has dropped looking directly into Russian collision in the election (what he was supposed to be working on) and now he is digging around in years past financial transactions between Trump, his companies and Russia
  • The location of the impaneled grand jury is fishy since it was called in a region that voted for Clinton by 94% so it is unlikely to be neutral

Yet CNN did not cover these issues at all. They repeated over and over the left leaning views they assume there was collision, there are shady financial deals, Mueller must be a good guy, and everything is fair and above board.

To prove my point there is more. Last evening Trump was holding a rally at which a democratic governor announced he was switching parties and would become a republican. This is stunning news. Yet during the live televised announcement, did CNN switch over to live coverage? Did they even report this on their news ticker on the screen? No they did neither. They ignored the news and failed to examine its implications. Some minutes later they did report the news, post live, as a snippet and moved right back to promoting their own agenda.

It’s a sad day to have to admit and call out that CNN has to come just a mouthpiece for the left. I really did love that channel. I still hope that Jonathan King, come the next election, remains neutral. If he goes, I will have had it with CNN.

What is Wrong with Capitalism

Finally some data is coalescing around a real problem that is hindering capitalism and specifically that part known as creative destruction. For without creative distruction we end up with a pilloried version of capitalism that undoes itself via a painful transition (in our future) rather than peaceful adaptation (what we really want).

You have to connect several dots here in order to discover the twisted position of capitalism today. The data points are these:

– The vast and growing majority of profits are created by fewer and fewer firms (see ‘Tech ‘superstars’ risk a populist backlash‘)

– There are fewer and fewer publicly listed organizations (see ‘Why America should worry about the shrinking number of listed firms‘)

– Start-ups are starting up at record low levels (see ‘Where are all the start-ups?‘)

– Competitive sprit is running at all time lows (see ‘Bright Minds in Chicago worry about the state of competition in America‘)

It seems the success of capitalism, the ability to create wealth, has been twisted into a beast that seems out of control and likely to garrote itself out of spite. The populist movement will put this into sharp focus when it notices the situation and then takes aggressive political action to counter it.  This will cause more pain than the current monster we call capitalism.

However this is not capitalism run riot. The issue is that socialist policies have twisted the capitalist model into a hybrid and it’s now a grotesque mess.

In some economic circles there is talk of a ‘winner takes all’ mentality. This is another way to capture what is happening. As firms got larger and more successful, perhaps enabled by globalization, they created the environment that helped protect them. This environment has evolved over a number of years and was partly enabled by lobbying politicians in order preserve change and limit impact of any rules that would undermine their firms’ position. This led to ‘crony capitalism’ and spending on lobbying is at record levels.  This form of capitalism has been transforming for over 20 years.

As an adjunct to this various polices driven from a left-of-center belief have gouged the economies natural ability to re-create itself from the waste of want and failure. Start-ups are running at near all time lows. Regulation, taxes and even social stigma has all but weeded out the individuals’ desire to better oneself and create something for oneself. Socialist policy embedded in every thing we do, now commonplace and taken for granted, suggests we simply reallocate money through taxes rather than seek to grow the size of the pie first.

And finally new data shows that the number of privately listed firms continues to decline and this suggests that the chances for expansion of the investor class is limited, even declining. This just accentuates the ‘winner take all’ body that we now see before our eyes.

If you overlay this with the situation of inequality and the declining level of home ownership (record levels in the US again) and the hollowing out of the middle class, you can see what is happening and it’s not good. But the problem is not easy to fix. For twenty years socialist policies have been adopted and due to the lack of any real capitalist alternative, these left-leaning policies have become standard and even accepted as normal:

  • Higher taxes
  • Larger and larger government (and) spending (with leads to increased regulation)
  • Which leads to emphasis and ability to focus on redistribution over growth

These polices lead socialist and the average less-well educated voter to assume that capitalism is broken and it needs extra help. This all stemmed from the ‘Third Way’ that was promulgated by Tony Blair and his ‘market-based socialism’ that was concocted as a populist message to beat Thatcherism in the 90s. It has now come full circle, feeding a monster that even the socialists cannot control. 

So now we have an odd situation. Left wing populism of the 90s gave way to cronyism in the 00s and now have a neo-right wing populist uprising. What a pickle. What we need is a down to earth shop-keeper or house- keeper to run for office with solid, no-nonsense ‘do unto others’ centered polices. A return to a real capitalist system will rebalance much of what has gone wrong. Too big to fail? Yes. Let’s let the failures start. It is through failure we learn (sometimes). This crony-based maladroit system of today is killing the golden goose.