Monday, October 31, 2011

From Greece to Italy To Europe ... The Importance of Private Sector Economic Growth

We all know Greece is essentially bankrupt. Game over.

But not everybody yet realizes how close Italy is to the same fate and what this will mean for other European countries, including France.

Finally, too few of us are making the connection between the European situation and U.S. debt and deficits, and what this says about America's economic future.

Italy's Growing Need for Change lays out in some detail how serious the situation in Italy is for Europe as a whole. It also pretty much confirms that Italy will not grow economically anytime soon and, as a result, its inability to grow and resulting precarious financial condition represents a clear and present danger not only to Italy, but to the whole of Europe and the rest of the world, too.

Here's what the article says:

"If the world's eyes are on Europe, then Europe's eyes are on Italy. Euro-zone leaders made it clear this weekend that Prime Minister Silvio Berlusconi must do more to reduce Italy's debt pile of 120% of gross domestic product. The only way to reduce debt convincingly and ease market concerns is to boost the country's anemic growth profile. But this is a task Mr. Berlusconi has repeatedly failed to achieve.

Investors' lack of confidence is reflected in 10-year Italian bond yields, which last week topped 6% for the first time since early August. While Italy's debt is onerous, it isn't at the root of the country's problems. Excluding interest payments, Italy is set to run a surplus of 0.9% of GDP already this year. Even assuming low growth averaging 0.8% between 2011-2014, as the government does, debt to GDP should fall quite quickly given a fiscal tightening that adds up to 3.5% of GDP.

The problem is even this level of growth may be challenging. Euro-zone purchasing managers indexes from Markit suggest the euro-zone economy outside Germany is contracting. Italy may shrink 1.1% in 2012, according to J.P. Morgan. That fragility means the country's financing remains at risk of a "sudden stop"—with auctions failing and yields spiking higher—if market confidence deteriorates further. That would be a disaster. Italy has the third-largest government bond market in the world, at €1.6 trillion ($2.22 trillion), and needs to roll over €193.7 billion of bonds next year. It is both too big to fail, and too big to save.

The policy prescription is clear: Italy needs to open up closed professions to competition, create a level playing field between temporary and permanent workers and reduce the bureaucratic burden for firms. It needs to decentralize wage-bargaining, perhaps setting an example by differentiating among public-sector wages by region. But these measures have proved politically difficult to introduce for Mr. Berlusconi, who has faced repeated votes on confidence in his administration.

Europe has few levers beyond exhortation. No amount of bank recapitalization or leveraging of bailout facilities will boost Italian growth; indeed, excessive bank capital or ill-thought-out bond insurance plans could even be counterproductive. Mr. Berlusconi holds a continent's fate in his hands."

Italy's debt is 120% of GDP. U.S. debt is now ~70% of GDP and climbing rapidly.

Italy's interest rates on government borrowings are ~6%. U.S. rates are ~2.3%.

Italy will experience at best slow growth and perhaps a recession in 2012. We will likely experience continuing slow growth.

Both Italian and U.S. economic growth will apparently be weak for years to come.

To get out of its economic dilemma, Italy must focus on growing its private sector and downsizing its public sector. So must the U.S. {In that regard, the U.S. is better positioned to do this, since we're not nearly as far down the road to socialism as are European countries, including Italy.}

Let's hope we get down to business and get government out of the way soon, before we become another Europe economically. We're not there yet, of course, but we're sure headed in that direction.

Thanks. Bob.

Sunday, October 30, 2011

The Economy is and will be Stalled for a Long Time

Our economy is weak and not showing any real signs of picking up steam anytime in the near future.

As such we are experiencing something unusual and in need of explanation. First, let's acknowledge that economic growth creates jobs and not the other way around. Second, jobs are an input and not an output. They represent a cost of doing business rather than a goal of doing business.

In the long run, we can only consume that which has been produced. Wealth is created by production which can then be exchanged with other wealth producers for consumption.

Credit doesn't create wealth or economic growth. Neither does the redistribution of wealth create additional wealth or economic growth. Money supply growth creates only more money and no more production.

Long ago economist Frederic Bastiat put it this way in "That Which is Seen, and That Which is Not Seen," 1850:

"In all times, but more especially of late years, attempts have been made to extend wealth by the extension of credit. . . .

The first thing done is to confuse cash with produce, then paper money with cash; and from these two confusions it is pretended that a reality can be drawn.

It is absolutely necessary in this question to forget money, coin, bills, and the other instruments by means of which productions pass from hand to hand; our business is with the productions themselves, which are the real objects of the loan; for when a farmer borrows fifty francs to buy a plough, it is not, in reality, the fifty francs which are lent to him, but the plough: and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house. Money only appears for the sake of facilitating the arrangements between the parties.

Peter may not be disposed to lend his plough, but James may be willing to lend his money. What does William do in this case? He borrows money of James, and with this money he buys the plough of Peter.

But, in point of fact, no one borrows money for the sake of the money itself; money is only the medium by which to obtain possession of productions. Now, it is impossible in any country to transmit from one person to another more productions than that country contains.

Whatever may be the amount of cash and of paper which is in circulation, the whole of the borrowers cannot receive more ploughs, houses, tools, and supplies of raw material, than the lenders altogether can furnish."

In the recent U.S. bubble years, we "consumed" too many houses with money we borrowed from the Chinese. Now we must repay the lenders the "houses" with new house equivalent production, to use Bastiat terms.

We borrowed to "consume" rather than invest. Accordingly, those borrowed funds were not used to invest in productive assets. So now we have no more production capability but a debt to repay with interest. That alone will restrict U.S. production for our own consumption for years to come.

But the problem is even bigger than that. To the extent government now takes even more wealth away from the own private sector in order to redistribute that wealth through public sector initiatives, we will further delay productive investment in the private sector.

Hence, we will underconsume and underinvest in order to pay back the "houses we borrowed" from the Chinese and others. Similarly we will undervinvest in future productivity due to the taking and redistribution of private sector wealth to the public sector.

Stated another way, both external loan repayments and public sector growth steal from future economic growth because wealth is first removed from the private sector. It's redistributed to lenders and the public sector instead. Thus economic growth stagnates, the economy stalls and unemployment remains high, as it has.

As a result, government tax receipts stay low and deficits and debt continue to climb.

Whether we look at the economies of individual European countries or our own, the public sector today is growing at a much faster rate than the private sector is creating wealth. Since this has been going on for a long time, sovereign debt levels are high and the prospects for sustainable economic growth are low.

Instead of investment, that private sector wealth has been used to feed the growth of public sector via redistribution policies. We've now reached the point where the public can't continue to spend what the private sector isn't able to supply.

Viewed from a long term perspective, we have less of a government spending issue than a private sector wealth creating output issue. Of course, we need to sharply curtail government spending as well.

The various borrowing and resulting debt bubbles have now burst, and economic activity has reached stall speed throughout much of the world. Nevertheless, public spending continues to grow, thereby draining funds from the wealth creating part of the economy.

In addition to us, Greece and many other European countries are even better examples of this stall speed economy in which we find ourselves. Greece public sector spending is more than 50% of that country's GDP. The same is true for Italy, Spain and others as well. We're gaining on them, unfortunately.

Thus, without economic growth led by private sector initiatives and investment, we won't get out of the stall speed rut anytime soon. That's too bad, but it's also too true.

Thanks. Bob.

Saturday, October 29, 2011

Oil and Gas vs. Wind and Solar

Our national energy policy has reached the point of ridiculousness.

If current policies were reversed, unemployment, government debt and deficits, energy costs and national security would all improve quickly. It's as simple as 1-2-3-4.

(1) With respect to job creation, oil and gas are far superior to wind and solar.
(2) Regarding government debt and deficits, the private sector and free markets are far superior to the public sector and government picked winners and losers.
(3) Looking at pricing and inflation, energy costs for consumers and businesses would decline substantially as the world's supply of energy increased.
(4) In terms of our nation's security, energy independence would be much enhanced by moving quickly and aggressively in the direction of a greater domestic oil and gas supply.

As a result of his ill considered policies, President Obama inadvertently and unintentionally has made a strong case for American job creation, stronger finances, energy independence and national security. His ridiculous energy policies are the only thing standing in our way.

Accordingly, we can have more jobs, less debt, lower prices and greater security simply by reversing the current administration's energy policies. It really is that simple.

Instead the government plays political games and loans money to solar companies like Solyndra and watches them go broke. At the same time, it makes it virtually impossible for and gas companies to drill for much needed oil and gas in America. And it does all this while we continue to import lots of high priced oil from Russia, Venezuela, Iran and other unfriendly countries.

So right here in the good old U.S.A. we could create jobs, reduce dependence on foreign oil and lower prices at the same time. Even though they would never admit it, President Obama and his cronies must be getting concerned about the anti-American prosperity corner into which they have painted themselves. For the rest of us Americans who merely want the right thing to be done, we have pretty much arrived at the same conclusion--this is crazy.

The administration's energy policies are absolutely harmful to employment, inflation and national security, all at the same time. Obama has achieved a trifecta and a harmful one at that. Doing the right thing would be a no brainer, and therefore it will be sometime soon. At least that's my bet.

Thus, since I believe that things which make sense eventually get done, it's easy to be more optimistic about our energy future. All we need now is some graceful way for the president to reverse course. Let's hope he finds one soon.

The CEO of ConocoPhillips makes a strong argument for job growth, greater energy independence and national security in Natural Gas Can Put Americans Back to Work.

Here's what the CEO says about the oil and natural gas industry's ability to create another 1.5 million jobs and $800 billion in tax receipts with no government help. All the government has to do is get out of the industry's way:

"A consulting firm, Wood Mackenzie, recently predicted that the oil and natural gas industry would create a half-million new U.S. jobs by 2030 under existing government policy. But with more favorable policies, 1.5 million new jobs could be created and tax revenues would rise by $800 billion. To make this possible, several steps are needed.

First, governments must stop singling out the oil and natural gas industry for tax increases. Its effective global tax rates already far exceed those of other industries.

Second, when considering new natural gas regulations, government should first assess the adequacy and enforcement of the thousands of existing federal, state and local regulations that already govern production. Duplicative or conflicting requirements add little protection but needlessly increase costs and further stifle the economy.

Third, government must open new areas to exploration, while ensuring sound environmental stewardship.

Finally, although all energy sources are needed, government mandates that force electric utilities to use renewable energy sources such as wind and solar are mistaken. Such sources are generally uncompetitive, requiring subsidies that increase costs to consumers. Further, by crowding out cleaner-burning natural gas, the mandates may not achieve significant reductions in greenhouse gas emissions. Rather than favoring particular technologies, governments should focus exclusively on setting environmental objectives and allow markets to innovate and select the most environmentally and economically effective sources based on their merits."

Let's all hope the current president and his administration soon stop ignoring reality. If and when they do, they will encourage American private sector job creation and unleash the forces within the oil and natural gas industry, thereby putting our nation firmly on the path to renewed prosperity and energy independence.

And if they don't choose to get government out of the way and allow all this good stuff to happen sometime soon, the next administration will.

Thanks. Bob.

Friday, October 28, 2011

Importance of College Degree ... Another Point of View

There are lots of ongoing discussions about the unemployment situation, the lousy economy, student debt and the inability of college graduates to get good jobs upon graduation.

Gloom Widespread as College Grads Face New Math describes the situation:

"If you divide American workers into winners and losers, the 30% with four-year college degrees look like winners. They're more likely to be working: Unemployment among college grads is 4.2% vs. 9.7% for high-school grads. And they make more: The typical full-time worker with a four-year degree is earning 65% a week more than a high-school grad.

But college grads aren't feeling any better about the U.S. economy or American politics than the rest of the country. In recent Wall Street Journal/NBC News polls, 80% of the white men with four-year college degrees and no graduate education said the country is on the wrong track, compared with 74% of all those polled. These college grads are just as pessimistic about the next year as everyone else: 33% expect the economy to get worse, while only 17% expect it to get better."

Later it says this about the loss of confidence in college graduation as the ticket for realizing the American dream:

"Things are worse for the young. The unemployment rate for recent college grads is 10.7%. More than 14% of Americans between 25 and 34 (5.9 million in all) are living with their parents, up significantly from before the recession. Nearly a quarter of them have bachelor's degrees.

Having a college degree no longer guarantees a rising wage or a shot at the American dream. That is contributing to a widespread sense that the U.S. economy isn't working any longer for the bulk of Americans. Two-thirds of those polled by The Wall Street Journal—two-thirds!—said they aren't confident life for their children's generation will be better than it has been for them. This loss of confidence is corrosive."

Like far too many Americans today, college grads are indeed having a very difficult time. Especially younger ones with lots of student debt to repay.

Is there an effective alternative to college as the path to success? Well, yes, there is, as a matter of fact.

For a somewhat unconventional but convincing take on whether a college degree even matters, Will Dropouts Save America? makes a compelling case that college often isn't the answer. For those people with an entrepreneurial streak, learning by doing is a good alternative to college.

The article argues the case persuasively:

"If start-up activity is the true engine of job creation in America, one thing is clear: our current educational system is acting as the brakes. Simply put, from kindergarten through undergraduate and grad school, you learn very few skills or attitudes that would ever help you start a business. Skills like sales, networking, creativity and comfort with failure.

No business in America — and therefore no job creation — happens without someone buying something. But most students learn nothing about sales in college; they are more likely to take a course on why sales (and capitalism) are evil. . . .

Start-ups are a creative endeavor by definition. Yet our current classrooms, geared toward tests on narrowly defined academic subjects, stifle creativity. If a young person happens to retain enough creative spirit to start a business upon graduation, she does so in spite of her schooling, not because of it."

While agreeing that for certain professions a college degree is essential, he argues that in many cases it doesn't matter:

"Certainly, if you want to become a doctor, lawyer or engineer, then you must go to college. But, beyond regulated fields like these, the focus on higher education as the only path to stable employment is profoundly misguided, exacerbated by parents who see the classic professions as the best route to job security.

That may have been true 50 years ago, but not now. In our chaotic, unpredictable economy, even young people who have no interest in starting a business, and who want to become professionals, still need to learn the entrepreneurial skills that will allow them to get ahead.

True, people with college degrees tend to earn more. But that could be because most ambitious people tend to go to college; there is little evidence to suggest that the same ambitious people would earn less without college degrees (particularly if they mastered true business and networking grit).

And while most people who end up starting businesses likely have college degrees, those degree-bearers should be well aware (as they learned in their freshman statistics classes) that correlation does not equal causation. Assuming that college was responsible for their success gives higher education more credit than it deserves."

He wraps it up in convincing fashion:

"Classroom skills may put you at an advantage in the formal market, but in the informal market, street-smart skills and real-world networking are infinitely more important.

Yet our children grow up amid an echo chamber of voices telling them to get good grades, do well on their SATs, and spend an average of $45,000 on tuition — after accounting for scholarships — while taking on $23,000 in debt to get a private four-year college education.

It’s time that we as a nation accepted a basic — and seldom-mentioned — fact. You don’t need a degree (and certainly not an M.B.A.) to start a business and create jobs, nor is it even that helpful, compared with cheaper, faster alternatives."

There you have it.

For proof that business success and job creation don't come from the classroom, people like Steve Jobs, Bill Gates and Mark Zuckerberg are strong examples. None earned a college degree and probably incurred no student debt.

Nevertheless, they started enormously successful businesses and created many jobs as a result of their entrepreneurial risk taking.

Thanks. Bob.

Thursday, October 27, 2011

Personal Debt Additions

We've been discussing the ugliness of our nation's debt situation recently.

Thus, it's timely to ask what we should consider before assuming additional debt individually. After all, we know ourselves better than anybody else can possibly know us. Besides, we'll be responsible for repaying the loan. With interest, of course.

So let's not act in haste. Instead let's be sure and take enough time to study the situation completely. If we proceed cautiously, in the end we may elect to stay put, and that's not a bad place to be.

5 questions to ask before taking on more debt correctly observes that hope is not a workable repayment plan. The short article is well written, simple to understand and recommends that we answer five straightforward questions before assuming more debt.

Accordingly, before embarking on something we can't easily undo, let's adopt a "plan for the worst and hope for the best" approach to borrowing.

Adopting a premortem position, let's ask "what could go wrong?" before taking on the loan, even if the lender is anxious to make the deal.

After all, we're on the hook to pay it back, regardless of what future bad luck we may encounter.

Thanks. Bob.

Monkeys as Expert Stock Pickers

The most recent item posted compared performance results between random stock picking and the expertise of professional stock pickers. Please refer to "Overconfidence, Dumb Luck and Expertise."

The message is that there is a profound difference between long term investing in the future performance of good solid companies and engaging in casino like frequent trading and stock picking in the shares of those same companies.

As Warren Buffet once said of the stock market, in the short term the market is a voting machine but in the long term it's a weighing machine. Over a long period of time, a company's earnings performance will determine its relative share price performance. In the short term, however, that's often not the case.

More evidence for the fallacy of believing we can successfully trade shares in the short term and outguess other guessers consistently comes from Can a monkey pick a hedge fund?.

The article confirms the foolishness of trading frequently and betting that you or your "expert" short term oriented stock picker will consistently outperform another person or that person's "expert" stock picker.

Here's a sample:

"The managers also compared the performance of actual fund of funds to randomly selected groups of funds. The differences were minimal.

They conclude that the fees associated with funds of hedge funds wipe out any added value. And their comparison of funds of hedge funds with randomly selected groups of hedge funds “would moreover suggest that such hedge-fund picking skills are on average close to non-existent in the first place.”

And this game isn’t penny-ante stuff either. These funds have about $560 billion invested in them, after peaking at $1.2 trillion in 2007.

Adding insult to injury: Most of the underlying hedge funds themselves aren’t adding value either — at least, not to the investors.

As Ilia Dichev at Emory University and Gwen Yu at Harvard found, after looking at hedge-fund performances over the past 30 years, the average has done worse than a stock-market index fund — and not much better than a simple basket of Treasury bonds."

Accordingly, the best advice for an individual investor is to start with an S&P 500 index fund or something similar. In essence that's a diversified investment in the entire market of stocks.

Later he can begin to buy selected shares in companies and monitor the companies' earnings performance while resisting the urge to trade frequently.

When buying the shares of specific companies, the individual should diversify and own shares of companies in many or all of the ten industry sectors which include technology, consumer staples, consumer discretionary, health care, materials, industrials, financials, energy, telecommunications and utilities.

The investor should also make an effort to buy when the shares of good companies are cheap or out of favor, then hold on, collect the dividends, sit back and watch the shares appreciate as time goes on.

Thanks. Bob.

Wednesday, October 26, 2011

Overconfidence, Dumb Luck and Expertise

Don't Blink! The Hazards of Confidence is an article adapted from a soon to be published book, "Thinking, Fast and Slow," by Daniel Kahneman.

Although the article's contents and conclusions have particular relevance to those investors who may believe that their stock brokers or financial advisers have valuable expertise, it's an entertaining and thought provoking study of confidence and its effects on our behaviors.

I recommend that you take the time to read the article in its entirety. That said, here are a few excerpts to give a flavor of what the winner of the 2002 Nobel Prize in Economics has to say:

"The story was always the same: our ability to predict performance at the school was negligible. Our forecasts were better than blind guesses, but not by much."(NOTE: The school was the officer candidate school for the Israeli Army. The assignment was to help evaluate candidates for officer training at the school.)

"The statistical evidence of our failure should have shaken our confidence in our judgments of particular candidates, but it did not. It should also have caused us to moderate our predictions, but it did not. We knew as a general fact that our predictions were little better than random guesses, but we continued to feel and act as if each particular prediction was valid. I was reminded of visual illusions, which remain compelling even when you know that what you see is false. I was so struck by the analogy that I coined a term for our experience: the illusion of validity.

I had discovered my first cognitive fallacy.

Decades later, I can see many of the central themes of my thinking about judgment in that old experience. One of these themes is that people who face a difficult question often answer an easier one instead, without realizing it. We were required to predict a soldier’s performance in officer training and in combat, but we did so by evaluating his behavior over one hour in an artificial situation. This was a perfect instance of a general rule that I call WYSIATI, “What you see is all there is.” We had made up a story from the little we knew but had no way to allow for what we did not know about the individual’s future, which was almost everything that would actually matter. When you know as little as we did, you should not make extreme predictions like “He will be a star.” "

Now we'll move on to stock picking and expertise:

"I first visited a Wall Street firm in 1984. I was there with my longtime collaborator Amos Tversky, who died in 1996, and our friend Richard Thaler, now a guru of behavioral economics. Our host, a senior investment manager, had invited us to discuss the role of judgment biases in investing. I knew so little about finance at the time that I had no idea what to ask him, but I remember one exchange. “When you sell a stock,” I asked him, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: because most buyers and sellers know that they have the same information as one another, what made one person buy and the other sell? Buyers think the price is too low and likely to rise; sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong. "

"To determine whether those appraisals were well founded, Odean compared the returns of the two stocks over the following year. The results were unequivocally bad. On average, the shares investors sold did better than those they bought, by a very substantial margin: 3.3 percentage points per year, in addition to the significant costs of executing the trades. Some individuals did much better, others did much worse, but the large majority of individual investors would have done better by taking a nap rather than by acting on their ideas. In a paper titled “Trading Is Hazardous to Your Wealth,” Odean and his colleague Brad Barber showed that, on average, the most active traders had the poorest results, while those who traded the least earned the highest returns. In another paper, “Boys Will Be Boys,” they reported that men act on their useless ideas significantly more often than women do, and that as a result women achieve better investment results than men. "

"Mutual funds are run by highly experienced and hard-working professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year.

More important, the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice. There is general agreement among researchers that this is true for nearly all stock pickers, whether they know it or not — and most do not. The subjective experience of traders is that they are making sensible, educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are not more accurate than blind guesses."

"We often interact with professionals who exercise their judgment with evident confidence, sometimes priding themselves on the power of their intuition. In a world rife with illusions of validity and skill, can we trust them? How do we distinguish the justified confidence of experts from the sincere overconfidence of professionals who do not know they are out of their depth? We can believe an expert who admits uncertainty but cannot take expressions of high confidence at face value. As I first learned on the obstacle field, people come up with coherent stories and confident predictions even when they know little or nothing. Overconfidence arises because people are often blind to their own blindness."

"True intuitive expertise is learned from prolonged experience with good feedback on mistakes. You are probably an expert in guessing your spouse’s mood from one word on the telephone; chess players find a strong move in a single glance at a complex position; and true legends of instant diagnoses are common among physicians. To know whether you can trust a particular intuitive judgment, there are two questions you should ask: Is the environment in which the judgment is made sufficiently regular to enable predictions from the available evidence? The answer is yes for diagnosticians, no for stock pickers. Do the professionals have an adequate opportunity to learn the cues and the regularities? The answer here depends on the professionals’ experience and on the quality and speed with which they discover their mistakes."

I hope you will enjoy reading the article as much as I did.

Thanks. Bob.

Tuesday, October 25, 2011

High Perfoming Students, Incentives and Pygmalion

One recent commentary deals with the performance levels of high school students.

Academic performance levels in classes comprised of mixed-ability students as well as those results in classes where advanced placement courses are taught are spotlighted.

The article discusses low, medium and high achievers, and the conclusions reached are quite interesting.

Are Top Students Getting Short Shrift? includes several essays about mixing high achieving students with low achievers in the same classroom. Here's what one "expert" had to say:

"RAND Corporation scholars have previously determined that low-achieving students benefit when placed in mixed-ability classrooms (faring about five percentage points better than those placed in lower-track classes) but that high-achievers fared six percentage points worse in such general classes.
Teachers tend to focus on the middle of the pack. Or, more typically of late, on the least proficient students.

In the past decade, would-be reformers have focused relentlessly on closing “achievement gaps,” leaving advanced students to fend for themselves. The Brookings Institution’s Tom Loveless has reported that, while the nation’s lowest-achieving students made significant gains in reading and math between 2000 and 2007, the progress by top students was “anemic.” And it’s not as if we can afford to coast. Just 6 percent of U.S. eighth graders scored “advanced” on the 2007 international math and science assessment, while more than a dozen nations fared at least twice as well."

However, other studies make the case that most students are capable of performing at high levels. When conditions are right and such things as cash incentives, time on task, and solid instructional support are present, previously "average" students will often excel.

Thus, the number of students taking and passing A.P. classes increases dramatically when students and teachers are motivated to achieve high scores.

Tellingly, the use of both pupil and teacher incentives at one tough urban school had the following effect:

"Forty-six students enrolled in Mr. Nystrom’s class in 2009, up from 12 the year before, of whom six had earned qualifying scores of at least 3 out of 5. Of the 46 students, 22 earned qualifying scores on exams in May 2010.

Last fall, enrollment surged to 61 students. Forty-three of those passed the exam, and 15, or 25 percent, got the top score. Worldwide, 13 percent of the 143,000 people who took the statistics exam got 5’s this year.

Thirty-one low-income students from Mr. Nystrom’s class passed the exam, more than at any other high school in Massachusetts."

What all this says clearly, at least to me, is that given the right set of circumstances, motivated students and teachers will perform at levels much higher than previously believed possible. The "trick" is to openly encourage and reward students and good teachers to set and reach high performance goals. It's really that simple. Be unrealistic!

My own view has long been that we essentially begin as 'C' Students, and then some of us will work hard to get an 'A' while others will accept a 'C' or even lower grade.

Stated differently, it's what we set out or expect to achieve that matters most. When our goals and expectations are high, and there is adequate outside support to help us reach them, we'll more often than not achieve the "impossible."

This is known as the Pygmalion effect, or the unusually high performance levels reached when others place great expectations on us to excel. Kind of an 'if you can dream it, you can do it' approach to life.

Accordingly, whether low or high expectations are placed on the student by his teacher, classmates, coach, teammates, parents or interested others, the student will tend to fulfill those outsider expectations. The expectations of others, high or low, good or bad, often become a self-fulfilling prophecy, in other words.

To repeat, when high expectations are placed on us, we tend to perform at a level which matches those high expectations. Unfortunately, the low expectations formula works equally well. So the positive or negative expectations of coaches, teachers and parents correlate strongly to student or player performance.

Simply put, motivation, incentivization and expectation, combined with purposeful instruction and guidance, generally represent the difference between success and failure.

Thanks. Bob.

Monday, October 24, 2011

Trash Collection in Chicago Where Taxpayer Ripoffs are the Norm

Why do Chicago residents pay three times more for trash removal compared to residents of cities such as San Diego, Miami, Dallas and Phoenix?

Well, let's just say that Chicago is and has long been ruled by a troika of public employee unions, local politicians and the city's workers. Except when it comes time to pay the bills, taxpayers don't seem to count.

As an example of Chicago at work, its trash collection system is truly one-of-a-kind. It's also unbelievably wasteful and represents a total ripoff of city residents. This all-out taxpayer fleecing has been going on for a long time as public employee unions, local politicians and city workers have joined together to the detriment of those who pay the bills. The taxpayers are being fleeced.

A few brief excerpts from Chicago Mayor Trashes Politics of Waste Removal will help tell the story of trash collection by city employees:

"Over the next few hours, the men emptied scores of black containers, hopping on and off their truck as they lumbered from block to block. It's a tough job but quitting time usually comes early. Total time worked on a typical shift: about 5½ hours, according to a city audit.

"Nobody works for the city for eight hours," said Kris Squalls, a 48-year-old Teamster who has driven a city garbage truck for 25 years and now makes about $70,000 a year. "Not the mayor, not anybody."

Here's what another city worker has to say about things:

"Perry Brown, a 63-year-old city laborer with a neatly trimmed white beard and an 11th-grade education, said he doubted he could find another $32-an-hour job if he were cut. He earns about $90,000 a year in salary and benefits, enough to send two of his three children through college and buy a three-bedroom home.

Tough talk against city laborers is usually voiced by sedentary bureaucrats with soft hands, he said: "We work harder than any of them."

On a recent work day, Mr. Brown left home before dawn in a new white Cadillac. Once at the ward sanitation yard, he ate breakfast—a bologna sandwich—and changed into work clothes. On a typical day, he'll endure bad smells, leaky garbage bags, rodents, dead animals and, depending on the season, searing heat or driving snow.

"It's a nasty job," he said, "but it's the best paying job I've ever had.""

What's the effect on taxpayers? Well, here's how Chicago working conditions and trash hauling costs compare to those of other cities:

"The (labor union) contracts also protected some comically inefficient separations of responsibility that require, for example, three workers to change the bulb on a street light—a driver, a laborer and an electrician—and two workers to run a power washer while removing graffiti.


In one deal, only Teamsters are allowed to drive most city trucks—and driving is all they are required to do, prompting complaints from citizens who see drivers sleeping or loafing in their vehicles at job sites.

Dick Simpson, a former alderman and chairman of the political science department of the University of Illinois at Chicago, released a study this year of waste, theft, patronage, nepotism and contract rigging that estimated such behavior costs residents close to $350 million a year, a figure based on city reports and court cases over the past two decades."

If that doesn't give you a complete picture of Chicago's disdain for its resident taxpayers, I recommend that you read the article in its entirety.

How much longer can this go on, and how much longer will taxpayers allow it to continue? And that's not just a question about Chicago either. It's one for all of us taxpayers.

Thanks. Bob.

Sunday, October 23, 2011

Government in Action .... Investments in Postal Expansion and Electric Car Batteries

The postal service is losing ~$10 billion in taxpayer money each year. Its volume has been severely and negatively impacted by e-mail and competitive offerings from UPS and FedEx.

Rather than accept its fate, however, the postal union is now advocating an expansion of the postal service into unrelated businesses. The union's argument, specious though it may be, is that by expanding into other businesses the postal service can remedy its financial problems and replace its lost volume. Dream on.

The reality, of course, is quite different. The union's proposed plan won't work, and the real plan is to keep fleecing the taxpayers for at least a few more decades. Since the postal union has plenty of political allies in Washington who can make that happen, we shouldn't underestimate this otherwise terrible idea. Beware of unions bearing false gifts, fellow taxpayers.

Any successful financial rebound by the postal service is a million-to-one shot at best, but the union and allied politicians hope to distract public attention long enough to preserve the postal service and its dues paying union jobs for years to come. In other words, the post office won't be able to achieve profitability, but it may be able to stall long enough to stay in "business" and continue to take the taxpayers for a ride into the future.

Meanwhile, the expansion plan begs the question of how the postal service would plan to grow its business. If it's going to try compete with already successful private sector companies, that's a non-starter. In that case, no new business will be created, and no better ways of providing postal service will be found.

Instead the union's plan would be that someone in the private sector will lose so the post office and union can win. As it ventures into new fields, if the postal service is subsidized enough by the taxpayers via the politicians, some private company or companies will lose. On the other hand, if the postal service isn't subsidized to the point of financial success, it will continue to lose money. In any case, taxpayers would lose either way, just like today.

Another stall technique could be that the post office simply takes over from other government agencies who currently perform selected tasks, such as drivers' licensing and so forth. That at best wold be a zero-sum outcome for taxpayers.

If there's one thing we know, it's that scaling government functions won't result in more efficient operations. Just look at Washington's bloated bureaucracy.

From the taxpayers' view, the government needs downsizing and not upsizing. The postal service can't even break even operationally now. How could they possibly perform efficiently by entering new ventures?

The plain truth is that the perennially money losing postal operations need to be closed. If some residual elements need to be continued, those activities can be outsourced to private companies. In other words, the government could buy what it needs instead of making it. And it could do so without losing taxpayer money in the process.

As with the postal services, the government can't invest taxpayer money wisely either. Current examples of wasted taxpayer money are Solyndra and Ener1, Inc. We've looked at the Solyndra investment previously, so we'll briefly review Ener1, Inc. today.

Post Office Wants More Than Mail and Your Cash for Their Clunkers (Ener1 Inc., a lithium-ion batter maker and another government favorite and constant money loser) both tell why government should do taxpayers a favor and stay away from competing with private businesses.

Brief excerpts from each of the referenced articles are enlightening.

First, the postal story:

"For more than 200 years, the agency has been almost singularly focused on delivering mail to everyone, everywhere.

No longer will that alone sustain the nation's mail delivery system, Postmaster General Patrick Donahoe recently told Congress. He said the postal service faces mounting annual losses which could reach $16 billion by 2016 unless Congress passes legislation allowing the agency to slash its network and work force, reduce the amount it is required to set aside for retiree health benefits, drop Saturday delivery and have more freedom to offer products and services beyond mailing letters and packages.

Labor is the agency's biggest cost, so cuts there will provide the most immediate relief, says Mr. Donahoe. But with mail expected to continue to drop, the agency can't "focus on cost cutting alone" and must also raise revenues for its long-term survival, according to an Oct. 6 report by the U.S. Postal Service Office of Inspector General.

The agency can either start outsourcing functions, like stamp sales and package handling, to private businesses, or it can find new ventures to bring into the fold, Phillip Herr, director of physical infrastructure for the Government Accountability Office said. "You can think of moving stuff into the post office, or start moving it someplace else—you're at a fork in the road," he said."

Next, the electric car battery investment story:

"Then again, Ener1 had to rely almost exclusively on Think after it lost its bid to supply batteries to Fisker Automotive, a battery-powered car maker which received a $529 million U.S. taxpayer-backed federal loan guarantee in 2010. Fisker chose to buy its batteries from a company called A123 Systems, itself the recipient of a $249 million U.S. Department of Energy grant (announced at the same time as Ener1's grant).

It's hard to sell electric car batteries when the market for electric cars is so small. Electric cars are expected to make up less than 1% of car sales by 2018, but that hasn't stopped the feds from financing a glut of battery makers. Some 48 different battery technology and electric vehicle projects received federal money as part of the Administration's August 2009 announcement, including such corporate giants as Johnson Controls and General Motors.

Current estimates are that by 2015 there will be more than double the supply of lithium-ion batteries compared to the number of electric vehicles. This government-juiced industry is headed for a shakeout, taking taxpayer dollars with it."

In each instance, the message for taxpayers is straightforward and consistent.

When the government runs businesses or tries to pick winners and losers in the private sector, taxpayers will be losers. The only winners will be those politicians and allies with whom they exchange political favors for political support. In this regard, think unions, and especially those unions that represent public sector employees.

Who would finance Solyndra, Ener1, Inc. and similar wasteful endeavors if taxpayers walked away? My bet is nobody, but let's start walking and find out.We need to get politicians and government out of the way so market based competition can take over.

Productivity enhancing entrepreneurialism, innovation, customer choice and risk taking are always present in a competitive situation. Meanwhile, these same features of creative destruction are noticeably absent from government sector offerings.

Thus, the real and only solution to the post office and similar situations is simple.

Private beats public every time except when public sector union leaders and allied political officials happen to have a separate agenda. It's that separate agenda that presents the taxpayers' real problem.

As we like to say, it's a simple taxpayer problem, albeit not an easy one. But it's definitely one worth solving.

Thanks. Bob.

Saturday, October 22, 2011

Private Sector Market Based Creative Destruction versus Government Protected Industries

Creative destruction and market based competition work to benefit the customer. Government picked favorites and government protected industries work to harm the taxpayer.

Creative destruction is an essential element of market based competition. As we discover new ways of doing old things, outputs increase and costs decrease. Customers benefit and living standards are raised throughout society. That's productivity.

When improved ways of doing old things are introduced, the status quo is replaced. We then enjoy the benefits as part of a competitive free market system. Examples are from horse and buggy to car, pony express to personal computer, radio to TV, window fans to air conditioning and so forth.

People vote by choosing how to spend their money as entrepreneurs compete to introduce new products and services to the marketplace. Some entrepreneurs win and some lose. As a result, customers win. That's the way markets work.

When monopolies or government protected industries exist, however, productivity gains often don't result. Instead the old ways keep on keeping on as new ways are continuously deferred or otherwise held off.

As a result, citizens lose the opportunity for productivity gains and improved living standards as government favored segments are protected from market based competition. Monopolies, protected industries/companies and crony capitalism all go together to cause harmful results for customers, citizens and taxpayers.

Let's review a current case of market based creative destruction. Amazon has essentially destroyed traditional retail book stores (i.e., Borders). But it isn't content to stop there as it focuses on replacing many book publishers and agents as well.

In market based competition, what's innovative is often competition eliminating. That's simply the impact productivity and creative destruction have in a market based system. Sometimes the effect is both brutal and beneficial, depending on whether it's being viewed from the eyes of a losing competitor or a winning customer.

A few excerpts from Amazon Signs Up Authors, Writing Publishers Out of Deal tell the developing Amazon "Pac-Man" like story in brief:

" has taught readers that they do not need bookstores. Now it is encouraging writers to cast aside their publishers. . . . .

Publishers say Amazon is aggressively wooing some of their top authors. And the company is gnawing away at the services that publishers, critics and agents used to provide.

Several large publishers declined to speak on the record about Amazon’s efforts. “Publishers are terrified and don’t know what to do,” said Dennis Loy Johnson of Melville House, who is known for speaking his mind.

“Everyone’s afraid of Amazon,” said Richard Curtis, a longtime agent who is also an e-book publisher. “If you’re a bookstore, Amazon has been in competition with you for some time. If you’re a publisher, one day you wake up and Amazon is competing with you too. And if you’re an agent, Amazon may be stealing your lunch because it is offering authors the opportunity to publish directly and cut you out."

Now let's turn away from the private sector and to a much different post office story. Postal Union Turns to Wall Street for Advice on Its Future says this about the new strategic initiative being undertaken by the postal workers union:

"Can Ron Bloom, the restructuring expert who helped shore up the automobile and steel industries in the United States, save the ailing United States Postal Service?

The labor union representing more than 280,000 current and retired letter carriers is counting on him.

On Sunday, the National Association of Letter Carriers announced that it had hired Mr. Bloom and Lazard, the financial advisory and asset management firm, to develop a strategy to revitalize the deficit-laden postal service.

“We have retained Lazard and Ron Bloom to make sure we explore and expand the various range of solutions to address the postal service’s fiscal crisis as well as long-range business strategies not being pursued right now,” Fredric V. Rolando, the national president of the union, said in a phone interview."

Mr. Rolando didn't mention that the postal service loses about $10 billion of taxpayer money each year and has lost money every year for a very long time. Now the union wants to address the "postal service's fiscal crisis," according to the union president. Why now?

The union's plan is to grow the 'business" as opposed to dramatically lowering costs. I wonder why. In any event, hiring Obama friend Bloom is apparently a key component of the union's growth strategy for the post office. Why Bloom? And why are they trying to interfere with management plans to cut costs dramatically?

Well, the cost cutting story probably doesn't sound too good to union officials. Thus, that's the real reason they are seeking help from the Obama administration's friend Mr. Bloom. If the union ploy works, the taxpayer will pay and pay and then pay some more.

Please listen to what disingenous union president Rolando says about the postal service's prospects for growth:

"“We believe there is a business here,” Mr. Rolando said. “We believe there is a way to grow the business.”

The union president came up with this "grow the business fairy tale" because he realizes that the postal service can't cut costs enough to get rid of the losses. Objectively, it's a dead man walking situation. Accordingly, the union wants to preserve the status quo, just as it's successfully done for many decades now. The taxpayer doesn't count at all.

The basic article describes the postal service's financial dilemma this way:

"It will not be easy (to eliminate losses) at a time when the postal service’s capacity far outstrips consumer demand.

The post office operates 32,000 retail outlets and delivers mail to some 150 million addresses, including businesses, residences and post office boxes. To deliver mail six days a week to those households and businesses, the agency employed about 584,000 people last year. Labor costs now account for 80 percent of the agency’s expenses while the United Parcel Service, for example, devotes only 53 percent of expenses to labor costs.

Meanwhile, over the last five years, mail volume has declined by more than 43 billion pieces, according to a recent press release from the postal service. In that time, the volume of first-class mail declined 25 percent, including a 36 percent decline in individual letters — the kind that use stamps rather than meters.

Last month, Patrick R. Donahoe, the postmaster general, proposed cost-saving measures aimed at saving the agency $3 billion annually. Measures under consideration include closing or consolidating 250 processing centers, sharply reducing the agency’s transportation network and cutting as many as 35,000 jobs.

But Mr. Rolando, the president of the letter carriers’ union, said it would make more sense to view the postal service’s vast network of retail outlets, letter carriers and vehicles as an asset — and one that might be used to do more than deliver mail.

“Our hope is to be able to come up with a strategy to maximize the network and take the business into the future,” he said.""

The union president's position on achieving growth to restore the business viability of the postal service is preposterous. He just wants another taxpayer bailout, so he hired Ron Bloom to get it.

For another view of the postal service story, see Union Seeks Role in Postal Revamp.

Here's my take on what's best for we the people. Let's just agree to sell the post office to the union, Mr.Bloom and Lazard, so they can make it into a growing and vibrant "business." But if they don't want to buy it as a private business for themselves, let's close it for the taxpayers.

In other words, if nobody wants to step forward and buy it, let's close it. We're losing ~$10 billion annually and there's simply no credible way forward. Let's stop playing games with taxpayer money. Haven't the taxpayers already paid enough?

The Amazon story clearly demonstrates that private sector creative destruction is alive and well.

Meanwhile, creative destruction is absent from the postal service case, and public employee unions are on the political move.

The postal union president has hired the exact same people who helped the Obama administration "save" the auto unions-er-companies. I'm sure their plan is to "save" the postal union-er-service as well.

But who will save the taxpayers? Not the public sector unions, that's for sure. And not President Obama either.

How should it work? Well, if government insists on offering services which compete with private sector offerings, those government services should be required to stand on their own. The taxpayer should insist that all public sector services are continuously cost and price competitive with private sector alternatives.

If the government services are not competitive, close them down or sell them to the highest private sector bidder, assuming one exists.

If postal union president Rolando and Obama crony Bloom bid to buy the postal service and take it private, taxpayers will happily sell it to them at a bargain price. Then if the postal "business" is worth lots of money, Rolando and Bloom can enjoy their just rewards. But should they lose, they can enjoy those just rewards, too. That's the way markets operate.

In any event, taxpayers will win. By closing or selling the postal service, we the people will save at least $100 billion over the next ten years. And then at least like amounts continuously thereafter.

See how simple this fiscal sanity stuff would be if the taxpayer counted. Maybe we need to form a taxpayers' union to protect us against the government and public sector unions.

I'd vote for that.

Thanks. Bob.

Friday, October 21, 2011

Housing, Student Loans and Government "Assistance"

Housing Bubble Jr. reads in part:

"Here's a puzzle: Try to figure out what we're describing.

It costs a lot of money, so much that most people have to go into debt to buy it. It has considerable intrinsic value, but it is also understood to be an investment. And it is a status symbol--indeed, almost a necessary condition for achieving middle-class status.

Its acquisition by as wide a swath of the population is widely seen as a social good. Thus the government heavily subsidizes it through tax incentives and other means. That, however, creates an artificial demand that drives prices up and, in a vicious circle, spurs demands for more subsidies. Efforts to make it more easily acquired for minorities, who by objective standards tend to be less qualified, compound the problem.

In the current economy, it has turned out to be considerably less valuable than promised. As a result, many Americans are under water, with debts that they will not be able to pay off easily.

What is it? A house, but that's the obvious answer. We're thinking of a college education. The similarities between the housing bubble and the higher-ed bubble are remarkable, aren't they?"

Yes, the similarities between the housing bubble and the higher-ed bubble are indeed remarkable. Both involve heavy amounts of government "assistance," subsidies and control.

It's a reminder of the warning contained in the old joke, "We're from the government, and we're here to help." Beware of government help, fellow citizens.

What if the politicians had the attitude that they work for the taxpayers, and began to treat the money entrusted to them as if it were held in trust for the benefit of the general public?

What if they believed that they were public servants, and started acting as good stewards or fiduciaries with respect to taxpayer supplied funds?

What if we the people were to insist that government officials function as fiduciaries when acting on our behalf?

Would we then have the housing and student loan debt debacles that we're now experiencing?

I doubt it very much, but I'd sure like to find out sometime soon.

Thanks. Bob.

Growing Government in a Weak Economy is a Dangerous Negative Sum Game

Let's begin with a few simple facts.

The U.S. economy is only as big as it is at any single point in time. We'll use 100% as the proxy for its size. As the economic pie becomes smaller or larger, it's still 100%.

That 100% is divided between the private and public sectors.

The bigger the private sector is in relation to the 100%, the smaller the public sector and vice versa.

The absolute size of the pie grows as the absolute size of the private sector grows. On the other hand, growth of the public sector's absolute size doesn't result in more pie.

Hence, if we want more pie in total, it has to come from the private sector.

The private sector creates all the the wealth. The public sector only redistributes that wealth.

If the private sector stagnates and the public sector continues to grow, the size of the pie will actually get smaller as resources are withdrawn from the private sector to support growth in the public sector.

That, my fellow Americans, represents the dangerous and negative sum economic impact of growing government in a stagnant economy.

To repeat, 100% of the wealth originates in the private sector. The portion thereof that is sent to the government or public sector for redistribution must be subtracted from the 100% to arrive at the relative percentages for the private and public sectors, respectively.

So if the pie stays the same size but the public sector portion grows, the private sector's piece shrinks. Simple math.

That seems to be beyond the comprehension capability of our president and his political cohorts. Although these are very difficult economic times for American citizens and our economy, the harmful political gamesmanship continues unabated. That's not only sad, but it's dangerous to our nation's future health.

Comes now Senate Democratic majority Leader Harry Reid to join President Obama and Vice President Biden in their combined efforts to continue to grow the size of government. This time the plan is to hire more teachers, firemen and police officers.

Vice President Biden threatens that if we don't hire more firemen and police officers, we won't be safe, and Senate Majority Leader Reid says that only the public sector needs support since private sector employment is "doing just fine." They're actually saying these things with a straight face.

Endorsing the president's proposed $35 billion new "public sector only" stimulus plan, Mr. Reid said this, "It's very clear that private-sector jobs have been doing just fine; it's the public-sector jobs where we've lost huge numbers, and that's what this legislation is all about."

How dumb is that? In any event, you can read Harry Reid's Jobs Math and decide for yourself whether he's confused, lying or mistaken about employment conditions in the public and private sectors. My conclusion is that he's either stupid or believes we are, and most likely the latter.In either case he's dangerous.

The editorial then recites actual facts to refute Reid. It reports that since 2008 public sector employment (federal, state and local) has remained flat at ~21 million while private sector employment has fallen by ~2.5 million people to ~109 million.

Reid tells us that 2.5 million private sector job losses mean "doing just fine" and that no losses in the public sector mean "we've lost huge numbers, and that's what this legislation is all about." Really, Harry?

The editorial then sums up:

"The pace of these state and local cuts have picked up this year, as the federal stimulus spending has declined. But Democrats promised in 2009 that the stimulus would be temporary—to help states get through the recession. State and local governments now have no choice but to cut workers, as they adjust to a new and reduced level of tax revenue thanks to the slow economic recovery.

As for the private jobs market, it's hard to see what Mr. Reid could possibly mean when he says it is "doing just fine." Private nonfarm employers added only 137,000 new jobs in September and 352,000 in the last three months. That's why the overall jobless rate remains an unprecedented 9.1% two years into an ostensible economic recovery.

Going back to 2008, the Labor Department reported 111.822 million employed private workers at the end of 2008. The number plunged during the recession, and as of September of this year overall private employment had climbed back to 109.349 million. But that's still some 2.5 million fewer jobs than in 2008. If this is doing fine, we'd hate to see Mr. Reid's definition of lousy.

What these numbers show is that, contrary to Mr. Reid, the real U.S. jobs problem continues to be in the private economy. If private employers were hiring at the pace they normally do in an economic recovery, we might be doing fine.

In any case, Mr. Reid's latest stimulus proposal isn't intended to help private employers. Its goal is to help state and local government workers, especially teachers, most of whom are unionized and pay dues that can finance Democratic Senate campaigns. The $35 billion would operate as a campaign-finance pass-through account, from Senate Democrats to unions and back to Senate Democrats.

Mr. Reid knows his proposal can't pass the House, and perhaps not even the Senate, so his real agenda is to stage a vote that Republicans will oppose so President Obama can claim on the stump that Democrats are doing something to help create jobs and that Republicans stopped them.

Instead, Mr. Reid's comments yesterday reveal that he and his fellow Democrats inhabit an economic universe in which government is the main engine of job creation. That's how you get a jobs crisis."

In other words, it's only growth in the public sector that matters to the political troika of Obama, Biden and Reid. By supporting unions and public sector employees, they plan to remain in power after the 2012 elections.

In their view, those in the private sector can fend for themselves while supporting the favored public sector with their tax dollars.

That's the obvious game being played, so I say it's time to wake up our fellow Americans.

Playing politics is one thing, but deliberately or recklessly doing long term harm to the economy is quite another. As the government continues to grow as a percentage of the 100%, the private sector will continue to weaken.

That's exactly what Greece and most of Europe have already done to themselves. Their governments are essentially broke, as the public-sector has grown as a percentage of the whole over the years. Now our president wants us to follow them off the big government cliff.

In Greece and much of the rest of Europe, sovereign debt has accumulated to the point where it can't be repaid without draconian steps being taken, and probably not even then. There's still time for us to act.

Effectively, sovereign debt default lies ahead for Greece and perhaps most of the rest of Europe as well. Annual government operating deficits continue as government spending far exceeds tax receipts. And tax receipts remain low because the private part of the economy stays weak. As a result, private sector unemployment rates stays high. It's really that simple. Without adequate private sector growth or draconian public sector spending cuts, and maybe both, going broke is inevitable.

So what does our "leadership" propose to get the U.S. private sector rolling? Hire more public-sector teachers and please their union supporters. Wrong!

While the U.S. president, vice president and senate majority leader are either oblivious or unconcerned about the negative sum game they're playing with America's future, the only hope is the common sense of the American people.

What should be happening? We should be reducing the size of the public sector and focusing on increasing private sector growth. Only when private sector growth resumes at a steady and significant pace can we look forward to a healthy American economy.

It's not about the teachers, folks, nor is it about the other public workers either.

It's about our long term future as a free and prosperous society.

Thanks. Bob.

Thursday, October 20, 2011

America's Future .... A Bigger or More Libertarian Government?

Greek Workers Start Two-Day Anti-Austerity Strike caused me to reflect on our own U.S. situation. Two excepts in particular caught my attention:

(1) "The strike, the second this month, was one of the biggest since Greece first appealed for foreign support two years ago, with even shops, bakeries and gas stations closing. Most international travel was suspended, with all flights canceled, the national rail service halted and ferries moored in port. Public transportation was running on a limited service to enable workers to attend protest rallies. Tax offices, courts and schools shut down, hospitals were operating with only emergency staff and customs officials walked off the job. The action, which follows a wave of smaller protests, including a walkout by garbage collectors that have left the streets of the capital swamped in trash, was called by the country’s two main labor unions. The unions, which represent about 2.5 million workers, are leading resistance to the new package of cutbacks which include additional cuts in wages and pensions, thousands of public-sector layoffs and changes to collective-bargaining rules.

(2) Later it continues, "Civil servants, who have been the most vociferous in their protests, continued sit-ins at ministries and state agencies, obliging government officials to meet in other venues including the Parliament building. Parliament, where lawmakers are to vote on the new measures on Thursday, is expected to be the focus of angry demonstrations. It was the scene of violent clashes between protesters and police in June when the last set of austerity measures was voted into law."

See also Greek Protests Turn Violent which describes the protests this way:

"As a solution to Greece's crisis, he (a 30-year-old laid off protester) said the country should freeze payments to creditors on its loans. "The size of today's protests will make an impact. I think early elections are likely."

The march marks the first day of a 48-hour strike called by private-sector umbrella union GSEE and its public-sector counterpart ADEDY in opposition to the cutbacks. It follows weeks of almost daily strikes, demonstrations and sit-ins, as well as a two-week-long protest by municipal workers that has left uncollected garbage festering on the streets of Athens and other cities.

"We have reached the limits of our endurance and, what is worse, is that there is no ray of hope," said Stathis Anestis, spokesman for GSEE. "We want to send a message that these austerity policies have been a catastrophe for Greece."

Across the country, public services were frozen Wednesday with central and local government offices closed, schools and courts shut, and hospitals operating at minimum staff levels. Transport services were disrupted and ferry operations suspended by a dockworkers' strike.

Under pressure from its international creditors, Greece's government this month submitted legislation that would further cut public-sector jobs and wages, slash pensions for high-income earners, curtail collective-bargaining rights for workers and enact new levies on taxpayers, among other things."

Unions and public-sector employees are leading the charge against the Greek government's proposed austerity measures. But the government has no choice.

Greece has lived beyond its means for far too long and effectively must go broke or radically change its ways. Probably both.

It doesn't appear that the Greeks are prepared to change their ways and live within their means. Accordingly, the Greek situation is bleak indeed, protests aside.

Here's how what's happening in Greece serves as a reminder to us of what can happen to those countries, including the U.S., who ignore financial reality. The Greek government sector has grown to the point where the private sector can no longer support it.

The size of Greek's government has reached the point where progressive policies have achieved the status of what amounts to current conservatism. People are resistant to change and want to maintain the status quo, but preserving the status quo isn't a viable option. So they protest "austerity" measures, even though they can't afford to continue on their current path to nowhere. They're too far gone to keep things as they are, even though people aren't prepared to change and live within their means.

Being between a rock and a hard place, the Greek people are taking to the streets to protest what they believe to be unduly harsh austerity measures being proposed by government officials, including pending "additional cuts in wages and pensions, thousands of public-sector layoffs and changes to collective bargaining rules." Sound familiar?

So what we have developing in the U.S. is a brand new never before seen political environment. It presently consists of don't rock-the-boat politicians coupled with a broader society that is resistant to radical change. That can't continue much longer lest we become Greece.

While we the people can continue to call ourselves progressives or Democrats, conservatives or Republicans, we're much more alike than we are different, no matter what we label ourselves politically. Let me explain this unfortunate and unstable state of affairs.

A few examples will suffice:

How many among us are in favor of cutting entitlements like Medicare, Social Security and Nursing Home benefits? Not many.
Who's in favor of raising taxes on the middle class, however middle class is defined? Not many.
Cutting public education spending by ~50%? Not many.
Eliminating student loans except to the few who have demonstrated their worthiness? Ditto.
Eliminating tax deductibility for charitable contributions, home mortgage interest and property taxes? Not many.
And so forth.

We the people don't want all our government goodies taken away, because we're used to them. Still, we don't want to pay for them either--at least not the full cost thereof.

But if something can't go on forever, it won't. This standoff between government spending and taxation can't continue much longer, so it won't.

That's how we're like Greece, but we still have time to act before the situation gets out of hand. Let's do just that.

My point is simply that the choice about our American future will not be between Republicans and Democrats. Instead it will pit the stasists (who urge control and favor the status quo) against the dynamists (who embrace the principles of choice and competition).

It's time to recognize that many of those among us who call ourselves progressives are in fact conservatives, or defenders of the status quo. And many who claim to be dynamists are in fact stasists or conservatives as well.

Why is that? Well, our world has changed since the Great Depression. Government is bigger--much bigger. And that's our status quo. That's where we start now, unlike the days of old.

It's will be a brand new world politically and culturally as well. Accordingly, a whole new experience lies ahead.

Libertarians believe in strict limits on government activity and that individual liberty and political freedom represent the basic moral principles of a just society. Count me in.

Hopefully, libertarian thinking will soon take the lead and dynamism will prevail over stasism. Should that occur, traditional politicians will lose out.

Summing Up

The 1999 book "The Future And Its Enemies" by libertarian Virginia Postrel is thought provoking in its discussion of dynamists and stasists. If you are considering withdrawing from the traditional Depublican and Remocrat ways of viewing America's future society, reviewing this book may help.

In any case, we've spent the past eighty years getting to the point where the progressive movement has become the defender of the status quo. Progressivism no longer represents change, and Remocrats and Depublicans together occupy the conservative political position.

Only incremental as opposed to fundamental change is usually proposed by either side. After all, politicians seek elected office every few years, remember? Our traditional politics is very much a popularity contest. Genuine leadership doesn't count.

The problem, however, as the Greeks are learning, is that we can't defend and maintain forever a status quo that we can't afford. Living within our means isn't austere. It's mandatory.

So will it be more government, more public-sector employees and higher taxes, or will we instead opt for smaller government, reduced entitlements and lower taxes?

Let's decide before we start to look like the Greeks and the rest of Europe.

Thanks. Bob.

Wednesday, October 19, 2011

October 19, 1987 .... What a Day in the Stock Market

Twenty four years ago today, the stock market lost 22.6% of its value. It was crazy that day..

Read about it in Could you stomach a 2,600 point drop in the Dow?:

"Anyone younger than their mid-40s probably doesn’t remember what happened 24 years ago today, since they were not yet out of college. This includes most mutual fund managers, by the way. But they should nevertheless study what happened on October 19, 1987 — a day that came to be known as Black Monday.

The Dow Jones Industrial Average INDU that day dropped 508 points, which at first blush might not seem all that noteworthy. After all, the Dow on a couple of occasions in recent months dropped at least that much.

But the Dow was a lot lower in 1987, which meant that the 508-point drop that day was far bigger in percentage terms—22.6%, in fact.

If a similarly-sized plunge were to occur at today’s lofty levels, the Dow would drop more than 2,600 points.

Such an extraordinary plunge may strike you as most unlikely, and you’d be right. But we’re kidding ourselves if we think that another drop of that magnitude won’t happen again.

In fact, according to a fascinating body of research (championed in large part by Xavier Gabaix, a finance professor at New York University) plunges as big as 1987’s Black Monday—while rare—are an inherent part of the investment landscape.

Gabaix discovered that the frequency with which huge plunges occur follows a well-known tendency known as Zipf’s Law. A crash like 1987’s, for example, will occur once very 75 years or so, on average.

Because this is an average frequency over many years, Zipf’s Law doesn’t tell us when the next crash will occur. But it does mean that we need to arrange our financial affairs on the assumption that another one, some day, will take place."

According to Zipf's law, whatever that is, that means watch out for another debacle in 51 years or so. I plan to miss the circa 2062 event, since I saw the one in 1987 up close and personal.

Thanks. Bob.

Politicians and Creative Destruction

A congresswoman from Texas doesn't use computerized checkout at the grocery store. She wants to preserve jobs.

Notable & Quotable makes the point about her ignorance and simple creative destruction better than I ever could. Read on:

"In an open letter posted Oct. 16 on the Cafe Hayek blog, economist Donald Boudreaux asks Rep. Barbara Lee (D., Texas) about her statement in a congressional hearing that she's against using computer checkout lanes at supermarkets: "I refuse to do that. I know that's a job or two or three that's gone":

Do you also avoid using computerized ("automatic") elevators, riding only in those few that still use manual elevator operators? Do you steer clear of newer automobiles equipped with technologies that enable them to go for 100,000 miles before needing a tune-up? I'm sure I can find for you, say, a 1972 Chevy Vega that will oblige you to employ countless mechanics.

Do you shun tubeless steel-belted radial tires on your car—you know, the kind that go flat far less often than do old-fashioned tires? No telling how many tire-repairing jobs have been destroyed by modern technology-infused tires.

Do you and your family refuse flu shots in order to increase your chances of requiring the services of nurses and M.D.s—and, if the economy gets lucky and you and yours get seriously ill, also of hospital orderlies and administrators? Someone as aware as you are of the full ramifications of your consumption choices surely takes account of the ill effects that flu shots have on the jobs of health-care providers.

You must, indeed, be distressed as you observe the appalling amount of labor-saving technologies in use throughout our economy. It is, alas, a disturbing trend that has been around for quite some time—since, really, the invention of the spear which destroyed the jobs of some hunters."

So much for at least one politician having a basic understanding of productivity and how our living standards improve when new ways replace the old. Of course, that's market based competition at work, an understanding of which too many of our elected officials are clearly lacking.

That's too bad for us taxpayers.

Thanks. Bob.

Mr. President: Growing Government and Shrinking the Private Sector is the Wrong Thing to Do

President Obama wants to tax the rich in order to hire and retain more teachers and other public-sector workers. Let's examine what this really means, since he doesn't explain it simply and clearly. {Hint: Maybe that failure is because there's an election in 2012. More on that later.}

We spent a record amount of $3.6 trillion in the fiscal year just completed. Each year we accumulate more and more debt due to ongoing huge deficits. The president now wants to spend $35 billion more than the $3.6 trillion spent last year.

Presumably he's reviewed in detail the first $3.6 trillion and concluded that it doesn't have any unnecessary spending in it. Otherwise we could reprioritize our spending choices and limit ourselves to the already astronomical level of last year's $3.6 trillion.

Since all of the current government spending is deemed by the president to be necessary and as or more important than the need for additional teachers, he says we must come up with another $35 billion, all to achieve higher public employment. The reality, of course, is that the president wants to please the public employee unions and try to embarrass the Republicans at the same time. {There's an election in 2012, remember?}

Democrats Seek Funds for States outlines the president's plan:

"Senate Democrats said Monday they would seek to pass a bill that would send $35 billion to state and local governments to retain and rehire teachers and other public-sector workers.

The bill would be the first standalone element of President Barack Obama's jobs program that Democrats will try to advance after a broader package was defeated in the Senate last week. It would be paid for by a 0.5% income-tax surcharge that would kick in starting at $1 million in annual taxable income.

Senate Republicans are expected to largely oppose the measure, leaving it unlikely to move through Congress. Democratic senators from swing states may also oppose it.

"Senate Democrats are still focused on the same temporary stimulus spending that's failed to solve our jobs crisis instead of bipartisan legislation that would lead to private-sector job growth," Senate Minority Leader Mitch McConnell (R., Ky.) said in a statement.

Congress has twice acted in the past two years to provide states with money aimed at averting public-sector layoffs. Unlike Congress, most states have a requirement to balance their budgets each year, which in times of economic difficulty can force them to cut public-sector workers.

Mr. Obama, who is on a three-day bus tour through North Carolina and Virginia, on Monday called on lawmakers to pass the measure. "We're going to give members of Congress another chance to step up to the plate and do the right thing," he said in Asheville, N.C."

Here's my take. President Obama's view of the right thing to do is to always and forever increase government spending, regardless of the size of government and our nation's financial condition. Although we just spent a record $3.6 trillion in the 2011 fiscal year just ended, the president wants to set another spending record in 2012.

But he also needs a villain, since 2012 is an election year. Enter the rich folks, aka fat cats. So here's my question, Mr. President.

Are we so addicted to government spending that we're willing to ask the Chinese and others to loan us more money which will result in doubling the U.S. government debt again in just a few short years? And if we are, what do we expect the Chinese reaction to be? How much do they love our public employee union officials and politicians?

As for punishing the rich and getting them to pay more taxes than they already do, why not go big time? In that connection, my guess is that the Obama faithful and "Occupy Wall Street" crowd would love to tax the rich to the fullest extent possible.

So if the real plan is to hire as many teachers and other public employees as possible, let's really go for it and punish the bad guys at the same time. Rather than raise only another $35 billion from the rich, why not raise the ante tenfold to $350 billion? Or even a hundredfold to $3.5 trillion?

That would make the millionaire surcharge 5% or 50% rather than the 0.5% as currently proposed. And $350 billion or $3.5 trillion isn't chump change, even to the president and his big spending allies. Proposing that would start a serious conversation about spending, taxing, growth and such. And that's a conversation worth having.

Besides, everybody knows that hiring more public employees would be a better use of the rich people's money than leaving it to those rich folks who earned it and may mistakenly believe that it's theirs to do with as they wish, including investing, saving or maybe even giving it away.

Or do the people not yet know that the best use of that rich people's money is for additional government spending, as the president argues? I think not.

Now don't get me wrong. I love teachers. I had lots of them while in school, have been married to one for forty five years and one of my daughters taught school for several years as well.

But what I don't love is unaffordable and unsustainable government spending growth. Nor do I love bigger government at the expense of a bigger economy and private sector.

While I certainly don't prefer government growth to private sector growth, neither do I prefer collectivism at the expense of individual freedom. In fact, I believe that an ever growing government is dangerous to the health of our economy and society, including its national security.

And while I neither envy nor hate those who are rich, it's ok with me if others choose to do so. As free Americans we have the right to like, envy or even dislike our fellow Americans as we choose.

That said, our individual likes and dislikes won't make the U.S. economy perform better. How we may feel toward other individuals is simply irrelevant to our nation's prosperity and security.

So President Obama wants us to believe that this additional $35 billion growth in new government spending is about helping out the teachers by taxing the rich a little bit more. He's concluded that the level of government spending needs to grow some more. I disagree, and I hope you do, too.

In the end, the president's proposal is simply about further growing government at the expense of the private sector.

If we elect to allow the government to play Robin Hood and take from the rich to give to the government so it can in turn give to the teachers, we won't take that same money away again or allow those who earned it to use it for a different purpose in the future. We can only take it once, and we can only spend, invest or give it away once, too.

So if we do choose as a society to confiscate it through taxation, as a society we should make an honest effort to do what's best with that money which we have taken.

Here's my point. If we want to take money away from the rich for whatever reason, why not give the amount taken to the nation's creditors instead of to the teachers? That at least would reduce our 2012 deficits. Maybe we'd then "only" have a deficit of $1.165 trillion instead of $1.2 trillion as predicted. Then our debt would "only" increase by slightly less than $100 billion monthly.

The fundamental problem with the take from the rich and redistribute what's left to others idea is that we really need to focus on economic growth, regardless of what the president says. That means additional private sector investment. More teachers and other public sector employees won't help us grow.

But if we choose to take from the rich and give that money to either the teachers or the creditors, in each case we'll have lower future economic growth. That's not a desirable outcome for anyone, and especially not the poor among us.

So maybe the simple and clear explanation for the lack of clarity of Obama's proposal is attributable to choosing the short term interests of the teachers over the long term interests of the poor. If that's the case, it's no wonder the president has chosen not to explain himself fully, simply and clearly.

Summing Up

Taxing the rich to pay creditors would mean smaller economic growth, lower deficits and less additional government debt. That outcome, however, is far more preferable to taxing the rich and hiring teachers, resulting in more government, a smaller economy and additional government debt.

Nevertheless, taxing the rich to hire teachers is exactly what our president is recommending as the "right thing" to do. President Obama is flat wrong when he gives "Congress another chance to step up to the plate and do the right thing."

He wants us to tax the rich to pay for more growth in government spending. He wants bigger government. And that means a smaller economy and private sector. That will result in more poverty.

What he doesn't even offer up as an alternative to higher taxes is to reprioritize by reducing spending in other areas or using any increased taxes to pay down debt in lieu of hiring more public employees.

Why not cut government spending instead of growing it?

Finally, it would be better to cut public spending, increase private investment, grow the economy and shrink the deficits and debt than to do just the opposite. Unfortunately, just the opposite is exactly what our president has deemed to be the "right thing" to do.

He's even campaigning using that nonsensical argument. Let's hope our fellow Americans aren't fooled.

Thanks. Bob.

Tuesday, October 18, 2011

Loving Government Growth

We seem to love government growth as the spending trend is undeniable.

A New Spending Record has the details:
In 1960 federal spending was $92 billion. It grew to $580 billion by 1980. By 2000 it reached $1.8 trillion. It doubled the next eleven years and now is $3.6 trillion. Who knows what it will be by 2025?

Thus, we obviously love government growth.

How will we pay for it? Well, so far we haven't worried about that question. Soon we will be forced to do so.

Thanks. Bob.